Research shows intermediaries’ role is misunderstood. Local market realities more at play

Researchers associated with Pennsylvania University’s India study centre looked at agricultural markets of Bihar, Odisha and Punjab. They found that intermediaries are a rational response to the dominant structure of Indian farming.

A farmer working in a field | Representational image | Dhiraj Singh | Bloomberg

Most Indian farmers have tiny farms that yield meagre incomes. They face a multiplicity of risks, which jeopardises even these low incomes. These twin pressures are particularly acute in eastern India, manifest in the two states that were the focus of our study, Bihar and Odisha. With nearly 80% of the population in Bihar and 70% in Odisha still engaged in agriculture, increasing farmers’ incomes in these two states is critical.

Agriculture policies in India have largely focused on three policy tools to increase (and stabilise) farmers’ incomes: decreasing input costs through input subsidies, improving crop yields through better seeds and farming practices, and increasing output prices while stabilising incomes through the Minimum Support Price (MSP) and procurement. More recently, policy has begun to pay attention to getting farmers a greater share of the marketed surplus, which has led to renewed concerns about the state of agriculture markets, the focus of our study.

Markets 

The prices farmers receive for their produce vary considerably across farmers and commodities. There is a range of factors (timing of sale, site, volume) and transaction processes (grading, quality assessment, price determination, weighing method, and timing and mode of payment) that impact the final price.

The site of first sale also varies substantially. While the village (and to some extent local periodic markets or haats and small unregulated wholesale markets) remains the predominant site for farmers’ sales in Bihar and Odisha, the regulated mandi is the near-universal site of sale for farmers in Punjab. Thus, a singular focus on mandis as market sites for farmers will miss out the actual physical sites of sales for most farmers in eastern India.

Misconceptions about the primary site of sale also extend to the manner in which sales occur. Cash remains the predominant medium of exchange. Both electronic sales and auctions are small and, in many places, negligible.

In principle, farmers could engage in post-harvest processing, with the value addition giving them a price mark-up. However, post-harvesting processing is quite limited, reflecting market structure and price signals. On the other hand, grading at the farm level does not seem to translate into higher prices, and few farmers invest in it.

Farmers also scarcely invest in storage since delaying the sale of their harvested crops rarely results in higher prices. In Odisha, larger farmers do delay sales, because they are able to wait for the limited paddy procurement operations by the state to open so that they can benefit from the MSP. Smaller farmers, however, lack such access and sell earlier, in cash, to village traders at lower rates. In Punjab, where public procurement opens on schedule and all farmers sell at MSP via arhatiyas in the mandi, farmers again have little incentive to invest in storage since delayed sales do not bring higher prices.

Larger volumes sold by farmers do translate into higher prices but for the most part these gains are modest. Although this should create incentives for farm-level aggregation to increase lot sizes, the aggregation required is deemed to compromise quality (due to mixing) and can actually drive down prices for the farmers involved. The resulting trade-off means that there is little farm-level aggregation.

Finally, our findings challenge a longstanding assumption about Indian agriculture markets: the supposed ubiquity of interlinked transactions, especially for poor farmers. The majority of transactions between farmers and their first buyers in Bihar and Odisha do not show evidence of interlinked transactions. Interlinked markets do occur but for richer farmers in Punjab, where such exchanges between farmers and a stable network of commission agents continue to be important. Importantly, however, these interlinked markets in Punjab—between credit and product markets—only affect who the farmer sells through but not the price (which is determined by the MSP).

Market sites 

A farm’s location is a crucial determinant of the prices a farmer gets for his/her produce. Farmers in villages that are remotely located are doubly disadvantaged. First, the farmer gets lower prices because it is costlier to transport the farm produce to where there is demand. Second, there are fewer buyers, which limits competition and gives them greater monopsony power, further driving down the price the farmer gets in more remote locations.

But no matter what the location, if there is government procurement in a market site, farmers unequivocally benefit both due to higher prices (albeit modestly higher) as well as less uncertainty in their income stream. Nonetheless, when there is limited procurement, it is often regressive. The benefits accrue disproportionately to well-off farmers as they have both more financial and political power to take advantage of the de facto rationing. However, since procurement is confined to a handful of crops, especially paddy in eastern India, it reduces the relative risk of growing paddy versus other commodities. By providing a price floor in one crop, the government very actively influences farmers’ crop choices rather than responding to market signals. And by growing greater quantities of a crop whose domestic demand is slowing and which guzzles a critical life resource—water—the opportunity cost of its overuse is high and rising rapidly.

In principle, India’s farmers could shift to growing crops that bring higher average incomes but are riskier, if they could hedge against those risks. However, we find that insurance markets are largely missing, preventing farmers from hedging risk. Awareness of the Indian government’s flagship crop insurance programme (Pradhan Mantri Fasal Bima Yojana) is limited, and the actual take-up is only amongst a small minority of farmers.

The lack of clarity on the economic problem that MSP and procurement are trying to solve—increasing production, keeping consumer prices low, or increasing farmers’ incomes— has meant that a single policy instrument is being used to target multiple policy goals. Any policy change must take a long-term view, with gradual phase-in, and provide farmers viable options before reducing government support for policies such as MSP and procurement.

Market systems 

The marketing system has attuned itself to the prevailing farming system—one with many small farmers who have modest marketable surplus. This excludes the roughly one-third of farmers who sell very little in the market anyway (but for whom production is tied to household food security). This report solely focuses on farmers who produce enough to sell.

Larger entities—for example, the government and agro-processing companies—always have difficulties in transacting with many farmers. When a principal has to deal with many agents, as the number of agents grows, the principal faces a span of control problem. The result is multiple layers in the marketing system.

In Bihar and Odisha, this is manifest in the many small intermediaries buying from farmers in a few villages in close proximity. Each of them serves as a small aggregator who then passes on the agriculture commodity to larger intermediaries who in turn pass it on to processors. In Punjab, where farms are larger, there is usually one layer, with arhatiyas buying on behalf of the Food Corporation of India (FCI) in the case of paddy and wheat. Since intermediaries aggregate from many small farms, the mixing of produce from many farms undermines price premiums for higher quality produce. This reduces incentives for farmers to invest in post-harvest processing.

The market system with many intermediaries at multiple levels is less a sign of market inefficiency and more a rational response to the dominant structure and condition of Indian farming, which is characterised by tiny farm sizes. There is little evidence of intermediaries charging big mark-ups or delays in the movement of goods. Furthermore, farmers are also paid quickly. Other than remote locations, there is little evidence of the market power of the much-vilified middleman.

Intermediaries also help reduce risks faced by farmers, often paying them for the produce before they themselves get paid and absorbing the risk of the crop failing or prices falling (this is especially true in vegetables).

Brokers also seem to proliferate in dynamic markets where both local and non-local buyers are present, where they play an important role in providing some assurance against counter-party risk in the context of weak relationships between parties. This is especially the case when there is no formal regulation to provide such assurance.

In contrast to the dominant narrative of restrictive state regulation in agricultural markets in India through the Agricultural Produce Marketing Committee (APMC) Act, Bihar and Odisha are characterised instead by market deregulation (Bihar) and limited and weak formal regulation by the state (Odisha). The vast majority of first sales takes place at the village level itself and remains out of the purview of any formal regulation.

In recent years, new market infrastructure under eNAM appears to have been misdirected and inappropriately constructed and is therefore lying unutilised. Across the three eNAM sites in this study, we found significant resistance and virtually no substantial participation by farmers or traders in Hoshiarpur (Punjab), Sambalpur, and Koraput (both in Odisha).

The framework of equating mandis with APMCs needs to be expanded to consider the multiplicity of physical sites, from periodic haats to large, permanent wholesale markets. It is imperative that the state invest substantially in improving the physical infrastructure of market sites. This should prioritise building physical wholesale markets—both permanent and periodic—within the proximate distance of farmers.

Change in laws will matter little if the problem is structural. If farm sizes remain small, even if big firms enter, they will either buy from the same intermediaries or employ them and control greater market power, in which case farmers’ gains will be minimal.

The need for open, competitive, and well-regulated markets, market integration, electronic trading, and free movement of goods is now well recognised. However, implementing the reform vision will require several coordinated investments on the ground, taking into account local realities with routine feedback from local stakeholders such that all pre-requisite conditions are met for the reforms to take off.

The idea that there are discrete low-hanging fruits that can be easily plucked through simple interventions and that these will result in significant gains in price realisation for farmers is as seductive as it is mistaken.

Shoumitro Chatterjee is an Assistant Professor in the Department of Economics at the Pennsylvania State University. He is also a Non-Resident Visiting Scholar at the Center for the Advanced Study of India (CASI) and Visiting Fellow at the Centre for Policy Research.

Mekhala Krishnamurthy is an Associate Professor of Sociology and Anthropology at Ashoka University and Senior Fellow at the Centre for Policy Research. She is also a Non-Resident Visiting Scholar at CASI.

Devesh Kapur is the Starr Foundation South Asia Studies Professor and Asia Programs Director at the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University, Washington, D.C. He is also a Senior Fellow at CASI and Senior Visiting Fellow at CPR.

Marshall M. Bouton is president emeritus of The Chicago Council on Global Affairs. He is also a Senior Fellow at CASI. Views are personal.

This edited excerpt from the study titled ‘Agricultural Markets of Bihar, Odisha and Punjab‘, conducted by the authors and funded by the Bill & Melinda Gates Foundation between 2017 and 2019, was first published by the Center for the Advanced Study of India, University of Pennsylvania. Read the full study here.