India has a highly regulated agricultural marketing sector, which focuses on staple crops such as rice, wheat, pulses and oilseeds. But, as domestic demand changes and grows and the potential for export increases, the current marketing system is no longer appropriate or effective. It now needs to be improved.

This DFID/World Bank project aims to document just how the market for non-staple crops works at the moment, and how the existing marketing institutions could be improved. The value chains for mango, tomato, potato, maize and turmeric were examined in four different states: Maharashtra, Orissa, Tamil Nadu and Uttar Pradesh.

Indian agricultural production has modernised considerably, but the marketing chain is still rather primitive and marketplaces themselves need upgrading. Crop marketing chains have developed to ensure provision of sufficient quantities of food rather than high quality. There is very little grading, cold storage or attention to food safety risks. Handling is manual, using mainly bags or wooden crates. This results in large post-harvest losses. Contract farming is virtually non-existent (and in places illegal).

Farmers and small traders appear unaware of food safety risks. Sellers in general report only observable characteristics about the crops (for example, variety and size). There are no mechanisms to verify unobservable information (for example, the type of pesticides used) and crops with better unobservable characteristics do not fetch a higher price. Information about pesticide and chemical fertiliser use or fumigation is thus not passed from seller to buyer.

The study found:

• Regulated markets tend to have better market infrastructure.
• The auctioning of non-staple crops is unsatisfactory, given that many commission agents (through whom traders buy and sell crops) are also traders themselves.
• Farmers who sell through a commission agent do not receive a significantly higher price.
• There was little if any evidence of buyers helping farmers with credit and inputs.
• Processors are small enterprises, doing very basic transformation.
• Within any one area all non-staple crop farmers have equal access to wholesale markets, and there is no evidence that small-scale farmers receive a lower price.

For Indian farmers to increase earnings from non-staple crops the marketing system must be developed to ensure provision of quality produce. A double-edged approach to reform is recommended. Liberalisation of retail food markets which will benefit larger farmers and improving existing marketing channels which will benefit smaller farmers. The key measures will include:

• .Liberalise the retail and agro-processing trades to draw in new, larger players such as supermarkets and enable them to make dedicated sourcing arrangements with wholesalers, large farmers, and farmer co-operatives.
• Use market fees to upgrade the wholesale markets themselves with paving, stalls, better sewers, drainage, and pest control.
• Improve the current auction system, making it more accurate and transparent, and separating the physical movement of produce from trade itself.
• Review the role of commission agents to ensure that they are truly acting only as brokers, and not also as buyers and sellers.

Source(s):
‘The Marketing of Non-Staple Crops in India’, DFID/World Bank: London/Washington, by Marcel Fafchamps, Ruth Vargas-Hill, and Bart Minten, 2006 Full document.

Funded by: UK Department for International Development, World Bank

id21 Research Highlight: 30 March 2007

Further Information:
Professor Marcel Fafchamps
Department of Economics
Oxford University
Manor Road
Oxford, OX1 3UQ, UK

Tel: +44 (0)1865 281446
Fax: +44 (0)1865 281447
Contact the contributor: marcel.fafchamps@economics.ox.ac.uk

International Food Policy Research Institute (IFPRI), USA

Ruth Vargas Hill
Postdoctoral Fellow
Director General’s Office
International Food Policy Research Institute (IFPRI)
2033 K Street, NW
Washington, DC 20006-1002
USA

Tel: +1 202 8625600
Fax: +1 202 4674439
Contact the contributor: r.v.hill@cgiar.org

University of Oxford

Bart Minten
Senior Research Fellow
International Food Policy Research Institute (IFPRI)
New Delhi Office
CG Block, NASC Complex, PUSA
New Delhi 110 012
India

Tel: +91 11-2584-6565/6566/6567
Contact the contributor: b.minten@cgiar.org

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'Walking tightropes: supporting farmer organisations for market access'

'Collective action promotes economic development in Kerala'

'Lessons from agricultural reform in sub-Saharan Africa'

India: Agriculture and Rural Development

Indian Agriculture and Rural Development: Strategic Issues and Reform Options