Wither APMC mandies?

The food prices are rising much to the discomfort of the new government. The rise in prices particularly of onions and potatoes has pushed the food inflation to 9.5 percent. This despite the increase in production of these two crops compared to the previous year. It is said that rise in prices while hurting the consumers is not benefiting the farmers. So the villain in the opinion of the experts and the government is the middlemen especially the one operating out of the APMC mandies. The prescription offered to the malady range from delisting onions and potatoes from the APMC act to completely scrapping the mandi system. The argument is that since farmers have no alternative to market their produce apart from the mandi the middlemen exploit the situation.

Regulations in agricultural produce marketing were introduced in the late 50s and 60s to prevent the traders from exploiting the farmers through unethical practices such as under weighing and lower prices. Not only physical infrastructure like market yards were created price support was also introduced. These markets or mandies are governed by a committee representing all stakeholders that is farmers, traders, government officials, elected representatives of local bodies etc. Though the system worked fairly well, over the years it has become monopolistic and all the tendencies associated with it. Further, with the advent of value added processing and modern retail the mandi system was found to be inadequate. It increased the cost in the supply chain and hence inefficient. This called for reforms in the APMC act and the central government prepared a Model Act in 2003 and advised the state governments to amend their respective APMC acts as per the model act. Almost all the major states have adopted the provisions of the model act.  The amendment encourages direct sale by the farmers to the processors through contract farming, establishing market yards by private companies and farmers’ markets to sell fresh produce directly to the end consumer.

There are several companies such as McCain, Pepsico’s Frito Lay, ITC, AM Todd, Apachi, Global Green, Satnam etc who have entered into contract farming with farmers negotiating the quantity and price for crops like potatoes, wheat mint, cotton, basmati rice, gherkin. Organised retailers such as Reliance Fresh, Spencers and the German wholesaler Metro Cash and Carry, have established collection centres for fruits and vegetables where farmers bring their produce at a pre announced price. National Dairy Development Board (NDDB) has established a huge ultra modern terminal market near Bangalore on the lines of Holland’s famous Aalsmeer flower market to facilitate direct contact between the farmers with the processors and retailers. More such terminal markets are in the process of being established in the Public Private Partnership (PPP) mode in Mumbai, Chandigarh, and other cities with generous subsidy from the government. DCM groups have established Hariyali Kissan Bazaar with much fanfare to sell inputs as well as buy output. The idea was so novel that it attracted Harvard Business School to write a case material for teaching. However, DCM group could not expand on the concept and rolled back the initiative. The above examples show that it is not correct to argue that farmers are not having alternative to sell their produce.

Some of the initiatives chug along while others have run into problems as the Hariyali Kissan Bazaar and the tomato contract farming by Pepsico in Punjab. NDDB’s terminal market is struggling to get the volume. There are several reasons for farmers not finding these arrangements attractive; however, two are most important. The processor and retailers who enter into direct relationship with the farmers most often bench mark their purchase to the mandi price. A couple of rupees more than the mandi price is the kind of incentive offered to lure the farmers. However, because of the quality standards followed by these companies farmers have to take back a certain percentage of rejected quantity with them which often offset the gain they got by way of higher price. Farmers do not really see any major gain in the arrangement as the net income they realize under the system is at the most may be marginal. Hence, the initial enthusiasm of the farmers for the new arrangement fades and the relationships run into trouble.

The other important reason is the well known factor called credit commodity linkages which simply means the dependence of the farmers on mandi traders for credit. There are several studies highlighting the phenomena.  Despite several innovations and policy measures in providing rural credit from priority sector lending to kissan credit cards to Self Help Groups to ease the flow of credit to agriculture and rural areas the hold of informal credit is strong. Farmers typically take loan from the traders during the cropping season either to purchase inputs or meet the household emergencies. This association or bond has been built over the years and the traders know the credit worthiness or the trust worthiness of the farmers. The formal credit mechanism does not have such advantage and rely on collateral to extend credit. The ease with which the farmers could raise loans from the traders and mandi operators also binds them to sell the produce to them. The contract farming companies or the modern retail outlets are not in a position to extend such credit facilities for fear of default as well little recourse to recover the loan.

However, these companies should find ways to offer a better price to the farmers based on their cost structure as well as by increasing their supply chain efficiency instead of resorting the easy way of benchmarking with the mandi price. Otherwise farmers will continue to patronize the APMC despite the delisting and other measures contemplated by the government.  The extreme measure of scrapping the APMC would be counterproductive as without the credit lifeline farming will be more difficult. The government may well a turn a marketing or distribution problem of fresh fruits and vegetables into production problem.