Corporate Farming

To celebrate its 900th issue, Business India published a cover feature titled C2M (A Century to a Millennium). They asked me for my thoughts on the future of corporate farming in India. This is what I said:

Some people maintain that the next breakthrough in Indian agriculture can occur only through 'Corporate Farming', meaning corporates owning or leasing land and directly engaging in agricultural production. They advance two arguments in support; one, that the farm productivity can be raised only through substantial technology investments on large farms; and, two, that corporates are better equipped to service evolving consumer needs by vertically integrating the value chain and controlling the production system.

While there is some merit in these arguments, there is enough and more research to show that the smaller farms are more productive! Also, converting a farmer into a labourer on a corporate farm, diminishes the entrepreneurial energy of a small farmer - the hallmark of Indian agriculture. More importantly, farmers will earn more from efficient farming than leasing land and earning nominal wages. This is important because the current per capita GDP of an Indian farmer is one-fourth of that of the workforce engaged in other sectors, and agriculture is still the primary source of livelihood for over 50 per cent of our workforce.

There are better alternative models to raise farm productivity, serve consumers, and improve farmer incomes.

Contract Farming enables pooling the resources of the farmer viz. land, labour and know-how, and that of the corporates viz. capital, technology and market linkages, creating a much larger value for the consumer and transferring a higher share of that to the farmer. However, this model works better in crops where the corporates and the farmers have a natural reciprocal dependency, for example, any produce farmed to special specifications, such as seeds, or organic products. Otherwise the relationship becomes one of zero-sum game, and one of the two contracting parties gains by reneging on the contract when the market prices turn adverse to them. The zero-sum situation can be converted to win+win through institutional solutions such as futures & options contracts where the price risk is transferred to the wider market. Farmer collectives - cooperatives, self help groups - enable equitable negotiation of contract terms. Swifter and inexpensive dispute resolution mechanism helps in better contract enforceability.

For commodity crops like grains and oilseeds, where reciprocal dependency is not natural, and also given that the institutions are still evolving, ITC innovated the eChoupal model. Leveraging the power of the Internet and co-opting the farming communities in ground level execution, a collaborative ecosystem of organisations deliver end to end solutions to the farmers under the ITC eChoupal model, viz. real time & multi local information, farm inputs including credit, and access to competitive channels for marketing the farm output. Farmer transact at their free will. Participating companies capture value at individual transaction level. Today eChoupals serve forty lakh farming families; for the model to scale even further, the Agricultural Produce Marketing Acts need to be reformed.

One of these vertically coordinated models is more socially appropriate for India than the vertically integrated corporate farming...

As told to Soneera Sanghvi (published in Business India issue dated 16th September 2012)

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.

India: FDI in Retail

Here are the notes I had prepared as Aide Memoire for myself, for yesterday's Panel Discussion on FDI in Retail at the India Retail Forum 2010

With AT Kearney's Global Retail Attractiveness Index placing India at the very top since the mid 2000s, many MNCs and the Foreign Governments have been advocating liberalised FDI inflows into the sector for a while now. Their primary argument is that the FDI is a powerful catalyst to spur competition, especially in the retail industry which is characterised by low competition and poor productivity along the whole supply chain...

Some benefits are clear, while some are arguable! And, there are some genuine concerns too... A very calibrated reform process adopted by the Indian Government, to date, made sense. As the pressure mounts to open up the FDI in the hitherto reserved multi-brand retail, what should the Government do? Here is my analysis of the pros & cons. And the recommendations follow!

A. Clear Benefits:

1. More competition leads to more choice. And, more choice leads to greater value to the consumer.
2. Interactive engagement between the product and the consumer on the modern retail shelf leads to higher consumption. This means faster GDP growth at macro level, and better quality of life for the people at micro level

B. Arguable Benefits:

1. Retail sector generates large employment opportunities. Or, are they actually the jobs from the informal sector getting recognised as employment in the formal sector? Is there a metric such as "Relative Employment Intensity per Rupee of Sales" that resolves this argument?
2. Price paid to the small farmers will increase. Higher share of organised trade, the argument goes, results in higher farm gate prices. Or, will the small farmers actually get squeezed further, to pass the benefits on to the consumer in a hyper competitive market?

C. The Concerns:

1. Modern Retail will displace small retailers. In a nation of shopkeepers, is this justified? The counter-argument is that the small retailers are very savvy, they will find their own niches and co-exist; it's not as if modern retail will take 100% market share. Empirical studies prove that the small retailers in the vicinity of newly set up modern stores do suffer badly...
2. Big Box modern retail has adverse side effects on the environment. Huge energy consumption through ACs & lighting, besides large concrete constructions that skew the green ratios.

D. Some Related Issues:

1. When domestic large companies can invest in modern retail, what's the big deal in allowing FDI? On the other hand, is it not that every firm - however globally spread it is - has a dominant home nation orientation? What are the implications of such orientation on the gross value captured within the boundaries of a "market nation" for its people & economy?
2. FDI was allowed in cold chains some time ago, but no investment has come into cold chain! What's the reason? Does India really need large investments in cold chain, given that most perishable products are grown within a small vicinity of consumption geographies, taking advantage of its conducive agro-climatic conditions? Are we better-off with investments in information infrastructure and farmer-market linkages that enable rapid response by the production system to demand signals? Isn't that a more viable means to cut wastage than the expensive cold chains? Actually, where the cold chains are required (eg. for exports of perishables, for products that can be grown in some corner of the country), the investments (whether FDI or domestic) are not happening because of regressive Agricultural Laws (eg Essential Commodities Act, Agricultural Produce Marketing Act, Forward Contracts Regulation Act).

So, how do we gain from the positive outcomes listed in these arguments, and neutralise the negative outcomes?

Is a gradual 24, 49, 74% FDI permission the good route, taking stock of the outcomes at each stage? Or should we place some specific conditions? In a world where the flag-bearer of free markets - USA - advocates "Be American & Buy American", I believe, some conditions are apt! Otherwise, the benefits could remain "kehuni-pe-gur"!

E. My Recommendations:

1. Mandate that a proportion of the investments must be made in the back-end. Say 30% in logistics and another 30% in farm level infrastructure (including agricultural extension services). In today's world of specialisation, instead of insisting that the mandate be executed by the Retailers directly, let them decide which of these legs they would like to execute themselves, or which they would like to outsource to domain specialists.
2. Impose a special surcharge (say 1%) on the Sales Value of the modern retail that can be built into a "Displaced Small Retailer Rehabilitation Fund". Somewhat along the lines of the Universal Service Obligation Fund in telecom.
3. Reform Essential Commodities Act, Agricultural Produce Marketing Act, Forward Contracts Regulation Act while permitting FDI in multi-brand retail.
4. Leave the rest to the market.

Connecting Small Producers to Global Supply Chains: Importance of Local level Logistics - ITC eChoupal Case

A summary of the presentation made at World Bank, Washington DC on 6 May 2010

Customers served by the global supply chains look for consistent quality products that are cost competitive and delivered on time.

To meet these expectations while connecting small producers to global supply chains, four components of the local level logistics need to be managed. I will use agriculture to illustrate my arguments, but the same logic applies to several other non-farm outputs of small producers e.g. handicrafts.

The Local Components of Global Supply Chains:

Two of these are targeted at improving efficiency

1. Logistics Costs
2. Farm Productivity

And, the other two enhance effectiveness

1. Produce quality aligned to market demand
2. Safety in production and supply chain

Default characteristics of each of these components, in the emerging economies, constrain the small producers from achieving the desired objectives:

1. When farmers sell their output to agribusinesses, avoidable additional logistics costs are incurred because the price is discovered only after quality check is done at produce consolidation points i.e. mandis (auction centers) that are some 25 km away from the farm gate. From mandis, the produce then moves to the warehouses of the processing units. This system is in vogue for nearly half a century, as there was no other go when the farmers are small, they live in widely dispersed villages and each one’s quality is different given the heterogeneity of farming conditions.
2. For the same reasons of fragmentation, dispersion and heterogeneity, the delivery of agri extension (crop management knowledge) and other farm inputs viz. information, credit, seed, nutrients, crop protection chemicals, insurance etc., are uncoordinated. And, typically, this delivery is seen as a “last mile challenge”; hence there is no focus on building solutions for individual farmers keeping their unique contexts in mind. As a result, farm productivity tends to be much lower than the potential.
3. On the quality front, these supply chains are great illustrations of “lemons problem”, where the real quality of the produce is not objectively factored into pricing at the mandi, eventually driving out the quality consciousness among the producers. The intermediaries, who make up for the missing infrastructure, act as Principals to transactions further aggravate the problem by blocking market signals & information flow along the chain.
4. The product loses identity along the chain, due to indiscrete aggregation of the produce (of multiple producers) done by the intermediaries to maximize value for themselves. Varieties and grades get mixed up, giving no opportunity for the processors to determine blending ratios based on consumer preferences.

ITC eChoupal factors all these challenges and connects small producers to global supply chains efficiently and effectively:

1. Quality factored price discovery in the village itself, by leveraging the power of Information & Communication Technologies and by co-opting a local farmer as Choupal Sanchalak to facilitate quality assessment.
2. Bypasses the traditional intermediaries in the flow of information and market signals, yet leverages their physical handling capability in a weak infrastructure context, to manage the flow of goods & cash more efficiently, by co-opting them as Samyojaks.
3. Using the same ICT platform to gather the crop management problems of individual farmers, builds “first mile solutions” in collaboration with experts at the back end
4. Preserves product identity through the supply chain by defining the stack specifications, having already eliminated the vested interest of the intermediate principals by converting them into service providers.

Impact of ITC eChoupal on the four components of local logistics:

1. Since the price is discovered within the village, the produce is now moving directly to ITC’s warehouses bypassing mandis, thereby eliminating non-value-adding handling expenses.
2. With the context specific farming solutions offered, together with farm inputs, best practice adoption increased, thereby raising farm productivity and / or reducing the costs of farming.
3. Since the quality is objectively factored into pricing, farmers are incentivised for improving quality. Free-flow of market signals on ICT infrastructure, is enabling production system to respond to consumer demand in terms of variety and quality.
4. Since the sourcing is now directly from farmers, product identity is preserved along the chain with complete visibility provided to customers to determine their blends based on final consumer demand.

The result is a more efficient & effective connection of small farmers to the global supply chains, increasing their incomes and improving their ability to respond to markets.

Agriculture & Climate Change: Aligning Small Farmers

Last week I spoke on this topic at the Global Forum on Food & Agriculture, Berlin. These were the broad talking points I had jotted down for myself:

A. All of us know the three dimensions of agriculture vis-à-vis climate change

1. That agriculture is a part of the problem, causing climate change through Green House Gas emissions (methane from flooded paddy fields & ruminants like cows, nitrous oxide from the soils, CO2 from fossil fuels used in farm equipment etc)

2. That agriculture is also one of the most vulnerable sectors impacted by climate change (fall in productivity due to changing weather patterns)

3. And, that agriculture can be an important part of the solution to climate change (through emission reductions, carbon sequestration, increasing soil organic matter etc)

B. At a macro level, what needs to be done to produce abundant food that is safe, healthy and climate friendly also seems to be reasonably well known!

But, unlike in other sectors, the key actors that need to implement these solutions are hundreds of millions of small farmers spread around the world.

C. The challenge of aligning the small farmers to climate change issues is four fold!

1. Bringing relevant information to farmers living in dispersed geographies, especially where the supporting infrastructure is weak

2. Personalising the sustainable crop & livestock management practices to individual farmer circumstances, and then transferring that knowledge

3. Coordinating availability of all inputs like credit, water, seeds, risk management instruments etc, so that the new knowledge is actually adopted by everyone

4. And, most importantly, providing a financial incentive to the individual farmer when he has a difficult trade-off between today’s cost and tomorrow’s benefit, or between individual effort and common good

D. There is a solution to this apparently complex challenge. In fact, it is practically demonstrated through our company’s innovative business model named ITC eChoupal; that reaches four million small farmers in India today.

Although Information Technology is the most known face of ITC eChoupal, the model has three equally important components.

1. Firstly, leveraging Internet and increasingly Mobile phones so that real time information and personalized knowledge can reach the small farmers in an audio visual mode

2. Secondly, co-opting social capital through user groups that can help equitable distribution of common resources like water; also helps in accessing indeigenous knowledge and in conducting participative research

3. Thirdly, a collaborative network of organizations working together to bring a complete end-to-end solution to the farmer through a meta-market approach

E. With this approach, I am confident that we can align small farmers in the war against climate change. This alignment will happen faster, if the international community creates a fair reward system for farmers recognizing their contributions to climate change mitigation (eg carbon sequestration activities and bio-based energy services)