Farmers’ profits

In interviews with researchers, government officials and other experts, various different opinions were put forward about the effect that the purchasing activities of modern retailers had on farmers’ profits. Experts from the Confederation of Indian Industry (CII), the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), the International Food Policy Research Institute (IFPRI), the National Bank for Agriculture and Rural Development (NABARD) and the Ministry of Agriculture of Andhra Pradesh argued that farmers who sold their goods in modern value chains had higher profits. But the Confederation of All Indian Traders (CAIT) voiced the opinion that a complete control of the value chain by modern retailers would lead to lower prices for farmers, because the supermarkets could dictate the prices.

In Andhra Pradesh many supermarkets still source from traditional value chains − such as mandis – at least partially. In this case, our research did not reveal any significant effect on farmers’ profits. However, data showed that, if supermarkets procured directly from farmers, the said farmers supplying tomatoes to modern retailers would make 22 per cent higher profits on average than farmers in traditional value chains.

According to the literature, modern retail chains tend to procure produce straight from farmers, often by means of contract farming, instead of buying from wholesale markets. Yet, according to interviews, contract farming has not been successful for fresh fruit and vegetables in India.

One reason is because of difficulties in contract enforcement due to the weak legal framework in India. Experts from Global Agrisystems told us that farmers are generally receptive to contract farming because it would reduce their marketing risks. However, in practice, farmers could simply walk away from a contract if market prices were higher during harvest.

Domestic supermarket managers indicated that contract farming was not a suitable instrument in an environment with strong price swings, such as the fresh fruit and vegetable market in India. In addition, setting up an individual contract with numerous small farmers entailed high transaction costs that supermarkets were not keen on shouldering. Nevertheless the non-government organisation FDI Watch is convinced that farmers would still have lower profits even if they entered into contract farming agreements with supermarket chains. The actual effect of contract farming on farmers’

profits could not be measured as part of this research because none of the farmers interviewed had engaged in such an agreement.

The only method of direct sourcing that was employed by supermarket chains in Andhra Pradesh was the use of collection centres in rural areas (see Section 6 on efficiency). But as the previous discussion shows, the catchment area tends to be small, with only 9.3 km average distance between farms and supermarket collection centres. By comparison, the average distance between farms and the mandis is much larger, but this results in 2.4 times more transportation costs. The reason for the small size of the catchment area of supermarket collection centres is that, due to their limited number of outlets, supermarkets require only small quantities of fresh fruit and vegetables. Particularly farmers growing large quantities of tomatoes therefore answered that they did not supply directly to supermarkets. Farmers with large crops could potentially still supply indirectly to supermarkets via the mandis; in this case however, we did not find any effect on their profits.

Farmers supplying supermarkets also have significantly lower total land holdings compared to the sample average. They responded that they preferred supermarket collection centres because the centres were close to their farms and they received a higher price for their produce there. The collection centre managers we interviewed replied that modern retailers took mandi prices as a benchmark for their own purchasing price. Nevertheless, on average, farmers received 14 per cent more per kilogramme of tomatoes if they supplied to supermarket collection centres, compared to the price at the mandi.

According to empirical data, an average of 9.24 per cent commission is charged on average at the mandis, whereas there is no commission to be paid for supplying to the supermarket collection centres or the rythu bazaars.

When adding the commission, the average price at the collection centre is now 22 per cent (instead of 14 per cent) higher than in the mandis.

Farmers explained that they received less from the mandis, if they first sorted out and sold their best produce (namely grade-A tomatoes) to the collection centres and then afterwards brought the rest of the produce to the mandis.

So, a wider choice of marketing channels does not automatically lead to higher overall prices for the farmers. Apart from sorting and grading, which is mostly done in the collection centres, hardly any supermarket requires farmers to comply with product quality standards such as limitations on residual levels of chemicals. Supermarket representatives commented that the Indian consumer was very price-sensitive. Therefore, charging a price premium for better quality, especially through quality standards that are not directly apparent to the consumer, is hard to establish. Compliance with quality standards, which commonly present a constraint for small farmers when supplying to supermarkets, is thus not a substantial problem for tomato farmers in Andhra Pradesh. Nonetheless, farmers in modern value chains have on average 77 per cent higher input costs in terms of labour, chemicals, electricity and especially machinery compared to farmers who do not supply to supermarkets. This may indicate that the prospect of getting a better price for high-grade produce gives farmers an incentive to invest more in their production, compared to supplying tomatoes to the mandis, where most of the produce is sold ungraded. It could also mean that farmers have more disposable income to spend on better machinery and other inputs because they earn more profits when they sell to supermarket collection centres. However, a manager at an international wholesaler also replied that farmers in traditional value chains used excessive amounts of chemicals such as fertilisers and pesticides because they lacked the know-how about the correct use of these substances. This would mean that farmers in traditional value chains reduced their profits by unnecessary spending on inputs.

Unlike the trend observed in many other developing countries, results of our research show that especially small farmers delivered their tomatoes to supermarkets in Andhra Pradesh via collection centres, as shown in the following table:

Table 7: Tomato farmers supplying to supermarket collection centres