Wheat Products Promotion Society of India organized a webinar last month, and this is a gist of what I spoke on the subject:
First principles of value addition
When there’s a gap between consumer needs and farmer’s production, one has to bridge it through value addition. Broadly, there are four gaps, offering four types of value addition opportunities.
- What product does the consumer want? The Form.
- Where does the consumer want it? The Place.
- When does the consumer want it? The Time.
- How does the consumer want it produced? The Process.
Besides the basic wheat, products can be classified in two segments:
- Products from Milling – Basic Chakki Atta as a wholesome staple, a key source of energy & nutrition; Versatile Maida & Other Flours for different end uses in cooking at homes, industrial and specialty bakery
- Products from Extraction – Starch, Gluten Protein, Germ Oil, Vitamins, Minerals, Omega Fatty Acids etc. used in many industries like food, pharmaceuticals, nutraceuticals, textiles, paper, skincare etc.
We are still at a nascent stage in India in many products, so there is plenty of headroom.
In normal course, the value so added is retained by the processors and brand marketers, because the farm end is commoditized. For ploughing back a larger share of this value added, farmers have to push what’s called the “Value Offer Point (VOP)” downstream along the chain.
VOP can be pushed by using one or more of the three levers, (1) variety, (2) growing practices, (3) post-harvest practices.
India grows a large range of wheat varieties, but they often get comingled along the outdated supply chain system. The identity of the varieties must be preserved until the consumption point for the value to be captured. Also, the growing and post-harvest practices must ensure cleaner & consistent quality of wheat that improves the yield or enhances the manufacturability in the mills and subsequent processing.
This is easier said than done, because the wheat production is primarily driven by the Minimum Support Price (MSP) based Public Procurement System. Consequently, barring a few pockets, majority of the farmers focus on producing “fair average quality” wheat.
On the other hand, it is important for the industry to work in partnership with farmers to influence the farming practices and the logistics. The new farm laws, when they see the light of the day, will enable such a partnership.
The Place & The Time
Wheat is produced in about 25% of India’s districts (largely north and central) but is consumed across the length & breadth of the country. Therefore needs to be transported from production to consumption centers.
Wheat is a Rabi crop in India and harvested in less than three months from mid March to mid June, but is consumed round the year. Therefore needs to be carried for twelve months.
Value along these two dimensions of place and time is often added by the traders and the arbitrage pocketed by them.
Farmers can push the VOP by enhancing their holding power through three levers, (1) expanding the near-farm storage capacity, (2) increasing the post-harvest financing facility to be able to hold, and (3) accessing the commodity derivative markets for hedging the price risk inherent in long holding.
The recent One Nation One Price OMSS (Open Market Sales Scheme) that fixed one price across the country and through the year is adversely impacting the farmer.
While the scheme is attractive from the perspective of a consumer and processor in the non-wheat-growing region, it puts a cap on the in-season prices of wheat in the growing region, as the trade stays out of buying & holding because it is not economical.
This is a new fourth vector of value addition, arising from the demands of the more conscious consumer looking for food produced more sustainably. Based on the water consumed in production, the carbon foot print along the chain, the way waste generated in the process is managed etc.
The challenges of this dimension are also similar to the first one, given the need for traceability.
There’s plenty of scope for value addition along all the four dimensions and for ploughing a fair share of such value to the farmer, but there are two imperatives for this potential to be realized:
- Policy should not distort markets
- Industry and farmers must work in partnership