‘Market design - the forgotten key’

Agricultural policy making, with few exceptions, rarely extends beyond distribution of inputs and crop management. Marketing of the produce has never received the attention that it deserved — maybe years of subsistence agriculture and insufficient production never brought issues in agricultural marketing to the fore.

Compulsion to sell only in regulated market yards, limited infrastructure, a market loaded against the producer and a host of other restrictions characterise agricultural markets in India today.

Marketing of agricultural produce has two prerequisites — getting the produce from the farm to the market and participating in the selling process in the market. The producer faces an inherent disadvantage on both these counts. While the former entails initial expenditure compelling a sale on that very day, the latter in an alien setting places him at an inherent disadvantage.

The much maligned buyer in the regulated market has his own set of complaints — uncleaned and non-standard material being brought for sale is the most cited one. And this, from the buyer's viewpoint is the justification for the lower price offered and the discounts in weighing.

Twin issues

A fair market has to address these twin issues to make the process equitable to both participants. And designing such market structure, without alienating any section of participants is critical to any market intervention effort.

Gulbarga — a mid-size town in south India was the experiment ground for a new market structure. The area around the town is the bowl for redgram, a variety of pulses in India and the regulated market here is the place where the produce is sold traditionally by farmers in the area.

What distinguished this location for experimenting a market intervention was the strong presence of MYRADA, a woman focused voluntary agency, having presence for over three decades.

The experiment two years ago attempted to address the concerns of both the parties to the sale — the farmer and the commission agent or trader — to create a sense of fairplay.

Getting the produce from the farm to the market is a cost-intensive irreversible activity that invariably ends up in a sale. Avoiding or minimising this movement by storing the produce in warehouses and exposing standard lots to a competitive electronic auction could give an extra return to the farmer. Storing has an inherent weakness - the inability of the farmer to hold on to the produce. There comes a day when his desperation and need overcome the hope of a better price.

Funding the produce for an interim period to overcome the immediate need is critical and banks stepped in to meet this requirement.

Sampling, assaying and grading is sine quo non for such a changed process to be successful. With persuasion, buyers agreed to participate when assured that graded produce would be brought up for auction. And the seller was educated to agree to grading, as that improved the chances of realising a better price.

While menfolk remained sceptical of the intervention, the woman of the house persuaded by MYRADA carried the message home and soon, a few early converts wanted to try out the alternative market.

A part of the selling process — albeit an important one — now addressed, the focus shifted to drawing up standards for grading and mounting an intensive education campaign for organising farmers into groups for economic lot creation and gaining the confidence of both sections of participants for the electronic auction process.

The impact of the well-designed intervention was revealing. The cost of reaching the selling stage in the intervened areas was a quarter of the cost in the traditional areas. And graded lots fetched a better rate in the auction. A proper weighing system also contributed to a better realisation. All factors added up to an increase in realisation of 4-10 per cent over the normal sale process.

The downside of the intervention — two interrelated features — one, the expectation for a better price getting over rationality and a few farmers getting exposed to falling market prices and second the lack of means to protect the producer from the slide in prices.

An improved market structure could provide this safety net in a large market setting, but scaling up to reach there is the challenge.

And should this remain an experiment, limited to prove a point, only to be discussed in conferences? Here it transcended the experiment phase and led to an improved transparent auction market in the main regulated market yard. Grading was initially not a part in this market setting, but increased transparency through an electronic auction became the norm. And reaching out to grade the produce is not a difficult task.

Intermediation in any market is critical and cannot be eliminated; the key is to make it efficient. One section need not lose for the other side to gain; what is critical is a market fair to both the parties. If only policy makers can participate in and conceive a proper market design!

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