How FDI in retail will hurt farmers

With the government stating that its FDI policy on multi-brand retail will be on hold till after the UP elections, the publicity assault to prepare the ground for it to be brought back is palpable. The strategy employed is the classic “divide and rule”.

“If the trader groups are against FDI, then let farmer groups be set up to fight the trader groups” seems to be the ploy. We now see repeated stories in the media about how FDI in retail will benefit the farmers of India. We could have taken this seriously, but unfortunately the global evidence points in the other direction. Farmers in the West have paid a big price, with hundreds of thousands forced to shut down their farms, due to corporatisation of the farming sector, along with corporate concentration on the purchasing side among processors and retailers.

Big retailers' biz model

Big retail in the West and elsewhere functions on a simple business model.

Grow bigger and bigger till the market becomes an “oligopsony” — a situation where a small number of buyers exert power over a large number of sellers. The UK food retailing industry, for example, is now dominated by just four supermarket chains who together account for over two-thirds of retail food sales.

Likewise, the top five chains in the US account for over 60 per cent of food sales.

This results in the retailer exercising enormous control over their suppliers, which includes the farmers. This is shown in the diagram above:

It is this structure that has reduced farm prices and has forced the closure of farms. Foreign retailers will replicate this structure in India over time, with disastrous consequences for the Indian farmer.

Punjab example is wrong

A prominent TV channel featured the story of a few farmers in Punjab highlighting how direct purchases of produce by a retailer had given them a higher yield. This is a type of faulty reasoning described in college textbooks as “the fallacy of composition”. The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole.

The channel had obviously hand-picked a few farmers who suited its conclusion. The only way to assess the impact on farmers is to look at countries where big retailers dominate the market, and see how the entire farming community has fared.

Lower prices to farmers

A good way to measure the effect of retail power on farmers and farm workers is to look at the portion of each dollar spent on food at the supermarket — referred to as the retail food dollar — that goes back to the farm.

By this measure, virtually all food producers in the US have seen their share of the retail food dollar decline over time, at points dropping so low that farmers have been forced out of business in droves. Here are just a few examples:

In 1970, hog producers (those who raise pigs) in the US derived 48 cents of the retail dollar spent on pork. Three decades later, they received only 12 cents out of every retail dollar, causing loss to the farmers. While this happened, consumers didn't benefit from the low farm prices at all: retail pork prices stayed stable. ( Source: Agribusiness Accountability Initiative )

According to the US Department of Agriculture's Economic Research Service, in 1990, ranchers and farmers received 60 cents of the retail dollar spent on beef, retailers received 32.5 cents and meat companies 7.5 cents. In 2009, the numbers were reversed — retailers took 49 cents share of each dollar (up 16.5 cents) consumers spent on beef, while ranchers and farmers got 42.5 cents (reduction of 17.5 cents) and meat packers 8.5 cents.

The breed of the small rancher/farmer in the US is under threat as they go out of business in large numbers year on year. (Source: http://bloom.bg/et4eLU ) In the UK, the Royal Association of British Dairy Farmers has complained vociferously that prices paid to farmers for fresh milk are simply unsustainable, with the average farmer losing money on each litre of milk produced.

This has happened even as the supermarkets' margin on fresh milk has increased steadily over the years.

While it costs the consumer £1.45 to buy four pints of milk at a supermarket such as Tesco, the farmer receives just 58 pence (40 per cent) of this, causing a loss of 3 pence for every four pints. Small farmers have closed their dairy operations as a result.

In India, dairy farmers receive as much as 75 per cent of what the consumer pays for a litre of milk. (Source: http://news.bbc.co.uk/2/hi/uk_news/magazine/8103119.stm )

Subsidies prop farming

If big foreign retailers are expected to shore up our farmers as claimed by the publicity reports, there is no evidence of this in the countries where these retailers have spread their wings the widest.

In the US, farmers received direct commodity subsidies of over $167 billion in the period 1995-2010 (Source: http://farm.ewg.org/region.php?fips=00000 )

The European Union paid direct farmer subsidies of €39 billion ($51 billion) in 2010 alone. Why these subsidies if the big retailers are paying the best prices to the farmers as claimed?

Sorry example of Mexico

Mexico (population 112 million) signed the North American Free Trade Agreement in 1994. It has since witnessed a virtual takeover by Walmart which has gained nearly a 50 per cent share of the country's retail market.

Mexico can now be described economically as a vassal state. A combination of big retail and imports under NAFTA has driven over 1.25 million small Mexican farmers — 25 per cent of the country's farmers — off their farms. Consequently, the illegal immigration to the US, which was to have been reduced because of NAFTA, has more than doubled to nearly 6 million Mexicans.

Even a fraction of such a displacement in India, arising out of misguided policies, will cause social disruption on a vast scale. (Source: http://www.yesmagazine.org/issues/reclaiming-corn-and-culture )

India has more than 58 million small farmers, 12 million small retailers and 26 million small and micro enterprises representing over 450 million people.

The 300 MPs of the parties who opposed FDI in retail are right. Disturbing this mass of people is not politically sustainable.

The author is Group CEO, R K SWAMY HANSA and Visiting Faculty, Northwestern University, US. The views are personal.

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