Factors that govern change in prices of any agricultural commodity in India

A look at the reasons for the sudden yet erratic boom and bust in India’s agricultural sector and what the Indian government is doing about it.

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India is currently the second-largest agricultural land in the world in which more than 60% of rural Indian households earn their livelihood from agricultural production.

We will try to understand the Commodity market in India with reference to agricultural commodities like soybean oil, mentha oil price etc and have a look at the concepts like MSP.

Over time, we have seen a massive rise in inflation which is becoming a major cause of concern for local farmers and agri-tech startups who collectively invest crores of rupees into the agricultural fabric of the country.

This is in direct correlation with the steep price rise in agri-produce of the country. So, where does the problem lie?

Why are the prices of agricultural commodities steadily increasing over time(understanding the commodity market)?

This is mainly because of supply-side inflation that occurs due to scarcity of agricultural commodities, damaged farmlands, and damage during transit which eventually lead to a sudden and sometimes very steep price rise in these agriculture commodities.

Global factors like economic sanctions, weather disruptions and a slowdown in global trade can also induce heavy inflationary pressures on agricultural commodity pricing in India.

Furthermore, many obvious reasons are major factors of price rise in the nation. These are:

  • less space for cultivation due to rising population and product demand,
  • the increased cost of transportation,
  • hoarding of essential commodities by governments that lead to wastage,
  • increase in the demand for protein-enriched food and green vegetables for health purposes (Bennet’s Law),
  • improper management and distribution in the supply chain

All this more and leads to burgeoning prices in agricultural commodities on a year-on-year basis.

What is the effect of bumper produce on prices?

Also known as Cobweb farming, when the prices of a commodity steadily increase during a season of scarcity, more of it is cultivated (in anticipation of a profit) in the current or subsequent season leading to a problem of plenty-produce (bumper crop).

This sudden abundance of agricultural produce sometimes leads to a catastrophic crash in prices and dashes the hopes of farmers to earn a profit.

For e.g. farmers in Kolar, Karnataka had to dump their tomato produce on the roads since the price of the vegetable collapsed to a measly ₹2 per kg in the month of March 2018 whereas it was ₹10 to ₹35 in Jan-Feb 2018.

So basically, the state offered them roughly ₹2,500 MSP this year per quintal as opposed to an MSP of ₹10,000 per quintal last year in order to avoid a burden on the exchequer.

What is a supply chain in agricultural terms?

The supply chain or the AVC (agricultural value chain) is best described in colloquial terms as the series of links a product/produce has to pass through between the farmer and the market to reach the eventual customer.

Supply chains are principally concerned with the smooth and uninterrupted flow of products and information between all the supply chain member organizations.

These organizations undertake various tasks such as procurement of materials, the transformation of materials into finished products, and the distribution of those products to end customers.

Schematic Diagram of an Agricultural Supply Chain: Farmers -> Processors -> Distributors -> Retailers -> End-Consumer

Supply chains tend to add product value (increase in prices due to many hands involved in the process), but since they accelerate the time to market (the speed with

which a product reaches the End-Consumer), they are a highly sought after service since they help to retain customers and meet the daily food consumption demands of the country.

In India, due to various geopolitical, weather, and other supply credit-related issues, sometimes activities to coordinate the supply chain do not run effectively.

This generally leads to a spike/collapse in the market value of the product depending on the current location of the product in the supply chain.

The fragmented agri-supply chain system of India is also fraught with mismanagement due to various sartorial issues like corruption, the absence of scale

economies, the inadequacy of marketing infrastructure, and the inability of small/ marginal farmers to reach bigger markets.

According to reports, the difference in the wholesale and retail prices of agri-produce is a whopping 40%-60% and this margin is way more within large cities as compared to towns.

This is primarily due to inadequate and ill-equipped local markets (mandis), lack of cold storage facilities and no direct marketing by farmers to consumers; the advantage of which is taken by the middle-men in the supply chain who hike the price as the chain progresses.

All this skyrockets the price of vegetables and other commodities in your vicinity especially if you live far away from the origin or source of the product.

READ THIS ALSO – The negative aspect of Indian media and its incessant hunger for TRP!

What is the government doing about agricultural price rise currently?

To counter these negative impacts, the Central and State governments of India proactively introduce policies and incentives to improve farmers’ lives in order to achieve the PM Modi-led NDA government’s aim to double the average farmer’s income by 2022.

The government offers various incentives like subsidies on seeds, manure, fertilizers and farming equipment apart from helping them receive low-interest credit-based loans.

Apart from this, a minimum support price (MSP) is also announced at the start of the sowing season to shield farmers from untoward incidents like drought, hailstorms, flash floods, and price drops due to shifting demands or cobweb farming explained above.

The bulk of farm subsidies is provided in India in the form of fertilizer subsidy which has now been increased by around five times over the last ten years (Rs 12, 595 crores in 2001-02 to Rs 67, 971 crores in 2012-14 and Rs 73,000 crores in 2017-18.

The Economic Survey of 2016-17 had also pitched the idea of providing various Aadhar-linked subsidies and benefits directly to farmers using the ‘JAM’ (Jan Dhan,

Aadhaar, Mobile) model which has been very successful up till now to credit subsidies directly into Jan Dhan accounts linked with the Aadhaar of the farmers.

What is an MSP? Do farmers benefit from it?

Minimum Support Price (MSP) is a sort of a market intervention mechanism developed by the Government of India to insure farmers against the sharp fall in farming prices to help them subvert untoward losses.

The minimum support prices (MSP) are announced by the Government of India at the beginning of every sowing season for a selected list of crops on the basis of the recommendations made by the Commission for Agricultural Costs and Prices (CACP).

In short, MSP is a price fixed for certain agri-commodities by the Government to ensure that farmers do not have to make distress sales, and this also helps them earn sizeable profits.

Moreover, if the market price for the commodity suddenly falls below the announced MSP due to factors like bumper production and/or glut in the market, the government agencies generally purchase the entire quantity offered by the farmers

at the previously announced minimum price. Though this is just on paper, the reality is very different. Farmer suicides are a horrific phenomenon in India due to massive red tape in the procurement mechanism and political propaganda.

Determination of MSP

The CACP takes a comprehensive view of the entire structure of the economy to decide the level of minimum support prices in the country by analyzing the various following factors:-

  • Cost of production of the crop.
  • Changes in input prices of the crop.
  • Input-output price parity in the economy.
  • Trends in market prices for that produce/product.
  • Demand and supply in the economy.
  • Effect on the industrial cost structure.
  • Effect on the cost of living of the farmer.
  • Effect on the general price level of the produce.
  • International price situation in agrarian economies.
  • Parity between prices paid and the prices received by the farmers in previous years.
  • Effect on issue prices and implications for subsidy on the exchequer.

Crops covered under the MSP program:

A total of 26 commodities are currently covered in the MSP campaign by the Government of India which are:

  • Raw Cotton
  • Raw Jute
  • Sugarcane (Fair and remunerative price)
  • Oilseeds (8) – Groundnut, Rapeseed/Mustard, Toria, Soybean, Sunflower seed, Sesame, Safflower seed and Niger seed
  • Copra
  • Pulses (5) – Gram, Arhar/Toor, Moong, Urad, and Lentil
  • Cereals (7) – Paddy, Wheat, Barley, Jowar, Bajra, Maize, and Ragi
  • De-husked Coconut
  • Virginia flu cured (VFC) tobacco

What are the problems faced by Indian farmers due to the above factors?

As per the NITI Aayog and the National Sample Survey Office (NSSO), the average monthly income of a farm household in India was Rs. 6,426 per month for the agricultural year July 2012 to June 2013.

The highest-earning farmers were from Punjab with Rs 18,059 per month and the lowest-earning farmers were from Bihar who earned just Rs 3,558 per month.

So basically, the average farming household income from the farm as well as non-farm sources in India roughly stands at Rs. 77,112 per annum. In 2018, according to the Dalwai committee report, it is estimated at Rs 77976 per year.

That is way too low to run a household or a business! No wonder it forces many farmers into agrarian distress and makes them commit suicide when they have nowhere left to go!

According to the Agriculture Census 2010-11, 67.10% of India’s farmers are marginal farmers (who own below 1 h.a. land) followed by small farmers (who own about 1-2 h.a. land) at 17.91%.

Since Indian agriculture is largely dominated by marginal farmers, government support and raising land productivity is the only option left to help farmers survive.

This is why the ‘doubling farmers’ income by 2022 agenda is on the central government’s mind currently.

How does the government hope to tackle this in the future?

  • The Government at the Centre is implementing a number of schemes which aim to provide financial support to the farmers (small, marginal and medium) as well as to help them receive agricultural credit at subsidized rates so that they can procure a supply of seeds, ensure crops, procure agriculture machinery, nutrients, chemicals, and eventually earn due profits from all this investment and hard work.
  • About 650 Krishi Vigyan Kendras (KVKs) spread across the country managed by the Indian Council of Agricultural Research (ICAR) provide the farmers with institutional support, technological support and crop insurance at low rates to help them sow suitable crops on time.
  • Prime Minister Narendra Modi’s ambitious plan to double each farmer’s income by 2022 has been set to coincide with the year India celebrates its 75 years of Independence. The goal is to adopt cues from Israeli agriculture and irrigation technologies (the Israel Model which uses Micro or Drip Irrigation via pipes and emitters to keep lands moist and fertile) to raise agricultural productivity via water management, reuse of wastewater, and help increase farm productivity which would automatically increase the farmers’ income. The project is known as the India-Israel Agriculture Project.
  • The “More crop per drop” and “Hark khet ko pani” (water for every farm) idea will take root from subsidy being provided to encourage farmers for adopting this drip irrigation method through bodies like the National Mission on Micro Irrigation (NMMI).

In summation, by improving technology, using solar lights, using GMO seeds, increased afforestation to reduce soil erosion (Narmada Yatra by Government of Madhya Pradesh) are many missions that the government has laid out as a route map to double the farmers’ income by 2022. But, is it enough to remove the overall inefficiencies in the agricultural supply chain?

What are your views on this? Please comment below.


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