Farm protests: Why the government’s promise to buy crops at minimum support prices is often hollow

More than a loan waiver, what farmer groups protesting in several states have been demanding is the implementation of a report prepared in 2006 by a committee headed by agricultural scientist MS Swaminathan. The key recommendation of the committee was fixing the minimum support prices for agricultural produce at 50% profits over the farmer’s cost of production.

A minimum support price is an intervention by the government to buffer farmers against sudden slumps in the market price. It is the rate at which the government buys farm produce when there are no other buyers in the market.

On the surface, the Swaminathan committee’s formula of a higher minimum support price based on the cost of production would strengthen the safety net for farmers.

But a closer look shows even this would have limited impact since the mechanism of minimum support prices is broken. Here’s why.

1. Less than 6% of farmers sold their produce at the minimum support price.

The central government has declared a minimum support price for 25 crops, including major grains, pulses, oilseeds and cotton, jute, coconut and sugarcane. But the most visible procurement under the minimum support price mechanism is for two food grains – wheat and rice. The Centre buys them in bulk from farmers to meet its obligations under the National Food Security Act. Under the law, the Centre must bear the cost of providing 75% of India’s rural population five kilos of foodgrains per month at highly subsidised rates sold through the public distribution system.

To procure wheat and rice, the Food Corporation of India and the National Agricultural Cooperative Marketing Federation of India, funded by the Centre, set up counters at major agricultural markets across the country. According to estimates as of June 22, the government procured 23% of wheat produced in the country and 35% of rice in 2016-’17.

Procurement for the other 23 crops is sketchier. For the most part, the Centre does not procure these crops on a regular basis. For instance, in October 2016, the Centre instructed its procurement agencies to buy soyabean from farmers for the first time in several years, the Business Standard reported. There are other designated organisations that might use the mechanism to procure crops with central funds, such as the Cotton Corporation of India, which procures a highly variable amount each year.

Altogether, fewer than 5.8% of agricultural households across India are actually able to sell their produce to the government, a high-level committee report from January 2015 on restructuring the Food Corporation of India found.

2. States do not have the funds to procure crops for which the Centre has announced minimum support prices

While the Centre supports the procurement of wheat and rice, if states want to ensure their farmers can access minimum support prices for other crops, they need to use their own funds. They can also declare a bonus above the central minimum support price to encourage farmers to grow more of a certain crop. Maharashtra, for example, offered a bonus of Rs 500 per quintal for tur dal, above the declared price of Rs 5,050 in April.

But cash-strapped states are rarely in a position to procure the crops, let alone announce bonuses.

In Assam, for instance, the mechanism of minimum support price exists almost entirely on paper. Few farmers know about its existence. According to a senior official of the Assam Agriculture Marketing Board, the agency entrusted by the state government to buy produce from farmers at minimum support price, the board’s procuring power is severely limited by the lack of funds.

“The state government gave us a revolving fund of Rs 14 crore in 2012-’13,” said the officer who asked to be not named. “But nothing after that. Every year, the MSP goes up, and naturally our purchasing power decreases.”

The official claimed that last year, the board sought to take a loan from the National Bank For Agriculture And Rural Development to make up for its deficit, but the state government refused to stand in as the guarantor.

“We just can’t meet our targets at this rate,” he added. “Our target paddy procurement for this year is 40,000 metric tonnes, but it is unlikely if we can buy more than 30,000 metric tonnes.” Assam’s paddy production in 2014-’15 was estimated by the Union Agriculture Ministry to be 48.63 lakh tonnes.

3. When states enter the market to procure, they often set a cap

In Haryana, where farmers have been protesting about record low prices for their sunflower seeds, the state government has agreed to procure a quarter of the total production. It will procure from each farmer 25% of their harvest, up to a limit of 25 quintals per farmer.

The state began to procure sunflower seeds for the first time only two years ago, through the Haryana State Cooperative Supply and Marketing Federation Limited. Sunflower seeds are used in the production of edible oil – about 40% of its mass can be extracted for oil, compared to 18% for other oilseeds.

Farmers, who have been demanding better prices for their crops from the government, are not happy with the cap on procurement.

“What is the point of setting a minimum support price for crops if the government does not procure them at all or if they do, they do it in such small quantity?” asked Gurnam Singh, a farmer leader from Kurukshetra in Haryana. “What will we do with the rest of it?”

While the minimum support price is Rs 3,950 per quintal for sunflower seeds produced in 2016-’17, farmers who cannot sell them to the government will have to settle for around Rs 2,500 per quintal at the agriculture produce markets. The market price is on average Rs 800 less than their cost of production for a quintal.

Haryana produced 32,100 tonnes of sunflower seeds in 2014-’15 but only 14,800 tonnes in 2015-’16. Government data shows that the government procured 3,814 tonnes in 2014-’15 and 4,161 tonnes in 2015-’16. This means the government procurement at the minimum support price stood at 11.9% of the production for 2014-’15 and 28.1% of the production for 2015-’16.

4. After procuring the farm produce, states don’t know what to do with it

Maize, another crop that arrives in the agriculture markets in northern Haryana at around the same time as sunflower crops, has a minimum support price of Rs 1,365 per quintal, but there has never been any government purchase, largely because states hesitate to procure crops that they cannot channel into the public distribution system reserved for food crops.

In the case of sunflower seeds, the Haryana government began to procure it only after pressure from the Punjab and Haryana High Court. After procuring the seeds, HAFED will then search for the best prices from oil extractors and will sell the seeds at the best market price, usually by the end of July or mid-August. According to officials at the Shahabad market, this sale price is usually much lower than the minimum support price at which they had procured from farmers. This will result in losses for the state.

5. States often have nowhere to send the procured goods

It gets even more complicated when for political reasons states procure crops not on the minimum support price list at scales not previously accounted for. This is the case in Madhya Pradesh, where the state has for the last two years agreed to procure onions from farmers after successive market slumps. There is no minimum support price for onions or indeed any other vegetables. Here, the state has taken full fiscal responsibility to procure, store and sell.

“It is true that we do not have the storage capacity for these onions,” said Dnyaneshwar Patil, managing director of the Madhya Pradesh State Cooperative Marketing Federation that has procured 3.56 lakh tonnes of onions from farmers so far. “We have handed over the onions to the State Warehousing Federation and the Department of Civil Supplies has the responsibility to sell it.”

This scale is outside the ordinary scope of the state marketing federation, Patil said. They procure crops for which there is an MSP on behalf of NAFED, its parent organisation at the centre, with funds from them. For the onions, they had to take bank loans, for which the state government has stood as guarantor, and for which they will be reimbursed in seven to nine months.

“We take bank loans for any crops where there is a chance of loss,” Patil said. “Onions were always going to be a 100% loss so we had to take a loan for that. We are also procuring moong and urad for NAFED now, but that we are doing with their funds.”

For now, the civil supplies department has begun to float tenders for sale of onions in the open market. It is also selling the onions at Rs 2 per kilogramme in districts of the state that do not grow onions as well as auctioning the onions at markets both in and out of the state.

6. What farmers want and why it might be a mirage

With increased uncertainties in the open market, farmers across the country are looking to the government to bail them out. One of several demands in the recent protests has been for farmers to be able to sell all crops at fixed prices, not just the 25 listed by the government. This has in particular been a demand of farmers from Maharashtra and Madhya Pradesh.

“If there is fixed rate for all crops, then the farmer will know what to sow,” said Raviji Munde, a resident of Khatediya village in Dewas who had come to the market to sell his onions.

Farmers are also concerned about narrowing margins. At the agricultural produce markets in Kurukshetra and Ambala, farmers are currently selling maize at around Rs 1,150 per quintal, which is less than the cost of production by at least Rs 100 per quintal.

But farmers’ hopes from the MS Swaminathan committee might be too high, noted Harish Damodaran in The Indian Express. Current minimum support prices are in fact calculated as per the Swaminathan Report at 50% above the cost of cultivation – which is to say the costs incurred on inputs such as seeds, fertilisers, labour, irrigation.

However, the Commission for Agricultural Costs and Prices defines production costs in three different ways, only the most basic of which is the cost of direct input. The Swaminathan Committee’s recommendation does not then include the costs of family labour, rentals or interest on owned land. Unless the government includes this in a new formula to calculate minimum support prices or indeed revitalises the entire structure of the process, this might not be enough to calm rural anger.

This report is part of a series on why farmers are protesting across India. Read the other stories:

A collapse in the prices of soyabean led to violent protests by farmers in Madhya Pradesh.

Behind the farmer unrest in Haryana there is a history of instability in crop prices.

A farm crisis is slowly brewing in Assam – and farmers are staging protests to draw attention to it.