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Agriculture Marketing: APMC Act and Related Issues

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INSIGHTS

Table of Content
1. APMC act
1. Purpose
2. Shortcomings in old APMC acts
3. Model APMC act
4. Economic Survey on APMC act
2. Alternate Marketing Channels
1. Direct Marketing
2. Contract Farming
3. Futures Contracts and Negotiable Warehouse Receipt System
3. Importance of International Trade
4. Essential Commodities Act

Topics from Syllabus Covered

1. GS paper 2
1. Government policies and interventions for development in various sectors

and issues arising out of their design and implementation.

2. Welfare schemes for vulnerable sections of the population by the Centre and
States and the performance of these schemes; mechanisms, laws,
institutions and Bodies constituted for the protection and betterment of
these vulnerable sections
3. Issues relating to poverty and hunger.
2. GS paper 3
Issues related to direct and indirect farm subsidies and minimum support prices;
Public Distribution System- objectives, functioning, limitations, revamping; issues
of buffer stocks and food security; Technology missions; economics of animalrearing.

Introduction
Marketing and trade, as an activity comes at latter part of the value chain for any
commodity and yet it is the most important determinant for all other activities. All the
input expenses for labor, materials and capital are rewarded at this stage, which shall
include some incentive over and above inputs. Agricultural products, in a developing
country remain in uniform demand throughout year, while production of most of them is
concentrated in some part of the year. This results in fluctuation in prices which can
change equations of prot for the farmer. Apart from this, in a federal and diverse country,
every state or region has diverse resources, consumption patterns and rules regarding
taxation, levies, sale etc., which makes numerous hurdles in interstate trade. Integration of

all the regional markets into national market is desirable in interest of both farmers and
consumers. Farmers will get rewarding prices even if demand is not there in their region,
on other hand if there is less production in a state, consumer will still be able to get
products at reasonable prices. Same is true for international markets, we have seen few
years back when prices of sugar were up swinging, and then sugar imported from Brazil
came to rescue Indian consumers. However, integration of national and international
markets, at times can make domestic and regional farmer vulnerable because of external
forces. For these reasonable regulation is imperative.
In last article we read about procurement and disbursal by government which involves
about 33% of total production of food grains. Another, 33% is captively consumed by
farmers and residue is left for open markets. Trade of this quantity is also heavily
regulated by the government through APMC act and various taxes and levies. So, less
quantity left in market is in itself a strong reason for price rise, which is further
supplemented by monopoly of government in open market. Further, under current system
there are number of intermediaries who add little value to the product, but increase price
dramatically by commissions or trading margins. This all coupled with lack of integration
of market leaves farmers and consumer vulnerable alike.
1. Agricultural Produce Market Committee (APMC) Act
a) Purpose
Agriculture is a state subject and almost all state governments enacted APMC act
in 1950s or so, to bring transparency and end discretion of traders. This is
extension of overall government policy which is directed toward food security,
remunerative prices to farmers and fair prices to consumers. However, widespread
perception for this act is that it has worked contrary to almost every stated
objective, atleast in recent past.
It should be noted that though current system controlled by APMC is quite
inefcient, yet it is far improvement from pre-APMC/50s era. At that time there was
no control at all. Money lender, traders, bankers etc. were often one person. This all
in one role of middleman resulted in perpetual indebtness of farmer.
Under the APMC acts, States are geographically divided in to markets which are
headed by market committees and any production in that area shall be brought to a
market committee for sale.
This is applicable to notied agricultural products which differs from state to state
and generally includes most of the important cereals, vegetables and other

horticulture products. Notied products are meant to be brought to the market

committee and auctioned in presence of the farmer.
In this Market committee (popularly called Mandi) there are commissions agents
(called arhatiyas) who hold license and are allotted a shop in the market. Farmer
and buyer have discretion to go to any agent in this market, based on personal
relations. Normally farmers chose agents from their own village and are influenced
by age old relations of money lending. There are huge numbers of commission
agents in a particular APMC dealing in same crop, which results in constant price
discovery and adjustments for that particular crop.
At same time buyers, which may be rice mill, flour mills, cotton ginning mill owners,
come to procure these products. They make their bids and if these bids are fair, will
give best return to farmers. But unfortunately this is not so.

An APMC Yard
b) Shortcomings in Current APMC system
1. Monopoly of APMC Monopoly of any trade (barring few exceptions) is bad,
whether it is by some MNC corporation by government or by any APMC. It
deprives farmers from better customers, and consumers from original

suppliers.
2. Cartelization It is quite often seen that agents in an APMC get together to
form a cartel and deliberately restraint from higher bidding. Produce is
procured at manipulatively discovered price and sold at higher price. Spoils
are then shared by participants, leaving farmers in lurch.
3. Entry Barriers License fee in these markets are highly prohibitive. In many
markets farmers were not allowed to operate. Further, over and above
license fee, rent/value for shops is quite high which keeps away competition.
At most places only a group of village/urban elite operates in APMC.
4. Conflict of Interest APMC play dual role of regulator and Market.
Consequently its role as regulator is undermined by vested interest in
lucrative trade. They despite of inefciency wont let go any control.
Generally, member and chairman are nominated/elected out of the agents
operating in that market.
5. High commission, taxes and levies: Farmers have to pay commission,
marketing fee, APMC cess which pushes up costs. Apart from this many
states impose Value Added Tax.
6. Other Manipulations Agents have tendency to block a part of payment for
unexplained or ctitious reasons. Farmer is sometimes refused payment slip
(which acknowledges sale and payment) which is essential for him to get
loan.
c) APMC model act
Taking these concerns into cognizance, Central Government appointed a working
group which recommended a Model APMC act. Salient features are
1. Farmer doesnt need to bring his produce to APMC Mandi. He can directly
sell it to whomever he wants. But, if he doesnt bring his produce to Mandi,
then he cant stand for election in that APMC marketing committee.
It allows alternate markets such as direct purchase centers, private market
yards/mandis.
2. It increased responsibility of APMCs on following lines
1. Full payment should be made on day of sale itself.
2. Quantity brought and prices should be displayed near arrival gate. Its
being done electronically in many APMCs

3. Promote private partnership in management of APMCs

4. It shall make efforts to build facilities for Processing and other value
additions
5. Ensuring transparency in Pricing and Transactions in the market
3. It allows Public Private Partnership in the management and development of
agricultural markets in the country for post-harvest handling, cold storage,
pre-cooling facilities, pack houses etc.
4. It not only allows, but strongly advocates for contract farming. It also
provides for dispute resolution mechanism.
5. It mandates establish State Agricultural Produce Marketing Standards
Bureau for Grading, Standardization and Quality Certication.
6. It provides for abolishment of commission agent system. Payments will be
made for facilities such as grading, sorting, and processing.
APMC model act is a sort of roadmap for states for their respective APMC
acts which shall be amended. States has adopted Model APMC in piecemeal
manner as per vested interests of various pressure groups. Most of states
havent abolished system of commission agents as they constitute
influential people.
Bihar repealed APMC act in 2006, while Kerala never had any APMC act, but
situation is no better there as thrust on development alternate markets is
lacking. Demand is just to dismantle monopoly of state regulated APMCs
and increase competition. APMC can continue and with competition they
can get efcient overtime.
Why model APMC Act is also considered inappropriate?
The model legislation has actually given rise to a conflict of interest, as the
APMC, which is a major player, is also the regulator/registering authority.
There is reluctance on part of state governments to reform the APMC
legislation, as it generates huge revenues. Some states have created entry
barriers by prescribing either prohibitive license fees for setting up such
markets, or the minimum distance between private markets and APMC
markets.
d) Economic Survey on APMC act

1. The provisions of the State Agricultural Produce Marketing Committee

(APMC) Acts have prevented creation of competitive conditions in the
distribution of commodities and creation of a national market for agricultural
commodities. Multiple layers of intermediation in the distribution of food
articles have also pushed up prices for consumers. It is therefore necessary
to focus on distribution channels and on reducing food wastage in the
supply chain.
2. The liberalization of 1991 focused on the industrial sector. While industry
was liberalized and allowed to buy from, and sell to, anyone in the world,
Indian farmers in many states, are still required to buy and sell only in the
government-designated Agricultural Produce and Marketing Committees
(APMC) to licensed entities. Farmers are not allowed to sell their produce
directly to the consumers. A national market for food is yet to develop.
3. Interventions by the government are problematic. The rst is the maze of
restrictions on transactions and storage. This includes state-level APMC
laws, the Essential Commodities Act, and the administrative measures at
local and state levels that distort the decision to grow and the decision to
store.
4. State APMC laws are a major hurdle to modernization of the food economy.
They have articially created cartels of buyers who possess market power.
The proposed Model APMC Act 2003 is an inadequate solution, as APMCs
remain a non-level playing eld.
5. To create a national market the central government needs to use powers
under the Union List and the Concurrent List of the Seventh Schedule of the
Constitution to end the monopoly powers of the APMCs and replace other
punitive and coercive state laws affecting the food market.
6. Apart from breaking the monopoly and dissuading state governments from
treating the APMCs as liberal sources of revenue, substantive efforts have
to be made to create alternative trading platforms in the private sector where
it is possible to reduce the layers of intermediation. Since this may take time,
fruits and vegetables should be taken out of the purview of the APMC Acts
immediately. A processor should be able to buy directly from farmers
without having to pay any Mandi fee/tax to the APMC.
7.

1. Permit sale and purchase of all perishable commodities such as

fruits and vegetables, milk and sh in any market. This could later be
extended to all agricultural produce.

2. Exempt market fee on fruits and vegetables and reduce the high
incidence of commission charges on agricultural/horticultural
produce.
3. Taking a cue from the success of direct marketing efforts of states,
the APMC/other market infrastructure may be used to organize
farmers markets. FPOs/self-help groups (SHGs) can be encouraged
to organize farmers markets near urban centers, malls, etc. that have
large open spaces. These could be organized every day or on
weekends, depending on the concentration of footfalls.
4. Include facilitating organization of farmers markets under the
permitted list of corporate social responsibility (CSR) activities under
Companies Act 2013, to encourage companies engaged in agri-allied
activities, food processing etc. to take up this activity under CSR and
also help in setting up supply chain infrastructure. This would be
similar to the e-Choupal initiative of ITC Ltd., but under CSR.
5. All the above facilitators can also tie-up a link to the commodity
exchanges platform to disseminate spot and futures prices of
agricultural commodities
Some measures that would facilitate the creation of a barrier-free
national market are:
2. Alternate Marketing Channels
a) Direct Marketing
APMC model act promotes direct marketing. As farmer is allowed to sell his goods
outside APMC, he can now under APMC model act, directly sell to consumer. This
completely eliminates middleman and narrows gap between farmers sale price
and price paid by consumer. There are numerous successful examples all over
India such as Apni Mandi in Punjab, Rythu Bazar in Andhra Pradesh, Uzhavar
Sandhai in TN, Shetkari Bazaar in Maharashtra, Hadaspur Vegetable Market in
Pune, Krushak Bazaar in Odisha and Kisan Mandi in Rajasthan.
Central government sponsors Agricultural marketing Infrastructure, Grading &
standardization Scheme for development of infrastructure for direct marketing in
which capital subsidy of 25% is available (33.33% in NE states).
b) Contract Farming
Under contract farming inputs material may be provided by purchasing party for a

particular crop and there is a crop buyback agreement in advance Quality is

specied in advance. This is mainly entered into by big corporates who are in
business of food processing. So far there has been mixed results. It removes
uncertainty of Income for the farmer and he can fetch good prices. But this all
depends upon ready availability of genuine information about the market trends. It
is seen that there is stark information asymmetry between corporates and farmers.
This open up avenues for exploitation of farmers as these are long term contracts,
once agreed by farmer at lower price, market price doesnt matter for contract
period.
See major companies involved in contract farming here.
c) Future contracts and negotiable warehouse receipts in agriculture
A futures contract is a contract between two parties where both parties agree to
buy and sell a particular asset of specic quantity and at a predetermined price, at
a specied date in future. Lets take example of an Exporter Exporter sells goods
to USA at 3 month credit at $ 1 lakh. At this time exchange rate of 1$ is Rs 60. So
he expects to receive Rs 60 lakh After 3 months. But in 3 months exchange rate can
go down to Rs 57. This will cause him loss of Rs 3 lakhs.
So, at time of sale, exporter can enter into currency futures sale contract. He will
enter into contract with banker under which banker promises to
1. Buy dollars after 3 months,
2. Fixed quantity i.e. $ 1 lakh,
3. At predetermined rate whatever rate is going in market for 3 months
currency futures
At end date, contract may be either settled by delivery of dollars by bank to exporter
(at predetermined price/contract price) or by settling price difference market and
contract price in cash.
These contracts between two parties are tradable like commodities on various
exchanges. Note that, whenever exchange rate of a $ will vary, (below or beyond Rs
60) it will influence value of the contract itself.
Hence, these contracts are instruments for Risk management, price discovery and
trading. This trading attracts intense scrutiny of market analysts for prediction of
future trends of demand and supply, which in turn yield much useful data for
manufacturers and producers. This has much utility for the farmers as they can

decode future trends and plan their production accordingly. Farmer can similarly
sell his production in advance in futures market and buyers can buy in futures
market.
In 2003 futures trading in all agricultural commodities was allowed and in 2007 The
Warehousing (development and Regulation) Act, 2007 was passed. This created
Warehousing Development and Regulating Authority (WDRA).
WDRA introduced a concept of Negotiable Warehouse Receipt. There are WDRA
certied warehouses all over India, in which farmers can deposit there produce and
they will get a receipt (Negotiable Warehouse Receipt) acknowledging quantity,
type, category etc. of crop.
This receipt can be used by farmers to get loans, to make payments or to settle any
other type of claim. This receipt will be accepted by any certied warehouse in
India and possessor of this receipt can get quantity mentioned in it.
The Negotiable Warehouse Receipts (NWR) system aimed at not only helping the
farmers to avail better credit facilities and avoid distress sale but will also to
safeguard
nancial institutions by mitigating risks inherent in credit extension to farmers.
However, this to work effectively need a market based economy and free
determination of prices. Various commodities are time and again banned for
futures trading which keeps farmers and investors away. Further, there was scam
in commodity exchange NSEL; it was found that stock of underlying assets, on
basis of which contracts were entered, didnt existed. Consequently, NSEL failed to
settle its contracts.
3. International Trade
India is among largest producers for products like wheat, rice, milk, pulses etc., but
its share in agro global trade is much lower. This is partially due to heavy domestic
consumption and rest due to non-coherent and unpredictable policies. There are
quantitative restrictions which differ from crop to crop and time to time. Few years
back cotton exports were suddenly banned after domestic prices rise and soon ban
was lifted. There are export quotas, beyond which export is not allowed.
Trade of basmati rice was liberalized in 1990s and since then its prices are almost
integrated to international prices which are more remunerative to farmers.

Exports of agro product were valued at USD 32.3 billion in 2013-14, a jump of 122
per cent from 2008-09. But big part of this was offloading of surplus stocks by FCI
in foreign markets.
Import of one lakh tons of rice was undertaken over a ve month period from
Myanmar for augmenting the TPDS supplies in the north-eastern states. Such
avenues need to be explored especially as they could be more economical than
transporting rice from surplus states like Punjab or AP, and would limit FCIs
Procurement, and consequently, distortion, in the domestic market.
4. Essential Commodities Act
The EC Act, 1955 provides for the regulation and control of production, distribution
and pricing of commodities which are declared as essential for
1. maintaining or increasing supplies or
2. for securing their equitable distribution and
3. Availability at fair prices.
Major commodities are covered under the act. Some of them are:
1. Petroleum and its products, including petrol, diesel, kerosene,
Naphtha, solvents etc
2. Foodstuff, including edible oil and seeds, vanaspati, pulses,
sugarcane and its products like, khandsari and sugar, rice paddy
3. Jute and textiles
4. Drugs- prices of essential drugs are still controlled by the DPCO
5. Fertilizers- the Fertilizer Control Order prescribes restrictions on
transfer and stock of fertilizers apart from prices.
The Drug Price Control Order (DPCO) or Fertilizer Control Order and such
other orders have also been issued under the powers of the ECA.
The Act is thus pro-consumer and impacts at the level of the wholesaler and retailer
The Act empowers the Centre to order states to impose stock limits and bring
hoarders to task, in order to increase supplies and cool prices. Generally the Centre
species upper limits in the case of stock holding and states prescribe specic
limits. However in case there is a difference between states and the Centre, the act

species that the latter will prevail.

In 2002 and 2003 an order was passed removing the licensing requirements, stock
limits and movement restrictions on all specied foodstuffs. These orders allowed
dealers to freely buy, stock, sell, transport, distribute, dispose, acquire, use or
consume any quantity in respect of rice/paddy, wheat, coarse grains, sugar, edible
oils and oilseeds, pulses, jagery, Wheat products etc.
However, later in 2006 due to price rise in agro products, state governments
requested for restoration of powers under EC act and it was done by central
government. Since then there have been regular on and off policy. Different states
put different limits on stock. As of now only sugar and wheat stands denotied by
central government. Recently potato and onions were added to the list as inflation
control measure.
While it is true that at times hoarding of commodities can cause shortage in
market, yet ban on stocking runs contradictory to government policy directed
toward food processing and cold storage. If an entrepreneur invests in cold storage
facility, he is supposed to stock something to utilize storage space and for prot.
Ban on storage can demotivate investment storage capacities.
Further, thrust should be on dismantling incentives to stock products for long
period. From long experience it has been seen that government has limited
capacity to restrict illegal stocking. In this scenario inter-regional and inter-temporal
variation in prices of crops should be brought down. As already said, most crops
are produced seasonally, but are consumed throughout the year. Uniform supplies
of these crops throughout year can be insured by increasing competition at middle
of supply chain i.e. between wholesalers/retailers. This shall be supplemented by
adequate investment in supply chain infrastructure.
As we have seen most of these institutions were designed in 1950s and 60s in response
to formidable challenges of food security and farmer protection. This was followed by
green revolution, then by liberalization of economy. This gave India abundance of grains
and new trading mechanism like futures, NWR came to fore. In all these changes,
reformation and redenition of role of these institutions was overlooked. Consequently,
they gradually moved in opposite directions. To hold them together, government needs to
make a coherent policy to redene role of these institution and underlying mechanisms.
Recognizing that a competitive market, besides adding to the welfare of the producers and
consumers also plays a contributory role in poverty alleviation, the recent Budget also
highlighted that farmers and consumers interest will be further served by increasing

competition and integrating markets across the country. While these are discrete
measures, a holistic policy with across-the-board reforms would enable the Indian
agricultural market to cross the Rubicon and progress towards Achieving Pareto
efciency.
Questions
1. By and large, the APMCs have emerged as some sort of Government sponsored
monopolies in supply of marketing services/ facilities, with all drawbacks and
inefciency associated with a monopoly explain and suggest alternatives. (250
words)
2. What are Negotiable Warehouse Receipts? What are its benets? Explain. (200
words)
3. Why it is important to integrate National and International agricultural markets?
Examine. (200 words)