VZCZCXRO9557
RR RUEHBI RUEHCI
DE RUEHBI #2427/01 3640500
ZNR UUUUU ZZH
R 300500Z DEC 05
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 2513
INFO RUEHNE/AMEMBASSY NEW DELHI 4161
RUEHCI/AMCONSUL CALCUTTA 0869
RUEHBI/AMCONSUL MUMBAI 7164
RUEHCG/AMCONSUL CHENNAI 0939
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 MUMBAI 002427 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/TPP: SA/FO - RCHRISTENSON AND SA/INS - MNEWBILL 
USDOC FOR 4530/MAC/AMESA/ASO/LDROKER/ASTERN 
USDA/FAS/ITP/TPOMMEROY/JFLEMINGS/MFORD 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EAID ETRD PREL IN
SUBJECT: PRIVATE SECTOR EFFORTS TO IMPROVE AGRICULTURAL MARKETS 
BENEFIT FARMERS IN MADHYA PRADESH 
 
 
SUMMARY 
------- 
 
¶1. (U) Private sector efforts to take computer technology, 
retail trade, and modern commodities exchanges to rural India 
are helping farmers in Madhya Pradesh (MP) get higher prices for 
their crops by cutting out middlemen.  The Indian Tobacco 
Company (ITC), a major buyer of agricultural goods in the state, 
is leading efforts to remove agents and other intermediaries 
from the value-added chain by providing individual farmers 
real-time market information, borrowing ability and agricultural 
extension services. Besides operating thousands of "eChoupals" 
(internet kiosks) in rural farming villages, ITC has opened 
fully air-conditioned shopping malls at three different 
locations in MP, enabling farmers to buy the consumer goods that 
they can now afford with their additional income.  Other top 
Indian corporate houses are reportedly planning to emulate ITC's 
successful business model.  Additionally, commodities exchanges 
are making efforts to reach out to farmers by providing them 
with real-time pricing information, and the ability to use 
farm-produce warehouse receipts as collateral for trading 
margins and bank loans.  Results to date show that the private 
sector is taking a lead in bringing efficiency and transparency 
to India's vast and mismanaged agricultural markets. End 
summary. 
 
Is Intermediation Hurting Agricultural Development in MP? 
--------------------------------------------- ------------ 
 
¶2. (U) According to state government figures, 78 percent of MP's 
work force is directly engaged in agriculture.  Outside of MP's 
two major cities, Bhopal and Indore, the state is largely 
agrarian, with small, fragmented family farms dominating the 
agricultural sector.  Like elsewhere in rural India, poverty, 
infrastructure bottlenecks and small, unproductive farms 
historically have weighed down the sector and limited farmers' 
ability to invest in new technology.  In addition, substantial 
government subsidies, largely as price supports for rice and 
wheat, have not provided farmers an incentive to innovate or 
diversify.  Soybeans are perhaps the only exception, where large 
private investment in the soybean processing industry encouraged 
farmers to become the nation's leading growers of this crop. 
 
¶3. (U) During a recent trip to Bhopal, Indore and rural areas of 
MP, Consul General and EconOff heard other constraints that are 
stunting MP's agricultural development.  Our interlocutors 
frequently derided the extent to which intermediaries influence 
the agricultural markets in the state.  EconOff spoke to several 
small farmers in rural eastern MP who complained that the 
traditional agricultural marketing system favored unscrupulous 
agents and buyers rather than farmers.  We learned that, in 
response, several private companies are now using IT to improve 
transparency and efficiency, reduce intermediation and hence put 
more of the value-added chain into the farmers' pockets.  In 
particular, ITC and top commodities exchanges, both organized as 
private sector initiatives, are leading in this endeavor. 
 
Bringing Computers to the Family Farm 
------------------------------------- 
 
¶3. (U) In the year 2000, ITC, one of the country's largest 
exporters of agricultural commodities, launched the "eChoupal" 
project, which is now one of the most successful IT initiatives 
by a private corporation in rural India. (Note: "Choupals" are 
gathering places in the village where issues of the day are 
discussed. End note) To make an eChoupal, ITC puts a computer in 
the home of a village farmer, powers it using solar panels, and 
connects it to the internet by satellite dish.  From this 
eChoupal, dozens of neighboring farmers access ITC-designed, 
Hindi-language web pages that provide real-time market prices 
for agricultural commodities, as well as district-specific 
weather reports and tips on modern growing methods.  Farmers can 
access both ITC's prices and those of other area commodity 
buyers.  The eChoupal system gives farmers far more transparency 
regarding market conditions and is already reducing dependence 
on traditional agent-arranged sales, where intermediaries have 
typically had the upper hand on price information and bargaining 
advantage. 
 
¶4. (U) There are now over 5,200 eChoupal internet kiosks serving 
nearly 3.5 million farmers in 31,000 villages covering a range 
of crops (soybeans, wheat, rice, pulses, and coffee) in MP and 
elsewhere.  According to ITC, farmers are getting up to 25 
percent more for their goods when using the eChoupal system. 
 
MUMBAI 00002427  002 OF 003 
 
 
ITC, for its part, is able to purchase commodities according to 
its specifications from farmers at lower prices, since the 
company essentially splits the margin previously taken by 
intermediaries with farmers. 
 
¶5. (U) ITC also discovered that it could benefit from the 
increased purchasing power it helped place in farmers' 
pocketbooks by linking ITC purchase centers with retail outlets 
for farm inputs, machinery, and consumer goods.  In Sehore, a 
small town south of Bhopal, Consul General and EconOff visited a 
new "eChoupal mall", ITC's latest initiative which combines 
eChoupal with retail sales.  The mall is a modern, Wal-Mart like 
one-stop shop for farmers, enabling them to sell crops and also 
purchase items for farming or household use at the same 
location.  At the mall, farmers get their cargo weighed 
electronically and are paid immediately in cash.  The mall also 
has a lab to grade the quality of farmers' produce, and offers 
educational videos to farmers demonstrating improved 
agricultural practices.  Entire families travel to the mall, 
enjoying what is for most their first experience of shopping in 
an air conditioned, modern retail outlet without apparent caste 
prejudices.  Currently, three eChoupal malls operate in MP.  ITC 
intends to open 25 more by March 2006 and 700 over the next five 
years. 
 
¶6. (U) ITC's eChoupal project recently received several national 
and international awards for its potential to transform rural 
India.  The curriculum of the Harvard Business School now 
includes a case study on the project and how the eChoupal 
movement may signal a paradigm shift in Indian agriculture. 
Eager to emulate ITC's success - especially in gaining the 
confidence of farmers who might be encouraged to eschew 
subsidized rice and wheat for cash crops like fruits and 
vegetables - large Indian corporate houses such as Bharti, Tata 
and Mahindra are reportedly planning similar initiatives in MP 
and elsewhere. 
 
Commodities Exchanges Also Seek to Serve Farmers 
--------------------------------------------- - 
 
¶7. (U) Farmers are also benefiting from the two national 
commodity exchanges active in MP, the National Commodities and 
Derivatives Exchange (NCDEX) and the National Board of Trade 
(NBOT).  NCDEX is the larger of the two, but NBOT commands a 
strong regional following due to its domination of soybean 
trading, the leading cash crop of MP. 
 
¶8. (U) NCDEX's strength, in addition to its size, is its 
national system of 150 multiple-crop warehouses.  We visited the 
Jawar Ice and Cold Storage warehouse in Indore, which was 
accredited by NCDEX in 2004 and has a cold storage capacity of 
15,000 tons in addition to a dry storage capacity of 7,000 tons. 
 Jawar Cold Storage is linked to the NCDEX database and recently 
introduced the NCDEX's so-called "dematerialized warehouse 
receipts."  When farmers deposit their goods at the warehouse, 
they get receipts that can be used to finance margins for 
futures trading on the NCDEX.  From the viewpoint of the NCDEX, 
the receipts are on par with securities as collateral, and the 
securities depositories with which NCDEX collaborates can now in 
fact book and otherwise treat the receipts much like any other 
security.  With the warehouse receipt system, farmers can use 
NCDEX futures to hedge against future crop price losses.  Local 
banks are also now accepting the receipts as collateral for 
loans to farmers.  Warehouse owner Anil Jawar and the NCDEX 
management in Mumbai told us that the Reserve Bank of India is 
currently drafting legislation to make all warehouse receipts a 
form of legal tender for borrowing purposes.  NCDEX plans to 
triple its storage capacity by the end of 2006. 
 
¶9. (U) We also visited the National Board of Trade (NBOT) in 
Indore which, unlike the screen-based NCDEX, still uses an open 
outcry system of floor trading.  Regionally, NBOT specializes in 
and dominates the trading of soybean, soy oil, rapeseed, mustard 
seed and crude palm oil.  Karan Singh Pawar, an Indore-based 
Congress politician and NBOT trader, said NBOT continues to 
perform well despite intense competition from NCDEX because of 
its specialization and its links to the nation's major soy 
product manufacturers and distributors.  NBOT told us it is 
fighting hard to keep its privileged position as the regional 
soy-trading venue, claiming that traders prefer regional 
exchanges, but it was not clear from our discussions how NBOT 
planned to compete with NCDEX to court farmers. 
 
Comment 
 
MUMBAI 00002427  003 OF 003 
 
 
------- 
 
¶10. (U) Many of our interlocutors in MP cited the large number 
of brokers, agents and other intermediaries as a main stumbling 
block to more innovation in the state's agricultural marketing. 
While such intermediaries should, and still do, help reallocate 
risks and bring transparency to an otherwise fragmented market, 
many of them apparently use their market power to perpetuate the 
very sub-optimal situation that they are supposed to help 
overcome.  ITC and the commodities exchanges have now recognized 
the potential of using technology and market-based models to cut 
through many of the layers of intermediation so that farmers can 
gain more for their crops while consumers pay less for the end 
product.  Other large Indian corporate houses have also 
recognized the potential of accelerating the process of 
dis-intermediation of the agricultural sector.  Reliance 
Industries, for example, has ambitious plans for a series of 
Wal-Mart-like retail stores throughout India. Like Wal-Mart, 
Reliance intends to bypass as many intermediaries as possible to 
purchase directly from producers.  Endeavors like those of ITC, 
Reliance and the privately run commodities exchanges show that 
the private sector can play a leading role in bringing 
efficiency and transparency to India's vast and mismanaged 
agricultural marketing system.  End Comment. 
 
 
OWEN 
POMPER