It is beyond doubt that agricultural farming is an inherently risky business, primarily due to two factors: high dependency on weather conditions and volatile crop prices driven by national and international dynamics.
In Pakistan, crop price risk is further aggravated by a poor agricultural marketing system characterised by farmers’ weak market power (pricing power/bargaining power) and multiple layers of intermediaries who exploit farmers as well as buyers/consumers.
Whatever the structure of grain markets and crop prices, the blatant reality is that farmers have no control over the prices of their produce in Pakistan. Moreover, farmers’ weak financial liquidity compels them to sell their produce immediately after harvest to settle their outstanding loans and to buy agriculture inputs for the next crop. The result has been an oversupply and a drastic decrease in market prices.
Several countries worldwide have made structural changes in their crop-marketing system as an integral part of their holistic agriculture development strategy. Such changes have considerably enhanced their farmers’ market power.
By charging an 8pc commission on the total produce value, arthi effectively pockets almost one-fourth of the farmer’s profit
By gleaning lessons from their experiences and success stories, and taking into account the peculiar dynamics of Pakistan, farmers’ market power can be enhanced through a three-pronged strategy: reduce farmers’ crop price risk, increase farmers’ financial liquidity, and decrease middleman (intermediary/arthi) role and exploitation.
First, to reduce price risk, many countries use a minimum support price (MSP) mechanism that ensures a price level deemed essential for a particular crop’s financial viability.
India, for instance, announced MSP for 23 crops to protect farmers, and the government is supposed to procure the crop if market prices fall below MSP. Unfortunately, in Pakistan, only three crops (wheat, sugarcane, and cotton) come under the realm of MSP.
Given Pakistan’s massive current account deficit and trade deficit, the government should, as a policy matter, announce MSP for at least those crops where Pakistan has a comparative advantage along with sizable local production, yet we still have to import them worth billions of rupees every year. Garlic, onion, oilseeds, chickpeas, and mung beans are some notable examples whose production can be increased using MSP.
Another effective measure to reduce price risk is contract farming. A few prominent success stories of contract farming in Pakistan are those of Punjab Seed Corporation, Rafhan Maize Products Co, PepsiCo, and several sugar mills that increased the production of wheat seed, maise, potato, and sugarcane, respectively.
Under contract farming, the private sector provides farmers with high-yielding seeds, agriculture inputs, and credit, along with buy-back arrangements at pre-determined prices. Contract farming accelerated technology transfer and expedited the injection of capital into the cash-strapped agriculture sector of Pakistan.
However, contract enforcement is a major challenge in expanding contract farming in Pakistan due to lengthy civil court proceedings. To enhance the confidence of both private sector and farmers, special legal provisions are required for time-bound, speedy decisions of such contracts.
Second, farmers’ financial liquidity depends on their access to formal and informal agricultural credit. Traditionally, arthi (commission agent) has been the largest and most preferred source for the provision of informal in-kind or cash credit to farmers, as such transactions offer flexible terms without any collateral requirements.
Arthi’s role as a credit provider is gradually weakening because dozens of commercial banks and microfinance banks/institutions are currently advancing loans to farmers. They have tried to simplify procedural and collateral requirements; however, a lot needs to be done to ease collateral requirements, using some out-of-the-box solutions.
In order to solve collateral issues, several developed and underdeveloped countries have successfully implemented a warehouse receipt system (WHR), also known as inventory credit. It enables farmers to keep their crops in authorised/licenced warehouses and uses them as collateral to get loans from banks. In these countries, the WHR has successfully improved farmers’ liquidity and, in turn, smoothed out crop oversupply and market prices.
Pakistan is also on its way to introducing WHR and has already achieved several milestones. But to make it successful on a large scale, political commitment and active participation of the private sector are required. A high policy interest rate of 21 per cent is another challenge that may hamper its successful implementation in the country.
Third, several studies and reports have highlighted the exploitation of farmers at the hands of arthi in our grain markets/fruit and vegetable markets. During the last year, several markets have increased the commission rates up to 3-5pc for grains and 5-8pc for fruits and vegetables. These rates are even higher for farmers who take short-term advances/loans from arthi.
While facing the high risks of crop failure and market crash, a farmer, on average, hardly earns a 30-50pc profit margin from a crop. Ironically, by charging an 8pc commission on the total produce value, arthi effectively pockets almost one-fourth of the farmer’s profit, just in lieu of one-day service.
There was no justification for the last increase in commission rates, as the quantum of arthi’s commission has already grown considerably over the last two years, owing to significant price increases of agricultural commodities.
Another form of exploitation emerging in several grain markets is delayed payment offered to paddy (rice) and maise farmers. Farmers used to sell their produce in the grain markets because they could always get quick, hard cash. But now, in such markets, payments to farmers are made after several weeks. This implies that arthi and processors (mill owners) now use farmers’ money to meet their working capital needs.
Unfortunately, due to the peculiar socio-cultural environment, cooperatives that can provide collective bargaining power to farmers have not succeeded in Pakistan. As a result, farmers look to the government to protect them from such exploitation by taking measures on at least two fronts: improving government regulatory control over markets and promoting information and communication technology-based solutions to link individual and institutional buyers and sellers directly, eliminating most, if not all, intermediaries.
In conclusion, farmers’ protests demanding a reduction in the prices of agriculture inputs is a common phenomenon in Pakistan, where the government can no longer provide subsidies to the agriculture sector due to the mounting fiscal deficit and intense pressure from international financial institutions.
Nonetheless, implicit financial support can be provided to the agriculture sector by enhancing farmers’ market power, which would certainly increase farmers’ earnings and enable them to remain competitive on the world stage.
Khalid Wattoo is a farmer and a consultant in the social sector.
Rahema Hasan is a political economist and graduate of the London School of Economics and Political Science
Published in Dawn, The Business and Finance Weekly, May 5th, 2023
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