There’s no better way to understand agriculture markets – and the need for some kind of price assurance for farmers – than looking at specific commodities.
An illustrative case is jeera or cumin. This seed spice is currently selling at an average of Rs 30,000 per quintal in Gujarat’s Unjha APMC (agricultural produce market committee) mandi. It is trading even lower in the National Commodity & Derivatives Exchange (NCDEX) futures market, at Rs 25,380/quintal for the one-month-ahead (March 20) and at Rs 24,350 for two-months (April 19) expiry contracts.
Jeera prices in Unjha were at Rs 22,000-24,000/quintal during sowing time (early-November to mid-December) for the 2022-23 crop. During harvesting, from mid-February to March-end, these crossed Rs 30,000 levels. The peak of Rs 73,755 was touched on July 22 and the average modal (most-quoted) price at Rs 58,750.
The prices have since come off those highs and, going by the NCDEX futures, may further drop with the new crop’s arrival.
Consider this from the farmer’s perspective. When he sowed this time, the modal price in Unjha was Rs 40,000-45,000/quintal through November and the first week of December. Imagine his disappointment if he were now to sell at half that rate and below the levels of a year ago.
It’s not simply prices that are lower. The jeera grower, as the Jodhpur-based agritech entrepreneur Bhagirath Choudhary notes, has also incurred higher expenses. Seed costs alone have soared from Rs 400-500 to Rs 1,100-1,200 per kg this season. At 15 kg/hectare, that translates into Rs 16,500-18,000 and Rs 80,000 with all other input costs. Taking jeera yields of 6-7 quintals per hectare and price at Rs 25,000/quintal, the farmer would net an income of Rs 70,000-95,000. It would be Rs 40,000-60,000/hectare if realisations fall to Rs 20,000/quintal.
Jeera is just an example of how exposed farmers are to price volatility. This is apart from production uncertainty at every stage of the crop – whether due to dry weather, pathogens and pests (jeera is highly susceptible to fusarium wilt and alternaria blight fungal disease and aphid and jassid attacks) or unseasonal rain, frost and hot winds. No large listed automaker, consumer durable or FMCG company can plausibly handle this extent of both price and production risk!
Why are crop prices so volatile? The answer is prices themselves. When these are good, farmers plant more. Gujarat, for instance, has reported 5.61 lakh hectares (lh) area sown under jeera this time, as against 2.76 lh in 2022-23 and the last three years’ average of 3.51 lh. Expanded acreages result not only in bumper crop and price collapse, but also higher costs for farmers from increased demand for seed and leased-in land. We have seen it in jeera.
That’s where the minimum support price (MSP) comes in. MSP is a means for insulating farmers from low prices – which may, incidentally, reduce plantings in the following year, engendering a fresh round of volatility. But MSP can also help promote crop diversification. We want Punjab farmers to cultivate less paddy and wheat, and divert that area to maize, cotton, oilseeds, pulses and horticultural crops. But why would they, sans any price assurance for the latter? Farmers are ultimately producers, not traders or stock investors. Their income comes primarily from what they grow, on which there’s no certainty of yield between the time of sowing and harvesting. The least we can give them is some certainty of price.
The debate today should be not on “why” but “how” MSP. The government cannot obviously procure all the jeera and kinnow that farmers may otherwise be selling at distress prices; it cannot do so even for the 23 crops technically covered under MSP. Nor can the government realistically force the private trade to pay the MSP if this is higher than the prevailing supply-and-demand based market price. The trade may choose not to buy at all, making the farmer worse off.
It leaves a third option: Price deficiency payments (PDP). Suppose the MSP of jeera is set at Rs 20,000/quintal, guaranteeing a 50 per cent return on production cost of Rs 80,000 at 6 quintals/hectare. If the ruling market rate is Rs 18,000/quintal, the government, instead of procuring at Rs 20,000, would pay the difference (Rs 2,000/quintal) and transfer the amount (Rs 12,000 on 6 quintals) to the farmer’s account.
The PDP has several advantages.
One, it doesn’t interfere with the market mechanism. Traders and farmers would continue buying and selling at market rates. Nor will the government physically purchase and stock.
Two, farmers when aware of PDP will start demanding receipts from buyers detailing both the quantity and price at which they have sold. It will induce formalisation of the entire farm trade, which we know is largely cash-based. Just as with the GST – where the buyer makes sure the supplier pays the tax charged on goods or services purchased by him in order to claim input credit – farmers would henceforth insist on recording of transactions through digital payments.
Three, PDP will incentivise states to set up APMC mandis or even electronic trading platforms outside physical market yards, where farmers can sell their produce. The farmer only needs the sale invoice to be able to claim the PDP. The onus for creating this market infrastructure for recording of transactions should lie with the states. If Bihar Chief Minister Nitish Kumar wants the maize farmer in Purnea or Khagaria to get MSP via price difference – which the Centre will pay – he has to ensure generation of the necessary sales data.
MSP through PDP, in other words, can fulfill many of the goals dear to the Narendra Modi government: Formalisation, digitisation, crop diversification and even the marketing reforms that were envisaged in the repealed farm laws. The farmer only needs basic price assurance. So long as it is there, he will grow the crops we want him to.
PDP, it is argued, may be used by traders to game the market. If, say, the normal market-clearing price is Rs 18,000/quintal, the jeera trader can bill the farmer for Rs 15,000 and ask him to claim Rs 5,000 as PDP. Out of the Rs 3,000 gain, he can share maybe Rs 1,000 with the farmer and pay that in cash.
But these market manipulations, like with GST, cannot sustain beyond a point. The government can always determine indicative market prices below which it will not pay, or combine PDP with some physical procurement. At the end of the day, MSP is not charity. India, unlike most other countries, has many mouths to feed. As consumers, it’s in our vested interest that the farmer and his children remain in business.
harish.damodaran@expressindia.com
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