Agricultural Marketing Trade and Prices PDF

Agricultural Marketing Trade and Prices Author TNAU, Tamil Nadu  Index LN Name Page No 1 Introduction 4-23...

Agricultural Marketing Trade and Prices Author TNAU, Tamil Nadu  Index LN Name Page No 1 Introduction 4-23 - 42 2 Market structure conduct and performance 24 3 Marketing channels, marketing cost, marketing efficiency and market 43 - 75 integration 4 External trade in agricultural products 76 - 92 5 Cooperative agricultural marketing institutions 93 - 142 6 STATE TRADING and QUALITY CONTROL 143 - 160 - 203 7 Warehousing and food corporation of India 161 - 220 8 Agricultural prices and risk management 204 Agricultural Marketing Trade and Prices 1 CHAPTER 1 INTRODUCTION Mankind is considered the superior to the living things in the world. Civilization transformed that into producer of food and other basic requirements from the nomadic behavior in which hunting and snatching were the way of life. Land cultivation and food production marked the beginning of civilization particularly in the riparian lands. Mother Nature has to offer Her blessings to satisfy the food needs of all living creatures. Land cultivation, otherwise known as farming is influenced by the behavior of natural events like rainfall, drought, flood, storm and so on and so forth. Food production has its limitations and so all food cannot be produced in all places. In other words, food production is restricted to specific locations where the soil, weather and moisture favor that activity. Nevertheless food produced has to be consumed worldwide by the human beings, animals, birds and others in need. A group of people specializing in food production and identified as farmers shoulder the noble responsibility of feeding the entire world. Hence there is no need to emphasis that food produced at specific places has to be distributed to other places of consumption. It is in this juncture, marketing plays its vital role. Marketing is as critical to better performance in agriculture as farming itself. Therefore, market reform and marketing system improvement ought to be an integral part of policy and strategy for agricultural development. Although a considerable progress has been achieved in technological improvements in agriculture by the use of high-yielding variety seeds and chemical fertilizers, and by the adoption of plant protection measures, the rate of growth in farming in developing countries limping behind the desired levels. This has been largely attributed to the fact that not enough attention has been devoted to the facilities and services which must be available to farmers that would support agricultural sector for its development. Marketing is one of those facilities needed for over all economic development of nations. Concept and Definition The term agricultural marketing is composed of two words – agriculture and marketing. Agriculture, in the broadest sense, means activities aimed at the use of natural resources for human welfare, i.e., it includes all the primary activities of production. But, generally, it is used to mean growing and/or raising crops and livestock. Marketing encompasses a series of activities involved in moving the goods from the 4 www.Agrifair.in Agricultural Marketing Trade and Prices 2 point of production to the point of consumption. It includes all activities involved in the creation of time, place, form and possession utility. Philip Kotler has defined marketing as a human activity directed at satisfying the needs and wants through exchange process. American Marketing Association defined marketing as the performance of business activities that directs the flow of goods and services from producers to users. According to Thomsen, the study of agricultural marketing comprises all the operations, and the agencies conducting them, involved in the movement of farm- produced foods, raw materials and their derivatives, such as textiles, from the farms to the final consumers, and the effects of such operations on farmers, middlemen and consumers. Agricultural marketing is the study of all the activities, agencies and policies involved in the procurement of farm inputs by the farmers and the movement of agricultural products from the farms to the consumers. The agricultural marketing system is a link between the farm and the non-farm sectors. It includes the organization of agricultural raw materials supply to processing industries, the assessment of demand for farm inputs and raw materials, and the policy relating to the marketing of farm products and inputs. According to the National Commission on Agriculture (XII Report, 1976), agricultural marketing is a process which starts with a decision to produce a saleable farm commodity, and it involves all the aspects of market structure or system, both functional and institutional, based on technical and economic considerations, and includes pre- and post-harvest operations, assembling, grading, storage, transportation and distribution. Agricultural marketing system in developing countries including India can be understood to compose of two major sub-systems viz., product marketing and input (factor) marketing. The actors in the product marketing sub-system include farmers, village/primary traders, wholesalers, processors, importers, exporters, marketing cooperatives, regulated market committees and retailers. The input sub-system includes input manufacturers, distributors, related associations, importers, exporters and others who make available various farm production inputs to the farmers. However, as Acharya has described, in a dynamic and growing agricultural sector, the agricultural marketing system ought to be understood and developed as a link between the farm and the non-farm sectors. A dynamic and growing agricultural 5 www.Agrifair.in Agricultural Marketing Trade and Prices 3 sector requires fertilizers, pesticides, farm equipments, machinery, diesel, electricity, packing material and repair services which are produced and supplied by the industry and non-farm enterprises. The expansion in the size of farm output stimulates forward linkages by providing surpluses of food and natural fibres which require transportation, storage, milling or processing, packaging and retailing to the consumers. These functions are obviously performed by non-farm enterprises. Further, if the increase in agricultural production is accompanied by a rise in real incomes of farm families, the demand of these families for non-farm consumer goods goes up as the proportion of income spent on non-food consumables and durables tends to rise with the increase in real per capital income. Several industries, thus find new markets for their products in the farm sector. Agricultural marketing, therefore, can be defined as comprising of all activities involved in supply of farm inputs to the farmers and movement of agricultural products from the farms to the consumers. Agricultural marketing system includes the assessment of demand for farm-inputs and their supply, post-harvest handling of farm products, performance of various activities required in transferring farm products from farm gate to processing industries and/or to ultimate consumers, assessment of demand for farm products and public policies and programmes relating to the pricing, handling, and purchase and sale of farm inputs and agricultural products. Of late trade in the domestic and international markets also become the part of it. Scope and Subject Matter Agricultural marketing in a broader sense is concerned with the marketing of farm products produced by farmers and of farm inputs and services required by them in the production of these farm products. Thus, the subject of agricultural marketing includes product marketing as well as input marketing. The subject of output marketing is as old as civilization itself. The importance of output marketing has become more conspicuous in the recent past with the increased marketable surplus of the crops and other agricultural commodities following the technological breakthrough. On one hand surplus production in agriculture resulted in problem of distribution to consumption centres and on the other transformed agriculture into a commercial venture where market needs came to the lime lite. Input marketing is a comparatively new subject. Farmers in the past used such farm sector inputs as local seeds and farmyard manure. These inputs were available with them; the purchase of inputs for production of crops from the market by the farmers was almost negligible. The 6 www.Agrifair.in Agricultural Marketing Trade and Prices 4 importance of farm inputs – improved seeds, fertilizers, insecticides and pesticides, farm machinery, implements and credit – in the production of farm products has increased in recent decades. The new agricultural technology is input-responsive. Thus, the scope of agricultural marketing must include both product marketing and input marketing. In this book, the subject-matter of agricultural marketing has been dealt with; both from the theoretical and practical points of view. It covers what the system is, how it functions, and how the given methods or techniques may be modified to get the maximum benefits. Specially, the subject of agricultural marketing includes marketing functions, agencies, channels, efficiency and costs, price spread and market integration, producer's surplus, marketing institutions, government policy and research, imports/exports of agricultural commodities and commodity and futures trading. New Role of Agricultural Marketing Agricultural marketing scenario in the country has undergone a sea-change over the last six decades owing to the increases in the supply of agricultural commodities and consequently in their marketed surpluses; increase in urbanization and income levels and thereby changes in the pattern of demand for farm products and their derivatives; slow and steady increase in the linkages with the overseas markets; and changes in the form and degree of government intervention in agricultural markets. Therefore, the framework under which agricultural produce markets function and the factors which influence the prices received by the farmers now need to be understood in a different perspective compared to that in the past. The role of marketing now starts right from the time of decision relating to what to produce, which variety to produce and how to prepare the product for marketing rather than limiting it to when, where and to whom to sell. Markets and Marketing Market – Meaning The word market originated from the latin word 'marcatus' which means merchandise or trade or a place where business is conducted. Word 'market' has been widely and variedly used to mean: (a) a place or a building where commodities are bought and sold, e.g., super market; (b) potential buyers and sellers of a product; e.g., wheat market and cotton market; (c) potential buyers and sellers of a country or region, e.g., Indian market and Asian market; (d) an organization which provides facilities for exchange of commodities, e.g., Bombay stock exchange; and (e) a phase or a course of commercial activity, e.g., a dull market or bright market. 7 www.Agrifair.in Agricultural Marketing Trade and Prices 5 There is an old English saying that two women and a goose may make a market. However, in common parlance, a market includes any place where persons assemble for the sale or purchase of commodities intended for satisfying human wants. Other terms used for describing markets in India are Haats, Painths, Shandies and Bazar. The word market in the economic sense carries a broad meaning. Some of the definitions of market are given below: 1. A market is the sphere within which price determining forces operate. 2. A market is the area within which the forces of demand and supply converge to establish a single price. 3. The term market means not a particular market place in which things are bought and sold but the whole of any region in which buyers and sellers are in such a free intercourse with one another that the prices of the same goods tend to equality, easily and quickly. 4. Market means a social institution which performs activities and provides facilities for exchanging commodities between buyers and sellers. 5. Economically interpreted, the term market refers, not to a place but to a commodity or commodities and buyers and sellers who are in free intercourse with one another. 6. The American Marketing Association has defined a market as the aggregate demand of the potential buyers for a product/service. 7. Philip Kotler defined market as an area for potential exchanges. A market exists when buyers wishing to exchange the money for a good or service are in contact with the sellers who are willing to exchange goods or services for money. Thus, a market is defined in terms of the existence of fundamental forces of supply and demand and is not necessarily confined to a particular geographical location. The concept of a market is basic to most of the contemporary economies, since in a free market economy, this is the mechanism by which resources are allocated. Components of a Market For a market to exist, certain conditions must be satisfied. These conditions should be both necessary and sufficient. They may also be termed as the components of a market. 1. The existence of a good or commodity for transactions (physical existence is, however, not necessary); 2. The existence of buyers and sellers; 8 www.Agrifair.in Agricultural Marketing Trade and Prices 6 3. Price at which the commodity is transacted or exchanged 4. Business relationship or intercourse between buyers and sellers; and 5. Demarcation of area such as place, region, country or the whole world. Dimensions of a Market There are various dimensions of any specified market. These dimensions are: 1. Location or place of operation 2. Area or coverage 3. Time span 4. Volume of transactions 5. Nature of transactions 6. Number of commodities 7. Degree of competition 8. Nature of commodities 9. Stage of marketing 10. Extent of public intervention 11. Type of population served 12. Accrual of marketing margins Any individual market may be classified in a twelve-dimensional space. Classification of Markets Markets may be classified on the basis of each of the twelve dimensions already listed. 1. On the Basis of Location or Place of Operation On the basis of the place of location or place of operation, markets are of the following types: (a) Village Market: A market which is located in a small village, where major transactions take place among the buyers and sellers normally residing in that village, is called a village market. (b) Primary Markets: These markets are located in towns near the centres of production of agricultural commodities. In these markets, a major part of the produce is brought for sale by the producer-farmers themselves. Transactions in these markets usually take place between the farmers and primary traders. (c) Secondary Wholesale Markets: These markets are located generally at district headquarters or important trade centres or near railway junctions. The major transactions of commodities in these markets take place between the village traders and 9 www.Agrifair.in Agricultural Marketing Trade and Prices 7 wholesalers. The bulk of the arrivals in these markets are from other markets. The produce in these markets is handled in large quantities. There are, therefore, specialized marketing agencies performing different marketing functions, such as those of commission agents, brokers and weighmen in these markets. These markets help in assembling commodities from neighboring district/tehsil/state. (d) Terminal Markets: A terminal market is one where the produce is either finally disposed of to the consumers or processors, or assembled for export. In these markets, merchants are well organized and use modern methods of marketing. Commodity exchanges exist in these markets which provide facilities for forward trading in specific commodities. Such markets are located either in metropolitan cities or at sea- ports. Delhi, Mumbai, Chennai, Bengaluru, Kolkata and Cochin are terminal markets in India for many commodities. (e) Seaboard Markets: Markets which are located near the seashore and are meant mainly for the import and/or export of goods are known as seaboard markets. These are generally seaport towns. Examples of these markets in India are Mumbai, Chennai, Kolkatta and Cochin (Kochi). 2. On the Basis of Area/Coverage On the basis of the area from which buyers and sellers usually come for transactions, markets may be classified into the following four classes: (a) Local or Village Markets: A market in which the buying and selling activities are confined among the buyers and sellers drawn from the same village or nearby villages. The village markets exist mostly for perishable commodities in small lots, e.g., local milk market or vegetable market. (b) Regional Markets: A market in which buyers and sellers for a commodity are drawn from a larger area than the local markets. Regional markets in India usually exist for food grains. (c) National Markets: A market in which buyers and sellers spread at the national level. Earlier national markets existed for only durable goods like jute and tea. But with the expansion of roads, transport and communication facilities, the markets for most of the products have taken the form of national markets. (d) World or International Market: A market in which the buyers and sellers are drawn from more than one country or the whole world. These are the biggest markets  from the area point of view. These markets exist for the commodities which have a world-wide demand and/or supply, such as coffee, machinery, gold, silver, etc. In recent 10 www.Agrifair.in Agricultural Marketing Trade and Prices 8 years many countries are moving towards a regime of liberal international trade in agricultural products like raw cotton, sugar, rice and wheat. It is expected that the international trade in such commodities will become free from many restrictions that exist now. 3. On the Basis of Time Span On this basis, markets are of the following types: (a) Short period Markets: The markets which are held only for a day or few hours are called short-period markets. The products dealt within these markets are of a highly perishable nature, such as fish, fresh vegetables, and liquid milk. In these markets, the prices of commodities are governed mainly by the extent of demand for, rather than by the supply of, the commodity. (b) Periodic Markets: The periodic markets are congregation of buyers and sellers at specified places either in villages, semi-urban areas or some parts of urban areas on specific days and time. Major commodities traded in these markets is the farm produce grown in the hinterlands. The periodic markets are held weekly, biweekly, fortnightly or monthly according to the local traditions. These are similar to 'spontaneous markets' in several developed countries. (c) Long-period Markets: These markets are held for a longer period than the short-period markets. The commodities traded in these markets are less perishable and can be stored for some time; like foodgrains and oilseeds. The prices are governed both by the supply and demand forces. (d) Secular Markets: These are markets of a permanent nature. The commodities traded in these markets are durable in nature and can be stored for many years. Examples are markets for machinery and manufactured goods. 4. On the Basis of Volumes of Transactions There are two types of markets on the basis of volume of transactions at a time. (a) Wholesale Markets: A wholesale market is one in which commodities are bought and sold in large lots or in bulk. These markets are generally located in either towns or cities. The economic activities in and around these markets are so intense that over time the population tends to get concentrated around these markets. These markets occupy an extremely important link in the marketing chain of all the commodities including farm products. Apart from balancing the supply and demand and discovery of  the prices of a commodity, these markets and functionaries in them serve as a link between the production system and consumption system. The wholesale markets for 11 www.Agrifair.in Agricultural Marketing Trade and Prices 9 farm products in India can be classified as primary, secondary and terminal wholesale markets. The primary wholesale markets are in the nature of assembling centres located in and around producing regions. The transactions in primary wholesale markets take place mainly between farmers and traders. Secondary wholesale markets are generally located between primary wholesale and terminal markets. The transactions in these markets take place between primary wholesalers and traders of terminal market. The terminal markets are generally located at the large urban metropolitan cities or export centres catering to the large consuming population around them or in the overseas markets. (b) Retail Markets: A retail market is one in which commodities are bought by and sold to the consumers as per their requirements. Transactions in these markets take place between retailers and consumers. The retailers purchase the goods from wholesale market and sell in small lots to the consumers in retail markets. These markets are very near to the consumers. The distinction between the wholesale and retain market can be made mainly on the basis of buyer. A retail market means that the buyers are generally ultimate consumers, whereas in the wholesale market the buyers can be wholesalers or retailers. But sometimes-bulk consumers also purchase from the wholesale markets. The quantity transacted in retail markets is generally smaller than that in the wholesale markets. 5. On the Basis of Nature of Transactions The markets which are based on the types of transactions in which people are engaged are of two types: (a) Spot or Cash Markets: A market in which goods are exchanged for money immediately after the sale is called the spot or cash market. (b) Forward Markets: A market in which the purchase and sale of a commodity takes place at time t but the exchange of the commodity takes place on some specified date in future i.e., time t + 1. Sometimes even on the specified date in the future (t + 1), there may not be any exchange of the commodity. Instead, the differences in the purchase and sale prices are paid or taken. 6. On the Basis of Number of Commodities in which Transaction Takes Place A market may be general or specialized on the basis of the number of commodities in which transactions are completed: 12 www.Agrifair.in Agricultural Marketing Trade and Prices 10 (a) General Markets: A market in which all types of commodities, such as foodgrains, oilseeds, fibre crops, gur, etc., are bought and sole is known as general market. These markets deal in a large number of commodities. (b) Specialized Markets: A market in which transactions take place only in one or two commodities is known as a specialized market. For every group of commodities, separate markets exist. The examples of specialized markets are foodgrain markets, vegetable markets, wool market and cotton market. 7. On the Basis of Degree of Competition Each market can be placed on a continuous scale, starting from a perfectly competitive point to a pure monopoly or monopsony situation. Extreme forms are almost non-existent. Nevertheless, it is useful to know their characteristics. In addition to these two extremes, various midpoints of this continuum have been identified. On the basis of competition, markets may be classified into the following categories: (a) Perfect Markets: A perfect market is one in which the following conditions hold good: (i) There is a large number of buyers and sellers; (ii) All the buyers and sellers in the market have perfect knowledge of demand, supply and prices; (iii) Prices at any one time are uniform over a geographical area, plus or minus the cost of getting supplies from surplus to deficit areas; (iv) The prices of different forms of a product are uniform, plus or minus the cost of converting the product from one form to another. (b) Imperfect Markets: The markets in which the conditions of perfect competition are lacking are characterized as imperfect markets. The following situations, each based on the degree of imperfection, may be identified: (i) Monopoly Market: Monopoly is a market situation in which there is only one seller of a commodity. He exercises sole control over the quantity or price of the commodity. In this market, the price of a commodity is generally higher than in other markets. Indian farmers operate in monopoly market when purchasing electricity for irrigation. When there is only one buyer of a product, the market is termed as a monopsony market.  (ii) Duopoly Market: A duopoly market is one which has only two sellers of a commodity. They may mutually agree to charge a common price which is higher than the 13 www.Agrifair.in Agricultural Marketing Trade and Prices 11 hypothetical price in a common market. The market situation in which there are only two buyers of a commodity is known as the duopsony market. (iii) Oligopoly Market: A market in which there are more than two but still a few sellers of a commodity is termed as an oligopoly market. A market having a few (more than two) buyers is known as oligopsony market. (iv) Monopolistic Competition: When a large number of sellers deal in heterogeneous and differentiated form of a commodity, the situation is called monopolistic competition. The difference is made conspicuous by different trade marks on the product. Different prices prevail for the same basic product. Examples of monopolistic competition faced by farmers may be drawn from the input markets. For example, they have to chose between various makes of insecticides, pumpsets, fertilizers and equipments. 8. On the Basis of Nature of Commodities On the basis of the type of goods dealt in, market may be classified into the following categories: (a) Commodity Markets: A market which deals in goods and raw materials, such as wheat, barley, cotton, fertilizer, seed, etc., are termed as commodity markets. (b) Capital Markets: The market in which bonds, shares and securities are bought and sold are called capital markets; for example, money markets and share markets. 9. On the Basis of Stage of Marketing On the basis of the stage of marketing, markets may be classified into two categories: (a) Producing Markets: Those markets which mainly assemble the commodity for further distribution to other markets are termed as producing markets. Such markets are located in producing areas. (b) Consuming Markets: Markets which collect the produce for final disposal to the consuming population are called consumer markets. Such markets are generally located in areas where production is inadequate, or in thickly populated urban centres. 10. On the Basis of Extent of Public Intervention  Based on the extent of public intervention, markets may be placed in any one of the following two classes: 14 www.Agrifair.in Agricultural Marketing Trade and Prices 12 (a) Regulated Markets: These are those markets in which business is done in accordance with the rules and regulations framed by the statutory market organization representing different sections involved in markets. The marketing costs in such markets are standardized and, marketing practices are regulated. (b) Unregulated Markets: These are the markets in which business is conducted without any set rules and regulations. Traders frame the rules for the conduct of the business and run the market. These markets suffer from many ills, ranging from unstandardised charges for marketing functions to imperfections in the determination of prices. 11. On the Basis of Type of Population Served On the basis of population served by a market, it can be classified as either urban or rural market. (a) Urban Market: A market which serves mainly the population residing in an urban area is called an urban market. The nature and quantum of demand for agricultural products arising from the urban population is characterized as urban market for farm products. (b) Rural Market: The word rural market usually refers to the demand originating from the rural population. There is considerable difference in the nature of embedded services required with a farm product between urban and rural demands. Rural markets generally have poor marketing facilities as compared to urban markets. According to the survey of the Directorate of Marketing and Inspection (DMI) of Government of India, only 46 per cent of rural primary markets, of the country have the facility of market yards; 6.4 per cent have office buildings, 3.2 per cent have cattle shed, 3 per cent have canteen, 4.9 per cent have storage facilities, 5.1 per cent have auction platforms, 12.9 per cent have drinking water facility and 5.2 per cent markets have electricity facility. Marketing support services such as godowns, cleaning, price information and extension services were found completely non-existent in most of these rural markets. 12. On the Basis of Market Functionaries and Accrual of Marketing Margins  Markets can also be classified on the basis of as to who are the market functionaries and to whom the marketing margins accrue. Over the years, there has been a considerable increase in the producers or consumers co-operatives or other organizations handling marketing of various products. Though private trade still handles bulk of the trade in farm products, the co-operative marketing has increased its share in 15 www.Agrifair.in Agricultural Marketing Trade and Prices 13 the trade of some agricultural commodities like milk, fertilizers, sugarcane and sugar. In the case of marketing activities undertaken by producers or consumers co-operatives, the marketing margins are either negligible or shared amongst their members. In some cases, farmers themselves work as sellers of their produce to the consumers. On the basis, the market can be (a) farmers markets, (b) cooperative markets or (c) general markets. It must be noted that each market or market place can be classified on the basis of the 12 criteria mentioned above. A 12-dimensional classification of markets is shown in Chart 1.1. 16 www.Agrifair.in Agricultural Marketing Trade and Prices 14 Chart: 1.1 12 – Dimensional Classification of Markets VILLAGE MARKETS PRIMARY MARKETS SECONDARY WHOLESALE ON THE BASIS OF LOCATION MARKETS TERMINAL MARKETS SEA-BOARD MARKETS LOCAL/VILLAGE MARKETS REGIONAL MARKETS ON THE BASIS OF AREA OR NATIONAL MARKETS COVERAGE WORLD/INTERNATIONAL MARKETS COMMODITIES TRANSACTED ON THE BASIS OF TIME SPAN ON THE BASIS OF DEGREE OF COMPETITION ON THE BASIS OF VOLUME OF TRANSACTIONS ON THE BASIS OF NATURE OF TRANSACTIONS ON THE BASIS OF NUMBER OF  FORWARD MARKETS SHORT PERIOD MARKETS PERIODIC MARKETS GENERAL MARKETS LONG PERIOD MARKETS SPECIAL MARKETS SECULAR MARKETS PERFECT MARKETS WHOLESALE MARKETS MONOPOLY MARKETS RETAIL MARKETS DUOPOLY MARKETS OLIGOPOLY MARKETS SPOT/CASH MARKETS MONOPOLISTIC 17 www.Agrifair.in Agricultural Marketing Trade and Prices 15  COMPETITIVE MARKETS ON THE BASIS OF NATURE OF COMMODITY MARKETS COMMODITIES CAPITAL MARKETS ON THE BASIS OF STAGE OF PRODUCING MARKETS MARKETING CONSUMING MARKETS ON THE BASIS OF EXTENT OF REGULATED MARKETS PUBLIC INTERVENTION UN-REGULATED MARKETS ON THE BASIS OF TYPE OF URBAN MARKETS POPULATION SERVED RURAL MARKETS ON THE BASIS OF MARKET FARMERS MARKETS FUNCTIONARIES AND CO-OPERATIVE MARKETS ACCRUAL OF MARKETING GENERAL MARKETS MARGINS Importance of Agricultural Marketing Agricultural marketing plays an important role not only in stimulating production and consumption, but in accelerating the pace of economic development. Its dynamic functions are of primary importance in promoting economic development. For this reason, it has been described as the most important multiplier of agricultural development. India's age-old farming practices have taken a turn in recent decades. There has been a technological breakthrough – the evolution of high-yielding variety seeds, increasing use of fertilizers, insecticides, pesticides, the installation of pumping sets, and tractorization. This technological breakthrough has led to a substantial increase in production on the farms and to the larger marketable and marketed surplus. To maintain this tempo and pace of increased production through technological development, an assurance of remunerative prices to the farmer is a prerequisite, and this assurance can be given to the farmer by developing an efficient marketing system. 18 www.Agrifair.in Agricultural Marketing Trade and Prices 16 The agricultural marketing system plays a dual role in economic development in countries whose resources are primarily agricultural. Increasing demands for money with which to purchase other goods leads to increasing sensitivity to relative prices on the part of the producers, and specialization in the cultivation of those crops on which the returns are the greatest, subject to socio-cultural, ecological and economic constraints. It is the marketing system that transmits the crucial price signals. On the other hand, and in order to sustain the growth of the non-agricultural sector, resources have to be extracted from the agricultural sector – physical resources to guarantee supplies of food and raw materials for the agro-industry and financial resources for investment in non- farm economy as well as for re-investment in agriculture. On the basis of IADP experience, Kiehl has shown that the "marketing problem" begins to emerge in the process of shifting from traditional to modern agriculture because of production surpluses generated by the shift. Indeed, the term modern agriculture implies a market-oriented agriculture. The scope for moving towards modern agriculture must include market dimensions if the momentum of production transformation is to be sustained. The importance of agricultural marketing in economic development is revealed from the following: (i) Optimization of Resource use and Output Management An efficient agricultural marketing system leads to the optimization of resource use and output management. An efficient marketing system can also contribute to an increase in the marketable surplus by scaling down the losses arising out of inefficient processing, storage and transportation. A well-designed system of marketing can effectively distribute the available stock of modern inputs, and thereby sustain a faster rate of growth in the agricultural sector. (ii) Increase in Farm Income An efficient marketing system ensures higher levels of income for the farmers reducing the number of middlemen or by restricting the cost of marketing services and the malpractices, in the marketing of farm products. An efficient system guarantees the farmers better prices for farm products and induces them to invest their surpluses in the purchase of modern inputs so that productivity and production may increase. This again results in an increase in the marketed surplus and income of the farmers. If the producer does not have an easily accessible market-outlet where he can sell his surplus produce, he has little incentive to produce more. The need for providing adequate incentives for 19  www.Agrifair.in Agricultural Marketing Trade and Prices 17 increased production is, therefore, very important, and this can be made possible only by streamlining the marketing system. (iii) Widening of Markets An efficient and well-knot marketing system widens the market for the products by taking them to remote corners both within and outside the country, i.e., to areas far away from the production points. The widening of the market helps in increasing the demand on a continuous basis, and thereby guarantees a higher income to the producer. (iv) Growth of Agro-based Industries An improved and efficient system of agricultural marketing helps in the growth of agro-based industries and stimulates the overall development process of the economy. Many industries like cotton, sugar, edible oils, food processing and jute depend on agriculture for the supply of raw materials. (v) Price Signals An efficient marketing system helps the farmers in planning their production in accordance with the needs of the economy. This work is carried out through transmitting price signals. (vi) Adoption and Spread of New Technology The marketing system helps the farmers in the adoption of new scientific and technical knowledge. New technology requires higher investment and farmers would invest only if they are assured of market clearance at remunerative price. (vii) Employment Creation The marketing system provides employment to millions of persons engaged in various activities, such as packaging, transportation, storage and processing. Persons like commission agents, brokers, traders, retailers, weighmen, hamals, packagers and regulating staff are directly employed in the marketing system. This apart, several others find employment in supplying goods and services required by the marketing system. (viii) Addition to National Income Marketing activities add value to the product thereby increasing the nation's gross national product and net national product. (ix) Better Living The marketing system is essential for the success of the development programmes which are designed to uplift the population as a whole. Any plan of economic development that aims at diminishing the poverty of the agricultural 20  www.Agrifair.in Agricultural Marketing Trade and Prices 18 population, reducing consumer food prices, earning more foreign exchange or eliminating economic waste has, therefore, to pay special attention to the development of an efficient marketing for food and agricultural products. (x) Creation of Utility Marketing is productive, and is as necessary as the farm production. It is, in fact, a part of production itself, for production is complete only when the product reaches a place in the form and at the time required by the consumers. Marketing adds cost to the product, but, at the same time, it adds utilities to the product. The following four types of utilities of the product are created by marketing: (a) Form Utility: The processing function adds form utility to the product by changing the raw material into a finished form. With this change, the product becomes more useful than it is in the form in which it is produced by the farmer. For example, through processing, oilseeds are converted into oil, sugarcane into sugar, cotton into cloth and wheat into flour and bread. The processed forms are more useful than the original raw materials. (b) Place Utility: The transportation function adds place utility to products by shifting them to a place of need from the place of plenty. Products command higher prices at the place of need than at the place of production because of the increased utility of the product. (c) Time Utility: The storage function adds time utility to the products by making them available at the time when they are needed. (d) Possession Utility: The marketing function of buying and selling helps in the transfer of ownership from one person to another. Products are transferred through marketing to persons having a higher utility from persons having a low utility. The foodgrain marketing system is more important in India than the marketing of other agricultural commodities because of the following reasons: (a) Foodgrains account for around two-thirds of the gross cropped area and 40 per cent of the gross value of crop output in the country. Foodgrain marketing, therefore, provides income to most Indian farmers so that they may buy the required inputs for the farm as well as purchase items of domestic need; (b) The foodgrain marketing business provides livelihood to lakhs of traders, processors, commission agents and other persons engaged in the foodgrain trade; and (c) The foodgrain marketing system helps in providing food for consumers and fodder for livestock. 21 www.Agrifair.in Agricultural Marketing Trade and Prices 19 Model Quiz 1. Agricultural marketing is a process which starts with _________________ of a saleable farm commodity. 2. The subject matter of agricultural marketing includes _____________ as well as _____________ marketing. 3. The word MARKET originated from the latin word _______________________ 4. ___________________ markets are located in towns near the centres of production of agricultural commodities 5. Commodity exchanges exist in _________________ markets. 6. __________________ markets are of a permanent nature. 7. Which of the following is an imperfect market? a. Monopoly b. oligopoly c. both a and b d. none of these Ans: c 8. In duopsony market there will be a. One buyer b. one seller c. two buyers d. two sellers. Ans : c 9. Pick out the wrong statement Ans: d a. Heterogenous and differentiated form of a commodity is noticed in monopolistic competition. b. Different trade marks are used in monopolistic competition. c. Different prices prevail for the same basic product. d. Sellers in monopolistic competition mutually agree to charge a common price. 10. Converting groundnut into oil creates a. Place utility b. form utility c. time utility d. possession utility. Ans: b. 11. Transport function of marketing creates a. Place utility b. form utility c. time utility d. possession utility. Ans: a. 12. Storing milk creates a. Place utility b. form utility c. time utility d. possession utility. Ans: c. 13.ABC company buying potatoes from XYZ trader results in a. Place utility b. form utility c. time utility d. possession utility. Ans: d. TRUE or FALSE 1. Commodities traded in secular markets are not durable in nature. (False) 2. Retail markets are very near to consumers. (True) 3. In forward markets, exchange of commodity takes place in future time. (True) 22 www.Agrifair.in Agricultural Marketing Trade and Prices 20 4. In perfect markets, commodity prices at a point of time differ only by the cost of transport between the markets. (true) 5. Fertilizer market is an example of oligopoly market. (False) 6. Raw materials are sold in capital market. (False) 7. Retail markets are located in the consuming markets. (True) 8. Traders frame the rules for the conduct of the business in regulated markets. (False) 9. Marketing margins are usually high in cooperative marketing. (False) 10. Number and size of the firms existing in the market is a measure of market conduct.(False) 23 www.Agrifair.in Agricultural Marketing Trade and Prices CHAPTER 2 MARKET STRUCTURE CONDUCT AND PERFORMANCE Market Structure – Meaning The term structure refers to something that has organization and dimension – shape, size and design; and which is evolved for the purpose of performing a function. A function modifies the structure, and the nature of the existing structure limits the performance of functions. By the term market structure we refer to the size and design of the market. It also includes the manner of the operation of the market. Some of the expressions describing the market structure are: 1. Market structure refers to those organizational characteristics of a market which influence the nature of competition and pricing, and affect the conduct of business firms, 2. Market structure refers to those characteristics of the market which affect the traders' behaviour and their performances, 3. Market structure is the formal organization of the functional activity of a marketing institution. An understanding and knowledge of the market structure is essential for identifying the imperfections in the performance of a market. Components of Market Structure The components of the market structure, which together determine the conduct and performance of the market, are: 1. Concentration of Market Power The concentration of market power is an important element determining the nature of competition and consequently of market conduct and performance. This is measured by the number and size of firms existing in the market. The extent of concentration represents the control of an individual firm or a group of firms over the buying and selling of the produce. A high degree of market concentration restricts the movement of goods between buyers and sellers at fair and competitive prices, and creates an oligopoly or oligopsony situation in the market. 2. Degree of Product Differentiation Homogeneous or other nature of the product affects the market structure. If products are homogeneous, the price variations in the market will not be wide. When 24 www.Agrifair.in Agricultural Marketing Trade and Prices products are heterogeneous, firms have the tendency to charge different prices for their products. Everyone tries to prove that his product is superior to the products of others. 3. Conditions for entry of Firms in the Market Another dimension of the market structure is the restriction, if any, on the entry of firms in the market. Sometimes, a few big firms do not allow new firms to enter the market or make their entry difficult by their dominance in the market. There may also be some government restrictions on the entry of firms. 4. Flow of Market Information A well-organized market intelligence information system helps all the buyers and sellers to freely interact with one another in arriving at prices and striking deals. 5. Degree of Integration The behaviour of an integrated market will be different from that of a market where there is no or less integration either among the firms or of their activities. Firms plan their strategies in respect of the methods to be employed in determining prices, increasing sales, coordinating with competing firms and adopting predatory practices against rivals or potential entrants. The structural characteristics of the market govern the behaviour of the firms in planning strategies for their selling and buying operations. Dynamics of Market Structure – Conduct and Performance The market structure determines the market conduct and performance. The term market conduct refers to the patterns of behaviour of firms, especially in relation to pricing and their practices in adapting and adjusting to the market in which they function. Specifically, market conduct includes: (a) Market sharing and price setting policies; (b) Policies aimed at coercing rivals; and (c) Policies towards setting the quality of products. The term market performance refers to the economic results that flow from the industry as each firm pursues its particular line of conduct. Society has to decide the criteria for satisfactory market performance. Some of the criteria for measuring market performance and of the efficiency of the market structure are: 1. Efficiency in the use of resources, including real cost of performing various functions; 25 www.Agrifair.in Agricultural Marketing Trade and Prices 2. The existence of monopoly or monopoly profits, including the relationship of margins with the average cost of performing various functions; 3. Dynamic progressiveness of the system in adjusting the size and number of firms in relation to the volume of business, in adopting technological innovations and in finding and/or inventing new forms of products so as to maximize general social welfare. 4. Whether or not the system aggravates the problem of inequalities in inter- personal, inter-regional, or inter-group incomes. For example, inequalities increase under the following situations: (a) A market intermediary may pocket a return greater than its real contribution to the national product; (b) Small farmers are discriminated against when they are offered a lower return because of the low quantum of surplus; (c) Inter-product price parity is substantially disturbed by new uses for some products and wide variations and rigidities in the production pattern between regions. The market structure, therefore, has always to keep on adjusting to changing environment if it has to satisfy the social goals. A static market structure soon becomes obsolete because of the changes in the physical, economic, institutional and technological factors. For a satisfactory market performance, the market structure should keep pace with the following changes: (i) Production Pattern Significant changes occur in the production pattern because of technological, economic and institutional factors. The market structure should be re-oriented to keep pace with such changes. Emergence of producers groups or group marketing practice is likely to alter market structure. (ii) Demand Pattern The demand for various products, especially in terms of form and quality, keeps on changing because of change in incomes, the pattern of distribution among consumers, and changes in their tastes and habits. The market structure should be re- oriented to keep it in harmony with the changes in demand. Change in the consumption pattern and tastes and preferences of consumers leads to specific or exclusive marketing practices followed by the companies to cater to the specific needs of that group. (iii) Costs and Patterns of Marketing Functions 26 www.Agrifair.in Agricultural Marketing Trade and Prices Marketing functions such as transportation, storage, financing and dissemination of market information, have a great bearing on the type of market structure. Recent policy encourages group marketing or operation of producer groups and this is likely to reduce the number of buyers and/or sellers actually taking part in marketing functions. Government policies with regard to purchases, sales and subsidies affect the performance of market functions. The market structure should keep on adjusting to the changes in costs and government policy. Number of players in the market must be in accordance with the marketing functions performed and size of operations to take advantage of size economy. (iv) Technological Change in Industry Technological changes necessitate changes in the market structure through adjustments in the scale of business, the number of firms, and in their financial requirements. Establishment of retail chains and entry of MNCs in the food retailing effected conspicuous change in the structure of vegetable markets in India Agricultural Marketing and Economic Development Orderly and efficient marketing of food grains plays an important role in solving the problem of hunger. Most of those who go hungry do so because they can not pay higher prices for food grains. If marketing system is not efficient, price signals arising at the consumers' level are not adequately transferred to the producers, as a result farmers do not get sufficient price incentive to increase the production of the commodities which are in short supply. Thus, an inefficient marketing system adversely affects the living standards of both the farmers and consumers. In agricultural-oriented developing countries like India, agricultural marketing plays a pivotal role in fostering and sustaining the tempo of rural and economic development. Markets trigger the process of development. The development of an efficient marketing system is important in ensuring that scarce and essential commodities reach different classes of consumers. Marketing is not only an economic link between the producers and the consumers but it also helps to maintain a balance between demand and supply. The objectives of price stability, rapid economic growth and equitable distribution of goods and services cannot be achieved without the support of an efficient marketing system. Marketing Functions and their Classification The marketing functions may be classified in various ways. For example, Thomsen has classified the marketing functions into three broad groups. These are: 27 www.Agrifair.in Agricultural Marketing Trade and Prices (i) Primary Functions Assembling or Procurement Processing Dispersion or Distribution (ii) Secondary Functions Packing or Packaging Transportation Grading, Standardization and Quality Control Storage and Warehousing Determination or Discovery of Prices Risk Taking Financing Buying and Selling Demand Creation Dissemination of Market Information (iii) Tertiary Functions Banking Insurance Communications – Posts & Telecommunication Supply of Energy – Electricity Kohls and Uhl have classified marketing functions as follows: (i) Physical Functions Storage and Warehousing Grading Processing Transportation (ii) Exchange Functions Buying Selling (iii) Facilitative Functions Standardization of Grades Financing Risk Taking Dissemination of Market Information Converse, Huegy and Mitchell have classified marketing functions in a different way. According to them, the classification is as follows: (i) Physical Movement Storage Functions Packing Transportation 28 www.Agrifair.in Agricultural Marketing Trade and Prices Grading Distribution (ii) Ownership Movement Determining Need Functions Creating Demand Finding Buyers and Sellers Negotiation of Price Rendering Advice Transferring the Title to Goods (iii) Market Management Formulating Policies Functions Financing Providing Organization Supervision Accounting Securing Information Marketing Agencies In the marketing of agricultural commodities, the following agencies are involved: (i) Producers Most farmers or producers, perform one or more marketing functions. They sell the surplus either in the village or in the market. Some farmers, especially the large ones, assemble the produce of small farmers, transport it to the nearby market, sell it there and make a profit. This activity helps these farmers to supplement their incomes. Frequent visits to markets and constant touch with market functionaries, bring home to them a fair knowledge of market practices. They have, thus, an access to market information, and are able to perform the functions of market middlemen, (ii) Middlemen Middlemen are those individuals or business concerns which specialize in performing the various marketing functions and rendering such services as are involved in the marketing of goods. They do this at different stages in the marketing process. The middlemen in foodgrain marketing may, therefore, be classified as follows: (a) Merchant Middlemen Merchant middlemen are those individuals who take title to the goods they handle. They buy and sell on their own and gain or lose, depending on the difference in 29 www.Agrifair.in Agricultural Marketing Trade and Prices the sale and purchase prices. They may, moreover, suffer loss with a fall in the price of the product. Merchant middlemen are of following types: Wholesalers: Wholesalers are those merchant middlemen who buy and sell foodgrains in large quantities. They may buy either directly from farmers or from other wholesalers. They sell foodgrains either in the same market or in other markets. They sell to retailers, other wholesalers and processors. They do not sell significant quantities to ultimate consumers. They own godowns for the storage of the produce. The wholesalers perform the following functions in marketing: (a) They assemble the goods from various localities and areas to meet the demands of buyers; (b) They sort out the goods in different lots according to their quality and prepare them for the market; (c) They equalize the flow of goods by storing them in the peak arrival season and releasing them in the off-season; (d) They regulate the flow of goods by trading with buyers and sellers in various markets; (e) They finance the farmers so that the latter may meet their requirements of production inputs; and (f) They assess the demand of prospective buyers and processors from time to time, and plan the movement of the goods over space and time. Retailers: Retailers buy goods from wholesalers and sell them to the consumers in small quantities. They are producers' personal representatives to consumers. Retailers are the closest to consumers in the marketing channel. Itinerant Traders and Village Merchants: Itinerant traders are petty merchants who move from village to village, and directly purchase the produce from the cultivators. They transport it to the nearby primary or secondary market and sell it there. Village merchants have their small establishments in villages. They purchase the produce of those farmers who have either taken finance from them or those who are not able to go to the market. Village merchants also supply essential consumption goods to the farmers. They act as financers of poor farmers. They often visit nearby markets and keep in touch with the prevailing prices. They either sell the collected produce in the nearby market or retain it for sale at a later date in the village itself. Mashakhores: This is a local term used for big retailers or small wholesalers dealing in fruits and vegetables. Earlier, the mashakhores used to deal only in one or 30 www.Agrifair.in Agricultural Marketing Trade and Prices two vegetables, purchasing from the commission agents or wholesalers in substantial quantities usually three to four quintals of vegetables like potato, onion, carrot, okra, tomato and spinach. They usually sell to the bulk consumers like hotelwalas, para- miliary units or small retailers/vendors in lots of around 5 kg to 10 kg each. However, in recent years, mashakhores have started retailing to all types of customers without the condition of a minimum quantity. In other words, the mashakhores are now working more like ordinary retailers. (b) Agent Middlemen Agent Middlemen act as representatives of their clients. They do not take title to the produce and, therefore, do not own it. They merely negotiate the purchase and/or sale. They sell services to their principals and not the goods or commodities. They receive income in the form of commission of brokerage. They serve as buyers or sellers in effective bargaining. Agent middlemen are of two types: Commission Agents or Arhatias: A commission agent is a person operating in the wholesale market who acts as the representative of either a seller or a buyer. He is usually granted broad powers by those who consign goods or who order the purchase. A commission agent normally takes over the physical handling of the produce, arranges for its sale, collects the price from the buyer, deducts his expenses and commission, and remits the balance to the seller. All these facilities are extended to buyer-firms as well, if asked for. Commission agents or arhatias in unregulated markets are of two types, Kaccha arhatias and Pacca arhatias: Kaccha arhatias primarily act for the sellers, including farmers. They sometimes provide advance money to farmers and itinerant traders on the condition that the produce will be disposed of through them. Kaccha arhatias charge arhat or commission in addition to the normal rate of interest on the money they advance. A Pacca arhatia acts on behalf of the traders in the consuming market. The processors (rice millers, oil millers and cotton or jute dealers) and big wholesalers in the consuming markets employ Pacca arhatias as their agents for the purchase of a specified quantity of goods within a given price range. In regulated markets, only one category of commission agent exists under the name of 'A' class trader. The commission agent keeps an establishment – a shop, a godown and a rest house for his clients. He is, therefore, preferred by the farmers to the co-operative marketing society for the purpose of the sale of the farmer's produce. Commission agents extend the following facilities to their clients: 31 www.Agrifair.in Agricultural Marketing Trade and Prices (i) They advance 40 to 50 per cent of the expected value of the crop as a loan to farmers to enable them to meet their production expenses; (ii) They act as bankers of the farmers. They retain the sale proceeds, and pay to the farmers as and when the latter require the money; (iii) They offer advice to farmers for purchase of inputs and sale of products; (iv) They provide empty bags to enable the farmers to bring their produce to the market; (v) They provide food and accommodation to the farmers and their animals when the latter come to the market for the sale of their produce; (vi) They provide storage facility and advance loans against the stored product up to 75 per cent of the value; (vii) They arrange, if required by the farmer, for the transportation of the produce from the village to the market; and (viii) They help the farmers in times of personal difficulties. Brokers: Brokers render personal services to their clients in the market; but, unlike the commission agents, they do not have physical control of the product. The main function of a broker is to bring together buyers and sellers on the same platform for negotiations. Their charge is called brokerage. They may claim brokerage from the buyer, the seller or both, depending on the market situation and the service rendered. They render valuable service to the prospective buyers and sellers, for they have complete knowledge of the market – of the quantity available and the prevailing prices. Brokers have no establishment in the market. They simply wander about in the market and render services to clients. There is no risk to them. They do not render any other service except to bring the buyers and sellers on the same platform. In most regulated markets, brokers do not play any role because goods are sold by open auction. Their number in foodgrain marketing trade is decreasing. But they still play a valuable role in the marketing of other agricultural commodities, such as gur, sugar, edible oil, cotton seed and chillies. (c) Speculative Middlemen Those middlemen who take title to the product with a view to making a profit on it are called speculative middlemen. They are not regular buyers or sellers of produce. They specialize in risk-taking. They buy at low prices when arrivals are substantial and sell in the off-season when prices are high. They do the minimum handling of goods. They make profit from short-run as well as long-run price fluctuations. 32 www.Agrifair.in Agricultural Marketing Trade and Prices (d) Processors Processors carry on their business either on their own or on custom basis. Some processors employ agents to buy for them in the producing areas, store the produce and process it throughout the year on continuous basis. They also engage in advertising activity to create a demand for their processed products. (e) Facilitative Middlemen Some middlemen do not buy and sell directly but assist in the marketing process. Marketing can take place even if they are not active. But the efficiency of the system increases when they engage in business. These middlemen receive their income in the form of fees or service charges from those who use their services. The important facilitative middlemen are: Hamals or Labourers: They physically move the goods in marketplace. They do unloading from the loading on to bullock carts or trucks. They assist in weighing the bags. They perform cleaning, sieving, and refilling jobs and stitch the bags. Hamals are the hub of the marketing wheel. Without their active co-operation, the marketing system would not function smoothly. Weighmen: They facilitate the correct weighment of the produce. They use a pan balance when quantity is small. Generally, the scalebeam balance is used. They get payment for their service through the commission agent. The weighbridge system of weighing also exists in big markets. Graders: These middlemen sort out the product into different grades, based on some defined characteristics, and arrange them for sale. They facilitate the process of prices settlement between the buyer and the seller. Transport Agency: This agency assists in the movement of the produce from one market to another. The main transport means are the railways and trucks. Bullock carts or camel carts or tractor-trolleys are also used in villages for the transportation of foodgrains. Communication Agency: It helps in the communication of the information about the prices prevailing, and quantity available, in the market. Sometimes, the transactions take place on the telephone. The post and telegraph, telephone, newspapers, the radio and informal links are the main communication channels in agricultural marketing. 33 www.Agrifair.in Agricultural Marketing Trade and Prices Advertising Agency: It enables prospective buyers to know the quality of the product and decide about the purchase of commodities. Newspapers, the radio, television and cinema slides are the main media for advertisements. Auctioners: They help in exchange function by putting the produce for auction and bidding by the buyers. Marketing Institutions Marketing institutions are business organizations which have come up to operate the marketing machinery. In addition to individuals, corporate, co-operative and government institutions are operating in the field of agricultural marketing. They perform one or more of the Marketing functions. They assume the role of one or more marketing agencies, described earlier in this section. Some important institutions in the field of agricultural marketing are: (a) Public Sector Institutions (i) Directorate of Marketing and Inspection (DMI) (ii) Commission for Agricultural Costs and Prices (CACP) (iii) Food Corporation of India (FCI) (iv) Cotton Corporation of India (CCI) (v) Jute Corporation of India (JCI) (vi) Specialized Commodity Boards Rubber Board Tea Board Coffee Board Spices Board Coconut Board Oilseeds and Vegetable Oils Board Tobacco Board Cardamom Board Arecanut Board Coir Board Silk Board National Horticulture Board (NHB) National Dairy Development Board (NDDB) 34 www.Agrifair.in Agricultural Marketing Trade and Prices (vii) Others Central Warehousing Corporation (CWC)' State Warehousing Corporations (SWCs) State Trading Corporation (STC) Agricultural and Processed Food Export Development Authority (APEDA) Export Inspection Council Marine Products Export Development Authority (MPEDA) Silk Export Promotion Council (SEPC) The Cashewnuts Export Promotion Council of India (CEPCI) Agricultural Produce Market Committees (APMC) State Agricultural Marketing Boards (SAMB) Council of State Agricultural Marketing Boards (COSAMB) State Directorates of Agricultural Marketing Research Institutions and Agricultural Universities (b) Cooperative Sector Institutions (i) National Cooperative Development Corporation (NCDC) (ii) National Agricultural Cooperative Marketing Federation (NAFED) (iii) National Cooperative Tobacco Growers Federation (NTGF) (iv) National Consumers Cooperative Federation (NCCF) (v) Tribal Cooperative Marketing Federation (TRIFED) (vi) Special Commodity Cooperative Marketing Organizations (Sugarcane, Cotton, Milk) (vii) State Cooperative Marketing Federations. (viii)Primary Agricultural Cooperative Marketing Societies PRODUCER’S SURPLUS Producer's Surplus of Agricultural Commodities In any developing economy, the producer's surplus of agricultural product plays a significant role. This is the quantity which is actually made available to the non-producing population of the country. From the marketing point of view, this surplus is more important than the total production of commodities. The arrangements for marketing and the expansion of markets have to be made only for the surplus quantity available with the farmers, and not for the total production. This is because, only a portion of the total 35 www.Agrifair.in Agricultural Marketing Trade and Prices production is sold in the market after personal consumption by the members of farm household and retention in the farm for several reasons. The rate at which agricultural production expands determines the pace of agricultural development, while the growth in the marketable surplus determines the pace of economic development. An increase in production must be accompanied by an increase in the marketable surplus for the economic development of the country. Though the marketing system is more concerned with the surplus which enters or is likely to enter the market, the quantum of total production is essential for this surplus. The larger the production of a commodity, the greater will be the surplus of that commodity and vice versa. The knowledge of marketed and marketable surplus helps the policy-makers as well as the traders in the following areas: i. Framing Sound Price Policies: Price support programmes are an integral part of agricultural policies s necessary for stimulating agricultural production. The knowledge of quantum of marketable surplus helps in framing these policies. ii. Developing Proper Procurement and Purchase Strategies: The procurement policy for feeding the public distribution system has to take into account the quantum and behaviour of marketable and marketed surplus. Similarly, the traders, processors and exporters have to decide their purchase strategies on the basis of marketed quantity iii. Checking Undue Price Fluctuations: A knowledge of the magnitude and extent of the surplus helps in the minimization of price fluctuations in agricultural commodities because it enables the government and the traders to make proper arrangements for the movement of product from one area, where they are in surplus, to another area which is deficient. iv Export/Import policies: Advance estimates of the surpluses of such commodities which have the potential of external trade are useful in decisions related to the export and import of the commodity. If surplus is expected to be less than what is necessary, the country can plan for imports and if surplus is expected to be more than what is necessary, avenues for exporting such a surplus can be explored. v. Development of Transport and Storage Systems: The knowledge of marketed surplus helps in developing adequate capacity of transport and storage system to handle it. Meaning and Types of Producer's Surplus 36 www.Agrifair.in Agricultural Marketing Trade and Prices The producer's surplus is the quantity of produce which is, or can be, made available by the farmers to the non-farm population. The producer's surplus is of two types: 1. Marketable Surplus The marketable surplus is that quantity of the produce which can be made available to the non-farm population of the country. It is a theoretical concept of surplus. The marketable surplus is the residual left with the producer-farmer after meeting his requirements for family consumption, farm needs for seeds and feed for cattle, payment to labour in kind, payment to artisans – carpenter, blacksmith, potter and mechanic – payment to landlord as rent, and social and religious payments in kind. This may be expressed as follows: MS=P–C Where MS = Marketable surplus P = Total production, and C = Total requirements (family consumption, farm needs, payment to labour, artisans, landlord and payments for social and religious work). 2. Marketed Surplus Marketed surplus is that quantity of the produce which the producer-farmer actually sells in the market, irrespective of his requirements for family consumption, farm needs and other payments. The marketed surplus may be more, less or equal to the marketable surplus. Whether the marketed surplus increases with the increase in production has been under continual theoretical scrutiny. It has been argued that poor and subsistence farmers sell that part of the produce which is necessary to enable them to meet their cash obligations. This results in distress sale on some farms. In such a situation, any increase in the production of marginal and small farms should first result in increased on- farm consumption. An increase in the real income of farmers also has a positive effect on on-farm consumption because of positive income elasticity. Since the contribution of this group to the total marketed quantity is not substantial, the overall effect of increase in production must lead to an increase in the marketed surplus. Bansil writes that there is only one term – marketable surplus. This may be defined subjectively or objectively. Subjectively, the term marketable surplus refers to 37 www.Agrifair.in Agricultural Marketing Trade and Prices theoretical surplus available for sale with the producer-farmer after he has met his own genuine consumption requirements and the requirements of his family, the payment of wages in kind, his feed and seed requirements, and his social and religious payments. Objectively, the marketable surplus is the total quantity of arrivals in the market out of the new crop. Relationship between marketed surplus and marketable surplus The marketed surplus may be more, less or equal to the marketable surplus, depending upon the condition of the farmer and type of the crop. The relationship between the two terms may be stated as follows: > Marketed surplus < Marketable surplus = 1. The marketed surplus is more than the marketable surplus when the farmer retains a smaller quantity of the crop than his actual requirements for family and farm needs. This is true especially for small and marginal farmers, whose need for cash is more pressing and immediate. This situation of selling more than the marketable surplus is termed as distress or forced sale. Such farmers generally buy the produce from the market in a later period to meet their family and/or farm requirements. The quantity of distress sale increases with the fall in the price of the product. A lower price means that a larger quantity will be sold to meet some fixed cash requirements. 2. The marketed surplus is less than the marketable surplus when the farmer retains some of the surplus produce. This situation holds true under the following conditions: (a) Large farmers generally sell less than the marketable surplus because of their better retention capacity. They retain extra produce in the hope that they would get a higher price in the later period. Sometimes, farmers retain the produce even up to the next production season. (b) Farmers may substitute one crop for another crop either for family consumption purpose or for feeding their livestock because of the variation in prices. With the fall in the price of the crop relative to a competing crop, the farmers may consume more of the first and less of the second crop. 3. The marketed surplus may be equal to the marketable surplus when the farmer neither retains more nor less than his requirement. This holds true for perishable commodities and of the average farmer. 38 www.Agrifair.in Agricultural Marketing Trade and Prices Factors Affecting Marketable Surplus The marketable surplus differs from region to region and, within the same region, from crop to crop. It also varies from farm to farm. On a particular farm, the quantity of marketable surplus depends on the following factors: (i) Size of Holding: There is positive relationship between the size of the holding and the marketable surplus. (ii) Production: The higher the production on a farm, the larger will be the marketable surplus, and vice versa. (iii) Price of the Commodity: The price of the commodity and the marketable surplus have a positive as well as a negative relationship, depending upon whether one considers the short and long run or the micro and macro levels. (iv) Size of Family: The larger the number of members in a family, the smaller the surplus on the farm. (v) Requirement of Seed and Feed: The higher the requirement for these uses, the smaller the marketable surplus of the crop. (vi) Nature of Commodity: The marketable surplus of non-food crops is generally higher than that for food crops. For example, in the case of cotton, jute and rubber, the quantity retained for family consumption is either negligible or very small part of the total output. For these crops, a very large proportion of total output is marketable surplus. Even among food crops, for such commodities like sugarcane, spices and oilseeds which require some processing before final consumption, the marketable surplus as a proportion of total output is larger than that for other food crops. (vii) Consumption Habits: The quantity of output retained by the farm family depends on the consumption habits. For example, in Punjab, rice forms a relatively small proportion of total cereals consumed by farm-families compared to those in southern or eastern states. Therefore, out of a given output of paddy/rice, Punjab farmers sell a greater proportion of paddy/rice, Punjab farmers sell a greater proportion than that sold by rice eating farmers of other states. The functional relationship between the marketed surplus of a crop and factors affecting the marketed surplus may be expressed as: M = f(x1, x2, x3, x4) where M = Total marketed surplus of a crop in quintals 39 www.Agrifair.in Agricultural Marketing Trade and Prices x1 = Size of holding in hectares x2 = Size of family in adult units x3 = Total production of the crop in quintals x4 = Price of the crop Relationship between prices and marketable surplus Two main hypotheses have been advanced to explain the relationship between prices and the marketable surplus of foodgrains. Inverse Relationship There is an inverse relationship between prices and the marketable surplus. This hypothesis was presented by P N. Mathur and M. Ezekiel. They postulate that the farmers' cash requirements are nearly fixed, and given the price level, the marketed portion of the output is determined. This implies that the farmers' consumption is a residual, and that the marketed surplus is inversely proportional to the price level. This behaviour assumes that farmers have inelastic cash requirements. The argument is that, in the poor economy of underdeveloped countries, farmers sell that quantity of the output which gives them the amount of money they need to satisfy their cash requirements; they retain the balance of output for their own consumption purpose. With a rise in the prices of foodgrains, they sell a smaller quantity of foodgrains to get the cash they need, and vice versa. In other words, with a rise in the prices of foodgrains, they sell a smaller quantity of foodgrains to get the cash they need, and vice versa. In other words, with a rise in price, farmers sell a smaller, and with the fall in price, they sell a larger quantity. Olson and Krishnan have argued that the marketed surplus varies inversely with the market price. They contend that a higher price for a subsistence crop may increase the producer's real income sufficiently to ensure that the income effect on demand for the consumption of the crop outweighs the price effect on production and consumption. Positive Relationship V.M.Dandekar and Rajkrishna put forward the case for a positive relationship between prices and the marketed surplus of food grains in India. This relationship is based on the assumption that farmers are price conscious. With a rise in the prices of food grains, farmers are tempted to sell more and retain less. As a result, there is increased surplus. The converse, too, holds true. 40 www.Agrifair.in Agricultural Marketing Trade and Prices Model Quiz 1.Market conduct includes a. Market sharing and price setting policies b. Policies aimed at coercing rivals c. Policies toward setting the quality of products d. Efficiency in the use of resources Ans: b. 2. Knowledge of marketable surplus helps the a. farming population b. non farm population c. both a and b d. neither a nor b. Ans: c 3. Marketable surplus will be more in the case of a. rice b. jowar c.cotton d. gram Ans: c 4. Marketable surplus will be less in the case of a. rice b. cotton c.sugarcane d. tomato Ans: a 5. All the following have positive relationship with marketable surplus except a. size of family b. size of holding c. quantity of production d. a and b Ans: a. 6. Commodity price and marketed surplus would have negative relationship in the case of a. rice b. cotton c. sugarcane d. jute. 7.Primary function of marketing includes a. Procurement b. transport c. storage d. banking