AGRICULTURAL ECONOMICS
Technological Innovation in Indian Agricultural Marketing
Aparajita Goyal, Economist, The World Bank 1/1/2011 1:11:00 AM
Agriculture is crucial to the Indian economy, contributing 21 percent to India's Gross Domestic Product. The rural areas are home to 72 percent of the India's 1.1 billion people, a large number of whom are poor. However, recent changes in domestic and global markets are creating tremendous opportunities for farmers and agribusiness entrepreneurs. The demand for high-value primary products is rapidly increasing, driven by rising incomes, faster urbanization, and advancing technology. These developments are expanding market opportunities that are potentially important for faster agricultural growth (World Bank 2008).
Well-functioning agricultural markets can reduce the uncertainty of supply and improve the food security of households. Efficient markets require institutions and services that provide market information, establish grades and standards, manage risks, and enforce contracts — a continuing challenge in many countries. For instance, in India, layers of intermediaries are common in the marketing of agricultural commodities. The traders and intermediaries are often self-funded because of limited access to credit, and they maximize the returns on their working capital by rapidly turning over small quantities, with little storage. Quality grades are rarely standardized, nor are weights and measures, making personal inspection by buyers essential.
Improvements in information can have a dramatic impact on the marketing of agricultural output. Several innovative approaches are being piloted in developing countries, building on advances in communications technology (radio, cell phone, television, Internet) and the liberalization of telecommunications and broadcasting (Jensen 2007, Aker 2008, Muto and Yamano 2009). In India, the Ministry of Agriculture operates AgMarkNet that collects price information from wholesale markets nationwide and disseminates it through the Internet. The private sector in India is also investing in telecommunications infrastructure, such as mobile phone networks and Internet-linked rural kiosks, which aid in strengthening market information, extension, and other services to farmers. This paper highlights the effects of a pioneering intervention implemented in the Indian state of Madhya Pradesh that delivers relevant price information to soybean farmers as well as facilitates direct interactions between farmers and processors to enhance the functioning of rural agricultural markets.
Agricultural Marketing in Madhya Pradesh
Madhya Pradesh (MP) is the second largest Indian state in terms of area and ranks seventh in population. The Madhya Pradesh State Agricultural Marketing Board, established in 1973, facilitated the development of mandis (government regulated wholesale agricultural markets) as an essential requirement for farmers to receive a fair price for their produce. Currently there are a total of 233 main mandis in the state with well built storage and display areas where farmers periodically sell their produce. The MP State Agricultural Marketing Act, 1972 prohibits transactions outside the mandis. Every farmer is required by law to sell his or her produce in these regulated markets.
Soybean cultivation in India was negligible until 1970, but it grew rapidly thereafter in response to the domestic deficit of edible oil supply. India is now the 5th largest producer of soybean in the world and MP produces more than 60 percent of India's soybean crop. Soybean is usually sown in June because it requires sufficient moisture for its germination, and the monsoon rains are important for the subsequent growth of the crop. The crop is ready to be harvested in September and being a cash crop, almost the entire crop is marketed. Approximately 65 percent of the total soybean produced in a year is sold in the mandis from October-December, immediately after the harvest. There also appears to be considerable seasonal fluctuation in price. For instance, the average price in the fourth quarter, over the years 2000-2005, is 8.5 percent lower than in the second quarter.
After harvest, farmers transport their produce by animal-drawn carts and tractors to a nearby mandi where it is sold through an open outcry ascending bid auction. Field studies reveal that farmers travel 30-50 kms on an average to reach a mandi and they usually make this trip a couple of times each month (Anupindi and SivaKumar 2006). The farmer displays his produce in a heap in the mandi yard or simply stands besides his tractor. The auction begins when the auctioneer (a government employee) visually inspects the quality and sets the initial bid. From here the traders bid upwards until the produce is sold. This is a very rapid process and in a matter of seconds the final price is decided. The government employee and the traders move from heap to heap picking up samples of the produce and making a price estimate. In principle, edible oilseeds are traded on the basis of Fair Average Quality (FAQ) determined by the presence of dirt, damaged seeds and moisture content in each lot of produce offered for sale. For instance, the highest or the FAQ price is offered to a sample of soybean that is on a 2-2-10 quality scale (not more than two percent of the sample contains dirt, two percent contains damaged seeds and at most 10 percent moisture in the seed). Traders start to discount the price of beans when the proportion of dirt, moisture and damaged seeds exceed that level. Once the final price is set, the farmer's produce is bagged and weighed on a manually operated balance scale. After weighing, the full value of the farmers produce is calculated and the farmer is paid in cash.
Although the traders make up for lack of infrastructure such as transport and storage facilities in rural areas, they are also well informed about prices prevailing in different markets and the price offered by processors (Bardhan and Udry 1999). Farmers often do not have information about market conditions prior to the sale. Moreover, processors are unable to perfectly monitor the traders. Access to information as well as direct interactions between farmers and processors can therefore have a potentially important effect both on the price received by rural producers and on their behaviour.
An Innovative Private Sector Intervention in Central India
A large private sector company, ITC Limited, launched a unique e-choupal intervention in October 2000 in the state of Madhya Pradesh that to some extent addressed this need. Prior to this intervention, ITC bought soybean from traders (operating in the mandis) and processed the beans to produce edible oil for sale in the Indian domestic market and DOC (de-oiled cake) for export. Since ITC did not have any direct contact with the farmers, it commissioned certain traders (called commission agents) to buy soybean from the mandis on its behalf. The company was dependent on its agents' knowledge about local farmers and their produce.
Interviews with ITC officials revealed that the distortion of quality undertaken by the agents meant that the company paid a high price for a lower overall quality of soybean, which upon processing yielded less oil and more contaminated DOC. ITC believed that by bypassing the intermediaries, it would be able to better control the quality of the produce and also lower its transaction costs. ITC calculated that it saved Rs. 12.9 million in the first year of operation through better quality oil and DOC obtained from processing soybean procured through the e-Choupal intervention. Moreover, the company had dual roles for the infrastructure that it was creating as it planned to sell its own consumer products in rural areas in the future.
This intervention provided an alternative both to ITC for procuring soybean and to soy farmers for selling their produce. Beginning in the year 2000, ITC established a total of 1700 internet kiosks and 45 hubs over the course of 4.25 years in the major soy growing districts of the state. The intervention has two dimensions. Internet kiosks were set up in villages that provide information about mandi prices to soy farmers in the state. Each day the (minimum and maximum) prices of soybean in approximately 60 local mandis are posted on the website. Along with this information, ITC's own offer price at its 45 hubs is also posted. In addition, information on farming techniques and weather conditions is also available in the local language to farmers through the kiosks. Each internet kiosk was designed to cater to its host village and four other neighboring villages within a five kilometer radius (Prahalad 2003). The internet kiosks are managed and operated by trained farmers who are selected from within the village and provide free services to other soy farmers.
Hubs represent a point of contact between farmers and the ITC. A farmer can sell directly to ITC by going to the nearest hub. ITC's goal is to have a hub within a 30-40 km. radius of its target farmer. Once the farmer arrives at one of the hubs, his produce is carefully tested to discern quality. ITC can offer a price below the posted FAQ price if quality is below the FAQ level. However, the minimum support price (declared annually by the Government of India) is the lowest price that ITC can offer for a certain poor quality threshold. After the price is set and accepted by the farmer, his beans are weighed on an electronic weighbridge, and the weight is multiplied by the offered price. The farmer then receives cash instantly.
In the initial period of the intervention, ITC used a provision in the by-laws of the Marketing Act to procure soybean from farmers at its hubs. This provision permitted farmers with small landholdings and low annual output, who are unable to travel to the mandi, to sell their produce outside the regulated markets, in front of a government official in the village (Government of MP 2003). The state Marketing Act was subsequently amended in April 2003 allowing farmers to sell outside the mandis provided that the buyers obtain a ‘Purchase Center License’. This license enables a particular buyer to establish centers to procure agricultural produce outside the physical confines of a particular mandi subject to full documentation of its transactions and the payment of mandi tax. The amendment of the Act represents an important step towards greater flexibility in the marketing of agricultural produce in the state.
In recent work (Goyal 2010), I examined the impact of this innovative initiative on the price received by soybean farmers in the mandis and on their subsequent planting decisions. Improvement in price information to farmers, due to the presence of kiosks, is likely to reduce the trader's monopsony power leading to an increase in the offer price of the good in the mandis. The presence of a hub, however, is likely to exert two opposing forces. On one hand, direct buying by ITC is expected to divert a part of the sales away from the mandis, leading to an upward pressure on price, the competition effect. On the other hand, scientific testing of quality performed at the ITC hubs might induce farmers to self-select, putting a downward pressure on the price offered in the mandis, the composition effect. If farmers with good quality soybean have a greater tendency to sell directly to the private company, the effect of the hub on the mandi price is a priori ambiguous, and is ultimately an empirical question.
The location and installation date of each internet kiosk and hub, available from the private company, provide the spatial and time patterns of the implementation of the intervention in the state of Madhya Pradesh. The outcomes, monthly wholesale price and volume of crops sold in all government regulated mandis in the state from April 2000 to September 2005, are available from the Madhya Pradesh State Agricultural Marketing Board. Measuring the output response to this intervention is crucial for understanding the effect of this intervention on farmers' behaviour. Annual district level data on area cultivated, production and yield of crops from 1998 to 2004 are available from the Commissioner of Land Records, Madhya Pradesh.
This is the first attempt to collect detailed data on price and volume of crops sold in the mandis to examine the impact of information technology on the functioning of rural markets in India. Using differential timing in the introduction of kiosks and hubs across the districts of the state, the study finds an immediate and significant increase in the average price of soybean after the kiosks are introduced, The presence of an internet kiosk in a district is associated with an increase in the monthly mandi price of soybean by approximately two percent. While the presence of hubs appears to have no effect on average price, hubs are associated with a dramatic reduction in the volume of sales in the mandis. In addition, the dispersion of soybean prices across the affected mandis in Madhya Pradesh decreased after the intervention. The increase in price and the reduction in dispersion appears to influence farmers' planting decisions. There is a significant increase in the area under soy cultivation due to this intervention. The findings of the study show that information provision to farmers is potentially crucial to increasing the efficiency of rural markets in India. The analysis also contributes to an understanding of the role of information technology in enhancing rural development.
Conclusion
Price information is crucial for market efficiency. The introduction of internet kiosks across districts of the state of Madhya Pradesh is associated with a significant increase in the monthly price of soybean in government regulated wholesale agricultural markets. The use of Information and communication technologies by farmers, fishermen and other agents in the agricultural supply chain, particularly in the marketing of output, such as obtaining price information or arranging sales has risen significantly in recent years. Moreover, direct interactions between producers and processors are gaining considerable interest in the developing world. While intermediaries deliver critical services to rural producers, they are also often exploitative and there can be large efficiency gains from their removal. The innovative intervention by ITC shows that it requires serious investment to bypass intermediaries, but it is possible, and can be beneficial for both farmers and final buyers.
References and Additional Thinking
Anupindi, Ravi, and S. Sivakumar. 2006. “Supply Chain Reengineering in Agri-Business: A Case Study of ITC’s e-Choupal.” In Building Supply Chain Excellence in Emerging Economies, ed. Hau L. Lee and Chung-Yee Lee, 265–307. New York: Springer.
Aker, J. 2008. “Does Digital Divide or Provide? The Impact of Cell Phones on Grain Markets in Niger,” Center for Global Development Working Paper No. 154
Bardhan, P. and Udry, C. 1999. Development Microeconomics, Oxford University Press.
Government of Madhya Pradesh. 2003. “Agricultural Marketing Act, 1972.” M.P. Act No. 24.
Goyal. A. 2010. “Information, Direct Access to Farmers, and Rural Market Performance in Central India,” American Economic Journal: Applied Economics 2(3): 22-45.
Jensen, R. 2007. “The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector,” Quarterly Journal of Economics, 122(3), 879-924.
Muto, Megumi, and Takashi Yamano. 2009. “The Impact of Mobile Phone Coverage Expansion on Market Participation: Panel Data Evidence from Uganda,” World Development, 37(12): 1887–96.
Prahalad, C.K. 2003. “What Works Case Study Series,” University of Michigan Business School
World Bank 2008. World Development Report: Agriculture for Development, World Bank.
Bhatnagar, S. and Schware, R. 2000. Information and Communication Technology for Development: Cases from India, SAGE Publications India Ltd
Brown, J. and Goolsbee, A. 2002. “Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry,” Journal of Political Economy, 110 (3), 481-507.
Upton, David, and Virginia A. Fuller. 2003. “ITC eChoupal Initiative.” Harvard Business School Case Study 604016.
(Aparajita Goyal is an economist at the World Bank. Her research focuses on microeconomic issues of development. Prior to her doctoral studies, she worked with an NGO, ActionAid. In 2000-2001, she received the Graduate Merit Award at the London School of Economics and was the recipient of the Economic Club of Washington Research Fellowship. Her research has been featured in The Economist, Financial Express, Frontline, and others. She obtained a PhD in Economics from the University of Maryland, College Park in 2008.
The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)
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