For centuries, grain markets have been the principal mechanism to connect farmers and buyers (individuals, wholesalers, and processors) for trading durable agricultural commodities. Almost every sizeable town in the agricultural areas of Pakistan has these grain markets — physical places (ghalla mandis) — where arthi (middlemen) sell farmers’ produce, mostly through auction.

After decades of business as usual, these grain markets in Punjab have been experiencing specific dynamics and evolutions for the last few years, which may weaken their role in the agricultural market system.

Surprisingly, the supply of agricultural commodities in the grain markets is experiencing a downward trend, both in terms of percentage of total agricultural production and, in several cases, in absolute terms, as well.

Farmers now prefer selling their produce to traders/agents (intermediaries) at the farm gate or directly to processors (rice mills, feed mills, oil mills, flour mills, cotton factories) for numerous reasons.

Farmers now prefer selling their produce to traders/agents at the farm gate or directly to processors

First, traditionally, arthi have been the largest, most common, and preferred source of credit for farmers. However, its role as a credit provider (in-kind or cash) has witnessed gradual weakening in recent times, because of an increase in access to alternative financing options for farmers.

Over the last two decades, commercial banks have aggressively promoted crop input financing to large and medium-sized farmers, whereas microfinance banks/institutions have actively targeted small farmers. The Pakistan Economic Survey 2023 reveals that agriculture credit has witnessed a high growth rate of 27.5 per cent just in the last year alone.

The expanded financing options have relieved farmers from the obligation to take their produce to the arthi’s shop. It is expected that farmers’ appetite for bank loans would further escalate with a drop in the State Bank’s policy interest rate, which currently stands at record 22pc.

On the other hand, despite higher prices of agricultural inputs coupled with the adverse effects of climate change on farming, the overall financial muscle of large and medium-sized farmers has significantly improved over the last few years. This is because they were able to fetch better prices for their produce, primarily due to food inflation and the weakening Pak rupee. By virtue of this, farmers’ dependency on arthi has decreased considerably.

Second, the increased trend of selling at farm-gate or directly to the processors is an effort on the part of farmers to protect themselves from arthi’s exploitation and price uncertainty caused by open or closed/secret auction in grain markets.

Over the last twenty years, arthi’s commission rate has increased dramatically, now touching 5pc from a mere 1-2pc in the past. In absolute terms, the commission has grown far greater, owing to a sharp increase in the price of agricultural commodities in the recent past.

Third, there are some key enablers that have facilitated farm-gate selling in a big way. Cellular teledensity of around 85pc has enabled farmers — living in even remote rural areas — to get going market prices within minutes and communicate with traders/agents easily, who can buy their produce at the doorstep.

Moreover, processing facilities have also grown in number, with their presence in almost every cluster of the respective crop. Close proximity has made it possible for traders and farmers to transport commodities directly to processing facilities without the need for re-routing through the grain market or involving any additional layer of intermediary.

Additionally, with the greater availability of weighing bridges (weighing scales), even on branch roads, farmers can now get their sold produce (in truck or trolley) weighed in one go, rather than filling and weighing each bag individually in grain markets, which causes significant weight loss for farmers. Likewise, the online payment system has also facilitated farmers and traders to strike business deals (s) at the farm gate level.

Fourth, arthi rely on social pressure rather than demanding collateral for advancing loans. Multiple divisions of society based on religion, sect, caste, class, language, and, most recently, political affiliation have made it difficult to exert social pressure to settle business disputes.

Moreover, cases related to the Contract Act take a long time to settle in civil courts. To top it all, a high policy interest rate forces arthi to either increase the commission rate or invest his money in some other lucrative way.

Due to these factors, arthi in some grain markets, are shrinking their loan portfolio and trying to restrict themselves to a few trusted farmers to lower their business risk. Instead of farmers, many of them now prefer lending money to a limited number of small traders to purchase commodities (small lots) from farmers and transport them to grain markets for auction.

This arrangement has yielded mixed results for both arthi and traders. Furthermore, responding to socio-economic changes, some arthi have repositioned their businesses and are now working as purchasing agents or suppliers for processors and exporters in lieu of commission or profit.

In case the trend of selling at farm gate picks up further momentum, which is a natural outcome of the developments taking place in our rural areas, the grain markets are under the threat of losing their significance.

The launch of some effective information and communication technology-based solution/app that can link farmers and buyers directly, eliminating most, if not all, intermediaries, would definitely become the straw that breaks the camel’s back.

However, amid all these developments, there are a few rays of hope for grain markets. Landless farmers, who take land on lease/rent, have no other option but to go with arthi as they can’t secure sufficient bankable collateral. Likewise, some farmers don’t like interest-bearing loans from banks due to their religious beliefs.

Another factor is the growing number of smallholders, resulting from the division of land among family members in successive generations, and they are relatively more dependent upon informal credit providers like arthi.

Additionally, higher cropping intensity has shortened the harvest window. To sow the next crop in time and sometimes to avail better market prices, many farmers harvest their crops somewhat earlier, at high moisture content. As a result, farmers can’t hold their produce for more than one day, and they usually send it to the grain market for immediate disposal.

All in all, the existing agricultural market system, plagued by market imperfections, rent-seeking, and exploitation, is not geared towards meeting the emerging challenges of the global food system.

In the prevailing situation, when regulatory institutions fail to ensure a fair price for farmers’ produce, let the market forces, now supported by technological advancement, determine the economically optimal outcome.

Khalid Wattoo is a farmer and a development professional Rahema Hasan is a political economist and graduate of the London School of Economics and Political Science

Published in Dawn, The Business and Finance Weekly, July 10th, 2023