The traditional narrative about exploitation in farming sector is of poor farmer being exploited by arthis who advance them credit for inputs at exorbitant rates, and in return procure disproportionate share of farm output at the time of harvest when crop prices are at their lowest.
There exists little reason to question this version; after all, faced with the choice of vacating land (often their only asset), distressed farmers caught in vicious debt cycles have little bargaining power. The outcome of this version of events; however, is of wholesale vilification of arthis as systemic exploiters, who earns abnormal returns off the sweat and blood of poor farmer, without offering any value creation to the supply chain.
But consider another version of events, increasingly heard from sellers’ markets of agricultural produce in Punjab. In this story, farming produce sold to mills – mainly of flour and sugar – is often made on credit terms.
Suppliers - whether middlemen or large landholders who sell their produce directly to mills – have little choice but to accept payment on credit when faced with the prospect of harvested crop going bad in the absence of storage facilities. This is further exacerbated by the fear that mills only operate for a limited season (three to four months, on average), and failure to agree delivery on credit may result in stock going unsold altogether.
Reports of millers delaying timely cash payment even long after the agreed credit period has lapsed is, of course, no news. But anecdotal evidence suggests that an increasing number of such ‘liquidity strapped’ millers, in turn, offer their suppliers final product such as refined sugar or flour on barter terms in lieu of cash.
What’s the harm? Mainly that the realizable value of the final product in wholesale market is often at a discount to invoiced value of the crop. This also makes intuitive sense, considering that crashed price of final product is one of the primary causes why the miller may be genuinely liquidity strapped in the first place. The exploiter middleman is exploited back, and the story comes full circle.
Who to blame? The spiritually minded among the readers may be tempted to appeal to their sense of divine justice and karma. Well meaning as that explanation may be, it does little in alleviating the suffering of the destitute farmer, who not only stays just as poor, but is possibly taken even more advantage of in future periods as the middlemen seeks even higher profits to makeup for losses of the past.
A more objective commentary, on the other hand, may be sympathetic to behaviour of each economic agent who acts rationally, given available information about the marketplace and prices, to maximize self-interest.
Consider for example that the miller may be genuinely cash strapped for a variety of reasons from low selling prices due to supply glut, weak economies of scale due to poor crop quality, inability to relocate mill to more optimal region due to regulatory restrictions, and/or ridden by interest payments on bank debt. All ground realities that reflect genuine woes of productive sector of the economy.
Arthi, on the other hand, adds value by assisting in price discovery and market clearing mechanism. Although arthi often also acts as a dealer by maintaining own stocks (in addition to functioning as a broker), he has little incentive to scale and invest in commodity storage facilities given the seasonal operations of mills. Why bear cost of inventory when the only buyer in the market will go out of production once the season ends?
Lastly, the growers, both with large landholdings and small, who simply act on lagging information of prices from past season. So long as crop offers an adequate return, they continue to expand acreage, irrespective of outlook for ending stocks. More often than not their consideration-set in making crop sowing decision does not go beyond availability of cheap inputs, supply of water, and proximity to buyer – whether a ginnery or a crushing mill.
It is easy to cherry pick any one agent from grower to middlemen or miller, and censure them for rent seeking behaviour and indifference to investing in productivity improvement. The reality is that incentives governing behaviour of economic agents are much more complex. A crucial factor in optimizing productivity is availability of timely information and functioning markets, both of which are found wanting in markets for agriculture produce.