Investing in market efficiencies, raising the prospects of India's farmers

Choosing to grow something that is perishable is risky. Having better price information can reduce the risk.

By Kamalini Ramdas and Nicos Savva 14 March 2016


Armed with a mobile, a farmer or fisherman operating in an area with reasonable coverage can phone a relative, neighbour or friend to check what prices are being offered at which local markets. This is useful information: it can underpin decisions about where to take a particular type of produce to achieve the best return; it can determine whether a farmer should harvest a crop today or wait until a depressed price picks up. Better information improves market efficiency.

But in parts of the world, the use of mobiles to share information has been taken an important stage further. Rather than simply relying on one-to-one calls and text messages to find out prices, some farmers can now take advantage of services that provide a far more comprehensive picture of what their crops will fetch at various locations. No longer need the farmer rely on fragmentary nuggets of price information gleaned from a cousin or a neighbour. Instead, for a monthly fee, he or she receives regular, up-to-date details on what prices commodities are fetching at various markets. The mobile still plays a key role: the price information is sent as text messages.  But the crucial difference is that the service garners price data from many more local markets and for many more types of produce than could ever be achieved by a chat with the notional cousin or neighbour.

How much difference can such a service make? Does it make pricing more efficient? A piece of research by Chris Parker PHD2007, formerly a PhD student at London Business School (LBS) who is now on the faculty at Penn State University, and Kamalini Ramdas, Professor of Management Science and Operations and Nicos Savva, Associate Professor of Management Science and Operations, both at LBS, sought to provide answers.

The research was possible only because of a decision by the Indian government in September 2010 to ban bulk text messages for 12 days. The ban had nothing to do with agriculture. It was imposed in an attempt to stop agitators from using bulk messages to foment unrest over an upcoming Supreme Court of India ruling on the Babri Masjid, a site in Uttar Pradesh considered sacred by both Hindu and Muslims. This site had been the source a centuries-old dispute between Hindu and Muslim groups.

The ban hit Reuters Market Light (RML), an established service providing information on the price of agricultural commodities.  When the service was running, information was sent daily via text to paying subscribers. During the 12 days of the ban, the service was blocked: RML continued to collect price data as before, but those data could not be distributed to the service’s clients.

What impact did the absence of RML have? The LBS researchers looked at prices of 170 crops across 13 states before, during and after the ban. When the ban came into force, the degree of “price dispersion” on a given day – the variation in price of the same commodity in different markets within a state – increased by an average of more than 5%. The implication was clear: farmers who had previously used RML no longer knew where to take their produce to achieve the best price; markets were working less efficiently. When the ban was lifted, price dispersion returned to normal. The biggest changes took place in the markets where RML was most widely used: this bolstered the idea that the increase in price dispersion during the 12-day interruption was accounted for by the absence of RML information rather than some other external factor such as weather.

But why do the findings matter? One key consideration is that, on the whole, producing perishable goods allows farmers to make more money – but it is also more risky. “The farmer needs to get those lettuces or fenugreek leaves to market,” says Professor Ramdas. “If he takes them to the wrong market on a particular day, and the price there is low, he might think he can take them to a different market the following day. But then he is going to be selling wilted produce. Choosing to grow something that is perishable is risky. Having better price information can reduce the risk.”

With better price information farmers can plan ahead and they can borrow money with more certainty that they can repay the loan.

Reduce the risk and farmers are more likely to switch to growing perishable goods, on which they can make a higher return. Dr Savva adds: “With better price information farmers can plan ahead and they can borrow money with more certainty that they can repay the loan.”

Also, if producers can see what price their output is fetching at its final destination – in Delhi, for example – “farmers can decide whether it’s worth their while to pool their resources and hire a truck to take their produce there”, says Ramdas.

The findings have important implications for policy. Between 2003 and 2010, the World Bank put US$4.2 billion into improving information and communication technology infrastructures in the developing world. Such investment continues.

No one denies that spending money on physical infrastructure to improve mobile phone coverage in emerging economies can yield big benefits – not least in helping agricultural markets to work more efficiently. This is important for a country such as India where around half the labour force is employed in agriculture. The numbers of people in agricultural households in India who live in extreme poverty run into the hundreds of millions.

But the findings of the LBS research raise a question: should governments and agencies such as the World Bank continue to concentrate investment almost exclusively on developing mobile phone networks and access to the internet, for example? Or should some funding also be channelled to operations such as RML that provide reliable, comprehensive, and up-to-date information to buyers and sellers of goods? Dr Savva says: “It may be that investment in infrastructure should be complemented by investment in third parties that collate information and distribute it through the existing infrastructure. It is not an either/or choice. But one involves hardware and one involves people.”

Professor Ramdas says: “If you are helping people get a better price for their produce, that’s exactly the sort of thing the government and World Bank would interested in.” The question is how best to lubricate the workings of the market.

The curious aspect of the research, of course, is that it was made possible by an event that was completely unexpected and triggered by an event that had nothing to do with the price of okra, lentils or whatever. But, in Dr Savva’s words, “luck favours the prepared mind.”

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