Rethinking Defaults of Agribusiness in the wake of the Pandemic- Part 01

A Two-Part Investigation on the two fundamental design patterns which are shaping the past and future of the business of agriculture

Every time a pandemic occurs, as historians and wise men living on the Internet have observed, we humans are forced to think about defaults.

Defaults, if you've cared to notice, are two kinds.

Image Credits: Breaking Smart Newsletter

There is a default mode in which we humans like to operate in the world and there is an even subtler default mode in which the systems we have built have been designed.

Of course, systems have largely one default mode and plenty of edge cases. But, for the most part, it is the default mode which dictates how things must work.

And then, as you know, shit happens.

You can rationalise it however you want. "New normal". "Post-Pandemic World". It doesn't matter.

In the wake of the pandemic, there have been plenty of discussions on how to address the default of the obvious kind - How do we make our supply chains resilient from the crisis? How do we prevent food shortage and so on?

Under the pretext of talking about these obvious defaults, opportunistic (or should I call parasitic?) marketers have been trying hard to shoe-horn coronavirus into their marketing story and convince us darnedest why now is the right time to buy their solutions to address the problems the pandemic has revealed about our fragile food system.

Barring a few here and there, there hasn't been much talk about defaults of the non-obvious kind. What defaults have shaped our global food and agriculture system? How do we examine the underlying design principles which have shaped the business of agriculture globally?

Although the scope of such an exploration will be huge, I will limit this exploration to two fundamental design patterns, one, which shaped the business of agriculture so far, and two, which is shaping the business of digital agriculture.

So what is this crucial default design pattern which has shaped the business of agriculture so far?

Design Pattern#1: Exploitation of Agriculture is required for Development

At first blush, I know this sounds less like a pattern, and more like a judgement that is not comfortable to hear. And I am not the first one to suggest this. In case you are finding it difficult to swallow, economists have coined pithy formulas to make it sound palatable.

"Move Out, Move Up" is the formula suggested for India to come out of its agrarian crisis by Shenggen Fan, Head of the International Food Policy Research Institute (IFPRI). In an interview, he further elaborated his line of thought.

“I think some of them must go out [of the sector], including some of the well-to-do farmers. [This is what] we have learnt from China, Vietnam and other countries in east Asia.” - Shenggen Fan

Economists are largely in the chorus when they talk about it. Arvind Panagariya in his Op-Ed on farming crisis wrote,

"We need to systematically remove obstacles – many of them erected by past policies – to the exit of a large number of marginal farmers from agriculture. Simultaneously, we must unshackle labour-intensive sectors in industry and services to create good jobs for them."

If you have been reading my blog posts, you can probably connect the dots between this design pattern and vision#1, which I spelt out in last week’s newsletter on the two visions which are competing for the future of agriculture.

Vision #1: Small landholding farmers don't matter in the long run, as their farms will be eventually consolidated by the market economics of digital agribusiness.

If you want to understand how this pattern is made to look like obvious economic sense, look no further than this illustration.

It is the exploitation of agriculture which provided cheap labour to the manufacturing and services industry. Those migrant labourers in India who walked back from cities with existential uncertainty about survival and livelihood, once upon a time, left their villages as agriculture didn't make any economic sense.

In plain and simple words, we are culpable in this exploitation of agriculture.

The development that we enjoy in urban cities, the food prices we are habituated to pay without our wallets being pinched, the cheap labour we get from the local contractor when we build a house or a swanky mall in our neighbourhood, have all been sponsored by cheap labour that came by as a result of the failure of agriculture.

When public policies and institutional arrangements ensured that agricultural prices remained lower than those in international markets, agriculture could never be profitable by design and farmers who pursued agriculture, despite its unprofitable nature, had no other option other than to migrate to urban slums for survival.

Let’s do the quick math, just in case you think I am being rhetorical about our culpability.

The table above from CACP data shows the MSP Price of Paddy, Wheat and Cotton right from the seventies till 2018. A farmer was paid Rs.76 as MSP during 1970.

Now compare this with the lowest government salary that was offered during the same period. In India, Government salaries are largely decided by the Central Pay Commission.

As per the seventh pay commission, the minimum salary increased from 7000 to 18000.

Essentially, while a farmer in 1970 got MSP of 76, the minimum salary of a government employee was around 196. In 2018, while the farmer got paid 1735 for a quintal of wheat, the minimum salary of the government employee was 18000.

In other words, while farmer’s MSP climbed by 22 times over a period of forty-eight years(2018-1970), the minimum government salary increased by 91 times during the same period.

Why have the farm incomes not risen to the same proportion as a lowest rung of a government employee?

It is the exploitation of agriculture which ensured that food inflation is kept in check with only a marginal increase in producer prices when compared to consumer prices.

Lest you think I am making higher-than-thou moralistic judgements about farmers being exploited without any data, here is data from Niti Aayog on Changing Crop Production Cost in India: Input Prices, Substitution and Technological Effects. Regular readers would remember this data I had shared when I explored the central dharmasankata of digital agribusiness

Why is it that the growth in output is not able to catch up with the cost of cultivation?

The cost incurred to produce 100 rupees of crop output increased from 51 in 1990-91 to 66 in 2002-03 and the net return declined at the rate of 2.77 per cent per year. The time period between 2002-03 to 2007-08 was a good time for Indian farmers when the cost of producing 100 rupees of output came down to historically lowest level of 48 by the year 2007-08. Naturally, this increased crop profitability substantially.

Post 2007-8, this optimistic story took a strong nose dive when the cost of cultivation began to rise rapidly at 3.22 per cent a year, leading to a shift in cost cultivation from 48 to 64 in 2014-15. In other words, the net returns received by an Indian farmer in 2014-15 was far lesser than what he must have earned ten years ago. 

This labour migration from agriculture towards development is not just happening in India alone.

Even though Germany had imposed ban of travel of foreign workers, the powerful asparagus supply chain ensured that the German lobby used their influence to request the Berlin government to ask the Romanian government to grant a special case exemption from the lockdown and fly down the seasonal workers from Romania to take care of the German asparagus harvest during the pandemic.

Bear in mind. This phenomenon is not just an economic trend that is caused by wage differentials alone.

What makes this a default design pattern in the business of agriculture is the fact that this has been happening much before the Industrial revolution. Enough and more evidence has been well documented in books like Rise and Decline of Nations.

If you dig into history, you would realise that this pattern dates back a long time. Government policies in Britain and the rest of Europe before the industrial revolution overpriced industrial goods and commercial services and underpriced many agricultural products.

All said and done, what explains the logic of this pattern?

So far, the best explanation which explains this pattern comes from a powerful theory I learned from the works of Mancur Olson.

The Logic of Collective Action

Agriculture, if you've paid notice, happens differently in developed countries and developing countries. Even if you've had paid scant attention to agriculture, you would notice a strange anomaly.

How come more number of farmers in developing countries have smaller say in critical decisions about their livelihoods than a smaller number of farmers in developed countries?

Theoretically speaking, in a country like India with 61.5 % of its population into farming, they must have a greater say about policies and decisions concerning their livelihoods than, say, America, where farmers and ranchers make up just 1.3% of their labour force.

How come we end up seeing more subsidies in developed countries with smaller farmer population and more exploitation in developing countries with a larger farmer population?

What makes developing countries to underprice agricultural products and overprice industrial products?

Enter the Logic of Collective Action.

Let's take a hypothetical scenario to understand this.

Let's assume that farmers across the Indian subcontinent massively organise themselves using the latest technology and bring the entire country to a standstill by orchestrating a large-scale supply restriction of their produce. They are able to wield political power so much to the point that they are able to successfully lobby for assured farm income from the Indian Government.

What would happen in such a hypothetical scenario? Naturally, the benefits of such a lobby or reform would automatically go to everyone in the large farming community, whether or not each farmer had borne any of the cost of the lobbying.

It is this individual-vs-collective inequality which ensures that the benefits of collective action offer no incentive to individual farmers to engage in collective action. This is the curse of being a part of a large group.

In other words, the free-rider problem will ensure that collective action is impossible in large groups. In contrast, smaller lobbies are able to enforce collective action as they can bring in the right set of incentives and make a bargain to engage in collective action without much difficulty.

If you are paying close attention, you would understand why it’s impossible to make FPOs a successful enterprise in India. The reason is simple. You can’t avoid the curse of the logic of collective action.

It is a strange irony that the key pattern which shaped the business of agriculture explicitly states that agriculture must be exploited for development. This has a tremendous amount of implications in the way our economic machine is designed to run in the world.

How do we rethink these defaults?

In this article, I looked at the pattern which has shaped the business of agriculture globally. What is the key design pattern which will shape the business of digital agriculture?

Let's talk about it next week. Feel free to share this newsletter, should you wish that more eyeballs need to pay attention to this.

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