Know how to grow

Bird’s eye view of Agricultural

Marketing Reforms at the State
Level

Agri-Marketing Summit – Dr. C.Prabhu

2006 Associate Director
29th September, 2006 Rabo India Finance Pvt. Ltd.
Contents

1 Need for Agricultural Market Reforms

2 Proposed Reforms
3 Alternate Markets
4 Direct Selling
5 Linking Farmer to Commodity Market
6 Legal Reforms
RABOBANK: Global Financial Powerhouse
Focused on Food & Agri (F&A)
business

• Headquartered in the Netherlands; rated among safest banks

in the world
• 108 year old Co-operative bank with current membership of
almost 1.5 million persons
• Amongst the world’s largest banks with over USD 650 bln in
assets
• Over 50% of international activities are Food & Agribusiness
related
• Knowledge driven banking services in Food and Agribusiness
supported by sector studies and dedicated research teams,
across the world
Need for Agricultural Market
Reforms
 Agricultural Marketing
• Objective
– Increase the farmer share in the consumer price through disintermediation

• Jurisdiction
– Agricultural production and marketing : State Subject
– Food security/ Market Intervention/ Implementation of MSP : Central Subject

• Role of State Government

– Agricultural Production : Limited
– Agricultural Marketing : Absolute
– Value Addition : Limited ( Many states don’t have a vision for food
processing)

– Key Legislations
– Agricultural Produce Marketing Act (APMC)
– Essential Commodity Act (ECA)
– Tenancy Act
Need for Agri Market Reforms: Value Chain of Processed
Foods

Value chain of processed foods consist of a large number of intermediaries leading to

wastages, cost escalation, limited value addition and low value realisations for the farmer

Example: Value Chain for Processed Fruits and Vegetables

Village District
Farmer Commission Commission Processor Wastage Wholesaler Retailer Consumer
Agent Agent
27% 5% 6% 15% 22% 5% 20% 100%

Issues Non- Products routed through mandis High

transparent Primitive cleaning sorting& grading facilities prices
pricing Rampant wastage Limited
Limited Lack of quality & hygiene consciousness choices
financial
capability Poor infrastructure (cold chains)
Opportunistic profiteering
Need for Agri Market Reforms: Cost Build-up in the Value
Chain
Farmer share in end consumer price is typically less than 30-40% due to distortions in the
value chain

1 ' 2$
3 & 2$
' 45
3 6 )
4 63 &
2)
+ $ '
%5 "
$ 7 &' 6
68
$ !) +
! ) * "" * " "- +)) "$'
+
"#$ + ." /0 $ " #
- 6- " (
%"&' ( ,
)
 Why is Reform Required
• The objective of higher farmer share in the customer price has not been achieved
– Multiplicity of intermediaries

• The interaction between farmer and processor is very limited

– Heightened government controls
– This negatively affects the quality of the agricultural produce

• Major share of marketed surplus is transacted through private trade, but options for
private investments in agricultural marketing is limited
– This hinders the much needed investments in agriculture
Proposed Reforms
Proposed Reforms

Market
Infrastructure

Legal Reform Access to Market

Proposed Reforms

• Market Infrastructure
• Promoting alternate markets with a view to disintermediate and enhance investments
in post-harvest infrastructure
– Terminal Markets
– Rural Hubs/ Agri service centres
• Direct Selling by Farmer
– Facilitation by government promoted markets
– Contract farming

• Access to Market
• Governments role in linking farmer with the commodity market

• Legal Reforms
• Legal reforms required to achieve the above
Alternate Markets
Terminal Market: Proposed Ownership
Structure
Government (Central / State)

Equity
Contributio
Working n
Banks Capital SPV (Company)
Long term
debt
Equity
Equity Contributio
Contributio n
n
Private Enterprise Commission Agents
& Traders
Association

Stakeholder % Equity Contribution

Government (Central / State) 49

Private participant and Stakeholders association (Commission agents, 51
Wholesalers)

• Government funding can be in the form of direct funding / land

• Government can provide upto 49% of equity, returnable at par on successful operation of the
project.
Key features of successful Terminal Market Models

• Centralised selling system with reduced role of growers in selling

• Standardisation through the supply chain including in product quality, packaging,
unitisation etc.
• Concentration of demand and matching supply
• Transparent mechanism of price discovery
• Seamless information flow across all players in the marketing chain
• Higher efficiency and lower transaction costs due to systematic logistics of the
auction system.
International Infrastructure on F&V Trade

Aalsmeer: Flower Auction, The Netherlands

Auction Markets: Advantages

• Increase farmers’ share in end consumer price and reduce the role of intermediaries
• Farmer associations would aggregate supply from farmers at village level
– Reducing the role of village commission agent / consolidator

• Collection centres would ensure that farmers produce is properly graded and
farmers’ remuneration is fixed as per the grades
• Price discovery mechanism would be more transparent to farmers
• Farmers would have access to market information and auction prices
• As per Rabo estimates
– Farmer realisation in consumer price would increase from 27% to 50%
– Price for consumers to come down by 15-20%
– Wastage in the value chain to come down from 22% to 5%
 Rural Hubs / Agri Service Centres

Is an innovative concept emerging in the rest of the world and many parts of India

• Retailing of products and services

• Offtake arrangements and contract farming

Stakeholders Benefits
Farmers • Assured supply of inputs
• Assured quality
• Improved yields
• Market linkages

Agri input vendor / Others • Enhanced interface with farmers

• Enhanced brand recall
• Effective farm extension / technology transfer
Offtaker • Assured Supply
• Superior quality produce
• Reduced wastages
Government • Employment generation in rural areas
• Increased income for farming community
• Export potential
 Agri Service Centers: Current Scenario

ITC e-Choupal Choupal Sagar DSCL Hariyali Kisan Tata Kisan Sansar Mahindra
Bazar Shubhlabh

Value Information, services, Farm and non-farm Agri-inputs, technical Agri-inputs, Agri inputs, farm
proposition procurement, products sale products, guidance, crop finance, agronomic services. management
Procurement petrol retailing solutions

Geographic MP, UP, Rajasthan, MP Punjab, Rajasthan, UP UP, Punjab, Haryana. TN, Rajasthan,
reach Karnataka, AP, Maharashtra. 14,000 villages Punjab, MP,
31,000 villages, 3.1mn Maharashtra, Gujarat
farmers.

Revenue Procurement, sale of agri- Procurement, selling Farm inputs. Agri-inputs, rentals, Farm inputs, rentals
streams inputs, farm machinery, edible of consumer goods On the anvil- personal services on equipment, crop
oil/ semi durables, rentals. and farm inputs, products, staples. management
services. advisory

Investment/ Rs.1 to 5 lakhs/e-choupal Rs.2-4 crores Rs.1crore - -

outlet

Land area On 8 acres of land, On 2.5-3 acre, 6-7 persons Store area: 800-1200 Store area-2000sq.ft.
15 people per store per store sq. feet Warehouse-
1000sq.ft.
Time to reflect
Direct Selling
Direct Marketing: Facilitation by Government

• Examples
– Uzhavar Sandhai (Farmer market)
– Rythu Bazaar

• Research has shown that farmer profit has gone up

by almost 100% and the consumer price has decreased
by 15% as compared to the conventional marketing

• Complete disintermediation
• Market for only fruits and vegetables
Direct Selling: To processors & Traders

• Example
– Contract farming in seed production
– Contract farming in poultry
– Contract farming in Gherkin, Tomato etc

• Key requirements
– Ability of the contracting firm to offer higher returns to the farmer while being competitive in
pricing
– Ability to provide embedded services like inputs, credit and insurance
– Farmer level organizations for better negotiation
– Dispute settlement mechanism

• Drawbacks
– Can’t be practiced in all crops (crop characteristics is a critical factor in contract farming)
 Linking Farmer to the
Market: Access to Market
Linking Farmer to the Market

• A well functioning and liquid market enhances

– Price discovery
– Price risk management through hedging

• State governments could permit electronic spot markets (by amending APMC act)
which could help
– Create a common market
– Reduce logistics cost

• State governments / private sector to enhance the storage capacity

– Avoid distress selling
– Enhances the liquidity of the stock through WHR finances

• Steps to enhance the tradability of the WHR

Legal Reforms
Legal Reforms

• Agriculture Production is free from controls, but Marketing & Processing of

agricultural commodities are not
– State Governments alone are empowered to set up markets
– Processing industries cannot buy directly from farmers
– Processed foods go through multi-level taxation
– Stringent controls on storage & movement of several agri commodities
Acts as disincentive to farmers, trade and industries
 APMC Act: Amendments

Promotion of Agricultural Markets in private/cooperative sector

• For private players to take up market infrastructure projects, legal reform required in:
– Allowing private individual/ corporate entities/ co-operative bodies to set up market yards
– Model APMC act to be implemented by the state governments
– Deregulation of areas where new markets will be set up, alongwith backward & forward
linkages

Direct Marketing
• Allowing private individuals/ corporates to procure directly (at farm gate) from the
farmer under contract farming mechanism
• Creation of a dispute settlement mechanism for contract farming
• Tenancy acts to be amended for leasing of agricultural land for integrated farming
(specially for high tech agriculture)
 Essential Commodities Act: Amendments

Essential Commodities Act

• Controls the production, supply, storage, movement of, trade & commerce in agri
commodities
Amendment is required to
– Prune the negative list which would allow bulk handling and storage
– Remove restrictions on the inter-state movement of goods s as to create a common market
Thank -You