The Agricultural Supply Chain in India:Opportunities and Prospects : Opportunities and Prospects

By Dr. K G Karmakar | Ex-Managing Director | NABARD

Introduction

Though the agriculture sector in India is in distress, there is no doubt that the dynamics of the sector is changing. However, the rural non-farm sector has become an increasingly important source of employment, given the vulnerability of agricultural activities to the natural disasters, global warming and climate change effects. There is diversification of sources of income among rural households that is happening which is very welcome. But are credit institutions able to meet the credit demands of smallholder farmers and are these credit instruments suitable for the multipurpose requirements of rural households? Are we able to come up with multi-sectoral products which can meet rural credit requirements? Is the rural infrastructure capable of meeting the post-harvest requirements of smallholder farmers? Are there enough mandis, haats, shandies and agri-markets to meet the requirements? Are there enough agro-industries, rural warehouses / cold storages to ensure a robust rural economy? So many questions and very inadequate answers!

There is a need to re-think and re-invent our approach and promote comprehensive household-based income generating activities and enable the poor to innovate and take initiatives to secure their fragile livelihoods. There are so many other issues including loan waivers for which we have to find out solutions. Of course, problems will crop up, but we have to live with them and find out solutions to overcome them.

The advent of organised retail chains coupled with the rise in disposable incomes, has triggered a rapid and significant change in the demand preferences of consumers across India. Not only has this change led to a rearrangement in the contents of the household food basket in both urban and rural India, but has also brought about much greater sensitivity to quality, variety and brands in the food market. The major changes needed in the Produce Value chain are for products like Pulses, Cereals, Oilseeds, Fruits and Vegetables and it remains to be seen whether the dietary requirements of the younger people have actually changed. To cater to the changes on the demand side, the supply chain for food has to make rapid strides so that safety, traceability and availability of quality food products are ensured all round the year. Organised retail (though as yet only 3% of the total retail market) is expected to double its share every three years or so and therefore is likely to play a profound role in influencing the nature of existing agricultural markets. Another game changer on the horizon is the proposed National Food Security Bill, which will require the sourcing of huge volumes of foods from domestic producers. Traditional production and supply arrangements are unlikely to prove adequate in meeting challenges posed by these two major developments. Unless there is urgent intervention in aggregating producers through grass-roots level farmers’ institutions, India is unlikely to achieve required scale-up in production or leverage it to the advantage of all stakeholders, especially farmers, our primary producers. The value chain in Indian agriculture is replete with numerous intermediaries, most of which are predatory in nature and add negligible value to the farm produce but take away a major chunk of profits.

High levels of wastage, low returns to producers, volatility in supply and prices for consumers and poor quality orientation are ubiquitous in perishable commodities. Estimates of the wastage of perishables such as fruits and vegetables range from 18-40%, depending on distance from markets and cold storage availability, clearly indicating a highly inefficient system. Wide fluctuations in quantum and quality of horticultural produce resulting from varying levels of wastage and sophistication of handling systems, lead to increased information asymmetry in the supply chain, allowing intermediaries to gain disproportionately at the expense of both consumers and producers. The total lack of transparency in major fruits and vegetable markets is another problem that ensures that middlemen rule and receive a major portion of the trading profits while the farmer gets a negligible profit despite bearing the production risks and market price risks!

Barring the example of AMUL in the dairy sector, value chain integration in perishables and other high value agricultural produce, is largely non-existent or sub-optimal. Unless farmers are organised and can control a greater portion of the value chain, possibly up to the stage of marketing and distribution or at least up to processing stage, producers and consumers will continue to play into the hands of the rapacious intermediaries and marketers who have contributed precious little by way of capital investments and improvements for reducing wastage of perishable produce. They would prefer this chaotic system to be perpetuated till infinity so that their stupendous margins remain intact. Partnerships between farmers’ groups and market players operating at the critical last mile section, could unlock hidden synergies that can be improved through better links with input suppliers, financial institutions and research bodies. This convergence can lead to better targeting of government expenditures on agricultural subsidies and achieve better outcomes for public policy. Israel is one country totally geared to remain ahead of the High-value Export market requirements despite a hostile environment, a very hostile climate and very less water availability. Overall, a collaborative effort between the Government, farmers and corporates in agriculture, is likely to raise the rate of agricultural GDP growth, thereby directly impacting rural poverty and would be able to increase farmers’ financial margins appreciably!

Key Bottleneck in Agricultural Value Chain

Fragmentation in Supply Chain: Most small and marginal farmers in India are price–takers. Their contact with “markets” is often limited to dealing with a produce collector or to sales at the local/ village market and district market. The typical value chain for most agricultural produce is crowded by a large number of players operating all along the chain result in weak farm-firm linkages. Producers’ share in wholesale price of perishable commodities continues to be small (about 35 percent) with the the major share going to market intermediaries as marketing cost.

Undifferentiated Produce: Agricultural produce coming from farmers remains largely undifferentiated till it reaches the processor. As a result, the prices of unprocessed farm produce are largely controlled by intermediaries who are able to charge more for their minimal incremental contribution made towards grading or quality improvement. Most of the farm produce retains its commodity nature till it is processed and branded, obviating any scope for farmers to exercise bargaining power over buyers of their produce.

Lack of Decentralisation in Post-Harvest Infrastructure: A good number of facilities exist for post-harvest value-addition in agriculture. The ownership and location of these facilities are usually favorable to large farmers, intermediaries and traders but not to the small and marginal farmers who deal in small volumes and for whom it is not feasible to carry their produce beyond a certain distance. In case of horticulture and dairy produce, distance of chilling/cold facility from the point of aggregation, has immense impact on the quality of final produce/product.

Low Focus on Direct-to-Consumer/Producer-Oriented Markets: Barring a few exceptions like Rythu Bazaars, markets for direct sale of produce/products of farmers and their enterprises are non-existent. Of the various components of the marketing mix, producer enterprises find themselves disadvantaged most in terms of the place. A producer-oriented enterprise like Amul, Mother Dairy or Fab India is able to extract premiums for farmers/artisans through retail marketing systems built up over time at cost, facing threats from existing middle-men who have to be ousted so that primary producers get a fair deal!

Absence of Farmer-friendly Farm Equipment and Agricultural Support Services: Given that most farmers do not own all the necessary machinery for efficient farm operations and quality improvement, their economic output is usually suboptimal as profitability is a function of both quality and efficiency. Farm mechanisation services such as the one offered by Mahindra Shubhlabh are not able to address the needs of small and marginal producers. Enhancing shelf life and hygienic packing of produce by cleaning, steaming and waxing of fruits, could improve farmers’ incomes, drastically. The utility and quality of essential agricultural support services which include market intelligence, farm credit, crop insurance, quality certification etc. also leave much scope for improvement.

Total Solution for Smallholder Farmers

An integrated project should provide end-to-end support to producers of high-value agricultural produce [fruits & vegetables (F&V), milk (dairy) and sheep, pigs, goats, poultry (animal rearing)]. The key activities are the project production support, aggregation of produce, value-addition of produce, trading and marketing (product development, packaging, branding, distribution, and retailing).

The above project could leverage the existing infrastructure for postharvest processes like storage, primary value-addition, and higher-level processing. Nevertheless, infrastructure for postharvest operations, wherever inadequate for ensuring quality, could be set up close to the point of aggregation for minimising deterioration during transport, handling and storage.

Supply chain management, as proposed under this project, would be a powerful tool in linking farmers to the markets, for sustainable income generation.

Well established practices like supply-demand matching, collaborative forecasting, sharing of market information and efficient transport scheduling are yet to find their way into the Indian food supply chains.  The recent developments in the processing and retailing sectors have resulted in new marketing and trading opportunities, but the challenge lies in linking farmers with these emerging markets in order to make the process inclusive, competitive, sustainable, and scalable.

Concept for the Supply Chain

“From Fields to Forks” – This implies that consumers should hold the centre-stage when it comes to production by farmers. Consumer demand in terms of nature (safe/low chemical input-based), form (ready-to-use) and time utility (round-the-year) of Vegetable produce has to guide the operations and strategy of the proposed Farmer Producer Company

“Differentiation of Produce” – Organic produce poses a double hazard as it has limited scalability for a farmer and poor affordability for a middle-class (mass) consumer. When the key driver of demand for such produce is the concern about pesticides and toxic chemicals, it would be worthwhile to promote pesticide-free crop production. A label and a well-defined system for safe production (free of pesticides and toxic chemicals) could be encouraged among farmers as the initial step towards organic farming. Produce from safe production system could be certified on the basis of internal control systems similar to organic farming but where the onus is on peer monitoring by farmers instead of sole monitoring and certification by an external agency, the safety of the produce could be verified through pesticide-residue tests by competent agencies of international stature like SGS, Intertek etc.

“Localisation of Postharvest Facilities” – The fragmentation and dispersion of farmers in India necessitates that facilities for collection, cleaning, sorting, grading, drying, transit storage and basic packing are brought within the reach of the small and marginal farmer. In regions where a particular commodity is either grown in huge quantities or has a distinct identity of its own, intermediaries and processors will compete to procure the produce from the farm-gate or doorstep of the farmers including the small and marginal cultivators. But for regions that do not enjoy such advantages, sale of agricultural produce in its raw form without basic value-addition, severely limits income for a small and marginal farmer. The identification of the numbers and the appropriate physical locations for establishing Post-harvest Value-addition Centers (PVC) can be undertaken through a participatory exercise with farmers.  Improved postharvest handling and marketing can help in disintermediation and strengthening of the agricultural supply chain through better linkages between producer groups and large commodity players.

“Holistic End-to-End Approach” – The project seeks to take into account the entire gamut of horticultural development where farmer would not only have access to modern farm practices, latest agri-inputs and credit linkages but also vital intangible value enhancers like real-time market information, risk management tools and leading industry certifications (GAP). Practices like supply-demand matching, collaborative forecasts, market intelligence and efficient transport scheduling would be employed to improve the efficiency of supply chain. 

“Focus on Retail for Long-term Profitability” – Operating in the prime retail space makes it possible for a marketing entity to compete for a higher share in the disposable incomes of the affluent consumers. In this direction, retail outlets need to be set up in the key urban centers. The existing outlets for these produce could be based on the SAFAL (Mother Dairy) Retail Outlets in Delhi.

“Mechanisation and Technology for Efficiencies”– Farm Mechanization Services (FMS) can go a long way in improving the economic realisation of farmers, particularly the small and marginal farmers by providing them access to vital technology and equipments that are unaffordable to them, due to their higher acquisition costs, higher rentals or simply, poor availability. By fostering the establishment of Equipment and Technology Fleets (ETF) for servicing farms, the project will help in bridging the economic disparities between small and large farmers owing to their differential access to mechanisation and technology. Farmer collectives can be motivated to form such ETFs which can pool agricultural machinery of the constituent farmers and bring in the missing elements by accessing credit and agricultural infrastructure development schemes of the State.

“Farmer-centric Collaborative Value Chain” – This emphasises that collaborative supply chain models are now delivering better performance than a traditional supply chain where each entity is looking to maximise its gains. Though disintermediation has been outlined as one of the key objectives, the role of certain intermediaries is value-enhancing and vital for efficient functioning of the supply chain. The ability of intermediaries to financially and logistically support the operations of proposed Producer Companies will have to be suitably leveraged for mutually beneficial outcomes.

Digitisation and Warehouses

Traditionally, agri warehousing industry was looked upon as an asset-heavy model which gave importance to creation of the warehousing space alone without any emphasis on efficient handling, scientific processes and management of the same. There is a shift in focus with increasing importance being attributed to systems and processes which are making agri- logistics, a services-driven sector. With a sector focused on services and better delivery modules, an integrated model is emerging wherein warehousing management, collateral financing and agri financing are provided under one umbrella. This enables the delivery of agri financing within hours of approval rather than days or months, as earlier. 

With the emphasis on better services and innovative delivery models, technology is the key enabler for growth of this sector. There are very few integrated service providers aware of the fact that technology can help reduce costs and improve efficiency in business delivery and overall market development. 
Digitisation and modern technology is redefining this sector. Changing times are seen real-time by technology use with GPS and GEO tagging happening in warehouses that look old and depleted. 
From real-time crop health measurements like pest infestation levels to moisture readings of the crop to satellite imagery of the warehouses, the once asset-driven model now looks like a scene from a science fiction movie. Only this is the new reality. A reality wherein handheld devices using mobile telephony are talking to satellites and delivering data to centralised servers which are analysing and converting grain into monetised assets. Such high-tech interventions have allowed financial institutions to use agricultural crops as the primary collateral, thus ensuring real financial inclusion. Gone are the days when to get a loan on a bag of wheat you had to pledge your land.  A new dawn has set upon the industry challenging the status quo and setting benchmarks of service levels, efficiency, turnaround times and collateral management.  In keeping with this, the benefits are being reaped on the ground with enhanced crop protection, curtailment of food wastage and increasing credit availability to the stakeholders of the agri value chain. The future is here and, just as software and technology has revolutionised other sectors, agriculture also can benefit from healthy doses of services provided in the rural areas that will be a boon to Farmers. 

Opportunities in the Agricultural Vertical

• Ensuring consumers with good quality and fresh produce
  • Consumer orientation in downstream activities
  • Higher efficiency through inter-linked process and stakeholders
  • Enabling new value addition opportunities
  • Achieving sustainability through regulated (APMC)/ unregulated markets
• Problems of non-regulation, high marketing/transaction and spoilage costs due to large number of intermediaries
• No appreciation of quality and Lack of transparency in pricing
• Lack of infrastructure for grading/sorting
• Non-existent cold chain
• Mismatch between demand and supply leading to high price fluctuations
• High post-harvest losses
• Restructuring and Modernisation in Food Supply chains is urgently needed
• Rapid urbanisation, Rise of middle class, Dietary diversification  has led to emergence of supermarkets  linked with improvement in efficiency of agricultural marketing system
• Organised fresh food supermarkets are seen as one of the innovative ways to link farmers to the markets and ensure better margins
• In many cases, supermarkets are investing at all levels and buying fruits and vegetables directly from farmers
• Growth of supermarkets will be very high with the recent permission of FDI in retail in India
• Thus, the future of organised retail may be different in the years to come.
• Agri-food systems are slowly undergoing transformation with supermarkets entry though their procurement operations are still at a nascent stage.
• Supermarkets work with less-resourceful small cultivators through oral, informal, verbal and non-registered contracts due to higher productivity and higher Grossed Crop Area under vegetables.
• Procure only a limited proportion of the grower’s crop without any firm commitment, on a day-to-day basis.
• Supermarkets do not decide upon the procurement regions at random, but chooses the more productive regions and farmers first.
• Farmers report that supermarkets reduce their transaction cost as they pick produce from farmers’ fields saving time and cost of farmers.
• Written agreements with legal binding and assured pricing (formal contract farming) should be the norm.
• Supermarkets should also take responsibility of providing a package of practices for vegetables and encouraging cooperative/ joint farming.
• As farmers rely on local markets, infrastructure of these local markets should be improved to reduce post-harvest losses.
• Regulated Markets for fruits and vegetables to reduce farmer exploitation.

Perspectives:

The Agricultural Supply Chain offers tremendous scope for entry for Joint Liability Groups of smallholder Farmers, for Farmer Producer Organisations, for agro-industries and markets, cold storages and small warehouses, for markets, transporters, infrastructure like roads and bridges for connectivity with markets, etc. The policy initiatives and incentives and innovations for a boost to the rural economy are needed so that the Indian economy is strengthened to levels existing prior to the colonial era after 1750’s.

(Shilpa Bichitra | Anniversary Edition | 2018)