Agricultural issue relating to marketing and commodity.

Agricultural issue relating to marketingAgricultural marketing and external trade in agricultural commodities are assuming increasing importance in the wake of ushering in second green revolution, improving the living standards of farm families, making India hunger free and turning poverty into history in the shortest possible time. The challenges facing the marketing system are quite different than what these used to be about two decades before. Agricultural development has been considered to be an indicator of the quality of life at the grassroots level making it what may be called peoples sector. In regard to the importance of agriculture in a broader socio-economic sense, all the three basic objectives of economic development of the country, namely, output growth, price stability and poverty alleviation are best served by growth of agriculture sector. If public investment and market infrastructure in agriculture continue to be inadequate, there could be a serious problem of competitiveness and adequate supply response. No doubt, India is a large producer of several agricultural products. In terms of quantity of production, India is the top producer in the world in milk, and second largest in wheat and rice. We should, therefore, be concerned about improving quality while maintaining the lead in quantity. In a modern economy, it is inconceivable that the role of middlemen can be eliminated. This underscores the need to regulate the middlemen in order to make them more efficient, competitive and accountable. It is necessary to move to a situation where an efficient system of market intermediaries is created in agriculture sector. The current regime of subsidies does not tackle the major problem of agriculture viz. uncertainty. Uncertainty of weather may be alleviated by insurance-mechanisms but unfortunately the experience so far, with what has essentially been insurance of credit to agriculture, has not been encouraging. Commercialization of agriculture can progress only when institutional arrangements such as insurance penetrate deep within the agriculture sector. To benefit the farming community from the new global market access opportunities, the internal agricultural marketing system in the country also

needs to be integrated and strengthened. In particular the market system has to be revitalized to provide incentives to farmer to produce more and convey the changing needs of the consumers to the producers to enable production planning and foster true competition among the market players and to enhance the share of farmers in the ultimate price of his agricultural produce.

Main Problems in Agricultural Marketing

Agricultural marketing in India is characterized by pervasive government intervention. The objectives and forms of intervention have, however, changed substantially over time. State intervention in agricultural marketing is by definition aimed at correcting perceived market failures. Several instruments of such state intervention in India have their origin in the experience of the Bengal Famine, where market failure occurred due to inadequate state intervention. In the current situation of agricultural surpluses, however, market failure is occurring due to excessive state intervention. Agricultural marketing has changed conspicuously during the last fifty years. The main reasons for this change are increased marketable surplus, increase in urbanization and income levels and consequent changes in the pattern of demand for marketing services, increase in linkages with distant and overseas markets, and changes in the form and degree of government intervention. Some basic features of the system and associated problems are:

. The market size is already large and is continuously expanding. Farmers. Market linkages (both backward and forward) have also increased manifold. But the marketing system has not kept pace. . Private trade, which handles 80% of the marketed surplus, has not invested in marketing infrastructure due to the excessive regulatory framework and dominance of the unorganized sector. . Increased demand for value-added services and geographic expansion of markets demands lengthening of the marketing channel but this is hampered by lack of rural

infrastructure. . Direct marketing by farmers to consumers remains negligible. In the 27,294 rural periodic markets, where small and marginal farmers come to the markets, 85% lack facilities for efficient

Trade. . For facilitating trade at the primary market level, 7161 market yards/sub-yards have been constructed but they are ill equipped. . Food processing industry has a high income multiplier effect and employment potential. But in India the value addition to food production is only 7%, mainly because of the multiplicity of food-related laws. . Due to poor handling (cleaning, sorting, grading and packaging) at the farm gate or village level, about 7% of grains, 30% of fruits and vegetables and 10% of seed species are lost before Reaching the market. . An estimated Rs. 50,000 crore is lost annually in the marketing chain due to poorly developed marketing infrastructure and excessive controls. . State Agricultural Produce Markets Regulation (APMR) legislation hampers contract farming initiatives, which otherwise can be highly successful. . Farmers shifting to higher-value crops face increased risk of fluctuation in yield, price and income. . While agricultural price policy and associated instruments have induced farmers to adopt new technology and thereby increase physical and economic access to food, they have reduced private sector initiative and created several other problems in the economy.

Concluding observation Attempts to strengthen Indian agriculture must address not only farm production (farmers) but also processing, marketing, trade, and distribution. We must link farmers to markets. In this endeavor, marketing and rural credit systems are extremely important. Indian agricultural Marketing and rural credit systems have undergone several changes during the last decade. However, in the emerging environment, these need many more changes for making the agricultural sector vibrant and responsive to the aspirations of the rural masses. The suggested agenda for reforms includes (i) revision in the state APMR legislation, (i) redefining the role of state marketing boards and market committees, (iii) repeal of ECA except under emergencies, (iv) putting in place a unified food law, (v) introduction of new instruments like contract farming and warehouse receipt system, and (vi) assurance to investors that

regulations will not be reimposed. The policy of price support needs to be rationalized and decentralized. CACP and support prices marketing infrastructure should be made. The system of training farmers by strengthening the marketing extension education network needs to be put in place. Instruments for insurance of farmers against production and price risks should be made an essential component of development strategy. In the field of credit delivery, the financial institutions are under stress, particularly since the financial sector reforms of 2006-09. The credit policy should continue to emphasize small borrowers. Commercial banks are wary of lending to the agricultural sector and rural poor. The provisions of mandatory lending for the priority sector and agricultural activities should continue. Banks should take the help of NGOs and local formal institutions in their lending programs to reduce transaction costs. These apart, effective linkages between farmers and processors on the one hand and between processors and credit agencies on the other should be promoted. Interlocking of credit and product/input markets is crucial and should be recognized. To meet the credit needs of the poor, programs like linking of self-help groups with lending agencies are important but in these linkages, the role of promoting institutions should not be lost sight of. Marketing and institutional credit systems have always remained critical for agricultural development. Their role has been enhanced in the liberalized economic environment. The set of reforms and strategic actions suggested in this paper will help these systems strengthen Indian agriculture.

Agricultural issue relating to commodityInstability of commodity prices has always been a major concern of the producers, processors, traders as well as the consumers in agriculture -dominated country like India. Farmers direct exposure to price fluctuations, for instance, makes it too risky for many farmers to invest in otherwise profitable activities. There are various ways to cop with this problem. Apart from increasing the stability of the market, various actors in the farm sector can better manage their activities in an environment of unstable prices through commodity exchanges. Commodity exchanges as defined in a narrow sense in the Indian context are centre where futures trade is organized. These exchanges serve a risk-shifting function, and can be used to lock -in futures prices instead of relying on uncertain price developments. Apart from being a vehicle for risk transfer among hedgers and from hedgers to speculators, futures markets also play a major role in price discovery.

The price risk refers to the probability of adverse movements in prices of commodities, services or assets. Agricultural products, unlike others, have an added risk. Many of them being typically seasonal would attract only lower price during the harvest season. The forward and futures contracts are efficient risk management tools which insulate buyers and sellers from unexpected changes in future price movements. These contracts enable them to lock in the prices of the products well in advance. Moreover, futures prices give necessary indications to producers and consumers about the likely future ready price and demand and supply conditions of the commodity traded. The cash market or ready delivered market on the other hand is a time- tested market system which is used in all forms of business to transfer title of goods,

Agricultural products form a large portion of the export commodities of many developing countries, especially the poorer ones. However, they face steep and in some cases catastrophic declines in the prices of these commodities. From 1980 to 2000, world prices for 18 major export commodities fell by 25% in real terms. The decline was especially steep for cotton (47%), coffee (64%), rice (61%), cocoa (71%) and sugar (77%) (World Commission on the Social Dimension of Globalization 2004: p83).

The effects of falling commodity prices have been devastating for many countries. According to UN data, in sub-Saharan Africa, a 28% fall in the terms of trade between 1980 and 1989 led to an income loss of $l6 billion in 1989 alone. In the four years 1986-89, sub-Saharan Africa suffered a $56 billion income loss or 15-l6% of GDP in 1987-89. For 15 middle-income highly indebted countries, there was a combined terms-of-trade decline of 28% between 1980 and 1989, causing an average of $45 billion loss per year in the 1986-89 periods, or 5-6% of GDP (Khor 1993).

In the 1990s, the losses were higher. Non-oil primary commodity prices fell by 33.8% from the end of 1996 to February 1999, resulting in a cumulative terms-of-trade loss of more than 4.5% of income during 1997-98 for developing countries. Income losses were greater in the 1990s than in the 1980s (UNCTAD 1999: p85).

Among agricultural commodities exported by developing countries, some are in competition with the same commodities produced by developed countries, and some are not in such competition. Developing countries commodities that compete with developed countries: There are agricultural commodities which developing countries produce which compete with the products of developed countries. In such cases, such as cotton and sugar, the world prices are lower largely because of the high domestic and export subsidies attached to the developed countries' commodity exports. The share of global export revenue accruing to developing countries has dropped in many cases, with the developed countries having an increased share. A large part of the problem facing developing countries is related to the subsidies of the rich countries, which give the latter an unfair advantage (see Section III). The example of cotton is provided in Section III.

Developing countries commodities that do not compete with developed countries : There are also agricultural commodities of developing countries which do not compete with the developed countries. Developing countries face a range of problems, including their products being at the lower end of the value chain with the lack of capacity (or the lack of market access) to climb the value chain through processing and manufacturing. Another problem is a situation of global over-supply in the case of some commodities, which exerts a downward pressure on prices. This is partly the result of too many countries being advised by international agencies to expand the export of the same commodities. Yet another problem is that the developing countries have little bargaining power when selling their products to monopsonist buyers, which are usually transnational companies, and thus they get lower prices. The case of coffee within this category of commodities is provided below.

Illustration: The case of coffee

The price of coffee beans has dropped sharply, and the share of the coffee market revenue accruing to producer countries has also declined sharply. The price of coffee in December of the year fell from 127 US cents per lb in 1980 to 46 cents in 2001. In 1992, producer countries earned US$10 billion from a global coffee market worth around $30 billion; in 2002 they received less than $6 billion export earnings from a market that has doubled in size. Their share of revenue fell from 33% to less than 10% (Oxfam 2002a).

The effect of the fall in coffee price has been very serious for many countries and the 25 million coffee growers around the world. Coffee accounts for over 50% of Ethiopias export revenue and 80% of Burundis. Coffee is linked to the livelihoods of a quarter of the population in Uganda, 10% in Honduras and 8% in Guatemala. In Brazil there are 230,000 to 300,000 coffee farmers and another 3 million are employed in the coffee industry, and in India 3 million are also employed in the coffee industry (Oxfam 2002a: p8). The price fall has had devastating effect on national export revenues and on communities alike. There has been much increased unemployment, reduced income and hunger among the coffee-growing communities in the developing countries (Oxfam 2002a: pp9-12).

The main reason for the fall in price is the increasing oversupply situation. Supply has grown by over 2% per year whilst demand growth has been lower at 1-1.5% per year, leading to stocks being built up to 40 million bags. Up to 1989, the coffee market was regulated by the International Coffee Agreement (ICA) made up of producer and consumer countries and managed by the International Coffee Organization (ICO). The ICA broke down in 1989, with opposition from the US (which left as a member) being a major factor. The Agreement remains but no longer has the power to regulate supply through quotas and the price band. Coffee prices are now determined by futures markets. After the ICA broke down, prices have fallen very low. Proposals to revive the Agreement have been impeded by lack of political will, with consumer countries not willing to restart their participation (Oxfam 2002a: pp17-18).

Another reason for the low prices is the expansion of production by some countries, including Vietnam (which is a relatively new major coffee producer) and Brazil, the largest producer. The increased overall supply has not been matched by a similar rate of increase in demand, resulting in an imbalance between demand and supply that is depressing price levels. Moreover, there is a great imbalance in the global coffee supply chain, with small farmers at the lowest end being paid very low prices by their traders, the exporting traders in developing countries being paid little by the large roaster companies in the US and Europe that buy the coffee beans, and these companies reaping much of the benefits on their retail coffee business.

In a study of the stages and prices on the value chain, Oxfam found that the coffee farmer in Uganda received 14 US cents per kilo for his green beans, which pass through various traders to the roaster factory at a price of $1.64 per kilo. It ends up at a UK supermarket shelf as soluble coffee at $26.40 a kilo, which is 7000% higher than the price paid to the farmer. A similar journey into a pack of roast and ground coffee sold in the US involves a price rise of nearly 4000% (Oxfam 2002a: p22).