From Farm to Fork

Here, I would like to take up an issue in Pricing: i.e. that why is there such a great difference between the price that a producer/manufacturer gets and what the ultimate consumer pays. To be India specific, this is my observation:

Due to the Black (Unaccounted un taxed Cash) Money Economy that runs parallel in India; and without getting into whether the “white” economy is bigger or the “black” economy is bigger (In a Planned & Organized Deficit Spending (PODS) economy these 2 economies would be the same.

Lala Kunjoos (“Lala” is slang for the business class & “Kunjoos” means: Miser) has INR 1 Crore (10 millions) in cash and this money is as Black as it can get. Lala ji cannot put this money into a bank and earn interest, or invest it in some legitimate venture and earn interest as he does not believe in mutely paying taxes. If he is to eat every day and live well with his family, he would, without any “white” economic activity, have to either eat into his capital of INR 1 Crore, or use this money in a manner that he earns some? 

So what Lala ji does is that he buys 5000 bags of Rice from a farmer, in a village, (who he may have lent money to also, but this goes un recorded as agricultural income is not taxed) whom he pays at least the minimum price set by the government for that year (but deducts his interest that he charges to the farmer on a loan) and so 5000 bags of rice cost him INR 1000/- per bag of 50 kgs of Rice. As he buys and pays cash at harvest time, he decides to stock his 5000 bags in his this farmer village warehouse.

The harvest gets over and all the rice has been bought/sold, and as it is eaten (not by rats but by people including the farmers) the prices start rising (due to so called Demand/Supply reasons which are artificially created because of this “warehousing”) and soon Lala ji is offered by another : Lala ji No. 2, of another village (where Rice is not produced in that abundance) & where the weather, or pests played truant, a price of INR 1250/- per bag of Rice. Lala ji calculates that his costs of living for himself and his family, say for another three months, would be approximately INR 40,000/- per month and so he decides to sell to Lala ji No 2; 480 bags of Rice @ INR 1250/- per bag earning himself a tidy sum of INR 120,000/- which will take care of his expenses and also cover his costs of his warehouse and its personnel for 3 months. Lala ji No 2 has the same problem that Lala No 1 ji has: he also has INR One Crore in black money and also needs to earn his living for himself and his family. Lala ji No 2 soon decides to sell some Rice to Lala ji No 3 who is located in the local town. From here the Rice starts getting sold and resold and by the time it reaches Lala ji No. “N”; who sells it to a shopkeeper, and who (the shopkeeper) finally sells the rice to one of his regular customers living in the town and/or city, the price of the Rice has reached INR 100/- per kg, out of which, the shopkeeper makes a cool INR 11/- per Kg.

So Rice which started out from the producer (our village farmer who sold to Lala Ji 5000 bags of rice) at INR 20 /- per Kg, is eventually sold to an actual consumer for INR 100/- per Kg. INR 70/- per kg has been “earned” by “N” numbers of Lala jis, and INR 10/- per Kg has been made by the shopkeeper.

Who is to blame for all this? The absence of PODS!

Because if PODS was there, then Lala ji would get adequate (10%) legal interest on his capital of INR One Crore which he would now honestly be able to and want to keep in the Village/Town/City Bank. And so would all the other “N” Lala jis be able to do the same. They would not have to speculate to earn a living from their capital.

In this case, only the logistics costs of moving the rice and its packaging, from the grower farmer’s village, to the other village/town or city could be justified into the costing of the eventual price that the actual consumer pays.

Another question in pricing that does arise is: Is the shopkeeper justified in making a cool Rs 10/- per Kg on the Rice?? My observation on this is similar to how logistics should be treated and which has been explained later. But to explain it in manner related to a Shop or Shops: here goes……

……At one end we have the Mom & Pop shop(s) and at the other end you have the Major Chain Super Sized & Stocked Shop/Markets. The Mom & Pop shop essentially provides convenience of shopping over pricing (this may not hold true always)

while the Super market chain provides attractive pricing over convenience (this also may not hold true always). A Mom & Pop shop can Buy a 100 kg bag of rice from the local wholesale market, and in their backyard or their basement warehouse, they could “cut” the 100 kg bag into 100 One kg bags, and sell them at the same price as at the nearby supermarket, whose purchase department also buys from the local wholesale market, but bought at the same wholesale rate.

Then gross offerings (as in a total of simple numbers irrespective of products or types of products) in a Mom & Pop shop would be like one department of a super market. For example, a Mom & Pop might stock, at any given time, 1000 number of items, whereas the super market would stock 1000 different brands of soaps only in A Special Soap Department. The number of items would be the same. And maybe for the example’s sake, there would be 30 different departments in the Super Market, and coincidently there are also 30 different Mom & Pop shops in the vicinity served by the Super market that have similar and approximate items number parity. Now we could invite all 30 different Mom & Pop shops, to own equity in the greater Super market, and as well as gainfully employ them & they then act both as employers & employees and assume (or maybe after a survey, find out the actual incomes in both modes of shops) that incomes could be more; less, or remain the same. What the income would be as per this survey could be used to either support One Super market or 30 different Mom & Pop shops with the assumption (or, as per the survey, whose scope could be accordingly increased) that convenience cancels out the price difference. These permutations and combinations by themselves are adequate to determine whether there should be a Mom & Pop shop (s) or a Super market shop. It is recommended that all effected personnel, as in the Mom & Pop shops, be invited first to join up in the Super Shop, should the market surveys point at a Super Shop being more profitable & better than a/many Mom & Pop shops.

So if the objective of so many layers in the pricing is to create opportunities for speculation & profit, besides enabling actual physical supply from the farm to the town, to bigger towns, to cities and finally to metros, then only the latter activity of physical supply should remain, and all the speculation should end. 10% interest should be given on capital (refer to my PODS article) so that the layers between the price which the farmer ( & One Village Farms-OVF) gets, & what price the actual consumer pays, would be removed in such manner, that the farmer or OVF gets a higher price,  and the actual consumer gets a lower price.

If you read the my earlier article about farmers & agriculture, I recommend that just as the logistics of crude petroleum is managed mostly by major government players, then the logistics of farm produce should be managed by major government players, who could draw on the experiences of the massive population of Lalajis that would be displaced without agro-speculation. However, if PODS is practiced only then this would be possible.