A farmer works in a millet field on the outskirts of Bengaluru, India, on June 9, 2017. (Photographer: Dhiraj Singh/Bloomberg)

Farm Prices After A Bumper Crop: Managing A Problem Of Plenty

BloombergQuintOpinion

Recent episodes of farmers’ distress in Madhya Pradesh and Maharashtra have reopened debates on two fronts; the problem of bumper supply in the market, and the public policy response in terms of a loan waiver to manage the agrarian crisis. Loan waivers bring temporary relief, but as Ashok Gulati points out in a recent article, waivers do not address fix the markets. Like, Gulati, Jawaharlal Nehru University’s Himanshu stresses on the need for storage infrastructure like warehouses to protect farmers from price volatilities. Indeed, warehousing is one of the key long-term solutions to manage food stocks and avoid major price fluctuations. Warehousing acts a buffer space for food stocks and at the same time, provides avenues to farmers to obtain pledge finance against their stocks.

In this article, we contribute to the debate on two fronts. First, we argue that if warehousing has to be used effectively by farmers to guard against price volatility, it is useful to study the price movements after events like bumper harvests.

More often than not, farmers are unable to assess market conditions and anticipate recovery of falling prices.

With a lack of information, small farmers end up making distress sales to recover their cost, instead of utilising the option of warehousing. Second, we look at possible solutions to bolster the warehousing capacity.

The Unfolding Of A Bumper Harvest Situation

Under normal circumstances, farmers manage their produce by dividing it between self-consumption, using it as seeds for future cultivation, selling it at the Minimum Support Price (MSP) under public procurement schemes or in Agricultural Produce Market Committee (APMC) mandis or markets. However, in the case of a bumper harvest, the situation changes significantly.

Farmers have to find avenues to sell their excess production.

Government agencies are constrained by limited buying capacity, they can buy only a part of the excess supply and run the risk of overstocking. The problem is severe in the case of horticulture crops, i.e. fruits and vegetables. There is limited public procurement, and the excess production has to be sold in the mandis, which puts a downward pressure on prices leading to a collapse. Perishable items are either sold at throw-away prices, or get wasted in search of a buyer.

In recent times, there has been a gradual rise in the productivity of major crops. As farm yields increase, coupled with bumper crop instances, the use of storage to prevent a collapse in prices becomes critical. Take the case of soybean and potato. The chart below plots the trend of the percentage change in monthly mandi arrivals over the previous year for both these crops.

Farm Prices After A Bumper Crop: Managing A Problem Of Plenty

In the case of soyabean, during August 2013, mandi arrivals went up by nearly 250 percent compared to the previous year. Similarly, in September 2015 and January 2017, mandi arrivals due to a bumper crop went up by over 140 percent. For potatoes, mandi arrivals during March 2013 jumped nearly 40 percent as compared to the same month in the previous year. Similarly, December 2014 and as recently as March 2017 were other two occasions when output at the mandis jumped nearly 40 percent. In the next chart, we plot the monthly modal mandi prices of potato and soybean for the past five years.

Farm Prices After A Bumper Crop: Managing A Problem Of Plenty

The information of prices trends can be summarised to compare the change in prices during the periods of peak arrivals at the mandis.

Farm Prices After A Bumper Crop: Managing A Problem Of Plenty

Mandi arrivals change on a daily basis. During a bumper harvest season, prices fall as large quantity arrivals take place in a quick succession. The view from a monthly level conveys the broader picture. For instance, during the month of peak arrivals in August 2013, soybean prices fell by 47 percent as compared to the previous year. Prices were on a decline for nearly two months to reach a low at Rs. 3,172 per quintal, before rising again. Similarly, on other two occasions, September 2015 and January 2017, prices declined in the month of peak arrival and recovered within two months after reaching their lowest. Price movements of Potato also reveal a similar picture. Except during December 2014, prices were subdued for nearly four months, prices on other occasions - March 2013 and March 2017 - were quick to rebound with a month after reaching their lowest.

There are two takeaways from the analysis.

  • First, after an immediate decline, prices have a usual tendency to recover, barring certain cases where some rare combination of factors keeps prices subdued for a longer time.
  • Second, the duration of price recovery also depends on the nature of crops. For perishable crops, due to offtake, spoilage, and wastage, the excess supply is expected to clear faster.

Farmers, therefore need a mechanism by way of which they can tide over the period when the prices are low and sell when the prices have recovered. They also require information about the prices in the futures market in order to take advantage of holding on to their stock. Warehouses are traditionally considered points of storage but they can also solve liquidity issues. Farmers can use their own deposits as collaterals for raising loans.

However, financial institutions lend against warehouse receipts only when they are assured of the standards of warehousing and the warehouse service providers.

Warehouses registered under the Warehousing Development Regulatory Authority Act, 2007 can issue Negotiable Warehouse Receipts (NWRs) against stocks which are instruments of pledge finance. The Act has provisions for the development and regulation of warehouses, the negotiability of warehouse receipts, the establishment of the regulatory authority, and for matters connected therewith or incidental thereto. NWRs provide access to other online or offline markets such as commodity futures and other derivative trading platforms. The question then is; how can the warehouses be incentivised to register with WDRA?

A farmer counts sacks of wheat at the New Grain Market in Karnal, Haryana, India, on May 19, 2016. (Photographer: Prashanth Vishwanathan/Bloomberg)
A farmer counts sacks of wheat at the New Grain Market in Karnal, Haryana, India, on May 19, 2016. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Way Forward

The warehousing sector in India is presently a hopscotch of government and privately owned warehouses. Warehouses are primarily licensed by state warehousing laws. In the midst of these registered entities, many unorganised players also thrive. While there is no census on the total number of warehouses, there are 1,222 warehouses registered with WDRA with a total capacity of 127 million tonnes. Almost three-fourth of the registered warehousing capacity is held by public sector units like Food Corporation of India, Central Warehousing Corporation, and State Warehouse Corporation.

Roughly, 15 percent of the warehousing storage capacity is with the private sector, as per the WDRA’s annual report for 2015-16.

The remaining warehousing capacity is held by the cooperative sector. The Ministry of Agriculture had initiated a scheme in the year 2001 called the Gramin Bhandaran Yojna (GBY) to create rural godowns closer to the farmers. The scheme is now called Agricultural Marketing Infrastructure (AMI), which provides subsidised institutional credit for building storage facilities. Warehouses built under the AMI scheme need not get themselves registered with WDRA unless they want to issue NWRs.

The way forward is to increase the universe of warehousing by incentivising the warehouses to register with WDRA and comply to WDRA’s regulatory standards. Under the present registration system followed by the WDRA, a warehouse can be registered only if it meets the minimum standards, else is considered as unregistered. In a recent policy initiative, WDRA is considering a more pragmatic and holistic approach of using a grading system to signal the quality of warehouses. The grading system can be used to differentiate the quality of warehousing services and at the same time, acts a pressure mechanism on unregistered warehouses to improve their services and benefit by getting themselves registered.

The other issue with warehousing services is lack of information.

WDRA ought to bolster the information infrastructure by disseminating the list of registered warehouses and mandating warehouses to publicise basic information such as location, available capacity and storage rents.

Farm Prices After A Bumper Crop: Managing A Problem Of Plenty

To sum up, warehousing can provide a solution to guard against price volatility for a short period. In the aftermath of a bumper harvest, our analysis suggests that prices, on average, rebound in a short span. The information on duration of price recovery of a variety of crops can help farmers make informed decisions about stocking and not making a distress sale. Solutions to bolster warehousing capacity must focus on incentivising the unregistered warehouses to register and comply to regulatory guidelines and standards. Such a policy move will provide farmers the facilities they need, instead of loan waivers, which unfortunately they now want.

Amey Sapre is pursuing his doctoral studies in Economics at IIT Kanpur and Smriti Sharma is a researcher at the National Institute of Public Finance and Policy.

The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.