Can institutional innovations in agri-marketing channels alleviate distress selling? Evidence from India

Abstract

• We address farmers’ distress selling issue through institutional innovations in agri-marketing channels. • We compare likelihood of distress selling through Contract Farming and Farmer Producer Companies against APMC. • Findings suggest a favourable effect of alternate agri-marketing channels in alleviating distress selling. • Simulation results suggest under what circumstances farmer sells to alternate channel. Distress selling of agri-produce is a common phenomenon in Indian agriculture, and is especially true for horticulture crops, given their highly perishable nature and not being covered under minimum support prices. This study focusses on uncovering the role of institutional innovations in agri-marketing channels in addressing the issue of distress selling. Using primary survey of 108 tomato grower farmers from the Western state Maharashtra in India, the study compares the likelihood of distress selling for farmers selling through the alternative channels of Contract Farming (CF) and Farmer Producer Companies (FPCs), as against selling through the conventional marketing channel of Agriculture Produce Marketing Committees (APMCs). Building on the insights from prospect theory, where a farmer would react more severely to losses than to gains, we develop a mathematical model to compare the utility derived from selling in alternate channels (that is, CF and FPC) vis-à-vis selling through the APMC channel. Subsequently, using econometric analysis, we find that opting to sell through alternative marketing channels helps farmers minimize losses and shields them from distress selling. Finally, a probability function is developed to determine the likelihood of a farmer opting to sell in an alternate marketing channel (CF/FPC) as against the conventional APMC channel. The findings aid in framing optimal pricing strategies that could be used by the contracting firms and FPCs.