Farm reforms: Giving the Farmer a “Choice” they always had-How do we provide empowering choices?

Much has been said about the resistance to the agriculture and farm reforms introduced by the Government, through the latest 3 bills, especially from farmers in Punjab and Haryana. A lot of political overtones have clearly overwhelmed the thought process of the public and expert comments by agriculture economists advocating text book principles of supply-demand, price discovery, and efficiencies in a free market and “choice” of selling produce outside the designated APMC market yards, have made this complex problem even more difficult to fathom.

Are we making too much of a “choice” the farmer always had? In reality, Is the choice and option that is being talked about as the USP of these laws, being given to private buyers for the first time to buy at the farm gates directly from farmers, which hitherto was not allowed? That too without a regulatory regime in sight!

Are we taking a “farmer-first” approach which we should be, to have successful implementation of farm reforms?

Out of three bills, one of them is only an amendment to the existing Essential Commodities Act, which really does not affect farmers directly. The two new bills are primarily, Farmer’s Produce Trade and Commerce (Promotion and Facilitation) Act, 2020 which allows farmers to engage in trade of their agricultural produce outside the physical markets notified under various state Agricultural Produce Marketing Committee laws (APMC acts) and the Farmers (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, 2020 which seeks to provide farmers with a framework to engage in contract farming, where farmers can enter into a direct agreement with a private buyer (before sowing season) to sell the produce to them at pre-determined prices.

The philosophy, intent and direction of these reforms cannot be questioned as it is imperative to move from a supply driven system to a demand or market driven system and make ourselves competitive with international pricing trends. What worked during the Green revolution in 1960s is not necessarily effective in 2020 and beyond. What should be up for debate is the sequence and implementation issues of these reforms.

Are we really giving an “empowering choice” to the farmer?

This brings us to the question on what is the status of deregulating the input side industry while throwing open the output or produce side of the industry which only accentuates the imbalance between supply and demand. Do we need to address these regulatory hurdles first, before we throw open the markets to private buyers?

As per the Swaminathan report, the farmers need to have assured access and control over basic resources including land, water, bio-resources, credit and insurance, technology and knowledge management, and markets, without which, it would be difficult to make them perceive the “choice” of selling anywhere as a positive development in their favor.

However, the mechanism of implementation needs to be discussed and debated to serve the purpose of all stakeholders, through a systems thinking approach which encourages us to explore inter-relationships (context and connections), perspectives (each actor having their own unique perception of the situation) and boundaries (agreeing on scope, scale and what might constitute an improvement) to address a complex and what seems to be a “wicked” problem involving every stakeholder in society, and very importantly our natural environment for sustainability, besides the critical question of food security.

A case for complete deregulation of agriculture is not justified, given the uncertainty in this activity (not an industry!), and globally too, the developed countries give massive subsidy to their farmers to enable them to be globally competitive, based on international prices prevailing. There is unequivocal agreement on the fact that A farmer can only respond to the vagaries of nature. He can’t control them and hence requires a different treatment for the liberalization of the sector.

Given the imperative of diversifying cropping pattern in Punjab and Haryana, from rice and wheat to other value added crops (our stocks of rice and wheat have spiraled up to more than 700 lakh MT in FCI go downs as in September 2020), the incentive to move away from excess production to those crops which the country needs, the MSP can play a vital role. This can also save the ecological costs of both, pollution due to stubble burning and the depleting water table in this region. These cost savings can very well be diverted to MSP for other crops like oilseeds and pulses which are in short supply and serve to stabilize the pricing by balancing out supply-demand dynamics. India is the world's largest importer of edible oil. As much as 70 per cent of India's domestic demand for edible oil is met through imports, of which palm oil constitutes around 80 per cent. Value of pulses imported into India from financial year 2011 to 2020 is almost 1495.51 Billion Indian Rupees.

Can we have an AtmaNirbhar scheme or PLI (production linked incentives) for farm produce to really empower and give the choice and option to farmers, thus also saving much needed foreign exchange? The savings in forex outgo as well as savings in restoring ecological and water table could easily take care of the additional reformulated MSP to direct cropping patterns to where it is needed most.

Moreover, the MSP regime still has to be streamlined to give the benefits that it is intended for. As per Swaminathan committee report, farmers were to get a minimum support price at 50 per cent profit above the cost of production classified as C2 by the Commission for Agricultural Costs and Prices (CACP).

 The CACP defines production costs of crops under three categories -- A2, A2+FL (standing for family labor) and C2.A2 is the actual paid-out expenses incurred by farmers -- in cash and kind -- on seeds, fertilizers, pesticides, hired labor, fuel, irrigation and other inputs from outside.A2+FL includes A2 cost plus an imputed value of unpaid family labor.

 C2 is the most comprehensive definition of production cost of crops as it also accounts for the rentals or interest loans, owned land and fixed capital assets over and above A2+FL.Swaminathan Commission recommended this to be the basic cost and prescribed MSP 50 per cent above C2.

 However the farmers have been getting MSP based on A2+FL and not C2, notwithstanding the fact that only the 23 crops designated under the APMC scheme and only slightly above 6 % by value of agriculture produce gets sold at MSP. The very fact that 94% of the crops is out of the ambit of MSP and APMC regime signifies that farmers always had a “choice” or “option” to sell outside the designated markets.

 The contract farming laws specify that the farmer needs to enter into a contract with the private buyer, before the sowing season at pre-determined prices. In the absence of a mature, sophisticated, stable policy on rice and wheat futures trading, does the farmer really have a choice, except for contracting at spot prices?

  A focus on reforming these input markets as well as strengthening the existing policy on negotiable warehousing receipts (NWR which could also be used to secure bank finance) would not only give more empowering choice to the farmers in exercising the option, but also bring in much needed investments into warehousing space that adhere to the norms prescribed by the Warehousing Development and Regulation Authority (WDRA) and are accredited by the authorities. Banks have lent just over Rs 1,700 crore against NWRs in the last eight years and, that too, mostly to traders.

 The eNAM which is a National Agriculture Market, a pan-India electronic trading portal which networks the existing APMC mandis to create a unified national market for agricultural commodities has only 1000 out of the 6700 odd mandis & sub mandis registered in the country. Can we accelerate this process and integrate the same with the registered warehouses?

Shouldn’t market forces unleashed by structural reforms like these, help to bring in private players into the agricultural value chain investments, which is one of the important stated objectives of the farm bills, instead of directly legislating access of private buyers at farm gates?

An oft repeated analogy comparing it with the popular “Amul” model of cooperative system unleashed by Dr Varghese Kurien, which has stood the test of time in reaping enormous benefits for farmers engaged in animal husbandry activities, as additional income to the vagaries of agricultural crop incomes, has been cited as evidence that such a system can only benefit farmers in the long run. Is the analogy justifiable?

Comparison with Amul model

The analogy to the business model of a Federation (owned by farmers) or Nestle collecting milk from member cooperative societies ( owned by the same farmers) and paying them in terms of measurable quality standards, which in this case is the fat percentage and Solid non fats (SNF), is a comparison which has limitations. That could be further supported with a “not so successful “foray by the same National Dairy Development Board (NDDB) into other commodities like oilseeds, trying to replicate the success of the milk story.

The first fundamental difference between agricultural grains like rice and wheat on one hand and dairy which is a subsidiary activity, is the nature of the production-processing-distribution-marketing value chain. The natural rhythm of the two categories of commodities is different with respect to timing of acquisition of a productive asset, milch animals in the case of milk, and land, labor, capital, inputs like seeds, fertilizers ,irrigation, electricity in the front end and insecticides and pesticides towards the end of life cycle, by which time the farmer runs out of credit availability and this is where the perceived value of traders, “arthiyas” (the pivot on which both the farm and the market rotate )comes in, who have the capacity to not only pay the farmers for the next crop cycle, but also stock and wait for the public procurement system to kick in through the APMC system at MSP. Alternatively, vegetables which do not fall under this system are exposed to market volatility as we have seen repeatedly, in the case of onions and tomatoes.

The similarities between the Amul model and the agriculture grains scenario controlled by the APMC regime may be a few, but the differences are fundamental to the probability of success ( or not) of such a model in successful implementation of the current farm reforms.

a) The “Anand pattern” as the Amul model is called, is essentially an economic organizational pattern to benefit small producers who join hands forming an integrated approach in order to get the benefits of economy of a large scale business. It is a three-tiered structure with the dairy cooperative societies at the village level federated under a milk union at the district level and a federation of member unions at the state level, most importantly all owned by the farmers or their elected representatives.

b) To start with, the cooperative dairy industry operates on a daily cash cycle which mitigates the working capital pressures unlike the front loading of input resources in the case of grains. Of course there is a capital investment in milch animals with estimated ROI based on lactation period and yields of different breeds, which is an end to end integration by the three layers of the organization ( owned by the same set of farmer owners), including inputs like cattle feed, molasses block, frozen semen, chilling stations and so on. Of course this situation may be in for dramatic economic and social ramifications with cow slaughter bills being implemented in different States of the country (that is another story by itself). Therefore the concept of “bargaining power” does not come into play because all the stakeholders are aligned to the same overarching purpose and hence there are no “agency” issues. In the case of a private sector player procuring grains from farmers, it is natural that the bargaining power is heavily tilted towards the corporate.

c) There has been at best, limited success with a similar model of FPO (farmer producer organizations) in other commodities, with 6000 odd being formed in the last decade. FPOs can perform as expected, only when its management systems, governance and capital structure are strong which needs to be taken up on mission mode. Other external factors like infrastructure development, market and financial accessibility, credit affordability, efficient commodity pricing mechanism etc. need to be managed by government at equitable pace.

d)The payment system in the dairy industry is based on specific ,measurable, unambiguous parameters like fat content and SNF. Much work needs to be done if we are to evolve a similar system of measurable parameters for grains. As per FAO, with over 420 standard test methods, including at least 75 internationally-applicable, it is apparent that there is a large diversity in grain character. This is obvious when considering the range of uses for grain: paddy to produce milled rice, barley for malting, durum wheat for pasta production etc.

e)  Many assessments are commodity-, product- or end user-specific. Of the wide range of properties, bulk density and foreign matter are commonly assessed for most types of grain. In addition, the influence of moisture content on other grain qualities, as well as the simple economic fact, makes it important for quantification. Much research needs to be done on these aspects of quality frameworks.

f) There is possibility to convert the excess milk procured in the flush season into SMP, white butter and ghee, which, in turn can even out supplies during the lean season of summer, whereas storage and transportation of grains is a huge challenge wherein FCI has not been very efficient, adding 40% to the costs over and above MSP, leading to enormous wastage.

g) The natural rhythm of crops like rice, paddy, oilseeds, pulses from tilling, sowing to harvesting cannot be controlled or crashed by machines which is possible to some extent, in factories to level out demand-supply mismatches.

Ramifications on natural resources and Sustainability:

Regulatory changes in Punjab and Haryana to protect groundwater led to a change in cropping patterns and also impacted the region's air pollution load which the nation’s capital faces every year in October/November due to stubble burning since the farmer wants to sow wheat early.

Haryana and Punjab have the highest yields of rice and wheat in South Asia. Irrigation practices for these crops, however, pose a threat to the region’s groundwater levels that are being fast depleted. This, in turn, could endanger the country’s food security, a situation that triggered laws to reduce dependence on groundwater. In 2009, the Punjab Preservation of Subsoil Water Act and the Haryana Preservation of Subsoil Water Act were passed by the respective state governments.

Punjab and Haryana governments introduced groundwater legislations in 2009 to prohibit early rice establishment in the season, in an attempt to reduce groundwater usage for irrigation. The legislation pushed back rice planting from May, when farmers were solely dependent on groundwater reserves, to June, in order to bring cultivation closer to the monsoon season and save precious water.

Consequent to the depleting water table, the evapotranspiration (The water need of a crop consists of transpiration plus evaporation. Therefore, the crop water need is also called "evapotranspiration") for paddy is almost 450-700 mm/total growing period. Are we exporting the precious resource of water given that our rice exports are to tune of USD 6.3 billion, which is unsustainable in the long run for farmers? The condition is worsened by power subsidies which lead to unbridled pumping usage in agriculture.

There is a strong case for repealing the Subsoil Act, without jeopardizing food security, since only 17.4% of India's wheat, and 11.32% of India's rice (2018–19) is grown in Punjab and our stocks of rice and wheat have spiraled up to more than 700 lakh MT in FCI go downs (as in September 2020), giving nutrition to rodents, rather than humans. The State of Food Security and Nutrition in the World, 2020' report states 189.2 million people are undernourished in India and 34.7 per cent of the children aged under five in India are stunted, which requires urgent intervention from policy makers.

Advocating a Systems thinking approach:

A bit of delving into history about Amul would also help us realize that the initiation of the White revolution was to unshackle the dairy farmers from the exploitation of private interests, namely Polson Dairy in Anand which bought milk at very low rates and sold it to Bombay Government in 1946.

In the current imbroglio, we are trying to unshackle? the Government machinery of APMC which served our interests very well in 1960s onwards, to get in private players in the output markets to drive efficiencies across the supply chain and try to increase farm incomes.

Are we trying to turn the wheel back?

Based on these complex inter-relationships, perspectives and boundaries, what is advocated is a “farmer-first” systems approach to look at deregulating input markets, introduce a more mature, sophisticated futures and options trading regime, incentivize crop diversification thus saving humungous costs of healthcare due to pollution, as well as water table depletion, repeal irrelevant laws pertaining to water and power, improve capacity building and governance of FPOs to enhance their bargaining power, without losing sight of ramifications on natural resources, so that the farmer can be nudged towards more climate resilient agriculture and sustainable practices, which serve all sections of society in an equitable way, and we achieve the objective of doubling farmer income within a stipulated time frame. A "band-aid" policy of only allowing unregulated private buyers to buy directly from farmers will not work, without the other enabling factors being introduced in a time bound manner.

It is time we pause and reflect, before politics gets the better of economics! After all, good economics is good politics.