Price impact of organized retail chains on farmers
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  • 1. IMPACT OF ORGANIZED RETAIL CHAINS ON REVENUE OF FARMER (A CASE STUDY OF MOTHER DAIRY CENTRE S IN HARYANA) JITENDER SINGH ASSISTANT DIRECTOR RESEARCH STUDIES OFFICE OF THE ECONOMIC ADVISER DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION MINISTRY OF COMMERCE & INDUSTRY UDYOG BHAWAN, NEW DELHI INDIA 2011 Views expressed in this paper are those of the author(s) and may not be attributed to the Government of India.
  • 2. 2 | P a g e Acknowledgement This acad em ic endeavor w ould not have been pos s ible w ithout the help of a number of people w ho w ith there k ind cooperation, active supervision and steadfast support have made this research work reality. I am extremely grateful to Prof. R. K. Sharm a, w hose k een continuous encouragement and suggestions helped to complete this work. I am thankful to Shri M.C. Singhi, Senior Econom ic Advis er, for his valuable com m ents and encouragem ent to com plete this w ork . I also extend m y s incere gratitude to Shri S aju K. Surendran, Deputy Director and Shri Ashwani Kumar, Deputy Director for their precious comments. I w ould lik e to m ention appreciation es pecially to villagers/ farm ers w ho helped me to their m axim um throughout the field w ork . I am also thank ful to m y colleagues in the Office for ins piring m e and actively participating in the debate and discus s ions on related is sues. Palace: Date: Jitender Singh
  • 3. 3 | P a g e CONTENTS SN Subject Pg. No. 1 Introduction 5 2 Rise of Organized Retail Chains 6 3 Studies of Marketing Efficiency 10 4 Objectives of the Study 11 5 Data & Methodology 11 6 Comparison of the Alternative Models of the Direct Procurement of Vegetables 12 7 Market Integration and Uncertainty in the Prices of Alternative Marketing Channels 15 8 Impact on Revenue 17 9 Conclusion 23 10 Bibliography 24 11 Annexure 32 Table Title Pg. No. 1 Vegetable Production & Inflation in India 5 2 Augmented Dickey Fuller Unit Root Results 15 3 Co integration Results 16 4 Variability of Prices 17 5 Th e h ypoth etical valu es to sh ow im pact of price an d quantity changes on revenue of the farmer 18 6 Average Net Reven u e of Tradition al Market an d MD Channel 20 7 Results of the above equation 21 8 Elasticity of Prices w.r.t. Arrivals (Arr) an d procured quantity (PR). 22
  • 4. 4 | P a g e Abstract The objective of the s tudy is to exam ine the terms and conditions of the procurement contracts of Mother Dairy and Reliance Fresh and also comparing revenue impacts of Mother Dairy and Traditional Marketing Channel on farmer. It is found that the by law s of the Reliance Fresh is much better than the Mother Dairy procurement contract in terms of price information, quality monitoring, mode of pay ments etc. The relatively simple contract of Reliance Fresh provides an edge to the Company to attract better quality of the product. How ever it does not mean that the Mother Dairy does not put up an incentive to grow more and better quality to the farmer. Despite the complexity of the contract of Mother Dairy (MD), it provides a relatively better deal to the farmer as compare to the traditional m ark et chain. This m ay be the reason that it has been successful for such a long tim e in m any areas. On the practical s ide of the impacts of MD it is found that except Green Chilli Onion, and Musk Melon the prices of local m ark et are co-integrated w ith Mother Dairy prices. How ever, the net revenue of the MD is es tim ated more volatile then TM for all the vegetables except Bhindi and Tomato. This is quite oppos ite to the notion that the organized retail chains w ill s tabilize the prices for the farmer and consequent the returns w ould be s tabilized. How ever, the higher ins tability of revenue does not mean that it affect farmers income alw ay s negatively, rather the effect m ay be pos itive if the prices are fluctuating upw ard. The net revenue of the farmer for selected vegetables is found on an average 17 per cent higher for carrot, 134 per cent for Lauki, 17 per cent for Green Chilli, 45 per cent for Onion, 50 per cent for Bhindi, and 57 percent higher for Musk Melon, in the MD as compare to TM except Cauliflow er. Bes ides, direct revenue impact, there are indirect impact on the revenue of the farmers of the direct procurement of MD. And it is not only confined to those supply ing to MD rather extended to all those farmers s upply ing to the TM. The indirect impact als o seems to be considerable given the fact of low derived dem and elas ticity of the local m ark ets . In short the direct procurement of the MD has enhanced the farmer s revenue.
  • 5. 5 | P a g e I INTRODUCTION Why low grow th of area under vegetable and high rate of inflation and perhaps profitability in vegetable coexis t? Is it because the price advantages do not accrue to the farm ers or producing vegetables is a risky business? 1.2 The widening gap between dem an d an d produ ction of the vegetables h as been eviden t in risin g prices of vegetables in recen t past. The average increase in the prices of vegetables at wholesale markets was 9.5 per cen t du rin g 2006-2010. The contributory factors for this increase have been an in crease in dem an d an d sticky su pplies. On th e dem an d side, th e per capita in com e of th e cou n try is risin g an d th e con su m ption pattern is getting diversified towards vegetables. Table: 1. Vegetable Production & Inflation in India Year Production (T) Production Growth (%) Yield (Tone/hec.) Area ('000' Hec.) Area Growth (%) Yield Growth Inflation in Vegetable (%) 2006-07 114993 3 15 7581 5 -2 0.5 2007-08 128449 12 16 7848 4 8 19.9 2008-09 129077 0 16 7981 2 -1 3.5 2009-10 133738 4 17 7985 0 4 14.0 Source: National Horticulture Board, and the Office of the Economic Adviser. 1.3 On th e su pply side th e produ ction of vegetables is n ot keepin g th e pace with dem an d. Th e low growth of th e vegetables produ ction du rin g 2008-09 an d 2009-10 h as been n ot on ly becau se low yield bu t also becau se of low growth in th e area u n der vegetables. Th is in dicates th at th e in cen tives for th e crop diversification perh aps were not sufficient en ou gh to in du ce allocation of area to vegetables. Wh y th e farm er is n ot diversifying area towards vegetable wh en prices of vegetables h ave been very h igh ? Th e m ain reason for slow crop diversification toward vegetables is the h igh risk-h igh retu rn pattern of th e vegetables. Th e high risk is due to fluctuating prices in the local markets and a low share in a u n it of con su m er price. Th e farm er m ay n ot n ecessarily be a risk averse bu t h as a low risk appetite. Lack of credible in stitu tion al m ech an ism wh ich cou ld resu lt in an in crease in h is sh are in each ru pee a consumer spends on vegetables is further reinforcing this risk aversion.
  • 6. 6 | P a g e 1.4 Th e sm all size of th e local m arket an d its disin tegration , h ave m ade th e prices su pply sen sitive. Bu t wh ile farm ers are n ot able to ben efit from th e in crease in prices, a fall h its th em im m ediately. Dem an d for vegetables, in so far as th e farm ers are con cern ed is a derived dem an d, th e dem an d of th e in term ediaries. Th e existen ce of perfect com petition am on g th e farm ers as sellers of vegetables an d a few oligopolistic bu yers or m iddlem en , th erefore, resu lts in distortion of the in cen tive stru ctu re. Flu ctu atin g prices of th e vegetable, wh ich are kept low by th e in term ediaries; do n ot provide en ou gh in cen tives to th e farmers to produce more vegetables. Prevalence of high prices and higher in flation are also du e to th e h igh tran saction cost of vegetables tran sfer an d h igh m argin s of th e m iddlem an . Besides, th e perish able n atu re of th e vegetable togeth er with in adequ ate storage facility, im proper dem an d m an agem en t an d in efficien cy in su pply chains create h u ge wastes in transit. In this situation, while increased supplies results in a price crash for farm ers, lower su pplies does n ot provide th em an y econ om ic ren t. Th is fu rth er rein forces th e risk aversion of th e farm ers. On e option for th e efficien cy in th e su pply ch ain s is to encourage organ ized retail chains. 2. RISE OF ORGANIZED RETAIL CHAINS 2.1 The evolu tion an d pattern s of th e diffu sion process of m odern food retail in du stry h as varied worldwide, bu t its en try an d con sisten t in crease in m arket pen etration h ave had sign ifican t im plication s across all countries including US, European Union and the developing countries of Latin Am erica an d East Asia in clu din g Ch in a1. For In dia, th e size of food retail in 2008-09 was estim ated at abou t Rs.10,700 billion, wh ich is 61 per cen t of th e total retail in du stry. Wh en 95 per cen t retail is in unorganized sector, th e organ ized retail (only 5 per cen t) is likely to grow at an an n u al rate of arou n d 11 per cen t an d is projected to tou ch bu sin ess levels of Rs 53,000 billion by 2020. The Agri-food retailin g accounts for 18 per cent of the organized retail today and is likely to have a lower share (12 per cent) by 20202. According to ICREAR report annual growth rate of organ ized retail in food an d grocery is estim ated at 16 percen t du rin g 2004 20073. Oth er estim ates pu t th e growth rate of 1 The IFPRI Discussion Paper (2008). 2 NABARD study on Organised Agri-Food Retailing in India(2011) 3 Impact of Organized Retail Chains on Income & Employment, ICREAR(2009).
  • 7. 7 | P a g e organ ized food an d grocery at h igh er level of 42 percen t in 2006 over 20054. 2.2 The sh are of expen ditu re towards food an d beverage in total con su m ption expen ditu re of th e h ou seh olds is expected to declin e. Su ch a declin e, as per th e En gle Law, is a n orm al h appen in g as part of th e process of developm en t. Th e organ ized retail m ay also, th erefore, experien ce a declin e in ratio of th eir bu sin ess tu rn over derived from th e sale of food related produ cts. Th ere wou ld, h owever, be two positive factors. Th e risin g in com es an d stan dards of livin g are expected to pu sh u p th e dem an d for h igh valu e foods. Th e ch an ges in con su m er beh avior an d preferen ces in favou r of processed foods as a resu lt of an in creasin g participation of wom en in labou r force cou ld h elp in su stain in g th e organ ized retail s sh are in food an d related produ cts. Moreover, in creasin g u rban ization is also associated with a ch an ge in th e sh oppin g beh avior of th e m iddle class du e to h igh er in com es an d increasing opportu n ity cost of tim e for th e con su m ers (bu yers), particu larly th e women. Im provem en t in processin g tech n ology, progress on accou n t of road con n ectivity, in vestm en t in storage facilities, fast an d safe tran sport an d in form ation tech n ology revolu tion is likely to solve m an y of th e problem s of m arketin g system an d provide opportu n ities to private traders. 2.3 In creased in vestm en t in organ ized retail by dom estic an d foreign players brin gs abou t u pstream ch an ges in su pply ch ain an d an in creased cen tralized procu rem en t of agri produ cts from farm ers as th e experien ce of th e East Asian cou n tries su ggest. Th e rapid rise of su perm arkets in differen t cou n tries h as tran sform ed th eir agri-food system, though the speed of transformation has been different. In case of In dia th e tran sform ation as of n ow h as been slow both at u pstream an d at downstream. In the downstream changes; the retail sector is now open for th e corporate to develop su perm arket in frastru ctu re, th e foreign investment is likely to flow in near future. 2.4 The direct procu rem en t in fresh fru its an d vegetables may offer better price, provide kn owledge of market demand, tech n ological in pu ts an d access to credit on accou n t of assu red m arket to th e farm ers. While it is estim ated th at direct procurement of fresh fru its an d vegetables 4 The India Retail Report, Ministry of Commerce and Industry, 2007.
  • 8. 8 | P a g e could redu ce wastage by abou t 7 per cen t an d can im prove th e ch ain efficien cy by as m u ch as 17 per cen t, th ere is n o con sen su s wh eth er th e upstream operation of supply chain would be inclusive and cover farmers of all sizes of lan d h oldin gs. Th e tradition al ch an n el where h u ge wastage of com m odities, lack of in frastru ctu re, m issin g in stitu tion , lack of stan dardization an d m oreover lack of in cen tives to in vest in storage facilities, standardization, packaging etc are very much evident. Experiences of other institutional innovation in agri-marketing 2.5 The experien ces of th e con tract farm in g, particu larly regarding th e in clu sion of sm all farm er under con tract farm in g, th e distribu tion of profits between farm ers an d the con tractor, sh arin g risk by agribu sin ess firm s, an d m in im ization of th e adverse im pacts on en viron m en t an d society h ave led to m ixed resu lts. Th ere are variou s price an d n on -price effects on agricu ltu re. Some positive im pacts of con tract farm in g in clu de th e crop diversification , in crease in produ ctivity, im provem en t in th e profitability of farm ers, improved decision m akin g, increase in wages an d em ploym en t of agricu ltu ral labor an d tech n ology tran sm ission . Th e issu e of in clu sion is m ore im portan t becau se of em ergin g tren ds of large n u m ber of sm all farm er in In dia an d decreasing size of lan d h oldin gs. A sm all farm er operatin g predom in an tly with fam ily labor h as m an y advantages which reduce th e cost of labor su pervision , cost of monitoring, screen in g of h ired labou r, cost of con tract en forcem en t an d cost of n egotiation 5. Collectively, it is easier to deal with sm all farm ers by the contracting firms which reduce th e possibility to get involved in to a con flict. On th e oth er h and, th ere are disadvantages du e to high dependency on farm in com e wh ich redu ces h is bargain in g power, low capacity to invest restricts (prohibits) implementation of new technology and to experiment with new farming practice and crops etc.. 2.6 Th e sm all farm er is in terested in takin g u p con tract farm in g becau se it facilitates availability of m odern in pu t, wh ich are eith er u n available or cou ld be obtain ed th rou gh other sources at a very h igh cost6. Con tract farm in g also redu ces his price risk and eventually stabilizes in com e. Th e firm s, h owever, prefer large growers to avoid dealin g with large n u m ber of sm all farm ers. It is n ot on ly easy to bargain 5 Key, Nigel and Runsten, D. 1999 6 Porter Gina and Howard Phillip K., 1997
  • 9. 9 | P a g e with sm all n u m ber of large farm er, it is also advan tageou s to th e firm to redu ce th e in pu t su pply cost, cost of su pplyin g exten sion services. Large farm s h ave a h igh er risk takin g ability, can pu t in larger in vestm en ts in lan d. Th ey h ave relatively better qu ality lan d m ore u n iform an d consolidated. Man y stu dies7 reveal th at th e system of con tract farm in g is skewed towards m ediu m an d large farm ers, th ou gh there were n o sign ifican t differen ces in produ ctivity between sm all, m ediu m an d large farms. Th ere was n o discrim in ation in procu rem en t by agribu sin ess firms as well as price obtained by small and large farmers. 2.7 Th e exclu sion of th e sm all farm er eviden t in th e con tract farm in g, m ay h ave severe con sequ en ces for ru ral econ om y. If firm ch oose to con tract prim arily with large com m ercial farm s, then small farm er of th e ru ral popu lation may fail to ben efit directly from con tract arran gem en ts. In th e con text of liberalized m arkets, con tract farm in g th at exclu des sm all farm er can lead to m ore con cen trated lan d own ersh ip an d displacem en t of ru ral poor8. Th e way con tracts an d th e in com e earn ed from con tractin g is distribu ted with in a ru ral com m u n ity can h ave important implication for economic and social differentiations within that community9. Th ese issu es are particu larly im portan t in th e con text of In dia wh ere 85 percen t of lan d h oldin g are sm all an d m argin al h oldings an d m ore th an 40 percen t of ru ral popu lation is lan d less. Addition ally, th ere is a social stratification with h igh -in com e in equ alities in ru ral areas. 2.8 Even if small farmers are incorporated in contract farming, there is n o gu aran tee th at th e contracting firm wou ld n ot exploit or at least provide som e ben efits to th e sm all farm er. In th e absence of representative farmer s organ ization s, th e con tract-farm in g sch em e may have a limited regional/ local impact.10 Large number of small farmer are more pron e to rem ain u n organ ized du e to m issin g n etworkin g, lack of information an d lim ited awaren ess of organ ization ben efits. In th e lon ger run, h owever, if th e con tractin g firm becom es pervasive, th e farm er m ay n ot h ave any option but to sell th eir produ ce through th ese ch an n els, but if these channel become nonoperational, farmers may need to reverse their con tract an d switch over to oth er firm . Th ere are oth er possibilities 7 Kumar Promod (2006) 8 Key, Nigel and Runsten, D. 1999 9 Korovkin, 1992 10 Porter Gina and Howard Phillip K., 1997
  • 10. 10 | P a g e also; th e firm can m axim ize its sh ort ru n profits with ou t con cern in g abou t su stain ability of the farm an d the farm er an d by exh au stin g th e potential of the region it may switch over to other relatively regions. 2.9 Th is easy switch over by firm to oth er region to con tract or to procu re th e produ ce an d any lim its on th e exit of th e farm er from con tract m ay distort th e bargain in g power equ ation in th e lon g ru n in favors of th e firm . Som e altern atives, h owever, h ave em erged. The sch em es to prom ote direct m arketin g ch an n els are Apn i Man di, Ryth u Bazars, Hadspar, Uzh avar San dies etc. in variou s States. Th e prom otion of in vestm en t in su perm arkets an d retail ch ain s also is th e step in th is direction. Studies of Marketing Efficiency 2.10 Th ere are m an y stu dies on estim ation of operation al m arketin g efficien cy of tradition al m arketin g ch ain s, m ostly u sin g th e farm er s sh are in th e con su m er price. Th e stu dy of Th aku r, (1994) h as observed that in case of Tom ato, Cau liflower, Capsicum, an d Peas in Him ach al Pardesh du rin g 1991-92, m arket efficien cy was between 46-52 %. In an oth er stu dy of Karnataka state, du rin g 1985-86, by Kiresu r et al, (1989) also revealed th e low m arketin g efficien cy (36 to 51 %) in perish able com m odities like Tom ato, Brin jal, wh ile in case of potato an d on ion , wh ich are relatively du rable vegetables with a lon ger sh elf life, th e m arketin g efficien cy was between 60 to 67 %. In a stu dy of wholesale market in Bangalore by Chengappa and Nagaraj (2005), it was found that retail ch ain s h ad en h an ced th e farm ers profitability by 10-15% as com pared to th e tradition al ch an n el an d redu ced the m arketin g cost by about 4.25% to 8%.. 2.10 Despite, th e claim s th at organ ized retail ch ain s wou ld im pact farm ers in a better way in term s of en h an cem en t of in com e, farm efficiency an d, u pdatin g farm ers with m arket related in form ation etc, these positive im pacts on farm ers are depen den t on th e term s an d con dition of th e procu rem en t con tract. These term s an d con dition s defin e th e legality an d en forceability of th e con tract. Th e design of th e procurement contract also provides for some obligations on company and the farm er, wh ich once in stitu tion alized cou ld serve as a m odel con tract, beneficial to both the contracting firm and the farmers.
  • 11. 11 | P a g e 2.11 The direct procu rem en t con tracts, with bin din g or flexible su pply option s, n eed to design an in cen tive m ech an ism wh ich ben efits farm ers. The focu s of th is paper is, th erefore, also on th e an alysis of th e altern ative m odels of direct procu rem en t of fresh vegetables. Th ere are m an y con tracts with differen t term s an d con dition s operating simultaneously based on th e varyin g bargain in g powers of th e con tractin g parties. However, n ot all th ese con tracts are su stain able in th e fu tu re. It m ay, th erefore, be n ecessary to stu dy of th e n atu re of contracts closely to assess th eir efficien cy an d su stain ability an d their impact on parties. This study examines the relative efficiency of vegetable procu rem en t con tracts of Moth er Dairy an d Relian ce Fresh an d the tradition al ch an n els of m arketin g of th ese produ cts an d validates th e impact through field observation. 3. OBJECTIVES OF THE STUDY I. Exam in ation of th e design of th e altern ate Models of direct procurement. II. Testin g co-m ovem en t an d u n certain ty of th e prices of altern ate channels. III. Estim ation of In com e effect of th e altern ative m arketin g ch an n els on the farmers. 4. DATA & METHODOLOGY 4.1 Th e stu dy is based on prim ary data on prices an d qu an tity, collected from growers payment sheets su pplied by Mother Dairy centers from 2005-2007. Procurement cen tres selected for th e stu dy in clu ded Pu th i, Moi, Rabh ra, Balyan a an d Kh an drai in Son epat district in Haryana. Th e wh olesale prices for respective vegetables were collected from th e records of th e Marketin g Com m ittee of th e n earest m arket. Th e m arketin g cost data was collected from farm ers du rin g th e prim ary survey. A set of ran dom ly selected farm ers are in terviewed. Th e vegetables covered u n der stu dy were selected on th e basis of data availability from th e Moth er Dairy cen tres, wh ich are also largest grown vegetables in the sample villages. The vegetables e.g. bottle gourd, carrot, on ion , green ch illi, tom ato, lady fin ger, cau liflower, and m u sk m elon are included in this study.
  • 12. 12 | P a g e 5. COMPARISON OF THE ALTERNATIVE MODELS OF THE DIRECT PROCUREMENT OF VEGETABLES Model: Mother Dairy 5.1 Moth er dairy (MD) u n der th e Nation al Dairy Developm en t Board (NDDB) started in 1985 as an organ ized retail ch ain of fru its an d vegetables in In dia. The procurement in 1985 was just 250 kg of vegetables wh ich in creased over th ou san d folds to reach 250,000 kg in recen t years. In th is sh ort span of tim e it h as becom e largest retail ch ain in Asia an d th e secon d largest in the World. Th e popu lar Bran d u n der which MD is doin g bu sin ess is Safal . It procu res 40-45 season al item s of fru its an d vegetable from over 17 states in In dia. Arou n d 22,000 sm all and big farmers are su pplyin g th eir produ ce to MD wh ich are directly lin ked to it at u pstream of th e ch ain . At down stream , th ere are arou n d 350 outlets spread across the National Capital Region (NCR) Delhi selling th e procu red fru its & vegetables. Th e distribu tion centres at Pallabakh tavarpu r an d Man golpu ri in Delh i lin k th e farm ers an d the consumers. At distribution centre huge storage and logistic facilities have been put in palace. 5.2 At u pstream MD operates th rou gh procu rem en t cen ters spread across th e cou n try to procu re fresh an d qu ality vegetable from growers. Th e locally produ ced top qu ality vegetables an d fru its are procu red at remunerative prices from th e farm ers. Farm ers Association s also exists wh ere farm ers elects on e Presiden t from among themselves. The Secretary, wh o is also respon sible for th e en tire arran gem en t of procu rem en t an d record m ain ten an ce, is appoin ted by MD. Secretary is en titled to get salary for h is services at procu rem en t cen tre. Major costs incurred during procu rem en t su ch as paym en t of salaries to secretary, helper, safai karam ch ari an d ren t paym en t for th e lan d an d sh ed of th e centre are paid from th e Association s fu n ds. Th ese fu n ds are gen erated from th e con tribu tion of th e 1.75 per cen t of th e total valu e of procured qu an tity from th e cen tre. All th ese costs in clu din g the transportation an d h an dlin g ch arges in clu din g th e m arket fee are dedu cted from th e growers price. The price paid to th e farm er is net of all th e ch arges an d costs incurred until the produce reaches the distribution centre. 5.3 Farmers brin g th eir vegetables to th e procu rem en t cen tre on daily basis an d after packagin g an d weigh tin g, th ese are tran sported to th e
  • 13. 13 | P a g e distribution centre of MD every evening. During procurement special care is taken by th e staff at procu rem en t cen tre to en su re th at th e procu rem en t m eets th e qu ality n orm s of MD. Rest of produ ct is retu rn ed to th e farm ers to be disposed of by th em at th e n earest Man di. Mandi, th erefore, faces an adverse selection as th e produ cts brou gh t are in a way rejects of MD. Besides a loss in term s of th e prices, farm ers are requ ired to in cu r expen ditu re on tran sportation an d m arketin g. It also in volves spen din g a m in im u m of th ree to fou r h ou rs an d h ave an opportu n ity cost.11. MD does n ot lift th e en tire qu an tity produ ced. The secretary at th e procurement centre, as th e key agen t of th e MD coordinates th e procu rem en t. MD in form s th e secretary of its requ irem en ts on a daily basis an d th ese are com m u n icated to th e farm ers. Total qu an tity procu red by MD on daily basis, particularly during th e peak tim e of season in term s of th e produ ce, is less th an th e total produce of the day. Consequently only a part of the farmers produce is procu red and n ot th e wh ole produ ce, in depen den t of its qu ality. Bein g in th e n atu re of perish ables, th e vegetable can n ot be h old, th e excess produce, therefore, after su pply to MD, is sold in th e local Man di, (Annexure 2). 5.4 MD does n ot provide th e farm ers an y credit or in pu t su pport. Vegetable growers, wh o do n ot h ave m arket su rplu s of food grain s, depen d on com m ission agen ts for m eetin g th eir credit an d in pu t n eeds. Since these farmers bring relatively poor quality of vegetables (as the first grade h as already been offered to MD), its affects th eir credit ratin g. The farmers visited du rin g th e survey were requ ested to give th eir opin ion on th e issu e of difficu lties faced by th em in gettin g credit. It was observed th at th e sm all farm ers wh o m ostly grow vegetables h ave a relatively greater depen den cy on com m ission agen ts for credit an d in pu ts an d they are the worst affected. 5.5 The famers also m en tion ed th at th e qu oted price of th e su pply is n ot kn own at th e tim e of su pply. It is on ly on th e n ext day wh en th e ten tative prices are informed. Th e actu al price is delivered to th e farm ers after ten days when their payment sheet is received by the secretary from MD. Th e actu al weigh ts an d qu an tity th at h as fin ally been accepted is indicated on ly in th e grower paym en t sh eet, though ten tative qu an tity an d percen tage of rejection is in form ed to th e farm er on th e n ext day of 11 IFPRI 2010
  • 14. 14 | P a g e th e su pply. Th e paym en t made after ten days of th e su pply th rou gh a bearer cheque. 5.6 Th e prices are a little m ore u n certain in MD th an in Man di, in th e sen se th at in Man di th e prices are kn own to th e farm er on th e spot. Wh ile in MD, first th e produ cts are su pplied an d on n ext day prices are told to farmers. Comparing with contract farming, in MD there is no price or qu an tity con tract form alized with farm er. Th e MD is n ot bou n d to procu re th e qu an tity offered by th e farm ers. On th e other hand MD gives freedom to th e farm ers to n ot to su pply to th em , or sell an ywh ere else. Com pared to formal con tract farm in g, th e flexibility wh ich MD offers to farm ers is often is risky, particu larly to a sm all farm er, becau se th e prices and quantities procured are determined on daily basis. 5.7 Man y of th e farm ers m en tion ed du rin g th e su rvey th at if th ey are in form ed of th e prices at th e tim e of su pply of th eir produ ce, th eir decision to sell to MD or in a Man di cou ld be based on better information. Th e qu ality con trol of MD was also reported to be of a sign ifican tly h igh er level an d strin gen t wh ich leaves a sizable portion of produ ce to be m arketed th rou gh th e Man di. Som e of th e farm ers also informed th at th e price told at th e tim e of procu rem en t were h igh er th an th e actu al prices fin ally paid. Th ere was also a gen eral observation th at MD s procu rem en t was related to th e prevailin g prices, declin in g du rin g th e period wh en prices were depressed an d th at accen tu ated th e risk of the farmers. Model of Reliance Fresh: 5.8 Reliance Fresh (RF) operates through a procurement centre at each selected village. Th ere is n o form al written con tract between the farmers and RF they are free to sell to MD or an y oth er ch an n el. However RF centre is m ore soph isticated and uses better tech n ology in clu din g a com pu ter to con solidate procu rem en t in form ation . Th e m an power at RF is better train ed an d qu alified u n like MD wh ere secretary m ay n ot h ave an y tech n ical qu alification . Th e procu rem en t term s and conditions of RF are simple and th ey give th e price in form ation an d accept or reject the qu ality an d qu an tity at th e spot. Both , MD an d RF procu re on ly best qu ality produ cts from th e farm ers an d th e rest is left with th e farm ers to be sold by them. Th ere is n o farm ers association like in MD. The mode of payment in RF is both cash and cheque.
  • 15. 15 | P a g e 5.9 In th is con text of th e above an alysis of th e procu rem en t con tracts of th e MD an d RF it seem s th at th e Relian ce Fresh con tract is relatively better th an th e Moth er Dairy procu rem en t con tract in term s of price in form ation , qu ality m on itorin g, m ode of paym en ts etc. Despite th e com plexity of th e con tract of Moth er Dairy, it provides a relatively better deal to the farmer as compare to the traditional marketing channels. 6. MARKET INTEGRATION AND UNCERTAINITY IN THE PRICES OF ALTERNATIVE MARKETING CHENNELS Market Integration 6.1 Th e MD pricin g policy is n ot based on th e local m arket prices. The prices given to th e farm ers are determ in ed on th e basis price qu otation of good qu ality vegetable from Ajadpu r m arket (term in al m arket or TM), Delhi. Th e tran sportation cost, h an dlin g ch arges an d oth er fees su ch as salary to th e secretary, ren t of th e lan d etc are also n etted from qu oted price. Therefore the price paid by MD to a farmer excludes these charges. However, it m ay n ot m ake sign ifican t differen ce to th e test of co- in tegration becau se th ese ch arges are alm ost a fixed am ou n t dedu cted from price qu otation . Th e disin tegration , if an y, between th e MD an d TM prices sim ply in dicate th at th e well con n ected m arkets of Son epat an d Delh i are n ot sh arin g price sign als. To test m arket in tegration th e respective price series are tested for station ary. It is fou n d th at all series are n on -stationary at level bu t in tegrated at first differen ce (ADF results may be seen in table 2). Table: 2. Augmented Dickey Fuller Unit Root Results Traditional Market Price Mother Dairy Price Vegetables At Level Critical Value At First Difference Critical Value At Level Critical Value At First Difference Critica Carrot -2.57 -3.51 -5.1 -3.5 -2.23 -4.07 -7.45 -4 Lauki -2.63 -4.23 -5.14 -4.25 -2.62 -4.23 -4.43 -4 Green Chilli -2.35 -4.73 -3.99 -3.76 -0.7 -4.73 -1.52 -4 Onion -2.47 -4.39 -4.97 -3.62 -1.79 -4.39 -4.05 -3 Bhindi -2.9 -4.05 -7.29 -3.45 -3.31 -4.05 -5.65 -3 Tomato -2.57 -4.37 -3.98 -3.61 -2.74 -4.35 -5.52 -4 Musk Melon -2.61 -4.32 -3.63 -4.33 -2.01 -4.32 -3.15 -2 Cauliflower -3.3 -4.35 -3.66 -3.6 -1.7 -4.33 -3.74 -3 6.2 Th e secon d step towards testin g co-in tegration is to ru n bivariate co-in tegration test of En gle-Granger. It is fou n d th at except Green Ch illi
  • 16. 16 | P a g e Onion, and Musk Melon, the prices of local market are co-integrated with MD prices. Th e n on existen ce of price in tegration for th e green ch illi m ay be becau se it is n ot produ ced in large volu m e in th e villages of th e stu dy areas. Non-in tegration of Onion prices m ay be becau se of th e n earby Pan ipat m arket, wh ich is th e m ajor m arket for on ion in th is region an d ju st 32 km from th e stu dy area. Th is n earn ess m ay be exerting more in flu en ce on local m arkets th an th e TM. Lon ger sh elf life of on ion cou ld be oth er reason . Mu sk Melon s TM prices are also weakly co-integrated with MD, though th e region produ ces it in good qu an tity. TM prices of Carrot, Lauki, Bhindi, Tomato and Cauliflower are co integrated with MD (results are Table.3.). Table:3. Co integration Results Vegetables Eigen Value Likelihood Ratio Leg Co-integration Carrot 0.06 5.66* 2 Yes Lauki 0.15 5.99* 2 Yes Green Chilli 0.23 3.68 2 No Onion 0.04 0.99 2 No Bhindi 0.106 11.29* 2 Yes Tomato 0.15 4.32* 2 Yes Musk Melon 0.11 3.43 2 Weak Cauliflower 0.15 4.33* 2 Yes * Significant at 5% level, Critical value is 3.76. Variation of Prices 6.3 Th e Stan dard Deviation (SD) an d Coefficien t of Variation (CV) is u sed as a m easu re of th e prices variation . Th e n et reven u e of th e MD is observed to be m ore volatile for all th e vegetables except Bh in di an d Tom ato wh ere as the CV is estim ated to be less in MD th an TM. Th is is qu ite opposite to th e n otion th at th e organ ized retail ch ain s will redu ce th e volatility of prices for th e farm ers an d con sequ en tly stabilize th e returns. (Table 4) Table: 4. Variability of Prices Vegetables TM MD
  • 17. 17 | P a g e SD CV (%) SD CV (%) Carrot 114 62 143 63 Lauki 24 111 44 120 Green Chilli 18 76 35 104 Onion 197 50 375 62 Bhindi 38 129# 53 125 Tomato 76 0.86# 80 0.71 Musk Melon 43 0.67 90 0.81 Cauliflower 47 94 51 146 *SD is Standard Deviation, CV is coefficient of Variation Impact on Revenue Theoretical relation between elasticity of demand and total revenue: 6.4 Assu m in g th at th ere are h omogeneous goods an d m an y sm all seller an d bu yers, objective of a seller is to m axim ize his profits; with an au ction in g system to determ in e th e price in the market through com petitive biddin g, th e m arket equ ilibriu m is determ in ed by equality of demand and supply and prices are market clearing. The demand curve is assu m ed to be a n egatively sloped an d th e su pply fixed in a day. In th e dynamic equilibrium if there are change in the demand and supply in the m arket th is wou ld im pact on th e farm er trou gh respective ch an ges in total reven u e. Th e qu estion is h ow it is goin g to im pact an d to wh at extent? Suppose p = is net price (netted by marketing cost) received by farmer q = quantity sold in the market by a farmer R = revenue So, a profit maximizing farmer will calculate its R as R = p .q Taking first derivative of R w.r.t. p or ..(1) where (2) Taking first derivative of R w.r.t. q
  • 18. 18 | P a g e ..(4) In the situation of profit m axim izing the change in total revenue of the farm er w ould be either because of change in the price or change in the quantity or both. Therefore the total change in the revenue of the farmer is:- (5) 1+ ) dp + p (1+ ) dq .. (6) Table: 5. The hypothetical values to show impact of price and quantity changes on revenue of the farmer Elasticity of demand 100% increase in price 100% increase in quantity 0.5 66 33 1 50 50 2 33 66 6.5 Th e equ ation (6) explain s th e relation sh ip between th e ch an ges in th e reven u e of th e farm er with respect to th e ch an ges in th e price an d quantity. The ch an ges in total reven u e con sequ en t u p on th e ch an ges in price an d qu an tity are in opposite direction for a given elasticity of demand. The higher the elas ticity of dem and the lower w ould be the increase in the revenue w ith an increas e in the price. There is, therefore, a negative relation betw een price changes and revenue changes at high elas ticity of dem and vice vers a. At h igh elasticity of dem an d, a declin e in price is more effective to increase revenue and at low elasticity of demand th e price in crease wou ld be a good strategy for h avin g a increase in total reven u e. For th e qu an tity changes, th ere are positive relation s between increase in revenue and the elasticity of demand. The increase in quantity in the m ark et at high elas ticity of the dem and w ould als o increase the revenue of the farm er w hile at low er elas ticity of dem and, any increase in quantity w ould als o decreas e the revenue of the farm er. This explains the paradox of the agriculture w here good crop season m ay not be remunerative for the farm er because of low elas ticity of dem and of the products. In a situ ation of bu m per crop th e in crease in th e reven u e would be less not only due to the depression in the prices but also due to the low elasticity of demand in the market. 6.6 The revenue impact on the farmer generally gets aggravated in case of th e vegetable m arkets becau se of the n atu re of com m odity an d their
  • 19. 19 | P a g e yield pattern . Vegetables bein g th e perish ables in th e n atu re requ ire storage facilities to redu ce th e exten t of a fall in price. Also th e season plays an im portan t role in th e yield pattern of th e vegetable. Besides, th e sm all size of th e m arket an d disin tegration in th e local m arkets lead to overreaction of th e su pply ch an ges on th e reven u e an d th rou gh price depression s. Given th is inverse relation between qu an tity in crease an d the low in crease in reven u e at low elasticity of dem an d th ere are m oral h azard for th e produ cers. Th ere is n o in cen tive for th e farm ers to in crease th e produ ction wh en th e m arket dem an d cu rve is inelastic, becau se th e in crease in th e qu an tity will add less to th eir reven u e. This is all th e m ore tru e in case of vegetables wh ere th e dem an d is very inelastic. The low elasticity of dem an d in th e local m arket is th e gen eral ph en om en on in In dia. Th is m ay be du e to th e sm all size of th e m arkets, low integration with other markets or isolated markets. Empirical estimation of revenue effect: 6.7 The estimation of remunerability of the prices of MD to the farmers is estim ated in th e followin g way. Let Pij price of i vegetable for j m arketin g ch an n el an d Qij is u n it of qu an tity su pplied of i vegetable to j m arketin g ch an n el. MCij is th e per u n it m arketin g cost of th e i vegetable for j m arketin g ch an n el an d Rij is th e rate of rejection for i vegetable under j marketing channel. NPij = Pij *(Qij* Rij) MCij i = vegetable, j = marketing channel Th e rejection rate is calcu lated from th e farm er grower sh eets an d th e m arketin g cost is calcu lated from th e prim ary data of field su rvey. Applying rejection rate, Rij, to the quantity supplied we can get the actual quantity for which the price, Pij , is received by the farmer. 6.8 Table: 6 sh ows th at if th e farm er sells th e sam e am ou n t of vegetable to eith er of m arketin g ch an n els h ow m u ch average n et reven u e will accru e to h im . For exam ple, for carrot in Novem ber 2005, if th e Q1 qu an tity is sold to MD th e average n et reven u e received by farm er is h igh er at Rs. 221 as com pare in Tradition al Market on ly Rs. 192 for th e sam e qu an tity of carrot. Th erefore MD is addin g 16 per cen t m ore to th e reven u e of th e farm er for th e carrot in Novem ber 2005. Except 2007, in 2005 an d 2006 th e MD h as been a m ore rem u n erative ch an n el for carrot as compared to traditional market.
  • 20. 20 | P a g e Table: 6. Average Net Revenue of Traditional Market and MD Channel Vegetables Year Month Average Net Revenue MD (Rs.) Average Net Revenue TM Price (Rs.) MD Premium (%) Nov 221.2 192.4 16.4 2005 Dec 312.0 263.4 15.3 Nov 251.3 161.7 54.1 2006 Dec 135.5 113.2 10.6 Carrot 2007 Jan 77.9 85.8 -10.7 2005 Jun 15.8 6.5 189.4 Jul 87.4 43.8 179.0 Aug 19.4 6.2 223.0 Sep 28.3 26.7 47.1 Lauki Oct 13.5 11.1 33.8 2005 May 8.0 7.7 14.5 Jun 22.4 17.6 17.3 Jul 65.5 42.9 43.9 Green Chilli Aug 29.3 31.7 -7.6 2005 Jun 581.7 372.7 50.7 Aug 611.3 390.0 70.0 Onion 2006 Jun 510.7 435.6 16.1 2005 May 65.2 47.1 46.4 Jun 45.0 29.1 75.1 Jul 22.9 16.1 42.5 Aug 23.9 19.1 21.7 Sept 55.4 33.7 66.8 Oct 26.9 22.8 14.1 2006 May 26.1 19.8 33.1 Bhindi Jun 20.1 10.4 103.4 Tomato 2005 May 7.8 24.7 7.8 2005 May 83.8 41.3 104.4 Jun 114.4 72.1 59.6 Musk Melon Jul 51.6 40.2 7.1 2005 Nov 16.3 34.6 -51.7 Dec 53.4 47.7 -5.3 Cauliflower 2006 Jan 42.8 88.6 -47.2 Difference between Prices 6.9 A regression equ ation is u sed to ch eck wh eth er th e differen ce between th e MD an d tradition al m arket prices is sign ifican t or n ot. First th e differen ce between th e prices Din = Pi1-Pi2 of altern ative m arketin g
  • 21. 21 | P a g e channels is calculated an d th en to test th e sign ifican ce of th e differen ce between prices the following equation is specified: Din = ain + bint + uin n = number of observations. Hypothesis tested are H: ain = 0 Ha: ain 0 Th e in tercept term (aij) in th e fu n ction will give th e differen ce in n et m arketin g prices. If th e prices are sign ifican tly differen t th en th e in tercept wou ld be sign ifican t. Th e resu lts given in table-7 sh ow th at th e MD prices are sign ifican tly h igh er th an th e tradition al m arket prices for the vegetables except Cauliflower. Table: 7. Results of the above equation Vegetables ain bint Carrot 93.7* 0.09 Lauki 270* -2.7* Chilli 111* -0.15 Onion 131* -0.47 Bhindi 222* -0.01 Tomato 86* 1.77* Musk Melon 198* 0.26 Cauliflower -83* 4.02* Indirect Impact of the MD on Prices: 6.10 Th e direct procu rem en t of th e retail ch ain s also im pacts th e reven u e of th e farm ers in directly. Bein g a credible option for th e farm er to sell its produ cts oth er th an local m arket, it redu ces th e depen den cy from th e tradition al m arketin g ch ain s. Th e local m arkets are relatively small in size and may not necessarily be integrated, and even if these are integrated, it m ay n ot n ecessarily resu lt in transfer of th e su pplies quickly, an d also m ay n ot add ben efits to th e farm ers. Th erefore an y extra arrivals m ay cau se su bstan tial depression in th e prices of th e local m arket. Su ppose th e MD wou ld n ot h ave been th ere for direct procu rem en t th e qu an tity wh ich is n ow procu red by it, th e en tire produce wou ld h ave been sold in to th e n earest m arket. The im pact of
  • 22. 22 | P a g e th is extra arrival on th e price cou ld h ave h ad m oderatin g im pact on prices. To calcu late th e in direct im pact of th e direct procu rem en t on th e local m arket prices th e elasticity of th e price w.r.t. arrivals is calcu lated (see table). Usin g th is elasticity of price th e n et price im pact is calcu lated for different vegetables. Table:8 Elasticity of Prices w.r.t. Arrivals (Arr) and procured quantity (PR). Vegetables Carrot -0.10 -0.16 Lauki -0.016 0.11 Green Cilli -0.03 0.11 Onion -0.048 0.25 Bhindi -0.097 0.03 Tomato -0.163 -0.22 Musk Melon -0.15 -0.15 Cauliflower -0.118 -0.46 6.11 Usin g th e estim ated elasticity of prices of respective i, it is easy to calcu late th e n ew price wh ich wou ld h ave been New Pi1 if all th e produ ce of i vegetable (i.e. local m arket arrival plu s direct procu rem en t) wou ld h ave been sold in n earest m arket. The New P1 is calcu lated with th e followin g form u la an d basis of th e assu m ption s th at th e New Pi1 cannot be negative and more than Pi1, as long as dInArr is positive: New Pi1 = Pi1 (1- e* dInArr) Wh ere Pi1 is th e price in Rs. Per Qtls. of a vegetable in th e local m arket, e , wh ich is elasticity of local m arket price w.r.t. Arrivals and dInArr is th e per cen t ch an ge in th e Arrivals. Th ere is sign ifican t in direct impact of the direct procurement on the local market prices. Interestingly th is ben efit is prim arily accru ed to th ose wh o are sellin g in th e local m arkets. Th is states th at th e reven u e effect is n ot on ly con fin ed to th e farm ers directly lin ked to th e MD ch ain but also to oth er farm ers wh o sells in th e local n earest m arket. Th e graphs as per Annexure 1 clearly indicates that the New P1 would have been much lower than P1. 7. CONCLUSION 7.1 Th e su pply ch ain efficien cy an d in efficien cy im pacts wh ole agricu ltu re system . Th e tradition al m arketin g ch ain s are ch aracterized by high margins of the middlemen, low prices to the farmer, low elasticity
  • 23. 23 | P a g e of derived dem an d, h u ge wastage of agricu ltu re produ ce, etc. Th e n ew m arketin g arran gem en ts su ch as farmers m arket e.g. Apan i Man di etc, con tract farm in g, an d em ergen ce of direct procu rem en t by organ ized retail ch ain s are h opes for em ergen ce of efficien t agricu ltu re m arketin g. However, th ere cou ld be problem s of exclu sion of sm all farm ers, sh ort term view bein g taken by th e con tractin g com pan y etc., in stitu tion al reform s n eed to redu ce th e m u ltiple layers of in term ediation . Th e direct procu rem en t is still geograph ically restricted to th e h ot spots of th e vegetable produ cin g region s, an d n ot for all, and th eir im pact on farm ers depen ds on th e term s an d con dition of th e procu rem en t con tract. Procu rem en t system adopted by th e two agen cies, MD an d RF, suggest th at th e approach adopted by RF is m ore in form ative in term s of price information, quality monitoring, mode of payments etc. 7.2 Th is sim plicity of th e con tract of RF cou ld be con sidered to provide an edge to it, bu t m u ltiple agen cies an d a variety of con tractin g arran gem en ts cou ld co-exist. Becau se despite th e com plexity of th e contract, MD still provides a relatively better deal to th e farm er as compared to th e tradition al m arketing ch ain s. Th is m ay be th e reason that it h as been su ccessfu l for su ch a lon g tim e in m an y areas. On th e practical side of th e im pacts of MD it is observed th at except Green Chilli, On ion an d Mu sk Melon , th e prices of local m arket are co- integrated with MD prices. Th e n et reven u e of th e farm ers for selected vegetables is fou n d on an average 17 per cen t h igh er for carrot, 134 per cent for Lauki, 17 per cent for Green Chilli, 45 per cent for Onion, 50 per cent for Bhindi, and 57 percent for Musk Melon. 7.3 Th ere are positive spillovers an d oth er in direct im pacts on th e reven u e of th e farm ers of th e direct procu rem en t by MD. Th e in direct ben efits are n ot con fin ed only to th ose su pplyin g vegetables to MD, th ese rath er get exten ded to all th ose farm ers su pplyin g to local Man di or TM. In sh ort th e direct procu rem en t of th e MD h as en h an ced the farm ers revenue. ***
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  • 32. 32 | P a g e Annexure-1
  • 33. 1 | P a g e