IMPACT OF ORGANIZED RETAIL CHAINS ON REVENUE OF FARMER (A CAS E S TUDY 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.

Acknowledgement

Th is a ca d e m ic en d e a v or w ou ld n ot h a v e b een p os s ib le w ith ou t th e h elp of a n u m b er of p eop le w h o w ith th ere k in d coop e ra tion , a ctiv e supervision and steadfast support have made this research work reality.

I a m ex tre m ely gra tefu l to Prof. R. K. S h a rm a , w h os e k een continuous encouragement and suggestions helped to complete this work.

I a m th a n k fu l to S h ri M.C. S in gh i, S en ior Econ om ic Ad v is er, for h is v alu a b le com m en ts an d en cou rage m e n t to com p le te th is w ork . I a ls o ex te n d m y s in cere gra titu d e to S h ri S a ju K. S u ren d ran , Dep u ty Director and Shri Ashwani Kumar, Deputy Director for their precious comments.

I w ou ld lik e to m en tion a p p re cia tion e s p ecia lly to v illagers / farm ers w h o h elp ed m e to th e ir m a x im u m th rou gh ou t th e field w ork . I a m als o th a n k fu l to m y colle agu e s in th e Office for in s p irin g m e an d actively p articip a tin g in th e d eb a te a n d d is cu s s ion s on rela te d is s u e s .

Palace: Date:

Jitender Singh

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SN 1 2 3 4 5 6 Introduction

CONTENTS Subject

Pg. No. 5 6 10 11 11 12

Rise of Organized Retail Chains Studies of Marketing Efficiency Objectives of the Study Data & Methodology Comparison of the Alternative Models of the Direct Procurement of Vegetables Market Integration and Uncertainty in the Prices of Alternative Marketing Channels Impact on Revenue Conclusion Bibliography Annexure

7 8 9 10 11

15 17 23 24 32

Table 1 2 3 4 5 6 7 8

Title Vegetable Production & Inflation in India Augmented Dickey Fuller Unit Root Results Co integration Results Variability of Prices Th e h yp ot h et ica l va lu es t o s h ow im p a ct of p r ice a n d quantity changes on revenue of the farmer Aver a ge Net Reven u e of Tr a d it ion a l Ma r k et a n d MD Channel Results of the above equation E la s t icit y of Pr ices w.r .t . Ar r iva ls (Ar r ) a n d p r ocured quantity (PR).

Pg. No. 5 15 16 17 18 20 21 22

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Abstract
Th e objectiv e of th e s tu d y is to ex a m in e th e term s a n d con d ition s of th e procu rem en t con tra cts of Moth er Da iry a n d Re lia n ce Fres h a n d a ls o com p a rin g revenue impacts of Mother Dairy and Traditional Marketing Channel on farmer. It is fou n d th a t th e by la w s of th e Relia n ce Fres h is m u ch be tte r th a n th e Moth er Da iry procu re m en t con tra ct in te rm s of price in form a tion , qu a lity m on itorin g, m od e of p a y m en ts e tc. Th e relatively simple con tra ct of Relia n ce Fres h provides a n ed ge to th e Com p a n y to a ttra ct be tte r quality of the prod u ct. How e ver it d oes n ot m e a n th a t th e Moth er Da iry d oes n ot pu t u p an in cen tiv e to grow m ore a n d be tte r qu a lity to th e fa rm er. Des p ite th e com plex ity of th e con tra ct of Moth er Da iry (MD), it prov id es a rela tiv ely be tte r d ea l to th e fa rm er a s com p a re to th e tra d ition a l m a rk e t ch a in . Th is m a y be th e re a s on th a t it h a s been s u cces s fu l for s u ch a lon g tim e in m a n y a re a s . On th e pra ctica l s id e of th e im p a cts of MD it is fou n d th a t excep t Green Ch illi On ion , a n d Mu s k Melon th e prices of loca l m a rk e t a re co-integrated w ith Moth er Da iry price s . How e ver, th e n e t rev en u e of th e MD is es tim a te d m ore v ola tile th en TM for a ll th e vege ta b les exce p t B h in d i a n d Tom a to. Th is is qu ite oppos ite to th e n otion th a t th e orga n iz ed re ta il ch a in s w ill s ta b iliz e th e prices for th e fa rm er a n d con s equ en t th e re tu rn s w ou ld be s ta b iliz ed . How e v er, th e h igh er in s ta b ility of reven u e d oes n ot m e a n th a t it a ffect fa rm ers in com e a lw a y s n ega tiv ely , ra th er th e effect m a y be pos itiv e if th e prices a re flu ctu a tin g u p w a rd . Th e n e t reven u e of th e fa rm er for s elected vegetables is found on an average 17 per cent higher for carrot, 134 per cent for Lauki, 17 per cen t for Green Ch illi, 4 5 per cen t for On ion , 5 0 per cen t for B h in d i, a n d 5 7 perce n t h igh er for Mu s k Melon , in th e MD a s com p a re to TM excep t Ca u liflow e r. B es id es , d ire ct reven u e im p a ct, th ere a re in d irect im p a ct on th e reven u e of th e fa rm ers of th e d irect procu rem en t of MD. An d it is n ot on ly con fin ed to th os e s u p ply in g to MD ra th er ex tended to a ll th os e fa rm ers s u pply in g to th e TM. Th e in d irect im p a ct a ls o s ee m s to b e con s id era ble given th e fa ct of low d erived d e m a n d ela s ticity of th e loca l m a rk e ts . In s h ort the direct procurement of the MD has enhanced the farmer s revenue.

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INTRODUCTION

Why low grow th of are a u n d er vege ta b le an d h igh ra te of in fla tion an d p erh ap s p rofita b ility in vege ta b le coex is t? Is it b eca u s e th e p rice a d v a n ta ge s d o n ot a ccru e to th e farm ers or producing vegetables is a risky business? 1.2 The widening gap between d em a n d a n d p r od u ct ion of the vegetables h a s b een evid en t in r is in g p r ices of veget a b les in r ecen t p a s t . The average increase in the prices of vegetables at wholesale markets was 9 .5 p er cen t d u r in g 2 0 0 6 -2010. The contributory factors for this increase have b een a n in cr ea s e in d em a n d a n d s t ick y s u p p lies . On t h e d em a n d side, t h e p er ca p it a in com e of t h e cou n t r y is r is in g a n d t h e con s u m p t ion pattern is getting diversified towar ds vegetables. Table: 1. Vegetable Production & Inflation in India
Year Production (T) Production Growth (%) 3 12 0 4 Yield (Tone/hec.) Area ('000' Hec.) 7581 7848 7981 7985 Area Growth (%) 5 4 2 0 Yield Growth Inflation in Vegetable (%) 0.5 19.9 3.5 14.0

2006-07 2007-08 2008-09 2009-10

114993 128449 129077 133738

15 16 16 17

-2 8 -1 4

Source: National Horticulture Board, and the Office of the Economic Adviser.

1.3 On t h e s u p p ly s id e t h e p r od u ct ion of veget a b les is n ot k eep in g t h e p a ce wit h d em a n d . Th e low gr owt h of t h e veget a b les p r od u ct ion d u r in g 2008-0 9 a n d 2 0 0 9 -1 0 h a s b een n ot on ly b eca u s e low yield b u t a ls o b eca u s e of low gr owt h in t h e a r ea u n d er veget a b les . Th is in d ica t es t h a t t h e in cen t ives for t h e cr op diversification p er h a p s wer e not s ufficient en ou gh t o in d u ce a lloca t ion of a r ea t o veget a b les . Wh y t h e fa r m er is n ot d iversifying a r ea t owa r d s veget a b le wh en p r ices of veget a b les h a ve b een ver y h igh ? Th e m a in r ea s on for s low cr op d iver s ifica t ion t owa r d vegetables is the h igh r is k -h igh r et u r n p a t t er n of t h e veget a b les. Th e high risk is due to fluctuating prices in the local markets and a low share in a u n it of con s u m er p r ice. Th e fa r m er m a y n ot n eces s a r ily b e a r is k a ver s e b u t h a s a low r is k a p p et it e. La ck of cr ed ib le in s t it u tion a l m ech a n is m wh ich cou ld r es u lt in a n in cr ea s e in h is s h a r e in ea ch r u p ee a consumer spends on vegetables is further reinforcing this risk aversion. 5|Page

1.4 Th e s m a ll s ize of th e loca l m a r k et a n d its d is in t egr a t ion , h a ve m a d e t h e prices s u p p ly s en s it ive. Bu t wh ile fa r m er s a r e n ot a b le t o b en efit fr om t h e in cr ea s e in p r ices , a fa ll h it s t h em im m ed ia t ely. Dem a n d for veget a b les , in s o fa r a s t h e fa r m er s a r e con cer n ed is a d er ived d em a n d , t h e d em a n d of t h e in t er m ed ia r ies . Th e exis t en ce of p er fect com p et it ion a m on g t h e fa r m er s a s s eller s of veget a b les a n d a few oligopolistic b u yer s or m id d lem en , t h er efor e, r es u lt s in distortion of the in cen t ive s t r u ct u r e. Flu ct u a t in g p r ices of t h e veget a b le, wh ich a r e k ep t low b y t h e in t er m ed ia r ies ; d o n ot p r ovid e en ou gh in cen t ives t o t h e farmers to produce more vegetables. Prevalence of high prices and higher in fla t ion a r e also d u e t o t h e h igh t r a n s a ct ion cos t of veget a b les t r a n s fer a n d h igh m a r gin s of t h e m id d lem a n . Bes id es , t h e p er is h a b le n a t u r e of t h e veget a b le t oget h er wit h in a d equ a t e s t or a ge fa cilit y, im p r op er d em a n d m a n a gem en t a n d in efficien cy in s u p p ly chains create h u ge wa s t es in transit. In this situation, while increased supplies results in a price crash for fa r m er s , lower s u p p lies d oes n ot p r ovid e t h em a n y econ om ic r en t . Th is fu r t h er r ein for ces t h e r is k a ver s ion of t h e fa r m er s . On e op t ion for t h e efficien cy in t h e s u p p ly ch a in s is t o encourage or ga n ized r et a il chains. 2. RISE OF ORGANIZED RETAIL CHAINS 2.1 The evolu t ion a n d p a t t er n s of t h e d iffu s ion p r oces s of m od er n food r et a il in d u s t r y h a s varied worldwide, b u t it s en t r y a n d con s is t en t in cr ea s e in m a r k et p en et r a t ion h a ve had s ign ifica n t im p lica t ion s across all countries including US, European Union and the developing countries of La t in Am er ica a n d E a s t As ia in clu d in g Ch in a 1 . For In d ia , t h e s ize of food r et a il in 2 0 0 8 -0 9 wa s es t im a t ed a t a b ou t Rs .1 0 ,7 0 0 b illion, wh ich is 61 p er cen t of t h e t ot a l r et a il in d u s t r y. Wh en 9 5 p er cen t r et a il is in unorganized sector, t h e or ga n ized r et a il (only 5 p er cen t ) is lik ely t o gr ow a t a n a n n u a l r a t e of a r ou n d 1 1 p er cen t a n d is p r oject ed t o t ou ch b u s in es s levels of Rs 53,000 b illion b y 2 0 2 0 . The Agri-food r et a ilin g accounts for 18 per cent of the organized retail today and is likely to have a lower share (12 per cent) b y 2 0 2 0 2 . According to ICREAR report annual gr owt h r a t e of or ga n ized r et a il in food a n d gr ocer y is es t im a t ed at 16 p er cen t d u r in g 2 0 0 4 20073 . Ot h er es t im a t es p u t t h e gr owt h r a t e of
1 2

The IFPRI Discussion Paper (2008).

NABARD study on Organised Agri-Food Retailing in India(2011) 3 Impact of Organized Retail Chains on Income & Employment, ICREAR(2009).

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or ga n ized food a n d gr ocer y a t h igh er level of 4 2 p er cen t in 2 0 0 6 over 20054 . 2.2 The s h a r e of exp en d it u r e t owa r d s food a n d b ever a ge in t ot a l con s u m p t ion exp en d it u r e of t h e h ou s eh old s is exp ect ed t o d eclin e. S u ch a d eclin e, a s p er t h e E n gle La w, is a n or m a l h a p p en in g a s p a r t of t h e p r oces s of d evelop m en t . Th e or ga n ized r et a il m a y a ls o, t h er efor e, exp er ien ce a d eclin e in r a t io of t h eir b u s in es s t u r n over d er ived fr om t h e s a le of food r ela t ed p r od u ct s . Th er e wou ld , h owever , b e t wo p os it ive fa ct or s . Th e r is in g in com es a n d s t a n d a r d s of livin g a r e exp ect ed t o p u s h u p t h e d em a n d for h igh va lu e food s . Th e ch a n ges in con s u m er b eh a vior a n d p r efer en ces in fa vou r of p r oces s ed food s a s a r es u lt of a n in cr ea s in g p a r t icip a t ion of wom en in la b ou r for ce cou ld h elp in s u s t a in in g t h e or ga n ized r et a il s s h a r e in food a n d r ela t ed p r od u ct s . Moreover, in cr ea s in g u r b a n iza t ion is a ls o a s s ocia t ed wit h a ch a n ge in t h e s h op p in g b eh a vior of t h e m id d le cla s s d u e t o h igh er in com es a n d increasing op p or t u n it y cos t of t im e for t h e con s u m er s (b u yer s ), p a r t icu la r ly t h e women. Im p r ovem en t in p r oces s in g t ech n ology, p r ogr es s on a ccou n t of r oa d con n ect ivit y, in ves t m en t in s t or a ge fa cilit ies , fa s t a n d s a fe t r a n s p or t a n d in for m a t ion t ech n ology r evolu t ion is likely t o s olve m a n y of t h e p r ob lem s of m a r k et in g s ys t em a n d p r ovid e op p or t u n it ies t o p r iva t e traders. 2.3 In cr ea s ed in ves t m en t in or ga n ized r et a il b y d om es t ic a n d for eign p la yer s b r in gs a b ou t u p s t r ea m ch a n ges in s u p p ly ch a in a n d a n in cr ea s ed cen t r a lized p r ocu r em en t of a gr i p r od u ct s fr om fa r m er s a s t h e exp er ien ce of t h e E a s t As ia n cou n t r ies s u gges t . Th e r a p id r is e of s u p er m a r k et s in d iffer en t cou n t r ies h a s t r a n s for m ed t h eir a gr i-food system, though the speed of transformation has been different. In case of In d ia t h e t r a n s for m a t ion a s of n ow h a s b een s low b ot h a t u p s t r ea m a n d at downstream. In the downstream changes; the retail sector is now open for t h e cor p or a t e t o d evelop s u p er m a r k et in fr a s t r u ct u r e, t h e for eign investment is likely to flow in near future. 2.4 The d ir ect p r ocu r em en t in fresh fr u its a n d veget a b les may offer better p r ice, p r ovid e k n owled ge of market demand, t ech n ologica l in p u t s a n d a cces s t o cr ed it on a ccou n t of a s s u r ed m a r k et t o t h e fa r m er s . While it is es t im a t ed t h a t d ir ect procurement of fr es h fr u it s a n d veget a b les
4

The India Retail Report, Ministry of Commerce and Industry, 2007.

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could r ed u ce wa s t a ge b y a b ou t 7 p er cen t a n d ca n im p r ove t h e ch a in efficien cy b y a s m u ch a s 1 7 p er cen t , th er e is n o con s en s u s wh et h er t h e upstream operation of supply chain would be inclusive and cover farmers of a ll s izes of la n d h old in gs . Th e t r a d it ion a l ch a n n el where h u ge wa s t a ge of com m od it ies , la ck of in fr a s t r u ct u r e, m is s in g in s t it u t ion , la ck of s t a n d a r d iza t ion a n d m or eover la ck of in cen t ives t o in ves t in s tor a ge facilities, standardization, packaging etc are very much evident. Experiences of other institutional innovation in agri-marketing 2.5 The exp er ien ces of t h e con t r a ct fa r m in g, p a r t icu la r ly regarding t h e in clu s ion of s m a ll fa r m er under con t r a ct fa r m in g, t h e d is t r ib u t ion of p r ofit s b et ween fa r m er s a n d the con t r a ct or , s h a r in g r is k b y a gr ib u s in es s fir m s , a n d m in im iza t ion of t h e a d ver s e im p a ct s on en vir on m en t a n d society h a ve led t o m ixed r es u lt s . Th er e a r e va r iou s p r ice a n d n on -price effects on a gr icu lt u r e. Some positive im p a ct s of con t r a ct fa r m in g in clu d e t h e cr op d iver s ifica t ion , in cr ea s e in p r od u ct ivit y, im p r ovem en t in t h e p r ofit a b ilit y of fa r m er s , improved d ecis ion m a k in g, increase in wages a n d em p loym en t of a gr icu lt u r a l la b or a n d t ech n ology t r a n s m is s ion . Th e is s u e of in clu s ion is m or e im p or t a n t b eca u s e of em er gin g t r en d s of large n u m b er of s m a ll fa r m er in In d ia a n d decreasing s ize of la n d h old in gs . A s m a ll fa r m er op er a t in g p r ed om in a n t ly wit h fa m ily la b or h a s m a n y advantages which reduce t h e cos t of la b or s u p er vis ion , cos t of monitoring, s cr een in g of h ir ed la b ou r , cos t of con t r a ct en for cem en t a n d cos t of n egot ia t ion 5 . Collect ively, it is ea s ier t o d ea l wit h s m a ll fa r m er s b y the contracting firms which reduce t h e p os s ib ilit y t o get involved in t o a con flict . On t h e ot h er h a nd, t h er e a r e disadvantages d u e t o high dependency on farm in com e wh ich r ed u ces h is b a r ga in in g p ower , low capacity to invest restricts (prohibits) implementation of new technology and to experiment with new farming practice and crops etc.. 2.6 Th e s m a ll fa r m er is in t er es t ed in t a k in g u p con t r a ct fa r m in g b eca u s e it fa cilit a t es a va ila b ilit y of m od er n in p u t , wh ich a r e eit h er u n a va ila b le or cou ld b e ob t a in ed t h r ou gh other sources a t a ver y h igh cost6 . Con t r a ct fa r m in g a ls o r ed u ces his p r ice r is k and eventually stabilizes in com e. Th e fir m s , h owever , p r efer la r ge gr ower s t o a void d ea lin g wit h la r ge n u m b er of s m a ll fa r m er s . It is n ot on ly ea s y t o b a r ga in
5 6

Key, Nigel and Runsten, D. 1999 Porter Gina and Howard Phillip K., 1997

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wit h s m a ll n u m b er of la r ge fa r m er , it is a ls o a d va n t a geou s t o t h e fir m t o r ed u ce t h e in p u t s u p p ly cos t , cos t of s u p p lyin g ext en s ion s er vices . La r ge fa r m s h a ve a h igh er r is k t a k in g a b ilit y, ca n p u t in la r ger in ves t m en t s in la n d . Th ey h a ve r ela t ively b et t er qu a lit y la n d m or e u n ifor m a n d consolidated. Ma n y s t u d ies 7 reveal t h a t t h e s ys t em of con tr a ct fa r m in g is s k ewed t owa r d s m ed iu m a n d la r ge fa r m er s , t h ou gh there were n o s ign ifica n t d iffer en ces in p r od u ct ivit y b et ween s m a ll, m ed iu m a n d la r ge farms . Th er e wa s n o d is cr im in a t ion in p r ocu r em en t b y a gr ib u s in es s firms as well as price obtained by small and large farmers. 2.7 Th e exclu s ion of t h e s m a ll fa r m er evid en t in t h e con t r a ct fa r m in g, m a y h a ve s ever e con s equ en ces for r u r a l econ om y. If fir m ch oos e t o con t r a ct p r im a r ily wit h la r ge com m er cia l fa r m s , then small fa r m er of t h e r u r a l p op u la t ion may fa il t o b en efit d ir ect ly fr om con t r a ct a r r a n gem en t s . In t h e con t ext of lib er a lized m a r k et s , con t r a ct fa r m in g t h a t exclu d es s m a ll fa r m er ca n lea d t o m or e con cen t r a t ed la n d own er s h ip a n d d is p la cem en t of r u r a l p oor 8 . Th e wa y con t r a ct s a n d t h e in com e ea r n ed fr om con t r a ct in g is d is t r ib u t ed wit h in a r u r a l com m u n it y ca n h a ve important implication for economic and social differentiations within that community9 . Th es e is s u es a r e p a r t icu la r ly im p or t a n t in t h e con t ext of In d ia wh er e 8 5 p er cen t of la n d h old in g are s m a ll a n d m a r gin a l h oldings a n d m or e t h a n 4 0 p er cen t of r u r a l p op u la t ion is la n d les s . Ad d it ion a lly, t h er e is a s ocia l s t r a t ifica t ion wit h h igh -in com e in equ a lit ies in r u r a l areas. 2.8 Even if small farmers are incorporated in contract farming, there is n o gu a r a n t ee t h a t t h e contracting fir m wou ld n ot exp loit or a t lea s t p r ovid e s om e b en efit s t o t h e s m a ll fa r m er . In t h e absence of representative farmer s or ga n iza t ion s , t h e con t r a ct -fa r m in g s ch em e may have a limited regional/ local impact. 10 Large number of small farmer are more p r on e t o r em a in u n or ga n ized d u e t o m is s in g n et wor k in g, la ck of information a n d lim it ed a wa r en es s of or ga n iza t ion b en efit s . In t h e lon ger run, h owever , if t h e con t r a ct in g fir m b ecom es p er va s ive, t h e fa r m er m a y n ot h a ve any option but t o s ell t h eir p r od u ce t hrough t h es e ch a n n els , but if these channel become nonoperational, farmers may need to reverse their con t r a ct a n d s wit ch over t o ot h er fir m . Th er e a r e ot h er p os s ib ilit ies
7 8

Kumar Promod (2006) Key, Nigel and Runsten, D. 1999 9 Korovkin, 1992 10 Porter Gina and Howard Phillip K., 1997

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a ls o; t h e fir m ca n m a xim ize it s s h or t r u n p r ofit s wit h ou t con cer n in g a b ou t s u s t a in a b ilit y of the fa r m a n d the fa r m er a n d b y exh a u s t in g t h e potential of the region it may switch over to other relatively regions . 2.9 Th is ea s y s wit ch over b y fir m t o ot h er r egion t o con t r a ct or t o p r ocu r e t h e p r od u ce a n d any lim it s on t h e exit of t h e fa r m er fr om con t r a ct m a y d is t or t t h e b a r ga in in g p ower equ a t ion in th e lon g r u n in fa vor s of t h e fir m . S om e a lt er n a t ives , h owever , h a ve em er ged . The s ch em es t o p r om ot e d ir ect m a r k et in g ch a n n els a r e Ap n i Ma n d i, Ryt h u Ba za r s , Ha d s p a r , Uzh a va r S a n d ies et c. in va r iou s S t a t es . Th e p r om ot ion of in ves t m en t in s u p er m a r k et s a n d r et a il ch a in s a ls o is th e s t ep in t h is direction. Studies of Marketing Efficiency 2.10 Th er e a r e m a n y s t u d ies on es t im a t ion of op er a t ion a l m a r k et in g efficien cy of t r a d it ion a l m a r k et in g ch a in s , m os t ly u s in g t h e fa r m er s s h a r e in t h e con s u m er p r ice. Th e s t u d y of Th a k u r , (1 9 9 4 ) h a s ob s er ved that in ca s e of Tom a t o, Ca u liflower , Capsicum, a n d Pea s in Him a ch a l Pa r d es h d u r in g 1 9 9 1 -92, m a r k et efficien cy wa s b et ween 4 6 -5 2 %. In a n ot h er s t u d y of Karnataka state, d u r in g 1 9 8 5 -86, b y Kir es u r et a l, (1 9 8 9 ) a ls o r evea led t h e low m a r k et in g efficien cy (3 6 t o 5 1 %) in p er is h a b le com m od it ies lik e Tom a t o, Br in ja l, wh ile in ca s e of p ot a t o a n d on ion , wh ich a r e r ela t ively d u r a b le veget a b les wit h a lon ger s h elf life, t h e m a r k et in g efficien cy was b etween 6 0 to 6 7 %. In a s t u d y of wholesale market in Bangalore by Chengappa and Nagaraj (2005), it was found that r et a il ch a in s h a d en h a n ced t h e fa r m er s p r ofit a b ilit y b y 1 0 -15% as com p a r ed t o t h e t r a d it ion a l ch a n n el a n d r ed u ced the m a r k et in g cos t by about 4.25% to 8%.. 2.10 Des p it e, t h e cla im s t h a t or ga n ized r et a il ch a in s wou ld im p a ct fa r m er s in a b et t er wa y in t er m s of en h a n cem en t of in com e, fa r m efficiency a n d , u p d a t in g fa r m er s wit h m a r k et r ela t ed in for m a t ion etc, thes e p os it ive im p a ct s on fa r m er s a r e d ep en d en t on t h e t er m s a n d con d it ion of t h e p r ocu r em en t con t r a ct . These t er m s a n d con d it ion s d efin e t h e lega lit y a n d en for cea b ilit y of t h e con t r a ct . Th e d es ign of t h e procurement contract also provides for some obligations on company and the fa r m er , wh ich once in s t it u t ion a lized cou ld s er ve a s a m od el con t r a ct , beneficial to both the contracting firm and the farmers. 10 | P a g e

2.11 The d ir ect p r ocu r em en t con t r a ct s , wit h b in d in g or flexib le s u p p ly op t ion s , n eed t o d es ign a n in cen t ive m ech a n is m wh ich b en efit s fa r m er s . The focu s of t h is p a p er is , t h er efor e, also on t h e a n a lys is of t h e a lt er n a t ive m od els of d ir ect p r ocu r em en t of fr es h veget a b les . Th er e a r e m a n y con t r a ct s wit h d iffer en t t er m s a n d con d it ion s operating simultaneously b a s ed on t h e va r yin g b a r ga in in g p ower s of t h e con t r a ct in g p a r t ies . However , n ot a ll th ese con t r a ct s a r e s u s t a in a b le in t h e fu t u r e. It m a y, t h er efor e, b e n eces s a r y t o s t u d y of t h e n a t u r e of contracts clos ely t o assess t h eir efficien cy a n d s u s t a in a b ilit y a n d their impact on parties. This study examines the relative efficiency of vegetable p r ocu r em en t con t r a ct s of Mot h er Da ir y a n d Relia n ce Fr es h a n d the t r a d it ion a l ch a n n els of m a r k et in g of t h es e p r od u ct s a n d va lid a t es t h e impact through field observation. 3. OBJECTIVES OF THE STUDY I. II. III. E xa m in a t ion of t h e d es ign of t h e a lt er n a t e Mod els of d ir ect procurement. Tes t in g co-m ovem en t a n d u n cer t a in t y of t h e p r ices of a lt er n a t e channels. E s t im a t ion of In com e effect of t h e a lt er n a t ive m a r k et in g ch a n n els on the farmers.

4.

DATA & METHODOLOGY

4.1 Th e s t u d y is b a s ed on p r im a r y d a t a on p r ices a n d qu a n t it y, collected from growers payment sheets s u p p lied b y Mother Dairy centers fr om 2 0 0 5 -2007 . Procurement cen t r es s elect ed for t h e s t u d y in clu d ed Pu t h i, Moi, Ra b h r a , Ba lya n a a n d Kh a n d r a i in S on ep a t d is t r ict in Haryana. Th e wh oles a le p r ices for r es p ect ive veget a b les were collected fr om t h e r ecor d s of t h e Ma r k et in g Com m it t ee of th e n ea r es t m a r k et . Th e m a r k et in g cos t d a t a was collect ed fr om fa r m er s d u r in g t h e p r im a r y survey. A s et of r a n d om ly s elect ed fa r m er s a r e in t er viewed . Th e vegetables covered u n d er s t u d y were s elect ed on t h e b a s is of d a t a a va ila b ilit y fr om t h e Mot h er Da ir y cen t r es , wh ich a r e a ls o la r ges t gr own vegetables in the sample villages. The vegetables e.g. bottle gourd, carrot, on ion , gr een ch illi, tom a t o, la d y fin ger , ca u liflower , and m u s k m elon are included in this study.

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5. COMPARIS ON OF THE ALTERNATIVE DIRECT PROCUREMENT OF VEGETABLES Model: Mother Dairy

MODELS

OF

THE

5.1 Mot h er d a ir y (MD) u n d er t h e Na t ion a l Da ir y Developm en t Boa r d (NDDB) s t a r t ed in 1 9 8 5 a s a n or ga n ized r et a il ch a in of fr u it s a n d vegetables in In d ia . The procurement in 1985 was just 2 5 0 k g of vegetables wh ich in cr ea s ed over t h ou s a n d fold s t o r ea ch 2 5 0 ,0 0 0 k g in r ecen t yea r s . In t h is s h or t s p a n of t im e it h a s b ecom e la r ges t r et a il ch a in in As ia a n d t h e s econ d la r ges t in the Wor ld . Th e p op u la r Br a n d u n d er which MD is d oin g b u s in es s is S a fa l . It p r ocu r es 4 0 -4 5 s ea s on a l it em s of fr u it s a n d veget a b le fr om over 1 7 s t a t es in In d ia . Ar ou n d 2 2 ,0 0 0 s m a ll and big farmers a r e s u p p lyin g t h eir p r od u ce t o MD wh ich a r e d ir ect ly lin k ed t o it a t u p s tr ea m of th e ch a in . At d own s t r ea m , t h er e a r e a r ou n d 350 outlets spread across the National Capital Region (NCR) Delhi selling t h e p r ocu r ed fr u it s & veget a b les . Th e d is t r ib u t ion centres a t Pa lla b a k h t a va r p u r a n d Ma n golp u r i in Delh i lin k t h e fa r m er s a n d the consumers . At distribution centre huge storage and logistic facilities have been put in palace. 5.2 At u p s t r ea m MD op er a t es t h r ou gh p r ocu r em en t cen t er s spread a cr os s t h e cou n t r y t o p r ocu r e fr es h a n d qu a lit y veget a b le fr om gr ower s . Th e loca lly p r od u ced t op qu a lit y veget a b les a n d fr u it s a r e p r ocu r ed a t remunerative p r ices fr om t h e fa r m er s . Fa r m er s As s ocia t ion s also exists wh er e fa r m er s elect s on e Pr es id en t from among themselves. The S ecr et a r y, wh o is a ls o r es p on s ib le for t h e en t ir e a r r a n gem en t of p r ocu r em en t a n d r ecor d m a in t en a n ce, is a p p oin t ed b y MD. S ecr et a r y is en t it led t o get s a la r y for h is s er vices a t p r ocu r em en t cen t r e. Ma jor cos t s incurred during p r ocu r em en t s u ch a s p a ym en t of s a la r ies to s ecretary, helper, s afai k a r a m ch a r i a n d r en t p a ym en t for th e la n d a n d s h ed of t h e centre a r e p a id fr om t h e As s ocia t ion s fu n d s . Th ese fu n d s a r e gen er a t ed from t h e con t r ib u t ion of t h e 1 .7 5 p er cen t of t h e t ot a l va lu e of procured qu a n t it y fr om t h e cen t r e. All t h es e cos t s in clu d in g the transportation a n d h a n d lin g ch a r ges in clu d in g t h e m a r k et fee a r e d ed u ct ed fr om t h e growers p r ice. The p r ice p a id t o t h e fa r m er is net of a ll t h e ch a r ges a n d costs incurred until the produce reaches the distribution centre. 5.3 Farmers b r in g t h eir veget a b les t o t h e p r ocu r em en t cen t r e on d a ily b a s is a n d a ft er p a ck a gin g a n d weigh t in g, t h es e a r e t r a n s p or t ed t o t h e 12 | P a g e

distribution centre of MD every evening. During procurement special care is t a k en b y t h e s t a ff a t p r ocu r em en t cen t r e t o en s u r e t h a t t h e p r ocu r em en t m eet s t h e qu a lit y n or m s of MD. Res t of p r od u ct is r et u r n ed t o t h e fa r m er s t o b e d is p os ed of b y t h em a t t h e n ea r es t Ma n d i. Mandi, t h er efor e, fa ces a n a d ver s e s elect ion a s t h e p r od u ct s b r ou gh t a r e in a wa y r eject s of MD. Bes id es a los s in t er m s of t h e p r ices , fa r m er s a r e r equ ir ed t o in cu r exp en d it u r e on t r a n s p or t a t ion a n d m a r k et in g. It a ls o in volves s p en d in g a m in im u m of t h r ee t o fou r h ou r s a n d h a ve a n op p or t u n it y cos t . 11. MD d oes n ot lift t h e en t ir e qu a n t it y p r od u ced. The s ecr et a r y a t t h e procurement centre, a s t h e k ey a gen t of t h e MD coordinates t h e p r ocu r em en t . MD in for m s t h e s ecr et a r y of it s r equ ir em en t s on a d a ily b a s is a n d t h es e a r e com m u n ica t ed t o t h e fa r m er s . Tot a l qu a n t it y p r ocu r ed b y MD on d a ily b a s is , particularly during t h e p ea k t im e of s ea s on in t er m s of t h e p r od u ce, is les s t h a n t h e total produce of the day. Consequently only a part of the farmers produce is p r ocu r ed and n ot t h e wh ole p r od u ce, in d ep en d en t of it s qu a lit y. Bein g in t h e n a t u r e of p er is h a b les, t h e veget a b le ca n n ot b e h old , t h e exces s produce, therefore, a ft er s u p p ly t o MD, is s old in t h e loca l Ma n d i, (Annexure 2). 5.4 MD d oes n ot p r ovid e t h e fa r m er s a n y cr ed it or in p u t s u p p or t . Veget a b le gr ower s , wh o d o n ot h a ve m a r k et s u r p lu s of food gr a in s, d ep en d on com m is s ion a gen t s for m eet in g t h eir cr ed it a n d in p u t n eed s . Since these farmers bring relatively poor quality of vegetables (as the first gr a d e h a s a lr ea d y b een offer ed t o MD), it s a ffect s t h eir cr ed it r a t in g. The farmers vis it ed d u r in g t h e s urvey wer e r equ es t ed t o give t h eir op in ion on t h e is s u e of d ifficu lt ies fa ced b y t h em in get t in g cr ed it . It wa s ob s er ved t h a t t h e s m a ll fa r m er s wh o m os t ly gr ow veget a b les h a ve a r ela t ively gr ea t er d ep en d en cy on com m is s ion a gen t s for cr ed it a n d in p u t s a n d t hey are the worst affected. 5.5 The famers a ls o m en t ion ed t h a t t h e qu ot ed p r ice of t h e s u p p ly is n ot k n own a t t h e tim e of s u p p ly. It is on ly on t h e n ext d a y wh en t h e t en t a t ive p r ices are informed. Th e a ct u a l p r ice is d eliver ed t o t h e fa r m er s after ten days when their payment sheet is received by the s ecretary from MD. Th e a ct u a l weigh t s a n d qu a n t it y t h a t h a s fin a lly b een a ccep t ed is indicated on ly in t h e gr ower p a ym en t s h eet , though t en t a t ive qu a n t ity a n d p er cen t a ge of r eject ion is in for m ed t o t h e fa r m er on t h e n ext d a y of
11

IFPRI 2010

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t h e s u p p ly. Th e p a ym en t made a ft er ten d a ys of t h e s u p p ly t h r ou gh a bearer cheque. 5.6 Th e p r ices a r e a lit t le m or e u n cer t a in in MD t h a n in Ma n d i, in t h e s en s e t h a t in Ma n d i t h e p r ices a r e k n own t o th e fa r m er on t h e s p ot . Wh ile in MD, fir s t t h e p r od u ct s a r e s u p p lied a n d on n ext d a y p r ices a r e told to farmers. Comparing with contract farming, in MD there is no price or qu a n t it y con t r a ct for m a lized wit h fa r m er . Th e MD is n ot b ou n d t o p r ocu r e t h e qu a n t it y offer ed b y t h e fa r m er s . On t h e ot her hand MD gives fr eed om t o t h e fa r m er s to n ot t o s u p p ly t o t h em , or s ell a n ywh er e els e. Com p a r ed t o formal con t r a ct fa r m in g, t h e flexib ilit y wh ich MD offer s t o fa r m er s is oft en is r is k y, p a r t icu la r ly t o a s m a ll fa r m er , b eca u s e t h e prices and quantities procured are determined on daily basis. 5.7 Ma n y of th e fa r m er s m en t ion ed d u r in g t h e s u r vey t h a t if th ey are in for m ed of t h e p r ices a t t h e t im e of s u p p ly of t h eir p r od u ce, t h eir d ecis ion t o s ell t o MD or in a Ma n d i cou ld b e b a s ed on b ett er information. Th e qu a lit y con t r ol of MD was also r ep or t ed t o b e of a s ign ifica n t ly h igh er level a n d s t r in gen t wh ich lea ves a s iza b le p or t ion of p r od u ce t o b e m a r k et ed t h r ou gh t h e Ma n d i. S om e of t h e fa r m er s a ls o informed t h a t t h e p r ice t old a t t h e t im e of p r ocu r em en t were h igh er t h a n t h e a ct u a l p rices fin a lly p a id. Th er e wa s a ls o a gen er a l ob s er va t ion t h a t MD s p r ocu r em en t wa s r ela t ed t o t h e p r eva ilin g p r ices , d eclin in g d u r in g t h e p er iod wh en p r ices wer e d ep r es s ed a n d t h a t a ccen t u a t ed t h e r is k of the farmers. Model of Reliance Fresh: 5.8 Reliance Fresh (RF) operates through a procurement centre at each selected villa ge. Th er e is n o for m a l wr it t en con t r a ct b et ween the farmers and RF they a r e fr ee t o s ell to MD or a n y ot h er ch a n n el. However RF centre is m or e s op h is t ica t ed and uses b et t er t ech n ology in clu d in g a com p u t er t o con s olid a t e p r ocu r em en t in for m a t ion . Th e m a n p ower a t RF is b et t er t r a in ed a n d qu a lified u n lik e MD wh er e s ecr et a r y m a y n ot h a ve a n y t ech n ica l qu a lifica t ion . Th e p r ocu r em en t t er m s and conditions of RF are simple and t h ey give t h e p r ice in for m a t ion a n d a ccep t or r eject the qu a lit y a n d qu a n t it y a t t h e s p ot . Bot h , MD a n d RF p r ocu r e on ly b es t qu a lit y p r od u ct s fr om t h e fa r m er s a n d t h e rest is left wit h th e fa r m er s t o be sold by them. Th er e is n o fa r m er s association like in MD. The mode of payment in RF is both cash and cheque. 14 | P a g e

5.9 In t h is con t ext of th e a b ove a n a lys is of t h e p r ocu r em en t con t r a ct s of t h e MD a n d RF it s eem s t h a t t h e Relia n ce Fr es h con t r a ct is relatively b et t er t h a n t h e Mot h er Da ir y p r ocu r em en t con t r a ct in t er m s of p r ice in for m a t ion , qu a lit y m on it or in g, m od e of p a ym en t s et c. Des p it e t h e com p lexit y of t h e con t r a ct of Mot h er Da ir y, it provides a r ela t ively b et t er 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 p r icin g p olicy is n ot b a s ed on t h e loca l m a r k et p r ices . The p r ices given t o t h e fa r m er s a r e d et er m in ed on t h e b a s is p r ice qu ot a t ion of good qu a lit y vegetable from Aja d p u r m a r k et (t er m in a l m a r k et or TM), Delhi. Th e t r a n s p or t a t ion cos t , h a n d lin g ch a r ges a n d ot h er fees s u ch a s s a la r y t o t h e s ecr eta r y, r en t of t h e la n d et c a r e a ls o n et t ed fr om qu ot ed price. Therefore the price paid by MD to a farmer excludes these charges. However , it m a y n ot m a k e s ign ifica n t d iffer en ce t o th e t es t of coin t egr a t ion b eca u s e t h es e ch a r ges a r e a lm os t a fixed a m ou n t d ed u ct ed fr om p r ice qu ot a t ion . Th e d is in t egr a t ion , if a n y, b et ween t h e MD a n d TM p r ices s im p ly in d ica t e t h a t t h e well con n ect ed m a r k et s of S on ep a t a n d Delh i a r e n ot s h a r in g p r ice s ign a ls . To t es t m a r k et in t egr a t ion t h e r es p ect ive p r ice s er ies a r e t es t ed for s t a t ion a r y. It is fou n d t h a t a ll s er ies a r e n on -stationary a t level b u t in t egr a t ed a t fir s t d iffer en ce (ADF re s u lts may be seen in table 2).
Table: 2. Augmented Dickey Fuller Unit Root Results Traditional Market Price Vegetables Carrot Lauki Green Chilli Onion Bhindi Tomato Musk Melon Cauliflower At Level -2.57 -2.63 -2.35 -2.47 -2.9 -2.57 -2.61 -3.3 Critical Value -3.51 -4.23 -4.73 -4.39 -4.05 -4.37 -4.32 -4.35 At First Difference -5.1 -5.14 -3.99 -4.97 -7.29 -3.98 -3.63 -3.66 Critical Value -3.5 -4.25 -3.76 -3.62 -3.45 -3.61 -4.33 -3.6 At Level -2.23 -2.62 -0.7 -1.79 -3.31 -2.74 -2.01 -1.7 -4.07 -4.23 -4.73 -4.39 -4.05 -4.35 -4.32 -4.33 Mother Dairy Price Critical Value At First Difference -7.45 -4.43 -1.52 -4.05 -5.65 -5.52 -3.15 -3.74

Critica

-4

-4

-4

-3

-3

-4

-2

-3

6.2 Th e s econ d s t ep t owa r d s t es t in g co-in t egr a t ion is t o r u n b iva r ia t e co-in t egr a t ion t es t of E n gle-Granger. It is fou n d t h a t excep t Gr een Ch illi 15 | P a g e

Onion, and Musk Melon, the prices of local market are co-integrated with MD p r ices . Th e n on exis t en ce of p r ice in t egr a t ion for t h e gr een ch illi m a y b e b eca u s e it is n ot p r od u ced in la r ge volu m e in th e villa ges of t h e s tu d y areas. Non-in t egr a t ion of Onion p r ices m a y b e b eca u s e of t h e n ea r b y Pa n ip a t m a r k et , wh ich is t h e m a jor m a r k et for on ion in t h is r egion a n d ju s t 3 2 k m fr om th e s t u d y a r ea . Th is n ea r n es s m a y b e exerting more in flu en ce on loca l m a r k et s t h a n t h e TM. Lon ger s h elf life of on ion cou ld b e ot h er r ea s on . Mu s k Melon s TM p r ices a r e a ls o wea k ly co-integrated wit h MD, though t h e r egion p r od u ces it in good qu a n t it y. TM p r ices of Carrot, Lauki, Bhindi, Tomato and Cauliflower are co integrated with MD (results are Table.3.).
Table:3. Co integration Results Eigen Value Likelihood Ratio Leg 0.06 0.15 0.23 0.04 0.106 0.15 0.11 5.66* 5.99* 3.68 0.99 11.29* 4.32* 3.43 2 2 2 2 2 2 2 2

Vegetables Carrot Lauki Green Chilli Onion Bhindi Tomato Musk Melon Cauliflower

Co-integration Yes Yes No No Yes Yes Weak Yes

0.15 4.33* * Significant at 5% level, Critical value is 3.76.

Variation of Prices 6.3 Th e S t a n d a r d Devia t ion (S D) a n d Coefficien t of Va r ia t ion (CV) is u s ed a s a m ea s u r e of t h e p r ices va r ia t ion . Th e n et r even u e of t h e MD is ob s er ved t o b e m or e vola t ile for a ll t h e veget a b les excep t Bh in d i a n d Tom a t o wh er e a s the CV is es t im a t ed t o b e les s in MD t h a n TM. Th is is qu it e op p os it e t o t h e n ot ion t h a t t h e or ga n ized r et a il ch a in s will r ed u ce t h e vola t ilit y of p r ices for t h e fa r m er s a n d con s equ en t ly s t a b ilize t h e returns. (Table 4)

Table: 4. Variability of Prices Vegetables TM MD 16 | P a g e

Carrot Lauki Green Chilli Onion Bhindi Tomato Musk Melon Cauliflower

SD 114 24 18 197 38 76 43 47

CV (%) 62 111 76 50 129# 0.86# 0.67 94

SD 143 44 35 375 53 80 90 51

CV (%) 63 120 104 62 125 0.71 0.81 146

*SD is Standard Deviation, CV is coefficient of Variation

Impact on Revenue Theoretical relation between elasticity of demand and total revenue: 6.4 As s u m in g t h a t t h er e a r e h omogeneous good s a n d m a n y s m a ll s eller a n d b u yer s , ob ject ive of a s eller is t o m a xim ize his profits; with a n a u ct ion in g s ys t em t o d et er m in e t h e p r ice in the market through com p et it ive b id d in g, t h e m arket equ ilib r iu m is d et er m in ed b y equality of d emand and supply and prices are market clearing. The demand curve is a s s u m ed t o b e a n ega t ively s lop ed a n d t h e s u p p ly fixed in a d a y. In t h e dynamic equilibrium if there are change in the demand and supply in the m a r k et t h is wou ld im p a ct on t h e fa r m er t r ou gh r es p ect ive ch a n ges in t ot a l r even u e. Th e qu es t ion is h ow it is goin g t o im p a ct a n d t o wh a t 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

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..(4 )

In th e s itu a tion of p rofit m a x im iz in g th e ch an ge in tota l re ven u e of th e farm er w ou ld b e e ith er b ecau s e of ch a n ge in th e p rice or ch an ge in th e qu an tity or b oth . Th erefore th e tota l ch a n ge in th e reven u e of the farmer is:(5) 1+ ) dp + p (1+ ) d q .. (6)

Table: 5. The hypothetical values to show impact of price and quantity changes on revenue of the farmer

Elasticity of demand 0.5 1 2

100% increase in price 66 50 33

1 0 0 % in cre a s e in qu a n tity 33 50 66

6.5 Th e equ a tion (6 ) exp la in s t h e r ela t ion s h ip b et ween t h e ch a n ges in t h e r even u e of t h e fa r m er wit h r es p ect t o t h e ch a n ges in t h e p r ice a n d quantity. The ch a n ges in t ot a l r even u e con s equ en t u p on t h e ch a n ges in p r ice a n d qu a n t it y are in op p os it e d ir ect ion for a given ela s t icit y of demand. Th e h igh e r th e ela s ticity of d e m a n d th e lower w ou ld b e th e in cre a s e in th e reven u e w ith a n in cre a s e in th e p rice. Th ere is , th erefore, a negative rela tion b e tw e e n p rice ch an ge s a n d rev en u e ch a n ge s a t h igh ela s ticity of d em a n d v ice vers a . At h igh ela s t icit y of d em a n d , a d eclin e in price is more effective to increase revenue and at low elasticity of demand t h e p r ice in cr ea s e wou ld b e a good s t r a t egy for h a vin g a increa s e in t ot a l r even u e. For t h e qu a n t it y changes, t h er e a r e p os it ive r ela t ion s b et ween increase in revenue and the elasticity of demand. Th e in cre a s e in qu a n tity in th e m a rk e t a t h igh ela s ticity of th e d e m a n d w ou ld a ls o in cre a s e th e reven u e of th e farm e r w h ile a t low e r ela s ticity of d em a n d , a n y in cre a s e in qu an tity w ou ld a ls o d ecre a s e th e reve n u e of th e farm er. Th is exp la in s th e p ara d ox of th e a gricu ltu re w h ere good crop s e a s on m a y n ot b e re m u n era tive for th e farm er b ecau s e of low ela s ticity of d e m a n d of th e products. In a s it u a t ion of b u m p er cr op t h e in cr ea s e in t h e r even 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 t h e veget a b le m a r k et s beca u s e of the n a t u r e of com m od it y a n d their 18 | P a g e

yield p a t ter n . Veget a b les b ein g t h e p er is h a b les in t h e n a t u r e r equ ir e s t or a ge fa cilit ies t o r ed u ce t h e ext en t of a fa ll in p r ice. Als o t h e s ea s on plays an im p or t a n t r ole in t h e yield p a t t er n of t h e veget a b le. Bes id es , t h e s m a ll s ize of t h e m a r k et a n d d is in t egr a t ion in th e loca l m a r k et s lea d t o over r ea ct ion of t h e s u p p ly ch a n ges on t h e r even u e a n d t h r ou gh p r ice d ep r es s ion s . Given t h is inverse r ela t ion b et ween qu a n t it y in cr ea s e a n d the low in cr ea s e in r even u e a t low ela s t icit y of d em a n d t h er e a r e m or a l h a za r d for t h e p r od u cer s . Th er e is n o in cen t ive for t h e fa r m er s t o in cr ea s e t h e p r od u ct ion wh en t h e m a r k et d em a n d cu r ve is inelastic, b eca u s e t h e in cr ea s e in t h e qu a n t it y will a d d les s t o t h eir r even u e. This is a ll t h e m or e t r u e in ca s e of veget a b les wh er e t h e d em a n d is ver y inelastic. The low ela s t icit y of d em a n d in t h e loca l m a r k et is t h e gen er a l p h en om en on in In d ia . Th is m a y b e d u e t o t h e s m a ll s ize of t h e m a r k et s , 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 es t im a t ed in t h e followin g wa y. Let Pij p r ice of i veget a b le for j m a r k et in g ch a n n el a n d Q ij is u n it of qu a n t it y s u p p lied of i veget a b le t o j m a r k et in g ch a n n el. MCij is t h e p er u n it m a r k et in g cos t of t h e i veget a b le for j m a r k et in g ch a n n el a n d R ij is t h e r a t e of r eject ion for i veget a b le under j marketing channel. NPij = Pij *(Qij* Rij) MCij i = vegetable, j = marketing channel Th e r eject ion r a t e is ca lcu la t ed fr om t h e fa r m er gr ower s h eet s a n d t h e m a r k et in g cos t is ca lcu la t ed fr om t h e p r im a r y d a t a of field s u r vey. Applying rejection rate, R ij, to the quantity supplied we can get the actual quantity for which the price, Pij , is received by the farmer. 6.8 Table: 6 s h ows t h a t if t h e fa r m er s ells t h e s a m e a m ou n t of veget a b le t o eit h er of m a r k et in g ch a n n els h ow m u ch a ver a ge n et r even u e will a ccr u e t o h im . For exa m p le, for ca r r ot in Novem b er 2 0 0 5 , if t h e Q1 qu a n t it y is s old t o MD t h e a ver a ge n et r even u e r eceived b y fa r m er is h igh er a t Rs . 2 2 1 a s com p a r e in Tr a d it ion a l Ma r k et on ly Rs . 1 9 2 for t h e s a m e qu a n t it y of ca r r ot . Th er efor e MD is a d d in g 1 6 p er cen t m or e t o t h e r even u e of t h e fa r m er for t h e ca r r ot in Novem b er 2 0 0 5 . E xcep t 2 0 0 7 , in 2 0 0 5 a n d 2 0 0 6 t h e MD h a s b een a m or e r em u n er a t ive ch a n n el for ca r r ot as compared to traditional market. 19 | P a g e

Table: 6. Average Net Revenue of Traditional Market and MD Channel

Vegetables Year Month Average Net Revenue MD (Rs.) 221.2 312.0 251.3 135.5 77.9 15.8 87.4 19.4 28.3 13.5 8.0 22.4 65.5 29.3 581.7 611.3 510.7 65.2 45.0 22.9 23.9 55.4 26.9 26.1 20.1 7.8 83.8 114.4 51.6 16.3 53.4 42.8 Average Net Revenue TM Price (Rs.) 192.4 263.4 161.7 113.2 85.8 6.5 43.8 6 .2 26.7 11.1 7.7 17.6 42.9 31.7 372.7 390.0 435.6 47.1 29.1 16.1 19.1 33.7 22.8 19.8 10.4 24.7 41.3 72.1 40.2 34.6 47.7 88.6 MD Premium (%) 16.4 15.3 54.1 10.6 -10.7 189.4 179.0 223.0 47.1 33.8 14.5 17.3 43.9 -7.6 50.7 70.0 16.1 46.4 75.1 42.5 21.7 66.8 14.1 33.1 103.4 7.8 104.4 59.6 7.1 -51.7 -5.3 -47.2

Carrot

2005 2006 2007

Lauki

2005

Green Chilli

2005

Onion

2005 2006

Bhindi

2005

2006

Tomato Musk Melon

Cauliflower

2005 2005

2005 2006

Nov Dec Nov Dec Jan Jun Jul Aug Sep Oct May Jun Jul Aug Jun Aug Jun May Jun Jul Aug Sept Oct May Jun May May Jun Jul Nov Dec Jan

Difference between Prices 6.9 A r egr es s ion equ a t ion is u s ed t o ch eck wh et h er t h e d iffer en ce between t h e MD a n d t r a d it ion a l m a r k et p r ices is s ign ifica n t or n ot . Fir s t t h e d iffer en ce b et ween t h e prices Din = Pi1-Pi2 of a lt er n a t ive m a r k et in g 20 | P a g e

channels is calcu la te d a n d t h en t o t es t t h e s ign ifica n ce of t h e d iffer en 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 t er cep t t er m (a ij) in t h e fu n ct ion will give t h e d iffer en ce in m a r k et in g p r ices . If t h e p r ices a r e s ign ifica n t ly d iffer en t t h en in t er cep t wou ld b e s ign ifica n t . Th e r es u lt s given in t a b le-7 s h ow t h a t MD p r ices a r e s ign ifica n t ly h igh er t h a n t h e t r a d it ion a l m a r k et p r ices the vegetables except Cauliflower. Table: 7. Results of the above equation a in b int 93.7* 0.09 270* -2.7* 111* -0.15 131* -0.47 222* -0.01 86* 1.77* 198* 0.26 -83* 4.02* n et th e th e for

Vegetables Carrot Lauki Chilli Onion Bhindi Tomato Musk Melon Cauliflower

Indirect Impact of the MD on Prices: 6.10 Th e d ir ect p r ocu r em en t of t h e r et a il ch a in s a ls o im p a ct s t h e r even u e of t h e fa r m er s in d ir ect ly. Bein g a cr ed ib le op t ion for t h e fa r m er t o s ell it s p r od u ct s ot h er t h a n loca l m a r k et , it r ed u ces t h e d ep en d en cy from t h e t r a d it ion a l m a r k et in g ch a in s . Th e loca l m a r k et s a r e r ela t ively small in size and may not necessarily be integrated, and even if these are integrated, it m a y n ot n eces s a r ily r es u lt in transfer of t h e s u p p lies quick ly, a n d a ls o m a y n ot a d d b en efit s t o t h e fa r m er s . Th er efor e a n y ext r a a r r iva ls m a y ca u s e s u b s t a n t ia l d ep r es s ion in t h e p r ices of t h e loca l m a r k et . S u p p os e t h e MD wou ld n ot h a ve b een t h er e for d ir ect p r ocu r em en t t h e qu a n t it y wh ich is n ow p r ocu r ed b y it, t h e en t ir e produce wou ld h a ve b een s old in t o t h e n ea r es t m a r k et . The im p a ct of 21 | P a g e

t h is ext r a a r r iva l on t h e p r ice cou ld h a ve h a d m od er a t in g im p a ct on prices. To ca lcu la t e t h e in d ir ect im p a ct of t h e d ir ect p r ocu r em en t on t h e loca l m a r k et p r ices t h e ela s t icit y of t h e p r ice w.r .t . a r r iva ls is ca lcu la t ed (s ee t a b le). Us in g t h is ela s t icit y of p r ice t h e n et p r ice im p a ct is ca lcu la t ed for different vegetables.
Table:8 Elasticity of Prices w.r.t. Arrivals (Arr) and procured quantity (PR).
Vegetables Carrot Lauki Green Cilli Onion Bhindi Tomato Musk Melon Cauliflower -0.10 -0.016 -0.03 -0.048 -0.097 -0.163 -0.15 -0.118 -0.16 0.11 0.11 0.25 0.03 -0.22 -0.15 -0.46

6.11 Us in g t h e es t im a t ed ela s t icit y of p r ices of r es p ect ive i, it is ea s y t o ca lcu la t e t h e n ew p r ice wh ich wou ld h a ve b een New Pi1 if a ll t h e p r od u ce of i veget a b le (i.e. loca l m a r k et a r r iva l p lu s d ir ect p r ocu r em en t ) wou ld h a ve b een s old in n ea r es t m a r k et . The Ne w P1 is ca lcu la t ed wit h t h e followin g for m u la a n d b a s is of t h e a s s u m p t ion s t h a t t h e Ne w Pi1 cannot be negative and more than Pi1, as long as dInArr is p os itiv e: New Pi1 = Pi1 (1- e* dInArr) Wh er e P i1 is t h e p r ice in Rs . Per Qt ls . of a veget a b le in t h e loca l m a r k et , e , wh ich is ela s t icit y of loca l m a r k et p r ice w.r .t . Ar r iva ls and dInArr is t h e p er cen t ch a n ge in t h e Ar r iva ls . Th er e is s ign ifica n t in d ir ect impact of the direct procurement on the local market prices. Interestingly t h is b en efit is p r im a r ily a ccr u ed t o t h os e wh o a r e s ellin g in t h e loca l m a r k et s . Th is s t a t es t h a t t h e r even u e effect is n ot on ly con fin ed t o t h e fa r m er s d ir ect ly lin k ed t o t h e MD ch a in but a ls o t o ot h er fa r m er s wh o s ells in t h e loca l n ea r es t m a r k et . Th e graphs a s p er Annexure 1 clea r ly indicates that the New P1 would have been much lower than P1 .

7.

CONCLUSION

7.1 Th e s u p p ly ch a in efficien cy a n d in efficien cy im p a ct s wh ole a gr icu lt u r e s ys t em . Th e t r a d it ion a l m a r k et in g ch a in s a r e ch a r a ct er ized by high margins of the middlemen, low prices to the farmer, low elasticity 22 | P a g e

of d er ived d em a n d , h u ge wa s t a ge of a gr icu lt u r e p r od u ce, et c. Th e n ew m a r k et in g a r r a n gem en t s s u ch a s farmers m a r k et e.g. Ap a n i Ma n d i et c, con t r a ct fa r m in g, a n d em er gen ce of d ir ect p r ocu r em en t b y or ga n ized r et a il ch a in s a r e h op es for em er gen ce of efficien t a gr icu lt u r e m a r k et in g. However, t h er e cou ld b e p r ob lem s of exclu s ion of s m a ll fa r m er s , s h or t t er m view b ein g t a k en b y t h e con t r a ct in g com p a n y et c., in s t it u t ion a l r efor m s n eed t o r ed u ce t h e m u lt ip le la yer s of in t er m ed ia t ion . Th e d irect p r ocu r em en t is s t ill geogr a p h ica lly r es t r ict ed t o t h e h ot s pots of t h e veget a b le p r od u cin g r egion s , a n d n ot for a ll, and t h eir im p a ct on fa r m er s d ep en d s on t h e t er m s a n d con d it ion of t h e p r ocu r em en t con t r a ct . Pr ocu r em en t s ys t em a d op t ed b y t h e t wo a gen cies , MD a n d RF, suggest t h a t t h e a p p r oa ch a d op t ed b y RF is m or e in for m a t ive in t er m s of p r ice information, quality monitoring, mode of payments etc. 7.2 Th is s im p licit y of t h e con t r a ct of RF cou ld b e con s id er ed t o provide a n ed ge t o it , b u t m u lt ip le a gen cies a n d a va r iet y of con t r a ct in g a r r a n gem en t s cou ld co-exist. Beca u s e d es p it e t h e com p lexit y of t h e contract, MD still p r ovid es a r ela t ively b et t er d ea l t o t h e fa r m er a s compared t o t h e t r a d it ion a l m a r k et ing ch a in s . Th is m a y b e t h e r ea s on that it h a s b een s u cces s fu l for s u ch a lon g t im e in m a n y a r ea s . On t h e practical s id e of t h e im p a ct s of MD it is observed t h a t excep t Gr een Chilli, On ion a n d Mu s k Melon , t h e p r ices of loca l m a r k et a r e cointegrated with MD p r ices . Th e n et r even u e of t h e fa r m er s for s elect ed veget a b les is fou n d on a n a ver a ge 1 7 p er cen t h igh er for ca r r ot , 1 3 4 p er 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 er e a r e p os it ive s p illover s a n d ot h er in d ir ect im p a ct s on t h e r even u e of t h e fa r m er s of th e d ir ect p r ocu r em en t by MD. Th e in d ir ect b en efit s a r e n ot con fin ed only t o t h os e s u p p lyin g vegetables t o MD, th es e r a t h er get ext en d ed t o a ll t h os e fa r m er s s u p p lyin g t o loca l Ma n d i or TM. In s h or t t h e d ir ect p r ocu r em en t of t h e MD h a s en h a n ced the fa r m er s revenue. ***

23 | P a g e

8.

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83. Mccu lloch , N.An d Ot t a , M., (2 0 0 2 ), E xp or t Hor t icu lt u r e An d Pover t y In Ken ya , Id s Wor k in g Pa p er174.Brighton, Sussex: Ids 84. Wein b er ger , K. An d Lu m p k in , T., (2 0 0 5 ), High Va lu e Agr icu lt u r a l Pr od u ct s In As ia An d Th e Pecific For Sm a ll Hold er Fa r m er s : Tr en d s , Op p or t u n it ies An d Res ea r ch Pr ior it ies , Rom e, Gfarhtpp://Www.Egfar.Org/Documents/02 Meet in g Workshop-OnHigh Value Productsoct, 2005/Regionlap.Pdf. 85. Government of In d ia (2 0 0 7 ), Agr icu lt u r a l Ma r k et in g In fr a s t r u ct u r e An d Policy Requ ir ed For In t er n a l An d E xt er n a l Tr a d e Rep or t Of Th e Working Group For The 11th Five Year Plan, Planning Commission. 86. Reardon, T & Gu la t i, As h ok , (2 0 0 8 ), Ris e Of S u p er Ma r k et a n d Th eir Im p lica t ion s , Dis cu s s ion Pa p er IFPRI, 87. NABARD Study, (2 0 1 1 ), Organized Agri-Food Ret a ilin g in In d ia . 88. ICRE AR Rep or t , (2 0 0 9 ), In com e & E m p loym en t . Im p a ct of Or ga n ized Ret a il Ch a in s on

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Annexure-1

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1|Page