Agricultural Cooperatives - Key to Feeding the World

“Agricultural Cooperatives - Key to Feeding the World” is the theme of World Food Day 2012. I spoke on the subject, earlier today, at an event organised by the Hyderabad Chapter of Association of Food Scientists & Technologists (India), South Zone of OilTechnologists Association of India and the National Institute of Nutrition.

This is a gist of what I spoke:

The challenge of ‘feeding the world’ has many dimensions:

Firstly, we need to produce more food. Per an FAO estimate, we need to produce 50% more cereals and 75% more meat by 2050, to feed the growing population and rising per capita consumption. We also need to more than double the fruits & vegetables production.

If it was only just this bit – i.e. produce more food – it wouldn’t probably be such a big challenge. We know that our current technologies are capable of getting us there. The six riders that come along make it severely complex!

Rider 1: We need to raise the farm yields to raise the total food production, because there isn’t much more land that we can bring under cultivation – a luxury we had enjoyed in the past.  

Rider 2: We need to add value to this food, aligned to the consumer demand. This means more variety, better quality, assured safety, enhanced convenience, and so on...

Rider 3: We need to transfer a “fair” share of this added value back to the producers, to incentivise production. Majority of the farmers are poor, and their income has to increase, in any case.

Rider 4: We need to protect bio-diversity while raising the farm productivity, because the productivity depends on soil micro-organisms, pollinators, predators of agricultural pests, and the genetic diversity.

Rider 5: We need to manage the natural resources (e.g. water and soil) judiciously, as the rate of depletion is already far exceeding the regeneration capacity of the earth.

Rider 6: We need to minimise the green house gas emissions from agriculture. With high emissions from fertiliser volatilisation, wetland rice cultivation and livestock digestion systems etc., agriculture accounts for a sixth of all global emissions.

There are, of course, solutions to deal with each one of these riders viz. improved crop varieties through plant breeding for better yields; supply chain management and processing for value addition; inclusive business models for fair trade; integrated crop management practices to conserve bio diversity; micro-irrigation, precision farming and other water management systems; good practices framework for soil & nutrient management; minimum tillage and other conservation agriculture techniques...

Implementing these solutions on the ground through hundreds of millions of small farmers is the tricky part!

This involves raising their awareness, transferring know-how, making sure the resources are available, and trigger income incentives to get them to act.

It is not easy to do all this because the bargaining power of small farmers is weak, limiting their resource base. Every input they buy is bought at retail prices at the end of a long chain, and the output they sell is sold at wholesale price at the beginning of another long chain! So, one challenge is to bring the ‘power of scale to the small’.

Also, because the ecology & natural resource challenges do not usually impact the individual in the short term, and because any investment to solve them benefits others who may not have invested, we also need to deal with the ‘tragedy of commons’. As is well known, people tend to overuse commons and eventually deplete them beyond repair, even though it is not in their best interest to do so; because no one has any incentive to do otherwise.

It is in this context that the cooperatives become important.

Any form of aggregation - conventional cooperatives, or the new-generation producer companies, or Self Help Groups or their Unions and Federations - improves the bargaining power of farmers while buying inputs and selling inputs. Aggregation also helps in transmission of information (market signals, weather forecasts) and accessing know-how more effectively at lower transaction costs. Pooling resources helps in building infrastructure (quality testing, storage, transport etc) that can be shared, or even forward integrate into processing, branding and marketing to capture more value for the producers. Collectives carry weight and help shape policies.

Self-regulation among the members of the cooperatives solves the ecology and common property issues more effectively. User members team up to cooperatively manage the commons resource; participatory monitoring facilitates more effective management. Conflicts between members, when they arise, get resolved quickly and inexpensively.

Thus, cooperatives offer effective solutions to both the scale and commons problems.         

In theory, any member owned enterprise, run on democratic principles should deliver these benefits. Indeed there are many successful cooperatives that prove this argument. At the same time, unfortunately, there are also several failed cooperative efforts. Quality of governance and management determine the success of cooperatives. So, while supporting cooperatives as a solution to feeding the world, one must recognise these limitations too.

To overcome these limitations, yet deliver similar beneficial outcomes to the farmers, a revolutionary new model, ITC eChoupal was conceived. Farmers are "virtually" aggregated by leveraging Internet technologies, and "freedom of choice" in transactions democratises the power. Isn't that some new food for thought?

          

Physics and ITC eChoupal

At a conceptual level, several ideas behind eChoupal were based on Physics. This write-up is a part of an old document; just realised this was never posted on Shiv's Third Eye...

So here goes:

Value Creation

As a physics student I was deeply fascinated by Einstein’s famous insight e=mc². Until he figured out the implication of speed of light, energy and mass were two independent and unrelated fields. With one stroke of genius he converged the two, and the world was never the same again.

In a similar manner, capitalist markets, with self interest of the entrepreneur as the foundation, were never thought of as a means to achieve social equity.

Interest of the disadvantaged communities, on the other hand, was always considered as the exclusive domain of Government or Community based organizations or Not-for-profits.

Much later, when our experience at ITC has demonstrated that markets do deliver social equity when you co-create them together with empowered communities, I felt the same excitement as I did when I understood Einstein’s equation.

In other words, co-creation concept has converged the two independent domains of equity and markets. Equity = Markets Co-created with Empowered Communities. A new meaning to e=mc²! And the core idea behind the value creation process in eChoupal.

Value Delivery

Another metaphor from physics, Lever, helps in easily understanding the idea behind the value delivery process in eChoupal system.

People at the Bottom of the Pyramid access markets under constrained conditions because of the voids in physical or institutional infrastructure, besides limitations in some of their own capacities.

Void filling by some appropriate “lever” can force multiply the outcomes and enable an empowered market access for these people.

Investment in Information & Communication Technologies was the key lever that made all the difference in case of eChoupal, through the process of price discovery in the village.

Value Capture

Yet another physics principle, ChaosTheory, holds the secret of the most important idea in the "business" model aspect of eChoupal viz. the value capture mechanism.

In the world of chaos, an attractor ensures stability and predictability.

Much the same way, as the Orchestrator of the eChoupal ecosystem, ITC puts the network together, innovates the value capture mechanisms that do not strain the small wallets of the customers at the Bottom of the Pyramid. Win+win outcomes for all stakeholders through logistics reorganization, value through identity preserved produce are obvious examples of this phenomenon.    

Vision of eChoupal

Yet another physics metaphor! Black Holes for a Green World.

Curious? Another blog-post, in due course, will have the details.

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)

Indian Agriculture: Value Creation Opportunities

Earlier today, I spoke on the subject at a Conference in Delhi. In essence, this is what I said: 

India has successfully transitioned out of an era of food shortages, with the help of giant strides taken by Indian agriculture over years.

With the increasing per capita incomes and growing awareness, today’s consumers are seeking better quality and more variety in their food products. They prefer products that offer convenience while buying and using. Food safety is another area of concern. Much like the agricultural production system responded to the growing demand in the past, there is an opportunity for the agri-business system to respond and deliver these requirements to the consumer.

Besides adding value through conventional processing and packaging, today’s agri-businesses can also explore a number of additional sources of value creation.  For example, 

Supply Chain Management: Through supply chains that preserve product identity from farm gates to the retail shelves, or even better, supply chains that trace products to farm practices, product integrity can be maintained and safety can be assured.

Backward Integration: Through tighter integration of production systems into their value chains, agri-businesses can transmit demand signals to the farmers, transfer modern crop management technologies, coordinate delivery of farm inputs, and share production & market risk with the farmers; this will help produce crops and varieties more sharply aligned with the market demands.   

Risk Management: Through new market based risk management institutions such as Commodity Derivative Markets (Futures & Options) and Weather Based Crop Insurance Products, the production and market risk inherent in agriculture can be transferred into the broader marketplace for more effective management.

These steps will deliver value to the consumers, improve farm profitability and create sustainable opportunities for the enterprises that connect the consumers with farmers.

On its part, the Government must facilitate this transition by reforming the currently restrictive agricultural laws such as Agricultural Produce Marketing Act, Essential Commodities Act and Forward Contracts Regulation Act.    

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 :)

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.

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.