Distressed Selling by Farmers: Model, Analysis, and Use in Policy-Making

Among the various governmental schemes that support agriculture, support prices have been adopted by many developing countries. A support price for an agricultural crop is a guaranteed price at which a governmental entity agrees to purchase that crop from farmers. Despite this surety, a surprising practice of distressed selling has been widely observed in practice: Farmers sell a significant portion of their crops to outside agents at prices much lower than the support price. We build a tractable stochastic dynamic programming model that captures the salient features of the ground realitieslimited as well as uncertain procurement capacity, high holding costs for the farmers, and lack of affordable creditthat conspire to induce distressed selling and, consequently, a significant loss of welfare of the farmers. Using real data on procurement under a support-price program, we establish the accuracy of our model's prediction on the volume of distressed sales. Finally, we show how our model and its solution can serve as a simple and useful tool for policy-makers to assess the relative impact of the improvements in the main determinants of distressed sales.