What farmers want

What would I want the most if I were a small farmer with 6-7 acres of land?
My main problem is that what I produce needs to be sold in a market which is some distance away. Having carried the produce, I am in no position to take it back (the costs) and therefore I am forced to sell at whatever price the trading cartel is giving me at that point in time.
What I would like is that I have a warehouse within 10-15 kms of my farm. I go there, get the produce graded and certified and it is then stored. I in turn get a warehouse receipt, which clearly specifies what I delivered. This WR is then tranferable, tradable and a fully negotiable instrument. This implies that I can hold the WR, sell it to someone or pledge it for loan to a bank.
This increases my stock holding capacity. No longer am I at the mercy of a local cartel. I can wait for the prices or cash out.
To enable a farmer to reach the stage described above, the government needs to either build (or incentivize others to build) these warehouses (maybe 25-30,000 across the country), create a system of accredition of produce (grading and storing), make WR negotiable and tranferable.
Apart from targeted investments, this means that companies interested in this sort of a supply chain ought to be encouraged (cash and carry wholesalers and large scale retailers). Markets for trading WR (physically or in demat forms) need to be created and these markets should replace the current practice of markets where the producer has to carry goods.
Can the budget itself do much towards achieving this? It can in terms of allocations for such programs and tax incentives encouraging investments in these areas. However, the budget alone is not enough. A clear policy and implementation over 3-5 years will be required. Do those in power have the will to carry this through?

Warehouse Receipts

India should use warehouse receipts to make it more attractive for banks to lend to the agricultural sector, to reduce the cost of public support for agricultural marketing, to reduce transaction costs and to improve price-risk management.

Outside of the ports, the Central and the State Governments dominate the warehousing industry, both as client and as service provider. Warehousing facilities owned by the central and the state Governments account for about 66 million tons of warehousing capacity. About 46 million tons of capacity is owned or leased by the Food Corporation of India and the State Food and Civil Supplies Corporations. The storage capacity that can be made available by state-owned warehousing corporations is about 20 million tons.

While Government warehouses have mainly served the public sector, they constitute a major asset that can be used to further the employment of warehouse receipts. Government warehouses are present across the country. They have developed homogeneous storage and quality practices, and their warehouse receipts are accepted by banks.

Warehouse Receipts (WR) and pledge finance are means that can prevent farmers from making distress sales. It would allow farmers to place their material in warehouses and raise finances. WR as tradable instruments, would

a) Increase liquidity
b) Allow participants to hold material
c)Facilitate integration with future market exchanges and reduce dependence on local markets
Currently, WRs are transferable, through endorsement, in some states. Full negotiability would increase liquidity.

Pledge finance, allows a person to pledge his product at a warehouse and get loans (up to 75% of the value of produce). The instrument for pledge finance is the warehouse receipt, which should be bankable.

Issues:
1) Banks would finance only if the WR is issued by an established authority such as CWC or SWC.
2) Most CWC and SWC warehouses are located at district centers, far away from farm lands
3) Most of the CWC and SWC are occupied by input material (fertilizers, etc.) and PDS procurements. What is left available is used mostly by large traders
4) The center has set up a “grameen bhandaran yojana” program for construction of rural godowns by entrepreneurs. These are located near farm lands. These warehouses have defined guidelines, which makes them eligible for pledge finance, provided that the material quality is certified

Commercial banks normally honor receipts made by CWC or SWC. Private receipts (as in case of rural private godowns) are not sufficient collaterals, unless a credible accreditation process is put in place.

In the absence of quality certification of material, banks can and do provide "lock and key" financing, wherein the material remains in banks possession. However, this can be used by large farmers only since a typical godown will have a capacity of 100-150 tons

In MP and Karnataka, the states have made certain reforms under which private warehouses are licensed to issue warehouse receipts. Thus rural godowns are benefiting producers, though it is still early days and the penetration is not large. The licensing authority is SWC and for other states to implement this, they also need to take similar regulatory measures. Random regular checks (audits) are conducted by SWC in MP on rural godowns licensed to issue WR receipts. There are guidelines on storage and fumigation

The center is considering amendments to the Central Warehousing Act. Amendments in the act have been proposed. The bill is expected to be presented to parliament shortly. Key features:
1) An authority to regulate and accredit processes in warehouses.
2) There will also be an advisory committee
(These bodies will be purely regulatory and outside the CWC)
3) It is expected to enable CWC to license warehouses to issue bankable WR

At state level there are similar warehousing acts, which need to be amended to allow SWC to play the same role.

A quiet revolution

One of the major impediments to growth in the farm sector were the APMC Acts. The Agricultural Produce Markets Act prescribes the setting up of mandis (Markets) for agricultural products. The Act prevents farmers from selling their produce directly to retailers. They have to go through regulated mandis and bear mandi charges. The Act restricts trade in agri-commodities to those who have paid market fees, have the necessary licenses, and permits. In other words, they first restrict the farmers marketing channels to state-regulated markets; they then charge multi-point market fees as well as sales taxes in some cases. The lack of adequate storage facilities at most markets makes the farmers bargaining abilities that much weaker in such market places.

The APMC acts have been in existence in all the major producing states of India. The Central Government had initiated agricultural reform measures. However, since Agriculture is a State subject, a lot more had to be done before Indian Agriculture was rid of the problems facing it. The private sector needs policy reforms that will allow it to make much larger investments in the sector, thus propelling the growth rate of agriculture sector. The center drafted a model APMC act in 2002, which the states were expected to implement. For a long time, the states dragged their feet on this. However, in last one year significant movement has happened on this.
a) States that have implemented the model laws in part or wholly – AP, HP, MP, Maharashtra, Punjab, Haryana, Gujarat, TN, Rajasthan, Chhatisgarh, Nagaland and Sikkim.
b) States that did not have APMC acts to start with – Kerala, Manipur, Daman&Diu, Dadra and Nagar Haveli, Arunachal Pradesh
c) West Bengal is yet to amend its laws, but its act was anyway not as restrictive as in most other states
d) UP and Karnataka are two major states yet to implement the changes
e) Bihar, has leap-frogged all other states and has scrapped the APMC Act.

The results have been instantaneous. Sample the following:
a) Metro Cash and Carry is investing heavily in wholesale of agricultural products in AP, WB and Maharashtra
b) Reliance Retail is expanding furiously in AP, Maharashtra and Gujarat and has plans to go to 700 cities within 5 years
c) ITC is wholesaling F&V and has set up stores in Hyderabad, Pune, Chandigarh and Kolkata. Further plans are being made
d) Bharti is aggressively building agricultural plans in Punjab

The impact is likely to be big and fast. Massive investments are coming up in all these states in the area of storage, transportation, cold chain, with corresponding multiplier effects in employment. Specialized services players are entering the fray (cold storages, refrigerated vans, etc.)

This could truly be a revolution in the making. So much so that I am surprised that newspapers seem to have missed the story altogether