Is the law of supply and demand essentially anti-farmer?

The law of supply and demand is often regarded as a cornerstone of modern economics. But if we were to talk about farmers, it seems that this law has been interpreted to benefit a select few at the expense of everyone else.

The farmers that we are talking about here are the small and marginal farmers who make a living through growing and selling food. They practice farming even though it does not pay much because the alternate options of livelihood are not good enough. This set of people also includes farms that maybe larger in size but do not follow modern industrialised machinery and processes for growing food. Essentially, these are people who cannot afford high input costs and do not have the capacity to hold the inventory for long.

Coming to the law of supply and demand, I think it has been interpreted or distorted in a way that it ends up favouring a select few who twist and turn the dynamics of the curves to shape their own destiny. Sometimes I feel that the law has been used since long as a tool to exploit the poor.

The law of supply and demand essentially states that if a product or service is in short supply, while its demand and other influencing factors remain the same, then its price would go up. Similarly, if the supply increases under similar demand conditions, the prices would begin to fall. It is said that this rise or fall happens to arrive at a point of equilibrium. This equilibrium price is said to be the price at which the sellers can sell all their goods and buyers can buy all that they need. In an ideal world this may have worked well. Sadly, the real world is not an ideal world!

It is assumed that these laws help economists, businesses, policy makers, etc. understand the dynamics of the market. But that does not stop someone from using the understanding to control the outcome. This control can be in the form of artificial supply or demand, monopolised markets, restrictive trade practices, manipulated government regulations, misplaced political decisions, surplus capital, etc. It is pretty obvious that those who have access to these controls are the ones who are in a position to dictate the outcome.

Interestingly, this economic principle was first proposed by Philosopher John Locke to shift the control of the lending rates from the hands of the government to the free market. The argument was that total government control led to unintended consequences. He, however, did not use the term ‘Supply and Demand’. The term was used for the first time in 1767 by Sir James Steuart who was mainly concerned about the impact of supply and demand on labourers. Interestingly, Sir James Steurat was a political economist. Political economy is a discipline which takes a broader view of economics, rejecting the narrow focus on ‘pure markets’. From what I understood of political economy, it seems to present a wider view of market and trade, unlike traditional economics which believes only in its own truth.

The much loved supply and demand curve was developed by Alfred Marshal in 1890. He also introduced the concept of price elasticity of demand. He observed that in real life the supply demand relationship is not always true. Moreover, there are some goods whose prices are inelastic hence they may remain unaffected by the law of supply and demand. These include goods like medications and food which are crucial to the consumers.

Like every law of science, the law of supply and demand is also boxed by a set of assumptions. These theoretical assumptions often do not account for various forces that affect or manipulate the point of equilibrium. Anyone who has the financial or political muscle to control the outcome is in the position to alter this point of equilibrium. The price fluctuations of onions explains this well.

Onion has a high shelf life and with the help of cold storage chains, it can be ‘held’ for significant period of time, say 8/9 months to almost an year! Even without a cold storage it can be ordinarily stored for one to almost six months, if adequate precautions are taken. You must have observed that the price of onions fluctuates abnormally, leading to public outcry and political chaos. Incidentally, onion is one of the key ingredients of Indian cuisine hence almost everyone needs it on a daily basis. Due to high prices one may reduce the consumption but it is hard to give it up altogether. As the socio-political impact of this spike is high, I sometimes wonder if this spike is designed for short term market as well as political gains. Interestingly, this fluctuation clearly proves that there is nothing called a free market. Markets are controlled, either by businesses, or by governments, or both. The choices of ordinary citizens mostly stand manipulated.

Now let us examine the law of supply and demand from a farmer’s perspective.

Ideally, the farmer should rejoice when the production is high. But it does not happen that way. A bumper crop leads to lesser procurement prices. I have personally witnessed ridiculously low purchase rates – rates so low that even transporting the goods for sale becomes unviable. Unlike traders and whole sellers, the growers do not have the financial capacity to hold the produce. Unlike corporate players, they do not have cold storages through which they can control the supply. As their income is seasonal, their need for quick payments is high. They also do not want delays due to risk of spoilage.

Isn’t it strange that in this game of modern economics, farmers are pushed from the supply side to the demand side. Good yield floods the supply line thereby hitting the sale price. The money they should earn from sale ends up becoming their ‘demand’. As the crop production is based on season and geographic location, the ‘demand’ is localised and high. The buyer is the ‘supplier’ of money and the law of supply and demand seem to play in his favour. Interestingly, even the aggregator often asks the producer, “Aapki demand kya hai?”, which means “What is your demand?”

Apart from issue of supply and demand, there is another important aspect to consider. One may like to believe that there is ample supply of agri-produce but that is not true. What most poor people are consuming can hardly be considered as food. In a completely free market there would be further deterioration of quality in what is anyways a ‘lesser’ food. In that context, we cannot overlook the fact that food is an essential commodity and that access to decent food is a basic human right. Imagine what will happen if everything is left to free markets and prices end up going beyond the reach of the poor.

For a moment, let us turn the table and explore an imaginary scenario from an alternate perspective. What if majority of the farmers decide to form large Farmer Producer Organisations (FPOs) and create their own storage infrastructure to control the supply, thereby dictating the prices. Frankly speaking, the farmers can then easily convert their apples into iapples! In a free market scenario this is a plausible as well as acceptable outcome. But if anything like this was to happen then the middleclass would cry foul, the rich would cry foul and even governments would cry foul. I am more than 100% sure that government would intervene the very next day through regulatory mechanisms. But when a select few do the same, governments does not seem to have any problems with that. In fact they seem to love it in the name of market liberalisation.

The way this law hits the farmers, it also adversely affects the interests of artisans, labourers, etc. Essentially this law seems to be anti-poor. Imagine a builder in Gurgaon constructing a housing complex – his work progressing as per the plan, with no budgetary constraints. Even his sales targets have been met. Meanwhile, a weak monsoon badly affects eastern Uttar Pradesh and Western Bihar. Many people from this region migrate to Gurgaon for work. The builders reduce the daily labour rate due to surplus labour in the market. There are no marks for guessing who loses and who gains in this deal. Having said that, I am pretty sure that there must be many things good about the law, but as of now I am pretty sure that not everything is right about it!

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3 Responses

  1. Prashant says:

    I like the concept of FPOs. But it is interesting to note that not many cooperatives have succeeded in India. GCMMF/ Amul is more of an exception. Why is it so?

  1. March 2, 2021

    […] Instead of simplistically superimposing various economic models on the agri-sector, we need to really understanding the journey of food. On one hand we want everyone to have access to food, on the other hand we want the growers to be happy about doing what they are doing. We want their incomes to go up and the overall supply of food to increase. For anyone with a sane head, it is not hard to understand that this dynamics is not a simple demand & supply issue. In fact demand and supply theories seem to be anti-farmer! (I have discussed this is a separate article titled – Is the law of supply and demand essentially anti-farmer?) […]

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