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Freeing
farmers from intermediaries
Published: The
Hindu Business Line, April 16, 2008
By Pradeep S
Mehta and V V Singh
One way of reducing
the intermediary chain and generating competition
among intermediaries is through better road and
rail connectivity and improved storage
infrastructure such as well-maintained warehouses
and modern cold storages.
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
number of farmers and the even larger number of
final consumers, there is no dearth of competition
among sellers at the farm gate and buyers at the
retail outlets. Alas, between the farm gate and
the final buyer there are intermediaries at
different stages.
By virtue of their
monopsonistic/monopolistic position in the
intermediary chain, they are able 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 before the purchase by 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 able to buy
farm produce at a low price.
Such
wholesalers/processors then converge on to the
next level where the markets are again isolated
because of poor infrastructure and are
characterised by fewer sellers relative to buyers.
This enables the intermediary at each stage to
earn a sizeable margin over his buying price.
Effect of
globalisation
With globalisation
the problem of lower earnings over subsistence
might worsen if the current situation of a long
chain of intermediaries characterised by absence
of competition persists.
This is not a
drawback of globalisation per se. In fact, when
import tariffs for products are reduced, prices in
the domestic wholesale markets become closely tied
to the corresponding global prices which are lower
than the domestic prices under autarky (closed
economy case).
As prices dip in the
domestic consumer markets there will also be a
downward impact on the prices that farmers obtain.
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 globalisation? Globalisation
will have some beneficial effects as the lower
prices will benefit consumers, including large
segments of the farmer population who are net
buyers 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, global
prices (in constant rupees) might fall further and
lead to a tightening of the noose around the
Indian farmer’s neck.
This can be
prevented by diluting the market power of buyers
at the farm gate and by introducing competition.
This would imply that a large portion of the
current mark-up of the retail price over the
wholesale price could be recovered by farmers.
Thus, even during falling global prices,
generation of competitive forces in domestic
markets for farm produce can bring about an
increase in the income that farmers receive. Thus,
it might be possible for both consumers and
producers to benefit.
The intermediary
chain
One way of reducing
the length of intermediary chain and generating
competition among intermediaries is through better
physical connectivity (roads, railway connections,
lorry facilities, etc), which removes geographical
isolation of markets and brings the farmer closer
to the consumer, and infrastructure for storage
(warehouses, cold storages, etc). Second, easy and
swift credit (microfinance facilities, traditional
banking, etc) will help improve the bargaining
power of the farmer and invite competition for his
produce.
In the Indian
context, this is largely the responsibility of the
Government. However, there are other measures too.
Currently, three
measures are being 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 variables;
Contract farming
which entitles the farmer to sell a fixed quantity
of a product at a stipulated time and price to a
buyer; and
Direct farming or
the direct interaction between farmers and final
buyers at the retail or wholesale level.
The first method
enables the farmer to have information about
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 but
also brings the urban wholesaler or large retail
chain into direct contact with the farmer, thereby
removing a large section of the traditional chain
of intermediaries.
If there is more
than one contract buyer vying for the farmer’s
produce then contract farming can be a means of
enhancement of competition in agricultural
markets.
Direct farming by
definition involves the almost complete
elimination of intermediary chains. When direct
farming is undertaken on the basis of choice
facilitated by 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
been successful in ensuring effective competition
and guarding the producer’s interest. These
markets succeeded partially in regulating the
conduct of intermediaries but have not paid any
attention to breaking 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 urban
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
better price.
(Mr Mehta is
Secretary General, CUTS International, and Mr
Singh is Fellow, CUTS Centre for Competition,
Investment and Economic Regulation)
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