Agricultural Economics Research Review

Vol. 20 (Conference Issue) 2007 pp 425-439

Linking Farmers to Markets

for High-Value Agricultural Commodities
Pratap S. Birthal, Awadhesh K. Jha and Harvinder Singh

Abstract

Growing demand for high-value food commodities is opening up

opportunities for farmers, especially smallholders to diversify towards
commodities that have strong potential for higher returns to land, labour
and capital. But, there is an apprehension about the capability of
smallholders to participate in the market-oriented production due to their
lack of access to markets, capital, inputs, and technology and extension
services. In this paper, possibilities have been explored of linking
smallholders to markets through such institutions as cooperatives,
growers’ associations and contract farming that reduce marketing and
transaction costs and alleviate some production constraints. Evidence
has shown that smallholders do participate and make a sizeable contribution
to the production of high-value food commodities, but their links to markets
are not strong. Though market institutions like cooperatives, contract
farming and growers’ associations do not altogether ignore smallholders,
some policy support is imperative to strengthen their linkages with the
markets.

1. Introduction
Market liberalization and globalization are causing a transformation in
agriculture and agri-food markets in India. Food basket is changing towards
high-value food products like fruits, vegetables and animal products, and in
response, the agricultural production portfolio is diversifying. Simultaneously,
food procurement and distribution system is also witnessing institutional
innovations like contract farming, producers’ associations, cooperatives and
supermarkets. These changes are creating opportunities as well as challenges
for farmers. They are expected to benefit from diversification into high-
value commodities that have a strong potential for higher returns to land,
labour and capital. Institutional innovations in marketing enhance their access
National Centre for Agricultural Economics and Policy Research (NCAP), Pusa,
New Delhi 110 012
426 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

to markets, quality inputs, technology, information, and services, which

eventually lead to improvement in productivity and reduction in marketing
and transaction costs. Nevertheless, Indian agriculture is dominated by
smallholders and there is an apprehension whether smallholders can benefit
from such innovations. Often, agri-business firms prefer contracts with those
farmers who can fulfill their quantitative and qualitative requirements.
In this paper, we have examined opportunities and challenges for
smallholders in market-oriented production of high-value commodities, and
have identified the enabling institutional and policy requirements for their
participation. The paper has been organized as follows. The next section
has discussed opportunities for smallholders to diversify towards high-value
commodities. Section 3 has examined the status of high-value agricultural
production and participation of smallholders therein. Some successful models
of linking smallholders to markets have been described in Section 4.
Conclusions and policy requirements for upscaling these models have been
discussed in the final section.

2. Opportunities in High-value Agriculture

Growing Domestic Demand

The high-value segment of agriculture offers considerable opportunities
to farmers for improvement in their livelihood. Food basket is undergoing a
significant change. Table 1 shows trends in shares of different food
commodities in total food expenditure for the rural and urban consumers.
For rural consumers, the share of high-value food commodities (fruits,
vegetables, animal products and beverages) in total food expenditure
increased from 30.4 per cent in 1983 to 44.1 per cent in 2004-05. Urban
consumers spend relatively more on high-value foods. In 2004-05, high-
value foods accounted for 55.3 per cent of their food expenditure, up from
45.3 per cent in 1983. On the other hand, the share of food grains in rural
food expenditure, during this period declined from 55.3 per cent to 38.6 per
cent, and in urban food expenditure from 38.6 per cent to 29.0 per cent.
Though urban consumers spend relatively more on high-value foods, their
consumption in rural areas has been growing faster, indicating a tendency
of convergence in the consumption pattern.
The demand for high-value food commodities is more responsive to
income changes. Expenditure elasticity for high-value food products ranged
from 0.80 to 1.04, and was much higher than for any other food item (Ravi
and Roy, 2006). Thus, as income increases consumers spend relatively more
on high-value foods.
 Birthal et al.: Linking Farmers to Markets 427

Table 1. Shares of different food items in total food expenditure in India

(per cent)
Food items Rural Urban
1983 1993-94 2004-05 1983 1993-94 2004-05
Cereals 49.5 38.5 32.8 32.9 25.8 23.8
Pulses 5.8 6.3 5.8 5.8 5.9 5.3
Milk and milk products 11.5 15.0 15.4 15.7 17.9 18.6
Edible oil 6.2 7.0 8.4 8.2 8.0 8.1
Meat, egg and fish 4.6 5.3 6.0 6.1 6.2 6.4
Vegetables 7.2 9.6 11.1 8.4 10.0 10.5
Fruits 2.1 2.8 3.4 3.6 4.9 5.3
Sugar 4.3 4.8 4.3 4.2 4.4 3.5
Salt and spices 3.8 4.2 4.5 3.6 3.8 3.9
Beverages 5.0 6.6 8.2 11.6 13.2 14.6
Total 100.0 100.0 100.0 100.0 100.0 100.0
Share of food in 65.6 63.2 55.0 58.7 54.7 42.5
total expentiture
Source: GOI (2006)

These changes in consumption pattern were driven by sustained income

growth and urbanization. Between 1980-81 and 2004-05, the per capita
income in India grew at about 4 per cent a year, and urban population by
about 3 per cent a year. Besides, changing lifestyles, increasing entry of
women in workforce, growing nuclear families, increasing use of credit
cards, improvements in transport infrastructure and rise of supermarkets
have also facilitated these changes. These trends have been quite robust in
the recent past and are likely to continue at least for some more time, leading
to a faster increase in demand for high-value food commodities. Ravi and
Roy (2006) have predicted demand for high-value food products to grow at
an annual rate of around 5 per cent by 2020, as against 2.5 per cent for food
grains.

Expanding Global Food Markets

Globalization is creating opportunities for the export of high-value
products. Evidences have indicated an accelerated flow of exports of high-
value food products from developing to developed countries (Diaz-Bonilla
and Recca, 2000; Aksoy, 2005). India however is not a significant player in
the global trade of agricultural products. It shares only 1.2 per cent of exports
and 0.8 per cent of imports. As far high-value products are concerned,
India’s share in world exports is 1.2 per cent for fruits and vegetables, 0.6
per cent for meat and 0.2 per cent for dairy products. India however has a
considerable share (10%) in exports of commodities like mangoes and onions.
428 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

Table 2 shows the changes in composition of India’s exports and imports

of agricultural products. During 2001-04, rice has been found to dominate
India’s agricultural exports with a share of 17.7 per cent, followed by
horticultural products (16.1%). Meat and meat products accounted for 5.3
per cent. Over time, the share of horticultural products has remained almost
constant, while that of rice, meat and dairy products has increased
substantially. On the other hand, the share of traditional export commodities
(tea, coffee, cocoa and spices) has declined considerably.
India’s imports of agricultural products have also increased. In 2001-
04, edible oils accounted for about half of the agricultural imports, followed
by horticultural products (23%) and pulses (13%). The share of dairy
products, rice and wheat has fallen drastically, mainly due to improvements
in their domestic production.

Table 2. Trends in exports and imports of agricultural products

Agri-products 1981- 1986- 1991- 1996- 2001-
85 90 95 2000 04
Exports
Total agricultural exports 2372 2525 3567 5265 6080
(US $ million)
Commodity shares %
Rice 9.7 9.2 16.2 17.8 17.7
Fruits and vegetables 13.4 15.3 16.0 15.4 16.1
Coffee, tea, cocoa and spices 34.8 35.2 21.5 20.6 13.3
Wheat 0.4 0.5 1.1 1.1 6.1
Meat and meat products 3.1 2.7 3.5 4.2 5.3
Sugar 2.7 0.3 2.1 1.5 4.3
Pulses 0.1 0.3 0.7 1.5 1.4
Milk and milk products 0.1 0.1 0.2 0.4 1.0
Imports
Total agricultural imports 1629 1416 1514 3093 4489
(US$ million)
Commodity shares %
Edible oils 46.5 30.3 17.5 45.3 47.2
Fruits and vegetables 7.7 23.5 28.0 19.0 23.5
Pulses 4.4 16.0 11.3 6.5 13.0
Coffee, tea, cocoa and spices 1.8 1.3 1.2 1.9 3.0
Sugar 5.5 5.7 10.5 4.3 1.4
Milk and milk products 7.2 3.7 0.9 0.5 0.3
Rice 2.6 4.7 0.7 0.1 0.0
Wheat 17.8 5.2 4.1 5.4 0.0
Source: FAOSTAT (2007)
 Birthal et al.: Linking Farmers to Markets 429

Globalization of agri-food markets though is an opportunity for the Indian

farmers to participate in the global food supply chains by increasing exports,
the question however is ‘can Indian farmers compete in the global market’.
Producer prices of commodities like milk, pig and bovine meat, eggs, bananas
and grapes are lower in India than in many other countries, indicating its
comparative advantage in their production (FAOSTAT, 2007). However,
India loses in the international market due to (i) lack of scale economies in
processing, (ii) stringent food safety and quality standards in the global trade,
and their high cost of compliance, and (ii) huge protection to producers and
exporters in major exporting countries.

3. Growth in High-vlaue Agriculture

Rapidly expanding demand for high-value food commodities incentivizes
farmers to diversify their production portfolio towards commodities that
have a strong potential for higher returns to land, labour and capital inputs.
The changes in agricultural production over the past two decades are shown
in Table 3. The share of high-value food commodities in the value of
agricultural sector output increased from 35 per cent in TE1982-83 to 47
per cent in TE 2003-04. The changes in the production portfolio are starker
at the commodity or commodity group level. During this period, the share of
fruits and vegetables increased from 14 per cent to 17 per cent, of milk
from 13 per cent to 18 per cent, of poultry from 1.6 per cent to 3.2 per cent
and of fish from 2.6 per cent to 4.3 per cent.
There was a deceleration in the growth of most commodities, except
for high-value food commodities. Between 1990-91 and 2003-04, horticulture
grew at an annual rate of 5.4 per cent, much faster than that during 1980s.
Poultry production experienced a consistent growth of over 6 per cent per
annum. Dairy production too grew consistently at about 4 per cent per
annum, despite a marginal deceleration in the latter period. Growth in fish
production accelerated from 3.2 per cent during 1980s to 5.9 per cent during
1991-92 to 2003-04. These trends are much robust compared to those for
rest of the agriculture. On the whole, growth in high-value segment
accelerated from 4.2 per cent during 1980s to 4.8 per cent during 1990-91
to 2003-04. This provided a cushion to the agricultural growth, which
otherwise would have decelerated at a higher rate.
A robust growth in high-value agriculture was facilitated by such policies,
as establishment of the National Horticulture Board in 1984 to promote
production, processing, marketing and exports of horticultural products. The
Milk and Milk Products Order (MMPO) that restricted the private sector
participation in dairy sector, was relaxed considerably in phases. Besides,
430 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

Table 3. Changes in the composition of agricultural sector

Agri-products Share in value of Annual compound
output, % growth, %
TE TE TE 1980-81 to 1991-92 to
1982-83 1992-93 2003-04 1990-91 2003-04
Crops 77.3 74.3 69.3 2.6 2.2
Cereals 27.4 27.2 22.9 3.0 1.3
Rice 14.6 15.1 12.5 3.6 1.0
Wheat 7.9 8.2 7.5 3.4 2.1
Pulses 5.6 4.6 3.4 1.2 -0.2
Oilseeds 6.6 8.5 7.1 5.3 0.8
Fibres 3.4 3.3 2.7 5.3 0.8
Drugs and narcotics 1.6 1.4 1.8 1.8 5.0
Condiments and spices 2.1 2.2 2.5 4.6 3.9
Fruits and vegetables 14.0 13.5 17.3 2.7 5.4
Sugars 6.0 5.9 5.6 3.2 2.3
Livestock 20.0 22.7 26.4 4.7 4.1
Dairy 12.9 15.4 17.5 5.5 4.1
Poultry 1.6 2.2 3.2 6.2 6.3
Meat 1.4 1.8 1.8 5.5 2.9
Fisheries 2.6 3.0 4.3 3.2 5.9
Agricultural sector 100.0 100.0 100.0 3.1 2.8
High-value foods 34.6 38.2 46.6 4.2 4.8
Rest of agriculture 65.4 61.9 53.5 2.5 1.4
Source: GOI (various years)

the government also provided some fiscal incentives, such as reduction in

corporate taxes and excise duties on processed foods, as a part of the
economic reforms programme initiated in 1991. De-licensing of food
processing industry also attracted considerable foreign direct investment
(FDI), leading to a faster growth in processed food production.
Indian agriculture is dominated by smallholders; about 86 per cent farm
households have landholding size of ≤2 ha. High-value agriculture is suited
to smallholder production systems, as production of many high-value
agricultural commodities require more labour resource and smallholders have
a plenty of family labour. However, the question is whether smallholders
participate in high-value agriculture. It is often argued that smallholders are
constrained by lack of cpaital, inputs, technology and services, and access
to markets, which may act as a barrier to their diversification towards high-
value agriculture.
Table 4 shows the participation rate and contribution of smallholders in
selected high-value food commodities. On an average, 15.3 per cent
 Birthal et al.: Linking Farmers to Markets 431

Table 4. Participation of smallholders in production of high-value commodities

Category Vegetables Fruits Diary
Participation rate (%)
Small (< 2.0 ha) 15.8 5.0 41.0
Medium (2.0-4 ha) 14.8 2.7 56.7
Large (>4.0 ha) 10.4 3.0 68.5
All 15.3 4.6 44.2
Distribution of participating households (%)
Small (< 2.0 ha) 83.5 88.4 77.4
Medium (2.0 – 4 ha) 11.9 7.1 13.7
Large (> 4.0 ha) 4.6 4.5 8.9
All 100.0 100.0 100.0
Share in area/production (%)
Small (< 2.0 ha) 61.0 51.9 68.8
Medium (2.0 – 4 ha) 20.9 19.3 16.7
Large (> 4.0 ha) 18.1 28.8 14.5
All 100.0 100.0 100.0
Source: For fruits and vegetables, GOI (1999); for dairy, GOI (2005a).

households grow vegetables, 4.6 per cent fruits and 44.2 per cent dairy
animals. Participation of smallholders in fruits and vegetables production is
higher compared to any other category of landholders. However, participation
of smallholders in dairying is less as compared to others.
Smallholders have a larger presence in the high-value segment; over 84
per cent vegetable growers and 88 per cent fruit growers are smallholders.
They account for 61 per cent of the vegetable area and 52 per cent of the
fruit area. Their presence in milk production is also considerable; over 77
per cent milk producers belong to smallholders and contribute 69 per cent to
total milk production.

4. Improving Farmers’ Access to Markets through

Institutional Innovations
Smallholders though make a sizable contribution to high-value food
production, their access to markets is constrained by scale. Their marketable
surplus is small, while local markets for high-value commodities are thin and
sale in distant urban markets raises transportation and marketing costs.
Existing supply chains are long and are dominated by a number of
intermediaries like assemblers, wholesalers, sub-wholesalers, commission
agents and retailers. In the case of fruits and vegetables, farmers receive
one-third to one-half of the final price (Gandhi and Namboodiri, 2002),
indicating high marketing costs and margins. Birthal et al. (2005) have
432 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

estimated the marketing costs to be around 20 per cent of the sale price of
vegetables. Marketing costs are also high in the case of milk, 15-20 per cent
(Birthal et al. 2005; 2006).

Institutional Approaches
High marketing and transaction costs act as a barrier to farmers’
participation in markets. Institutions such as cooperatives, growers’
associations and contract farming are considered to reduce marketing and
transaction costs and risks by providing ‘markets’ to the farmers at their
doorsteps (Eaton and Shepherd, 2001). In this section, we have examined
some successful models of such institutions.

Cooperatives
India’s dairy cooperative model is one of the successful models linking
farmers to markets. The first dairy cooperative was established in the Kheda
district of Gujarat in 1946, primarily to save producers from exploitation by
the middlemen/informal traders, and improve their bargaining strength and
economies of scale in marketing. In 2004-05, there were more than 11.3
thousand village level dairy cooperative societies in India with 12.3 million
members. These procured 7.3 million tonnes of milk, equivalent to 7.9 per
cent of the total milk produced in the country (NDDB, 2005). Cooperatives
also provide inputs, services and information to the producers-members. In
recent years, some dairy cooperatives have started using information and
communication technology for milk procurement and information
dissemination systems to improve efficiency and transparency in marketing.
Cooperatives market the milk and milk products in over 800 cities and towns
through their retail outlets.
Cooperatives also exist for other products, including oilseeds, fruits and
vegetables. Two important cooperatives in horticulture are Mahagrapes in
Maharashtra and HOPCOMS (Horticulture Produce Cooperative Marketing
and Processing Society Limited) in Karnataka. Mahagrapes is an association
of grape growers’ cooperative societies. It was established in 1991 to improve
the grape growers access to domestic and international markets, which
otherwise was difficult for individual producers or cooperative societies. It
now has 16 growers’ cooperatives with 2500 farmer-members.
Mahagrapes supplies inputs, technology, and extension services to
farmers through cooperatives and empowers them to produce quality output
conforming to food safety and quality standards of the importing countries.
Cooperatives associated with Mahagrapes have refrigerated transport and
cold storage facilities, for which cooperatives charge a fixed amount, on per
kg basis from the farmers.
 Birthal et al.: Linking Farmers to Markets 433

In 2003-04, Mahagrapes exported grapes worth US$ 2.2 million, mainly

to UK, Netherlands and Middle East countries. Mahagrapes does not retain
the profits it earns. It charges a fixed amount from farmers, on per kg basis,
to meet costs of transportation, labour and other activities. The profits are
passed on to the farmers. The net revenue for farmer members was about
60 per cent higher than those selling in the open market (Bakshi et al.,
2006).
Established by the state government in 1959 in Bangalore, HOPCOMS
now secures its supplies from about 12,000 framer-members through its
procurement centres. It markets about 500 tonnes of vegetables daily through
504 retail outlets. It also has 5 cold storages and one processing unit. The
Society also has outlets for the supply of inputs to the farmers.

Growers’ Associations
Growers’ associations are informal cooperatives managed by the farmers
themselves. SAFAL — a village level association promoted by the Mother
Dairy Fruits and Vegetables Limited (MDFVL), has been quite successful
in linking fruit and vegetable farmers to markets. SAFAL was established in
1988 to cater to the growing demand for fruits and vegetables in the
metropolitan city of Delhi. At present, there are 250 SAFAL associations
with about 20,000 farmer-members in the country.
MDFVL provides technical support to these associations in preparation
of crop calendar and showing schedules to get the desired supply on a
regular basis. The firm also provides inputs like quality seeds, bio-pesticides
and bio-fertilizers, and extension services to the producer-members. The
MDFVL is an ISO-9002 and HACCP certified firm. Quality standards for
each fruit and vegetable are defined in respect of size, weight, colour and
appearance, and are displayed at each SAFAL collection centre for farmers
to comply with.
Daily wholesale market prices in the Delhi wholesale market serve as
the base price for the producers. Farmers are paid the modal price plus a 5-
10 per cent premium for quality. The firm does not share any production
and price risk.
MDFVL has a 100 per cent export-oriented fruit-processing unit in
Mumbai. The MDFVL markets produce in fresh, frozen and processed
forms with brand name ‘SAFAL’. Retailing activity in fresh fruits and
vegetables is restricted to the metropolitan area of Delhi through its network
of about 300 retail outlets. The processed products are meant for domestic
as well as export markets. Major export destinations for SAFAL products
are: Europe, USA, Australia, Middle East, Japan, Singapore and Hong Kong.
In 2004, SAFAL had a turnover of about Rs1.5 billion.
434 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

Farmers have benefited from the SAFAL supply chain. A study on

spinach production by Birthal and Joshi (2007) has shown that SAFAL
farmers, on average, realized 78 per cent higher profits, 8 per cent higher
prices and incurred 92 per cent less marketing costs over those supplying it
in the open market.
There are also grower’s associations for other commodities. Two notable
examples include Self-Help Groups (SHGs), promoted by Appachi Cotton
Company Limited in Tamil Nadu, and Agrocel Pure & Fair Cotton Growers’
Associations, promoted by Agrocel Industries Limited in Gujarat.

Contract Farming
In India, contract farming is in the nascent stage, but is likely to emerge
as an important form of vertical coordination with unfolding of market
liberalization and globalization. Recent reforms in agricultural markets have
opened up new avenues for agribusiness in India, and many a big business
houses have started entering the agricultural markets, and use contract
farming as a means to source their raw material requirements. Contract
farming is practised in many agricultural commodities including wheat,
Basmati rice, fruits, vegetables and medicinal plants, but is prominent in
poultry and dairy. About 40 per cent broiler production in the country is
under contract. For milk, no such estimate is available, but the private sector
procures nearly 8-10 per cent of the total milk produced in the country.
The agri-business firms follow different models of contract farming,
ranging from bi-partite to multi-partite agreements. A bi-partite contract is
an agreement between producers and firms, which may take the form of a
market specification or resource providing contract. Inclusion of other
agencies by the agri-business firms to provide inputs, credit and insurance
gives rise to multi-partite contracts. In India, bi-partite contracts are common
in poultry. Firms provide critical inputs like day-old chicks, feed, medicines,
vaccines and extension services. Poultry farmers bear the cost of labour,
shed, litter, water and electricity. Farmers are provided a guaranteed
remuneration in the fixed growing charges based on bodyweight of the
birds. The firms lift the entire output and thus farmers are insulated against
market risks.
From farmers’ perspective, most important benefit of contract farming
is their insulation against price risk which is very high in poultry production.
Ramaswami et al. (2006) have shown that through contract farming farmers
could shift as much as 88 per cent income risk to the firms. Another benefit
is the access to interest-free credit in the form of inputs. In a study, Birthal
et al. (2005) have estimated 58 per cent reduction in marketing and transaction
costs and 13 per cent increase in net profits due to contract farming.
 Birthal et al.: Linking Farmers to Markets 435

Tri-partite contracts are common in dairying. Firms enter in contract

with a local person in the village who acts as an intermediary/facilitator
between producers and firm. This reduces transaction costs of contracting
with a large number of small-scale producers. Bi-partite contracts are with
large dairy producers.
The intermediary (agent) also assists firm staff in dissemination/
distribution of information, inputs, services and milk payments to producer-
suppliers. Price of milk is determined on the basis of its fat and SNF (solids
not fat) contents, taking into consideration the prices fixed by its competitors.
Main benefit from the contract farming in milk is the reduction in
marketing and transaction costs. Birthal et al. (2005) have shown that with
contract farming farmers could save as much 92 per cent of these costs.
This enabled them to earn almost twice the net revenue as compared to that
by independent farmers.

ICT-enabled Supply Chains

India is witnessing a revolution in Information Communication
Technology (ICT). Its applications in linking farmers to markets are on the
rise. The e-chaupal initiative of the Indian Tobacco Company Limited (ITC)
is one of such efforts. The ITC provides information on market prices,
agronomic practices, inputs, weather, etc. through internet kiosks, free of
charge. A farmer can sell his produce to ITC at the market price, and can
also avail inputs from it, if he desires. ITC has about 6100 e-chaupals
spread over 35000 villages, serving 3.5 million farmers in eight states.
There are several such other initiatives taken by big business houses.
Some of these are : ‘Hariyali Kisan Bazar’ of the DCM Limited, ‘Kisan
Sansar’ of the Tatas, ‘Mahendra Shubhlabh’ of Mahendras & Manhendars,
etc.

Inclusion/Exclusion of Smallholders
Marketing and transaction costs are higher for smallholders. They are
expected to benefit most from institutional marketing arrangements. The
question however is: ‘Are they included in the supply chains?’ Often agri-
business firms hesitate contracting with smallholders because of their small-
scale and inability to comply with food and quality standards. Contracting
with smallholders thus raises transaction costs (search, monitoring and
enforcement) to the firm.
There is a mixed evidence regarding participation of smallholders in the
coordinated marketing systems. In contract farming of spinach (Birthal and
436 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

Joshi, 2007) and gherkin (Erappa, 2006) more than 50 per cent farmers
were found small landholders (d”2ha). Birthal et al. (2005) have reported
considerable involvement of small-scale producers in contract farming of
milk, but not in broiler production. In dairying, 56 per cent contract farmers
had d”5 milch animals, while in broiler production, only about one-third of
the contract producers had d”5000 birds/cycle. On the other hand, Kumar
(2006) has found very little involvement (15%) of small landholders in crop
production in Punjab.

5. Conclusions and Policy Implications

Unfolding of market liberalization and globalization is causing significant
changes in agriculture and agri-food markets. Agriculture is diversifying
towards high-value food commodities, and food marketing system is moving
towards vertical coordination. These imply a greater need for strong linkages
between production and markets.
Both, central and state governments have taken a number of steps to
strengthen linkages between agriculture and agri-business. These include
relaxation in regulations governing markets, fiscal incentives for food
processing industry, pruning of the list of food products reserved for small-
scale industry, increased availability of credit to farmers at lower interest
rate, funding of contract farming schemes by institutional agencies, permission
of FDI in single brand retailing, etc. But, there are a number of other issues
that require policy attention.
Expanding agri-business will confront infrastructural constraints such
as poor roads, transportation and storage facilities, and erratic electricity
supply. Empirical evidence has shown a lower concentration of high-value
agriculture in areas with poor road network (Parthasarathy Rao et al., 2006).
In this age of information, electricity is crucial to effectively utilize information
technology to retrieve and transmit information on production and post-
harvest technology and management practices, prices and markets.
Investment is required in public infrastructure to not only facilitate market
linkages but also induce private investment in cold chains and food processing.
Expanding domestic and global food markets are accompanied by
increasing demand for food safety, quality, traceability and compliance.
Meeting these requirements is a big challenge for farmers, processors and
exporters due to their higher initial investment on machinery and equipment,
certification procedures and labelling, and monitoring and enforcement costs
at the farm level.
Tax incidence on processed foods is high (15-21%), despite some
reductions in recent years. In countries like UK, USA, Malaysia and
 Birthal et al.: Linking Farmers to Markets 437

Thailand, processed foods are either exempted from taxes or attract very
low taxes. In India, packaging cost is also high, ranging between 12 and 20
per cent of the total cost. High tax incidence and packaging costs raise
retail prices, making products unaffordable to large masses.
Foreign direct investment (FDI) in retailing is not allowed, except in
single brand. There is an apprehension that entry of multinationals would
displace workers in the unorganized food retailing. Nevertheless, FDI can
strengthen agribusiness supply chains, improve competitiveness in production
and marketing, and enable farmers to participate in quality-driven global
food chains.
Integration of smallholders on the supply chain is a major challenge.
Exclusion of smallholders from the supply chain is politically unacceptable
and socially undesirable. Their integration requires collectivization into
cooperatives and self-help groups or intermediary contracts, which reduce
transaction costs to both firm and farmers. The government should facilitate
such institutors.
Production of most of the high-value agricultural commodities is capital-
and information/knowledge-intensive and riskier, while smallholders lack
access to capital, improved technologies, quality inputs, extension services
needed for entry into the high-value segment. It is therefore essential to
strengthen institutional mechanisms that improve smallholders’ access to
credit, insurance, technology and support services.
By amending the Agricultural Produce Market Committee Act, the
Government of India has allowed agri-business firms to source raw materials
directly from the farmers through contract farming. The revised Act however
does not provide for any legal measures to overcome disputes arising due to
breach of contract and other opportunistic tendencies. Contract farming is
emerging in a big way in India, and there is all likelihood of rise of such
problems in the future. Policies to facilitate transparency in contract
arrangements and stringent rules to safeguard the interest of farmers as
well as firms are imperative.
An enabling policy environment is essential to strengthen the supply
chain and value addition. There are considerable opportunities for agri-
business development. India has diverse agro-climatic conditions, offering a
tremendous potential for growing a wide range of commodities round the
year. It is the largest producer of milk (14.6%, 97 million tonnes), second
largest producer of fruits and vegetables (9.2%, 128 million tonnes), and
sixth largest producer of meat (2.3%, 6 million tonnes) in the world. It
produces 40 per cent of world mangoes, 35 per cent of green peas, 29 per
cent of cauliflowers, 22 per cent of bananas and 20 per cent of cashew
nuts.
438 Agricultural Economics Research Review Vol. 20 (Conf. Issue) 2007

Demand for processed foods is expected to grow rapidly. Unfortunately,

food processing industry is under-developed. Organized sector processes
only 1.4 per cent of total output of fruits and vegetables, 6 per cent of
poultry, 8 per cent of marine products, 13 per cent of milk and 21 per cent of
buffalo meat (GOI, 2005b). The food processing policy envisions raising the
level of processing to 15 per cent in the case of fruits and vegetables, 25 per
cent in poultry, 20 per cent in marine products, 30 per cent in milk and 45 per
cent in buffalo meat. This will require considerable investment from the
private sector.

References
Aksoy, M.A., (2005) The evolution of agricultural trade flows. In: Global
Agricultural Trade and Developing Countries, Eds: M.A. Aksoy and J.C.
Beghin. The World Bank, Washington D.C.
Bakshi, K., D. Roy and A. Thorat, (2006) Small they may be and Indian farmers they
are but export they can — the case of Mahagrapes farmers in India. Paper
presented at the Workshop ‘From Plate to Plough- Agricultural Diversification
and Its Implications for Smallholders’, organized by the International Food
Policy Research Institute, New Delhi Office, and Institute of Economic Growth,
New Delhi, India, 20-21 September.
Birthal, P.S., A.K. Jha, M. Tiongco, C. Delgado, C. Narrod and P.K. Joshi, (2006)
Equitable intensification of smallholder market-oriented dairy production in
India through contract farming. Annexure I of the IFPRI-FAO final report
“Contract Farming of Milk and Poultry in India: Partnerships to Promote
the Environmental Friendly and Equitable Intensification of Smallholder
Livestock Production”. International Food Policy Research Institute,
Washington DC, USA.
Birthal, P.S., P.K. Joshi and Ashok Gulati, (2005) Vertical Coordination in High-
value Food Commodities: Implications for Smallholders. MTID Discussion
Paper 85. International Food Policy Research Institute, Washington D.C.
Birthal, P.S. and P.K. Joshi, (2007) Institutional innovations for improving
smallholder participation in high-value agriculture: A case of fruit and
vegetable growers’ associations. Quarterly Journal of International
Agriculture, 46(1): 49-68.
Diaz-Bonilla, E., and L. Recca, (2000) Trade and agro-industrialization in developing
countries. Agricultural Economics, 23(3): 219-230.
Eaton, C., and A.W. Shepherd, (2001) Contract farming: Partnerships for growth.
FAO Agricultural Services Bulletin 145. Food and Agriculture Organization,
Rome, Italy.
Erappa, S., (2006) Contract Farming in Karnataka: A Boon or a Bane? Research
report 9/ ADRT 113. Agricultural Development and Rural Transformation Centre,
Institute for Social and Economic Change, Bangalore.
 Birthal et al.: Linking Farmers to Markets 439

FAOSTAT, (2007) http://faostat.fao.org. Food and Agriculture Organization, Rome,

Italy.
Gandhi, V. and N.V. Namboodiri, (2002) Fruit and Vegetable Marketing and Its
Efficiency in India: A Study in Wholesale Markets in Ahmedabad Area. Mimco
Indian Institute of Management, Ahmedabad.
GOI (Government of India), (1999) Cultivation Practices in India. Report No. 451(54/
31/3). National Sample Survey Organization, Ministry of Statistics and Program
Implementation, New Delhi.
GOI (Government of India), (2005a) Income, Expenditure and Productive Assets of
Farm Households. Report No. 497(59/33/5). National Sample Survey
Organization, Ministry of Statistics and Programme Implementation, Government
of India, New Delhi.
GOI (Government of India), (2005b) Vision, Strategy and Action Plan for Food
Processing Industries in India. Ministry of Food Processing, New Delhi.
GOI (Government of India), (2006) Level and Pattern of Consumer Expenditure,
2004/05. Report No. 508(61/1.0/1). National Sample Survey Organization,
Ministry of Statistics and Programme Implementation, New Delhi.
GOI (Government of India), (various years) National Accounts Statistics. Central
Statistical Organization, Ministry of Statistics and Programme Implementation,
New Delhi.
NDDB, (2005) Annual Report. National Dairy Development Board, Anand, Gujarat.
Parthasarathy Rao, P., P.S. Birthal and P.K. Joshi, (2006) Diversification towards
high-value agriculture: Role of urbanization and infrastructure. Economic and
Political Weekly, June 30: 2747-2753.
Ramaswami, B., P.S. Birthal and P.K. Joshi, (2005) Efficiency and Distribution in
Contract Farming: The Case of Indian Poultry Growers. MTID Discussion
paper 91. International Food Policy Research Institute, Washington DC, USA.
Ravi, C. and D. Roy, (2006) Consumption patterns and food demand projection: A
regional analysis. Paper presented at the Workshop ‘From Plate to Plough-
Agricultural Diversification and Its Implications for Smallholders, organized
by the International Food Policy Research Institute, New Delhi Office, and
Institute of Economic Growth, New Delhi, India, 20-21 September.