Wednesday, 2 November 2016

Scaling-up Sustainability Solutions


This blog-post is built around my talk at the WBCSD Annual Meeting held in Chennai last month.

The Background:

2015 was a year of ambition that saw the adoption of the historic Paris Agreement and the Sustainable Development Goals (SDGs). World leaders committed to building an inclusive and thriving low carbon economy, and the SDGs provide us with an all-encompassing agenda for developing our societies while addressing the critical issues of poverty, inequality and environmental degradation. This unprecedented framework for action calls upon each of us to contribute, and forward-looking companies are translating ambition to implementation at scale.

Among other things, the event showcased how companies can capitalize on the new opportunities and economic incentives while contributing to the SDGs, thanks to WBCSD business solutions that align to their strategy and operations. The session in which I spoke zoomed in on how corporate leadership has scaled up solutions in India, and how this can be applied around the world. I shared ITC’s experiences in this regard.

Scale at which ITC operates:

Over the years, ITC has designed and implemented several large-scale programmes to create sustainable livelihoods, enrich the environment and address the challenges of climate change. I illustrate the scale using a couple of examples…

ITC’s soil & moisture conservation programme promotes local management of water resources by facilitating community-based participation in planning and executing watershed projects. Nearly 8,000 water harvesting structures have been constructed under this initiative, covering a total area of about 650,000 acres. It’s difficult to visualise that scale, and for a lay-person anything beyond the sight of a naked eye is big! It may be easier, if I use the analogy of Geneva Lake, a large water body most of the audience present must’ve seen; then imagine the whole city of Geneva of which this large lake is a small part. The area covered by ITC through the soil & moisture conservation intervention is 160 times the size of Geneva city! Yes, a hundred and sixty times.

ITC’s Farm & Social Forestry programmes have greened more than 560,000 acres through tree plantations by enabling financial, technical and marketing support to small and marginal farmers. Again, this acreage by itself may not make sense, other than appearing as some large number. Let me add, that those trees have sequestered more than 5,000 kilo tonnes of CO2, which is equivalent to keeping as many as one million diesel cars off the road, based on specific emission factors! Yes, a million cars.

The ITC e-Choupal initiative is a powerful example of a development model that delivers large-scale societal value by co-creating rural markets with local communities. With a judicious blend of click & mortar capabilities, ITC e-Choupal has triggered a virtuous cycle of higher productivity, higher incomes, and enhanced capacity of farmer risk management, larger investments and higher quality and productivity. These services reach out to some four million farmers. Again, just to visualise the scale, may I say that every Indian farmer could be brought into such a network, with not more than thirty companies operating at this scale.

All these, while ITC’s revenue has grown tenfold over the last twenty years! Profits grew 33 times and the Total Shareholder Returns grew at a CAGR of over 23%

For more details do read the GRI - G4 compliant, comprehensive, Sustainability Report of ITC.

The How of This Scale:

Essentially a three-dimensional approach. Focus. Outcome Orientation. Innovation.

Focus:

Imagine a Venn Diagram. The focus of our efforts is on those areas that converge from three angles. First, the development challenges that matter to the nation. Second, those interventions that create enduring value for our stakeholder communities. As many as 250,000 people participated directly in a “Needs & Priorities Assessment” exercise in the PRA format, earlier this year. Third, those initiatives where our interventions can multiply the impact significantly by virtue of their touch-points with our value chains or their geographical vicinities.

The resultant key focus areas, viz. livelihoods for the poor, sanitation, gender equality, vocational skills, education, and climate action mirror the important global SDGs too.

For a deeper understanding, you can browse through ITC’s CSR Policy and Sustainability Policies.

Outcome Orientation:

Often, sustainability interventions are designed as point solutions. They do make a difference, but not at scale. For example, provision of information or knowledge to small holder farmers. This is certainly one component of the services provided by ITC e-Choupal. While this is a necessary condition, this won’t, by itself, raise their incomes. The information and knowledge need to be often translated to investments on the farm. But, given the inherent risk associated with farming, farmers hesitate to make those investments. This is where our livestock and such other interventions that bring supplementary incomes come into play, which enhance the risk bearing ability of the farmers. Once the intent to invest is there, the next challenge is gaining access to the recommended inputs, credit, crop insurance, farm machinery etc. The intensity of agriculture has a bearing on natural resources like water and top soil. Without a community effort, individual farmers get trapped in the tragedy of commons and exhaust these resources, and face an unsustainable future. This is where our soil & moisture conservation interventions come into play. And so on…

Thus, commitment to the eventual outcomes - and doing whatever is necessary as well as sufficient - only can demonstrate the impact and involve the communities on larger scale.

This integrated approach of ITC and the impact is well documented in a report published by APAARI.

Outcome is not a static target but a dynamic goal as the communities evolve. New goals get set on an ongoing basis to make the programmes contemporary and strengthen their enduring relevance. For example, in the sixteen years since the first e-Choupal was rolled out, the model is in its fourth version now!

Innovation:

Investment in sustainability initiatives at this scale cannot be sustained by merely keeping a portion of the profits aside. With our Chairman, Mr Deveshwar articulating the paradigm of “responsible competitiveness” for growth, the entrepreneurial energies of the whole organisation are harnessed to innovate business models that improve business competitiveness while creating sustainable livelihoods and enriching environment.

Making Markets Work for Green GDP and Sustainable Livelihoods” is the theme of one of his speeches at ITC’s Annual Shareholders Meeting.

More importantly, co-creating solutions together with the participating communities makes the innovations relevant. This approach also synergises the complementary strengths of the multiple stakeholders, and helps execute the programmes at scale. Call it a PPPP – Public Private People Partnership – approach, if you will…

Saturday, 26 September 2015

Nuances of the Agricultural Value Chains in India

Earlier this week, I gave a talk on the subject in a Workshop of Development Professionals. One of the participants prepared this summary:

Drawing upon his extensive experience of setting up and managing businesses based on value chains in agricultural commodities, Sivakumar took off from where the previous speaker left.  He said that he would reconcile the two seemingly conflicting points of views brought up in the previous session. On one hand, farmers as well as consumers feel that the intermediaries in the value chain are getting all the cream at their expense. The other was the large body of research which says that there is no evidence to conclude that middlemen in any specific commodity sector are making any more returns than justified by the value they add through capital they invest, the costs they incur and the risks they take. Once he had done that, he said, he would propose a sort of “tool kit” that the participants could use to address the inefficiencies in the value chains.

He said that the situation in India was characterized by small ticket size, large geographic dispersion, and lack of homogeneity on both the producer and the consumer end. To reach the agri produce to appropriate buyers located elsewhere, seeking products at different times, and in different form, required the middlemen to discover mechanisms such as larger than required risk cover, substituting skills for instruments and local knowledge for things like credit rating or quality testing or bank reach. They then instituted less than "global optimal" solutions. The research on market efficiency in whichever commodity focussed on "local" connections between two subsequent legs of a value chain and these were competitively shaped leading to the conclusion about market efficiency. Yet, from the point of view of global marketplace, Indian value chains were very inefficient since the summation of local optimal efficiencies did not add up to a global optimum for the whole value chain because of the non-value adding costs and unwarranted risks. This explained the simultaneous existence of "efficient markets" as tested by economists at micro level with gross inefficiencies in aggregate.
The adverse impact of the inefficiency – in terms of higher costs and risks – have been pushed to the weakest link in the chain, namely, the small farmer! As a result, the producer’s share of a consumer rupee remained low. Also, neither the full market opportunity from the evolving consumer preferences, nor the full production potential of India’s rich agro-climatic conditions have been realised.   

He therefore suggested that any work to improve the lot of small farmers cannot be a “point” solution; interventions are needed to improve efficiencies of the value chains as a whole, by transferring the costs and the risks to the most capable players along the chain.
Citing his own experience in setting up ITC e-Choupals, he laid out an approach to build the "tool kit". He then talked of two points that move along the value chain: the first is related to how much a producer would be willing to go down the value chain to reach out to the consumer and the other as to how much a consumer would be willing to go up towards production side. For the former, he talked of producers willing to push their “value offer points” by reaching out to the consumers in terms of vendor managed inventory. For the latter, he talked of contract farming as an illustration of consumer extending the “order penetration point” up the stream in the value chain.

By studying what he called the “transaction velocity” metrics, he said it would be possible to identify the non-value adding transactions in a value chain and then eliminate them through suitable interventions. ITC e-Choupals, for example, eliminated the physical movement of goods from farmers to APMC and then from there to the factories through competitive price discovery at farmer’s doorstep. Through different business models, ITC reaches out to 70000 villages in 220 districts across 16 states of the country giving them a competitive edge in sourcing.
Next he talked of “identity preservation” of the product along the value chain to mix & match the heterogeneity of production to cater to the heterogeneity in demand. Giving an example, he said there were 16 major wheat types grown in the country and 7 major atta types preferred by the consumers in different regions of the country. By setting up suitable sourcing, storage, and movement systems – both physical and information flow – to ensure that right wheat went to right mills and the right atta to market, ITC could capture and retain a huge market share in the Rs 5000 cr branded atta market.

Third he talked of “intensity of information” embedded in the products and using it for the purpose of deriving extra value for the producers. This comprised things like organic produce, responsible produce, IPM produced stuff etc. for which some segments of consumers are willing to pay more if there is evidence of the claim of the produce being what it claims to be.
Fourth he talked about moving from backyard production to collective production systems, wherever “mass production to production by masses” ratios are favourable. He gave the example of small animal holders coming together for collective dairy farming.

He strongly recommended that it would be more productive for new entrants as well – irrespective of their size of operations – to start thinking in terms of steps to move towards a “global optimum” in their value chains rather than either engaging in a zero sum game of deriving more value by reducing someone else's earning or by competing within the existing system alone.    

Wednesday, 13 May 2015

Rural is more about doing it the right way: Effective Execution of Strategies


The Event Theme:

Rural India is the next growth destination. The aspirations of today’s rural consumers, who are “better-connected” and “more-aware”, are rising. They are fuelled further by their increasing incomes. “Why” marketers should go rural is not a question anymore… The task now is to devise strategies that can seize this opportunity. The “how” of it!

To help marketers navigate this future effectively, Rural Marketing Association of India organized a Conclave with the theme “From why rural to how rural”.

The event saw an amalgamation of two generations of the rural marketing fraternity. Experienced industry veterans joined the new age professionals to share the best practices and preview the next practices through panel discussions, presentations and case studies.

My Session Theme:

While some marketers have hopped on to the rural bandwagon early, many have started exploring more recently. Strategies that worked in rural markets, as also those that didn't, have been well documented. Riding on the increasing penetration of mobile devices and internet, social media and e-commerce are no longer the things of the future in rural India.

Coming well after the mid-point of the event, on Day 2, my job was to pick a few widely recommended “hows” (the strategies) from the preceding sessions, and share my thoughts on “how exactly” does one go about implementing them.

I picked four “hows” and went on to prescribe “how exactlies” based on the lessons from ITC e-Choupal experience… 

How 1: Because rural is a ‘connected community’ and the rural people are ‘social’, you must work through “Opinion Leaders” to influence the buying decisions of rural consumers.

Such Opinion Leaders could be Panchayat Presidents, Large Farmers, Shop Keepers, Teachers, and so on…

How Exactly does one go about finding the right Opinion Leader relevant to my offering and my context?

Step 1 is to figure out the exact role such a person would play in your business model, and accordingly determine the relevant profile.

For example, it could be a Value Chain Intermediary who is making up some missing infrastructure to improve efficiency.

Like the way the village money lender knows whether or not to extend an additional loan when the previous loan has not been repaid. Despite the missing credit rating infrastructure, he would know what to do because he knows whether the crop has failed, or if an unforeseen domestic expense has come up, or if the farmer simply wants to renege despite having cash on hand.

Or the way an Adathiya in the Mandi knows if the lot of agri produce has to be priced higher or lower than the average. Despite the missing laboratory infrastructure, he would know whether the lot has more of good, bad or ugly material. With one look!

That’s how the role of Samyojak came into being in ITC e-Choupal system. One of the roles of Samyojak, located at Choupal Saagar (the hub of the hub & spoke e-Choupal architecture) is to disburse cash to farmers. While the Banks offered to do this job at a cost of 1.0% of transaction value (accounting for the cost of a bill clerk, a cashier, and a security person, working in two shifts to service our working hours of 0700-2100), the adathiyas were ready to do this at 0.25% by combining all three roles into one! We found a Samyojak in the adathiya. He was making up for the missing cash-less transaction ecosystem. One day, when the infrastructure is in place, Banks will be able to do this more effectively.

Other example could be an Influencer who demonstrates the value of an offering through personal usage. Sort of a “lead consumer”.

It is important that the rest of the consumers perceive this person as “one amongst them”. Not the Agent of a Company, promoting their offerings. Nor should the companies see him as a Leader of the farmers / consumers as in a Trade Union context.

Thus, a medium sized farmer became a Sanchalak in the e-Choupal system. Not a large farmer, nor a shop keeper or a teacher with whom the majority of the farmers cannot identify with.  

The Choupal Sanchalak was the “go to” person for both the villagers (when they had an issue with the companies riding on the e-Choupal platform) as well as the companies (when they had an issue with the villagers). Sanchalak was “one of us” for both the parties!

To my mind, this unique institution of Sanchalak is a bigger innovation in the ITC e-Choupal model than bringing Internet to the villages when most of them hadn’t even seen telephones!

The social capital of the Choupal Sanchalak is further enhanced through a public oath he takes in front of the whole village that he would act a like trustee etc.

How 2: Although the rural consumer’s aspirations are more urban-like, you must tailor-make products for rural consumers and their contexts because rural is heterogeneous (eg. single razor vs multi-blade systems

You must co-create with rural consumers, because you can’t otherwise keep up with the speed with they are changing. They are not urban consumers with a standard time lapse, as someone said.

How Exactly do you co-create? This is an often-used but hardly understood phrase!

It may be easier to understand co-creation, if we first understand what is not J

Co-creation is not more research. It is not bringing consumer voice to the boardroom.

Co-creation is not crowd-sourcing ideas.

Co-creation is not even marketers immersing with consumers and developing empathy.

Co-creation is not testing company-centric product designs with the consumers.

Co-creation is giving consumers the tools and structure that allow them to become designers!

Sanchalaks – as lead consumers (of crop management knowledge, for example) – were integral part of the e-Choupal web portal design team. It was at their instance that a typical “best practices’ content was structured as “current practices, what is right or not right with them” and “why some practice needs to be changed, and then the recommended practices”. This helped add credibility to the portal that the scientists panel understood their context and then only were recommending something else, rather than a conventional expert style instruction…

The structure of periodic village meetings with all the farmers, further rolled up into Sanchalak Sammelans, helped embed their insights and inputs into the continuously evolving design of e-Choupal on an ongoing basis instead of an occasional feedback system…

We pleasantly realised that the brand “e-Choupal” was owned by the community, and that ITC was a mere trustee, when such a co-creation process articulated the brand tagline as “kisanonke hithme, kisanonka apna” in the very second year of the initiative.  The highest level any brand can attain, to my mind J  

When everyone was looking for a low-cost-last-mile to reach the rural markets, ITC e-Choupal was working on an intelligent-first-mile by working together with the communities.

How 3: You must forge partnerships to win in the “high-cost-to-reach but low-ticket-size” rural markets

Partnerships are relevant from many angles, how exactly do you determine what kind of a partnership does one forge?

I have a product, you have the channel. Let’s partner to expand outreach?

I have a product targeted at a market. You have a non-compete product for the same market. Let’s partner and go to market together and cut costs?

All such partnerships are eminently worthwhile. But the best partnership potential is in creating what is called a meta-market.

There is a fundamental disconnect in the conventional markets. Consumers think in terms of activities; companies think in terms products / services. For example, a car buyer would think in terms of information to understand the features of cars available in the market, source of credit, dealer in the vicinity, insurance, RTA etc. Each of these belong to a different industry, each trying to reach the consumer independently!

What a meta-market does is to cluster such complementary products / services and offer a complete solution to the consumer.

In the context of agriculture, farmers think in terms of weather forecasts, market prices, access to farm inputs, credit, insurance, markets for the produce, and so on… The ITC e-Choupal ecosystem assembled all these players from diverse set of industries on one platform to offer a seamless market experience to farmers / consumers at one place, right in the village! As many as 160 organisations ride on this platform today!

How 4: You must leverage technology to operate in the rural markets, because it can cut costs through remote delivery as well as personalise offerings

There is so much technology around me, how exactly do I use technology? Mobile advertising, geo-coding?

Simple! You understand the unfulfilled consumer needs and the current business processes first, and then see what role technology can play. Not the other way round.

For example, when the farmer goes to a mandi to sell his produce, four transactions are rolled into one. Price discovery, Sales, Delivery, Cash Collection. The sunk cost of transportation he has incurred even before discovering the price forces him to sell at whatever he is offered. Taking the produce back doubles his transportation cost with no guarantee that he would fetch a better prices next time he comes to sell.

ITC e-Choupal brought price discovery process to his doorstep using Internet (supplemented by the quality testing by the Sanchalak) empowering him to decide when and to whom he would sell without the pressure of a sunk cost.

When he sells to ITC, we have the ability to stack the produce of different farmers in different lots pooled as per our quality norms rather than the random aggregation done by the adathiya in a mandi. This helps preserve identity and maintain product integrity, so critical for the success of our brands.

A win more + win more solution enabled by technology J
 

Saturday, 28 February 2015

Union Budget 2015: Agriculture


“By the time of the 75th year of Indian independence, …India (has to) become a prosperous country and a responsible global power… Madam Speaker, I am mindful of the five major challenges I have to reckon with. Firstly, Agricultural incomes are under stress…” said the Finance Minister in his speech today.

His response to this rightly identified foremost challenge is embedded in three policy statements made in the budget, two sets of budget allocations, and some hope.

The Policy Statements:

1.      “I intend this year to work with the States, in NITI, for the creation of a Unified National Agriculture Market”, promised the FM. Such a unified market has the potential to transfer a larger share of the consumer price to the farmer. When the Economic Survey asserts, “If persuasion fails, it may be necessary to see what center can do, taking account of the allocation of subjects under the Constitution of India”, one sees some hope in converting this potential into reality.

2.      “I propose to merge the Forward Markets Commission with SEBI to strengthen regulation of commodity forward markets”, said the FM. Hopefully, this will ensure dusting the Parliamentary Standing Committee’s Report on the Forward Contracts (Regulation) Amendment Bill 2010, and introduction of Options and other forward looking instruments.

3.      “We need to cut the subsidies leakages, not subsidies themselves” declared the FM. Indeed subsidies are needed for the poor; what we need is a well-targeted system for subsidy delivery. For, these leakages distort the market and act as disincentive to private investments in the sector. As much as 42% of the grain distributed in the Public Distribution System leaks back into the open market per a study. The JAM trinity can help in Direct Transfer of such Benefits, minimize distortion and nurture vibrant markets.

The Budget Allocations:

1.      Rs 100,000 Crores is allocated to Rural Infrastructure Development Fund, and various Long & Short Term Rural Credit Funds. This will surely raise the investment capacity of the farmer and step up the Gross Capital Formation in the sector, besides expanding the much-needed rural infrastructure.  

2.      Funds already allocated to the ‘Deen Dayal Upadhyay Gramin Kaushal Yojana’ and the Scholarships and Loans promised under the ‘Pradhan Mantri Vidya Lakshmi Karyakram’, will enhance the employability of rural youth in non-farm jobs. This will improve the ratio of arable land available per agri worker, which is otherwise deteriorating to unviable and unsustainable levels.

The Hope:

The Economic Survey reiterated the importance of agricultural research, extension, irrigation, mechanisation etc as the key drivers of growth of the sector. Hopefully, the funds allotted under different Government schemes, such as Rashtriya Krishi Vikas Yojana, the National Food Security Mission, the Mission for Integrated Development of Horticulture, the Soil Health Card Scheme, the Pradhan Mantri Krishi Sinchayee Yojana etc, are channeled to appropriately technologise our farming to deal with the extreme weather variations which have now become the norm. Many of these schemes have been folded into the new Krishionnati Yojana, and the funding has been curtailed, with the FM expressing hope that the States will put in the required money from the higher allocations they now have from the 14th Finance Commission formula. I hope that hope is not belied...

It’s only then that the Amrut Mahotsav of our independence will be sweet!      

Monday, 16 February 2015

A New Deal for Oilseeds


Despite being one of the largest producers of oilseeds in the world, India’s import dependence has doubled over the past few years owing to expanding consumption of edible oils and stagnating production of oilseeds. The country imported vegetable oils worth $10 billion in 2013-14 compared with $5 billion in 2007-08. If this growing demand has to be met without adding to the country’s current account deficit, oilseed production and domestic manufacture of edible oils have to be ramped up significantly.

Yields down
 
Farm yields of oilseeds such as groundnut, mustard, soyabean and sunflower are barely 50-70 per cent of global averages. Demand for edible oils is likely to increase from 18.3 million tonnes (mt) in 2013-14 to 25.7 mt by 2020-21, with imports expected to touch 15.8 mt rising 40 per cent from the current level of 11.2 mt. It is possible to address this alarming deficit through a set of policy interventions that will enable expansion of area under oilseeds cultivation, increase farm productivity, and improve value-addition within the country.

Lack of incentives
 
The farmer gets no incentive to invest in oilseeds, in competition with cheap imported oils in the absence of any import restrictions. The recent removal of export duty on palm products by Malaysia and Indonesia to reduce their inventory has resulted in a spike in imports and a resultant downward spiral of domestic prices, adding to the woes of the farmer. India’s import of vegetable oils is expected to touch a record 12.3 mt in the current year. Avoidable costs such as multiple handling due to APMC regulations, mandi cess, etc make domestic manufacture of edible oil an expensive proposition, limiting the scope for value-addition.

Strategies suggested
 
To meet this challenge, CII has recommended a three-pronged strategy:
 
One, raising farm productivity through a complete package of practices i.e. new technology, quality inputs and farm-extension services; and linking farmers effectively with markets. The Integrated Scheme for Oilseeds, Pulses, Oil Palm and Maize (ISOPOM) and National Mission on Oilseeds and Oil Palm (NMOOP) need to focus especially on increasing availability of high quality seed material to the producers. The private sector can focus on other inputs, and extension services.
 
Two, farmers need to be incentivised to undertake oilseed cultivation through higher price realisations. This can be done by raising import duties to bring prices on parity with domestic cost of cultivation. In due course, as the productivity improvement measures succeed, Indian prices also will be globally competitive. Based on recommendations from CII and other stakeholders, the Government has increased import duty on crude oil to 7.5 per cent from 2.5 per cent and that on refined edible oil to 15 per cent from 10 per cent.
 
Looking at the future price trends, there is room for further increase in rates, without hurting the consumer interests. In any case, the bound rates under WTO are also far higher than the current levels. The additional revenue generated can also be ploughed back into increasing oilseed productivity. There is also a need to lower transaction costs in the domestic value chain by lowering the mandi cess to a nominal 0.5 per cent. Reforming APMC Act to allow farmers to sell directly to manufacturers at their factories or warehouses will also fetch them better returns by reducing unwarranted multiple handling costs.
 
Three, increasing acreage of high oil content oilseeds is another key requirement. Cultivating more mustard in Punjab and palm in coastal areas can be explored. Between Punjab and Haryana, wheat is cultivated on some 6 million hectares. Part of this could be redirected towards mustard to meet the edible oil demand. This will also help the situation of depleting groundwater tables in these States. More wheat can be grown in the eastern parts of the country.
 
The area under oil-palm cultivation can also be increased to provide a rich source of edible oil and crude palm oil, which are widely imported. The Government has identified 19.30 lakh hectares as suitable for plantations. However, oil-palm is cultivated on only about 2 lakh hectares despite two decades of effort. Moreover, a major part of these plantations are still pre-mature and are yet to yield oil-palm. Declaring oil-palm as a plantation crop, along with policy support to allow better germplasm import can attract more investments into the sector.
 
The rich agro-climatic conditions of India offer an opportunity to produce a wide range of oilseeds globally competitively, when nurtured with the right policy environment. There is no reason why the country should remain an importer of edible oils for all times to come. 

 
Published in The Hindu Business Line at

Thursday, 18 September 2014

Food Security Challenge: Re-engineering Solutions for Sustainability


Half a century ago, when India faced one of its most serious challenges in food security, it required a Green Revolution to bring the country out of the crisis. It was a time when the country was still battling bitter memories of the devastating Bengal famine. Food scarcity and inflation had triggered fears of a second disaster. Faced with the task of feeding an ever-growing population, the government had resorted to imports and relied on food grants for years. However, it was amply clear that a lasting solution would be found only when domestic production was stepped up substantially.
It was in this backdrop that a team of scientists led by geneticist Dr MS Swaminathan set to work, enthused by the high-yielding varieties of grains developed by the agronomist Dr Norman Borlaug. Their research gave birth to the Green Revolution in India, which powered a surge in food production and the consequent decline in food prices. In the years to follow, India not only became self-sufficient in food, but also reversed its role of being an importer to an exporter of grains.

The elements of strategy and organisation behind the success of the Green Revolution were many, primarily designed and executed by the Government.  Scientific farming methods were developed to exploit the high-yielding varieties of seeds in Indian agro-climatic conditions. Complementing these efforts of the ICAR-led public research system were the Seed and Fertiliser Corporations, and the farm-extension services wings of the state agricultural departments that disseminated the technologies among farmers. Mega irrigation projects, undertaken through public investments, made water available to these farmers. Instruments like the Minimum Support Price (MSP) played a pivotal role in assuring the farmers of economic returns and translating the new technologies into increased food production. Public institutions such as Food Corporation of India and the Agricultural Produce Marketing Yards (Mandis) played their role in operationalizing the MSP mechanism. Fair Price Shops set up under the Public Distribution System (PDS) sold essential food items to low-income consumers at affordable prices.
The success of the Green Revolution was not without its negative fallouts. To incentivise agricultural production, successive governments at centre and in different states introduced direct and indirect subsidies on key inputs like water, power, and fertiliser. This slew of subsidies not only caused fiscal deficits to soar, but also created a new crisis. Excessive ground water exploitation created several hot-spots around the country, leaving little water for future needs. Imbalanced usage of nutrients resulted in deterioration of soil quality, adversely impacting the land productivity. The increasing gap between MSP paid to the farmers and the PDS price to the consumers distorted markets, stunting the development of competitive value chains in the food and agricultural sector.

In order to promote sustainable agriculture and address the question of food security in the longer term, it is imperative to break out of the vicious cycle of subsidies and start looking for newer solutions. Taking cue from the Green Revolution, it is possible to address the challenge once again through a combination of new technologies and contemporary institutions that will take technology to the farmers and link them to consumption markets.  
The changing context of the Indian food economy

Food security is a priority for every Government. However, any exercise to address the issue would remain futile unless one takes into consideration the evolving new market context. With rapid globalisation and higher purchasing power, today’s consumers are seeking superior taste, better quality, larger variety, and more convenience in their food products. The share of cereals in the diets across all socio-economic classes has reduced in favour of vegetables, fruits, milk and meat. Value-added processed food is gaining popularity by the day. In this scenario, it is imperative that market signals reach the farmers, enabling them to continuously align their production with changing consumer demand patterns and realise better prices. As a large part of India’s poor are farmers, this would also address the issue of poverty alleviation. Additionally, raising farmer incomes would whet their risk-taking appetite and encourage them to diversify into crops beyond grains. This would, in turn, address the need for nutrition security, a necessity given the staggering levels of malnutrition in the country today. 
This new context warrants a transformation in the food and agriculture system that is more fundamental than what is generally understood. Producing what the consumer wants is quite different from selling whatever is produced by the farmer. An important prerequisite for this makeover is a re-orientation from production-driven supply chains to demand-driven value chains. This will entail huge investments in creating appropriate infrastructure in post-harvest, logistics, processing, packaging, retailing, and information systems.

This transformation cannot be achieved by the Government alone, as it successfully did in the circumstances prevailing fifty years ago. Companies specialising in supply chain management, food-processing, and marketing will need to work closely with the farmers to tap the emerging opportunities. However, a variety of policy constraints deter sizeable investments by such Corporates today. Foremost among them is the non-implementation of the ‘Model APMC Act’ by many states. In addition, the Essential Commodities Act (ECA) imposes stock limits and curbs movements from time to time, further affecting the viability of agri-businesses and food-processors. Therefore, policies related to trade and marketing in agriculture need a significant overhaul if farmers have to benefit from the expanding food consumption in the country.
Leveraging technology to raise production, reduce wastage and plugging leaks

Technology can play a vital role in raising farm yields, improving nutritional quality of food, reducing use of natural resources and in dealing with wide variations in weather conditions. Over the past few decades, India has indeed successfully leveraged technology to increase production of many crops. In wheat, for example, technological interventions and innovations have raised production from a mere ten million tons during early-1960s to nearly hundred million tons today. However, there is an urgent need to develop varieties of seed that can adapt or overcome the effects of climate change, besides serious biotic stresses and poor soil conditions. This is particularly pertinent given that the latest IPCC report has warned of an increased risk to food security and drinking water due to global warming, drought, floods and erratic rainfall. Since 65% of India’s total sown area meets its requirements from rainwater alone, it is time to invest in a wide spectrum of technology interventions that will make agriculture weather-proof.
On its part, the Government must craft a policy framework that encourages investment in research, and articulate a National Vision on critical traits relevant to India, in order to channelise the R&D efforts of private sector also towards this important mission. The regulatory processes for accelerated introduction of new technologies must also be streamlined to make them more scientific, transparent, and predictable. This will enable sustainable intensification of Indian agriculture and increase food production duly factoring all the constraints, while being sensitive to the ecology and environment.

Technology can also be leveraged to reduce food wastage. It is estimated that 5% to 40% of food is wasted along the value chain between the farmer and the consumer, depending on the perishability of the crop and the season. This reduces the availability of food even when the farmers have produced in adequate quantities. Setting up bag-less storage, handling, and transportation systems for grains and oilseeds, and world-class climate-control infrastructure for fruits & vegetables requires considerable investments. Since the private sector has the required expertise as well as the financial capacity to invest, it is important to stimulate investment sentiments by modifying the stifling regulations like the Essential Commodities Act.
Technological interventions can go a long way in plugging the leakages in the Public Distribution System as well, the country’s foremost mechanism to reach out to the beneficiaries of the food security measures. Introduction of bio-metrics and smart cards for identification, use of electronic weighing machines and setting up of ATMs or mobile vans for automatically vending essential commodities are some of the measures that will reduce corruption, and help deliver the benefits to the intended individuals in full. 

Creating market-based instruments to reduce the cost of providing food security
As pointed out already, the Green Revolution relied on institutions like the Food Corporation, Agricultural Extension Departments, APMC Market Yards and Fair Price Shops to execute its chief instrument, the Minimum Support Price. Similar, but contemporary, instruments and institutions are required to deal with the characteristics of today’s food economy.

The changing patterns of consumption discussed above require a larger number of food items like vegetables, milk and meat to be brought under the purview of the institutions and instruments that provide food security. However, considering the immense cost of implementing MSP in just two crops in three-and-a-half states, extending this support to at least a dozen crops spread across 15 states is well-nigh impossible. Instead of relying on government-administered subsidies alone, a more efficient mechanism would be to create a market-based instrument, and build institutions that can take such an instrument to the farmers. These market-based instruments will reduce the need for the State to engage in commodity operations directly, yet giving the government the power to influence prices in public interest, whenever required.
For the farmers, Commodity Derivatives such as “Futures” and “Options” are good safeguards as they facilitate alignment of production with demand. In the absence of future price signals, farmers are currently forced to make planting decisions based on the previous season’s prices. Commodity Derivatives can open up new possibilities for the farmers as they assure them of a post-harvest price before they take a decision on what to sow.

While trading in “Futures” is currently permitted, this instrument ties the farmer down with the obligation to deliver at the contracted price, even if the market moves up after harvest. What the farmers need is a more flexible instrument, which, like the MSP assures them of a minimum price before planting, while at the same time gives them the option of opting out if the market prices go up later. “Options” provide that flexibility. By buying a “put option”, the farmer gets the right to sell at a pre-determined future price, but does not have the obligation to deliver if the market moves up. This assurance builds the capacity of farmers to invest in productivity-enhancing and quality-improving technology and practices, which in turn raises food production.
It is vital, therefore, that the Forward Contacts (Regulation) Act is amended to permit trading in “Options”. To help the farmers afford the high cost of the premium typically charged for “Options”, the market needs to introduce exotic derivatives like caps and collars. The government too can step in and subsidise the premia, since that would entail a far less outgo than direct subsidies. Such subsidies would be better targeted too.

To manage the small lot sizes of farmers and the complexities involved in operating in the derivative markets, it is also important for the Act to recognise the role of the “Aggregators” who would offer simpler “options-embedded Over the Counter (OTC) contracts” to farmers. Private companies would then be motivated to take up this role. This would serve a twin purpose — the farmers’ needs would be met while private involvement in the sector would be encouraged. Suitably federated Farm Producer Organisations can also take on the role of Aggregators. “Options” thus are the win-win instrument that can help farmers hedge risk effectively and reduce pressure on the national exchequer by replacing expensive subsidies with an efficient market-based mechanism.
Making the nation food secure is the first step towards achieving the goal of sustainable and inclusive growth for all. The measures outlined here will not only achieve food security, but also go a long way in propelling Indian agriculture into the next orbit. With a market oriented policy impetus and effective public-private-people partnerships, the agriculture sector in the country can be rejuvenated to offer a new promise for the new aspirational India.

Tuesday, 5 August 2014

Commodity Options: New-age MSP mechanism that can trigger a Rainbow Revolution


Options can certainly be a win-win instrument not only to hedge farmers’ risk effectively, but also by replacing expensive subsidies with an efficient market-based mechanism.

A new future for Indian farmers dawned in 1960s with the Green Revolution. Another such turning point is emerging today, with an opportunity to craft the next leap for Indian agriculture. An instrument that played a pivotal role in translating the green revolution technologies into increased food production was the Minimum Support Price (MSP) assured to farmers. Institutions such as Food Corporation of India executed this instrument, complementing the research and extension services rendered by the ICAR-led public research system.

That was half a century ago. Rapid globalization since then, coupled with increasing purchasing power, have made today’s consumers seek a variety of food products, such as vegetables, fruits, meat, and milk, going beyond the green revolution crops, namely, rice and wheat. For the farmer, this requires a paradigm shift to bring consumer-preferred traits into crops, in addition to further improvements in productivity. This implies new risks for the farmers, which cannot be dealt with by the MSP that covers only a few commodities in a few states. 
If the cost of implementing MSP in two crops and three-and-a-half states itself is so taxing on the exchequer, one can only imagine the massive resources that would be required to support at least a dozen crops spread across not less than 15 states. A new “Rainbow Revolution” is now required to take the baton from a tiring Green Revolution. Technology already exists for such a revolution; we just need a new MSP-like instrument that can cover many more crops and several states. Instead of relying on a government-administered subsidy alone, a more efficient mechanism would be to create a market-based instrument as also build and strengthen institutions that can take such an instrument to the farmers. Market-based instruments will reduce the need for the state to engage in commodity operations directly, yet giving government the power to intervene and influence prices in the public interest by participating in such a market whenever required.

Commodity derivative markets offer such an instrument. Even though there are opponents to derivatives such as futures and options, the fact remains that they provide the best safeguards to farmers, simultaneously facilitating a swifter alignment of production with demand. Today, farmers make planting choices based on the prices received for previous season’s crops. There couldn’t be a more inefficient way! Derivatives open up new possibilities for farmers by assuring them of a post-harvest price before they take a decision on what to sow.
Trading in futures is currently permitted, but it doesn’t really help the farmers manage their risk, as it ties them down with an obligation to deliver at the contracted price, even if the market moves up after harvest. Farmers are looking for an MSP-like instrument, where they are assured of a minimum price before planting a crop, and still have the choice of taking advantage of the market if prices go up later. Options provide such flexibility. By buying a put option, the farmer gets a right to sell at a pre-determined future price, but without any obligation to deliver if the market moves up. This assurance not only provides the best hedging solution to farmers, but also builds their capacity to invest in productivity-enhancing and quality-improving technology and practices, in turn raising production and containing inflation without bringing farmer incomes down.

To make this happen, the Forward Contacts (Regulation) Act needs reform to permit “options”. The high premia typically charged for options can discourage farmers from extensively participating in the derivatives market. This can be dealt with by permitting exotic derivatives like caps and collars. The government could also step in to popularize the use of options for hedging or subsidize the premia since that would entail far less an outgo than direct subsidies (see box). Given the small lot sizes of farmers, as well as the complexities involved in operating in the derivative markets, it is also important to recognize “aggregators” under the Act who could offer the simpler “options-embedded Over the Counter (OTC) contracts” to farmers.
Options can certainly be a win-win instrument not only to hedge farmers’ risk effectively, but also by replacing expensive subsidies with an efficient market-based mechanism. Do we really have a better option than permitting “options” to achieve a rainbow revolution?

Farmers Hedging in Mexico
After joining the North American Free Trade Agreement in 1994, the Mexico government moved to liberalize the agricultural sector. The government designed a sustainable programme of guaranteed minimum price through the use of options to transfer risk from growers to international markets. The Support Services for Agricultural Marketing Agency (ASERCA), a decentralized body providing commercial support to farmers, offered the farmers a chance to participate for a fixed fee in a programme guaranteeing minimum cotton price. ASERCA offered a guaranteed price and hedged its own risk by using the fee to purchase a put option on the New York Cotton Exchange (now ICE Futures US). The put option gave ASERCA the right to sell cotton on a specific future date at pre-specified price ( that is, strike price).
When the prices dropped, ASERCA paid farmers the difference between the New York price at harvest and a minimum price (equivalent to the payoff value of put option). If prices rose instead, ASERCA made no payment to farmers. By paying a fee and participating in the programme, a farmer purchased insurance against a drop in prices below a certain level. ASERCA, in effect, acted as an intermediary between producers and commodity brokers. The Mexican government, through ASERCA, subsidized 100% of the premium payment in 1994.
Source: Innovative Agricultural Insurance Products and Schemes (by Kang, M. G.)