As I continue to interview small businesses including grocers and vegetable vendors to understand the unit economics of their businesses (see here and here, for example), I have become increasingly interested to learn about value chain from the producer to the consumer. This prompted me to visit the Agriculture Produce Market Committee – also known as APMC Yard – in Yeshwanthpur, Bangalore. An APMC Yard is essentially a regulated marketplace where wholesalers buy and sell food such as grains and vegetables. At the APMC, Mr. Vipul Rawal, whose family owns and operates a wholesale establishment in this market, was kind enough to take time out of his schedule to guide me through this.
Even as I was planning to visit the APMC Yard, my interest was piqued by a new book – Between the Buyer and Seller, by Karthik Shashidhar. Amongst the many interesting things that the book points out, the main takeaway for me has been paraphrased very nicely by the author: “Demonising the middlemen is rather common in popular discourse, as is to allege that he adds no value to the transaction apart from collecting his commission. Except in the case of a few tightly regulated markets, where the regulations protect the middleman, this is largely untrue.”
With this context, I began to explore the APMC Yard. This particular yard consists of close to 2000 wholesalers who deal primarily in grains such as rice, wheat and pulses, and vegetables such as onion, potato and garlic. Stores are lined up in long rows on both sides of wide and well laid out roads. These roads are almost entirely populated by the bustle of several trucks and people. The typical day at an APMC starts at 2am when the first trucks begin arriving. However, the peak hours are between 4 am to 10 am by which time most of the produce has been bought by wholesalers.
Given the fact that there are a large number of stores in the complex selling any given food item – rice/ onion/ potato/ pulses etc., the competition is very intense. In his book, Karthik Shashidhar explains that when the number of buyers and sellers are few, the final sale price depends to a greater extent on bargaining. However, when there are a larger number of buyers and sellers, the choice available to the consumer to purchase the same item from one of several other stores nearby, reduces the bargaining power of the seller over the buyer. Therefore, when the seller is the more desperate party, it is likely to move the price closer to the buyer’s ask.
As a result, the margins per sack of produce are also extremely small. The gross margins are typically around 1% to 1.5%. Therefore, the only way to actually earn any considerble amount of profit is to sell a sizable number of sacks per day.
An interesting point to note about these wholesale markets is the price fluctuation in the goods purchased and sold. Everyday based on the number of arriving truckloads of goods and the proportion of ownership of these goods, prices vary on a daily basis. These variations may be up to 50% on both sides of the normal price point especially for perishable produce such as fruits and vegetables. Also, prices can drastically vary on special ooccasions such as during the mornings of festival days, or during periods of famine, or on the days preceding and succeeding holidays etc.
For some foods such as rice, the variation is generally low. This is simply because their shelf lives are longer than their more perishable counterparts – fruits and vegetables. Similarly, other grains too witness relatively lower amounts of variation.
This results in a difference between the margins earned in the case of the sale of grain and vegetables at each change of hands along the value chain. The margins earned on the sale of grains is lesser than that in the case of vegetables.
In Figure 1 below I have attempted to capture the different actors in the value chain for grains. In Figure 2, I have done the same in the case of vegetables. The amounts mentioned at each stage are indicative and may vary substantially.
For someone who had not appreciated the number of intermediaries before farm produce reaches our homes, I was struck by how smoothly all of these intermediaries add value and ensure that markets work reasonably efficiently.
In fact more often than not, there are more intermediaries than shown in the diagrams above. For instance, there might be an intermediary who simply transports goods from the Wholesaler to the Retailer, or from the Commission Agent to the Processor.
I have often heard of people complaining about how the middleman simply causes an increase in the prices of goods for consumers without adding value. But on reading Between the Buyer and Seller, actually visiting an APMC Yard and seeing firsthand the nature of value that such intermediaries add, I have come back convinced that blaming the middleman simply reflects a lack of understanding of how markets work.
The crux of the matter is that intermediaries will only survive as long as they are adding value of some sort – simplifying logistics/ providing transportation/ offering temporary storage etc. – that enhances the value chain. Or else, a market as efficient as this one will simply not allow them to continue.
I learnt about the growing presence of another form of intermediary – the digital intermediary. This includes an emerging class of online websites and apps that list the prices of goods from all the wholesale stores in an APMC Yard. Retailers can observe these live prices, and accordingly purchase goods via these platforms.
While I got a good understanding about the APMC system in India during my visit, a quick search led me to see that many people held a starkly different view on this issue. An article published in the Economic Times regarding the APMC Act said the following:
“A complex, needlessly long and relatively low-tech supply chain with many nodes manned by an army of intermediaries separates, rather than connects the consumer from the producer. Of the price impulse imparted by greater demand from the consumer, only a fraction filters down to the producer on the farm. When the farmer increases his price at the farm gate, this supply chain magnifies that increment manifold by the time the produce reaches the consumer. This extant supply chain must be uprooted and supplanted by a modern one. This is where organised retail has a role to play.”
While debates on the APMC system persist, there is no denying that there continues to be a need for intermediaries to channel produce from the farm to the fork.