Linking small farmers to market

Praveen, K.V
Scientist, Division of Agricultural Economics

Introduction
Rapid transformation in terms of increasing concentration in processing, trading, marketing
and retailing is being observed in the agrifood system all over the world. Traditionally the
farmers were unaware in advance when, to whom and at what price they are going to sell their
produce. This scenario has changed with the greater coordination between farmers, processers,
retailers and other players in the supply chain. Now the farmers are producing to the
requirements of the market rather than relying on the markets to absorb whatever they produce.
The diversification in production by the farmers towards high value commodities due to the
changing food habits of the buyers, effected by their increasing income, is in line with this.
They have also started responding to the demands of the buyers in terms of quality and food
standards. The increase in demand for high value, high quality, more safe and convenience
food however offer both opportunities and threats to the farming community. It offers great
opportunities for the efficient and resource rich large farmers, whereas for the resource poor
small farmers (both small and marginal), it offers considerable threats.

Indian agriculture is the home of small farmers. In the year 2010-11, they contributed 84.9 per
cent to the total number of operational holdings and 44.3 per cent to the total area of operational
holdings (Table 1). The all India average size of the operational holdings in India is decreasing
continuously and is 1.16 ha in 2010-11 (Table 2). The performance of small farmers is thus
important for the agricultural growth, food and livelihood security in India. They also play
important role in poverty reduction and development of the economy. On the other hand, the
access to inputs and markets is the major challenge faced by them. Under these circumstances,
far more intervention and support by the government, than mere market oriented reforms, are
required to provide the small farmers a level playing field.

Table 1. Share of small and marginal farmers in number and area of total operational holdings in India (per cent)

Number (%) Area (%)

Category 2000 2005 2010 2000 2005 2010
Marginal 62.9 64.8 67 18.7 20.2 22.2
Small 18.9 18.5 17.9 20.2 20.9 22.1
Semi-Medium 11.7 10.9 10 24 23.9 23.6
Medium 5.5 4.9 4.3 24 23.1 21.2
Large 1 0.8 0.7 13.2 11.8 10.9

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 Total 100 100 100 100 100 100
Source: Various issues of agricultural census

Table 2. Category wise size of operational holdings in India (ha)

Average size of operational holdings (ha)

Category 2000 2005 2010
Marginal 0.4 0.38 0.38
Small 1.42 1.38 1.42
Semi-Medium 2.72 2.68 2.71
Medium 5.81 5.74 5.76
Large 17.12 17.08 17.37
Total 1.33 1.23 1.16
Source: Various issues of agricultural census

The small farmers must have access to land, water, inputs, credit, technology and markets.
Linking small farmers of India to markets (both input and output market) is thus a topic that
assumes significance by itself against this background. There is now an increasing
understanding that production support activities of small farmers must be linked to market
demand and that production activities must be looked at within the context of the whole supply
chain and the linkages, or business relations, within that chain. There are strong potential
benefits of closer links between farmers and markets. The economic, social, financial,
organizational and environmental circumstances and on the enabling environment that
government is able to provide will finally decide the magnitude of benefits.

Status of small farmers

Here we look into the status of small farmers in comparison with the other categories in terms
of access to various inputs and services. The access to irrigation has increased for all categories
of farmers. It is the highest for marginal farmers followed by small farmers. Table 3 indicates
that the percentage of area under irrigation for small farmers increased from 40 in 1980-81 to
56 in 2000-01. On the other hand, for large farmers it rose from 16 to 42 per cent during the
same period. It may, however, be noted that large farmers capitalize on cheaper sources like
canals while small farmers have to rent water. About 40 per cent of the irrigated are for large
farmers was from canals while it was less than 25 per cent in the case of small and marginal
farmers (NCEUS, 2008).

Table 3. Extent of area under irrigation in different farm size classes (per cent)

Year Marginal Small Semi- medium Medium Large All Categories

1980-81 40 33 29 24 16 27
1990-91 44 36 33 30 22 33
1995-96 48 40 38 37 33 39

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 2000-01 51 39 37 36 31 39
2005-06 56 47 46 47 42 48
Source: Various issues of agricultural census

The fertilizer consumption per hectare of gross cropped area is inversely related to farm size
for both irrigated and unirrigated areas (Table 4). It increased from marginal farmers in irrigated
areas from 153.12 kg. in 1996-97 to 200.10 kg. in 2005-06. The growth in the per ha fertilizer
consumption is faster in the case of small and marginal farmers when compared to the larger
ones.

Table 4. Fertilizer consumption per ha of gross cropped area according to farm size classes (kg)

Year Marginal Small Semi- medium Medium Large All Categories

Total Area
1996-97 103.85 82.60 75.31 68.13 51.15 77.11
2001-02 126.17 100.63 88.77 75.83 55.92 92.60
2005-06 139.74 128.33 108.34 95.13 67.64 112.76
Irrigated Area
1996-97 153.12 129.26 123.42 119.77 118.65 128.84
2001-02 175.34 151.43 138.51 125.57 117.86 145.68
2005-06 200.10 192.23 162.90 149.15 124.15 171.69
Unirrigated Area
1996-97 51.13 43.56 38.26 30.10 16.06 35.78
2001-02 71.45 61.58 52.52 39.64 27.27 50.85
2005-06 78.28 68.35 60.55 46.02 25.06 13.23
Source: Various issues of agricultural census

Similarly, the percentage of area under high yielding varieties (HYV) is also inversely related
to farm size (Table 5). In the irrigated areas, the coverage of are under HYV was 91%, 89% and
81% respectively in marginal, small and large farmers in 2005-06. In the case of unirrigated
areas, the coverage was above 50% for marginal, small and semi-medium but it was only 31%
for large farmers in 2001-02.

Table 5. Share of area under High Yielding Varieties according to farm size class (per cent)

Year Marginal Small Semi- medium Medium Large All Categories

Total Area
1996-97 59 55 54 53 42 54
2001-02 72 68 65 61 47 64
2005-06 75 70 67 64 52 67
Irrigated Area
1996-97 80 76 76 76 75 77
2001-02 89 86 85 82 78 85
2005-06 91 89 86 83 81 87
Unirrigated Area

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 1996-97 37 37 38 36 25 35
2001-02 52 54 52 46 30 48
2005-06 58 52 50 46 31 49
Source: Various issues of agricultural census

Table 6. Indebtedness in different farm size classes 2012

Farm size class Estimated % of Farmer Estimated % of Indebted Prevalence Rate

(ha) Number of Households Number of Farmer of Indebtedness
Farmer Indebted Farmer Households (%)
Household Household (lakh)
(lakh)
Marginal
Upto 0.01 12.59 1.40 5.71 1.3 45.3
0.01 – 0.40 292.87 32.80 130.11 30.0 44.4
0.41- 1.00 283.61 31.70 129.21 29.8 45.6
Small 160.60 18.50 81.92 18.8 51.0
Semi-medium 93.50 10.50 54.41 12.5 58.2
Medium 42.58 4.80 27.72 6.4 65.1
Large 7.75 0.80 5.15 1.2 66.4
Total 893.50 100.00 432.24 100.0 48.6
Source: Ministry of Agriculture, GoI 2012

From Table 6, it is clear that the per cent of indebted farmer households are more in the small
and marginal farmer category.

Issues and Challenges for small farmers

some of the general issues that confront marginal-small farmers are imperfect markets for
inputs/product leading to smaller value realizations; absence of access to credit markets or
imperfect credit markets leading to sub-optimal investment decisions or input applications;
poor human resource base; smaller access to suitable extension services restricting suitable
decisions regarding cultivation practices and technological know-how; poorer access to ‘public
goods’ such as public irrigation, command area development, electricity grids; greater negative
externalities from poor quality land and water management, etc.

The proportion of socially disadvantaged groups such as Scheduled Castes (SCs) and
Scheduled Tribes (STs) and the number of women farmers is higher among marginal and small
farmers than that of medium and large farmers. Despite their importance they are continually
denied their property rights and access to productive resources. The low level of formal
education and the lack of skills among the small farmers add to their disadvantages.

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Market linkages
For small and marginal farmers, marketing of their products is main problem apart from credit
and extension. In recent years, there has been some form of contract arrangements in several
agricultural crops such as tomatoes, potatoes, chillies, gherkin, baby corn, rose, onions, cotton,
wheat, basmati rice, groundnut, flowers, and medicinal plants. There is a silent revolution in
institutions regarding non-cereal foods. New production –market linkages in the food supply
chain are: spot or open market transactions, agricultural co-operatives and contract farming
(Joshi and Gulati, 2003).

Fluctuations in the output price is one of the most important problem for the small farmers.
There is a big gap between producer prices and consumer prices. There are different models
for collective marketing by the small and marginal farmers to realise better access to input and
output market, and share in the consumer rupee. These are: self-help group model, co-operative
model, small producer co-operatives and contract farming. Apni Mandi in Punjab, Rytu Bazars
in Andhra Pradesh, dairy co-operatives are some of the successful cases in marketing. The real
challenge lies in organising the small and marginal farmers for marketing and linking them to
high value agriculture. Thus, group approach is needed for getting benefits from marketing.
Small farmers can also benefit from the emerging super markets and value chains if linked
effectively.

According to the ways in which the farmers link to the buyers, market linkages can be classified
into the following categories:

 Farmer to domestic trader

 Farmer to retailer
 Linkages through cooperatives
 Farmer to agroprocessor
 Farmer to exporter
 Contract farming

These categories however do not represent the whole range of market opportunities available
to farmers. They are not always mutually exclusive also. Exporters can also be agroprocessors.
Agroprocessors can also run contract farming operations. Retailers may buy from farmers
through traders. What is characteristic of almost all of the linkages described, however, is that
they form clearly identified chains and often involve close relations between the participants.

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Farmer to domestic trader
Traditionally the traders have interacted with farmers on individual basis, either buying from
them at local markets or at the farm gate. Purchases at local markets can be efficient if they
enable the trader to buy sufficient quantity to achieve economies of scale with subsequent
transport, which is usually the main marketing cost. The marketing costs can be reduced if
farmers can work together to assemble all their products at one location, for purchase by one
or more traders. However, an external catalyst is required to develop such an arrangement. The
most logical catalysts for such developments would appear to be government extension staff.

Farmer to retailer
Large supermarket chains will not usually want to work with individual farmers on a long-term
basis. The farmers involved in such linkages often face difficulties in meeting quality
specifications. The farmers also may have to grow new varieties, and change production
practices to influence size and moisture content, stagger planting dates to ensure year-round
availability. The technical and financial assistance from the part of the company is inevitable
in such a model.

Linkages through cooperatives

The formation of cooperatives by the small farmers enable them to access both the input and
output markets in a profitable manner. The cooperative model has been successful in many
parts of the country but the major problem that they face is the lack of managerial skills. This
combined with the tendency to expand the activities beyond their ability also pose a major
threat.

Farmer to agroprocessor
The farmers growing crops that can be produced year round or stored for a considerable period
of time can engage in linkages with agroprocessors to ensure market for their produce.

Farmer to exporter
To link farmers to exporters, identification of the potential markets for the produce of the small
farmers is necessary and this can be done with the involvement of some external catalyst.
Exports to more sophisticated markets can involve farmers in considerable complexity and risk.
The high quality, safety and logistical standards demanded by importers can be expensive and
difficult, although not impossible, to achieve by smallholders. Linkages developed by
commercial firms would thus appear essential for ongoing success in high-value markets, with
companies providing technical training and on-farm monitoring.

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Table 7. Types of farmer-market linkages

Type of linkage Collective activity Advantages for farmers Disadvantages for farmers
Direct between Farmers usually act on individual Trust ensure long term sustainability May need to accept short-term deferred payments
farmers and basis with traders Formal farmer organisations not usually Limited access to better markets
traders May work together informally to needed
bulk-up produce to reduce costs
and attract larger traders
Direct between May require formal group Reliable market at agreed price Must meet variety, quality and safety specifications
farmers and structure Must be able to supply agreed quantities at all times
retailers
Linkages Farmers may link directly with Inputs, technical assistance etc. may be Cooperatives often depend on subsidies and external
through the cooperatives or through supplied on credit managerial assistance. Commercial activities can
cooperatives groups Crop marketing, packaging, grading and collapse when subsidies and assistance run out
storage and sometimes processing
organised by cooperatives
Potential for farmers to sell large volumes
Direct between Farmer groups can bulk-up May provide secure market at agreed price There may be an inadequate market for the
farmers and produce for collection by Inputs, technical assistance, etc. may be processed products, thus jeopardizing sustainability
agroprocessors processor supplied on credit Must meet variety, quality and safety specifications
Groups can facilitate supply of Processor often provides transport Open market price may be higher than that agreed
inputs and provision of technical Potential for farmers to sell larger volumes with processor
assistance
Farmer to Often involves grouping of Potential high returns if quality can be Export markets are inherently risky
exporter farmers achieved Compliance with standards can be problematic even
External technical assistance may Inputs, technical assistance, etc may be with technical assistance
be required supplied on credit
Exporter often provides transport and
packaging
Formal large- Company may prefer to group Inputs, technical assistance, etc. may be Companies often require external agency (bank) to
scale contract farmers, formally or informally, supplied on credit finance credit provision
farming for inputs and output marketing Crop marketing organized by company Frequent mistrust between farmers and companies
and extension and their employees
Contracted price lower than market price may lead
to sales outside of the contract

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Contract farming
The companies involve in contracts with the small farmers since it helps them to overcome
land constraints that would be present if they attempted to produce everything themselves.
Through the contracts they get the produce in required quantity and quality. However the
process of developing a replicable model which helps to supply inputs to the small farmers in
proper way and collect the specified quality product in the required quantity is complicated.
Table 8. Institutional innovations in agricultural marketing in India

Marketing Features
Institutions
Rythu  First started in Andhra Pradesh in the direction of empowering the farmers to participate
Bazaar in effectively in the open market to get a remunerative price for their produce
Andhra  To avoid the exploitation of both the farmers and the consumers by the middlemen by creating
Pradesh a positive atmosphere of direct interface between them
Apni Mandi  First started in Punjab in the direction of ensuring direct contact of the producer-farmers and
consumers and thereby enhancing the distributional efficiency of the marketing system. This
system does away with the middlemen
 The price spread is considerably low. Working satisfactorily in the case of fruits and vegetables
Farmers  Farmers markets initiated in Tamil Nadu in Nov, 1999 to eliminate middlemen and traders from
markets the marketing of vegetables in the farmers markets, and to establish direct contacts between
farmers and consumers
Hardaspar  Hadaspar vegetable market is a model market for direct marketing of vegetables in Pune city
Vegetable  This is one of the ideal markets in the country for marketing of vegetables
Market  The market has modern weighing machines
 Linking farmers to vegetable markets
Shetkari  Shetkari bazaars were established in the Maharashtra state for marketing of fruits and vegetables
Bazar  It will eliminate middlemen, links producers and consumers directly, reduce price spread, and
enhance producer share’s in consumer rupee
 Thus these markets increase the farm income, wellbeing of the farmers
Krushak  Established in the state of Orissa in 2000-01
Bazars  The purpose is to empower farmer-producer to compete effectively in the open market to get a
remunerative price and ensure products at affordable prices to the consumer
Cooperative  The need for cooperative marketing arose due to defects in the private and open marketing
Marketing system
Society  A cooperative marketing society can eliminate some or all of the intermediaries
 Few successful cooperative marketing societies for fruits and vegetables. eg. Maha-grape-
cooperative federation marketing, Maharashtra, Cooperative marketing. pomegranate, Co-
operatives marketing banana in Jalgaon district, Vegetables co-operatives in Thane District,
Milk co-operatives in Maharashtra, HOPCOMS, Bangalore and Gujarat and Co-operative cotton
marketing society
Contract  Essentially is an agreement between farmer-producers and the agribusiness firms to produce
Farming/Con certain pre-agreed quantity and quality of the produce a particular price and time
tract  This is an important initiative for reducing transaction costs by establishing farmer-processer
Marketing linkages
 Successful contract farming includes Organic dyes- Marigold farmers and extraction units in
Coimbatore, Pepsi Company and farmers of Punjab and Rajasthan for tomato growing
Safal Market  NDDB started a fruits and vegetable unit of SAFAL at Delhi was one of the first fruit and
vegetable retail chain
 NDDB has set up an alternate system of whole sale markets in Bangalore as a pilot project
 This market is a move to introduce a transparent and efficient platform for sale and purchase
fruits and vegetables by connecting growers through Grower’s associations
Forward  Forward and Futures markets have been identified as important tools of price stabilization and
and risk management

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Future  Extension of forward and futures markets to all major agro commodities has, therefore, assumed
Markets great importance
 Commodity futures markets in the country are regulated through Forward Contracts (Regulation)
Act, 1952
Commodity  Commodity exchanges for futures trading narrows the marketing, storage and processing
Exchanges margins, there by benefiting both growers and consumers.
 NAFED started National Multi-Commodity Exchange of India Ltd. on 26th November, 2002,
for cash crops, food grains, plantations, spices, oilseeds, metals and bullion among others.
 National Commodity and Derivate Exchange of India Ltd. was established in Dec, 2003 at
Mumbai with a similar purpose.
Food retail  Food retail markets in India during 1990s and early 2000 opened up the availability of food
super products dramatically. They key functions are
markets • Higher standards
• Lower prices
Source: Dastagiri MB, Immanuelraj TK (2012)

Factors affecting the success of linkages

The linking organisations need to be aware of the problems that the farmers may face in moving
from ad hoc sales to market oriented one. While organization of farmers into groups is not
always essential there are strong advantages to group activities. The farmers must aided in
developing strong contract negotiation skills.

The first step with all linkage development is to identify the type of linkage required and the
level of external support that may be necessary. It is important to balance the level of support
offered with the amount of assistance really required. The involvement of an extension worker
will help the farmers to improve linkages with traders by bulking up produce. At a slightly
more complex level, linkages with an urban retailer, or processor may be something that a
farmer association could develop. More sophisticated linkages may require support from
several agencies and many activities do involve a multiplicity of facilitators. Agencies for
providing technical inputs, carrying out market studies, microfinance institutions and
government agencies will certainly play a role. Several factors needs to be considered before
initiating a linkage and promoting a particular product based on market demand. These are:
farmer location, education levels, social structure, available infrastructure, farm size,
agronomic suitability of the land, the likelihood of pests and disease, the land tenure situation,
farmers’ assets, capacity to establish new enterprises, access to finance and capacity to use that
finance profitably, technological requirements and access to extension advice. It also needs to
take into account the capacity of farmers to adapt to new systems.

The development of farmer groups may help to a great extend in accessing inputs more easily,
improving product quality, increasing quantity and achieving economies of scale, and
increasing their bargaining power. Market-oriented collective action has potential when it

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overcomes the high transaction costs that would be faced by farmers acting individually. While
awareness of the potential benefits of such collective action often exists among farmers, this
awareness is often not sufficient to overcome their suspicions about working with each other.
This problem needs to be addressed and the leadership and management skills must be imparted
to farmers. The farmer groups must also be given a business orientation and they must be able
to carry out financial transactions. The group must be as homogenous as possible and all the
members must get the benefits equally. The small groups seem to work better than the larger
ones and thus the greatest challenge is in determination of group size. The group size must be
such that is big enough to exploit economies of scale and market potential without causing
conflicts and where the benefits achieved by individual farmers outweigh the costs of
compliance with collective rules and norms.

Case of contract farming

An enquiry into the economics of some of the successful contract farming ventures in India is
attempted here. Nestle India Limited – a multinational firm – is undertaking contract farming
to source milk from small-scale producers. To reduce the cost of contracting with large number
of small farmers, Nestle follows an intermediate model of contract farming where the
agreement is done with a local villager, called as an ‘agent’. The agent collects milk from small-
scale producers, and also facilitates distribution of inputs and delivery of services.The Mother
Dairy Fruits and Vegetables Limited (MDFVL) - a wholly owned subsidiary of the public
sector parastatal, National Dairy Development Board (NDDB) has undertaken contract farming
in vegetables. To reduce the high transaction costs in procuring from scattered farmers, it
promoted the growers ‘associations. The firm provides technical guidance, services and inputs
to association members to ensure that farmers follow best production and marketing practices.
The model of contract farming by Venkateshwara Hatecheries Limited in broilers in India is a
replica of what prevails in most other countries. Firms provide day-old chicks, feed, vaccines
and services to farmers at no cost to them, and lift entire output by paying fixed growing
charges (per kilogram of body weight of bird) in lieu of their contribution to cost (labor, water
and electricity charges, litter and rent for poultry shed and equipment). Farmers are thus insured
against market risks.

There is a striking difference in the profits of contract and non-contract farmers particularly in
the case of milk and spinach. Contract farmers realize more profits as compared to non-contract
farmers; the difference is more than double in milk, and 78 percent in spinach (Table 9).

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Table 9. Economics of contract versus non contract production (Rs per ton)

Milk Spinach Broilers

Item Con- Non- % Con- Non- % Con- Non- %
tract contract differe tract contract difference tract contract differenc
nce e
Yield* 11.9 11.4 4.4 8.6 8.3 4.0 1.78 1.79 -0.6
Production 5586 5782 -2.5 1485 1630 -8.9 - - -
cost
Marketing 100 1442 -93.1 35 437 -92.0 38 90 -57.8
and
transaction
costs
Total cost 5686 7170 -20.7 1520 2067 -26.5 - - -
Price 9337 8991 3.8 3311 3074 7.7 - - -
Net 3651 1821 100.5 1791 1007 77.9 2255 2003 12.6
revenue
* milk: 4 % fat corrected in kg per in-milk animal; spinach: tonnes/ha; broilers: body weight in kg/bird
Source: Birthal et al. 2005

Case of co-operative marketing

A comparison of the two major marketing channels of banana in Karnataka is attempted here.
The first one with the only involvement of a farmers’ cooperative society (HOPCOMS)
between farmers and consumers and the other one with the involvement of wholesalers and
retailers. In the co-operative channel, HOPCOMS procures banana (var. Neypoovan) from
farmers through its collecting centres located at the producing areas and disposes the same to
the consumers through its retail outlets located in major cities in Karnataka.

Table 10. Cost of marketing of banana through wholesale and co-operative channel (Rs per kg)

Particulars Wholesale channel Co-operative channel

Farmers 3.64 0.57

Wholesalers 0.21 0.73
Retailers 0.51 0.00
Sub-total 4.36 1.30
Share in the consumers’ price (%) 27.53 10.0
Source: Murthy et al. 2007

Table 11. Economics of co-operative versus wholesale marketing (Rs per kg)

Particulars Wholesale Co-operative

Farmers’ net price 8.36 8.68
Wholesalers’ margin 1.79 3.22
Retailers’ margin 1.33 -
Marketing efficiency 1.12 2.01
Price-spread (Rs per kg) 7.48 4.32
Consumers’ price (Rs per kg) 15.84 13.00

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Source: Murthy et al. 2007

Case of Rural market/Apni mandi/Direct marketing

Direct marketing by farmers to consumers in urban areas increases their share in consumer’s
rupee. It shortens marketing channels, eliminates middleman and brings producer-seller in
direct transaction with consumers. Some experiences of direct marketing in India have been
very successful. The Punjab Govt. experimented with a market called ‘Apni Mandi’. In Apni
Mandi, commodities are reported to be sold at rates 20-30% less than the retail markets rates
and 30-50% more than prevailing wholesale rates. The marketing efficiency of vegetables
under apni mandis and traditional marketing channel involving wholesaler and retailer are
compared in the Table 12.

Table 12. Marketing efficiency of vegetables under traditional marketing and apni mandis (Rs per qtl.)

Potato Tomato
Particulars Traditional Apni mandi Traditional Apni mandi
marketing marketing
Consumer’s 750.00 700.00 1200.00 1100.00
purchase price
Producer’s sale 500.00 700.00 600.00 1100.00
price
Total marketing 109.69 52.17 151.69 76.27
costs
Total margins of 140.31 - 448.31 -
intermediaries
Net price received 434.22 647.83 553.60 1023.73
by farmer
Marketing 1.74 12.42 0.92 13.42
efficiency
Source: NCAP 2010

Conclusion
An attempt is made here to get an insight on linking small farmers to markets in India. Despite
the domination of small farmers in Indian agriculture in terms of number, they are not having
access to cheaper sources of inputs. In the marketing of the final produce, the price that they
receive at the farm gate is considerably lower than the retail price. The new institutional
innovations in the marketing have been initiated in India in the last decade and some of the
cases show that they are far friendlier to the farmers when compared to the traditional
marketing forms. The evolving innovative marketing concepts like direct marketing, co-
operative marketing, contract farming etc are however not free of hitches. Proper policy

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intervention from the government, considering the farmers and the private players capable of
engaging in such innovative channels, is the need of the hour.

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