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.
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.
