A Potato Glut: Elasticity, Storage or Contract in Farrukhabad
Potato growers in Farrukhabad have had a record rabi. District output is about 25 per cent above last year and the wholesale price at the cold-store gate has fallen from ₹1,150 to ₹480 per quintal in six weeks. Traders put the price elasticity of demand for table potatoes in this market at about −0.4 and note that cold stores are 85 per cent full, with rent of ₹110 per quintal for a five-month hold, plus handling and transport of ₹18 per quintal and 8 per cent annual interest on the stored value. Weight loss in store is estimated at 10 per cent. The five-month forward price is expected to be ₹760 per quintal, but only if the national crop turns out normal. A chip manufacturer offers a contract at ₹560 per quintal for graded potatoes, with about 15 per cent of the consignment rejected as undersized. Suresh Kumar has 600 quintals in his field and must decide within ten days.
1. Compute the net realisation per quintal for selling now, storing for five months and taking the manufacturer's contract, and work out the forward price at which storage breaks even against selling now.
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Sell now: 600 × ₹480 = ₹2,88,000, i.e. ₹480 per quintal, with cash in hand and no further risk.
Store: weight after 10 per cent loss = 540 quintals; gross 540 × ₹760 = ₹4,10,400. Costs are rent ₹110 × 600 = ₹66,000, handling and transport ₹18 × 600 = ₹10,800, and interest at 8 per cent on ₹2,88,000 for five months = ₹9,600. Net = ₹4,10,400 − ₹86,400 = ₹3,24,000, i.e. ₹540 per quintal of the original 600 quintals.
Contract: 600 × 0.85 = 510 quintals graded, × ₹560 = ₹2,85,600, i.e. ₹476 per quintal, with immediate sale and no storage risk, but a firm rejection rate.
Break-even forward price P: 540P − ₹86,400 = ₹2,88,000, so P = ₹3,74,400 ÷ 540 = ₹693 per quintal. Storage is better than selling now only if the five-month price exceeds about ₹693; at the expected ₹760 the gain is ₹36,000, but a fall to ₹600 would lose about ₹50,000 against selling now. Recommendation: store the sound, well-graded stock, sell the doubtful stock now, and if possible pre-sell part of the stored quantity forward; the contract at ₹560 is dominated unless he desperately needs cash.
2. Using the quoted elasticity of −0.4, quantify what a 25 per cent rise in supply should do to price and to growers' total revenue, and check the prediction against the observed price fall.
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In the very short run the harvested quantity is fixed, so price is set by demand. With an elasticity of −0.4, the percentage price change equals the percentage quantity change divided by the elasticity: 25 ÷ 0.4 = 62.5 per cent fall. Predicted price = ₹1,150 × (1 − 0.625) = about ₹431 per quintal.
Revenue index = quantity index × price index = 1.25 × 0.375 = 0.469, a fall of about 53 per cent in growers' total revenue even though the crop is 25 per cent larger. On the base of ₹1,150, revenue per quintal of last year's crop would fall from ₹1,150 to ₹431, and total revenue from 100 units to 46.9.
The observed fall from ₹1,150 to ₹480 is 58.3 per cent, close to the 62.5 per cent predicted. That agreement is important: it tells us this is not a market failure or a conspiracy by traders but the arithmetic of inelastic demand. When demand is inelastic, a good harvest is bad news for income, which is exactly why potato prices oscillate - the cobweb cycle. If elasticity were −1.2, the same 25 per cent increase would cut price by only about 21 per cent and revenue would actually rise, so the policy lesson differs sharply.
3. What should the district administration and the local farmer producer organisation do in the next ten days, and what should they build for the next season? Judge which interventions actually change the outcome.
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Inelastic demand means the short-run problem is disposal, not price persuasion. In the next ten days the FPO should aggregate members' stock so that grading, transport and bargaining are done at 5,000-quintal scale rather than 600, negotiate directly with the chip manufacturer and with processors outside the district, and use the cold stores that are still 15 per cent empty for the sound stock. The administration can help by arranging space, waiving mandi fees temporarily, and publishing daily arrival and price data so growers do not dump stock in the same week.
Interventions that would not change much: appeals to traders to hold prices, and retail price controls, which do not reach the farm gate. Announcing a procurement operation at ₹480 merely validates the market price unless the quantity bought is large.
For the next season, the durable fixes are demand-side and risk-side: a written contract with the processor before planting, seed shifted towards processing and chipping varieties that fetch a premium, staggered planting to spread arrivals, a price-deficiency or market-intervention scheme triggered automatically, and crop insurance. The elasticity figure shows that unless demand is made more elastic by adding processing capacity or export outlets, every good potato year will repeat the same income collapse.