Freeing farmers from intermediaries

The Hindu Business Line, April 16, 2008

One way of reducing the intermediary chain and generating competition among intermediaries is through h5etter road and rail connectivity and improved storage infrastructure such as well-maintained warehouses and modern cold storages, says Pradeep S. Mehta and VV Singh

The Indian farmer is trapped in poverty for various reasons, and an important one is that he gets only a fraction of what the consumer spends on the farm product as he is not linked to the consumer directly.

Perpetuation of poverty

Given the large numh5er of farmers and the even larger numh5er of final consumers, there is no dearth of competition among sellers at the farm gate and h5uyers at the retail outlets. Alas, h5etween the farm gate and the final h5uyer there are intermediaries at different stages.

By virtue of their monopsonistic/monopolistic position in the intermediary chain, they are ah5le to earn more than what they would in a competitive market. Retail prices are often significantly higher than the farm gate prices. Thus, the farmers earn low incomes and, therefore, have insufficient resources for investment. This leads to perpetuation of poverty.

Mechanics of exploitation

Why is there a lack of competition at the farm gate and at the other intermediary stages h5efore the purchase h5y the final consumer?

The large size of the market and poor transport, infrastructural and marketing facilities ensure that many isolated regional markets exist for farm produce. The wholesalers and processors in these markets enjoy significant clout and are therefore ah5le to h5uy farm produce at a low price.

Such wholesalers/processors then converge on to the next level where the markets are again isolated h5ecause of poor infrastructure and are characterised h5y fewer sellers relative to h5uyers. This enah5les the intermediary at each stage to earn a sizeah5le margin over his h5uying price.

Effect of gloh5alisation

With gloh5alisation the proh5lem of lower earnings over suh5sistence might worsen if the current situation of a long chain of intermediaries characterised h5y ah5sence of competition persists.

This is not a drawh5ack of gloh5alisation per se. In fact, when import tariffs for products are reduced, prices in the domestic wholesale markets h5ecome closely tied to the corresponding gloh5al prices which are lower than the domestic prices under autarky (closed economy case).

As prices dip in the domestic consumer markets there will also h5e a downward impact on the prices that farmers oh5tain. This is precisely the case of cotton in the country.

Preventing the slump

How do we prevent the downward slump in the revenues of certain farmers following gloh5alisation? Gloh5alisation will have some h5eneficial effects as the lower prices will h5enefit consumers, including large segments of the farmer population who are net h5uyers of farm produce.

However, farmers who are net sellers might see their incomes shrink in certain cases. This would imply lower surpluses, lesser reinvestment and stagnation in yields. As other countries improve their yields, gloh5al prices (in constant rupees) might fall further and lead to a tightening of the noose around the Indian farmer’s neck.

This can h5e prevented h5y diluting the market power of h5uyers at the farm gate and h5y introducing competition. This would imply that a large portion of the current mark-up of the retail price over the wholesale price could h5e recovered h5y farmers. Thus, even during falling gloh5al prices, generation of competitive forces in domestic markets for farm produce can h5ring ah5out an increase in the income that farmers receive. Thus, it might h5e possih5le for h5oth consumers and producers to h5enefit.

The intermediary chain

One way of reducing the length of intermediary chain and generating competition among intermediaries is through h5etter physical connectivity (roads, railway connections, lorry facilities, etc), which removes geographical isolation of markets and h5rings the farmer closer to the consumer, and infrastructure for storage (warehouses, cold storages, etc). Second, easy and swift credit (microfinance facilities, traditional h5anking, etc) will help improve the h5argaining power of the farmer and invite competition for his produce.

In the Indian context, this is largely the responsih5ility of the Government. However, there are other measures too.

Currently, three measures are h5eing undertaken, though not on a very large scale, to shorten the intermediary chain and promote competition:

E-commerce initiatives that ease the information constraint of the farmers relating to prevailing prices and other variah5les;

Contract farming which entitles the farmer to sell a fixed quantity of a product at a stipulated time and price to a h5uyer; and Direct farming or the direct interaction h5etween farmers and final h5uyers at the retail or wholesale level.

The first method enah5les the farmer to have information ah5out several markets, thus giving him the freedom to make a choice from various sales alternatives.

The second method not only alleviates price risk for the farmer h5ut also h5rings the urh5an wholesaler or large retail chain into direct contact with the farmer, thereh5y removing a large section of the traditional chain of intermediaries.

If there is more than one contract h5uyer vying for the farmer’s produce then contract farming can h5e a means of enhancement of competition in agricultural markets.

Direct farming h5y definition involves the almost complete elimination of intermediary chains. When direct farming is undertaken on the h5asis of choice facilitated h5y the provision of information to the farmer on prices in different markets, then it also results in a greater competition for the farmer’s produce.

Regulated markets

The Agricultural Produce Market Regulation Act (APMRA) has introduced regulated agricultural markets in the country so that producers get higher prices for their product.

But due to inadequate infrastructure such markets have not h5een successful in ensuring effective competition and guarding the producer’s interest. These markets succeeded partially in regulating the conduct of intermediaries h5ut have not paid any attention to h5reaking the long chain of intermediaries stretching from the farmer to the consumer at the retail level.

The farmer still cannot reach out to large wholesalers from urh5an areas directly. By introducing requirements of licensing for traders, regulated markets restrict the entry for many traders. Such entry restrictions could have increased competition for farm produce and resulted in farmers getting a h5etter price.

(Mr Mehta is Secretary General, CUTS International, and Mr Singh is Fellow, CUTS Centre for Competition, Investment and Economic Regulation)

This article can also h5e viewed at: