The Indian Economy Blog

February 14, 2008

On Dumping Tomatoes, Burning Wheat And Leaving Stands Unsold

Filed under: Agriculture,Capital markets — Karthik @ 10:30 am

About a month back, I’d written that farmers in Karnataka, when faced with a glut in the tomato crop, elect to throw sack loads of tomatoes on the highways, rather than selling them. During the great depression in America, sack loads of wheat were burnt in order to prevent wheat prices from falling. During the India-Pakistan test match in Bangalore 2 months back, an entire stand (south east i think) was left completely unsold. All these have a common thread of logic – artificially restrict supply so that prices don’t crash, and you make more money.

Yes, I understand this is counterintuitive. How can you expect to make more by selling less rather than selling more? How can you expect to make more money by destroying what you’ve produced after investing thousands of rupees? Here is my take on the same. I’ll start with the necessary conditions for this kind of a situation, and then proceed to try and explain why this works. And then I’ll try and explain how some policy changes can help avoiding wastage.

1. Monopoly: A monopoly is essential for implementation of this kind of a situation. It is easy to understand why. Suppose there are multiple independent suppliers. Who is going to dump their stock? What is the incentive for you to dump your stock? You would rather that your neighbor dump his stock which is going to increase your profits. The only way out of this is in collusion. All producers get together and decide to dump stocks. Which effectively creates a cartel, and thus a monopoly.

2. Inelastic demand: For dumping to work, the additional revenue we make out of the un-dumped stocks should be more than the revenue we would’ve made from the dumped stock if we hadn’t dumped it. So basically the demand needs to be inelastic – around the region where we are going to dump. What i’m saying is that for a small change in quantity supplied, the price should increase by a large amount. As long as this keeps happening we can dump.

Going back to textbook monopoly economics, what we do to price is to maximize quantity * price. In other words, we supply the quantity where the total revenues are maximized. And it usually happens that this particular level is below the total amount we have produced. So we introduce into the market only as much produce that will maximize our revenues.

But what about the effort that has gone into production of this excess? Just look at the examples that I’ve mentioned. In all of them, you have already spent whatever amount that you had to spend. The costs have already been sunk. Apart from a couple of minor expenses (transportation, facilities, etc.) all expenses have been incurred before we made this decision. In other words Revenues are almost equal to profits. So we maximize revenues, not profits.

Now, taking the case of tomatoes, what do we do with the stock that we don’t want to sell? One option is to store it. That again, we’ll need to do based on how much the stored tomatoes will fetch us in the future, costs of storage et al. Given the facilities in India, it usually turns out that the costs of storage would be much higher than the expected revenues from it. So we only lose money by doing so. So what do we do? Dump them on the highways. Or if they take my suggestion, organize a Tomatina.

The other thing with tomatoes is that farmers don’t cooperate when they are making the decision regarding what to plant. If they did back then, some land that would’ve otherwise been used to sow tomatoes would be diverted to some other crop, which on the margin would yield more. Interestingly, the farmers seem to come together in a cartel only after the tomatoes have been produced!

So what are the policy implications from this? Firstly, infrastructure has to be improved. We need to be able to make storage of tomatoes cheaper, so as to encourage storage rather than throwing away. We need to encourage building of cold storages, and refrigerated transport systems. We need more investments in warehouses. Intuitively, it may appear as if these warehouses are just going to add to the cost of production, and thus push up inflation. If you see the larger picture, they are effectively encouraging efficient usage of land – which in my opinion is the most precious resource.

Second, the farmer needs to be able to easily estimate the revenues he will get by storing his goods. More importantly, he should be able to have a good idea about the revenues he will get from each crop even before he sows. And should be able to lock in the revenues before sowing.

We need to extend futures markets into all agricultural commodities. And keep the lot size reasonable so that it is accessible to small farmers. It is not as if the farmers won’t be able to use technology. Make it accessible to them, and they’ll easily take to it. The cell phone revolution is proof of that. Yes, small lot size could be a problem when it comes to settlement. Cash settled futures need to be explored.

Throwing tomatoes on the highway may be economically efficient when looked at in isolation. Looking at the larger picture, it only points to certain amounts of land and water and other inputs that have been wasted. That have been wasted growing tomatoes which no one needs, when they could’ve been used to grow something else. Agricultural commodity prices have been going up all over the world. Agricultural land and water are precious inputs, and need to be utilized judiciously if we have to continue feeding everyone. Futures markets help us allocating these resources efficiently.

18 Comments »

  1. The excess supply could have been used to make manure
    why throw it away

    Comment by Shobhit — February 14, 2008 @ 1:40 pm

  2. I have been reading the Indian Economy Blog since it started. The blog is well written and gives a useful insight into a lot of issues in India. I remember one post which I liked a lot was regarding employability of defence personnel in the corporate sector. I read a few other ecoblogs – Econbrowser, Econlog, ElectEcon etc. This blog compares favourably with the general Economics Blogsphere.

    The point of the above is – I am pretty sure this blog has a relatively sophisticated readership.

    This post is inexplicable on a number of points. I’ll highlight a couple:

    The author writes “All these have a common thread of logic – artificially restrict supply so that prices don’t crash, and you make more money. Yes, I understand this is counterintuitive.”
    Restricting supply, other things being equal will lead to an increase in the price. Why is that counter intuitive ? The post is then based on clearing this supposed counter intuition. We then get an explanation on the underlying determinants – Monopoly, Inelastic demand and an exposition from ‘textbook monopoly economics’.
    “Intuitively, it may appear as if these warehouses are just going to add to the cost of production, and thus push up inflation.”
    Huh? Am I missing something? When did innovation/efficient resource utilization become intuitively inflationary?
    This post is sort of a non-post – based on a self generated ‘counter intuition’ and followed with an explanation of that ‘counter intuition’.

    Comment by Anon — February 14, 2008 @ 1:45 pm

  3. It is such a pity that food has to go to waste like this. Of course I understand the economics involved here, but it doesn’t justify the situation any.

    Another problem is the WAY food is wasted. I’m sure they could have driven the surplus tomatoes to some alternate arenas… maybe get purees or sauces in this case. That should have curbed the supply of direct tomatoes while still giving utilitarian value to some part of it.

    Or… they could have had a tomato fight fest… I’ve heard that Spain does it… make a proper festival out of it. Charge visitors for the ‘fun’ they’d have.

    It would still result in wastage of food, but it makes better economic sense. Wouldn’t you agree?

    Comment by Hamish — February 14, 2008 @ 2:18 pm

  4. “The other thing with tomatoes is that farmers don’t cooperate when they are making the decision regarding what to plant. If they did back then, some land that would’ve otherwise been used to sow tomatoes would be diverted to some other crop,”

    Can they actually do this? I know in Sri Lanka there’s a law which prevents a farmer from diversifying crops, maybe it applies only for Padd y..

    Comment by Deane — February 14, 2008 @ 2:59 pm

  5. This is a reply to Shobhit’s comment on why is it put as “counterintuitive” in the blog to curb supply so as to increase the price of the commodity.
    I would suggest him to see the meaning of the word “intuition”.For someone who doesn’t know how price of a commodity behaves with changes in demand and supply it is “Counterintuitive” enough to throw somethng on highways to increase the reenues.

    Comment by Abhi — February 14, 2008 @ 4:05 pm

  6. We can’t understand Indian agriculture without understanding the politics of land ownership, control and decision making, inextricably linked up with caste.
    Most agricultural labourers have simply no say in what they are planting. It’s as simple as that. In most cases, they are forced to buy back grain from the landowners or other buyers who have a local procurement monopoly, at several times the cost at which it was procured. Government, on the other hand, buys only from these traders, and all the high procurement prices etc. go to them. They benefit from subsidies which are conditional on planting what the government wants them to plant, and the motive is profit rather than food availability. Monoculture has become the norm instead of crop rotation. Even with food crops, biodiversity has fallen and hardy, nutritious and sustainable crops such as pulses and millets are cultivated less and less. Whatever is pushed is dependent on high quantities of expensive inputs, and is extremely ecologically destructive. The purpose is defeated because productivity falls eventually – this is what is happening in Punjab now. There are also health problems etc. due to excessive input use. Under cover of Bhakra dam and being ‘India’s bread basket’, Punjab’s groundwater has been drained to over 1000 ft in places, thanks to free electricity.
    Demand and supply are meaningless when you have such monopolies in procurement and consumption. That’s how we manage to export millions of tonnes of foodgrain while nearly 50% of children below 6 years of age are malnourished.
    There are alternative arrangements which are workable, but we have to let go of market fundamentalism for them to work. Too often, especially in the post-liberalisation phase, have we confused profitability with overall optimisation and efficiency w.r.t food security, ecological sustainability, and an egalitarian ethos.
    Here is an article describing one such attempt: http://www.indiatogether.org/2005/oct/agr-sovereign.htm

    Comment by Dhruva — February 14, 2008 @ 6:09 pm

  7. hi i just resd ur essay it’s quiet good

    Comment by clint — February 14, 2008 @ 6:50 pm

  8. ‘A monopoly is essential for implementation of this kind of a situation.’

    Not necessarily true. Take the case of small-time tomato farmers in Karnataka dumping their excess produce. Given their obvious lack of market clout and co-ordination, monopoly or cartel formation can be hardly blamed here (there are better things that monopolists can do, see below).

    The reason why they’re destroying their excess inventory is quite simple – the expense involved in storing it and selling to a wholesale dealer is more than the market value of the produce itself. The wholesale prices fall simply because of the supply glut, which in turn, (in this case) is because of abnormally high tomato production. Often this happens because of uncoordinated planting, the precise opposite of a rational monopolistic behaviour!

    Any monopoly (or cartel) should rationally produce less produce to begin with, instead of first producing and then destroying excess produce! Look at 1980s Bajaj, Maruti or AT&T!

    Comment by photonman — February 14, 2008 @ 9:48 pm

  9. This is the reason why I call for inviting some good upcoming or accomplished economists on the blog.

    photonman said it best. Basically the market worked (or failed from a different perspective.) The actors responded to how the market priced their good. They responded very logically from the point of view of capital preservation but from a resource point of view it was a complete disaster.

    There is nothing “counterintuitive” in this unless this is something very new to the readers. Anon said it.

    The dumping of tomatoes is the result of capitalism. The perspective is from that of capital rather than resource preservation.

    Comment by HmmBut — February 15, 2008 @ 5:23 am

  10. @shobhit
    i agree with you. but i think the revenues they get from the manure would be less than the value of the publicity they get by throwing it on the highway!

    @anon1
    that you restrict supply to make more is not counterintuitive. what is counter intuitive is that destroying goods can result in greater profit.

    oh and trust me, many people would see stuff like warehouses as an expense, not an investment.

    @hamish
    if you follow hte link at the beginning of the post, it’ll lead to my blog, where i’ve made a case for something like tomatina in india.

    @deane
    as far as i know there aren’t any restrictions on choice of crop for farmers. and i think the way they are doing it in Sri Lanka isn’t the right way to go about it. subsidies work better i think

    @dhruva
    compeletely agree with you. i’d written another piece here on the IEB a few months back (last may/june). that was about teh APMC act and consequent distribution monopoly. the previous govt tried to undo this but then this one isn’t doing much

    @photonman
    i think i made the point that there isn’t any collusion before sowing. and that it happens only after the thing is produced. if collusion were there before sowing, situation would’ve been much better.

    @hmmbut
    i think wiht the right infrastructure and information (eg. futures trading) capitalism can be much more efficient at resource preservation than central planning

    Comment by Karthik — February 15, 2008 @ 10:18 am

  11. Tomatoes on the road ? Wouldn’t that cause a few accidents?

    Comment by SJ — February 15, 2008 @ 6:52 pm

  12. If farmers are made to understand seasonal demand and supply situation things will solve.But dont understand charts and graph because they are ignorant. Why not follow what japanese cooperative fish farming does. Give them chart of when to produce and how much to produce. Ignorant people always follow sticks than carrots. I dont like sticks but world is like that what to do. Atleast people will benefit even if they dont understand.

    Comment by Satish — February 16, 2008 @ 12:35 am

  13. Hi,
    I am not sure if I am quiet eligible or qualified enough to comment or write here, yet its just an attempt to understand this whole system of agriculture in India. I being a software professional , feel sad that our businessmen who invest more and more into industries like entertainment, infrastructure and IT, only looking at the high profitability dont even think of investing into agriculture, like trying to harmoinse the way indian agriculture is lead. I believe most of all what is lacking in Indian farming is that great network, synergy.. our farmers dont know what is happening in Indian economics, atleast majority of them dont know if not all farmers, mostly because of lack of education. They dont understand which part of the country and how many regions are going to grow the same crop this year?, these and many more issues can be eliminated if someone takes incharge of educating them. Dealing this sector of India as a big time business. for example just as Reliance has comeup with Reliance fresh. I understand they are hampering those small scale shoppers, yet they are organizing selling of vegetables or anyting of that sort taking over this confusion of throwing things to road. Going forward I am sure it will be more organized. Likewise Can we identify and organize all the subsystems of Indian agriculturing based on what all we need to grow, and help farmers secure their hardwork by exporting the excess of it and not throw them to the road.
    I could be quiet ameture to suggest or comment these things because ther are already people who have dedicated themselves into this sector of India and made great researchs and even social service behind the stage, I wish to join such silent contributers who do it purely for the goodness of the country. I am learning to look at this slowly and instead of applauding Shahrukh or Malya for buying crickters I thought of spending my time in searching blogs and information on this and start my first step here.

    This was a helpful start looking to the above blog.

    thank you,
    Kavita.

    Comment by Kavita — March 1, 2008 @ 9:04 pm

  14. @Karthik

    “but i think the revenues they get from the manure would be less than the value of the publicity they get by throwing it on the highway!”

    ..may be that’s why some of them kill themselves because the value of publicity is more than their value to the family..

    BTW: Will they also crush the dumped tomatoes with their Dodge RAMs??

    Comment by raghu — March 11, 2008 @ 5:11 pm

  15. Hello Karthik Sir, myself Vaishnavi, a Management Student, read ur articles on economic blog. Actually I have choosen these topic for my project presentation of Economic Subject. But some related topics like the exact date, place & area is not known to me. These details are needed for my presentation which i am going to present before my whole class on 25th of march 2008, so can you please help me out for these details by mailing me on my email id: vaishu_ambkar@yahoo.com
    as early as possible.

    And i will surely reply you about the comments on presentation on the next day.

    Thanks, Vaishnavi Ambkar.

    Comment by Vaishnavi — March 22, 2008 @ 8:40 pm

  16. This is common practise in developed countries too.In EU millions worth agri produce is thrown in sea,tons of milk products are burned down to avoid the price collapse.But that was around a decade back.Thanks to liberalisation,they dont have to throw their products in sea or burn them.They now dump it in developing countries like India.

    Comment by Abhishek Upadhyay — March 23, 2008 @ 2:57 pm

  17. Why is there no *questioning* of the economic models and theories that force farmers to waste food like that? Seems like these theories are being considered as sacrosanct (like Ten Commandments from God) and we are supposed to change our behavior to irrational (though there’s a rational explanation for that behavior from the market perspective) to conform to this model.
    And how many of you economists/market experts have worked on a farm (even if for a few months) or grown your own food, to get an idea how nature works?
    Would love to read some thoughts.

    Comment by EconBuddhu — April 4, 2008 @ 4:10 am

  18. I could not find this news on the net. please provide link:

    “During the great depression in America, sack loads of wheat were burnt in order to prevent wheat prices from falling”

    Imran Samad Khan

    Comment by Imran Samad Khan — August 13, 2008 @ 11:12 am

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