Sunday, 16 October 2011

Food Prices - From Crisis to Stability

On the occasion of World Food Day, I gave a talk at an event hosted by National Institute of Nutrition earlier today. The event was co-organised by the Hyderabad Chapter of the Association of Food Scientists & Technologists of India and Oil Technologists Association of India Southern Zone.

The subject of my talk is the theme of this year's World Food Day, "Food Prices - From Crisis to Stability".

Here is a summary of what I spoke:

What is this crisis all about?

For five years now, the food prices have been at quite high levels and very volatile too. This unprecedented price hike started in 2007-08 and is still going strong, barring a dip last year...

Contrast this with the generally stable prices, with a secular downward trend in real prices for decades - helped by improving efficiencies in farm productivity and food value chain!

My today's talk has two parts:

What caused this crisis? And, what are its implications?

What are the building blocks of a solution towards stability? And, what role can Food Scientists and Technologists play in building some of those blocks?

What caused this crisis in prices?

Everyone knows that price is an outcome of Demand & Supply dynamics. And, that subject to some elasticity numbers, prices in turn influence demand and supply.

So, let's examine those demand and supply conditions that triggered this crisis...

Firstly, consumption rose faster than usual in recent times, as more people started consuming more food per capita - as most of the population rise, as well as income growth happened in developing countries where the per capita food consumption was very low compared to developed country numbers.

On the other hand, supply didn't rise as much, as agricultural productivity dropped during this period. This was because investments in agriculture fell. Probably, due to complacency on part of the Governments around the world, based on the experience of the past decades. Share of agriculture in the Official Development Assistance in the last thirty years dropped from over 10% to under 5%.

A substantial portion of the earlier growth in agricultural production also came from area expansion. In recent times, large amount of land and some crops (eg corn) got diverted to non-food usage (eg fuel, factories and urbanisation)

In addition to these supply and demand aspects, there is another factor that aggravated the problem. Having identified the wide gap between demand and supply, institutional financial investors put very large amounts of funds into commodity markets. This caused further surge in prices. At another level, though, there is an argument that such amplification of weak signals by the derivative markets alerts production system to respond earlier than otherwise.

People who suffer the most from this price surge are obviously the poor consumers, but even te small farmers struggle. On the face of it, when the prices go up, farmers should gain; but, their decisions become risky when the prices are volatile. In any case, large part of the price rise goes to intermediaries, and part of the higher income goes into buying food not produced by themselves...

Let me now turn to the second part of my talk. That is, how to deal with this crisis?

There are some short term solutions... Regulate hoarding through measures like Essential Commodities Act, raising interest rates etc. Also, Governments stock more food as a buffer to distribute it to the poor with subsidies.

Both of these are good solutions that bring immediate relief, but have a negative impact in the long run as these measures distort the market, causing Private Sector to withdraw their investments in agriculture.

There is a third short term solution that can have better impact, but unfortunately isn't used much! Governments must act in anticipation and open up imports or alter tariffs, instead of acting much after the crisis hits! This, of course, requires high quality market intelligence and entrepreneurial governance systems.

The real long term solution is raising supply ie. more agricultural production...

Before we see how to raise agri production, let's look at the order of magnitude of the challenge. By 2050, the world population will touch 9 billion (up a third from the current 7 billion); more people will live in urban areas (70% vs today's 49%) and incomes will grow significantly (in today's world GDP, developing nations' share is just about 20%, that will go up to 50%). To feed this larger, more urban and richer population, the world needs to produce 3 billion tons of cereals (vs today's 2 billion tons) and a half billion tons of meat (vs today's 270 million tons)

As we attempt to raise production to such levels, whether by bringing more forest land into cultivation or intensifying agricultural input usage, there is a huge concern about its impact on ecology that is already fragile.

And then, there is a third dimension. Inequity in food consumption. A billion people at the top end are exposing themselves to huge health risks by eating overly rich diets, while the billion people at the bottom, who don't have enough to eat, suffer from acute malnutrition.

Many people try to solve these problems, but one at a time based on their domain. This may, in fact, be the reason for the real problem! The need is to find a long term solution that deals with all these challenges "together".

"Feeding nine billion people in a sustainable and equitable way will probably be one of the greatest challenges our civilisation has ever faced" says Dr Foley of University of Minnesota, in a recent paper.

To raise production, we need large investments in Agriculture. An FAO committee estimates that the investments by developing countries need to go up by 50% from the current $140 billion p.a.

Investments are required in hard infrastructure like irrigation and power, as well as soft infrastructure like agri extension services, to raise productivity in underproductive regions that have potential. Simultaneously, input usage intensity needs to reduce in over-exploited regions.

More than 80% of the future increase in production needs to come from productivity improvement, as only 20% can come from area expansion - the conversion of forests and grasslands to agricultural use has to stop forthwith, as the environmental damage far exceeds the increased food production. In fact, scope for area expansion in India is negligible... This calls for investments in R&D to reverse the trend of stagnating yields.

Then there are some medium term solutions (actually these cut across short & long terms; in that sense, medium may be a wrong label)

More food that the world produces must reach people's plates than it is today. If developing countries must reduce losses in the post-harvest stage, the developed countries must educate their consumers to cut the wastage of food.

This food must also reach people's plates at lower cost. Transaction costs must be cut through infrastructure investments and by eliminating non-value adding intermediation.

And, the food must be right too! For example, more efficient chicken compared to the less efficient beef. Or, more importantly, low-cost nutrition for the poor; and more healthy food for the rich.

It is in the context of this set of medium term solutions, that I wanted to bring up the role of food scientists and technologists, who make up most of the audience here today.

Your goal must be, "to deliver healthy food to the consumer safely, by preserving the quality and to ensure year round availability". To do that, you need to work at the intersection of several science disciplines, as you have always done...

Fortify foods with vitamins and minerals, and build functional foods that cater to specific consumer segments beyond nutrition. Leverage your understanding of Nutrition for that. Dal Analogue from Soybeans has been one of my favourite projects to deliver low cost nutrition to the poor in India.

Extend the shelf life of food through your knowledge of chemistry; and, leverage biology to deal with post harvest plant physiology.

Raise the efficiency in food manufacturing processes to preserve the food attributes using Physics discipline.

Deliver the taste, texture, flavour etc to meet the demands of different consumers, by using your competence in Sensory Science and Material Science.

Through all these suggestions, about which you know more than I do, all I want to say is that Food Scientists and Technologists have to play a vital role in transforming the food economy to stability from its current crisis. I am sure, you are game for that :)

Sunday, 10 April 2011

Role of Agriculture in India's Double Digit Economic Growth

A couple of weeks back, I spoke on the subject at a CII Conference. This is a high level summary of my talk.

On the face of it, Agriculture has a very limited role in India's economic growth... Since agriculture forms less than 15% of India's GDP, even a 4% growth in agriculture - this itself is nearly twice as much as the growth rate of the last ten years - will barely add a half percent to the overall GDP growth number!

However, growth in agriculture is vital for Indian economy from three angles:

  • in providing food & nutrition security to a growing population. Today child malnutrition is prevalent in 7 percent of children under the age of 5 in China and 28 percent in sub-Saharan African compared to a whopping 43 percent in India.
  • in India's inclusive growth agenda. 50% of India's workforce still relies on agriculture as the primary source of their livelihoods - in other words per capita GDP of a farmer is one fifth of that of the rest of Indians.
  • in dealing with the challenge of climate change. Remember, agriculture is a major cause and a victim, as well as a potential solution to this problem.

Interestingly, if Western Indo-Gangetic Plains and Godavari contributed to India's first Green Revolution, Eastern Indo-Gangetic Plains and Brahmaputra can deliver the second Green Revolution. Eastern region, especially the Indo-Gangetic Plains are well endowed with basic natural resources viz. fertile land, abundant water and lots of sunshine. But, the route needs to be different, as the context is different...

Firstly, the per farmer land holding in Eastern region is just about a half of the national average and is not even a fourth of the Western Gangetic Plains. So, the ecosystem needs to factor this in, in terms of crops grown or technology inducted or the enabling institutional framework.

Secondly, the market for food in India in late 50s and early 60s was founded on a ship to mouth supply chain. The institutions created by the Government at that time, viz. Public Research System, Government Agri Extension System, Food Corporation of India, Public Distribution System, APMC Market Yards were relevant for that context. Today, with rising incomes and growing urbanisation, the consumer is seeking quality, variety, convenience, safety etc. Such market is better served by the Private Sector. The Government has to play the role of a Reformer and Regulator, rather than being a Player as before.

To co-opt private sector, reforms in agricultural marketing are key - Agricultural Produce Marketing Act, Essential Commodities Act and Forward Contracts Act.

To empower small farmers, producer company type institutions need to be built, which facilitate crop diversification as well as growth of livestock & fisheries.

To raise productivity, deal with climate change, and use natural resources like water more efficiently, development of new technologies is key.

Sunday, 13 March 2011

Dairy Coops: What next?

Dairy cooperatives formed under the successful Amul Pattern, operate in a three-tier vertically integrated structure owned by the milk producers. The Dairy Cooperative Society at the village level collects the milk, the Union at the district level does processing, while the Federation at the state level is responsible for milk & milk products marketing. Aggregation of milk at right levels in these three tiers brought the vital economic scale to the micro milk producers of India, and linked them to the national and global markets effectively. This helped transfer a fairer share of the consumer price to the producer, rather than to the chain of intermediaries. The milk business is strengthened through research, knowledge transfer, feed production and marketing, disaggregated in the reverse direction.

Meanwhile, a 2002 amendment to the Indian Companies Act, defined a new institution called "Producer Company", and offered significant flexibility to the producers in managing their affairs vis-a-vis the constraints imposed by the Cooperative Societies Acts of various states.

In this backdrop, I spoke on "what the dairy coops could do next", at a workshop on 'the design and formation of milk producers' companies" organised by NDDB Dairy Services recently. This is what I said:

In the several decades since Amul has been formed, the world has changed. Today's marketplace throws several challenges and offers many new opportunities.

Rapidly evolving consumers seeking variety, quality, safety, convenience etc on one hand, and heightened competition with deep pockets and strong capabilities in consumer understanding, product development, marketing etc on the other hand, throw a challenge! Compared to the past, cooperatives need significantly larger financial - and far superior human - resource to compete and win in this new marketplace.

Let me also hasten to add that several new developments in information technology and better understanding of the dynamic of collaboration in the same period, offer a new opportunity to the milk producers to actualise the benefits of vertical integration without the associated costs. In other words, I am recommending a "virtual vertical integration" through appropriate collaborations.

The economic objective of milk producers can be achieved through a value chain that delivers them a higher net income (a combination of higher productivity, better quality, lower costs) at lower risk. Micro producers at one end and micro consumers at the other end are connected through different business models that aggregate and disaggregate milk at different points of the value chain. Different points also need different levels of labour intensive care, special technology and financial capital as per the business model specifics. Not all of these resources may be present in any one organisation. That's where collaboration comes in.

In the ever changing and hyper competitive marketplace, multiple organisations could come together to leverage their complementary resources & capabilities to create and capture value that is greater than what any one of them individually could.

Of course, every collaborating organisation may need to give up some control, or may not capture all the value they otherwise could, compared to a solo operation by themselves. If the collaborating organisations were to part at some stage, there would also be a risk of creating competition by virtue of shared trade secrets etc.

The trick is in retaining the lever of control in one's hand through key assets such as brands or technology, and make the partners fungible... Or, by recognising and respecting the mutuality of interest with the partners, one could structure a relationship that is built on reciprocal dependency, that all the partners have a vested interest in strengthening...

Any which way, every dairy cooperative must start with a clarity in terms of what they have and what they lack, so that collaboration with partners having complementary capabilities can be forged. For some, it may be expanding distribution into new markets, for others it may be attaining a larger scale to lower costs, and for some it may be new technology to create special products. In addition to these economic frames, given the unique context of cooperatives, it is important to look for organisations with shared vision and cultural fit too. Fortunately, such collaborations are now possible with the new institutional form of "producers' companies", unlike the limitations that the cooperatives face!

I illustrate two specific ways in which collaborations with private sector can add value to milk producers.

Instead of producers' companies trying to build marketing capabilities themselves, they could partner with organisations that possess such capabilities, and focus their efforts on reorganising milk production systems. Given that incremental value generated by improvement in productivity and quality is far greater than value captured through controlling marketing activity, this can multiply producer incomes manifold. In any case, demand for milk and milk products in India is rising rapidly, and the milk production needs to double in less than fifteen years

One such production reorganisation possibility is to move from 'Family Owned Micro Livestock Operations' to 'Collective Dairy Farming Units'. Every village can have a few such units depending on the potential. This can help in rearing animals in a controlled environment to implement best practices more easily. Producers can share work at the farm by "livestock units" or by "legs of operations". This will also facilitate collective decisions on land use, in turn protecting ecology and conserving bio-mass. Well managed dairy farming units can capture ecological credits through controlled release of methane gas. Apex institutions of the Producers Companies can co-opt knowledge & input providers, processors and marketers into the ecosystem and take on the role of a Network Orchestrator to achieve the "virtual vertical integration".

One of the workshop participants mentioned that such collective dairy farming units are already operating in Gujarat, as "Animal Hostels". In this early phase of evolution, it is important that many such experiments are carried out to craft models that suit different contexts. In recent times, other ecosystems in India such as road construction and telecom have grown through such innovative partnerships.

Another interesting collaboration possibility is in the Private Sector building the capacity of producer companies. When cooperatives are thinking in terms of transforming into companies, there is a need for them to create and sustain process driven institutions. Corporates run on SOPs (Standard Operating Procedures) with strong in-built internal controls. Self-correcting systems are part of their culture and ethos. Innovative use of IT systems strengthens these processes further. All these systems promote transparency and accountability, which are critical for the long term sustainability of the newly formed producer companies.

All in all, I think, the Indian dairy sector is ripe for another institutional change.

Saturday, 5 February 2011

Agricultural & Environmental Concerns: Role of Education

Yesterday, I spoke at a seminar on the subject theme organised by Knowledge Xchange in Chennai. This is a summary of what I said...

You must've heard several speakers on the subject since morning, and now you must be wondering what a corporate has to do with this topic. Let me deal with that first.

Purpose of education = Know How. Know How has two components. Firstly, Know What. Training typically focuses on Know What, while education is expected to build the other component of the capacity i.e. Know Why.

Purpose of Know How = Do How.

And, purpose of Do How is to actually "do" things that "deliver" the intended outcomes.

What are those outcomes, in relation to the Seminar theme?

  1. Raise incomes for the farmers (Per Capita GDP of Indian farmers is just about a third of the rest of Indians)
  2. Achieve Food & Nutrition Security for our all our people (a third of all our children are malnourished)
  3. Do this in an environmentally sensitive manner (so that we leave a habitable world behind for our children and their children)

The theme of my talk is "What can Corporates do, to enable these outcomes?"

Basically, I have three messages to share:

  1. For the Know How to be effective, the medium (of education) must be tailored to the context.
  2. For the Know How to be translated to Do How, the education must be an integral part of a "meta-process"
  3. To execute the idea of a meta-process in the real world on a large scale, you must leverage the power of innovative business models

To substantiate these arguments, I will walk you through the nature of challenges in Indian agriculture and the corresponding solution themes. And then illustrate those through the creative solutions successfully deployed by ITC on the ground.

1. The context of Indian agriculture and the farmer is quite complex, with multiple dimensions and each dimension with multiple degrees of challenges. The "media strategy" of "education", if I may call that, must be tailored to this context. Let me outline four of those dimensions, relevant to our theme today.

a. Any context must first be seen from the perspective of "outcome for the consumer", in our case the "farmer". Each of our famer is so very different from the other. Starting with variations in farm size, to the heterogeneity in agro-climatic conditions, to the far more individualised resource availability and risk taking ability. In other words, one message is not relevant to all farmers. That means, many messages need to be personalised, some can be mass-customised, while a few can be generic.

b. The second dimension of the context, is the "nature of message" itself. That varies according to the action that the message should trigger to achieve the objective. In some cases, it could be simple awareness about a market or a weather condition; while in another case, it may need to alter an existing farm practice such as seed rate or row spacing; in yet another case, it could create a conflict between short term effort or cost with long term benefit (such as investment in micro irrigation for soil conservation). Again, obviously, one tool doesn't trigger action in all cases. In one case it could be SMS on mobile phone, in the other it is an on-farm demo, and may be an audio-visual in another case.

c. The third dimension is "time" that enables action. In agriculture, as you will all know, most activities are very time sensitive. Therefore, a piece of information or a knowledge component has to be delivered absolutely on time. Especially when some of the actions are linked to random events like rain fall or pest attack.

d. The last dimension is "cost". Notwithstanding different levels of message and types of tools, obviously the cost can't be out of whack with the benefit being delivered or the risk being managed.

In ITC eChoupal, multiple media are used in a 3600 approach tailored to the need. For example, improved practice or a new input through the eChoupal website, followed by an on-farm demonstration through Choupal Pradarshan Khet for better conviction; then the adoption is facilitated through SMS reminders & telecalling to clarify suitability for specific farm condition, and obtaining feedback on practice / product performance through tele-helpline.

2. The second message is about translating all this Know How to Do How. The farmer may know what to do, but many times timely & affordable access to other inputs is a problem. Be it, credit or seed or some crop protection chemical. In the mind of the farmer, all of these elements are part of one process. Call it the "meta-process", because it is in the mind of the farmer. Deciding which crop to grow, managing it through the crop season, and then realising cash from the crop. But, these needs are served by different industry verticals such as agri extension, banks, seed companies and so on... Unlike in evolved markets, the delivery of these inputs is not synchronised with knowledge. Therefore, the action doesn't happen often. Consider an evolved market like buying a car in Chennai. You can acquire the knowledge about a car suitable to your needs through several magazines, a loan through a bank, actual vehicle from a dealer, insurance from an agent, and the service arrangement through a dealer seamlessly. But, for many farmers in rural India, such seamless process is still a dream. Fragmented farm sizes, dispersed villages, heterogeneous conditions compounded by weak infrastructure make synchronised delivery a challenge.

ITC eChoupal factors these challenges while orchestrating an ecosystem that delivers the desired end-to-end solution to farmers. It is achieved through a new digital, physical and human infrastructure organised in a hub & spoke configuration. Today some four million farmers access services through the ITC eChoupal network, offered by 160 organisations cutting across Government, Private and Social Sectors.

3. To roll out an infrastructure like eChoupal on ground, it costs a lot of money. How ITC designed a business model so that the cost of such a system is not a burden on the farmer, but recovered through innovative revenue models, is the third message.

For example, by eliminating non value adding costs of a village to mandi to our warehouse chain through a village to our warehouse chain by discovering price in the village is one such model.

In another model, we embed traceability along the chain (having sourced directly from the farmers) into our products, we deliver greater value to consumers and capture some of that value for ourselves and the farmers.

Yet another model is charging a toll on these 160 organisations for bringing them cost-effective access to the rural markets.

Allow me to repeat my three messages, before I close:

  1. For the Know How to be effective, the medium (of education) must be tailored to the context.
  2. For the Know How to be translated to Do How, the education must be an integral part of a "meta-process"
  3. To execute the idea of a meta-process in the real world on a large scale, you must leverage the power of innovative business models
Thank you.

Friday, 28 January 2011

Bringing about enterprise accountability and the concept of triple bottom line

Some of you may remember my tweets and Fb updates on the subject a couple of months ago, when I participated in a panel discussion at National Geographic's Green Conclave. I got busy soon after, and couldn't post a blog. Yesterday a friend asked for some material on triple bottom line, and I decided to write it now...

There are two arguments on what a good Corporate Citizenship is. One argument views business enterprises as pure economic citizens. The other, a position taken by ITC, sees them as Socio-economic Citizens.

Pure Economic Citizen argument says enterprise accountability starts with earning profits and ends with paying taxes; that the responsibility towards social and environmental aspects is best left to other organs of society viz Government and Civil Society Organisations. Further that the focus of Business Enterprises should be on satisfying the shareholder desire for a return on their financial investment to the exclusion of non-financial stakeholders.

Essentially, the argument is that the Corporates, as artificial entities, should have no social responsibility; people or real individuals must have social responsibilities. Generating profit by servicing consumers in a competitive environment is considered the most socially responsible act of an economic enterprise.

On the other hand, ITC views enterprises as socio-economic citizens and therefore as accountable to today's & tomorrow's society and environment from which it is drawing resources, besides to its financial shareholders. The expectation from socio-economic citizens is that the core business activities must be implemented with broader responsibility towards ALL the stakeholders. In other words, enterprises must demonstrate positive economic, social and environmental performance over long term. This is called Triple Bottom Line approach.

Of course, the trade-offs in the value created for multiple stakeholders make Triple Bottom Line approach a difficult path to follow. ITC has creatively enmeshed the interests of shareholders, the poor, and environment to build business models that overcome the trade-off challenge. ITC eChoupal initiative, Social Farm Forestry programme in Bhadrachalam area and Agarbatti business linked to women self help groups are some examples of Triple Bottom Line approach by ITC.

Other panelists argued that such enmeshing isn't easy and the trade-offs are inevitable, pushing companies to be profit focused or compromise on profits. I proposed that Government could do four things and create a market mechanism to deal with such a trade-off challenge.

  1. ‎Make TBL reporting mandatory. Peer group and market pressure will then automatically broaden accountability of enterprises
  2. Define TBL accountability metrics clearly along outcomes lines. For example, Water Positive and Carbon Positive Corporates...
  3. Create tradeable instruments from such metrics. TBL then becomes a source of economic advantage
  4. ‎Deepen the market for these social credits by mandating threshold TBL for bidding in Govt projects. Non TBL enterprises can buy credits to be able to bid