To Improve Farmers’ Income, Regulate the Processors, Not Middlemen

Processors are the most powerful players in the agricultural supply chain. It is at this stage that the government needs to introduce regulation.

This is the second of a two-part series on farmers’ experiences at the input and output levels of the supply chain. This is relevant, given the recent news reports which showed that India’s exports of key agricultural commodities rose by 16% in the first half of 2022. While this spells good news for the agricultural export industry, we must ask who has benefitted most from this development and whether these benefits have actually trickled down to the farmers who grew the products.

The first part looked at the pre-harvest stage and highlighted how farmers have little control over what they grow to how much money they receive for it. The second part examines the post-harvest process mediated by middlemen, in which the role of processors emerges.

After the inputs are procured, seeds sown, and the produce harvested, the last mile in the farming supply chain is getting the produce to the markets and consumers. Who do the goods flow through to get from the producer to the consumer? Who determines the final price that buyers pay for the produce? A range of actors, often with greater negotiating powers than farmers themselves, are involved at this stage.

Much of the discourse around the 2020 farm laws was centred around eliminating the Agricultural Produce Market Committee (APMC) and middlemen from the supply chain. This promised to make things better for farmers by allowing farmers to gain better prices for their crops. To evaluate this claim, we must first understand the current marketing and trade structure.

Farmers take their produce to the APMC, where they meet the middleman known as arhtiya. They take the produce for auction, where traders check the quality of produce by hand and bid against it. Prices for grains like soybean and grams are set on the principles of supply and demand, between 11.30 am and 12.30 pm. Following this, the auction starts in APMC.

Second, we must expand our discussion beyond middlemen to include the role of processors. From my experience of growing up in a farming family and working with an FPO, processors are the most powerful players in the agricultural supply chain. It is at this stage that the government needs to introduce regulation.

Who are the players?

An arhtiya is the middleman between traders and farmers who conducts the auction and charges a fee against it, not exceeding 1% of the total payment. While it varies across APMCs, in most cases in Maharashtra, it is the trader who pays the arhtiya’s fees.

The arhtiya also doubles as a moneylender at this stage. Traders usually pay farmers within seven to 10 days of receiving the produce. However, if the farmers want the payment on the same day, the arhtiya pays money to the farmers on behalf of the traders and charges 1% interest.

Traders are the main connectors to processors in this chain. The daily rates for the grains are declared by the processors, and traders supply to them after accounting for transport and labour expenses, cess charges, and their commission. Traders usually make less than 1% of the total turnover per day.

In the case of grains like soybean, traders supply the entire produce to the processor. This is because processing these grains requires heavy machinery and lots of capital. In the case of other grains, like red gram and Bengal gram, for example, few traders supply to the millers at all. The ones who have their own mill double up as processes and sell directly to retailers. In such cases, traders earn around 1% behind the total turnover.

Processors are the last link in this chain. They are also the ones with the most negotiation power and the rest of the actors in the chain function on the terms and conditions of the processors.

In India, the major processors of soybean are Adani, Suguna, ADM, and Abis, and they have their own networks. While purchasing soybean, they mainly look at three parameters of quality: foreign material (FM), damaged material (DM) and moisture. After a quality check, the processors set the price. The rate per quintal is declared for produce which has 2% FM, 2% DM and 10% moisture. If the produce has more than this, the quality decreases and rates get deducted as per the percentage of FM, DM and moisture.

After seven days of delivery, the produce processors release the payment to the traders. The payment released does not include the cost of the jute bag, which costs Rs 25-40. The processors also don’t count the weight of the bags they take the produce in. So, in this case, traders have to bear the cost of the bags.

These are unwritten rules which are set by the processors on which the trade runs. The soybean is processed and products are sold in the market or exported as DOC (de-oiled cake).

Millers of red gram and Bengal gram also check for quality on similar parameters, with the percentage of each component varying from crop to crop. Millers run their trades through brokers and charge 2.5% of the cost as a batav per quintal of produce. Traders pay this amount as an assurance of receiving the payment on the seventh day after delivery.

If they fail to do so, traders receive their payment after the 40th day of delivery. This is because millers are not institutionalised, and grams don’t fall under the GST regime; the entire trade is carried out informally with maximum risk borne by traders.

Prices set by the processors vary only by Rs 50-100. Similar variance exists across prices set by millers. However, in the case of millers offering a higher price, they do quality testing rigorously and deduct prices based on the quality to this term they called “Hard Claim”.

Also read: Middlemen or Service Providers: What Role Do Arhtiyas Play in Market Yards?

Processors are the most powerful players

At the post-harvest stage, the entire supply show is run on the conditions set by the processors. It becomes clear through this chain why the payments are made only after seven days of delivering the product, probably making farming one of the few trades where payment is delayed after the up-front procurement of the product. In my experience, processors have maximum negotiating power – from determining quality to setting the final price to releasing the payment.

As the quality check for FM and DM components of the produce are done manually, processors can cheat traders. Even though machines are available for quality testing and can produce accurate results, not a single processor uses this. After the produce is delivered, traders don’t have a choice to take their produce back as it is an expensive and time-consuming process, and storing the produce is also costly.

Processors also use their associations and strong network to build rules and regulations in their favour. This is true even for international players, like ADM and Cargill, that employ the same strategy while running their businesses in India. Traders and farmers don’t have the power to negotiate with them, especially in the soybean trade. It is a commodity that has very few processors and requires high-level processing, a business that is completely owned by these big players.

The farmers end up paying the indirect cost of these processes. Policy and media discourse has centred around APMCs, arhtiyas and traders. Rules and regulations are set only for the farmers and at the APMC level. But no one talks about the processors and the need for greater regulation and transparency at this level.

The government needs to intervene in this process and reform the system. If this is not addressed, removing the APMC or arhtiya will make no difference and the trade will keep running on the processor’s terms. One way to do this is by implementing the use of quality testing machines, which will make the price determination process transparent and give farmers a fair price for their crops.

Hitesh Bhoyar pursued a degree in social work from TISS Mumbai and worked with a grassroots NGO in Maharashtra. He has also worked with a farmer producer organisation in the agri-tech startup space. Currently, he’s an Asia resident at Dalberg.