Special Report: Machiavellian middlemen
SYED Hasan Ali had a foolproof business plan last year when he decided to grow vegetables on a 20-acre leased farm in Dhabeji, a small town 60 kilometres away from Karachi.
But his hopes came crashing down when his produce fetched a surprisingly low price in the wholesale market. His revenue did not even cover his expenses.
“Every business has a mafia. In agriculture, that mafia is the middleman,” says the 45-year-old grower.
Commonly known as Arthis, these middlemen buy produce from growers — sometimes through their local contractors — and sell to wholesalers and retailers in major fruit and vegetable markets for a cut of 6-10 per cent.
“I have no idea about the rate my brinjal was sold at in Sabzi Mandi. Wholesale prices of perishables have a high intraday volatility. There’s no mechanism to stop the Arthi from lying to growers,” he says. “The grower has no seat at the table.”
Trading is just one part of the crucial role that these middlemen play in the supply chain. What makes them indispensible, however, is their status as informal moneylenders. Banks shy away from lending funds to small growers citing lack of collateral as many of them work on rented farms of less than 25 acres.
Hence, Arthis provide growers with funds at a mark-up that the latter use to buy seeds, fertilisers and chemicals. In some cases, Arthis buy entire crops at the beginning of the season while in others they conduct auctions and charge a fee from both sellers and buyers.
According to Asif Ahmed, one of the prominent Arthis who also serves as vice chairman of the market committee that manages Karachi Sabzi Mandi, criticism of middlemen is uncalled for. “Arthis take risks, growers don’t. It’s our money that’s at stake. We extend financing to growers when banks look the other way,” Mr Ahmed says.
He denied that Arthis charge ‘exorbitant’ interest rates, although a study published by the State Bank of Pakistan (SBP) in 2014 found out that growers pay a mark-up of almost 50pc on funds they borrow from informal lenders. This mark-up is in addition to their 6-10pc fee that they charge for trading about 90pc of the entire produce that comes to the market.
Muhammad Kashif, a Karachi-based wholesaler, says growers are ‘captive customers’ of Arthis. “Sabzi Mandi is off-limits to independent growers. They can’t bring their produce inside the Mandi without involving an Arthi. The only way for growers to cut out the Arthi is to become one by setting up shop,” he says.
Middlemen defend this rule, claiming that gatekeepers exist in every line of business. “You can’t trade shares in the stock market without a broker. Why should that not be the case in Sabzi Mandi?” says one Arthi, requesting anonymity.
But the issue becomes thornier whenever a grower tries to change Arthis without any ‘fair reason’. In such a dispute, market committee members convene a Jirga to settle the issue. Both the grower and the new Arthi are fined for causing a loss of business to the original middleman.
So how exactly do these Arthis make money? Most of them maintain informal credit lines with suppliers of farm inputs like seeds and fertilisers. Arthis provide growers with inputs at a higher than actual price that is adjusted at the end of the season along with the standard commission.
For example, the SBP study found that a bag of urea selling for Rs1,800 in the cash market was sold for Rs2,400 in credit. This translates into 33.3pc mark-up for a four-month crop cycle or 100pc mark-up on an annual basis.
“The credit extended through Arthis is without any guarantees. Arthis have a dual advantage in getting commission on produce sold through them in the wholesale markets,” it said.
Lending and recovery methods of these middlemen are not subject to any regulatory oversight. Except for a small ‘market fee’ on the total traded value, they operate mostly out of the tax net.
Growers believe the banking regulator should simplify procedures for agriculture financing. They say the regulators should promote ‘group lending’ on personal guarantees for agricultural inputs through growers’ representative bodies. “Arthis exist because growers have no one else to borrow from. Making banks extend credit at market rates will wipe out informal lenders,” says Mr Kashif.
“The provincial government should set up farmers’ markets across major cities where growers can bring and sell their produce without engaging any middlemen,” he adds.
After his loss in the last crop cycle, Mr Ali of Dhabeji is now growing animal feed on his leased farm. One of the reasons for his decision to switch from vegetables to animal feed is the upcoming Baqra Eid.
“I can bypass the Arthi of the Cattle Market and set up a retail stall anywhere in the city. I’ll save money by not paying the middleman. At least I’ll know for sure the actual selling price of my produce.”
Published in Dawn, The Business and Finance Weekly, April 22nd, 2019