PRIVATE SECTOR EFFORTS TO IMPROVE AGRICULTURAL MARKETS

UNCLAS SECTION 01 OF 03 MUMBAI 002427

SIPDIS

SIPDIS

DEPT FOR EB/TPP: SA/FO - RCHRISTENSON AND SA/INS - MNEWBILL
USDOC FOR 4530/MAC/AMESA/ASO/LDROKER/ASTERN
USDA/FAS/ITP/TPOMMEROY/JFLEMINGS/MFORD

E.O. 12958: N/A
TAGS: EAGR ECON EAID ETRD PREL IN
SUBJECT: PRIVATE SECTOR EFFORTS TO IMPROVE AGRICULTURAL MARKETS
BENEFIT FARMERS IN MADHYA PRADESH


SUMMARY
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1. (U) Private sector efforts to take computer technology,
retail trade, and modern commodities exchanges to rural India
are helping farmers in Madhya Pradesh (MP) get higher prices for
their crops by cutting out middlemen. The Indian Tobacco
Company (ITC),a major buyer of agricultural goods in the state,
is leading efforts to remove agents and other intermediaries
from the value-added chain by providing individual farmers
real-time market information, borrowing ability and agricultural
extension services. Besides operating thousands of "eChoupals"
(internet kiosks) in rural farming villages, ITC has opened
fully air-conditioned shopping malls at three different
locations in MP, enabling farmers to buy the consumer goods that
they can now afford with their additional income. Other top
Indian corporate houses are reportedly planning to emulate ITC's
successful business model. Additionally, commodities exchanges
are making efforts to reach out to farmers by providing them
with real-time pricing information, and the ability to use
farm-produce warehouse receipts as collateral for trading
margins and bank loans. Results to date show that the private
sector is taking a lead in bringing efficiency and transparency
to India's vast and mismanaged agricultural markets. End
summary.

Is Intermediation Hurting Agricultural Development in MP?
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2. (U) According to state government figures, 78 percent of MP's
work force is directly engaged in agriculture. Outside of MP's
two major cities, Bhopal and Indore, the state is largely
agrarian, with small, fragmented family farms dominating the
agricultural sector. Like elsewhere in rural India, poverty,
infrastructure bottlenecks and small, unproductive farms
historically have weighed down the sector and limited farmers'
ability to invest in new technology. In addition, substantial
government subsidies, largely as price supports for rice and
wheat, have not provided farmers an incentive to innovate or
diversify. Soybeans are perhaps the only exception, where large
private investment in the soybean processing industry encouraged
farmers to become the nation's leading growers of this crop.


3. (U) During a recent trip to Bhopal, Indore and rural areas of
MP, Consul General and EconOff heard other constraints that are
stunting MP's agricultural development. Our interlocutors
frequently derided the extent to which intermediaries influence
the agricultural markets in the state. EconOff spoke to several
small farmers in rural eastern MP who complained that the
traditional agricultural marketing system favored unscrupulous
agents and buyers rather than farmers. We learned that, in
response, several private companies are now using IT to improve
transparency and efficiency, reduce intermediation and hence put
more of the value-added chain into the farmers' pockets. In
particular, ITC and top commodities exchanges, both organized as
private sector initiatives, are leading in this endeavor.

Bringing Computers to the Family Farm
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3. (U) In the year 2000, ITC, one of the country's largest
exporters of agricultural commodities, launched the "eChoupal"
project, which is now one of the most successful IT initiatives
by a private corporation in rural India. (Note: "Choupals" are
gathering places in the village where issues of the day are
discussed. End note) To make an eChoupal, ITC puts a computer in
the home of a village farmer, powers it using solar panels, and
connects it to the internet by satellite dish. From this
eChoupal, dozens of neighboring farmers access ITC-designed,
Hindi-language web pages that provide real-time market prices
for agricultural commodities, as well as district-specific
weather reports and tips on modern growing methods. Farmers can
access both ITC's prices and those of other area commodity
buyers. The eChoupal system gives farmers far more transparency
regarding market conditions and is already reducing dependence
on traditional agent-arranged sales, where intermediaries have
typically had the upper hand on price information and bargaining
advantage.


4. (U) There are now over 5,200 eChoupal internet kiosks serving
nearly 3.5 million farmers in 31,000 villages covering a range
of crops (soybeans, wheat, rice, pulses, and coffee) in MP and
elsewhere. According to ITC, farmers are getting up to 25
percent more for their goods when using the eChoupal system.

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ITC, for its part, is able to purchase commodities according to
its specifications from farmers at lower prices, since the
company essentially splits the margin previously taken by
intermediaries with farmers.


5. (U) ITC also discovered that it could benefit from the
increased purchasing power it helped place in farmers'
pocketbooks by linking ITC purchase centers with retail outlets
for farm inputs, machinery, and consumer goods. In Sehore, a
small town south of Bhopal, Consul General and EconOff visited a
new "eChoupal mall", ITC's latest initiative which combines
eChoupal with retail sales. The mall is a modern, Wal-Mart like
one-stop shop for farmers, enabling them to sell crops and also
purchase items for farming or household use at the same
location. At the mall, farmers get their cargo weighed
electronically and are paid immediately in cash. The mall also
has a lab to grade the quality of farmers' produce, and offers
educational videos to farmers demonstrating improved
agricultural practices. Entire families travel to the mall,
enjoying what is for most their first experience of shopping in
an air conditioned, modern retail outlet without apparent caste
prejudices. Currently, three eChoupal malls operate in MP. ITC
intends to open 25 more by March 2006 and 700 over the next five
years.


6. (U) ITC's eChoupal project recently received several national
and international awards for its potential to transform rural
India. The curriculum of the Harvard Business School now
includes a case study on the project and how the eChoupal
movement may signal a paradigm shift in Indian agriculture.
Eager to emulate ITC's success - especially in gaining the
confidence of farmers who might be encouraged to eschew
subsidized rice and wheat for cash crops like fruits and
vegetables - large Indian corporate houses such as Bharti, Tata
and Mahindra are reportedly planning similar initiatives in MP
and elsewhere.

Commodities Exchanges Also Seek to Serve Farmers
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7. (U) Farmers are also benefiting from the two national
commodity exchanges active in MP, the National Commodities and
Derivatives Exchange (NCDEX) and the National Board of Trade
(NBOT). NCDEX is the larger of the two, but NBOT commands a
strong regional following due to its domination of soybean
trading, the leading cash crop of MP.


8. (U) NCDEX's strength, in addition to its size, is its
national system of 150 multiple-crop warehouses. We visited the
Jawar Ice and Cold Storage warehouse in Indore, which was
accredited by NCDEX in 2004 and has a cold storage capacity of
15,000 tons in addition to a dry storage capacity of 7,000 tons.
Jawar Cold Storage is linked to the NCDEX database and recently
introduced the NCDEX's so-called "dematerialized warehouse
receipts." When farmers deposit their goods at the warehouse,
they get receipts that can be used to finance margins for
futures trading on the NCDEX. From the viewpoint of the NCDEX,
the receipts are on par with securities as collateral, and the
securities depositories with which NCDEX collaborates can now in
fact book and otherwise treat the receipts much like any other
security. With the warehouse receipt system, farmers can use
NCDEX futures to hedge against future crop price losses. Local
banks are also now accepting the receipts as collateral for
loans to farmers. Warehouse owner Anil Jawar and the NCDEX
management in Mumbai told us that the Reserve Bank of India is
currently drafting legislation to make all warehouse receipts a
form of legal tender for borrowing purposes. NCDEX plans to
triple its storage capacity by the end of 2006.


9. (U) We also visited the National Board of Trade (NBOT) in
Indore which, unlike the screen-based NCDEX, still uses an open
outcry system of floor trading. Regionally, NBOT specializes in
and dominates the trading of soybean, soy oil, rapeseed, mustard
seed and crude palm oil. Karan Singh Pawar, an Indore-based
Congress politician and NBOT trader, said NBOT continues to
perform well despite intense competition from NCDEX because of
its specialization and its links to the nation's major soy
product manufacturers and distributors. NBOT told us it is
fighting hard to keep its privileged position as the regional
soy-trading venue, claiming that traders prefer regional
exchanges, but it was not clear from our discussions how NBOT
planned to compete with NCDEX to court farmers.

Comment

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10. (U) Many of our interlocutors in MP cited the large number
of brokers, agents and other intermediaries as a main stumbling
block to more innovation in the state's agricultural marketing.
While such intermediaries should, and still do, help reallocate
risks and bring transparency to an otherwise fragmented market,
many of them apparently use their market power to perpetuate the
very sub-optimal situation that they are supposed to help
overcome. ITC and the commodities exchanges have now recognized
the potential of using technology and market-based models to cut
through many of the layers of intermediation so that farmers can
gain more for their crops while consumers pay less for the end
product. Other large Indian corporate houses have also
recognized the potential of accelerating the process of
dis-intermediation of the agricultural sector. Reliance
Industries, for example, has ambitious plans for a series of
Wal-Mart-like retail stores throughout India. Like Wal-Mart,
Reliance intends to bypass as many intermediaries as possible to
purchase directly from producers. Endeavors like those of ITC,
Reliance and the privately run commodities exchanges show that
the private sector can play a leading role in bringing
efficiency and transparency to India's vast and mismanaged
agricultural marketing system. End Comment.


OWEN
POMPER