Linking small farmers to market Praveen, K.V Scientist, Division of Agricultural Economics

Transcription

1 Linking small farmers to market Praveen, K.V Scientist, Division of Agricultural Economics Introduction Rapid transformation in terms of increasing concentration in processing, trading, marketing and retailing is being observed in the agrifood system all over the world. Traditionally the farmers were unaware in advance when, to whom and at what price they are going to sell their produce. This scenario has changed with the greater coordination between farmers, processers, retailers and other players in the supply chain. Now the farmers are producing to the requirements of the market rather than relying on the markets to absorb whatever they produce. The diversification in production by the farmers towards high value commodities due to the changing food habits of the buyers, effected by their increasing income, is in line with this. They have also started responding to the demands of the buyers in terms of quality and food standards. The increase in demand for high value, high quality, more safe and convenience food however offer both opportunities and threats to the farming community. It offers great opportunities for the efficient and resource rich large farmers, whereas for the resource poor small farmers (both small and marginal), it offers considerable threats. Indian agriculture is the home of small farmers. In the year , they contributed 84.9 per cent to the total number of operational holdings and 44.3 per cent to the total area of operational holdings (Table 1). The all India average size of the operational holdings in India is decreasing continuously and is 1.16 ha in (Table 2). The performance of small farmers is thus important for the agricultural growth, food and livelihood security in India. They also play important role in poverty reduction and development of the economy. On the other hand, the access to inputs and markets is the major challenge faced by them. Under these circumstances, far more intervention and support by the government, than mere market oriented reforms, are required to provide the small farmers a level playing field. Table 1. Share of small and marginal farmers in number and area of total operational holdings in India (per cent) Number (%) Area (%) Category Marginal Small Semi-Medium Medium Large

2 Total Source: Various issues of agricultural census Table 2. Category wise size of operational holdings in India (ha) Average size of operational holdings (ha) Category Marginal Small Semi-Medium Medium Large Total Source: Various issues of agricultural census The small farmers must have access to land, water, inputs, credit, technology and markets. Linking small farmers of India to markets (both input and output market) is thus a topic that assumes significance by itself against this background. There is now an increasing understanding that production support activities of small farmers must be linked to market demand and that production activities must be looked at within the context of the whole supply chain and the linkages, or business relations, within that chain. There are strong potential benefits of closer links between farmers and markets. The economic, social, financial, organizational and environmental circumstances and on the enabling environment that government is able to provide will finally decide the magnitude of benefits. Status of small farmers Here we look into the status of small farmers in comparison with the other categories in terms of access to various inputs and services. The access to irrigation has increased for all categories of farmers. It is the highest for marginal farmers followed by small farmers. Table 3 indicates that the percentage of area under irrigation for small farmers increased from 40 in to 56 in On the other hand, for large farmers it rose from 16 to 42 per cent during the same period. It may, however, be noted that large farmers capitalize on cheaper sources like canals while small farmers have to rent water. About 40 per cent of the irrigated are for large farmers was from canals while it was less than 25 per cent in the case of small and marginal farmers (NCEUS, 2008). Table 3. Extent of area under irrigation in different farm size classes (per cent) Year Marginal Small Semi- medium Medium Large All Categories

3 Source: Various issues of agricultural census The fertilizer consumption per hectare of gross cropped area is inversely related to farm size for both irrigated and unirrigated areas (Table 4). It increased from marginal farmers in irrigated areas from kg. in to kg. in The growth in the per ha fertilizer consumption is faster in the case of small and marginal farmers when compared to the larger ones. Table 4. Fertilizer consumption per ha of gross cropped area according to farm size classes (kg) Year Marginal Small Semi- medium Medium Large All Categories Total Area Irrigated Area Unirrigated Area Source: Various issues of agricultural census Similarly, the percentage of area under high yielding varieties (HYV) is also inversely related to farm size (Table 5). In the irrigated areas, the coverage of are under HYV was 91%, 89% and 81% respectively in marginal, small and large farmers in In the case of unirrigated areas, the coverage was above 50% for marginal, small and semi-medium but it was only 31% for large farmers in Table 5. Share of area under High Yielding Varieties according to farm size class (per cent) Year Marginal Small Semi- medium Medium Large All Categories Total Area Irrigated Area Unirrigated Area 3

4 Source: Various issues of agricultural census Table 6. Indebtedness in different farm size classes 2012 Farm size class (ha) Estimated Number of Farmer Household (lakh) % of Farmer Households Estimated Number of Indebted Farmer Household (lakh) % of Indebted Farmer Households Prevalence Rate of Indebtedness (%) Marginal Upto Small Semi-medium Medium Large Total Source: Ministry of Agriculture, GoI 2012 From Table 6, it is clear that the per cent of indebted farmer households are more in the small and marginal farmer category. Issues and Challenges for small farmers some of the general issues that confront marginal-small farmers are imperfect markets for inputs/product leading to smaller value realizations; absence of access to credit markets or imperfect credit markets leading to sub-optimal investment decisions or input applications; poor human resource base; smaller access to suitable extension services restricting suitable decisions regarding cultivation practices and technological know-how; poorer access to public goods such as public irrigation, command area development, electricity grids; greater negative externalities from poor quality land and water management, etc. The proportion of socially disadvantaged groups such as Scheduled Castes (SCs) and Scheduled Tribes (STs) and the number of women farmers is higher among marginal and small farmers than that of medium and large farmers. Despite their importance they are continually denied their property rights and access to productive resources. The low level of formal education and the lack of skills among the small farmers add to their disadvantages. 4

5 Market linkages For small and marginal farmers, marketing of their products is main problem apart from credit and extension. In recent years, there has been some form of contract arrangements in several agricultural crops such as tomatoes, potatoes, chillies, gherkin, baby corn, rose, onions, cotton, wheat, basmati rice, groundnut, flowers, and medicinal plants. There is a silent revolution in institutions regarding non-cereal foods. New production market linkages in the food supply chain are: spot or open market transactions, agricultural co-operatives and contract farming (Joshi and Gulati, 2003). Fluctuations in the output price is one of the most important problem for the small farmers. There is a big gap between producer prices and consumer prices. There are different models for collective marketing by the small and marginal farmers to realise better access to input and output market, and share in the consumer rupee. These are: self-help group model, co-operative model, small producer co-operatives and contract farming. Apni Mandi in Punjab, Rytu Bazars in Andhra Pradesh, dairy co-operatives are some of the successful cases in marketing. The real challenge lies in organising the small and marginal farmers for marketing and linking them to high value agriculture. Thus, group approach is needed for getting benefits from marketing. Small farmers can also benefit from the emerging super markets and value chains if linked effectively. According to the ways in which the farmers link to the buyers, market linkages can be classified into the following categories: Farmer to domestic trader Farmer to retailer Linkages through cooperatives Farmer to agroprocessor Farmer to exporter Contract farming These categories however do not represent the whole range of market opportunities available to farmers. They are not always mutually exclusive also. Exporters can also be agroprocessors. Agroprocessors can also run contract farming operations. Retailers may buy from farmers through traders. What is characteristic of almost all of the linkages described, however, is that they form clearly identified chains and often involve close relations between the participants. 5

6 Farmer to domestic trader Traditionally the traders have interacted with farmers on individual basis, either buying from them at local markets or at the farm gate. Purchases at local markets can be efficient if they enable the trader to buy sufficient quantity to achieve economies of scale with subsequent transport, which is usually the main marketing cost. The marketing costs can be reduced if farmers can work together to assemble all their products at one location, for purchase by one or more traders. However, an external catalyst is required to develop such an arrangement. The most logical catalysts for such developments would appear to be government extension staff. Farmer to retailer Large supermarket chains will not usually want to work with individual farmers on a long-term basis. The farmers involved in such linkages often face difficulties in meeting quality specifications. The farmers also may have to grow new varieties, and change production practices to influence size and moisture content, stagger planting dates to ensure year-round availability. The technical and financial assistance from the part of the company is inevitable in such a model. Linkages through cooperatives The formation of cooperatives by the small farmers enable them to access both the input and output markets in a profitable manner. The cooperative model has been successful in many parts of the country but the major problem that they face is the lack of managerial skills. This combined with the tendency to expand the activities beyond their ability also pose a major threat. Farmer to agroprocessor The farmers growing crops that can be produced year round or stored for a considerable period of time can engage in linkages with agroprocessors to ensure market for their produce. Farmer to exporter To link farmers to exporters, identification of the potential markets for the produce of the small farmers is necessary and this can be done with the involvement of some external catalyst. Exports to more sophisticated markets can involve farmers in considerable complexity and risk. The high quality, safety and logistical standards demanded by importers can be expensive and difficult, although not impossible, to achieve by smallholders. Linkages developed by commercial firms would thus appear essential for ongoing success in high-value markets, with companies providing technical training and on-farm monitoring. 6

7 Table 7. Types of farmer-market linkages Type of linkage Collective activity Advantages for farmers Disadvantages for farmers Direct between farmers and traders Trust ensure long term sustainability Formal farmer organisations not usually needed Direct between farmers and retailers Linkages through cooperatives Direct between farmers and agroprocessors Farmer to exporter Formal largescale contract farming Farmers usually act on individual basis with traders May work together informally to bulk-up produce to reduce costs and attract larger traders May require formal group structure Farmers may link directly with the cooperatives or through groups Farmer groups can bulk-up produce for collection by processor Groups can facilitate supply of inputs and provision of technical assistance Often involves grouping of farmers External technical assistance may be required Company may prefer to group farmers, formally or informally, for inputs and output marketing and extension Reliable market at agreed price Inputs, technical assistance etc. may be supplied on credit Crop marketing, packaging, grading and storage and sometimes processing organised by cooperatives Potential for farmers to sell large volumes May provide secure market at agreed price Inputs, technical assistance, etc. may be supplied on credit Processor often provides transport Potential for farmers to sell larger volumes Potential high returns if quality can be achieved Inputs, technical assistance, etc may be supplied on credit Exporter often provides transport and packaging Inputs, technical assistance, etc. may be supplied on credit Crop marketing organized by company May need to accept short-term deferred payments Limited access to better markets Must meet variety, quality and safety specifications Must be able to supply agreed quantities at all times Cooperatives often depend on subsidies and external managerial assistance. Commercial activities can collapse when subsidies and assistance run out There may be an inadequate market for the processed products, thus jeopardizing sustainability Must meet variety, quality and safety specifications Open market price may be higher than that agreed with processor Export markets are inherently risky Compliance with standards can be problematic even with technical assistance Companies often require external agency (bank) to finance credit provision Frequent mistrust between farmers and companies and their employees Contracted price lower than market price may lead to sales outside of the contract 7

8 Contract farming The companies involve in contracts with the small farmers since it helps them to overcome land constraints that would be present if they attempted to produce everything themselves. Through the contracts they get the produce in required quantity and quality. However the process of developing a replicable model which helps to supply inputs to the small farmers in proper way and collect the specified quality product in the required quantity is complicated. Table 8. Institutional innovations in agricultural marketing in India Marketing Features Institutions Rythu Bazaar in First started in Andhra Pradesh in the direction of empowering the farmers to participate effectively in the open market to get a remunerative price for their produce Andhra Pradesh To avoid the exploitation of both the farmers and the consumers by the middlemen by creating a positive atmosphere of direct interface between them Apni Mandi First started in Punjab in the direction of ensuring direct contact of the producer-farmers and consumers and thereby enhancing the distributional efficiency of the marketing system. This system does away with the middlemen The price spread is considerably low. Working satisfactorily in the case of fruits and vegetables Farmers markets Hardaspar Vegetable Market Shetkari Bazar Krushak Bazars Cooperative Marketing Society Farmers markets initiated in Tamil Nadu in Nov, 1999 to eliminate middlemen and traders from the marketing of vegetables in the farmers markets, and to establish direct contacts between farmers and consumers Hadaspar vegetable market is a model market for direct marketing of vegetables in Pune city This is one of the ideal markets in the country for marketing of vegetables The market has modern weighing machines Linking farmers to vegetable markets Shetkari bazaars were established in the Maharashtra state for marketing of fruits and vegetables It will eliminate middlemen, links producers and consumers directly, reduce price spread, and enhance producer share s in consumer rupee Thus these markets increase the farm income, wellbeing of the farmers Established in the state of Orissa in The purpose is to empower farmer-producer to compete effectively in the open market to get a remunerative price and ensure products at affordable prices to the consumer The need for cooperative marketing arose due to defects in the private and open marketing system A cooperative marketing society can eliminate some or all of the intermediaries Few successful cooperative marketing societies for fruits and vegetables. eg. Maha-grapecooperative federation marketing, Maharashtra, Cooperative marketing. pomegranate, Cooperatives marketing banana in Jalgaon district, Vegetables co-operatives in Thane District, Milk co-operatives in Maharashtra, HOPCOMS, Bangalore and Gujarat and Co-operative cotton marketing society Contract Farming/Con Essentially is an agreement between farmer-producers and the agribusiness firms to produce certain pre-agreed quantity and quality of the produce a particular price and time tract Marketing This is an important initiative for reducing transaction costs by establishing farmer-processer linkages Successful contract farming includes Organic dyes- Marigold farmers and extraction units in Coimbatore, Pepsi Company and farmers of Punjab and Rajasthan for tomato growing Safal Market NDDB started a fruits and vegetable unit of SAFAL at Delhi was one of the first fruit and vegetable retail chain NDDB has set up an alternate system of whole sale markets in Bangalore as a pilot project This market is a move to introduce a transparent and efficient platform for sale and purchase fruits and vegetables by connecting growers through Grower s associations Forward and Forward and Futures markets have been identified as important tools of price stabilization and risk management 8

9 Future Markets Extension of forward and futures markets to all major agro commodities has, therefore, assumed great importance Commodity futures markets in the country are regulated through Forward Contracts (Regulation) Act, 1952 Commodity Exchanges Commodity exchanges for futures trading narrows the marketing, storage and processing margins, there by benefiting both growers and consumers. NAFED started National Multi-Commodity Exchange of India Ltd. on 26th November, 2002, for cash crops, food grains, plantations, spices, oilseeds, metals and bullion among others. National Commodity and Derivate Exchange of India Ltd. was established in Dec, 2003 at Mumbai with a similar purpose. Food retail super Food retail markets in India during 1990s and early 2000 opened up the availability of food products dramatically. They key functions are markets Higher standards Lower prices Source: Dastagiri MB, Immanuelraj TK (2012) Factors affecting the success of linkages The linking organisations need to be aware of the problems that the farmers may face in moving from ad hoc sales to market oriented one. While organization of farmers into groups is not always essential there are strong advantages to group activities. The farmers must aided in developing strong contract negotiation skills. The first step with all linkage development is to identify the type of linkage required and the level of external support that may be necessary. It is important to balance the level of support offered with the amount of assistance really required. The involvement of an extension worker will help the farmers to improve linkages with traders by bulking up produce. At a slightly more complex level, linkages with an urban retailer, or processor may be something that a farmer association could develop. More sophisticated linkages may require support from several agencies and many activities do involve a multiplicity of facilitators. Agencies for providing technical inputs, carrying out market studies, microfinance institutions and government agencies will certainly play a role. Several factors needs to be considered before initiating a linkage and promoting a particular product based on market demand. These are: farmer location, education levels, social structure, available infrastructure, farm size, agronomic suitability of the land, the likelihood of pests and disease, the land tenure situation, farmers assets, capacity to establish new enterprises, access to finance and capacity to use that finance profitably, technological requirements and access to extension advice. It also needs to take into account the capacity of farmers to adapt to new systems. The development of farmer groups may help to a great extend in accessing inputs more easily, improving product quality, increasing quantity and achieving economies of scale, and increasing their bargaining power. Market-oriented collective action has potential when it 9

10 overcomes the high transaction costs that would be faced by farmers acting individually. While awareness of the potential benefits of such collective action often exists among farmers, this awareness is often not sufficient to overcome their suspicions about working with each other. This problem needs to be addressed and the leadership and management skills must be imparted to farmers. The farmer groups must also be given a business orientation and they must be able to carry out financial transactions. The group must be as homogenous as possible and all the members must get the benefits equally. The small groups seem to work better than the larger ones and thus the greatest challenge is in determination of group size. The group size must be such that is big enough to exploit economies of scale and market potential without causing conflicts and where the benefits achieved by individual farmers outweigh the costs of compliance with collective rules and norms. Case of contract farming An enquiry into the economics of some of the successful contract farming ventures in India is attempted here. Nestle India Limited a multinational firm is undertaking contract farming to source milk from small-scale producers. To reduce the cost of contracting with large number of small farmers, Nestle follows an intermediate model of contract farming where the agreement is done with a local villager, called as an agent. The agent collects milk from smallscale producers, and also facilitates distribution of inputs and delivery of services.the Mother Dairy Fruits and Vegetables Limited (MDFVL) - a wholly owned subsidiary of the public sector parastatal, National Dairy Development Board (NDDB) has undertaken contract farming in vegetables. To reduce the high transaction costs in procuring from scattered farmers, it promoted the growers associations. The firm provides technical guidance, services and inputs to association members to ensure that farmers follow best production and marketing practices. The model of contract farming by Venkateshwara Hatecheries Limited in broilers in India is a replica of what prevails in most other countries. Firms provide day-old chicks, feed, vaccines and services to farmers at no cost to them, and lift entire output by paying fixed growing charges (per kilogram of body weight of bird) in lieu of their contribution to cost (labor, water and electricity charges, litter and rent for poultry shed and equipment). Farmers are thus insured against market risks. There is a striking difference in the profits of contract and non-contract farmers particularly in the case of milk and spinach. Contract farmers realize more profits as compared to non-contract farmers; the difference is more than double in milk, and 78 percent in spinach (Table 9). 10

11 Table 9. Economics of contract versus non contract production (Rs per ton) Item Milk Spinach Broilers Contraccontract Non- % Con- Non- % Con- differe tract contract difference tract nce Noncontract % differenc e Yield* Production cost Marketing and transaction costs Total cost Price Net revenue * milk: 4 % fat corrected in kg per in-milk animal; spinach: tonnes/ha; broilers: body weight in kg/bird Source: Birthal et al Case of co-operative marketing A comparison of the two major marketing channels of banana in Karnataka is attempted here. The first one with the only involvement of a farmers cooperative society (HOPCOMS) between farmers and consumers and the other one with the involvement of wholesalers and retailers. In the co-operative channel, HOPCOMS procures banana (var. Neypoovan) from farmers through its collecting centres located at the producing areas and disposes the same to the consumers through its retail outlets located in major cities in Karnataka. Table 10. Cost of marketing of banana through wholesale and co-operative channel (Rs per kg) Particulars Wholesale channel Co-operative channel Farmers Wholesalers Retailers Sub-total Share in the consumers price (%) Source: Murthy et al Table 11. Economics of co-operative versus wholesale marketing (Rs per kg) Particulars Wholesale Co-operative Farmers net price Wholesalers margin Retailers margin Marketing efficiency Price-spread (Rs per kg) Consumers price (Rs per kg)

12 Source: Murthy et al Case of Rural market/apni mandi/direct marketing Direct marketing by farmers to consumers in urban areas increases their share in consumer s rupee. It shortens marketing channels, eliminates middleman and brings producer-seller in direct transaction with consumers. Some experiences of direct marketing in India have been very successful. The Punjab Govt. experimented with a market called Apni Mandi. In Apni Mandi, commodities are reported to be sold at rates 20-30% less than the retail markets rates and 30-50% more than prevailing wholesale rates. The marketing efficiency of vegetables under apni mandis and traditional marketing channel involving wholesaler and retailer are compared in the Table 12. Table 12. Marketing efficiency of vegetables under traditional marketing and apni mandis (Rs per qtl.) Particulars Consumer s purchase price Producer s sale price Total marketing costs Total margins of intermediaries Net price received by farmer Marketing efficiency Source: NCAP 2010 Potato Tomato Traditional Apni mandi Traditional Apni mandi marketing marketing Conclusion An attempt is made here to get an insight on linking small farmers to markets in India. Despite the domination of small farmers in Indian agriculture in terms of number, they are not having access to cheaper sources of inputs. In the marketing of the final produce, the price that they receive at the farm gate is considerably lower than the retail price. The new institutional innovations in the marketing have been initiated in India in the last decade and some of the cases show that they are far friendlier to the farmers when compared to the traditional marketing forms. The evolving innovative marketing concepts like direct marketing, cooperative marketing, contract farming etc are however not free of hitches. Proper policy 12

13 intervention from the government, considering the farmers and the private players capable of engaging in such innovative channels, is the need of the hour. Bibliography Shepherd, A.W (2007): Approaches to linking producers to markets, AMMF Occasional Paper 13, FAO, Rome. Birthal, P.S :(2008), Making Contract Farming Work in Smallholder Agriculture, National Centre for Agricultural Economics and Policy Research, New Delhi. Birthal, P.S., P.K. Joshi and Ashok Gulati; (2005), Vertical coordination in high value food commodities: Implications for smallholders, MTID Discussion Paper 85, International Food Policy Research Institute, Washington DC. Murthy,D.S., T.M Gajanana, M Sudha and V Dakshinamoorthy: (2007), Marketing losses and their impacts on marketing margins: a case study of banana in Karnataka, Agricultural Economics Research Review. Vol 20. pp Dastagiri M.B., Immanuelraj T.K :(2012), Supermarket Supply Chains in Horticulture in India: The Novel Marketing Models, Effects and Policies, Agrotechnol S11:001. doi: / s Fertiliser Association of India (2012): Fertiliser Statistics , New Delhi. GoI (2013): Agricultural census , and , Ministry of Agriculture, Viewed on 8 Janurary 2014 ( type.aspx) GoI(2010): Agricultural Statistics at a Glance 2010, Ministry of Agriculutre, Viewed on 15 May 2013 ( NCAP (2010): Estimation of marketing effieciency of horticultural commodities under different supply chains in India, New delhi. Mahendra Dev,S :(2012): Small farmers in India: challenges and opportunities. WP , IGIDR, Mumbai. 13