Cardamom economy: Domestic market structure and prices

Cardamom trade in India is what may be called a regulated trade. Cardamom (Licensing and marketing) Rules 1987 was introduced to streamline the system of marketing in general and bringing about control in the form of restricting the entry of persons into the different functional categories, namely exporters, dealers and auctioneers. The declared purpose of such regulation is to ensure a fair price for the product and the timely payment of the sale proceeds. Export marketing of cardamom is regulated by the Spices Board (Registration of Exporters) Regulation 1989. The Spices Board issues the following certificates/licenses:

  1. Cardamom dealer licenses.
  2. Cardamom auctioneer licenses.
  3. Certificate of Registration as exporter of spices.
  4. Registration-cum-membership certificates to exporters (RCMC).

Market Intelligence Officers have been posted in important marketing/auction centers to collect reports on crop purchase, sales, movement and price trends.

An important aspect of the market structure is the existence of an efficient auction system, which ensures fair prices to the larger planters who take their produce to the auction centre. There are at present 11 auction centers in India. Though the auction system is efficient, the quantity flowing through the auction centers is only about 70 per cent of the production. The licensed auctioneers conduct weekly auction during the harvesting seasons in the production tracts/assembly centers on particular days as approved by the Board and as per the conditions/directions issued from time to time. A sizeable quantity (about 30 per cent) flows from the producer to dealers outside the auction system. The reasons being: (1) non-availability of auction centers in growing regions and (2) because of the fixed quantity of (500 gm/lot) the auction sales is not profitable for lots less than 16 kg. A study by Joseph has revealed that the average price obtained tends to increase with the increasing size of the lot. The price obtained by the largest lot is 12–87 per cent higher than that obtained by the smallest lot depending upon the season and year of sale.

Price analysis

Analysis of the structure and behaviour of farm prices is of considerable interest in the context of finding ways and means for increasing production and productivity. Prices often act as a guide to indicate the change in production decisions.

Cardamom is a moderately storable export commodity. Long-term storage is not possible as in the case of pepper. This necessitates market clearance within the crop year, thereby ruling out speculations. Within these limits the formation of prices in the domestic market takes place in the following manner. Depending upon the length of the summer, severity of drought, pre-monsoon showers and the quantum of rainfall during the June–July period, the well-experienced traders forecast the crop prospects for the forthcoming season. This is aided by the fact that many of the dealers and exporters are also plantation owners. If the expected production is much lower than the normal production, a significantly higher price than that ruling in the previous year is set at the beginning of the season. If on the other hand the expected production is much higher than the normal production, a much lower price is set. Peak prices (prices ruling during the peak sales season) do not deviate very much from the opening prices in most of the years, but do deviate in abnormal years when production is low and forecast go wrong. Table “Auction, wholesale and export prices of cardamom in India” brings out this fact. It may be seen that the wide variation in prices (especially in an upward direction) is associated with sharp decrease in production.

Analysis of relationship between price, lot size and quality reveals that, during the peak season, quality (68 per cent) explains the price variation across different lots an the changes in lot size explain the price variation during the slack season. Accordingly, the formation of auction prices occurs

Export value of cardamom usually depends on its major quality aspect of colour. Traders are keen to acquire as much as possible of the output in the peak harvest season as high quality harvest (with good colour) comes in the middle of the season. This is what make for the peak prices in the peak-harvesting period, which in turn, becomes the peak sales period. This period broadly falls during September–December. The keenness of the traders is further borne out by the rather high percentage of peak purchases in years when the production was lower as for instance, 1976–77, 1981–82, 1982–83 and 1983–84. A study by Joseph indicates that the export price leads the domestic price with a la o -f about 1-month. But according to Nair et al. though there is trend synchronization between export prices and auction prices, a month-to-month correspondence does not hold. However, there exists an asymmetry, that a rise in the export price is not always paralleled by a corresponding increase in the domestic price, whereas a fall in the export price is transferred entirely to the domestic price. At times the domestic prices of both wholesale and farm used to be more than the export price indicating the strong domestic market. Therefore, an attempt is made to analyze the trends in auction, wholesale and fob prices of cardamom during the period from 1971–72 to 1997–98. As can be seen from the Fig. “Trend in prices of cardamom (1971–97)” all the three price variants of cardamom shows an overall upward trend with cyclical variations and short-term fluctuations.

Further, the estimated growth equation indicated that while the auction prices have registered an average annual growth rate of 6.8 per cent, both the wholesale and export prices increased at the rates of 6.4 per cent and during the entire period from 1971 to 1997–98. The closeness of the estimated values of growth rates of the three price variants is indicative of the high degree of market integration at different levels of trade.

Cyclical movement in price

As regards the trend, the prices have been increasing from 1950s, the increase being about ten-fold in 30 years by middle of 1980s. The compound growth rate of prices between 1954 and 1986 is 9.36 per cent per annum, while it is 7.2 per cent between 1970 and 1997. A perusal of the period-wise movement of cardamom prices brings out an important aspect of cyclical fluctuation of prices, which seems to occur in the following manner: Prices remain stable or tend to increase during a certain period followed by a sharp fall. They remain low for the next few years, then start moving up and continue to increase or remain stable for another period; the process of decline and subsequent increase repeats itself. Period of this cycle is worked out to be around 11 years. These cyclical fluctuations have a significant bearing on the conditions of supply side (area and production).

When the log transformed data on production and farm price for the period from 1971 to 1997 is graphed together as in Fig. “Trend in cardamom production and farm price (1997–98)”; it can be observed that both curves were moving inproportionately opposite to each other. The pattern observed in graph can be interpreted as either the price response to supply, or the supply response to price. When the supply swindled in 1983 and 1992, peak of the price cycle was achieved. But in certain years the price response is much sharper than the supply response to price. As regards supply response to price, it is not immediate, but reflected in jumps over a period causing alternate occurrence of over and short supply. The upswings and downswings in prices are clearly related to these gaps and excess in supply. The length of the upswing is about 6 years. Here, what needs to be remembered is that once new planting or replanting is done, the plant may start yielding by the third year. The subsequent few years mark the peak yielding stage. Then the jumps in production from one cluster to the next may be interpreted as increases in area taking place about 5 or 6 years prior to that period. With such an interpretation, it may be seen that the jumps in production correspond to the early phase of the upswing in prices. The significance of the above correspondence is that, once the farmers ascertain the upswing, they respond to it by bringing new area under the crop by replanting or new planting. It takes another five to six years for these to get reflected as increases in output. These responses must have been massive; otherwise the output would not have jumped at such high rates.