Agriculture will never be the same | Part 1 - Dismantling a Monopsony
In today's newsletter, we talk about the latest agri reforms and how it's likely change Indian agriculture forever.
The Story
Selling agriculture produce is hard. You can’t sell this stuff to end consumers directly. Instead, you’re expected to sell the produce in your designated “market area”/mandi. The mandis, in turn, are regulated by the Agricultural Produce Market Committee (APMC) comprising of local farmers, government representatives, and agri-commodity traders.
Once you make your way to the mandi, you get in touch with your agent, who helps you clean, sort, and organize your produce. He then takes the end product to the auctioneer who puts it on display. Interested buyers gather on the market platform and start bidding. The highest bidder will eventually take home your output and the agent will help you settle the transaction with the prospective buyer. You walk away with what you get, but not before you pay your agent his commission.
Ideally, this ought to be a fair transaction. At least considering we have a free and fair auction. But that’s not entirely true.
You see, most auctions are rigged. Traders who are responsible for the buying collude. Instead of competing against one another, they work together and artificially deflate prices by bidding low. Now, the collusion works only until the select group of traders can keep co-operating. And to this end, APMCs that issue new licenses (to traders) do their best to keep the club exclusive. Meaning corruption is rife.
At the end of it all, traders walk away with the king’s ransom and farmers are routinely short-changed. It’s a terrible travesty. In fact, by some accounts, farmers only get paid 20–25% of the end consumer price.
But it doesn’t have to be so bad.
Think of it this way. Farmers have little choice of picking their mandis since its illegal for them (in most states) to sell their produce outside of these market areas. Once they get to the mandi they get “one quote” since the traders collude. In essence, the system only has one buyer. Economists call this a monopsonistic marketplace — where the price is determined by a single buyer. And there’s no way you can get a fair quote when you’re operating in such unfavourable conditions.
In fact, efficient price realisation can only happen when there’s unfettered competition. So if you allow farmers to simply choose who they could sell to and foster competition (on the buying side), maybe they can get a fair price.
And that’s precisely what the government wants to do. It wants to open up the market and give farmers more choices. It wants to limit intermediaries and boost farm income. It wants to fundamentally change the way Agri commodities are marketed in India and it wants to do it now.
Now obviously this poses some very interesting challenges. For starters, laws on this subject (on marketing and selling agriculture produce) are framed and enforced by state governments. So if the state governments don’t comply, APMCs might still have some influence.
But what if the central government does something to bypass states altogether? Is it possible? Maybe. But we'll have to wait and see how the government circumvents the political opposition.
What we do know for certain, however, is that when farm produce moves between state borders, central laws will automatically kick in. So farmers will likely be able to sell their produce outside their own states and have a plethora of choice, no matter what. And once this happens, state APMCs will have to buck up. They’ll have to play fair to compete with entities outside. Ergo, farmers will be the ultimate beneficiaries.
The final concern is about free-market forces — those greedy corporates who try to use their size, scale, and bargaining power to browbeat small-time farmers. And sure, this could be problematic. But the thing is, big corporates like ITC and Adani are unlikely to deal with farmers individually. As the agricultural economist Ashok Gulati notes — “They [big corporates] need scale and to create scale you create an aggregation point and that is through farmer producer organizations.”
Meaning if farmers come together and form these small entities taking full ownership of their produce, they'll be able to solve the "scale problem" and bargain with large corporates as equals.
All we need now, is for the government to walk the talk. Implement this law in full, get states on board and unleash the animal spirits so that India can prosper.
Until then…