WEST BENGAL FARMERS' BUMPER POTATO CROP MEANS PROBLEMS NOT

UNCLAS SECTION 01 OF 03 KOLKATA 000126

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DEPT PLEASE PASS USTR - AADLER

E.O. 12958: N/A
TAGS: EAGR ECON EFIN SENV IN
SUBJECT: WEST BENGAL FARMERS' BUMPER POTATO CROP MEANS PROBLEMS NOT
PROFITS


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1. (U) On March 17, Econoff traveled to Magra in West Bengal's
Hooghly District (approximately 50 miles northwest of Kolkata)
to tour a potato cold storage facility and discuss the wholesale
market for the potato crop in the state. West Bengal is
experiencing a glut in its potato crop market and cold storage
facilities appear to be running at almost full capacity as they
work to manage a large flow of potato sacks into their
refrigerated warehouses each day. Farmers and traders who have
purchased the produce look to cold storage operations in Hooghly
as a means to extend the life of their crop while waiting out
the current drop in prices. However, these market fluctuations
are not the only concern for these back-end players; lack of
equal access to buyers, insufficient cold storage capacity, and
problems realizing the full profit of goods sold continue to
plague the potato supply chain each year and remain overarching
concerns. The difficulties experienced by the West Bengal
potato farmers reflect the overall problem with India's
agricultural sector as poor distribution and infrastructure
means that even as inflationary pressures cause rising prices of
basic food items for the Indian consumer, farmers are unable to
get decent returns for their crops. End Summary.

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Potato Glut
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2. (U) A long winter season and better crop management has led
to record potato production in West Bengal this year. According
to press reports, advance estimates by the West Bengal
government put potato production this year at around 80 lakh
tons (8 million),an increase of almost 60 percent over last
year's production of 50.52 lakh tons (about 5 million). (Note:
Last year's potato crop was severely impacted by a blight that
damaged 85 percent of the cultivable land. End note.) The
increase in produce comes despite the fact that the total area
used for growing the crop decreased by 22 percent to a little
more than 900,000 acres in the last year. In response, prices
for the vegetable in retail markets and with wholesalers have
fallen by about 30 percent compared to last year. Around 45
lakh tons (4.5 million) of the potato crop will be consumed
within the state of West Bengal, while the rest is exported to
other states and neighboring countries.


3. (U) To date, 25 percent of the harvested potato crop has been
placed in cold storage, according to press. The total capacity
of the 370 potato cold storage facilities in West Bengal is
about 5.3 million tons, according to media figures, and while
some farmers were able to sell their crops early in the harvest
season for around Rs 180 (about USD 4.50) per 50 kg sack many
are now bringing their crop directly to the cold storage
facilities or working with middlemen traders - who buy,
transport and package the produce - in order to extend the shelf
life of their crop and wait out the current slump in prices.

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Cold Storage Solution
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4. (U) On March 17 Econoff met with the owner and operator of a
cold storage facility in West Bengal and discussed the benefits
and interests of both traders and farmers who are utilizing this
service. The Santa Cold Storage operation in Magra, Hooghly
District is about 50 miles northwest of Kolkata in the heart of
the district's potato farming area. Ramesh Periwal, the owner of
Santa Cold Storage, explained that he will provide potato crop
storage for about 15,000 farmers at a capacity of about 11,000
tons in a five story ammonia-refrigerated structure from
February 26 to November 30 of this year. Servicing an area of
about 5,000 acres, Periwal's operation is a market where
farmers, traders, and wholesale buyers converge.


5. (U) Open for around 10 hours each day, Periwal's facility
weighs, labels, and stores the potato crop at Rs 93 (about USD
2.33) per 50 kg sack. This price is set by the West Bengal
Agricultural Marketing Department each year with minimal input
from the cold storage operators, according to Periwal, whose
cold storage facility is licensed by the same government outfit.
Once a farmer's produce is checked into the facility, he is
provided receipt that shows the weight and number of potato
sacks held in the warehouse, which can then be transferred and
sold at the farmer's discretion. (Comment: There is a large
market for these potato bonds based on speculation and other
factors. This market is controlled by the cartels of potato
traders, cold storage owners, wholesalers and retailers with

KOLKATA 00000126 002.2 OF 003


farmers receiving no part of the speculative profits. End
comment.).


6. (U) While Periwal's efforts at the moment are focused on
storing the crop, from May to December he expects to see more
traders and wholesalers coming into the facility to bring out
bags that they have purchased from farmers, as well as an influx
of farmers who have arranged for other means of transporting
their goods to the market. At that time, the potatoes will be
re-packaged, weighed, and graded before continuing along the
supply chain to retail outlets. According to Periwal, about
four to six percent of the stored crop becomes inedible due to
rot. However the benefits of extending a potato's shelf life by
almost six months (without refrigeration, the crop usually lasts
between six to eight weeks),far outweigh these minimal risks.
Both farmers and middlemen are pleased by the pricing stability
and security provided by an extended selling season, which they
say cuts down on short term fluctuations in the market.

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The Farmer's and Trader's Perspectives
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7. (U) Highlighting the impact of excess product on the market,
all the farmers with whom we spoke said that they had brought
crop in for storage because their costs of production were not
being met at the current prices offered for the produce.
According to the farmers, the production cost for a 50 kg packet
is Rs 120 (about USD 3.00),and they are can currently sell
these sacks for Rs 80 to 100 (USD 2-2.5) directly from their
farms. Hoping the market will yield better prices in the next
few months, the farmers have opted to use cold storage to extend
the life of their crop. They believe the expenditure of time
and effort put into packaging and transporting the crop to cold
storage, the Rs 20 (about USD 0.50) handling fee per sack
charged by the cold storage facility, and the Rs 93 rent for the
season, will be met before they are required to remove the
produce from Periwal's facility in the end of November.


8. (U) The farmers we spoke to said that 70 percent of their
crop this year will go as a distress sale (i.e. loss
minimization effort) and reminds them of a similar glut in 1997.
Farmers faulted the government and the lack of a structured
network of buyers for the lag in their ability to sell at a
profit. Traditionally, the Government of West Bengal has
promised a fixed price to potato farmers at which they can
wholesale their crop. However, farmer's complained that this
price has yet to be set, which has forced them to store their
crop rather than wait and possibly lose some of the potatoes to
rot.


9. (U) Describing themselves as a bridge between farmers and
consumers, the potato traders said they are currently buying
potato crop from farmers at between Rs 115 to Rs 120 (USD 2.90
to 4.00) per 50 kilogram sack. These middlemen provide
packaging and transport to the cold storage facility, and
generally work with small farmers whose capacity to manage this
end of the supply chain is constricted by the amount of manual
labor, time, and access to transportation typically available to
larger landholders like the farmers we spoke to. Traders, like
the farmers who directly store their produce, are also
responsible for selling the stock of potatoes they keep at the
refrigeration facility before the end of November.

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Different Impressions of What Ails the Supply Chain Network
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10. (U) With a bumper crop season in full effect, farmers
continually faulted the potato marketing system and lack of
government intervention for the financial straits they are
facing. The farmers we spoke to said they believed a demand for
their crop at beneficial prices existed in the market, however
they lack the ability to network with buyers and have inadequate
access to information that might allow them to identify,
contact, and sell to traders and wholesalers at greater profits
than are currently negotiable in the area. All three of the
mid-size farmers (who cultivate between 10 and 13 acres of land
each) we met said they would welcome large retail chains like
Reliance as well as foreign buyers without qualms, provided they
received a advantageous margin of profit for their crops, which
they said would be around Rs 170 (about USD 4.00) per 50
kilogram.


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11. (U) The potato traders we spoke with had a different
perspective. According to these brokers, they have adequate and
established access to a network of buyers with whom business is
traditionally transacted. Traders will typically reside in
their area of business so they have immediate access to the
farmers and then travel to the buyers in order to receive
payments and finish deals. Traders favor this current system
and are opposed to the entry of corporate buyers and
multinationals who can break the marketing cartel in their areas
of business. While they complained that the current system
inhibits the liquidity of the produce they have purchased, they
believe an instrument for spot trading of the crop will address
their issues with the current supply chain.

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A Possible Solution for Both Sides
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12. (U) After our discussions with the farmers and traders,
Periwal disclosed that he is in talks with a company to provide
his customers with automated up-to-date data on the price,
buyers, national and international trends in the potato crop
market that would serve as a technology based market place for
farmers and traders. Having met with the company three times in
the last year, Periwal hopes to have this center up and running
at the cold storage facility by April or May, which will be the
first one of its type in the immediate area, and provide his
trader and farmer clients with a solution to their problems with
liquidity and access to data on potential buyers.

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Comment
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13. (U) More equitable market access for farmers would probably
help stabilize potato prices in the future. During this year's
glut in the potato harvest, there are rumors that potato trading
cartels are deliberately not buying from the farmers and thus
artificially decreasing the price for the crop. These cartels
are then joined by cold storage owners who refuse to keep the
produce on the grounds that there is no space for it in their
warehouses. The cold storage warehouse we toured during our
trip was quickly filling up and the other cold storage
facilities in the area had long lines of farmers with their
potato laden trucks and wagons waiting to store the harvest.
There have been recent reports of potato farmer suicides, with
papers reporting that the farmers are unable to meet their debts
and unable to find adequate cold storage space for their crop.
If the queues, the glut, and the efforts at price manipulation
are any indication, this could be a rough season for West
Bengal's potato farming community. The difficulties experienced
by the potato farmers also reflect the fundamental problem of
India's weak agricultural infrastructure, which results in
farmers unable to gain decent returns for their crops even as
inflation drives up the prices of basic food items for the
Indian consumers.
JARDINE