emerging policy issues in indian agriculture: agricultural ... · emerging policy issues in indian...

Emerging Policy Issues in Indian Agriculture:Agricultural Marketing

Dilip Mookherjee, Lecture 2B

BREAD-IGC-ISI Summer School, New Delhi, July 2012


Emerging Policy Issues in Indian Agriculture: Agricultural Marketing

Second Topic: Agricultural Marketing

Often argued that main problem faced by Indian farmerdoes not pertain to land rights: most are owner cultivatorsNor is access to credit, modern seeds and fertilizers a bigproblemBut they face significant problems in marketing theirproduceMany are excluded from organized wholesale markets, andare forced to see to local middlemen who sell them inwholesale markets to retailers or exportersMany layers of middlemen between producers andconsumers, earning large margins?



How Large are Middlemen Margins?

Some descriptive statistics that suggest middlemenmargins are large:Breakdown of costs of Barbie doll (Feenstra (1998)) soldby Mattel in the US for $10: 35 cents for worker wages inChina, 65 cents for remaining material costs, and at least$1 in profit for MattelLess than 50% pass-through of commodity export priceincreases to farmers, e.g. Ugandan coffee 2002-03(Fafchamps-Hill (2008)), Mozambique cashews in 1990s(McMillan, Rodrik and Welch (2002))



Size and Role of Middlemen Margins

Suggests important reason for limited trickle down ofbenefits of globalization to small farmers and workersCould help explain empirical findings (Goldberg-Pavcnik(2007)) concerning failure of trade liberalization to lowerinequality in LDCs, contrary to conventional trade theorypredictions (e.g., Samuelson-Stolper theorem)Need to understand better the microstructure of marketingsupply chains: the role of trade middlemen, contractingbetween middlemen and farmers/suppliers



Research and Policy Questions

What roles do middlemen play?Do they add significantly to value creation?Do they provide important credit and insurance services tofarmers?Is there scope for entry of large corporations that buydirectly from farmers (e.g., FDI multibrand retail billpending in Parliament)?Or reforms of agricultural markets (mandis) so as to reduceexclusion of farmers?



Related Issue: Role of Asymmetric Information

Farmers are often not informed about price movements inorganized (wholesale and retail) markets wheremiddlemen sell their produceMiddlemen may use their informational advantage to claimresale prices are low, to avoid paying farmers a reasonablepriceSuggests role of policies that provide farmers with priceinformationPotential effect of cellphones: a number of recent studiesof this



Recent Evidence Concerning Price Effects ofCellphones

Jensen (2007), Aker (2010), Goyal (2010): find effects ofincreased cell-phone penetration on price dispersionacross locations, in settings w/o local intermediation(Kerala/Niger/MP)Fafchamps-Minten (2011): RCT involving SMS serviceproviding price/weather information to farmers inMaharashtra had no significant (average) impact onfarmgate pricesBut they do not provide any explanation of this findingThey speculate that contractual relationship betweenfarmers and traders and comparative advantage of latterwrt transport may be responsible



Experiment with Potato Farmers in West Bengal, India

In Mitra, Mookherjee, Torero and Visaria (2012) weconduct an experiment with provision of market priceinformation to potato farmers in WBBased on a detailed survey of farmers production andsalesFocus on impact of experimental provision of informationon trades with middlemenWe are in the process of carrying out surveys of themiddlemen to learn about their costs, entry, information etc.



Our Setting

72 villages chosen randomly in potato growing areas oftwo WB districts (Hugli, West Medinipur)WB produces 40% of India’s potatoes, suppliesneighboring states in East/Northeast (Hugli) andSouth-East India (Medinipur)Mostly produced by small farmers around March-April; twoout of six varieties account for 90% of outputTwo-fifth sold at harvest time, one-fifth out of home storeuntil early June, rest in cold store sold gradually till nextharvestPlenty of cold stores near the villages, obtain receipt for50Kg bags (bonds) which are tradeable



Potato Sales

Our sample: 25 farmers per village on average, stratifiedby landholding (including landless that lease in land)90% sales are to traders in the village, remaining 10% soldin neighboring local markets or the wholesale (mandi)marketBulk of former sales made to same trader over the past 3yearsLocal traders re-sell to wholesale buyers in the mandi, alsobased on bilateral transactionsLocal interviews indicate importance of personalizedbilateral long-term relationships, owing to two-sided trustproblems (quality/quantity assurance, trade credit)Coops play no role in marketing



Price Information

62% of farmers reported relying on local traders forinformation about prices at which they re-sell in thewholesale market (in 2007)Half the villages had public phone booths, 23% hadlandlines, 33% had cell-phonesIn interviews, however, those with phones said they had nofirst-hand/direct source of information regarding wholesalepricesProblem is that wholesale markets feature personalizedtrades rather than sales at publicly announced prices



Predicting Prices from Past Years?

Substantial year-to-year variability in prices (aggregatesupply shocks in the area, demand from neighboringstates)Year dummies raise R-sq from 22% to 87% in wholesaleprice regressions after controlling for market, season andvariety dummiesSome variability across mandi’s, two-thirds of which arefixed effects, rest is time-varyingTime pattern of variability varies also across differentpotato varieties



Gap Between Wholesale Prices and Farmgate Prices:Annual Averages

Price data, by districtHugli Medinipur West Overall

(1) (2) (3)

Big mandi prices 2008 (prices received by phoria) 4.23 6.00 4.77(0.04) (0.06) (0.04)

Gross Prices received by farmer 2008 (control group) 2.26 2.09 2.15(0.07) (0.03) (0.03)

when sold to phoria 2.25 2.07 2.14(0.07) (0.04) (0.04)

when sold in market 2.46 2.15 2.19(0.50) (0.07) (0.08)

Net prices received by farmer 2008 (control group) 2.16 2.01 2.06(0.07) (0.03) (0.03)

when sold to phoria 2.17 2.01 2.07(0.07) (0.04) (0.04)

when sold in market 2.43 1.94 1.99(0.51) (0.07) (0.09)

Tracked prices 2008 (control group) 2.72 2.11 2.30(0.10) (0.05) (0.05)

Table: Potato Prices: Wholesale Prices, Prices Received by Farmers,and Prices Tracked by Farmers



Gap Between Wholesale Prices and Farmgate Prices:Variation Across Weeks

23

45

6R

upee

s/kg

0 10 20 30 40 50Week

Overall

23

45

6R

upee

s/kg

0 10 20 30 40 50Week

Hugli

23

45

6R

upee

s/kg

0 10 20 30 40 50Week

Medinipur West

Prices received by phoria and farmersPrice paths, 2008

Mandi phoria priceFarmer price from phoriaFarmer price at marketTracked price



The Information Interventions

Two information treatments in 24 villages each:Public (noticeboards)Private (‘blocked’ cell phones for 4 farmers/village)

24 villages served as controlVillages selected to ensure they were at least 8 km fromeach otherDaily price information for two varieties in a number ofneighboring marketsRan June-Nov 2007, then Jan-Nov 2008 (but utilize resultsfrom 2008 data)



Average Effects of Interventions on Farmer PriceInformation and Trades

Information interventions significantly affected priceinformation of farmersRaised likelihood of farmers reporting they tracked marketprices, reduced average delay in tracking30% less farmers reported relying on traders for priceinformation in public information treatment villagesBut no significant average treatment effects on quantitysold or prices received!



Effects of Interventions on Quantity Sold

Private info 564.01 1.03 484.65 0.88 ‐140.93 ‐0.23 ‐93.44 ‐0.15Phone 524.55 1.18 ‐308.62 ‐0.66

Quantity sold (kg)Table: Effect of Intervention on Total Quantity Sold

Public info 230.38 0.44 229.40 0.44 ‐501.18 ‐0.85 ‐502.20 ‐0.85Land 2250.36 12.80 *** 2252.24 12.89 *** 2220.25 12.45 *** 2219.42 12.41 ***Medinipur dummy 254.90 0.61 251.28 0.60Constant 2846.29 5.16 *** 2844.90 5.16 *** 3606.06 6.33 *** 3608.72 6.33 ***

Mandi fixed effects No No Yes Yes

R‐squared 0.35 0.35 0.39 0.39Observations 2318 2318 1606 1606

Notes: The unit of observation is a farmer‐variety‐quality. Dummies for variety and quality are included. Standard errors are clustered at the village level. A mandi is defined as a market‐variety combination.

Table: Effect of Intervention on Total Quantity Sold by Farmers, 2008



Effects of Interventions on Price Received by Farmers

Table: Effect of Intervention on Average Net Price Received

Private info ‐0.06 ‐0.44 ‐0.07 ‐0.55 0.01 0.09 0.01 0.12Phone 0.10 1.05 0.03 0.40

Net price received (Rs/kg)

Public info ‐0.10 ‐0.82 ‐0.10 ‐0.82 ‐0.01 ‐0.06 ‐0.01 ‐0.06Land ‐0.09 ‐5.05 *** ‐0.09 ‐5.03 *** ‐0.07 ‐4.53 *** ‐0.07 ‐4.54 ***Medinipur dummy 0.23 2.45 ** 0.22 2.44 **Constant 2.21 18.26 *** 2.20 18.26 *** 2.31 23.56 *** 2.31 23.57 ***

Mandi fixed effects No No Yes Yes

R‐squared 0.37 0.37 0.46 0.46Observations 2318 2318 1606 1606

Notes: The unit of observation is a farmer‐variety‐quality. Dummies for variety and quality are included. Standard errors are clustered at the village level. A mandi is defined as a market‐variety combination.

Table: Effect of Intervention on Average Price Received (Net ofTransactions Costs) by Farmers, 2008



Testing Theories of Contracting

Do farmers and middlemen enter into long-term contracts,possibly implicit?Necessary if they are engaged in risk-sharing, wherebymiddleman margins may represent risk premia for priceinsuranceLong-term contracts require commitment to honorpromises ex post to trade specified quantities at specifiedprices, contingent on wholesale price reports made bymiddlemanExtend Myerson-Satterthwaite (1983) theory ofinformation-contrained efficient contracts to incorporatevariable quantity, risk-aversion, one-sided asymmetricinformation



What Theories of Ex Ante Contracts Predict

Asymmetric information creates incentives for middlemento under-reportOptimal contracts must screen efficiently: respect incentiveconstraints for middlemenEfficient screening distorts quantities traded downwardsrelative to first-bestInformation interventions relax these incentive constraints,therefore they ought to increase quantity traded in allstates of the world (except at the ‘top’)No firm predictions for effects on farmgate prices (dependson whether market is monopsonistic or competitive)



Testing the Ex Ante Contract Model

Already saw that there was no significant average impactof information interventions on quantity or priceThe theory suggests the effects would vary with v , themandi priceExamine how treatment effects varied with the mandi price



Panel B: Total Effects of the Intervention at 10th, 90th percentiles of the Mandi Price

Mandi fixed effects No Yes

Private Info, no phone10th percentile -799.23 -1.09 -1083.23 -1.85 *90th percentile 1832.83 1.80 * 1268.64 1.59Private Info, with phone10th percentile -0.31 0.00 -155.35 -0.1990th percentile 2015.05 1.71 * 1088.43 1.11

Public info10th percentile -642.83 -1.00 -1230.96 -2.25 **90th percentile 1007.59 1.11 829.14 1.16

Total Quantity sold (kg)

Table: Predicted Treatment Effects (on quantity) at 10th, 90thpercentiles of Mandi Price, 2008



Panel B: Total Effects of the Intervention at 10th, 90th percentiles of the Mandi Price

Mandi fixed effects No Yes

Private Info, no phone10th percentile -0.33 -2.00 ** -0.33 -2.83 ***90th percentile 0.17 1.00 0.42 2.83 ***Private Info, with phone10th percentile -0.24 -1.25 -0.27 -1.5590th percentile 0.25 1.07 0.48 2.17 **

Public info10th percentile -0.15 -0.98 -0.17 -1.4790th percentile -0.08 -0.42 0.08 0.51

Net Price Received (Rs/kg)

Table: Predicted Treatment Effects (on quantity) at 10th, 90thpercentiles of Mandi Price, 2008



Implications

Absence of significant average treatment effects maskedsignificant heterogeneous impactsWhere mandi prices were low, traded quantities and pricesfell: farmers worse off ex postConversely, farmers better off when mandi prices werehighMandi prices were low in 2008, so we probablyunder-estimated the average impact



Implications, contd.

Significant reduction in quantity traded in locations with lowmandi pricesContrary to predictions of ex ante contracting theoryCorollary: One cannot view middlemen margins as riskpremia for providing insurance to farmers



Alternative Theory: Ex Post Bargaining

Field interviews confirm absence of any ex anteagreements: stress the role of ex post bargainingOn any given day, trader quotes a price after observing v ;farmer then decides whether and how much to supplyConsistent with the fact that information treatmentsinduced farm-gate price and quantity to move in the samedirectionSo we develop a theory of ex post bargaining, with limitedoutside option of farmers



Limited Outside Options of Farmers

In the event of disagreement with trader, a farmer can takehis potatoes to the local market/mandiHowever, in the wholesale market they cannot sell directlyto a wholesaler owing to lack of a personalized tradingrelationshipSell to another small trader, who re-sells to a wholesalerExclusion from direct participation of farmers in wholesalemarkets limits their outside options: end up receiving lessthan half the price that traders get for the same crop on thesame day in the same market!



Explaining Experimental Outcomes

We show that the combination of ex post bargaining andlimited outside options of farmers can explain the observedoutcomes of the information experimentTraders offer a price to farmers that make them indifferentbetween accepting and rejectingProviding them with price information does not improvetheir outside option, as they cannot sell directly towholesalers



Summary of Main Results

We find evidence of significant middleman margins inpotato cultivation: 25-50% of farmgate pricesTrade is dominated by selling to long established buyers atevery layer of marketing chainWeb of personalized transactions owing to importance oftrust and quality reputationMain role of middlemen: evaluating and certifying quality ofproduce, aggregating purchases across large number ofsmall farmers for the benefit of wholesalersResults in exclusion of farmers from direct participation inwholesale markets



Implications

Failure of information treatments to help farmers securehigher prices reflect weaknesses of both formal andinformal institutionsWeakness of formal institutions: no centralized wholesalemarkets permitting farmers to sell directlyContrast WB with APMCs in other Indian states (e.g., MP,Maharashtra, Karnataka, TN)Weaknesses of informal trading relationships: no long termcontracts or insurance; ex post bargaining with limitedcompetition between traders



Other Implications

We are now trying to survey the middlemen to understandbetter their costs, concentration and market power,relationships with wholesale buyers (next layer of thesupply chain)What are the barriers to entry? How much market powerdo middlemen have?What would be the impact of entry of FDI retailers(Walmart, Monsanto, Reliance) who would be interested incontracting directly with farmers?Would they eventually be more predatory than traditionalmiddlemen?Role of supplementary transactions: credit (ongoingexperiment combining provision of credit and information),supply of new varieties of seeds, fertilizers etc.?



emerging policy issues in indian agriculture: agricultural ... · emerging policy issues in indian...

Documents