All decision-makers, be politicians, judges, policemen, parents, teachers, or corporate leaders, are subject to their emotions and biases. They could be personally connected to stakeholders, have personal interests, overconfidence, could be influenced by a deceptive presentation of the facts, etc. There is a long list of biases, their explanation, and insightful examples presented in this book.
Where do these biases, like those caused by excessive confidence and optimism, come from? How they survived the process of evolution? If the systematic mistakes made by cognitive biases were terrible for survival, natural selection would have eliminated the biased individuals, making biases rarer. Yet biases are universal. This suggests that these biases, or rather the heuristics, weren’t actually handicaps but assets for our distant ancestors.
The moral of the story – regardless of personal qualities, people are human, all too human, and many factors can lead them to make unjust decisions. This risk can never be eliminated entirely, but systems and processes can be evolved to reduce these risks. This observation does not question the skill and integrity of people. Of course, some individuals are better than others at keeping their biases and emotions at bay. They are clear-sighted and virtuous enough to resist the different types of biases and emotions. But let’s be honest and objective – we cannot expect all our leaders to embody all these virtues and overcome their biases in all their decisions.
In a corporate environment, just like in courts, police stations, schools, and even in a country’s parliament, it’s not enough for a final decision maker (usually a leader at the top) to be virtuous. That individual must also be able to collaborate with others; decisions can’t be made alone. And wisdom must arise from process, not from individual virtues.
Collaboration and process are the principles on which sound decisions are based. Period.
Before digging deep, let’s first be clear on a few elementary premises.
Farmers are just like investors. They invest their resources – capital, land, labor, and experiences to produce crops to make money which they can spend on their needs and what remains, reinvest to generate more money from growing crops. Elementary.
But production is just half a battle. A farmer doesn’t have an incentive to grow anything unless a housewife sitting elsewhere buys part of his produce as per her needs (read her quantity, quality, packing, delivery, and price requirements). Again elementary.
Let’s start adding complexities to these two premises.
A farmer grows and sells large volumes of just few products, but a retailer, and eventually a housewife buy many products in small quantities.
Re-read this line couple of times. Brood over it. You’ll understand that someone needs to sit in between to break the bulk of large amounts of few items into smaller portions and consolidate the product basket, that is small quantities of many things into one product basket, to satisfy both farmers’ and housewives’ needs.
Now you know why the system needs Wholesale Markets and many Intermediaries, a job that can and is also partly done by corporate retailers like Reliance Retail, More and Big basket, etc for small quantity. They are the “someone who sits in-betweens” the farmers and homemakers in the Indian Agri Marketing system.
But where do Governments, both State and Central, come into this. In a nutshell – to decide who could play the Agri marketing game, where, and the game rules so that everyone plays fair. States frame laws for APMCs and the Centre has now come up with new three farm bills to override the State APMC laws, the present bone of contention between agitating farmers and GOI.
The power of incentives is the invisible hand that shape the stakeholders’ behavior in this Agri marketing game like it does for the rest of human enterprises. Understanding incentives is the key to understanding stakeholders. Conversely, failing to recognize the importance of incentives often leads us to make significant errors. In this premise lies the crux of the issue presently at hand which is What right questions do the agitating farmers ask the Indian Government and seek answers?
Every stakeholder in the Agri-marketing supply/value chain, right from a farmer down to housewife through a maze of commission agents, wholesalers, sub wholesalers, transporters, loaders, unloaders, retailers (both of traditional (pushcarts, corner shops kind) and corporate kind), State and Central governments need incentives to maximize their return on investment i:e make (or save) more money for themselves, their enterprises and their sphere of influence.
Here comes the shocker, which both APMCs and Corporates may not like. Right now, both APMCs and Corporates are making more money for themselves at the cost of farmers and homemakers by gaming and subverting the system through the same rules that State Govt has framed (which were sometimes relaxed earlier) or the Central Govt has passed now for fair play without providing the answer to the fundamental question that sits right in the middle of incentives for each stakeholder.
The fundamental question in my view all farmers should now ask the Government and seek explanation should be: How to discover The Right Price of different Agri Products Marketed in India through the State APMCs Laws or the New Farm Bills?
It is elementary that money can be made (or saved) by each value chin stakeholder only by producing and selling more of better-quality products at a RIGHT PRICE. Each word in the bold text is essential but is mostly dependent on just two words it contains. RIGHT PRICE, the keywords.
Finding the right price is a complicated exercise. Useful price discovery requires several players’ direct participation: farmers/producers, intermediaries, wholesalers, investors, and other players. Price discovery depends heavily on physical market infrastructure and handling costs, storage costs, transportation costs, tax rates, speculation, and conflict resolution mechanisms, among other factors. In a nutshell, useful price discovery depends on an appropriate market structure and design, which is sadly not provided under either old APMCs laws or the new farm bills. However, old APMCs fare much better than new rules.
Who I’m to proclaim this on a public platform, you may ask.
Well, my view has been shaped by my hands-on involvement with farmers at the farm, FPOs, wholesale markets and retail levels in Agri produce marketing ecosystem at India’s largest Agri grow marketeers both Govt and Corporate types in the leadership position for almost three decades as well as the intellectual pursuit of thinking about how the Agri produce marketing operates and how it could do better.
Over the years, I have metamorphosed into an agribusiness consultant, corporate director at a successful software company, a philanthropist promoting FPOs in remote locations of India, and lately, an avid student of financial markets and the financial crises across the world.
I am trying to make by sharing some of my background with you to emphasize that the views I communicate in this post have evolved over many years and originate from more than just one perspective.
A few of the following observations shall help the reader understand what has shaped my views.
All the above snippets are just the tip of the proverbial iceberg but sufficient to prove that when a market system design is flawed and is not supported by the right legal mechanism, stakeholders will find loopholes and exploit it for their respective benefits.
The myth that only new bills allow corporates and private traders to buy directly from farmers needs to be firmly debunked. Few examples:
Safal market, Bangalore was a private wholesale market established in 2000. This market was established outside the purview of the Agri Produce Market Act, Karnataka (APMA). That means if a progressive thinking State Govt is convinced of the benefits of a private market in its state, it can still pass ordnance or amend the act to allow the private traders despite the existence of APMCs and associated laws. Period. (That Safal Market failed miserably is another subject for some other time but suffice enough to say here that I firmly believe that an in-depth and honest study and analysis of that failure would provide concrete answers to Govt planners on what Agri marketing reforms India needs).
Likewise, ITC’s e-chaupal, a private enterprise dealing with farmers’ direct purchases, also initiated in 2000, was established outside the state Markets.
APMC laws often create entry barriers for the new entrants. For example, at many APMC markets, if you don’t own or lease a shop in the wholesale market, you can’t get a license to buy and sell in that wholesale market. With limited real estate availability within a physical market, this statute creates oligopolies and oligopsonies, and a lousy environment for discovering the right price. You dig deeper into the law, and you’ll find many such regulations which knowingly or imperceptibly lead to the creation of market inefficiencies.
Both APMCs and Corporates are very bad at discovering the right price.
APMC laws and the auction rules (opaque often) have sometime led to a market design by virtue of which physical markets and market players have become very much fragmented. This makes transmission of the right market signals (demand and supply primarily) on which market prices are based have become next to impossible despite availability of cheap communication and information technology. Fragmented demand and supply is a sure recipe for unfair price discovery. Besides this, I can think of many other reasons for unfair price discovery at APMCs.
To discover the right price, corporates are not in a position yet to discover any price. Read this again to understand what I just said. They have no choice but to follow the prices discovered by the APMC markets as the market share of all items marketed by them is minuscule to influence market prices. Instead, corporate retailers use APMCs price to fix both the procurement and marketing prices. The only difference is that these prices are not real-time prices, a big differentiator from the APMC price discovery mechanism. But who cares for latency when you are a big corporate and there is no law to govern this.
If the APMC price discovery is not perfect, what one would call the prices based on APMC prices is anybody’s guess.
Corporates lack the liquidity offered by APMC wholesale markets, which can sell and dispose of much larger quantities of a large number of farmers/traders bringing varying quality. On the other hand, a corporate can neither accommodate the quantity that is more than their demand or storage or processing capacity or can absorb the quality other than what is demanded by their end customers. Many farmers have a perception (true quite often) that corporate retailers sometimes reject a consignment if the arrivals are more than the corporate’s latest demand.
On the other hand, any quantity and any quality sells in a wholesale market, albeit at a differential price for varying qualities and depending upon the quantum of arrivals vis-à-vis demand at a particular time. Gluts do happen sometimes, as do scarcities. These two crises are also the outcome of an inappropriate market design that Govt planners need to focus.
At corporates, however, a farmer must supply only as per the agreed quantity and quality norms. He must sort and grade produce at his cost. For the rest of the excess or inferior quantities that don’t conform to the corporates’ indent or quality norms, farmers still have to rely on selling that through agents at APMCs wholesale markets. Double whammy.
That few unscrupulous commission agents and wholesalers cheat on farmers by under-weighing their produce. But some unscrupulous corporates also do the same by gaming their electronic weighing scales and bribing weight and measuring inspectors. Emperor is naked on both sides as the market system is designed to benefit only the market emperors.
Ditto goes for pricing. There have many instances where the price spoken by an APMC seller (in front of farmers) is different from the actual price offered to the buyer, which was also different from the recorded price. I witnessed an incident in 1994 wherein material was sold by an auction agent at a higher price under an opaque auction (counting fingers under a handkerchief) while the auctioneer shouted a lower price for the benefit of a visiting farmer. However, when investigated further, the recorded price for that transaction was still lower than both actual sold and spoken prices. The reason – to save on market fee payment to APMC, a small portion of saving, of course, would have gone as bribes to APMC officials or who knows politicians as well.
But that is not to say that corporates are always transparent on the pricing front. Sometimes they bring the opaqueness in scientific and technical ways. Someone shared an instance wherein for more than a decade a corporate retailer continued to pay farmers a certain % age of the price over the agreed price for the offered quantity of good quality after doing sorting/grading to make his supplies conform to quality norms of a retailer. For example, a farmer who agreed for a 20% mark up over price got Rs 12 per Kg when he removed 20% rejection (200 g out of 1 Kg) for an unsorted item priced Rs 10 per Kg. That’s fair. No. Farmer’s price should have been Rs 12.50 per Kg as the farmer just sold 800g of sorted produce, for which the unsorted price was Rs 10 per Kg. Rs 10 per kg unsorted for 800g sorted is Rs 12.50 per Kg. Divide ten by 0.8 to get the answer. More the price or mark up increases more the chasm between fair and unfair price increase
There’ve been instances where the APMC law states that market agents can only charge a commission from the buyers, but the buyers’ cartel ensures that the commission is charged from farmers by undercutting the price. Likewise, a corporate buying directly from farmers without a license by just bribing an APMC official is not uncommon. Poor enforcement of the law, one would say.
Real-life stories from my Contract farming experiences are also telling. They are perfect examples where contract farming laws, unless the contracts are fairly designed for both buyers and sellers, doesn’t have easy answers.
I had seen buyers refusing to buy contracted Agri produce when the market prices were cheaper than the contracted prices. Likewise, some contract producers also bring their neighbors’ produce when contracted prices are much higher than the market prices.
The quality of farmers’ produce going wrong because of natural causes or because the seed/inputs provided by the contractor turned out to be wrong also created nightmares under contract farming for both farmers and contractors (usually corporates). I can recall numerous such examples from work-life till the cows come home.
The non-availability of a plausible yet implementable legal redress mechanism in such a scenario would surely kill any contract farming endeavour. Again, the design in contract farming current law is flawed is skewed against farmers.
Current law also doesn’t address all the issues associated with contract farming. And the issues are related to Liquidity, Non-standardization, Transparency, Perishability, Price Volatility, Legal redress Mechanism, Logistics, to name just a few.
This is not to say that all is lost. Both APMCs, their market traders, and Corporates play a stellar yet deficient role in the Indian Agri marketing system. Surprisingly, these actions are outside the purview and mandate of both old APMC or new laws. Both APMC market players and Corporates have their selfish profit motives behind these actions.
A good market design, well supported by reforms and laws, needs to ensure that both traders and corporates emulate and imbibe each other’s positive actions for farmers’ and housewives’ common good.
Following, though not exhaustive, shall sufficiently illustrate my point.
A primer on how market traders and APMCs build relationships with their farmers and suppliers.
Through financial means;
A market agent quite often forward advances to farmers. Think about farmers’ cashflows for a minute and the benefit such an advance provides. A farmer doesn’t get a monthly paycheck like you and me. His cash flows are always dependent upon a roulette played by weather god and price volatility at the markets, APMC, or corporate kind. (Given a chance, I would instead treat MSP for all Agri produce as an MNERGA for farmers to provide them an assured monthly income).
Depending on his suppliers’ requirement, an agent sometimes gives additional money than a farmers’ sale proceed. He keeps this additional amount as part of credit/debit with him to be settled settling at the end of the cropping season.
An agent can give better sale proceeds or a premium over actual sale realization. – Particularly to prominent and influential suppliers who are opinion leaders in their respective areas, more farmers in their catchment grow and bring better quality products for him to sell at a higher price.
Quite often supplies packing material and transport to farmers at their cost, which he recovers from their sale proceeds.
An agent usually transfers money to his suppliers very fast – through cash or hawala immediately.
There have been instances where some agents have provided transport insurance to farmers for a nominal sum as the public insurance companies do not touch transportation of perishables in India even with a high premium. No doubt a critical market design element.
An agent builds a relationship with his farmers and suppliers through social engineering
The barter system for the unavailable items in farmers’ remote location in place of farmers’ sale proceeds.
All expenses are paid whenever a farmer visits him for any reason whatsoever. He treats his suppliers exceptionally well. An agent often makes his car, his residence, telephone (STD) available to them for their use.
Participates in all farmers’ social functions and spend lavishly on gifts.
Occasionally get married or marries his sons with influential farmers. Developing family relations with his suppliers comes naturally to him as unlike paid staff of corporates, he has his skin in the game.
Visits suppliers 2-3 times at flowering, start, and end of the season and gives small gifts at that time – watches, calendars, etc.
An agent can be a farmer’s unofficial banker who can lend any amount of money without interest or any formality or questions asked.
In most cases, an agent, unlike corporates, inherits and transmits his relationships.
Networking
Agents build and manage a great network that acts as guarantors and surety for each other if a farmer wishes to explore other markets.
Conflict and Dispute resolution mechanism
APMCs which have farmers, Govt and traders representees and traders’ own association provide this service to both sellers and buyers.
But despite these benefits to farmers, an agent’s behavior and actions are looked upon as exploitative (true sometimes). But remember, they are mutually beneficial to both farmers and traders.
On the other hand, the biggest argument in favor of corporates that not only help them and farmers but the country as a whole too is corporates’ intervention in engaging farmers in their productivity enhancement programs by providing the latest technology and means to farmers in order to;
Increase production
Improve quality
Reduce the cost of the product
In the past, I had always wished those market agents should also engage in such activities. The good news is that some progressive agents have also started investing in such productivity enhancement programs. It is not uncommon to see traders investing in setting up sophisticated cold stores and logistics for their farmers and suppliers, which is ultimately for their benefit.
Though I have some ideas about Agri’s market structure and design, I end this piece with the following observations.
There is no doubt that Agri Markets in India needs reforms. The APMC acts and new farm bills are deficient not because they benefit no one but because they fail to provide a concrete answer or even attempt to answer the mega question: how the right price shall be discovered for every agricultural product produced and consumed anywhere in India.
What India needs is a rich, complete and complex market design based on the following elements, a prerequisite to discovering the right price. Markets are doomed to fail if even a single element out of the following is missing or deficient and the laws governing those elements are full of loopholes.
Contrary to popular public perception, most of the food loss on the supply side is value loss instead of physical loss. I’m yet to see mountains of rotton produce either in trade markets or farms. Most of the produce is consumed by various strata of society.
Main reasons for this value loss is because of inefficient marketing of perishable produce. I firmly believe that dependency of logistics with the price discovery and resultant quality loss because of multiple handling and inefficient distribution / delay in produce reaching the demand side, is the main reason for value loss in food.
On the production side, second major reason of food loss is lower value realization because of poor crop planning, low production tech and low bargain power because of the fragmented small holdings. I can elaborate on these aspects till cows come home.
In nutshell, small farmers (nearly 80%) don’t have any money and / or incentive to invest back in soil, post harvest and quality improvements. Needless to say, inferior produce get them lower value, contributing to food loss.
Watch out this page for my views on possible solutions.
Nudge is a beautiful word. But simple nudges or call it a gentle push, quite often results in positive outcomes. Last week, for Rohit, our IT guy, a nudge to talk to our existing Office 365 license provider resulted in cost saving of 50K plus annually. Agreeing to act on a nudge and achieving positive outcomes not only made Rohit happy but also made me very happy. Wish you had seen his body language when he announced this saving to me. During last three weeks, three operations executives had positive positive outcomes for three different functions because of simple nudges.
