Why milk scores over other produce in fetching the farmer a better price

Almost 80% of the price an end-consumer pays comes into the hands of the milkman, due to the existence of fewer middlemen and the efficient manner in which it travels from farm to kitchen

As the debate rages on about the three new agricultural laws recently passed by the Parliament, the basic question is whether these will lead to any improvement in the incomes of the farmers, who are the primary and perhaps the most important stakeholders in the entire value chain.

Perhaps a look at some of the farm produce in which the grower gets the lion's share of what the consumer pays will throw up some answers, apart from shedding light on why these food items deliver better returns to the farmer, and why many other crops aren't able to deliver the same.

Several studies show that in crops where the number of intermediaries between the farmers and end-consumer is low, the farmer tends to get a larger share of each rupee that the consumer spends.

The exact opposite happens in the case of commodities that have a higher number of go-betweens.

The milk example

Take the example of milk, one of most valuable farm commodities in India, whose exponential rise in output over the years has made India its largest producer in the world.

Several studies and reports show that almost 80 per cent of the price that an end-consumer pays for milk is transferred to the farmers. Milk, perhaps, is the only commodity in India in which there is an efficient transfer of the consumer price to the producers’ pocket.

A big reason for this could be the presence of a large number of cooperatives in the milk sector, but their share in overall milk production of India has been steadily falling.

This means that when it comes to milk, even corporate entities and private dairies don’t differ much from the standards set by the cooperatives as far as payment to the farmer is concerned.

Milk also benefits from the near absence of middlemen and organised markets in the entire value chain right, from the producer to the consumer. Milk is usually amassed every morning in collection centres, which are akin to village-level aggregation points, and then picked up for processing by the buyer, who uses his own transport system.

If any milkman decides to supply directly to sweetmeat shops, hotels, restaurants or other establishments, he usually contacts them directly or through agents who act as small aggregators for a large number of small farmers.

Milk model versus other farm goods

But this model does not exist in several other commodities.

In fact, a study by the Reserve Bank of India shows that the average share of farmers in the consumers’ rupee is found to be in a range of 28-78 per cent, depending on the type of produce.

Empirical results suggest that factors contributing to greater efficiency in the supply chain can help reduce the mark-up between consumer price and producer price. These factors include better road network, mandi infrastructure, tele-density to improve flow of information, irrigation facilities to reduce supply uncertainties, increase in overall literacy levels in the country, and greater consumer awareness. 

The study also found that in the case of perishables, infrastructure facilities such as tele-density, all-weather roads and the number of available markets to gross cropped area reduce the mark-ups of both the traders and the retailers.

Agricultural variables, rainfall deviation and irrigation intensity influence the traders’ mark-up for perishable commodities but not for non-perishable commodities.

“The possible reason could be the presence of government procurement of staple grains. Additionally, for perishables, increase in per capita income positively influences the mark-ups of both the traders and the retailers. Research has shown that an increase in per capita income drove the demand for high-value commodities, such as fruits, vegetables, meat and dairy products,” the RBI report said.

Also, this mark-up isn’t uniform across commodities, an RBI Survey done between December 2018 and April 2019 shows.

The survey shows that out of nine commodities, while the average share of a farmer in consumer price declined for five, between December 2018 and April 19, it rose for the remaining four during the same period.

The five items in which there was a decline were onion, banana, paddy, groundnut and moong, and the four in which there was an increase were tomato, tur, brinjal and potato (see table).

The average mark-up was the highest in case of perishables and food items that could not be stored for a longer duration, such as tomato and brinjal.

It is here that the role of aggregators, farmer producer companies and organisations will come into play. If they manage to lower this mark-up in perishables through better organisation, procurement and efficient delivery to the end-consumer then only the real worth of the new laws will be realised.

In the case of non-perishable items, there is limited scope for doing this as in several items, government procurement plays a vital role in prices, but in perishable items such as fruits and vegetables, this can be achieved.

The recent divergence between CPI and WPI rates during the Covid lockdown could throw further light on the need for cutting down on middlemen and intermediaries in the perishable value chain.

CPI VS WPI in lockdown

The disruption in the supply chain between the mandis to the end consumer during the Covid-19 lockdown, on the other hand, made food items dearer for the end consumers to some extent, but the price increase did not exactly translate into big gains for the growers, as mandi prices remained subdued, government data showed.

Wholesale Price Index-based inflation in the month of April 2020 was 2.55 per cent, and slipped further to 1.13 in May.

However, the Consumer Price Index for food items during the same period rose from 9.13 per cent to 9.28 per cent, thus widening the gap between the two from 6.58 percentage points in April to 8.15 percentage points in May 2020.

Prior to this, in the months starting from December 2019, both the CPI and WPI were falling until March, but the trend reversed in April and May.

While WPI continued to fall, CPI-food inflation rose, signaling a breakdown in the supply chain from the mandis to the final household. 

Table: Farmers’ average share in consumer prices

Crop	Survey 01*	Survey 02**
Onion	33%	31%
Banana	65%	35%
Paddy	49%	41%
Potato	28%	46%
Groundnut	76%	58%
Moong	63%	58%
Tomato	61%	62%
Tur	60%	65%
Brinjal	74%	88%

Notes

• *Bone in December 2018; **Done in April 2019 
• The survey was done by RBI in mandis across 16 states. It covered some 9,400 respondents, including farmers, traders and retailers in 2019. 
• Source: RBI report on supply chain dynamics and food inflation in India