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[Food Processing] Nuisance of APMC Acts, CommissionAgents; Marketing of agricultural produce: issues and

constrains for GS Mains

PrologueAPMC Acts: What and Why?Old APMC Acts: Problems?License raj=Lootera-rajHoardingAPMC Definition vs MSPModel APMC ActModel APMC Act: Salient FeaturesModel APMC Act:

Limitations/ProblemsAdditional suggestions to reform

APMC

Contract farming

Below APMC-Mandi marketDirect Sale / Cooperative markets

Rythu BazarVirtual MarketsITC e-Choupal

Single Food RegulatorProblem with overlapping lawsFSSAI Act 2006: Features

Prologue

In the previous two articles on [Food Processing], we saw

1. Intro to food processing industry: Awesomeness and Obstacles2. Truckload of Government Schemes and bodies

In this third article, we see the APMC, FSSAI Act and few other topics.

Although UPSC Syllabus nowhere mentions APMC Act but it needs to beprepared with respect to

1. GS3: Marketing of agricultural produce and issues and relatedconstraints (GS3)

2. GS3: Food processing Supply chain management (SCM): upstreamissues (Because outdated APMC Acts permit commissionagents=lengthen and fragment the supply chain=increase rawmaterial cost.)

3. Even for food inflation, FDI in Multibrand retail= APMC angle needs tobe discussed.

APMC Acts: What and Why?

In news columns, and TV Debates surrounding food inflation and FDI inmultibrand retail, you’ve often heard experts talking about APMC acts. So,what are these APMC Acts and how did they led to proliferation/nuisance of

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HOMEHOME ECONOMYECONOMY AUGUST 21ST, 2013AUGUST 21ST, 2013 32 COMMENTS32 COMMENTS

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middlemen/intermediaries in food supply chain?

In old Bollywood villages, there is always one Lala / Muneem typecharacter. He lends money to farmers for seeds/cattle/marriageexpenses, then arbitrarily purchases his wheat/rice @throwaway prices+ compound interest rate + illiteracy =>farmers in perpetual debt.To fix above problem, State governments started enacting AgriculturalProduce Market Committee (APMC) acts since 50s.

APMC acts run on two principles:

1. Ensure that intermediaries (and money lenders) do not compelfarmers to sell their produce at the farm gate @throwawayprices=farmer is not exploited

2. All food produce should first be brought to the market yard=> sellthrough auction=farmers gets good money.

Under APMC Acts:

A State is geographically divided and Market (Mandis) are establishedat different places within the states.Farmers have to sell their produce through the auction @mandi.To operate in Mandi, a trader has to get license.Wholesale, retail traders (e.g. shopping mall owner) or foodprocessing company etc cannot buy farm output directly from farmer.They’ve to get it through the Mandi.

Old APMC Acts: Problems?

Membership

State APMC Market Committees have 10-17membersEither elected or nominated by Government inaccordance with provisions of the respective StateAPMC Act.But in several States, regular elections of APMCs =not held.APMC board are administrated by bureaucrats. As aresult

1. APMC bodies have lost democratic nature.2. bureaucrats run the show= red tapes + bribery

FarmersCheated

Most Mandi traders do following:

Even after receiving the fruit/veggies/grains, theydelay payment to farmers for weeks and months.If payment is done on spot, then trader wouldarbitrarily deduct some amount, on excuse that hehas not received payments from the other parties.To avoid tax/cess, the traders don’t give sale slips tofarmers=>Later it is difficult for farmer to prove his‘income’ to get loans from banks.on an average basis the farmer is able to receivebarely 1/4th to 1/3rd of the final retail prices

DoubleCommission

Middlemen @Mandi charge commission on bothseller (farmer) + buyer (the urban retailer / foodprocessor)=double commission=final consumer has to payeven more!

Middlemen donot pass the benefit to either side

1. during peak season, when they buy from farmer

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HurtingBoth Sides

@low prices, they don’t drastically reduce the pricesto final consumer.

2. during lean season, when consumers prices arehigh, the farmers do not get higher returns on theirproduce.

ResistanceTo Reform

Middlemen have rent-seekers mentality.They resist anything that’ll increase transparency orreduce transaction cost and time.Even when electronic auction centres wereestablished like the Safal National Exchange inBangalore, the existing markets did not allow thetransition to a transparent system.

No ValueAddition

Middlemen have no facilities to do grading/sorting,all they do is pass the produce from farmer to finalconsumer and charge truckload of commission inbetween.Thus, post-harvest losses continue to be in therange of 18 to 40 per cent for several commodities

PriceDiscovery

For cereal, pulses and oilseeds, governmentannounces Minimum support prices (MSP). Sofarmers know in advance, what the price of theirproduce.But for most perishables fruits/veggies, governmentdoesn’t declare MSP.thus, farmers are completely dependent for pricediscovery and on intermediariesDuring peak production of seasonal crops, pricesdrop so drastically, the farmers can’t even cover thecash expenses of transportation to markets, leavealone the cost of production.

No auction

The licensee traders and commission agents haveformed informal cartels @mandis. No auction takesplace. Even if auction is held, collectively thesetraders keep low bidding so farmer never benefits.

Cess

Cess= tax on taxIn every Mandi, every transaction is subjected tomarket tax + market cess.This Cess money is to be used for furtherdevelopment of Mandi infrastructure- sortinggrading storage facilities etc.But money is not used for that purpose(Raja/Kalmadi-type elements omnipresent.)As a result, fruits and veggies often get rotten dueto lack of processing, storage facilities at the Mandi.Even the good produce gets contaminated due toflies and larvae=>gastrointestinal diseases.

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License raj=Lootera-raj

To operate in an APMC Market (Mandi), you need to get a license. Thislicense raj leads to following problems:

1. In most Mandis, the pre-condition to get license=> you must own ashop or warehouse in the Mandi. But Shops / warehouses are limitedn number= extremely high prices.

2. If you can’t find a shop/warehouse, then you’ll have to find an oldman who has license but leaving business due to age/health problemsand his sons not keen to join this profession. Then you buy hisshop/license @extremely high price (because there will be otherbuyers too outbidding each other to buy his license!)

3. In any business where license is required=>Bribes have to be paid. Beit Telecom or mining or APMC mandi. So again, you must exploit thefarmers to recover your (bribe) investment.

Because 1+2+3=> Commission agent/middleman/trader has to makeheavy investment to start his business in APMC. So, he decides to exploitthe farmers to recover that big investment.

In Mandi, even weighmen, Paddlers, Hamals have to get license => theyalso need to pay huge bribes=> they also overcharge the farmers torecover their (bribe) investment.

Hoarding

Over the years, India’s Agro-production has increased but number ofintermediaries in APMC remained constant= their cartel controls thesupply= hoarding, opportunistic profiteering. But how? Let’s understandthat with potato example:

Potato: peak supply December to March

Potato demand Throughout the year.

Big traders, agents: they buy potatoes from farmers @throwawayprices in the Mandi.They rent large cold storage houses across different states for storingpotatos only. (Majority of cold storage facilities in Uttar Pradesh andWest Bengal only devoted to Potato-storage)Thus these traders “control” the potato supply across India. Andwhoever can control the supply, can control the prices.Thanks to this hoarding and cartelism=> in peak and lean season ofpotato, you’ll find price difference up to 150 per cent or even more.Similar case for onions, tomatoes, daal and everything else.

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APMC Definition vs MSP

In APMC Acts, the definition of “agriculture”=very wide and vogue.Although main focus was on cereals, pulses and oil-seeds, evenhorticulture produce (fruits and veggies) also came within the broaddefinition of agriculture.And over the last five decades, the share of perishable produce in theAPMC market is increasing For example, the Azadpur Mandi in Delhiprincipally caters to perishable crops rather than cereal or oilseeds.Ok so what’s the problem?Problem= government declares minimum support prices (MSP) formany cereal, pulses and oilseeds crops=> middleman @APMC cannotexploit the farmers beyond a level (otherwise he can sell it to the FCI)but for fruits and veggies, government doesn’t declare minimumsupport prices (MSP)=> gives plenty of opportunity for the middlemanto exploit farmer (as well as end consumer).

Model APMC Act

So far we saw that original APMC Acts enacted by various states=bogus,inefficient, useless, ridiculous.

2003

After years of badass thuggary and inefficiency, suddenly Unionagriculture ministry woke up, drafted a new Model APMC act, andasked the State governments to adopt it. (Why? BecauseAgriculture is a state subject. So it is upto the States to reformtheir laws..)

2006 Bihar repealed its state APMC act altogether.

2012 So far only 16 states have adopted the model APMC act. (as perthe reply given by $harad Pawar in Loksabha)

This new/reformed/model APMC Act of 2003 has following features

Model APMC Act: Salient Features

New Model Act Old BogusAct

Farmer doesn’t need to bring his produce to APMCMandi. He can directly sell it to whomever he wants.(Although, if he doesn’t bring his produce to Mandi,then he cant run for election in that APMC marketingcommittee.)

farmers mustbring allproduce to theMandi.

Farmers Processors, exporters, graders, packers, etc.can buy agricultural produce directly from farmers.

Noone canpurchasefarm-producefrom farmeroutside Mandi.

Permits Private market yards, Direct Purchase Centers,farmers’ market for doing trade in agriculture produce.(monopoly of Mandis=destroyed)

Only StatemanagedAPMC Mandican to thetrade.(monopoly)

Public Private Partnership in the management anddevelopment of agricultural markets in the country forpost-harvest handling, cold storage, pre-coolingfacilities, pack houses etc.

lolz

A separate Chapter to regulate and promotecontract-farming arrangements in the country.Dispute resolution mechanism for contract farming.

lolz

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Prohibits commission agents in any transection.commissionagentspermitted.

establish State Agricultural Produce MarketingStandards Bureaufor Grading, Standardization and QualityCertification of agricultural produce (so they canfetch higher prices in desi-foreign markets)

lolz

Increased the responsibilities of APMC committee. Theyhave to:

1. ensure complete transparency in pricing systemand transactions taking place in market area;

2. ensure payment for agricultural produce sold byfarmers on the same day;

3. promote agricultural processing + value addition4. Publish data on arrivals and rates of agricultural

produce brought into the market area for sale.5. Setup and promote public private partnership in

Mandi Management.

maha-lolz

Ok this new Model APMC act sounds all well and good. But here are theproblems

Model APMC Act: Limitations/Problems

1. So far, Only 16 states adopted the Model APMC Act (as of 2012). Why?Because Middleman/trader lobby made truckload of cash fromexploiting farmers and consumers. Part of that money given in electionfunding to ruling parties in States=>reforms stalled.

2. Model APMC act is not ‘uniformly’ adopted, states have made their ownmodifications. For example

Andhra

Andhra Pradesh permitted private markets but they’ve topay a license fee of Rs 50,000 and project must be min.10crores =discourages small farmer/trader associations fromsetting up their own private markets.

Odisha Orissa has not permitted private markets for paddy/rice

Haryana Only adopted Contract farming related provisions.

Somestates

Even the private markets are subjected to Mandi tax andMandi cess.

commissionagent

Madhya Pradesh abolished commission agent system butsome other states didn’t adopt this provision of modelAPMC.

Bihar

Repealed its APMC act in 2006.Now, SDM is in-charge of the unregulated marketsNo market fee are charged from the farmers But othercharges for loading/unloading/Hamal charges arevogue/uncontrolled.

WBYet to amend its APMC Act.Mamata opposing the concept of contract farming onthe premise that it could jeopardise farmers’ interests.

Additional suggestions to reform APMC

(These were made by committees of planning commission, inter-ministerialgroups etc.)

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Removehorticulture

Horticulture should be specifically excluded fromdefinitions of APMC. Because these Mandis are mainculprits for inflation and wastage of fruits andveggies.

E-Auction All APMCs Mandis should introduce electronic auctionplatform

MembershipOpen membership of APMC’s by encouragingwholesalers and retailers to enter into transactionswith the growers.

No License

Anyone should be allowed to trade in APMC market.Licensing system should be abolished.The APMC Market Committee should only fix thetransaction fee and keep a Bank Guarantee fromtraders to ensure that the farmers’ payment is notaffected.

NoCess/Tax

all the taxes/cess levied in APMC Mandis should beabolished.

Contract farming

Contract farming is a forward agreement between farmers and buyers

buyer

Agrees to buy produce from farmer @predetermined price.Usually provides inputs (Seeds, fertilizers, pesticides),technology and production practices so that final producemeets his desired quality.

farmer Agrees to grow and supply the produce to the buyer @predetermined quality, quantity and prices.

Contract farming is prevalent only in those states, where the APMC actsare favorable for private player e.g. Andhra Pradesh, Himachal Pradesh,Madhya Pradesh, Maharashtra who adopted the model APMC Act.

State Farm produce Area under contractfarming (acres)

Buyer company

Punjab

Potato,Tomato, Chilli

6000 Pepsico (for theirpotato chips)

Basmati,Maize

400 MahindraShubhlabh

Soyabean 1200 ITC

Karnataka Ashwagandha 700 HimalayaHealthcare

MadhyaPradesh

Wheat 15,000 Hindustan Unilever

Contract Farming also done for export oriented cropping of Basmati, Chilli,Gherkins and soybean.

Below APMC-Mandi marketBelow the Mandi markets, there are primary assembly markets such asvillage-bazaar, weekly haat in tribal areas etc.

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There is wide variation in their governance. Some states run themunder Panchayati Raj institutions, some states put them undersupervision of district administration.Condition of cattle markets and fish markets are even worse. Most ofthem do not have even basic amenities like sheds, sanitation ordrinking water.Immediate reforms/upgrades necessary in all these markets.

Direct Sale / Cooperative markets

Long before the circulation of Model Act (2003), several States hadpromoted Farmer’s Market. Example

Rythu BazarBy Andhra government in ‘99to eliminate middlemento help farmers directly sell their produce to customersEvery farmer in the Rythu bazaar sells his produce as a retailer.

Current scenario:

Rythu Bazar in Andhra >100

villages covered >2000

farmers covered >40000

similarl direct marketing iniatives in other states:

Punjab and Haryana Apni Mandi

Rajasthan Kisan Mandi

Tamil Nadu Uzhavar Shanthigal

Maharashtra Shetkari bazaar

Problem: Over the years, small traders have taken over the place offarmers in many of these markets= again problem of middlemen andcommission agents.

In South Korea, with direct marketing of agricultural products= middlemenwere removed and as a result:

consumer prices declined by upto 30%

farmers’ income rose by upto 20%

Virtual MarketsExample of such virtual markets= Future exchange, Spot Exchange,Warehouse Receipt System and Web Marketing.In India, the Multi Commodity Exchange (MCX) and the NationalCommodity Derivatives Exchange (NCDEX) are the two biggest playersin the agro-futures market.

NCDEX

Setup an e-mandi (online wholesale market).Farmer will first deposit his produce to a NCDEXnominated warehouse, gets receipt.This receipt can be traded by the participant on the e-mandi across the country.

MCX

Working on similar project like above, with help of Yesbank.MCX online portal for commodity trading also available inregional languages to help non-English speaking farmers.

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an allied topic is negotiable warehouse receipts, but we’ll see it in the nextarticle under finance-taxation-FDI-exports.

ITC e-Choupal

In 2001, ITC (India Tobacco Company Limited) started small internet kiosksat the village level. Provides following:

1. direct procurement framework2. Real time market information related to prices3. Availability of inputs: seeds / fertilizers, their prices4. scientific farm practices5. weather, monsoon data6. Dispute resolution between the company and the farmers.

Coverage more than

farmers 4 million

villages 40,000

kiosks 6000

Thanks to ITC’s e-Choupal, farmers’ income increased by 10-15%(compared to earlier when they relied on middlemen @mandi)

Anyways we’ll see more about these intermediate market, supply chains inindividual articles for fruit-veggies etc. Now moving to the next law topic

Single Food Regulator

USA Single regulator: Food and Drug Administration (FDA).

UK Food standard agency (FSA) is the single authority forformulating all food laws.

Aus+NZAustralia and New Zealand have a common singleregulator known as “Food Standards – Australia NewZealand (FSANZ)”

India

Totally awesome: just check the list of overlapping andoutdated laws

1. Prevention of Food Adulteration Act 1954 (PFA)2. Essential Commodities Act 1955 (ECA)3. Vegetable oils, De-oiled meal and edible flour control

order, 1967 ( VPO)4. Fruit Product Order, 1955 (FPO)5. Meat Food Products Order, 1973 (MFPO),6. Milk and Milk Products Order, 1992 (MMPO)7. Agricultural Produce (Grading and Marketing) Act 19378. Bureau of Indian Standards, 19869. Standards and Weights Measure Act, 1976

10. Export (Quality Control and Inspection) Act, 1963

In 2006, After sleeping for decades, Government enacted Food Safety andStandards Authority of India (FSSAI) Act to provide for a single food lawregulator, and repealed those outdated acts. But until then, for so manyyears, those old laws did not allow Indian food processing industry to grow.How?

Problem with overlapping laws

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1. Many ministries deal with food laws = multiple bodies which set foodstandards = ambiguity, confusion for consumers, traders andmanufacturers.

2. Very few standards developed for raw agricultural produce.3. They dealt only with physical parameters of size, colour and farm

impurities. But not on microbiological and toxicological characteristics(which are necessary for export to US/EU).

4. Food laws are often inconsistent and contradicting each other. e.g.Emulsifiers and Stabilisers are permitted for use in Jams, Marmalade &Fruit Chutney under PFA but not under FPO.

5. In many cases, where one standard is more stringent than the other.Then food-entrepreneur would adopt the more stringent standard inorder to prevent potential penalization and bribe harassment by foodinspectors. For example, FPO allows use of artificial sweeteners incertain fruit products whereas PFA does not. Hence, the industryavoids using artificial sweeteners altogether.

FSSAI Act 2006: FeaturesEstablished a statutory body The Food Safety and Standards Authorityof India (FSSAI) @Delhi Under the Administrative control of Ministry ofHealth & Family WelfareRepealed various outdated central Acts viz.

Prevention of Food Adulteration Act (PFA)Various “Orders” by Central Ministries e.g. Fruit Product Order(FPO), Meat Food Products Order. Milk and Milk Products Order,Vegetable oil, Edible flour Order etc.

FASSAI made responsible for:

Guidelines

Scientific Food standards: frame them, enforce themRegulate the manufacture, import, processing,distribution, and sale of food.Make Guidelines for accreditation of foodlaboratories, food safety management bodies.International technical standards for food, sanitaryand phyto-sanitary standards (SPS)

AdvisoryScientific advice and technical support to CentralGovernment and State Governments food safety andnutrition related policies and rules.

Survey Collect Data on food consumption, foodcontamination, biological risk etc.

Networking

Create information network across the country toconnect public, consumers, Panchayats etc.Provide them rapid, reliable and objectiveinformation about food safetyRapid alert system for food contamination andbiological riskPromote general awareness about food safety andfood standards.

HRD Training to people involved in food business

In the next article, we see the finance-taxation-FDI-export matters relatedto food processing industry. Then we’ll dig into Supply chain management,upstream-downstream requirements for individual sectors: dairy,confectionary, fruit-veggies meat-fish, etc.

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[Agro/Food Processing] Export,Dumping, FDI, Finance, Taxation,Budget Provisions, CODEX, NWR,BRGF, RKVY

[Food Processing] Mega Food parks,Agri-Export Zones(AEZ), ColdChains and truckload of governmentschemes

[Food Processing] Introduction,Scope, Significance, Awesomeness(hardly), Obstacles (truckload of)

for GS Mains

[Economic Survey Ch13] Human Development (Part 4 of 4): PhysicallyDisabled, Elderly, Nomadic, Denotified Tribes, Drug junkies and Beggars

[Economic Survey Ch13] Human Development (Part 3 of 4): Women andChild Development, Saksham, Priyadarshini, Dhanlaxmi & yes ofcourseSABLA

[Economic Survey Ch13] Human Development (Part 2 of 4): SC, ST, OBC,Minorities: welfare schemes, 12th FYP targets

[Economic Survey Ch13] Human Development (Part 1 of 4): HDI-2012, HDR-2013, Poverty lines, Aajeevika, Tendulkar, Sreesanth, Saxena, Sengupta

[Economic Survey Ch12] Sustainable Development, Climate Change (Part 3of 3): PAT, RPO, REC, Cap-n-trade

[Economic Survey Ch12] Sustainable Development, Climate Change (Part 2of 3): SVA-GRIHA, Bachat Lamp Yojana, SEEP

[Economic Survey Ch12] Sustainable Development, Climate Change (Part 1of 3)

32 comments to [Food Processing]Nuisance of APMC Acts, CommissionAgents; Marketing of agricultural produce: issues and constrains forGS Mains

preeti raiReply to this comment

cool sir…thanxxxxxx a ton

sameerReply to this comment

thank you sir this was perhaps the most needed issue for us aspirants…. thanks a lot…

BittuReply to this comment

Mrunal can you please enlist the topics you are planning to post before mains 2013.

rakaReply to this comment

+ 1

ashishReply to this comment

+1

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himanshu singhReply to this comment

+1

AnandReply to this comment

+1

AdityaReply to this comment

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PiraiReply to this comment

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divyasriReply to this comment

thank u sir

SrinuReply to this comment

Very Good analysis..Thanks

Uday Kumar JhaReply to this comment

Thanks a lot!

urkenReply to this comment

thanks you vry much,this very article you post so helpful to us thanks you sir once againam great fan of you, i my life one want meet to, even todays world people like alsopresent who willing to help the needy one.

SheelbhadraReply to this comment

Photo of Jeevan is absolutely hilarious. Icing on the top of this already wonderful writeup.

haseebReply to this comment

Thanks a lot Mrunal for wonderful notes. Please continue your god work..

GirishReply to this comment

Brilliant man…. Keep it up.

himanshu singhReply to this comment

back with a bangMRUNAL you beauty…..

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shivaReply to this comment

plz post geography remaining parts (factors favouring location of industries)

sushmaReply to this comment

thank you mrunal ji.. we r expecting more articles 4m u sir..

subhashReply to this comment

thank u

AnandReply to this comment

Thank you sir.

ASHISH KUMAR SINGHReply to this comment

IT IS THE BIGGEST HELP ANYONE CAN DO FOR WHO TRYING THEIR BEST. THANKYOU…..

vishal kumarReply to this comment

thanks sir:)

VKReply to this comment

thanx sir….the content of the article itself shows that why u took lot of time to writeup…..great

Rahul SinghReply to this comment

Can any1 let me know abt how t reach Faridabad sector 16 at JLJ Academy for the RBIGrade B Officer exam ????My exam is on 24 August…..Plz help

dileepReply to this comment

mrunal ji thanks aa lot………truely this is great efforts

krishnam naiduReply to this comment

awesome man … keep it up

fanReply to this comment

cannot thank you enough Mrunal ..brilliant article… lolz in the comparison between theacts kept me laughing !

VIKAS GARGReply to this comment

pls upload the question papers of INSURANCE EXAM to be held on 8 sept. 2013

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shabeerReply to this comment

awesome article mrunalji… keep it up…. plz post an article regarding agriculturalsubsidies… WTO Box supports, NBS schemes etc…. it will be a great help….

adityaReply to this comment

thanx a lot sir…

sameerReply to this comment

plz, can anyone tell that all the attachments of xerox like LC, marksheets and castecertificate etc.. with mains form to be posted to UPSC should have attestation from aclass 1 gazzeted officer or any other local officer will do….

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