Farmers Selling Decision: Channel Selection Criteria and Factors Affecting Decision

Rajnish Tuli MART A-108, 2ND Floor, New Friends Colony New Delhi -25 India 09313328043 [email protected] Nidhi V. Srivastava Howard Community College [email protected]

Abstract Adequate presence of channels to buy agricultural produce, assist in minimizing wastage and ensuring competitive prices is important for a vibrant agricultural economy. In this context, this study focused on farmers selling decision especially with regard to channel selection criteria and factors that affect the selling decision. An important component was investigating the farmers perception of various channels. With the advent of ITC e-Chaupal it became especially interesting to record the response of framers in comparison to other channels. It involved a quantitative study with 200 farmers cultivating soybean with at least 3 acres of land and above across 3 districts of Madhya Pradesh covering 13 villages representing various POP strata. The study found that most farmers preferred to sell immediately after harvesting. In this they were largely driven by need for money (for the next crop, payment of loan family needs) and avoidance of incurring labour cost twice (once at time of storage and finally at time of selling). Among the channels the most popular in terms of awareness and usage were APMC and Intermediaries (money lenders). The key finding was that farmers utilise multiple selling channels and were, in most cases, driven by environmental and financial factors to decide on selling time and selling channel. The response to ITC-e Chaupal clearly indicated towards the scope for other innovative models for procurement and imparting information to farmers on agri-related issues.

Introduction In the last decade while the Indian economy has done quite well overalli, achieving a Compounded Annual Growth Rate (CAGR) of over 6.0%, agriculture has remained sluggish with a CAGR of only 2.0%. Even though the contribution of Agriculture in overall GDP of the country has declinedii from 44.5 per cent in 1970-71 to around 20.0 percent in 2005-06 (Economic Survey, 2006), agriculture continues to be the principal source of livelihoods for around 62.0% of the countrys population (Economy Overview, 2006). A stronger growth in agriculture would lead to higher income for farmers, generate more employment opportunities and sharply reduce poverty. However, this requires an adequate presence of channels to buy their produce, assist in minimizing wastages and ensure competitive price. Traditionally farmers are dependent on multiple channels like intermediaries, traders, APMC and directly to the company to sell their surplus produce. Yet most Indian farmers have remained quite poor. The causes include remnants of scarcityera regulation and an agricultural system based on small, inefficient landholdings. The agricultural system has traditionally been unfair to primary producers. Soybeans, for example, are an important oilseed crop that has been exempted from Indias Small Scale Industries Act 1951 to allow for processing in large, modern facilities. Yet 90% of the soybean crop is sold by farmers with small holdings to traders, who act as purchasing agents for buyers at a local, government-mandated marketplace, called a mandi. Farmers have only an approximate idea of price trends and have to accept the price offered them at auctions on the day that they bring their grain to the mandi. As a result, traders are well positioned to exploit both farmers and buyers through practices that sustain system-wide inefficiencies. This study focused on the farmers selling decision especially the channel selection criteria and factors affecting selling. In this context the study also investigated the farmers perception of various channels. With the advent of ITC e-Chaupal it became especially interesting to record the response of framers in comparison to other channels. The Selling Channels The study broadly covered the following six selling channels that were identified in the exploratory phase. 1. Agriculture Produce Marketing Committee (APMC) Mandi India's regulated market mandi was an innovation at the time of its establishment because it enabled farmers to sell to the most competitive buyer. However, the mandi (physical marketplace that is regulated by a market committee), enables traders to act in collusion. They can extract higher trading profits by offering lower prices to farmers and by selling produce to processors and to the retail markets at higher prices. However, farmers in most agrarian communities have no choice but to use the mandi. Though it involves auctions that provide an ideal price discovery mechanism to fragmented farming operations, farmers face and then bear the adverse outcomes of the sunk cost of transporting produce to the mandi.

Without bearing the cost of transportation, most farmers would not be able to gather price information and sell their produce. Nevertheless, after taking the produce to the mandi, the economic pressure to sell especially at very low prices becomes intense. Hence, non-availability of information before moving produce to the mandi and the cost sunk in the transportation of produce to reap the benefits of the oral auction and price discovery are serious shortcomings of the mandi market system. 2. Intermediary /traders Many small farmers sell their produce to intermediaries who in turn sell it in mandi or company directly. Farmers find no value in incurring transportation, cleaning, drying grading and sorting because of limited produce. Many of them are dependent for inputs on these traders and intermediaries therefore in most cases it becomes mandatory to sell the produce to them in order to pay back their loans. 3. E-chapual The e-Choupal initiative; the single-largest information technology-based intervention by a corporate entity in rural India. Transforming the Indian farmer into a progressive knowledgeseeking netizen. Enriching the farmer with knowledge; elevating him to a new order of empowerment. E-Choupal delivers real-time information and customized knowledge to improve the farmer's decision-making ability, thereby better aligning farm output to market demands; securing better quality, productivity and improved price discovery. The model helps aggregate demand in the nature of a virtual producers' co-operative, in the process facilitating access to higher quality farm inputs at lower costs for the farmer. The e-Choupal initiative also creates a direct marketing channel, eliminating wasteful intermediation and multiple handling, thus reducing transaction costs and making logistics efficient. The e-Choupal project is already benefiting over 3.5 million farmers. Over the next decade, the e-Choupal network is likely to cover over 100,000 villages, representing 1/6th of rural India, and create more than 10 million e-farmers

4. Food Corporation of India The Food Corporation of India was setup under the Food Corporation Act 1964, in order to ensure effective price support operations for safeguarding the interests of the farmers, distribution of food grains throughout the country for public distribution system; and maintaining satisfactory level of operational and buffer stocks of food grains to ensure National Food Security. FCI operates through a country-wide network with its Corporate Office in New Delhi, 5 Zonal Offices, 23 Regional Offices practically in all the State capitals, 168 District Offices (as on 01.01.2006) and 1452 depots (as on 01.01.2006). To a certain extent political and bureaucratic interventions in FCI has clouded its functioning in terms of attracting food grains or managing or distributing them effectively.

5. Companies (involved in Soya oil processing) Many companies in the Madhya Pradesh region where the study was conducted, have started directly procuring produce from farmers. They are biased towards large farmers as they bring clean, sorted and well graded produce. 6. Seed Organization It comprises of government and private players. The small group farmers are normally associated with seed companies. They offer $ 4.8- $ 7.14 above the prevailing market rate and require only registration and certification cost of $ 6 per month. Farmers also save time and other associated costs like transportation, labor etc.

Research Methodology The quantitative study was preceded by a qualitative study that focused on understanding the decision making process and factors impacting selection of selling channel by farmers. Quantitative phase involved 200 farmers cultivating soybean with at least 3 acres of land and above across 3 districts of Madhya Pradesh covering 13 villages representing various POP strata. Factors that affected sample selection were size of land holding, size of village and proximity to feeder town. Farmers/districts were selected to ensure variability across all these key parameters. Questionnaire was translated into Hindi and pilot test was carried to test the structure and comprehension. Descriptive statistics were used to draw inferences for analysis. Findings and Discussion The study found that most farmers preferred to sell immediately after harvesting. In this they were largely driven by need for money (for the next crop, payment of loan family needs) and avoidance of incurring labour cost twice (once at time of storage and finally at time of selling) (table 1). Their key information mechanisms for the purpose were farmers trip to the mandi, newspapers and from other traders over phone.

Table 1 Factors driving immediate selling Factors Cash requirements Loan repayment Attractive price during initial days Lack of storage facility High cost involved in storage % Mean Score 89 4.4 73 4.0 45 3.7 37 3.4 27 3.2

The key factors impacting price of the produce were Demand (mean = 4.6) and Quality of produce (mean = 4.5). This was followed by supply and moisture, foreign particle and size (table

2). Before selling farmers were principally interested in collecting information on mandi prices (95%) followed by nature of demand (60%), alternative market availability (56%), arrival of outside trader (45%) and supply in waiting (38%) (table 3).

Table 2 Factors impacting price of produce Factors Demand Quality of produce Supply in market Moisture, foreign particle and size Mean 4.6 4.5 3.9 3.8

Table 3 Information Collected before Selling Kind of Information Mandi Prices trend Nature of demand Market availability (Multiple Choice) Arrival of outsider traders/agents Supply in waiting Expected arrival % 95 60 56 45 38 35

Among the channels the most popular in terms of awareness and usage were APMC and Intermediaries (money lenders). Only about 40% respondents were aware of e-chaupal, seed corporation and traders (Non-APMC) of which only 20% had used e-chaupal. Only a small percentage used Seed Corporation. The awareness level and usage of companies as channel was the lowest (table 4).

Table 4 Types of Selling Channels Available and their Usage Channels to sell Mandi APMC Intermediary (Money lender) e-Chaupal Seed Corporation Traders (Non-APMC) Company Available % 98 88 43 42 39 13 Used % 86 77 20 10 29 3

The key attributes used by farmers for comparing channels were price offered, time involved in selling, transportation cost, labour charges, mandi tax, mode of payment, assistance in production, transparent dealing, collection or delivery of crop and crop suitability (table 5). APMC scored quite well on the 1st four criteria besides transparent dealing and crop suitability. FCI scored the highest on price offered (table 6). Farmers perceived mandi to be best available selling channel followed by traders, government (FCI) and chaupal (table 7). Most farmers had the option of selling to multiple channels. In some areas farmers had the option of using more than two APMC markets. However, small farmers with limited transport facility were forced to sell in Sub-Mandi.

Table 5 Attributes of Selling Channels Attributes Price offered Time involved in selling Transportation cost Labour charges Mandi tax Mode of payment Assistance in production Transparent Dealing Collection or delivery of crop Crop suitability % 89 68 63 61 56 56 48 41 40 36

Table 6 Comparison of Selling Channels Attributes APMC FCI* Intermediary Chaupal Price offered 4.0 4.2 3.9 3.3 Time involved in selling 4.0 3.0 2.6 3.9 Transportation cost 4.8 2.3 3.2 3.6 Labour charges 4.0 3.0 2.7 3.6 Local Tax 3.0 3.1 3.0 3.6 Mode of payment 3.0 3.0 2.4 3.7 Assistance in production 1.0 3.0 2.6 3.0 Transparent Dealing 4.4 3.1 3.6 3.9 Collection or delivery of crop 1.0 2.9 2.6 3.6 Crop suitability 4.0 3.0 2.9 3.3 N 195 35 60 40 Five point scale ranging from 1- very poor and 5- very good *FCI- Food Corporation of India Seed Company 3.5 3.3 3.5 3.5 4.0 3.5 2.5 3.3 2.5 4.3 30

Table 7 Best Selling Channel Channels Mandi-APMC (N=195) Trader (Directly) (N=175) Government FCI (N=23) Chaupal (N=45) Rank Mean 1.7 2.5 3.6 3.7 Rank 1 2 3 4

In terms of changes for the future, almost 68% respondents expressed desire for new channel while 92% expressed preference for trading across states. Interestingly, there was a statistically significant relationship (=.01) between education & perceived benefit of trading across borders. The perception of benefit was stronger among the middle age group (35-50) than others. A large group of respondents (36%) felt that trading across states was possible with the help of computers and an expert. Intermediaries and traders were found to be a necessary part of value chain among farmers. The key finding was that farmers utilized multiple selling channels and were, in most cases, driven by environmental and financial factors to decide on time and selling channel. The response to ITC-e Chaupal clearly indicated scope for other innovative models for procurement and imparting information to farmers on agri-related issues. Channels not only ensured support at the time of production in terms of funds, agri-inputs, storage facility etc. but even to meet personal and household needs. They were popular among mid-sized farmers who suffered from poor economies of scale to be able to carry produce to the Mandi and wait entire day to sell off the crop. They prefer intermediaries who carry entire

produce from their door step. An interesting factor that impacted the relationship with intermediaries was the fact that farmers felt a sense of obligation to sell their produce, even at lower rate, to intermediaries since the latter had helped them in need. Mandi attracted farmers because of being a major business hub of the area where farmers could avail various agri and non-agri inputs. Mandis provided selling opportunity to multiple crops in comparison to other channels, which catered to only one crop . FCI was popular among a limited segment of farmers, especially large farmers with deep pockets and resources since it was very time consuming to sell produce to them. Some farmers felt that it was possible to sell bad quality produce to FCI without much loss. e-Chaupal as a new selling channel has received positive response from educated farmers with large holdings. Large farmers are also parallely dependent on mandi and other channels. eChaupal is restricted to purchase of only one crop and for rest they have to depend on other traditional channels. However, mode of payment and time involved attracted farmers to echapual. Some farmers were not attracted to e-chapual as they perceived that it prererred only very good quality produce and turned away produce that did not meet its standards. For the farmer this meant sunk cost in terms of transportation and time.

End Note i. India is the fourth largest economy as measured by purchasing power parity (PPP), with a GDP of US $3.36 trillion. When measured in USD exchange-rate terms, it is the tenth largest in the world, with a GDP of US $691.87 billion (2004). India was the second fastest growing major economy in the world, with a GDP growth rate of 8.1% at the end of the first quarter of 20052006. (Economy of India, 2006) During the 54 years of Planning between 1950-51 and 2004-05, the share of agriculture in GDP has fallen by more than half from 59 per cent to 24 per cent, whereas the share of industry has almost doubled from 13 per cent to 25 per cent and the share of services has increased from 28 per cent to 51 per cent. The steep fall in the share of agriculture in GDP is due to the fact that its growth rate at 2.7 per cent per annum has been less than half of the growth rates of 5.6 per cent per annum for industry and 5.7 per cent per annum for services (Economy of India, 2006).

ii.

References Economic Survey, 2004-05. (2006, March 19) The Pioneer, p. 5. Economy Overview retrieved from the web November 12, 2006. www.economywatch.com Economy of India retrieved from the web November 10, 2006. http://www.organiser.org/dynamic Bibliography

www.itcportal.com www.mpstateagro.nic.in www.agriculture-industry-india.com www.fciweb.nic.in