Agriculture Class notes

AGRICULTURE MARKETING

It refers to post-production activities that include transportation, storage, sale, and

institutional mechanisms that enable the farmer to carry out remunerative sales in an
orderly manner.

It also involves linkages with the industry, processing of agricultural produce, and all
activities from farm to fork.

Evolution of agricultural marketing

Summary:-

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1. Issues in Agri Marketing
2. Setting up APMCs across country
3. New problems due to APMC functioning
4.

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Reforms undertaken
a. Setting up FCI, procurement at MSP
i. Challenges
b. Increase in MSP to pull up Market price

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i. Limited reach, too high cost, limited benefit
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c. Decentralised procurement
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d. e-NAM – Access to larger number of traders, easier licencing

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e. Greater range of crops – PM-AASHA

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f. Farm laws (repealed)

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Features of Agricultural trade – Issues: -

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● More farmers, less buyers/traders

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● The perishable nature of produce

● Low farming income since the last harvest
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● Immediate increase in supply in the market and thus a fall in price

● Non-availability of expected price information promptly so that a better cropping
decision could have been made

● A large number of intermediaries between the farmer and food processing industry
(FPI) and thus the consumer. Hence, less price is realized by the farmers, and a higher paid
by the consumer.

To improve these dynamics, immediate step is to restore the balance of power between
farmers and traders - increasing the number of traders, done through the APMC system.

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AGRICULTURAL PRODUCE AND MARKETING COMITTEE

● The centre proposed and states enacted a statutory framework of agricultural

marketing-i.e. for regulating the first sale.
● It requires that agricultural produce be sold only at a designated place (an agriculture
market, mandi) and in a designated manner (auctions)
● APMC is elected to oversee it, and its tasks are-

- To develop an orderly system of sale from farmer to trader.

- Develop facilities such as storage, grading, weighing, etc.
- To license traders such that there is greater participation in auctions.

● It collects a licence fee on the grant of licenses, and a mandi fee from traders on
every sale.

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● These funds are to be utilized for the development of facilities and the mandi.
● The composition of APMC is usually an equal representation of traders and farmers,
e.g. 6 farmers and 6 traders.

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Issues with APMC- Skewed towards traders’ interest, and non-performance of duties

● It is mostly the large farmers that usually get elected, their interest is more aligned
with traders than the farmers.

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As such, it does not grant licences easily – more licences would mean dilution of
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traders’ power.
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● It is mostly impossible to get licenses from APMC without payment of a bribe. As

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such, those who do get licences, behave as a cartel. Hence, there is no competitive bidding.
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There is just trader given price.

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● Further, though the trading fee is to be charged from the trader and not the farmer
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(seller), it is invariably borne by the farmer.

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● No modernisation of mandis has taken place and there is virtually no infrastructure

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that has been developed.

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● Most important is lack of storage- Virtually no storage capacity of private nature has
come up. Almost all the storage infrastructure is either government-made or govt-backed,
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that is, where FCI guarantees to store its procured foodgrains.

● Further, APMC taxes and fees collected are not a part of Consolidated fund of State,
and therefore, there is no audit. Hence, misappropriation- Public funds are used for private
purposes.

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Next set of reforms after setting up the APMC system: -

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A) FCI procurement at MSP-

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Food Corporation of India (FCI) was setup under the Food Corporation’s Act 1964, in order to
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fulfill following objectives of the Food Policy:

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i. Effective price support operations for safeguarding the interests of the farmers,
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ii. Distribution of foodgrains throughout the country for public distribution system
iii. Maintaining satisfactory level of operational and buffer stocks of foodgrains to ensure
national food security.

*FCI is under Ministry of Consumer affairs, Food and Public Distribution

CACP was setup one year later within Ministry of Agriculture to recommend MSP. Since then,
govt has been procuring at MSP as part of its effort to encourage remunerative prices to
farmers.

The govt entered the market as a trader itself- FCI- with a guarantee to procure at a
remunerative price- MSP.

MSP is recommended by the Commission on Agriculture Cost and Price (CACP) for 24+1
crops (1 here is FRP for sugarcane) to CCEA for crops such as wheat, cotton, pulses,

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groundnut, coarse cereals like Ragi, Jute, etc, including some crops endemic to tribal regions
such as Niger. (Please refer: https://pib.gov.in/PressReleasePage.aspx?PRID=1795706 )

CACP recommends MSP based on factors such as cost of cultivation, cropping pattern,
international prices, inflation, etc.

CCEA (Cabinet Committee on Economic Affairs) announces MSP before the cropping season
so that farmers can take cultivation decision well in time.

FCI procurement has 2 objectives –

a. Remunerative price to the farmers

b. Food security.
Food security consists of distribution under NFSA (National Food Security Act) at subsidised

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price and maintenance of buffer stocks.
i. NFSA – States identify beneficiaries and communicate total requirement to centre.
Around 66% of total population is covered. Centre procures, stores and distributes to
states; states distribute through PDS shops to identified beneficiaries. (*Also refer

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Decentralised procurement below) (Post covid, the scope has been expanded
through the PM-Garib Kalyan Yojana)

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ii. Buffer Stock – Maintained on quarterly basis, according to seasonality of crops.

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FCI doesn't participate in auctions but gives assurance to farmers that if their crop can't be
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sold at a price greater than MSP, then FCI will procure it at MSP.
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As such, theoretically, the market price should never fall below MSP – if it does, then farmer
can always sell it to FCI at MSP. However, it is rarely so. Most of the times, it is the maximum
price prevailing in the market. The market price is mostly much lower.
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This leads to 2 questions – i) Why is the market price lower than MSP?, ii) Why can’t the
government then procure at MSP?

Why is the market price lower?

Easy. When govt sets a high MSP, everyone will produce that crop, resulting in too much
supply. As such, there is over production and thus, price would fall.

Why does the government not procure it?

Easier. When there is excess production, there is only a limited amount that can be bought
by anyone. Logistical and economic challenges aside, but even fundamentally, how can the
govt procure an unlimited quantity? It is like saying that to ensure that people have clothes

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to wear, govt incentivised cloth producers. Now that they produce a lot, should govt buy all
their unsold clothes? Or should govt give me money because my restaurant is not full? Or
should govt compensate a coaching institute if it has more seating capacity than number of
enrolments? Obviously not. MSP was given to enable more production so that country’s
food security could be ensured, not to provide an unlimited source of money to a handful of
producers.

Now, it is logistically impossible for every farmer to sell or for the FCI to procure at MSP
hence only a few farmers, mostly large ones, sell their produce to FCI.

(* in the case of foodgrains there exists an open procurement policy, i.e. even if FCI’s
procurement requirement is fulfilled, it will still continue to procure. Hence, there is virtually
a guarantee- whatever the production, it will be procured at MSP by the government).

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This results in:-

1) No development of market mechanism – price ceases to act as a check on production and

demand.

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2) every farmer would prefer to cultivate only those crops where there is assured
procurement, i.e. foodgrains.

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3) Distortion of cropping pattern ai
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4) Overproduction of foodgrains and less production of other crops such as pulses- MSP
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ensures prices of foodgrains are always high and less production of pulses makes their
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market price high- Hence the cost for consumers is generally high
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5) It is only a few farmers who are able to avail these benefits.

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Small farmers are dependent on the large farmers/traders/ money lender for their needs-
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from money for cultivation to helping them sell their produce.

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Small farmers sell their produce to large farmers who in turn sell it to FCI at MSP. Since the
market has not developed, there is only dependency – we have a capital intensive
agriculture without any corresponding market institution.

Broad issues:-

1. Inequality at farmer level – Large farmers/traders benefit, small lose out.

2. Regional inequality – only a few regions with initial impetus to marketing
infrastructure and institutions benefit, others have not. Almost all of FCI
procurement is done from a few states.
3. Crop inequality – Only foodgrains, especially rice and wheat, have been
procured at MSP. Not possible to procure other crops as there is no storage
left. Virtual guarantee of procurement of rice/wheat (Open Procurement
Policy), whereas other crops are left out.

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 4. Distortion of cropping pattern – Rice/wheat being grown in regions where it is
not suitable. Sugarcane being grown in water scarce regions.
5. Environmental issues like overuse of groundwater, salinisation of ground,
chemical run-off, pollution of water bodies, etc.

So what do we do to address the above issues? The following steps have been taken (along
with their analysis, not necessarily in chronological order)

B) Increase the MSP-

The idea is an increase in MSP will pull up the market price as well. The govt announces
higher MSP every year – 50% population in the country is in agriculture- obviously, a very
strong political lobby. Within them, large farmer lobby of a small region enjoys
disproportionate power- the region that cultivates food grains (Wheat, Rice, Sugarcane). The

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idea is that an increase in MSP, even if benefits the small number of large farmers
disproportionately, will increase incomes of large number of small cultivators to some extent
– trickle down approach. Of course, the first objective (economic), would be to expand the
benefits directly to these small farmers – increase the coverage. For that, more infra and

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logistics are required, so up until that point, at least increase MSP so that benefits trickle
down.

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In 2005 MS Swaminathan committee recommended that MSP should be at least 50% over
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the cost. There are 3 ways to visualize costs- ai
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i) A2 Actual cost incurred in cultivation, for example- in seeds, fertilizers, agri labour,
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etc.
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ii) A2+FL Add the the imputed cost of family labour to actual costs.
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o Imputed cost had the family members not worked on the farm, more
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workers would have to be paid, the actual cost would have been higher. Or,
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other way to visualise it is, had the family members not worked on the farm,
they would have worked somewhere else, and hence would have earned
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some wages from there – since these wages are being ‘sacrificed’, they should
be added. It is not some actual cost incurred or some actual sacrifice, it is
simply a hypothetical, alternate scenario as to what may have been.
iii) C2 (Comprehensive cost) = A2+FL+Imputed cost of capital. i.e. had the farmer not
used his own capital, such as tractor or machines, and rented them out, then actual
cost would have been even higher.

The recommendation was that MSP be 50% above C2. However, due to high variation in cost
of capital it is not possible to arrive at it consistently. If the objective is to give a
remunerative price to farmers, then better give a high percentage above A2 or A2+FL.

Currently, MSP for all crops is at least 80% above A2+FL (for wheat and rice it is around
100%).

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But, as described earlier, MSP is just a temporary, and now, an unsustainable, solution to low
agriculture incomes.

C) Increase in MSP coverage- more farmers and more crops-

More farmers, more regions through decentralized procurement. Under it, procurement is
prioritised from the local area for distribution. The requirement of NFSA distribution in, say,
Assam, is to be met first from local procurement, and then from other areas. Earlier it was
only the original green revolution areas which were supplying for the entire country. It is not
as if they were the only ones producing, but the only ones which were selling to the govt.
Other regions had no infrastructure or institutional mechanism through which they could
sell. Since GR took place in some chosen regions, institutions and infrastructure for
procurement is there is only in those regions. The HYVs spread to other areas but

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procurement did not happen, exacerbating inequality. Decentralisation of procurement
intents to correct it. But, you may ponder, who will have a problem with this?

More crops PM AASHA (Pradhan Mantri Annadata Aay Sanrakshan Abhiyan, 2018). It

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has 3 components – PSS, PDPS & PPSS

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Government of India is working with the holistic approach of solving any issue rather than in

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fragments. Increasing MSP is not adequate and it is more important that farmers should get
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full benefit of the announced MSP. For this, government realizes that it is essential that if
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price of the agriculture produce market is less than MSP, then in that case State Government
and Central Government should purchase either at MSP or work in a manner to provide MSP
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for the farmers through some other mechanism. With this approach, Cabinet has approved
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the Umbrella Scheme of PM-AASHA with three sub-schemes i.e. Price Support Scheme (PSS),
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Price Deficiency Payment Scheme (PDPS) and pilot of Private Procurement & Stockist
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Scheme (PDPS).
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In Price Support Scheme (PSS), physical procurement of pulses, oilseeds and Copra will be
done by Central Nodal Agencies with proactive role of State governments. It is also decided
that in addition to NAFED, Food Cooperation of India (FCI) will take up PSS operations in
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states /districts. The procurement expenditure and losses due to procurement will be borne
by Central Government as per norms.

Under Price Deficiency Payment Scheme this scheme (PDPS), it is proposed to cover all
oilseeds for which MSP is notified. In this direct payment of the difference between the
MSP and the selling/modal price will be made to pre-registered farmers selling his produce
in the notified market yard through a transparent auction process. All payment will be done
directly into registered bank account of the farmer. This scheme does not involve any
physical procurement of crops as farmers are paid the difference between the MSP price and
Sale/modal price on disposal in notified market. The support of central government for PDPS
will be given as per norms.

Under the Private Procurement & Stockist Scheme (pilot project), private procurers are
designated to procure at MSP, and are given a priority in govt. procurement.

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 D) Increase the number of traders- development of broader markets - Through the
development of eNAM (electronic National Agriculture Market) -under mandis across
the countries

Auction can be done by farmers electronically and any trader can participate. It increases the
access to traders, currently around 1300 mandis have been integrated.

SFAC (Small farmers agribusiness consortium) is the lead agency to implement eNAM.
Mandis are given incentives by the center to join e-NAM such as development of backend IT
infrastructure.

E) Steps to be taken - Comprehensive reform in the marketing system (The 3 reversed

farm laws)

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States pursue them on their own to changes in agri-marketing laws. Center, from time to
time, brings up model laws that states can adopt. Example-Model APMC act (2003), APLEM
2017, etc.

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Reforms in marketing- Giving freedom to farmers to sell their produce to anyone and in a
manner of their choice and not be restricted by APMC mechanism. This can be done by
amending the APMC and gradually delisting certain products from this mechanism. Most

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states already do not require fruits and some vegetables to be sold in this manner.

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Reforms in Essential Commodities Act 1955- The ECA enables govt to designate any
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commodity as ‘essential’, and then, control its production, availability, demand, and restrain
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price. The most common step is to impose stock limits- storage beyond prescribed limits
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becomes a criminal offense. As such no private investor would invest in building storage as
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they know govt can impose arbitrary storage limits.

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Such excessive power discourages private investment and thus, it must be reformed in a
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manner that govt's ability to designate the commodity as essential is based on objective
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parameters, rather than political expediency. Hence, ECA reform is needed to curtain the
government’s power.
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Enabling farmers with rational information- This requires a well-developed contact farming
system. Because of this, the farmer can prior idea of what the future prices are expected to
be, and thus, can take more informed decisions today.

Further, because of contract farming, there is assurance of sale. Assured sale in future
enables the farmer to access credit from institutional sources.

The challenge, however, is the enforcement of the contract. At the time of execution,
depending on the market price, either of the parties may have an incentive to violate it. If
the market price is higher than the contract price(strike price), the farmer would want to sell
in market rather than to the party. If it is lower, the buyer would want to buy from the
market, rather than from the farmer. Thus, unless there is a disincentive for violation and an
accessible mechanism for dispute resolution, no party especially the farmer would enter into
a contract. The farmer would always fear that, relatively, the company (buyer) would find it

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easy to violate the contract- the farmer can’t be going to the court every week for hearings.
To prevent this two steps may be taken-

- more FPOs- have more negotiating power than an individual farmer

- Reducing the cost of access to justice- the farmer should be able to resolve these
disputes without having to be formal legal proceedings.

This can be done through arbitration forums with the representation of farmers.

F) Why do we still persist with MSP, and why is there a demand to legalise it?
- It has certainly resulted in increasing farmer incomes in past.
- Increase in farmer’s incomes results in better rural economy (trickle-down)
- With an incentive to produce more, the nation’s food security problem was
addressed, and now we sit on lot of surpluses.

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If a farmer can get 100% assured returns over his costs, why would anyone switch over to
any other crop (or even other activity)? With production of only a few crops becoming
excessive, it is neither possible for the government to keep on procuring, nor desirable. Even

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if government had infinite amount of money, what would it do with all the surplus? We are
already giving free/subsidised foodgrains to 75% people. Hence, fearing that govt would no

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longer be able to procure, some farmers are demanding a legal guarantee.

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