Procurement Perils
Written by
Ajendar Akula
Procurement Channel
Procurement of produce is assessed in terms of price realisation of produce like Minimum Support Price (MSP) and quantity of procurement done by agencies( Markfed, FCI, etc.). MSP's are covered for their prices. Procurement agencies are covered for their effectiveness of procurement (percentage of total produce harvested) in a given year.
Coverage and documentation of procurement have been widely studied in the academic circles. However, it is not talked much in journalistic pieces and anecdotal stories. The processes are different from region to region, agency to agency and crop to crop. So, it doesn't make sense to cover these details for general people(common people).
We, at Subjimandi believe in making production regions accessible with information relaying and process transparency for our buyers. While researching the processes of procurement, we came to know about the various procurement channels that exist in the market.
There is a difference between execution and ideal procurement model. This is not discussed much. To show this difference, we will outline the procurement process of Maize*. (Subjimandi doesn't currently procure Maize).
Procurement Model
Agencies are set up to procure all the produced crop from a farmer. This channel was provided as a feature to the farmers as means of last resort buyer if all others fail. The current model is laid out in the image down below.
The farmer harvests, cures and loads the cargo(Maize) into a tractor. This is transported to the nearest procurement centre. The farmer waits for his/her turn upon reaching the procurement centre. A mandatory humidity test is conducted. For Maize, the moisture content should be less than 14%, else it is not procured. Upon clearing the humidity test, the cargo is weighed and bagged. The total payment is calculated using M.S.P. and procured quantiy which is credited to the farmer.
It sounds simple and looks convenient but the process creates a market where the price realised by the farmer is always less than the MSP price.
The Unseen ( un-factored ) Costs:
Minimum Support Price(MSP) was constituted to help farmers realise a fair price for their harvest. It may be well-intentioned but the implementation is flawed. Farmers ends up bearing other costs that were not factored in MSP.
- At the procurement centre, labourers unload the cargo from the tractor and bag the cargo. For each bag, the farmer has to pay Rs.19 at the time of procurement. This is before getting paid for their cargo.
- Most times the cargo while being bagged ends up having the final bag with less than the bag's full capacity. This bag is given to the labourers. It is considered as payment in kind. The weight in the bag is not counted for procurement.
- Farmers bear the transportation cost to the procurement centre. This is a significant cost.
Incentives Mis-Match
By now, you may be thinking why the farmers don't sell outside. They would if they can get a better price. No one in the market pays a higher price than the MSP.
If the farmer wants to sell without the hassle of procurement centre and its processes, they can do so at a discounted rate. A trader can take care of the whole process. This practice is prevalent across commodities and not just maize. The reasons traders indulge in such practices:
- Unaware of potential buyers to sell
- Taking advantage of the farmers because MSP provides an artificial ceilin
The incentive of every participant in the market is misaligned with the intended aim of getting a fair price for the farmer. Instead, the structure propagates depressed prices to farmers at most times.
Access to the production market remains a problem. This leads to significant costs for the participants of the trade(farmers, buyers). The inefficiencies add unnecessary costs across the supply chain. This ends up depressing the actual cost of the produce at the production regions.
Price realisation is one of the biggest challenges of produce markets. We are working on mitigating this problem by providing access to the production regions. The buyers, at consumption regions, can "Buy graded produce from production regions".
*MSP for Maize is around 1760/- for Quintal.