Conceptual framework

Only a small share of what the consumer pays for products reaches the actual producers (Bardhan et al., 2009) while unproductive marketing costs and margins account for a large share. The long chain of intermediaries who serve to pass on the products from the producer to the final user and the inefficient ways of operation of these unorganized traders are responsible for the large difference or the ‘spread’ between the farmer’s price and the user’s price. In this process both the producer and the consumer lose.

However, it remains to be seen if the spread can be reduced by shortening the chain or by including a powerful player in the chain. While it is possible that by employing modern methods, the new players can enhance efficiency, the possibility that the margins shared by numerous traders will be appropriated by these entities and more intriguingly part of this appropriation may take the form of ‘reputational rent’ cannot be ruled out either.

The invisibility of unproductive trading functions

It has long been recognized that diversion of social or the ‘merchant’ capital (Harriss-White, 996) to ‘unproductive’ but ‘necessary’ functions of buying and selling commodities (Marx, 1972) is unavoidable. Since such functions are usually inextricably combined with productive activities like transport, storage, cleaning and processing in various degrees, it is not easy to disentangle the components that deserve to be qualified as productive and necessary from the other functions. It is also likely that much of the unproductive functions can be avoided today with superior managerial practices that have developed in tandem with the progress of technology.

Reforms would ideally minimize or eliminate the avoidable part of price dispersion between the producer and the user that may arguably constitute a collectivized measure of unproductive marketing cost. This is far from easy to evaluate and confirm

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in practice. The informal, nested and sometimes non-pecuniary dimensions of the functioning of trading intermediaries in the market chains make the subject of traders’

productivity extremely complex to unravel.

Traders in agricultural markets are known to discharge several additional and associated functions that remain embedded in their usual and more visible functions of buying and selling. Traditionally, markets for such services even if amenable to conceptualization are generally missing in developing countries where producers are typically poor and operate in undeveloped regions. Therefore factoring these services into the margins of traders is not easy. The trader’s role as financier, insurer (as in pre-harvest contracts or forward contracts) informer (agent of market intelligence) and input supplier is only implicit in their margins given their outdated accountancy practices.

In the past, these multi-market interfaces of traders leading to complicated interlocking, was widely discussed in the literature in context of farmers’ exploitation (Bhaduri, 1983 Bharadwaj, 1985). In a vast rural setting where undeveloped infrastructure, poor communication, pervasive ignorance and extensive poverty traditionally left organized industries disinterested, the traders generally formed the crucial conduit of market intelligence (Mulky, 2008). Despite their own constraints and limitations, the more mobile traders, are known to be more aware about the market situation than farmers are. This flow of knowledge through this medium facilitates the determination of prices at the producers end.

On the contrary, in the traditional supply chains the traders individually specialize only in small ambits of activities within the chain such as in striking negotiations (as by a broker), supervising in auction (commission agents), stocking at various points (merchants), distribution in retail (vendor in shops or with push-carts) to consumers.

This system encourages the entry of more and more players who claim their shares in the user price and often unjustifiably widen the price spread. It is felt that even with

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growth taking place in the larger economy and the changing pattern of food habits among the growing middle class, this wide dispersion of prices will come in the way of agriculture’s response to the demand stimulus and the elimination of poverty among farmers, providing a compelling rationale for opening up the system to new marketing methods and players.

The relative success of the emerging channels stimulated by the launch of reforms and cutting down of channel lengths now offers a potent way to understand the implicit significance of the traders’ presence. This is possible by comparing the performance of markets between a common traditional channel and an emerging channel with a shortened length, functioning simultaneously in the same region for the same product.

While the price spread or the gross cost of marketing a product which comprises of both actually incurred costs and traders’ margins may be encountered in both markets, the relative extent of this spread can be assessed by comparing the gross marketing cost incurred for every rupee received by the producer from selling the product. Similar standardization can be made with respect to what the final user pays for the same product if consumer welfare is considered as a priority.

The gross marketing cost may however include inextricably both productive and unproductive components but to the extent that this relative cost of marketing can be reduced by shortening the channel length or bypassing the commission agent, the productive value of the traders forgone in the channel can be questioned. Although the livelihood concerns of trader are a serious issue facing market liberalization, this possibility suggests a lesson that more productive avenues of channeling manpower in the Indian economy should be explored.

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Reaching out to Small Farmers

However, hypothetically even if the market can be made more efficient by reducing channel length and possibly implanting more resourceful and organized players in the chain, the beneficial effect to agriculture can hardly be deemed meaningful in India’s context if it is not inclusive of the small farmers. The small farmers including the marginal farmers who operate small units of holdings comprise a very large, over 80% of the producers in India’s agriculture and 53% of the operated land. If these farmers, for any reason, are not drawn into these more efficient channels, the emergence of these channels will have little impact on agricultural development and only serve to enhance rural inequality or trigger an exodus from farming.

There are strong reasons to expect a positive association to prevail between participation and holding size. Empirical studies in other countries have not refuted this possibility either (see chapter 3 Section 3.2). Two obvious links between holding size and participation create a case for exploration in the Indian context.

First, small size, discouraging mechanization and big investment, makes a farm mostly not viable in terms of income potential so that little surplus is generated for adopting superior methods of cultivation. Yet it is widely known that emerging channels are selective in procurement and buyers especially private companies tend to impose high quality standards on the sellers. In this situation, the small farmer who can scarcely invest and adopt better technology is less likely to achieve the required standards. The farmer will also enjoy less protection to tolerate rejections that are expected in these channels.

On the other hand, small farm households are increasingly drawn towards non-farm ways of earning including participation in public works programmes as provided by the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) to supplement

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farm incomes and could very well be able to invest additionally on farming as required by the channel. Also, it is simplistic to assume that financial command is the only way to higher quality, as natural advantages and indigenous skills are also possible contributory factors that the emerging market channels have no reason not to exploit. In this study we will find that corporate buyers of apples tend to be selectively biased towards, remote and higher altitude farms rather than larger farms.

Secondly, it is believed that modern chains prefer the participation of larger producers because, for the buyer, the transaction cost of searching, screening and negotiating with a very large number of small producers can prove to be a heavy burden. The modern supply chains are powered by the forces of trust, reliability and official certification all of which find the larger farmers to be in a privileged position to command. Such scale linked disadvantages need not be a total deterrent as they can be overcome by the small farmers’ coming together with common purposes and standards and their negotiating over bulk produce with buyers in a more organized fashion.

Efficiency, Productivity and Sustainability

The foregoing discourses suggested that new channels catalyzed by reforms could help in bringing the producer and the consumer closure in the supply chain, thereby diminishing the elements of unproductive marketing costs and narrowing the ‘spread’

between the producer and user prices. This gain in market efficiency is likely to benefit the farmers by increasing producer’s prices and by raising demand due to cheaper availability of products at the retail end. Moreover, there is a need to improve productivity from land, achieve higher quality production and above all improve farm incomes to reduce poverty and develop rural India in a sustainable way.

Agriculture in India is at cross-roads. While the green revolution-generated prosperity based on foodgrain production has reached a road end owing to ecologically adverse

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side effects and the attainment of national level self-sufficiency in food, changes in food habits, increased sensitivity to knowledge surrounding nutritional intakes, transformation of social fabric in terms of family structure and gender roles and the prospect of exports in a more globalized food market have created a rationale for diversification from grains. The prospect of promoting new marketing channels suitable for diversified products would be expected to infuse investment into the agricultural sector. The resulting upgradation of technology would improve farm productivity.

Together, higher producer prices and productivity coming from reforms would idelally enhance income from farming and ensure that practices are sustainable.