Price risk and farmer marketing contract preferences: Evidence from India
Majumdar, Inder Anil
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https://hdl.handle.net/2142/121328
Description
Title
Price risk and farmer marketing contract preferences: Evidence from India
Author(s)
Majumdar, Inder Anil
Issue Date
2023-07-19
Director of Research (if dissertation) or Advisor (if thesis)
Michelson, Hope C
Janzen, Joseph P
Committee Member(s)
Ando, Amy
Winter-Nelson, Alex
Department of Study
Agr & Consumer Economics
Discipline
Agricultural & Applied Econ
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
M.S.
Degree Level
Thesis
Keyword(s)
Price Risk
Development Economics
Agricultural Economics
Risk Management
Industrial Organization
Abstract
Onions in India are mostly produced by small farmers; transaction volumes are relatively low and production is spatially fragmented. Onion markets in India are also characterized by considerable price volatility; onion wholesale prices within a calendar year can range between $0.30 and $1.35 per kilogram, intra-annual swings of nearly 300%. The price distribution for onions is also highly skewed with most observed prices below the mean. The distribution is characterized, however, by a long right tail of infrequent, but very high prices. In recent years, large companies sourcing fresh fruit and vegetables in India have offered farmers marketing contracts featuring a predetermined price, delivery date, and contracted volume, all negotiated at the start of the growing season. Farmers across India have proved reluctant to enter into these sorts of marketing contracts, despite the fact that they theoretically offer benefits to both buyer and seller. Our research uses a survey of onion farmers in Maharashtra, a major onion producing state, to establish key facts about farmer price risk tolerance and contract attribute preferences. First, we show that farmers have price expectations in the right tail of the historic price distribution; these expectations appear to be influenced by prices observed later in the marketing period. Second, we use a choice experiment to model the likelihood of contract acceptance with respect to the volume of production, price per kilogram, and the number of weeks between delivery and payment. Finally, we show that farmers balance contract price against other features of the transaction; they prefer contracts that cover a higher portion of their production volume. Our results suggest that farmers do not always prefer contracts that offer price insurance from volatility and seem to prioritize agreements that keep search costs low.
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