Farmers in some States are regretting their abundant yields this year as the prices of agricultural commodities have crashed. Chilli farmers in Andhra Pradesh and Telangana, tomato growers in Karnataka, and toor dal cultivators in Maharashtra are at the centre of a severe crisis that has witnessed prices fall by more than half in a matter of just weeks. Some speculate that high commodity prices last year caused farmers to respond by boosting production, which in turn led to the present price crash.
Whether it is the wholesale mandi s where farmers sell their agricultural produce, or retail outlets where consumers buy them, price fluctuations are common. But whether such fluctuations can be explained as being due to mindless crop cultivation, as some speculate, is not as certain. For one, in the consumer market, commodity speculators usually dampen price fluctuations by managing supply according to consumer demand. For instance, when the supply of grains is abundant, speculators do not flood the market with all their stock but instead hoard the grains and sell them later when supply turns scarce. Thus, even if farmers engage in mindless grain production, speculators usually save the day for consumers by preventing steep rises and falls in grain prices.
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Price fluctuations
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Second, in the wholesale market, speculators can save farmers from similar price fluctuations by paying a competitive price for their produce even when there is abundant supply. Grain traders, to return to our previous example, who want to hoard supply expecting higher grain prices in the future would be willing to pay a better price to farmers today. This comes not out of compassion for farmers, but purely out of competition with other grain traders. When farmers are free to sell their produce to any trader they want, it is traders paying the best price who get hold of it. Farmers can also expect a more predictable price for their produce each season, reflecting stable consumer prices, thus preventing mindless cultivation.
Such competition though is precisely what is missing from the Indian agricultural scene where the supply chain is broken. Red tape, including limits on stocking agricultural products, has prevented the growth of a robust market for commodity speculation. The result is lack of investment in infrastructure like that of cold storage; about 40% of agricultural produce in India is wasted because of it. This, in turn, has led to price fluctuations that have affected both the farmer and the consumer. Wholesale agricultural prices are determined by trader cartels that block competitive bidding. This significantly reduces the price farmers can get for their products, while boosting the profits of some privileged traders. By some estimates, farmers receive only 20-25% of what the final consumer pays for his product. Thus, a free market in agriculture can be the best antidote to the crisis facing Indian farmers.