Tuesday 25 July 2017

ITC e-Choupal 4.0

This was an interview given to Commodity India Magazine. Reposted here: 

CI: We came to know that you are about to launch the next version of ITC e-Choupal, called 4.0. Can you tell us something about that? Actually, please tell us about e-Choupal 1.0 to 3.0 first.

SK: In a sense, it’s not the next version, as much as it’s the next tier, because e-Choupal 1.0 to 3.0 continue to operate and reinforce one another…

The e-Choupal 1.x series is about re-engineering the agricultural supply chains to make them more efficient and effective.

For example, 1.1 eliminated the non-value-adding costs along the supply chains of oilseeds and grains – such as, multiple handling costs & transaction charges – by enabling competitive price discovery of the price of farm produce in the village itself instead of farmers taking their produce to the mandi, which resulted in the avoidable additional costs. Free access to Internet through the e-Choupal Sanchalak, prices published on the echoupal portal, quality assessment system and quality-factored pricing mechanism at the e-Choupals in the village have made this possible. Because of this re-engineering, farmers net revenue increased while ITC’s gross costs reduced.     

In 1.2, the identity of each variety of a commodity (eg wheat) and its unique characteristics were preserved along the supply chain by virtue of direct buying from the farmers. Specially developed blends of such multiple varieties offered value-added products to the diverse needs of the different segments of consumers (eg atta of different colour, texture, taste, water-absorbing capacity, broken-starch content etc). Because of this re-engineering, ITC was able to build winning brand (Aashirvaad) and the farmers received better prices for the varieties in demand, instead of the usual average price that is equivalent to the lowest common denominator.

In 1.3, the traceability is pushed one-step further upstream to the practices followed on the farm (eg prawns) to ensure food safety and deliver the same to the consumers around the world. Similar innovations in 1.4 to 1.6, each suiting the dynamics of different agricultural commodity.
The e-Choupal 2.x series is about reimagining the infrastructure built for re-engineering the supply chains as a platform, and improving the delivery of products & services into rural India. The reverse flow…

If 2.1 delivered agricultural extension services through Choupal Pradarshan Khets, 2.2 to 2.4 delivered agri inputs, financial services (Kisan Credit Cards, Insurance) and FMCG. 2.5 brought modern retail experience to the rural consumers by co-locating hypermarts at Choupal Saagar Integrated Rural Service Centers. Each Choupal Saagar is positioned at the hub of a cluster of e-Choupals, housing a commodity warehouse, soil testing centre, fuel station, food court etc. Similarly, 2.6 to 2.8 deliver other goods & services relevant to the rural production or consumption.

To deliver the 2.x services effectively, ITC partnered with several businesses, governments & government agencies, not-for-profits etc combining their domain strengths with e-Choupal’s terrain knowhow and on-ground presence.

Bundling the strengths of e-Choupal with those of the partners brought together in Tier 2.0 ITC e-Choupal became a more complete rural ecosystem. In the 3.x series, the whole ecosystem is offered as a service, as an EaaS model, to bring more platforms to the rural markets…

3.1 connected rural youth to vocational skilling and employment markets, and 3.2 connected the farmers to the farm-machinery based service providers. Choupal Haats became 3.3, providing rural marketing services through a unique interactive engagement platform for the rural consumers. As many as ten million consumers annually across the e-Choupal geographies. More platforms are work-in-process, as we speak.

CI: So, how many e-Choupals exist today?

SK: Actually, after e-Choupal 1.0, the number of e-Choupals is a redundant metric. In its evolution into a platform and then an ecosystem, the media for interaction naturally expanded to mobile phones, Farmers’ Field Schools, Choupal Haats etc. So, while for record, there are 6100 e-Choupals, a better metric would be an outreach to 40,000 villages through one or the other medium.

CI: That’s a mind-boggling evolution through three tiers in seventeen years! Now, can you tell us about e-Choupal 4.0?

SK: In a way, e-Choupal 4.0 is an aggregation of e-Choupal 1.0 to 3.0, but more “plug & play ready” for partners in the rapidly growing digital economy.
In addition to the conventional agri input selling and agri output buying companies, you are seeing hundreds of agri services start-ups in the recent past. From hyper-local weather forecasts to support systems for precision agriculture; from sensors for smart irrigation to drones for crop-health monitoring; from image processing for disease recognition to predictive analytics for epidemic management; from next-gen farm management to online consumer outreach directly… the list is unending!

Most of these start-ups have brilliant technological solutions to everyday farming problems, and their business models are relevant across the country. Their technology is scalable too, but a large majority of them find it difficult to reach the farmer physically beyond their own local areas. With the rest of the agricultural ecosystem like ground-truth correlation, quality assaying, logistics, credit ratings, payment etc having not evolved enough, for each IT based solution to offer value to the farmer as a point solution.

e-Choupal 4.0 becomes an aggregator for all such services after integrating them with the on-ground presence of ITC’s agribusinesses across 70,000 villages (this goes beyond the reach of e-Choupal 1.0 to 3.0) and offers a meta-market to the farmers.

Two prototypes are already in their second season. First one, for example, is about building a community of seed producers and consumers focusing on open-pollinated seeds in which the seed companies have low interest (because there are no hybrids) and the farmers are saddled with impure seeds (because of low seed replacement ratios). From among the same community, there are seed processors, seed certifiers, seed financiers until the planting season and so on. In effect this is a self-managing community accessing all the relevant agri services through e-Choupal 4.0 platform.

Our plan at this time is to roll out the full-scale e-Choupal 4.0 by late 2018, by fusing multiple such communities across agriculture, skilling, health care etc.

CI: That’s a grand vision! But, do you think rural telecom infrastructure is geared to support such a platform?

No doubt, the infrastructure is still evolving. The penetration of low-cost bandwidth and the smart gadgets in rural India will reach an inflection point in a couple of years. The idea is to build partnerships and refine the business model by then.

In any case, even where farmers have personal smart phones, the preference is for assisted service. Like the e-Choupal Sanchalak who was key in executing 1.0 to 3.0, service providers dedicated to each identified group of farmers will be key in 4.0 as well. The Sanchalak numbers will multiply manifold.

CI: What’s the role of government policy in all these plans?

SK: Right from tier 1.0 to tier 3.0, the ongoing reform of agricultural policy has played a key role in expansion and evolution of e-Choupal. When 1.1 was first conceived, the APMC Act wouldn’t allow an agri produce marketing transaction outside the mandi. Since then a few states reformed their APMC Act and e-Choupal could operate in those states. Now, as part of doubling farmers incomes goal set by the Hon’ble Prime Minister, a new Model APMC Act is being proposed. Once implemented, this will open several possibilities for e-Choupal 4.0.

Similarly, allowing futures as a commodity derivative since 2003, and now options, the price risk management for the farmers as well as the processors like us becomes more institutionalized, laying ground for transacting much larger volumes of commodities.

The new GST regime, where basic agricultural commodities are exempted from tax, more transactions will happen in the formal sector because the tax-evading unscrupulous do not have an advantage any more.

Monday 17 July 2017

Reforms in Agricultural Marketing: A Requisite for Doubling Farmers’ Incomes by 2022

This article was written for CII Economy Matters. Reposted here.


Since the time Prime Minister Shri Narendra Modi gave a clarion call to double farmers’ incomes by 2022, much has been written on the subject, and many ideas have been floated. This is a complex challenge, and many paths need to be pursued simultaneously.   

Broadly there are three paths:

First is raising farm productivity. This will cover productivity per unit of land, water, labour, other farm inputs, and cost of cultivation in general, besides increasing the cropping intensity, by leveraging the large investments being made in irrigation – both macro and micro. Since there is enough headroom to do this, one can see a sizeable portion of the “doubling” coming from this route.

Second is diversification into high value crops and expand the various on & off-farm activities related to agriculture. This will cover growing vegetables & fruits, agro-forestry, increased livestock activity, setting up solar farms, as well as adding value to the products on the farm through grading & sorting, and adopting organic and safe-food practices. Since a substantial segment of consumers is seeking variety and quality of the food on the plate, is concerned about the safety of food being consumed, and is willing to pay a premium for convenience, one can see a sizeable portion of the “doubling” coming from this route as well.

Third is through linking farmers to the markets smartly. This will include lowering the transaction costs along the value chain to plough back a larger share of consumer price to the producer, as also to reach the safe & quality food to the target group of consumers thereby raising the value delivered and capturing a fair share of that value as well. It is this third route I want to write about in this piece, because without the requisite action on this front, the efforts put in the first two will only result in further distress to the farmer.

Higher production (route 1), especially of perishables (route 2) has ironically resulted in lower prices for the farmer often, only because the market linkages are poor! Instead of doubling, we may be halving farmer incomes if we simply accelerate on route 1 and 2 without clearing the roadblocks that are existing on the marketing front!

Actually, what I am calling roadblocks have all been excellent policy measures and institutions when they were first conceived several decades ago, and have contributed to doubling farmers’ incomes a few times since then. It’s just that the context is different now and those very instruments have become road blocks!

Agricultural Produce Marketing Committees (APMC) governed by the different State APMC Acts (of 1960s and 70s vintage) were major saviours of farmers, who till then were at the mercy of the village traders to sell their produce. In the absence of channels for market price information, farmers had to rely on the same traders for price discovery. Under the APMC regime, well laid-out market-yards and sub-yards were constructed around the country to display individual farmers’ produce for quality assessment by the participating buyers. An auction system was put in place for competitive price discovery.

Over time, however, since this was a monopoly system, transaction costs rose for the farmers in terms of commissions charged by the Agents licensed by the APMCs, not to mention malpractices in some mandis in terms of quality assessment, weighment and even cartelisation during price discovery. Also, since the farmer had to transport his produce even before price discovery, the sunk costs put pressure on him to sell at whatever price offered. Withdrawing the produce from auction means more costs with no guarantee of price some other day. More importantly, an unintended consequence of the auction-based price discovery mechanism is the nature of relationship between the farmer and the other players in the downstream value chain. The transactional nature of this relationship didn't lend itself to the possibilities of agribusinesses or food processors helping farmer with production technologies or post-harvest practices, barring a few exceptions.  

Appreciating these gaps, the APMC Act was remodelled in 2003, allowing farmers to directly market to consumers / businesses, or contract-farm, as also letting private sector to set up marketplaces. Not all states have adopted that Model Act, and among those adopted, many have prescribed Rules that are not in the spirit of the Act. Although some progress has been made, this reform remained largely on paper. Meanwhile, an electronic National Agriculture Market (e-NAM) was launched last year. While this has removed the physical boundaries of a mandi in a farmer’s neighbourhood and he can theoretically sell to an Agent in any other mandi, the real benefits will accrue only after assaying and logistics systems get integrated. In any case, this doesn't solve the relationship issue. More recently, the central government has released an improved model APMC Act for stakeholder consultation. Hopefully, this time around, the adoption by the states is quicker and more widespread.

Another important instrument used by the Government to aid green revolution, half a century ago, was the Minimum Support Price (MSP) mechanism. This removed the market price risk for the farmer and gave him confidence to invest in high-yielding varieties of wheat & paddy and fertilisers. The Government’s need to buy these food grains for public distribution (PDS) to the low-income consumers complemented the MSP system, and gave muscle to the Food Corporation of India (and some state government agencies) to be able to stabilise the price volatility. With the number of crops multiplying, and many of them being perishables, implementing such an MSP + PDS system in so many crops across India is next to impossible. Consequently, the farmer has no clue about the post-harvest price he would realise while he decides on the specific crop to plant from among several crops. Often, he decides based on the previous season’s prices. Many a time, this results in excess production of a crop that was in short supply in the previous season. It is also likely that imported stocks of the same product that were brought in to make up the previous year’s deficit. That’s a double whammy for the farmer. How often we have seen a farmer smiling at his bountiful crop that’s ready for harvest, but crying just a few weeks later, because the new market price won’t even fetch the cost of harvesting and transporting to the mandi.  

A practical alternative to government declaring MSPs to a large number of crops – and undertaking buying operations, not knowing how to deal with the challenges of storage and marketing of fast-perishing products – is the commodity derivative markets. Both futures and options. Indeed this is how the world has been managing the risks arising out of uncertainty of prices for a long time. When we were a shortages economy, the government had banned trading in commodity derivatives, with the belief that financialisation of physical markets fuels inflation through excessive speculation. With the change in the context of food & agriculture sectors, futures were allowed to be traded in 2003 by reforming the Forward Contracts Regulation Act (FCRA). Options were also to be introduced soon after. However, this optimism was short lived when the food prices went through the roof in 2007, due to the shortfall in global food production. Futures trading in some commodities was promptly prohibited. A case of shooting the messenger for carrying the bad news! Since then, the futures were slowly opened up.

More recently, options have also been permitted. Next steps can surely be calibrated, taking market evolution and the related risks into account, but those steps must surely be taken. There’s often a criticism that small farmers cannot directly participate in the derivative markets, so what good these institutions are for them. This is where aggregators come in, whether they are producers’ collective enterprises themselves, or agribusinesses / food processors who can price their physical transactions with the farmers by linking to the futures or embedding options into their pricing formulae. By adopting these instruments, farm production responds to the market signals continuously and creates equilibrium on a dynamic basis.


While a reform in FCRA enables timely price discovery & risk minimisation through vibrant derivative markets, the reform in APMC Act enables real-time demand discovery & value maximisation through seamless physical markets. A surer way to double farmers’ incomes than merely raising the agricultural GDP…

Tuesday 11 July 2017

The 101 of Agricultural Marketing in India

This article was originally published by QuintBloomberg at: 
https://www.bloombergquint.com/opinion/2017/07/11/farmer-crisis-the-101-of-agricultural-marketing-in-india-s-sivakumar-itc

Scene 1: Attracted by the market price of Rs 50 per kilogram, farmers plant onions only to stare at a price of Rs 5 per kilogram by the time they are harvested. Often it's not even worth taking those onions to the market, as the cost of transporting and selling are also not recovered!

Scene 2: You go to buy groceries or vegetables and fruits. Unless you dig to the bottom of the heap and select each piece yourself, you won’t get the quality stuff. With things like pesticide residues, you may not even be able to make that pick well, holding the produce in your hand.

Scene 3: You pay a price of Rs 40 for a kilogram of tomatoes and complain about the high prices; at the same time, the farmer who produced them, and sold at Rs 12 per kilogram, laments about unremunerative farming!

These are the all-too-familiar symptoms of the out-of-date agricultural marketing system in India. In a way, these pains are inevitable as our food and agricultural economy transitions from what was a ‘production driven supply chain' to a ‘demand driven value chain’ system. Although both the central government and several state governments have taken steps to facilitate the transition, the institutions built more than five decades ago still dominate the market, extending the pain for the farmers, consumers and businesses alike.

The mechanism of Minimum Support Price assured farmers to step up wheat and paddy production, without the fear of a post-harvest price fall, and brought about a green revolution. That was then. Today’s consumer is not living in an economy with shortages anymore. She is looking for variety, quality, safety and convenience in the food basket. It is well-nigh impossible for any government to manage support price operations in grains, oilseeds, pulses, milk, eggs, vegetables, fruits, sugarcane and twenty other such commodities. The world over, such price uncertainties are managed through derivative markets.

De-risking Volatility in Perishables

Large farmers and farmer collectives hedge their risks by selling futures or buying options before planting. Much larger volumes are sold by farmers to the businesses operating in the agriculture space, and food processing companies, through options-embedded forward contracts. These companies, in turn, hedge their risks on the derivative markets. Only recently has the Securities and Exchange Board of India (SEBI) allowed options in commodities. One earnestly hopes that these markets start soon and mature without taking too long.

Another way the world has dealt with the falling prices of perishables soon after harvest is through processing – freezing, pulping, dehydrating, milling, curing, crushing, and so on – for consumption through the year. Food processing in India is still very nascent compared even to many emerging economies. Given the apprehension of consumers that processing basically means adding unsafe preservatives, it is quite an effort for the authentic manufacturers and brand owners to convince the consumers that processed food is safe and hygienic. Recent efforts by the Food Safety Standards Authority of India (FSSAI) will go a long way in raising consumer awareness.

Another challenge in making processed food popular is the price barrier. A large part of the incremental price is made up of taxes. Historically, processed and branded food has been considered a rich man’s purchase and is taxed heavily. Although the tax rates have been brought down for some products in the new Goods and Services Tax regime, there is a need for further reduction, considering this is an important vector available to raise farmers’ income.

Bringing In Quality Checks

Let’s look at the challenge in the second scene now. The reason why ungraded produce travels all the way and comes to the consumer is that the conventional mandi system has incentivised the same. Starting with the visual inspection based pricing done by the adatiyas (traders representing sellers) at the mandis, the produce moves along the chain, and everyone gains by passing off a bad apple or two in the average quality heap. Those of you who studied economics know the problem of information asymmetry from Nobel laureate George Akerlof's paper on “The Market for Lemons” and how the average quality deteriorates with time.

Because of the APMC Act framework of the 1960s vintage, the buyer-seller relationships in the mandi have been purely price-based and transactional. Consequently, most agriculture businesses did not engage with the farmers directly which could have ensured product integrity, built traceability or facilitated grading at the farmers end. In the states where the APMC Act was amended in the 2000s, such direct engagement became possible. The pioneering work done by ITC e-Choupal in this space is well known.

Intermediaries and Commissions

As far as the difference between the consumer and the farmer prices is concerned, some mark-up is natural. After all, the produce has to move across distances, incur handling costs, bear losses on account of perishability, buffer the margins for quality variations due to visual inspection and the costs of aggregating produce from small farmers, and then disaggregation to reach out to the retail points.

The very high markup is because the old APMC Act gave monopoly power to the mandis, which led to higher transaction costs and commissions structure.

Because the Essential Commodities Act could be invoked at any time in any commodity, rendering the large scale investments in storage and handling infrastructure unviable, the value chains remained fragmented. This resulted in a series of intermediaries needed to connect the farmer with the consumer.

The 2017 Model APMC Act recognises the role of legitimate players along the supply chain and expects that the provisions of Essential Commodities Act would be used only against the unscrupulous hoarders. Hopefully, this Act will be adopted by the states without wasting much time, which would then usher the necessary investment.


Farm productivity may be raised by the different initiatives of the government, but the same will translate into higher farmer incomes only when these agricultural marketing reforms are carried out.