Middle Earth Moguls

One of the axioms of logic is called the Law of the Excluded Middle. Something has to be eit­her true or false—there’s no middle ground. As we all know, economics works a bit differently. Facts can be fickle, data pliable, and different things true at the same time. A kilo of potato can be worth both 11 paise and many multiples of that. Of course, you need to look at both extremes of the food chain to see this. But there’s a zone of stable truth in all this, and for that you need to include the middle. Or personify it. We’re talking of the Middleman, the one with a 900 per cent mark-up.

That’s a bit simplistic, but see it like this. We could be in a raging hyper-inflation, with a kilo of onions going for Rs 150, and consumers getting teary-eyed enough to vote out governments. Or we could be in a crisis such as we see now, where farmers across half of India are so desperate that many consider death by pesticide (and some, by police bullet). But between consumer and producer, there’s a vast middle ground that’s relatively insulated from these cyclical shocks. This is the zone that soaks in the bulk of the mark-up—which could routinely be, say, a mammoth 900 per cent, as we shall see.

Start with Pawan Kumar on his 50-bigha, or 12-acre, farm in Tatarpur, near Hapur, western UP. Last year he sowed potato and, by February, reaped a rich harvest of 1,200 quintal. The prices were rather low at the time—touching Rs 6-8 a kilo, well below the comfort zone of Rs 10-12 he could have managed just before demonetisation. So he stuffed the entire produce into hundreds of 50-kilo sacks—altogether 2,200 such sacks—and packed them off into a cold storage. Then he waited for the summer’s demand spike. But in three months, he got burnt.

^{Journalist: Pragya Singh; Video: Tribhuvan Tiwari; Editing: Rupesh Malviya}

In June, amid a bumper harvest, the resulting price crash and all the politics around it, potatoes are changing hands in the Ghazipur mandi in Delhi for Rs 5 to Rs 5.50 per kilo—trader to trader. At Azadpur, another Delhi mandi, prices ranged betw­een Rs 3-17 on Wednesday; the most common varieties were at Rs 5-7. At these rates, you’d think, Pawan Kumar should be getting Rs 250-275 for a 50-kilo sack. But that would be barely breaking even for him. And the reality is starker than that.

“The bichaulia (middleman) is offering me Rs 100 per 50-kilo packet, or Rs 2 per kilo. My cost is at least Rs 5 per kilo. I’m ruined,” says Pawan, who has roughly Rs 8 lakh worth loans to pay off at two local credit societies and a bank. He also cannot afford the rent of storage and has written off the rest of his crop. With India’s overall yield seven per cent higher than last year, which itself was a good crop, the 200-odd potato growers in and around his village face a similar crisis.

Meanwhile, the bichaulia Pawan sold to—the very first middleman in the chain—would have more than doubled the price as he sold onward. The differential between what the farmer got and what the consumer pays is distributed across six or seven such intervening layers, each of which is an essential element, offering a service that makes up the totality of the Indian agriculture bazaar. The profits at each layer too would expand or contract depending on the season, but never enough for governments to topple or suicide rates to climb.

In a simplified graph, here’s how the supply chain works. To cut costs, most potato growers sell their produce to local traders. At this stage, there’s the cold storage, where either the farmer or the first trader rents space. Once at the mandi, a commission agent (called an ‘artia’ in Punjab) buys it off the first middleman. He’s an aggregator, who buys off many such sour­ces, then sorts, grades and packs the produce. (Sorting is also outsourced to another informal layer of workers at the mandi.) Now, the artia’s commission is fixed by law, with state-specific ceilings. Typically, the artia sells to a sub-wholesaler within the same mandi—dealing only in graded, packed potatoes—who in turn sells to a wholesaler in a larger city mandi, such as Delhi, paying for the transport. From here on, there’s a distributor and finally the last vendor from whom you buy. Each time it changes hands, the potato naturally becomes costlier—a service is rendered, a cost incurred, and profits worked in.

The tragedy is that the farmers—and they alone—are bearing the burden of the price crash. It’s business as usual at all points downstream. That the price escalation doesn’t benefit the far­mer becomes obvious at both mandis in Delhi. It’s equally app­arent at the ‘farm gate’. Contacted by Outlook, several potato farmers from Hathras, Hapur, Agra and Aligarh say that if the local bichaulia offers anything under say Rs 6 a kilo, they would not break even. Even if they sell at the farm (avoiding the cost of transporting to the mandi), it still involves packaging into sacks (Rs 10-12 apiece) and often hired labour. These farmers are being offered as little as Rs 1-2 per kilo, even 50 paise.

Sahukar Singh, a farmer in Aligarh who pulled out his potatoes from the cold storage and brought it to Delhi’s Ghazipur, says he spent Rs 230 per 50-kilo packet, including cost of seeds. Each crop also yields new seeds which farmers often sell, but there were fewer seed buyers post-demonetisation, so farmers sowed that too—which also explains the bumper harvest. Sah­ukar grew 50 kg per bigha, paid Rs 126 per pack for storage, and another rupee for transportation to Delhi. “If I won’t earn Rs 6 per kilo, how can I break even? I would have sold it at the farm without storage if I’d known prices would crash,” Singh says.

Potato is amenable to freeze-storing, but it costs Rs 130 per 50-kilo bag for four to six months. But farmers expect prices to dip, not rise. Like Pawan, Om Dutt Singh, a farmer from Hapur, can’t afford to incur more cold storage costs—he too has written off his entire crop. “We are ruined. I can’t afford to get my potatoes out of cold storage because at rock bottom prices, ­after paying for storage, I’ll have nothing left,” says Om Dutt.

After October, time to sow a fresh crop, cold storage owners will do the inevitable. To clean their stores they will sell at a discount, discard it if it rots, or give it away. “What choice have we got,” says Jainaram Sharma of Raghunandan Cold Storage in Sasni, near Hathras. If farmers don’t pick up their produce, he loses too. The potato is now practically worthless. With no exp­ectation of an uptick—the contrary, in fact—Sharma predicts dead loss. “Right after demonetisation, farmers froze their produce because traders had no cash to buy, so prices dipped. But four months later, prices have collapsed,” he says.

“Big potato is selling for Rs 5-5.50 a kilo,” says Bilal, a commission agent at Ghazipur. Consider a farmer bold enough in def­lationary times to bring his own goods to mandis. He would add transport, labour, loading, unloading and packaging charges, taking costs to an unviable Rs 500-550 per sack. “That’s why potato farmers are not coming to mandis themselves this year,” says Bilal, whose own commission, he says, is 6 per cent, besides a 1 per cent mandi tax.

Typically, when prices are stable, the local middleman buys off the farmer and stashes it in freezers: the kisan needs quick money to pay off loans, start sowing. (The role-allocations are complex in reality—often the middleman is a big farmer too, as is the cold storage owner.) This spring, with low prices, middlemen were cold to farmer’s offers. “They pulled back when we loaded up and reached the stora­ges. That’s why most potato in storage still belongs to farmers, unlike other years. Even I put 2,000 to 2,200 bags in store,” says Om Dutt.

To put it succintly—and this is supported by the narratives of agents and wholesalers in both mandis of Delhi—traders were clever enough to sniff deflating prices. To be fair, cash hadn’t reached rural India by February—traders could buy much less. Still, compared to the total absence of a safety net at the farmer’s end, they were sheltered. And yet, look around Delhi’s ret­ail markets. Potato goes for Rs 20 or more—a massive 900-per cent mark-up over what Om Dutt or Pawan was offered. Yes, this is the highest quality, sold in upmarket locales by slicker retailers or pushcart vendors whose costs are generally high. And agreed, food inflation is touching negative. Yet, the perve­rse beauty of the system is how the farmer doesn’t necessarily strike it rich in days of soaring prices, yet sees a flameout now.

At both times, the intervening layers thrive. “If production is good, the farmer loses. If it’s bad, he still loses. That’s esp­ecially true with potato today,” says V.M. Singh, chief of the Rashtriya Kisan Mazdoor Party in UP. “Local traders join hands to determine demand and ens­ure supplies are kept under that. This keeps prices stable in cities while farmers suffer. Nobody benefits but middlemen.”

Do middlemen—bichaulias, transporters, commission agents, wholesalers, sorters, aggregators, retailers—profit at the farmer’s expense? Does the price-conscious consu­mer not do that too? Vipul Mittal, national head, food and vegetable at BigBasket.com, an online grocery supermarket, puts the matter in perspective. “Some healthy inflation,” he says, “is necessary in any commodity. A consumer likes ever-lower prices but he or she is not the only member of the food prism. There’s the farmer to think of too.” But that’s if profits flow back. Again, consumers don’t control prices like the farm-to-plate supply chain can. It’s not just the middleman’s margins, or that he takes none of the risk, while cornering all the benefits of a farmer’s produce. He can also arbitrage, he has a menu of options the sower has no access to or power over. All the links in the supply chain have that, by contrast. Thus, at Azadpur, Asha Kumari, a pushcart retailer in Jahangirpuri, bought potato at

Rs 8 per kilo—“I’ll sell at Rs 10-11,” she says. It had cost Bal Mukund, who sold to Asha, Rs 11 too. Says he, “I bought from a big wholesaler. I sort them by size and resell.” He has heaps of potato worth Rs 14, Rs 12 and Rs 8 a kilo, and so on. “I sell some at higher prices than I bought for. So I can sell some for lower prices. It balances out,” he says.

By now, the potato sold for Rs 2 at the farm touches seven times that price. Sure, it has reached a big city, graded and sorted, but does that justify the skew? Siyaram Rai, a commission agent at Azadpur, is typical of his tribe, offering a trite note of resignation and pointing elsewhere. “It’s true pot­atoes that reached Rs 800 last year are now at Rs 400 and some varieties are doing worse,” he says. “But the government can tackle that by opening exports to Pakistan and elsewhere.” Rai attributes most of the farmer’s woes to demonetisation. He, however, feels the commission for agents like him is inflexible. “The commission has been at 6 per cent for forty years,” he says. This commission is the only part of the whole chain that the APMC (Agricultural Produce Market Committee) Act regulates; 6 per cent is the ceiling in Delhi.

Another commission agent, Riy­azuddin, insists the potato market has collapsed due to low demand “ever since demonetisat­ion”. The “hawa”, he feels, suggests further drops. “The market will decline further,” concurs Naresh, another wholesaler. “The potato selling now came either from Hald­wani or from cold storages. This time, most of the cold-storage potato was with farmers, so they are taking a beating,” he says. No agent or wholesaler considers the scenario of trimming the commissions or margins.

Rajendra Sharma, a prominent member of the Azadpur mandi, is more aggressive in defending his turf. “When prices are low, our income falls too,” he counters. Sharma feels the government is misleading the public into holding commission agents responsible for farmer’s woes. “We are being atta­c­ked. It’s a conspiracy: shut mandis and render farmers helpless bef­ore corporations,” he says. “They call commission agents corrupt, they call us thieves, but in no other business does the government fix commissions. Agents neither buy nor sell potato, merely facilitate traders—why must anybody interfere?” he asks. To Sharma’s mind, “nothing” can crack this riddle, for potato, being perishable, cannot be stored indefinitely. “Anybody who says they can solve the problem by cracking down on hoarding is ­lying. Potato cannot be hoarded,” he says. “Things will get worse as monsoons arrive,” he says.

But the Bangalore-based Mittal illustrates other ways in which the supply chain ass­ists middlemen, who can play havoc with farmers, consumers and other buyers. The episode dates from the rec­ent wild swings in tomato prices. He thought “playing geographical arb­itrage” made a lot of sense—buying at a mandi in Ahmedabad, where the going rate was Rs 6 a kilo as opposed to Bangalore, where it was Rs 20. But when his emissaries landed at Ahme­dabad, all did not go as planned. “We really tried to exp­loit that opportunity, but middlemen are smarter. When a middleman finds a buyer like us, from other locations, keen to take advantage of lower prices, he will jack up his price from Rs 6 to Rs 17,” he says. In the end, who lost—the company failed to profit and the consumer got no taste of tomato at far lower prices.

It’s not like farmers fare any worse when they try to be enterprising. Narendra Vikram Singh Parmar, a potato grower from Etmadpur, a tehsil in Agra, says he spent Rs 400-450 to prod­uce each of his 250-odd packets. He decided to cart it to Hyderabad, spending 80 paise per kg on transportation and assorted expe­nses. “It was all for almost nothing, despite all my effort, first growing and then sending it halfway across India,” Parmar says. He made a paltry Re 1 per kilo.

A crisis that has stayed on front pages for a month, farmer suicides, agitations, deaths in police firing, a wave of loan waivers—through all this, the whole bazaar ecology that lies between farmer and consumer thrives. After all, farmers were committing suicide even before demonetisation. No one grudges a systematised, efficient supply chain with its stable profits. But conferring a part of that stability, and maybe profits, on the farmer is what policy should aim at. The potato farmer, admittedly, seemed relativ­ely prosperous till last year. But it’s still he who seems most unprepared to deal with the vagaries, and the most vulnerable. He still wagers his all, and stands to lose it all.

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Is This The Story Of Potato Pricing?

• At the farm gate, farmer sells for: Rs 2 - 4

• The First Middleman buys it and takes it to the urban Mandi

• The First Middleman is ready to sell it onward for Rs 5 to 7

• At the Mandi, the commission agent is supposed to take only 6% from the buyer, but he takes up to 12% (that is from both the parties)

• The wholesaler(often, commission agent doubles up as wholesaler) buys it from commission agent at about Rs 5.50 to 7.70

• He then sorts his produce and sells it to the retailer according to the quality of the produce

• Retailer buys it at a price range of Rs 8 to Rs 14 ­depending on the quality

• The Retailer sells good quality potatoes to consumer at about Rs 20

So, the price differential between the farmer and the consumer is Rs 16-18, this is a markup of 400-900%

Cold Storage rental: Rs 230 to 260 per bag these are the charges at Hathras in UP, a price too steep for potato farmers.
Now, these farmers have left their potatoes at the cold storage where the storage operator will get rid of them.