The GRSV Experts, especially the economists, further explored the idea of farmers having a say in determining the price of agricultural produce (see “Smallholder farmers in India should have a say in pricing what they produce” GRSV Blog no. 8 https://grsvconsulting.com/smallholder-farmers-in-india-should-have-a-say-in-pricing-what-they-produce/). Summary of these discussions are given below:
While farmers are a key to ending hunger and malnutrition worldwide, they are increasingly facing barriers to profitability, especially the smallholder farmers (SHF), who constitute the most vulnerable section. Some of the policy/institutions /institutional arrangements that directly or indirectly support farmers role in price formation that are presently in vogue are briefly described below.
Role of MSP
The Commission on Agriculture Costs and Prices (CACP) plays the anchor role in determining the Minimum Support Price (MSP). CACP consists of a Chairman (Official), 3 members (one official member, 2 member representatives of the farming community (usually have an active association with the farming community) and one Member Secretary (Official). CACP also visits States for on-the-spot assessment of the various constraints that farmers face in the production (the cost of production data are collected for 23 crops from the major growing states. This task is contracted to selected SAUs and General Universities) and the marketing of agricultural produce. Based on the cross-section data gathered by field assistants through a survey using a comprehensive questionnaire and based on its deliberations, CACP develops its recommendations and submits to the government in the form of draft Price Policy Reports every year to all the state governments and concerned National organizations and Ministries to seek their views. After receiving the feedbacks, the Cabinet Committee on Economic Affairs of the Union Government takes a final decision on the level of MSP.
The above is a summary of the mechanism and expected process of MSP determination. However, these mechanisms and processes are followed mechanically; nobody taking due interest and care to examine them closely and suggest corrections when/where required and follow it up to check on the fate of suggestion/s even if they were given. Presently, MSP applies to only 23 crops, while there are about 100 grown in significant hectarages, many of them by SHFs. Currently, the supply of the most crops with MSP exceeds the demand leading to a fall in price. Since the entire output is not procured at MSP (some estimates indicate that only 6% of farmers benefit from procurement at MSP – only a lucky few manage to sell most of their produce at the government-mandated floor prices) and from very few SHFs. Thus smallholders/producers realise low net returns through sales in the open market. It is only in the case of paddy and wheat procurement is carried out at MSP but restricted to few states only, although small quantities of pulses are also procured for buffer stocking. Also, this practice has led to other disastrous consequences related to the environment and ecological degradation due to continuous mono-cropping, stubble burring etc., for example, the rice-wheat system in Punjab, Haryana, UP etc. One has to construe that the MSP is only notional and it serves as a benchmark price; it cannot guarantee the remunerative prices all the time to most of the farmers, definitely very few SHFs benefit. Alternatively, smallholder farmers need direct benefit transfer or income support which is crop neutral, while the MSP is crop-specific. (One could even consider the environmental benefits that the SHF contribute since most of them may be practising production systems that are least damaging to the environment – such as minimal or no inputs, diversity of crops as against not monoculture), better resource utilization etc.)
Role of APMC
The agricultural produce markets (APMCs) were introduced about 55 years ago, they were expected to be a solution to the problem of marketing agricultural produce, but have become a problem. For example, the country’s farmers still get only a tiny share of the consumer’s rupee as indicated by a Reserve Bank of India study covering mandis in 16 states, 16 food crops and 9,400 farmers, traders, retailers (https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/1SUPPLYCHAINDYNAMICSE29D2F2AC0BF4F1DB05731C6E9B64885.PDF). In APMC a farmer has no role in setting the price for his product; he is an only price taker (i.e., accept the prevailing market price) hence lacks enough market power to influence the price in any way.
Another issue is the variation of quality of agricultural produce from farm to farm even within the same region. At present, the grading system is not functioning effectively and hence farmers invariably are not compensated fully for the quality of their produce. The present system of grading needs to be strengthened and streamlined for farmers to get a fair price based on the quality of produce. What is needed is perhaps a price band with upper and lower limits based on quality, with quality parameters specified beforehand.
The monopoly of the APMCs is also leading to tied transactions, for example, credit and output markets. The farmers generally end up getting a lower price under such situations. A large number of intermediaries in these markets combined with continued imperfections (very high mandi taxes, unreasonable deductions, etc.) in the markets result in farmers’ share in consumer price is low.
Factors influencing price
Several factors influence the price of a commodity irrespective of who sets the price. Corporate lobbies, along with government policy issues have an important role in determining the final Price. Corporate lobbies (mainly wheat and paddy processors) i.e., large firms processing agriculture products could influence the price through their nexus with the government. Government policy related to exports, imports tariffs, export quotas etc. have an impact on prices.
Ultimately one should note that price depends on supply and demand factors (however, this is only true in a truly competitive market). If there is overproduction, prices of that product are bound to fall. So, to determine the price there is a need for market intelligence related to supply, demand, price trends etc. A way out is to consider production quotas at the farm level, at the start of planting season where farmers cooperatives/FPOs can be allocated quotas for the season based on price (a fair price, farmers would like to be paid) in the supply-demand system.
Despite several factors influencing the price, the point that is being made here is that farmers, especially the SHF, should have a say in fixing the fair price of what they produce.
Land leasing
One of the issues often mentioned is how viable are small farms (1 ha or below 1 ha)? In most cases, small and marginal farmers augment their income through wage employment (i.e., they work as labour for larger farmers in the village) on the farm or through off-farm employment. One option to overcome the small size of farms is to legalise land leasing. This will enable absentee landlords to lease their lands to small farmers under different input and output sharing arrangements. This will enable large scale land leasing, augmenting the farm size of small farmers. It may also help small farmers to produce increased amounts of marketable surplus.
Thus, the question remains on what are the plausible institutional mechanisms to convey farmers’ voices, (farmers/ representatives from different states) to find a place in policymaking and price determination?
Inclusive Approach
The existing institutional arrangements need to be looked into for tweaking/ strengthening them and or coming up with altogether newer arrangements to promote a more inclusive approach.
Another important factor is to balance the prices between the producer and the consumer. Whenever prices rise consumers feel the pinch. The question is how to balance it.
Given the issues with the present system where farmers do not have much say in price determination, several innovative institutional models have been proposed and tried. The question always is how to empower millions of small farmers to negotiate with large scale processors, traders etc. The institutional mechanisms and alternatives being tried include the formation of FPOs (Farmer, Producer Organization), breaking the monopoly of existing APMCs by opening markets to private players, bulk marketing, direct marketing, contract farming, e-NAM and several others.
Many of these are in nascent stages and despite successes in pockets several issues related to them need to be resolved. One of the shining examples of a successful FPO is Sahyadri Farms; located in Nasik helping small farmers growing fruits and vegetables by providing forward and backward linkage – supplying inputs, procuring the produce, processing and marketing from farmer members. But these FPO’s are not discernible for all crops across different regions in the country. Hence, for large scale up-scaling of FPOs, one needs to identify the socio-economic and institutional factors responsible for farmers inability to come together collectively to enhance their bargaining power.
Contract farming where the price the farmer gets for his produce is fixed before sowing once the contract is signed. Thus, farmers are protected from price fluctuations in the market. However, though successful in specific regions and crops there are apprehensions that small farmers are exploited under this system and large-scale upscaling is not happening. However, there seems to be some evidence for some successful contract farming for some specific crops with SHF (e.g., gherkins in Karnataka, Tomato in Andhra Pradesh) and such ones can be promoted.