Monday, September 30, 2013

Market Failure and Primary Producers

There are two factors that affect the lives of farmers - Lack of financial planning and Information Asymmetry. Let us roughly cash flow of the marginal farmer (as owner or tenant or share cropper who cultivates agricultural land up to 2.5 acres) that will fall into low-income households. The cash out flow of the household is throughout the year and peak-out during festive season, marriage or birth) and bad patches (accident/death) in the family. The farmer gets cash inflow with sales of produce only. Hence, the borrowings of the farmer limits the growth option for the household.

Let us take an excerpt from the paper - Why Don‘t We See Poverty Convergence? by Martin Ravallion  - "Banerjee and Duflo (2003) provide a simple but insightful growth model with borrowing constraints. Someone who starts her productive life with sufficient wealth is able to invest her unconstrained optimal amount, equating the (declining) marginal product of her capital with the interest rate. But the 'wealth poor' for whom the borrowing constraint is binding, are unable to do so. Banerjee and Duflo show that higher inequality in such an economy implies lower growth. However, they do not observe that their model also implies that higher current wealth poverty for a given mean wealth also implies lower growth.."

There is failure of state even in few cases as farmer sold paddy at 900 Rs. to the middleman against the minimum support price of 1250 Rs. This was bought in my notice during a meeting with SHG woman at Khaprakhol block of Balangir District. Hence, the information asymmetry is a definite factor for the problems of primary producers. Let us take the case of Cotton producers at Balangir. Most of the farmers avail credit, fertilizer and seeds from the middlemen. Hence, they are forced to sell their produce to the middlemen. They mostly sell at the price negotiated upon irrespective of the price prevalent in the market. In almost all cases the negotiated price for future output is 10 to 30% lower than the market prices.

Since the cash inflow with the farmers happens only in time of sale post harvesting season. Hence, it is very hard for farmer to negotiate with the creditors, middlemen and even local traders in terms of price of the produce. Farmer is forced to sell the producer soon after the harvest. This phenomenon is called Distress Sell. The lack of holding capacity reveals failure of credit mechanism of government. Through better connected network and information, the middlemen are always able to better estimation of price of the commodity. This price distortion has been brought lower due to reach of mobile phone connectivity. This can be countered by providing loans to hold sale of harvest for few weeks/months and installation of the mini warehouse facility at the GP level.

The market failure is typically attributed to information asymmetries—that lenders are poorly informed about borrowers. But we will go more in the topic of distress sell. Let us see State Wholesale Prices for Onion in Orissa (Rs/ Quintal) [Source - http://agmarknet.nic.in/]


MonthsWholesale Prices (Rs/ Quintal)
April,2013 1500.81
May,20131607.41
June, 2013 1826.3
July, 20132556.19
August, 20134954.79
September, 20134056.14

What we see is the clear evident of the rise of price of Onion to 150-300% soon after harvest season of April and May. So, the actual producers are not getting benefit of the high prices of onion due to distress sell while traders are making money out of the misery of customers. While we talk about food inflation greatly, it has nothing to do with supply demand constraints in India. Its simply linked to hoarding and profiteering. I don't have concrete evidence for this fact, hence will not raise this issue.

Looking from the perspective of the neo -liberal, local traders are managing risk. But, through current practices, we are making agriculture unsustainable and economically nonviable for a small farmer. There are folk idioms like "Des bigade maarwadi, sadak bigade bael-gaadi" prevelant in the rural India. Local traders (often Maarwaris) whatever their motives, have done much to built the market in our country. What we need is inclusion of small farmers as players in the market. It is only by forming networks and communities built on solidarity that marginal farmers can make a difference. The main objective is get the remunerative price for primary cultivators and distress sale should be checked. That will be explored in the future posts through topic like Producer Groups

1 comment:

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