A More Efficient Soybean Market in Madhya Pradesh
About a year ago, I wrote a brief post about the Ethiopia Commodity Exchange (ECX), launched in April 2008 as a mechanism for helping farmers gauge their crop sales in light of up-to-date information about world commodity prices.1A similar effort to promote market efficiency is the subject of a study by Aparajita Goyal (pdf), an economist at the World Bank.2 Goyal studied data relating to soybean sales in the Indian state of Madhya Pradesh before and after introduction of internet kiosks and warehouses that provided "wholesale price information and an alternative marketing channel to soy farmers in the state."
The aim of setting up the kiosks and warehouses was to mitigate exploitation of farmers by middlemen. Due to poor rural transport and storage infrastructure, lack of reliable price information, and an inability on the part of purchasers — processing companies and exporters — to verify produce quality, middlemen were able to get away with paying lowball prices to farmers while often overcharging purchasers.
Goyal found that the availability of the kiosks,3 which began being installed in Madhya Pradesh villages in October 2000, produced a significant increase in prices received by farmers and in the amount of land farmers allocated to soy production. The rise in prices — driven by increased competition among buyers — resulted in a 33% increase in profit for farmers. Land cultivated in soybeans went up 19%.
ITC Ltd., the large Indian conglomerate that deployed the kiosks and built the warehouses — at which farmers could sell directly to ITC — benefited from the improvement in quality of soybeans procured (ITC tested beans for oil and protein content before purchasing them), from the creation of a direct marketing channel, and from a reduction in its transaction costs (principally, costs of storage, weighing, loading, and bagging). The value of these benefits fully offset the cost of the kiosks.
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1 ECX trades five commodities: maize, wheat, beans, sesame and coffee. You can read remarks by Eleni Gabre-Madhin, ECX's CEO, concerning the first eighteen months of ECX's operation here.
2 Members of the American Economic Association can access Goyal's paper, "Information, Direct Access to Farmers, and Rural Market Performance in Central India" (forthcoming in American Economic Journal: Applied Economics), here.
3 The kiosks are called "e-Choupals." "Choupal" is a Hindi word meaning "village gathering place." In addition to price information, the kiosks provide agricultural information and weather forecasts.
Labels: Business acumen, India
posted by Karen Nelson @ 11:16 PM
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