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The 101 Of Agricultural Marketing In India
Bloomberg Quint - 11 Jul 2017

Mr S Sivakumar | BloombergQuintOpinion

Scene 1: Attracted by the market price of Rs  50 per kilogram, farmers plant onions only to stare at a price of Rs 5 per  kilogram by the time they are harvested. Often it's not even worth taking those  onions to the market, as the cost of transporting and selling are also not  recovered!

Scene 2: You go to buy groceries or vegetables  and fruits. Unless you dig to the bottom of the heap and select each piece  yourself, you won’t get the quality stuff. With things like pesticide residues,  you may not even be able to make that pick well, holding the produce in your  hand.

Scene 3: You pay a price of Rs 40 for a  kilogram of tomatoes and complain about the high prices; at the same time, the  farmer who produced them, and sold at Rs 12 per kilogram, laments about  unremunerative farming!

These are the all-too-familiar symptoms of the out-of-date  agricultural marketing system in India. In a way, these pains are inevitable as  our food and agricultural economy transitions from what was a ‘production  driven supply chain' to a ‘demand driven value chain’ system. Although both the  central government and several state governments have taken steps to facilitate  the transition, the institutions built more than five decades ago still  dominate the market, extending the pain for the farmers, consumers and  businesses alike.

The mechanism of Minimum Support Price assured farmers to  step up wheat and paddy production, without the fear of a post-harvest price  fall, and brought about a green revolution. That was then. Today’s consumer is  not living in an economy with shortages anymore. She is looking for variety,  quality, safety and convenience in the food basket. It is well nigh impossible  for any government to manage support price operations in grains, oilseeds,  pulses, milk, eggs, vegetables, fruits, sugarcane and twenty other such  commodities.

The world over, such price uncertainties are managed through  derivative markets.

De-risking Volatility In  Perishables

Large farmers and farmer collectives hedge their risks by  selling futures or buying options before planting. Much larger volumes are sold  by farmers to the businesses operating in the agriculture space, and food  processing companies, through options-embedded forward contracts. These  companies, in turn, hedge their risks on the derivative markets. Only recently  has the Securities and Exchange Board of India (SEBI) allowed options in  commodities. One earnestly hopes that these markets start soon and mature  without taking too long.

Another way the world has dealt with the falling prices of  perishables soon after harvest is through processing – freezing, pulping,  dehydrating, milling, curing, crushing, and so on – for consumption through the  year. Food processing in India is still very nascent compared even to many  emerging economies. Given the apprehension of consumers that processing  basically means adding unsafe preservatives, it is quite an effort for the  authentic manufacturers and brand owners to convince the consumers that  processed food is safe and hygienic. Recent efforts by the Food Safety  Standards Authority of India (FSSAI) will go a long way in raising consumer  awareness.

Another challenge in making processed food popular is the  price barrier.

A large part of the incremental price is made up of taxes.  Historically, processed and branded food has been considered a rich man’s  purchase and is taxed heavily. Although the tax rates have been brought down  for some products in the new Goods and Services Tax regime, there is a need for  further reduction, considering this is an important vector available to raise  farmers’ income.

Bringing In Quality  Checks

Let’s look at the challenge in the second scene now. The  reason why ungraded produce travels all the way and comes to the consumer is  that the conventional mandi system has incentivised the same. Starting with the  visual inspection based pricing done by the adatiyas (traders representing  sellers) at the mandis, the produce moves along the chain, and everyone gains  by passing off a bad apple or two in the average quality heap. Those of you who  studied economics know the problem of information asymmetry from Nobel laureate  George Akerlof's paper on “The Market for  Lemons” and how the average quality deteriorates with time.

Because of the APMC Act framework of the 1960s vintage, the  buyer-seller relationships in the mandi have been purely price-based and transactional.

Consequently, most agriculture businesses did not engage  with the farmers directly which could have ensured product integrity, built  traceability or facilitated grading at the farmers end. In the states where the  APMC Act was amended in the 2000s, such direct engagement became possible. The  pioneering work done by ITC e-Choupal in this space is well known.

Intermediaries And  Commissions

As far as the difference between the consumer and the farmer  prices is concerned, some mark-up is natural. After all, the produce has to  move across distances, incur handling costs, bear losses on account of  perishability, buffer the margins for quality variations due to visual  inspection and the costs of aggregating produce from small farmers, and then  disaggregation to reach out to the retail points.

“The very high markup is  because the old APMC Act gave monopoly power to the mandis, which led to higher  transaction costs and commissions structure.”

Because the Essential Commodities Act could be invoked at  any time in any commodity, rendering the large scale investments in storage and  handling infrastructure unviable, the value chains remained fragmented. This  resulted in a series of intermediaries needed to connect the farmer with the  consumer.

The 2017 Model APMC Act recognises the role of legitimate  players along the supply chain and expects that the provisions of Essential  Commodities Act would be used only against the unscrupulous hoarders.  Hopefully, this Act will be adopted by the states without wasting much time,  which would then usher the necessary investment.

Farm productivity may be raised by the different initiatives  of the government, but the same will translate into higher farmer incomes only  when these agricultural marketing reforms are carried out.