Alternative Marketing Models

S Sivakumar, ITC Limited

FICCI Agriculture Summit

New Delhi, 9th Apr 2005
Structure of my Presentation
1. Functions of the Market

2. Traditional Marketing Models

• What these models could deliver
• And what they couldn’t

3. New Market Realities

4. Alternative Marketing Models

• Which one suits what context

5. Conducive Policy Framework

 Functions of the Market

Market

Exchange Physical Facilitating

Buying Storage Financing
Farmer Selling Transportation Information Consumer
Pricing Processing Risk bearing

Efficiency
Effectiveness
Equity
 Traditional Marketing Models

1. Regulated Market Yards

• Governance through State APMC Acts

2. Procurement by Government Agencies

• MSP, MIO, PDS
• FCI, NAFED, State Markfeds, SCSCs, Coops

3. Village Traders
Achievements of these Models
(At a Macro level)

Could:
• Self Sufficiency in Food Grains
• Employment to 57% of total workforce

Couldn’t:
• Underdeveloped Food processing industry
• Low share of consumer Rupee to farmer
• Farm productivity lower than potential
 Achievements of these Models
(At Micro level)
 Mandies:

Efficient price discovery, when farmers are small and the
produce quality is not standardised
By the time farmer knows the price for his produce he
has already sunk some cost, leaving no alternative but to
sell at whatever price is offered
 Govt Buying:

Surpluses and shortages managed well
Became a buyer of first resort for grains, distorting
markets and is unsustainable at the current scale (both
economic and ecological)
 Village Traders:

Boon for the resource-poor small farmers
But spins an exploitative cycle of dependency
 In other Words…
An Efficient Supply Driven Value Chain
appropriate only at a point of time in our evolution

Market

Exchange Physical Facilitating

Buying Storage Financing
Farmer Selling Transportation Information Consumer
Pricing Processing Risk bearing
 New Market Realities
 Globalising trade
• Cost competitiveness imperative – need to
improve farm productivity, reduce wastages
• Quality imperative – need to value add through
standardisation, differentiate through processing
and traceability
 Changing composition of Indian diet
• Diversification imperative – less cereals and more
fruits, vegetables, milk and meat (all are
perishables and also knowledge intensive
production systems)
 Necessitating a “vertically coordinated” and
“demand-driven” value chain
 Alternative Marketing Models
(will co-exist with the traditional channels)

1. Contract Farming

2. Private Mandies

3. Direct Marketing
As to which model works best…

 …depends on the context

• Type of crop
• Intensity of technology
• Length of value chain
• Stage of market evolution
• Risk transfer mechanisms
• Social infrastructure
• Strength of regulatory system
 Contract Farming
 Complementary strengths leveraged through contracts

Market linkages, Material inputs & Technical advice by the
agribusiness

Land, Labour & Traditional knowledge by the farmers

Quantity, Quality & Price being the variable terms
 Works better, when…

there is a natural reciprocal dependency between the two
parties (products of special specs, highly perishable, early
stages of technology adoption or market evolution)
 In undifferentiated and / or evolved products…

costs of contracting are higher than benefits, and both
parties look for backing out when it doesn’t suit them
 ITC eChoupal works through Contract farming in

Organic produce, Pesticide free produce etc
 Private Mandies
 Physical:
• In addition to the traditional mandi functions,
integrated services such as storage, commodity
financing, grading / sorting facilities added
• Works better for fresh produce marketing near large
consumption markets (metros)
• ITC eChoupal will set up these for horticulture
 Electronic
• Price discovery on electronic exchanges through
matching, auctions and reverse auctions
• More suitable for evolved chains and standardised
products
• ITC eChoupal’s Tradersnet platform ready for roll out
in Coffee
 Direct Marketing
 ITC eChoupal model for grains & oilseeds
• Two tier infrastructure:

Price discovery @ eChoupal in village through
Internet + Sanchalak combo

Produce delivery @ Choupal Sagar one per 40
choupal cluster
• Farmer empowered through freedom of choice (price
discovery without sunk cost) and benefits through
lower transaction costs (commissions etc)
• ITC benefits through traceability (direct buy from
farmers) and lower transport costs
• Integrated services (agri extension and supply chain
for farm inputs) resulting in higher productivity and
improved quality leading to long term competitiveness
 Conducive Policy Framework
 APMC reform
• Permitting all three alternative models
• Permitting deferred pricing and payments to farmer
• Regulatory framework relevant to the new dispensation
 Moderate taxes @ State level
• Incentivising compliance Vs evasion
 Permit negotiation of Warehouse Receipts
 P&L on Exchange transactions to be offset against
Physical market accounts
 Permit Options Trading