Efficient Agricultural Marketing

Zaibun Y Jasdanwalla This paper attempts an assessment of the efficiency of the marketing structure for agricultural products in India. In doing so, it formulates certain criteria for judging marketing efficiency at the midro and macro levels. After reviewing various aspects of marketing practice, the author concludes that the existing marketing structure does not need radical overhaul at the present stage of development of the economy. She, however, argues for a series of improvements in transport, in grading and storage systems and in the adoption of fair practices.
T H E rate of growth in the agricultural sector for 1975-76 was 8 per cent. A part of this growth is attributable to the chance factor of singularly good weather. But a considerable part of it is the result of substantial investment in the agricultural sector both at governmental and non-official levels. 1 In fact, the gradually discernible institutional and technological transformation in agriculture lends ^plausibility to the official projection of an estimated rate of growth of 4.35 per cent in the Sixth Flan. 8 Increased agricultural output w i l l lead to higher levels of marketed surpluses. The upward trend in marketed surpluses clue to higher production will be supported by growing movements of the farm population away from rural areas. Also, a change in consumption patterns among farmers, w i l l occur as the latter get introduced to more and more non-farm items of consumption. This w i l l induce farmers to market more so as to get additional purchasing power. And farther, the rising trend towards greater crop specialisation, in place of diffused cropping patterns, w i l l raise the size of marketed surpluses. Though researchers in the field of agricultural marketing have long been emphasising the importance of marketing as an economic activity, it is in the present context of substantial, actual and anticipated, increases in agricultural output and marketed surpluses that both public and private attention w i l l focus on the study of marketing procedures and on the ways and means of improving the structure for marketing agricultural produce. In this paper an attempt is made to outline some efficiency criteria for marketing, and to relate them to the Indian situation.
MARKETING EFFICIENCY

be considered. There could be handling of all marketing activities by the producers alone; there could be takeover of all marketing activities by the various categories of consumers of agricultural products; or there could be total take-over by the State, Alternatively, there could be as in most societies which are not totally centralised a system which is private-cumpublic and which includes some cooperative activity associating both producers and consumers in the marketing processes. Experience w i t h even the most limited consumer handling of marketing has not been very successful. Therefore, the option of a take-over by consumers of every aspect of marketing of all agricultural products does not merit much consideration. A total take-over by the producer does not also seem a feasible proposition for most societies, If the farmer has become, or is steadily becoming, a specialist in crop cultivation technology, he is not, generally Fpeaking and cannot be expected to become, a specialist in all the dimensions of the marketing operation, even in the most progressive agricultural situations. Moreover, sipce, for reasons of equity, government policy in most L D C s is to discourage large-scale farming, it would be realistic to expect that future surpluses will originate on small farms, w i t h the farmers' need for market functionaries increasing. Large fanners do and can by-pass middlemen for certain crops and can transact directly w i t h the users of their products especially the commercial users. This option, is not open in most cases to the small farmers who have small individual surpluses to sell. The third alternative is total takeover" of marketing by the State. The motivation for such fake-over may be multi-dimensional. The objectives could be to raise marketing efficiency; to promote social welfare and distributive justice; to bring about efficiency in resource allocation; and to stimulate agricultural production. Moves towards

such a take-over receive an impetus when agricultural production, particularly foodgrains production, is low Just as when there is too little, also when there is too much of surplus of agricultural produce, governmental take-over may be strongly mooted. In a scarcity situation, considerations of social justice weighing in favour of the low-income consumer may be the major inducement; in a situation of abundance, the need to sustain enlarged agricultural production even in future years may be the prime factor. However, even in these situations, there must precede an assessment of what is expected of a marketing set-up and what criteria are to be applied in assessing the efficiency of marketing operation. Basically', the marketing organisation is expected to procure and assemble surpluses of agricultural products from wherever they originate, and thereafter to distribute them among those who do not produce such commodities but have a demand for them. This is the purely physical dimension of the task, and is significant when agricultural production is showing a long-term upward movement. It is important also when production exhibits wide fluctuations and is geographically more diffused. A marketing set-tip that has grown and developed to handle a larger and more varied output, grown over a more extensive area, and fluctuating trends in output, is usually a viable and flexible service to the economy. Tables 1 and 2 show the production rise as well as the fluctuations in production for six important crops (viz, rice, wheat, sugarcane, groundnut, cotton, and jute) during 1949-50 to 1975-76. A larger quantum of output is handled today than two and a half decades ago. Also the fluctuation in output of cash crops that has had to be accommodated is marked. A n d lastly, a more extensive fob of physical assembly and dispersal of products has been assigned to the marketing organisation in the country over the last 35 years.

Since production without the adjunct of marketing is inconceivable, the possible theoretical options for any community of people, w i t h the retention of marketing as a procedure, may first

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ECONOMIC AND POLITICAL WEEKLY one. The suggestion is that the market structure should provide a cushion, through appropriate changes in wholesale inventories, to counteract such erratic supply behaviour. This would prevent frequent acreage and production fluctuations. Then shifts from one crop to another would occur as a matter of gradual transition, in response to a secular, long-term change in demand, and would be the result of a rational and optimal set of decisions taken by the farming community. In the latter situation, the demand shifts would be transmitted through the price and market mechanisms, and these mechanisms are, therefore, said to be working efficiently. Further, economic development, rising per capita incomes, and low income elasticities of demand for basic food items, w i l l mean that demand w i l l shift to the non-cereal food products and industrial raw material crops. Even currently, it is estimated that the those users who have the greatest use for it and who would therefore, be cash value of the marketing of such willing to pay the highest prices. Their items as cotton, oilseeds, fruits, vege'motivating' function would ensure that tables, milk and milk products is quite 4 This shifting trend in demand the state of demand for commodities high. w i l l have to be transmitted by market would get reflected for the producers who would be accordingly motivated to forces to individual producers, through move their resources away from or changes in the structure of relative towards the production of certain crops. prices. When changed price relationships achieve the new situation of Further, the price mechanism could lowered emphasis on foodgrains proalso bring about an appropriate distri- duction and increased production of bution of products, regionally and over other consumer food items and crops time, for each production period. If which constitute industrial inputs, then the territorial differences in prices keep the next task for the market organisawithin reasonable limits of the trans- tion w i l l be efficacious movements of portation costs, then the marketing increasing amounts of such crops to the organisation is said to be doing its job consuming points. If the costs of such satisfactorily. If the difference in prices, movements are not kept low, then much from one point of time to another, does of the advantage of the improved not exceed storage costs substantially, demand situation w i l l be lost. " I f this then again the inference is that the (the moving of perishable commodities) organisation is operating efficiently. In is reflected in much higher cost, then fact, a further conclusion is that the the net price received by farmers w i l l situation is an optional one, in that, all not fully reflect the growth in urban profitable opportunities w i l l have been demand and the production incentive explored for holding surpluses over into will not be given" 5 Adequate, speedy, future periods of demand as also moving and inexpensive marketing facilities them regionally, for the benefit of both will have to be increasingly provided the consuming and producing sections for the new consumer-preferred crops. of society. The market structure and-the price mechanism thus have a specific function In low-income, traditional, agricultural situations, however, the market in promoting resource shifts which are operation becomes complicated, because necessitated as a consequence of econoagricultural output and prices fluctuate mic development. violently with changes in weather condiTo recapitulate, a marketing structure tions. This opens the efficiency of the could be assessed as efficient if it offers system to question. Such price fluctuaagricultural products at prices which retions produce frequent inter-crop move- flect realistically the demand and supply ments in cultivated area, and the agri- situations. This can happen in a comcultural situation becomes an unstable petitive environment, especially where

The state and districtwise scatter of production of rice, wheat, sugarcane, groundnut, cotton, and jute, is given in Table 2 . T h i s Table depicts the total number of districts producing each crop and their geographical dispersal in the different states. For rice the major producing states have a total of 257 main markets; for wheat 317; for sugarcane (gur) 83; for groundnut 221; for cotton 35; and for jute 40 such markets. Table 3 gives a statewise break-up of the location of these markets. The complexities of marketing these commodities can be appreciated further from the fact that each of these crops has several different varieties grown and sold. Table 4 gives the varieties for two of the crops, viz, rice and cotton." The conclusion that can be drawn here is that the marketing structure in India is performing effectively a job that is intricate and challenging.
PRICES AND ALLOCATION OF RESOURCES

The second requirement from the marketing set-up would be that, through it, an effective price mechanism should operate. Prices should be determined through an interaction between independent buyers and sellers of agricultural products who are under no pressure or coercion to buy or sell at the prevailing market price. Prices should perform the useful function of acting as signals to producers and consumers. Their 'rationing' function would ensure that the commodity would get allocated to

ECONOMIC AND POLITICAL WEEKLY the movement into the trading section of the-marketing structure is unrestricted. Further, there should be minimal price divergences from one regional, seasonal, and vertical point in the market to another. And further, price movements should direct resource reallocations within agriculture in a manner which is stable and socially desirable. This, then, would ensureallocative efficiency in resource use and also optimal allocation of marketed surplus among different users separated by time, distance, incomes, and uses to which they put their product. Existing research of marketing in the Indian situation, establishes that seasonal fluctuations in prices are not inconsistent with storage costs and that regional price differences are fairly closely in line with transportation costs. Hence spatial and temporal market integration does exist to a considerable extent in the case of several agricultural commodities. Also, very little evidence has been found to show that serious collusion exists among , market intermediaries for exploiting the farmers. In many cases, since marketing firms can work w i t h very l o w overheads, instead of oligopolistic or monopolistic situations there is in "fact au overcrowding of firms.
DISTRIBUTIVE JUSTICE

Review of Agriculture to his small surplus, his lack of staying power, and his immediate need for cash Contrariwise, the larger farmers may get preferential treatment by being paid higher returns for their surpluses. Greater inter-group inequalities may be promoted; the trading community gaining at the expense of the fanning or consuming groups, Intra-group i n equalities i e, between large and small farmers, between large and small traders, between large commercial users of agricultural products and small purchasers of basic essential food items may get accentuated. Regional disparities i e, between prosperous high income areas and backward areas where purchasing power is low may get increased by the movement of surpluses by the market organisation to only those regions where the returns will be the highest. The basic issue, then, is that if the small farmer, the low-income consumer, and those backward areas that do not have significant purchasing power, are discriminated against, or penalised by the marketing structure, then on grounds of distributive justice it conies up against social disapprobation. In applying the above efficiency criterion to the Indian set-up, one relevant point needs to be stressed. The lowincome consumer's precarious situation as regards the procuring of food is a circumstance for which the blame cannot be attributed to the marketing organisation alone. It is part of income disparities, which are a concomitant of a non-centralised and private enterprise economic system. W i t h various tonus of government intervention, a palliative may be found which lessens the symptoms of a serious, basic, underlying problem. The marketing organisation is to be censured only in so far as it adds to an already grave situation, by causing harm to the weaker sections of the community.
MARKETING FIRM'S STRUCTURE

December 1977

The t h i r d efficiency criterion for the marketing set-up, relates to distributive justice. The relevant questions in this context are, whether the marketing system is aggravating income inequalities, reducing them, or maintaining a xtittw quo. The system escapes criticism only if its functioning is contributory to a realisation of a more equitous distribution within society. The market structure is assessed as unsatisfactory if it is aggravating i n come inequalities in the following ways. The marketing industry may be getting a return which is greater than its 'real' contribution to the national output. Moreover, the distribution of profits mtra-industry may be skewed, w i t h a a disproportionate share going to the larger marketing firms. The output of food crops in periods of shortages, particularly may be channelled into only the most lucrative avenues; lowincome consumers may find themselves extra-marginal buyers, reduced to destitution for lack of purchasing power. In a similar manner, the small farmer particularly in periods of abundance may be discriminated against by being offered a lower return, due

A common opinion is that if the margin between the price paid by the consumer and that received by the farmer is small, the marketing operation is being performed satisfactorily. This is obviously an erroneous generalisation. Margins may be small in a primitive situation where few market services are being rendered. Contrariwise, the marketing procedure may be a well organised and highly developed one, w i t h sophisticated market services being rendered, and so the consumer's price may be much higher than that received by the producer. The latter

situation is certainly not indicative of an inefficient marketing operation. However, when the margin is rising not because of improved services, but either because "the costs or the profit levels of the marketing firm are high, then the inference to be drawn is that there is inefficiency. High profits and high charges for market services may be indicative of absence of competition and restriction of entry for new marketing firms. And a high charge may also be a consequence of high costs of operation for the firm such as for resource-use inefficiencies, inappropriate input-mix less than optimum use of capacity, obsolescence of equipment and technical procedures, etc. At any one point in the movement of the commodity from its production point to the point of consumption there w i l l be several firms or business units in operation. Examples are of units offering assembling, handling, transportation, grading, processing, packaging and transport services. Reallocation of resources for firms engaged in marketing is indicated if excessive costs are being incurred. Such

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ECONOMIC AND POLITICAL WEEKLY ing incomes. As regards producing a |iven level of marketing service at lowest cost, the possibilities do exist of economies through mechanisation of several operations connected w i t h storage, grading, processing and packaging. However, such economies, when viewed in the context of existing levels of unemployment, provide some justification for preserving the status qua.
AREAS FOR IMPROVEMENT

reallocation may not be given effect to if there is protection from the rigours of competition and if high levels of profits accommodate high costs and inefficjencics. Alternatively, the situation could be a competitive one and yet the firm may continue to operate at low levels of efficiency. Its high costs of operation may prevent it from making normal profits. Its continued existence in the field is attributable to tradition; inter-generational occupational specialisation is still prominent in certain areas in developing countries. Lastly, a move towards greater efficiency on the part of the firm may be checked by uncertainties about government policy. M o dernisation involving heavy private i n vestment outlays, is not generally gone into if the overall direction of change in the economy is towards greater social control, 7 Marketing studies in India have have shown that margins, between the prices paid by the consumer and the prices received by the grower, are not excessive, But, while the margin may be commensurate to the services rendered by market intermediaries, considerable scope for improvement of the service especially in terms of processing and packaging does exist. Such improvement may, however, come into effect as a natural concomitant of economic progress, as consumer tastes get increasingly sophisticated w i t h ris-

On the basis of the marketing research that exists, the application of some of the efficiency criteria listed above to the Indian marketing system docs not warrant the conclusion that the situation calls for a complete change-over from existing structures. Further research in the future, linked to some of the criteria not tested may support or negate this conclusion. Even otherwise, there is no gain in saying that the set-up could be improved substantially through the introduction of changes in certain critical areas. These relate to systems of sale, tram spoliation, The tender system of sale, prevalent grading, storage, and warehousing. in certain regulated markets in Tamil A producer may sell his product at Nadu, is a system which like the open his village to a consumer (if his crop auction is very fair to the farmer-seller; is directly edible), or to a local shop- it should, , therefore, be promoted in keeper, or he may be compelled to set other markets in the country as w e l l off his surplus against loans taken from Much of the responsibility for the a moneylender. He may sell to an i t i smooth functioning of this system has nerant buyer or to the agent of a large to be assumed by an impartial agency, purchasing firm, on his farm. If it is such as the market committee of a renot an on-the-farm or village sale, the gulated market. When the produce is farmer may be taking his produce to brought in by the farmer, he is required the primary wholesale market and his to clean it as per the specification of sales may be negotiated through a cothe committee. The produce is weighoperative marketing society or a comed under inspection, arranged into lots, mission agent to the wholesaler; or he and tenders are invited from prospecmay sell to a processing firm, wholetive buyers for the different lots. This saler, or retailer, even directly. system is time-saving and also involves When surpluses are disposed of at minimum physical labour. Since an assembling market, instead of in the cleaning, weighing, and the arrangevillage, in the' majority of cases, the ment of produce into lots based on fanner benefits because, apart from quality, is done under the direction and other reasons, the element of competi- supervision of the market committee, tion on the buying side is decidedly the possibility of disputes is minimised. stronger at the market centre than in Importantly, the prices quoted in the the village. However, to foster a rise tenders are based more on individual in the proportion of sales at assembling calculations of profit margins of buyers markets, the system of sales at these than on .a motional working out of pamarkets needs to be regularised. A l l rities based on the terminal market existing systems should be replaced by prices. either the open auction system or the tender system of sale. TRANSPORTATION The major defects connected w i t h the open auction system of sale is that In the movement of agricultural it is very time-consuming. To overcome produce, a key service utilised is transthis problem, the important need is to portation. In the Indian context, it is promote the adoption of the practice particularly important because of the of grading by cultivators. If the lots wide geographical scatter of production placed for auctioning are pre-cleaned areas. The road and rail systems are

and prepared as per standard quality specifications, then the time involved in inspection and negotiation would be eliminated. The appointment of trained and impartial paid auctioneers, and the fixing of a minimum unit by which bids w i l l be increased by the buyers during the auction, are other devices by which open auction sales could be expedited. In fact, with the extensive adoption of the practice of grading and the establishment of warehouses, the sample of open-auction system could be adopted. This system, while retaining the advantages of the auction, minimises the amount of time that would be utilised in the conduct of the auction. Open auctions would be conducted on the basis of representative samples drawn from the warehouses, by depositors who wish to sell off their produce on a certain day. Since the sample issued by the warehouseman would indicate the grade, the scope for time-wasting disputes, between the buyer and the seller, relating to variation in quality between the sample and the bulk, would be reduced.

ECONOMIC A N D POLITICAL WEEKLY the transportation systems chiefly used in India for the movement of agricultural produce. Of the total road kilometrage in the country of 1,130,000, only 474,000 km are surfaced roads. Since 1960-61, considerable progress has been made. Surfaced roads have increased from $63,000 km to 474,000 km between 1960-61 to 1972-73, Nevertheless, 59 per cent of the roadways in the country are yet unsurfaced. These unsurfaced roads are mainly village roads and roads other than major district ones, over which agricultural produce moves from farms to primary markets and assembling centres. It is only with the development of good road links that a fluid and efficient movement of surpluses from farms to market centres could be promoted. Government recognition of the importance of transport and communication facilities is reflected in the sizeable outlays for the purpose under the Five-Year Plans. In the Second, T h i r d and Fourth Plans highest allocations in percentage terms were to this head of expenditure. In the Fifth Plan 19 per cent of the total outlay is to be on transport and communications. However, rural roads come under the purview of state governments. For the F i f t h Five-Year Plan, out of the total targeted state outlays of Rs 17,073 crores, Rs 1,297 crores or approximately 7 per cent only was allocated to transport and communications. In this context, it is noteworthy that, according to 1969 estimates, out of tax revenues from road transport amounting to Rs 17,778,000 the states and territories were spending only Rs 10,692,000 on development and maintenance of roads. The need to increase the quantity and quality of motorable roads gets stressed further when it is noted that transport costs work out to be less for mechanised forms of transport, such as trucks and tractor-trolleys, than for animal-drawn carriers, such as bullock carts. For a haul of 18 to 20 miles, it is calculated that in Punjab, the transport cost per quintal of foodgrains is Rs 2.30 by bullock cart, Rs 1.35 by truck and Rs 1.70 by tractor-trolley. The conclusion, then, is that the surfacing of roads should be expedited through greater allocation of state finances to rural roads. The other possibility is to encourage regulated markets to spend a part of their funds on the building of l i n k roads between the villages and the market centres as is being done in Haryana. Greater effort should also be made to promote the development of the Indian trucking industry. Licensing of trucks is done at the state level, and licences are granted by and large to small firms to operate w i t h i n a radius of approximately 150 miles. This policy requires modification; since the cost of haulage decreases with the distance hauled, long-distance baulage i n volving inter-state movement by vehicles of the same trucking firm should be encouraged- This can happen only if the growth of the size of the firm in the trucking industry is allowed through the issue of suitable licences. For this, inter-state trucking licensing would have to be done through a central agency outside the control of i n dividual state governments. Lastly, measures for the co-ordination of rail and road transport, w i t h the objective of streamlining the transport service in the country, which are under consideration of the Planning Commission, should be finalised and implemented without further delay.
GRADING

Review of Agriculture

December 1977

STORAGE AND WAREHOUSING

Storage availability, particularly in the context of growing surpluses, is A crucial ingredient of efficient marketing. The need for action in this field was recognised as early as in 1928 by the Royal Commission on Agriculture. The All India Rural Credit Survey Committee emphasised the necessity for the development of warehouses so that surpluses could be stored scientifically over periods of time, w i t h warehouse receipts serving as negotiable paper. In this way, fanners wanting to store produce could be helped to overcome both the physical and financial hurdles that they would face, The storage capacity owned by the Government and the F C I has gone up markedly as shown in Table 5. However, much of the storage capacity that is either owned or hired by the government is not utilised by the farmer as seen below: Utilisation of Central Warehouse Capacity (1970) , (per cent) (a) Producers 6 (b) Co-operatives 23 (c) Traders 71 Total: 100 Utilisation of State Warehouse Capacity (1970) (a) Government 72 (b) Producers 1 (c) Traders 22 (d) Co-operatives 5 Total: 100 Source: M S Asthana: "Role of Warehousing in Promotion of Orderly Marketing of Agricultural Produce", pp 235 and 236. [Seminar on Emerging Problems of Marketing of Agricultural Produce August 1972 (mimeographed) ] The farmer's storage practices remain by and large unscientific and the estimates of loss of produce, at this point, remain high. The situation would ease considerably if more small warehouses were opened at assembling points and if research results of the advantages from the use of improved types of storage receptacles are publicised, among farmers.
CONCLUSION

Grading, as a practice to improve marketing procedures, first received official attention 39 years ago, when the Agricultural Produce (Grading and Marking) Act, 1937, was passed. There are at present approximately 5,000 persons licensed to grade commodities under the Act. However, only about 100 of these are producers; and, as is to be expected, most of these licencces belong to the trading class. If grading were adopted more extensively not only would farmers be helped to realise a higher price, but market news dissemination and bulk storage and transportation practices could also be facilitated. W i t h the objective of helping fanners and promoting more scientific marketing, 500 centres have been opened under the aegis of state marketing departments, to grade the producer's surplus in the assembling markets, before it is sold by auction. For 1969-70, it was estimated that output worth about Rs 100 crores was graded at these centres. This is still a small beginning and there have been suggestions that, to speed up tha extension of this practice, compulsory grading should be enforced. Experience w i t h such compulsion has shown that the grower benefits immensely and that opposition comes mainly from tracers who gained in the earlier situation by underpaying the farmer.

The conclusion that emerges is that, for the present stage of development of the Indian economy, the existing marketing structure is not in need of radical overhaul. W i t h the regulation of an increasing number of markets and the adoption of fair systems of sale, with improvements in transport and com-

Review of Agriculture December 1977 munication facilities, w i t h increased market news dissemination, with an expansion of storage and warehousing faeilities, with the extensive adoption of standardised grading, with the application of improved technology at the packaging and processing stages, the mark-ting structure that exists w i l l improve considerably, In the case of most of the changes that are necessary, it is obvious that government sanction, support and even exemplary initiative, is essential. If this is provided, then there is no reason why one should not expert the private sector agricultural marketing system to keep pace with the progressive development of the other segments of the Indian economy.

ECONOMIC A N D POLITICAL WEEKLY Bank of India states that "...there are indicators that the investmentinduced growth component as contra-distinguished from the fortuitous component, was quite significant in 1975-76", Reserve Bank of India. Annual Report, 1975-70, P 2. 2 John W Mellor in his latest review of Indian agriculture takes a growth rate of 3.5 to 4 per cent, in the agricultural sector, "as a sale projection". John W Mellor, 'The Agriculture of India Scientific Amercian, Volume 235, September 1976, p 163.
3

price indexes, foodgrains comprise only a little over 40 per cent of the cash value of marketings of agricultural commodities, while milk and milk products comprise nearly 20 per cent and industrial raw material crops account for over 25' per cent. 5 6 Ibid p 358. Ralph Cummings Jr: "Pricing Efficiency in the Indian Wheat Market",' Impex India, New Delhi, 1967; and Uma J Lele ; "Foodgrain Marketing in India; Private Performance and Public Policy", Cornell University Press, USA, 1871. Uma J Lele: "Foodgrain Marketing in India" op cit; p 223.

J R Moore, S S Johl, and A M Khusro: "Indian Foodgrain Marketing", New Delhi, 1973, p 175. J W Mellor, T F Weaver, U J Lele and S R Sheldon, "Developing Rural India: Flan and Practice1', Indian Reprint, Bombay, 1972, p 357, " . . . according to the weights used for the consumer

Notes
1 The annual report of the Reserve

8 J R Moore, S S Johl and A M Khusro: "Indian Foodgrain Marketing" and M G Pavaskar and V Radhakrishnan; T o s t of Marketing Cotton', Bombay, 1970.