Raising Farmer Incomes through Value Addition to Wheat

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. 

1. What product does the consumer want? The Form.
2. Where does the consumer want it? The Place.
3. When does the consumer want it? The Time.
4. How does the consumer want it produced? The Process.

The Form

Besides the basic wheat, products can be classified in two segments: 

1. 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
2. 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India grows a large range of wheat varieties, but they often get comingled along the outdated supply chain system.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.

The Process

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.

Conclusion

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:

1. Policy should not distort markets
2. Industry and farmers must work in partnership

Union Budget 2015: Agriculture

“By the time of the 75^th year of Indian independence, …India (has to) become a prosperous country and a responsible global power… Madam Speaker, I am mindful of the five major challenges I have to reckon with. Firstly, Agricultural incomes are under stress…” said the Finance Minister in his speech today.

His response to this rightly identified foremost challenge is embedded in three policy statements made in the budget, two sets of budget allocations, and some hope.

The Policy Statements:

1.      “I intend this year to work with the States, in NITI, for the creation of a Unified National Agriculture Market”, promised the FM. Such a unified market has the potential to transfer a larger share of the consumer price to the farmer. When the Economic Survey asserts, “If persuasion fails, it may be necessary to see what center can do, taking account of the allocation of subjects under the Constitution of India”, one sees some hope in converting this potential into reality.

2.      “I propose to merge the Forward Markets Commission with SEBI to strengthen regulation of commodity forward markets”, said the FM. Hopefully, this will ensure dusting the Parliamentary Standing Committee’s Report on the Forward Contracts (Regulation) Amendment Bill 2010, and introduction of Options and other forward looking instruments.

3.      “We need to cut the subsidies leakages, not subsidies themselves” declared the FM. Indeed subsidies are needed for the poor; what we need is a well-targeted system for subsidy delivery. For, these leakages distort the market and act as disincentive to private investments in the sector. As much as 42% of the grain distributed in the Public Distribution System leaks back into the open market per a study. The JAM trinity can help in Direct Transfer of such Benefits, minimize distortion and nurture vibrant markets.

The Budget Allocations:

1.      Rs 100,000 Crores is allocated to Rural Infrastructure Development Fund, and various Long & Short Term Rural Credit Funds. This will surely raise the investment capacity of the farmer and step up the Gross Capital Formation in the sector, besides expanding the much-needed rural infrastructure.  

2.      Funds already allocated to the ‘Deen Dayal Upadhyay Gramin Kaushal Yojana’ and the Scholarships and Loans promised under the ‘Pradhan Mantri Vidya Lakshmi Karyakram’, will enhance the employability of rural youth in non-farm jobs. This will improve the ratio of arable land available per agri worker, which is otherwise deteriorating to unviable and unsustainable levels.

The Hope:

The Economic Survey reiterated the importance of agricultural research, extension, irrigation, mechanisation etc as the key drivers of growth of the sector. Hopefully, the funds allotted under different Government schemes, such as Rashtriya Krishi Vikas Yojana, the National Food Security Mission, the Mission for Integrated Development of Horticulture, the Soil Health Card Scheme, the Pradhan Mantri Krishi Sinchayee Yojana etc, are channeled to appropriately technologise our farming to deal with the extreme weather variations which have now become the norm. Many of these schemes have been folded into the new Krishionnati Yojana, and the funding has been curtailed, with the FM expressing hope that the States will put in the required money from the higher allocations they now have from the 14th Finance Commission formula. I hope that hope is not belied...

It’s only then that the Amrut Mahotsav of our independence will be sweet!      

Why are food prices rising unabated? What can we do about it?

This is the transcript of an interview given for the forthcoming issue of CII's Economy Matters:

Why are the food prices rising unabated despite several measures taken by the government?

Firstly, let's set the context correctly. The government has an unenviable task of walking a tightrope between the diametrically opposite expectations of the farmers for higher prices and the consumers for lower prices. Given that the majority of our farmers are small and resource-poor, and the consumers are largely low or middle-income, the government cannot short-change either constituency for the sake of the other.

In this backdrop, let’s recount the key actions taken by the governments from time to time, and the limitations of such actions, because of which the prices continue to rise.

When the objective is to balance conflicting interests, any government’s first strategy is to subsidise. Subsidies on inputs like water, power, credit, and fertiliser to keep the cost of production low; and then subsidies on food itself by buying at high support prices from the farmers and selling at lower prices to the poor consumers through the public distribution system. No doubt, subsidies have delivered the expectations to a large extent. But, given the fiscal position of the government, this strategy is neither scalable nor sustainable beyond a point. Once that point is reached, as we have now, the subsidies strategy leaves both the farmers and the consumers dissatisfied despite consuming massive amounts of money. Additionally, the resultant market distortion discourages the private investment in the sector, and the value chains remain under-developed.

Another strategy that's adopted is to import food products, or ban the exports in times of shortage. Given the fleeting speed at which the international commodity markets move, our responses are often too late. The problem is further compounded by the weak market intelligence system the governments typically have, and the complex logistics of the global trade. In times of shortages, expectedly, the domestic prices are sky-high while the crops are standing in the fields, raising the price expectations of the farmers; then the import consignments usually arrive just about the time the farmers are ready to harvest their crops, and the prices start falling like there is no bottom!

Imposing stock limits to prevent hoarding of farm produce is yet another measure that's commonly used to control prices. This action does soften the prices, but only temporarily. However, because this measure cannot actually increase the availability of food in the season as a whole, the prices do go up eventually. Besides, since the government doesn't distinguish between hoarders and the genuine Agri Businesses / Food Processors, such restraints render investments along the supply chain and processing unviable, and the value chain participants remain fragmented.

One can possibly refine these strategies a bit more, viz. sharper targeting of subsidies, proactive imports through real-time market intelligence etc., and keep the prices under check a few weeks longer. The longer-term food inflation cannot be truly tamed unless the key drivers are appreciated and managed. 

What according to you are the key drivers of food inflation?

While quite a few reasons have been cited for triggering food inflation, demand outpacing supply is definitely the key cause, to my mind. Increasing incomes and changing lifestyles & aspirations have spurred the demand for food items, especially high value products such as fruits, vegetables, milk and milk products, eggs, fish, and meat. Per capita consumption of many of these products in India is still significantly below that of comparable countries, suggesting the likelihood of this trend continuing in the years to come. Given this scenario, it is crucial that the supply rises substantially to meet the rapidly expanding demand for food.

That brings us to supply side drivers. Though farm yields in India have grown significantly over years, they are still largely dependent on the annual monsoon rains and other vagaries of weather. In certain crops like vegetables that are more vulnerable, adverse weather conditions result in serious damages, leading to exorbitant prices for a few months almost every year in some corner of the country. Rising Minimum Support Prices for certain key commodities, especially wheat and rice, have pushed the prices of those crops up. With the introduction of the Mahatma Gandhi National Rural Employment Guarantee Act, agricultural wages have risen as a result of labour shortage, contributing to rising costs of production. Then there are chronic supply chain deficiencies (high transaction costs due to long chains, huge wastages due to broken chains, increasing cost of transportation due to rising fuel costs) that don’t let a fair share of the consumer price flow back to the producer. The supply chain deficiencies also prevent the demand signals from flowing seamlessly to the farmer. In the absence of such a mechanism, most farmers produce crops based on the prices obtained for the previous crop rather than the prices expected for the crops being planted. This results in huge price swings due to supply-demand imbalances around the harvest time.

As a combined effect of all these complex factors, the food prices in India kept moving up since 2007 when supplies fell short of demand globally; all that the various price control measures achieved was temporary respite from time to time. In these seven years, prices of cereals rose unabated, at an average of 10% per annum; the vegetables also started at a similar rate of 10% per annum, but accelerated to an average annual rise of 30% in the more recent years.

More broad-based reforms in the agricultural policy framework, together with the creation of certain market based institutions and instruments only can deal with these complex factors and solve the problem of food inflation in the long run. Otherwise, one would have to fire-fight every few months to deal with the crisis.

What are those reforms, which can really contain food inflation in India?

There are four areas of intervention that will make a difference:

Reforming the APMC Act along the lines of new Model Act recommended by the central government in 2003 is the first step. The alternative marketing models envisaged in the Model Act, viz. Direct Marketing, Contract Farming, and Private Mandis will provide a healthy competition to the conventional Mandis and offer a choice to the farmer. These models will be customised to different contexts, eliminating the non value adding transaction costs that came into being only because the conventional Mandi was mandated as the only mechanism for a farmer to market his produce. APMC reform will also help in changing the purely transaction oriented relation between an Agri business / Food Processor and the farmer in a Mandi set up, to a reciprocally dependent partnership. This will motivate Businesses to engage with farmers to raise farm productivity and align crop quality to consumer demand in mutual interest. This will also lead to complementary investments in storage and handling infrastructure along the supply chain that reduces wastage.

Secondly, the Forward Contracts Regulation Act (FCRA) must be amended to permit trading in ‘Options’. Farmers will then be assured of a minimum price at the time of sowing itself, based on the future projections of demand simulated by a market consensus. This will help adjust the production volumes to the future demand conditions, thus minimising the potential shortages as well as avoidable wastages, and the consequent price volatility.

Solutions like crop and weather insurance are also essential to enhance the risk-taking capability of the farmer, who can then invest in the required technology and inputs to step up productivity.

Lastly, the protocols for approving new technology must be scientific, made transparent and predictable to attract investments into R&D. We have some distance to cover in discovering seeds that will optimize drought tolerance, disease resistance, yield enhancement, pest resistance, enable nutritional enhancement etc.

You mentioned Food Processing briefly. Can it play an important role in dealing with food inflation?

Anywhere from 5% to 40% of food is wasted along the chain, depending on the inherent perishability of the crop and the season. This obviously reduces the actual availability of food even after the farmers have produced. Food Processing offers a solution to reduce this colossal wastage and contain inflation.

India processes just about 2% of its agri-based products compared to other developing countries such as Malaysia and Thailand who process as much as 40 %. A key constraint for the growth of the sector is the high prices of processed food, primarily because of the cascading effect of taxation along the value chain. Consequently, consumption of processed food remains low despite rising disposable incomes, adversely impacting the investments in this very important sector.

Full potential of this sector can be exploited if processed food products are made affordable at lower prices through a zero-tax regime. Such a tax regime must be extended for a minimum period of 5 years to “communicate” stability and attract investment.

With the prediction of a deficit monsoon this year due to El Nino, do you see food inflation going out of bounds soon?

Just as El Nino was showing signs of weakening, a monsoon blocker developed in Indian Ocean! It is certainly a situation that requires close monitoring. More important than the overall deficit in rainfall, is its spacial and temporal distribution. There is insufficient visibility on that count at this time. We therefore need to be prepared with contingent plans for different micro-regions, to be able to rapidly deploy them as the situation evolves. A big comfort, of course, is the large stock of wheat and rice available with the government. So, if at all something goes out of bounds, it would only be a vegetable here or a fruit there…

Sowing the seeds of a farm revival

Very few sectors are as important, yet as beleaguered as agriculture in India. Engaging more than 50 per cent of the country’s workforce, it offers livelihoods to 75 per cent of the population living below the poverty line. It consumes 80 per cent of the nation’s fresh water resources, a quarter of the total electricity and more than 70 per cent of central government subsidies. However, it accounts for just about 14 per cent of GDP. Woefully therefore, the farmer’s per capita income is less than one-fifth of the rest of the country’s average.

A four-pronged policy agenda in agriculture has the potential to achieve the much desired ‘inclusive and sustainable’ growth of Indian economy.

Weather-proofing production, and conserving life-giving natural resources

 

Arguably, there has been significant progress in making Indian agriculture resilient to recurrent droughts. Nonetheless, it remains a stark reality that the vagaries of nature can potentially cripple the sector at any time. In addition, dwindling natural resources like groundwater can have disastrous consequences. Therefore, any solution will have to weather-proof production, and replenish and conserve life-giving natural resources, using the right technologies.

The entire technology spectrum — from better seeds to precision-farming practices, from micro-irrigation to watershed development, from renewable energy to power-saving farm equipment — will have to be fully harnessed. Over the years, among other policy initiatives, liberalisation of imports of improved varieties and breeding lines has revitalised the availability of high quality seeds. The Indian seed market, estimated at over $1 billion, has grown at double the pace of the global seed market. However, there is a long way to go in developing and deploying seeds that will address extreme weather variations and poor soil conditions, besides serious biotic stresses.

A policy framework that encourages investment in research, and streamlines regulatory processes for accelerated introduction of new technologies will enable sustainable intensification of Indian agriculture.

Making farming remunerative, and enthusing NextGen in agriculture

India’s young demographic profile is a great source of strength. Unfortunately, a future in the agricultural sector does not seem to evoke enthusiasm among the youth. Income from farming is not only unattractive but also not commensurate with the risks and drudgery associated with the farm sector. This has led to farmers moving away from farms to non-farm livelihoods in villages, besides migration to urban areas.

The next horizon in agricultural progress cannot be conquered without harnessing the vitality of the youth. This will require a policy impetus that encourages two vital components: one that enables greater mechanisation of farm operations to mitigate drudgery and enhance efficiency; and the other that enables larger value creation through farming that blends traditional knowledge with new technologies.

Aligning production to changing consumption trends, and linking farmers to markets

Rising disposable incomes and growing urbanisation has brought about a dimensional change in the pattern of consumer demand. The share of cereals is reducing in the diet, in favour of vegetables, fruits, milk, and meat. Besides more variety, today’s consumer demands superior quality, enhanced safety, and added convenience while shopping or using products. This dictates a fundamental transformation.

Producing what the consumer demands is an entirely different ball-game from consuming whatever is produced by the farmer. It is a re-orientation from production-driven supply chains to demand-driven value chains, and will entail huge investments in creating appropriate infrastructure in post-harvest, logistics, processing, packaging, retailing, and information systems.

Corporate involvement through vibrant agri-businesses and food-processing can considerably enhance value for farmers by linking them to the value-seeking markets. However, a variety of policy constraints deter any sizeable investment by the corporates today. Foremost is the non-implementation of the ‘Model APMC Act’ by many states. In addition, the ‘Essential Commodities Act’ imposes stock limits, and curbs movements from time to time, further affecting the viability of agri-businesses. ‘Forward Contracts (Regulation) Act’ also requires reform.

Currently, critical risk management tools, such as Options, are not available. Farmers can realise better prices without undue risk, by buying Options, either directly or through aggregators. This gives them a right to transact at a future price and not just an obligation, as is the case when only the Futures are available. Trade and marketing policies in agriculture will need a significant overhaul, if the farmers have to benefit from the huge consumption dividend offered by the country.

Sharper targeting of social subsidies, and vital investments in soft infrastructure

Over the years, subsidies in the farm sector have certainly played an important role in aiding resource-poor small farmers. However, subsidies can be significantly market-distorting. There is also a concern that systemic leakages significantly dilute the quantum of subsidies that finally reach the intended beneficiaries. Direct transfers of subsidies are perceived to be a more effective alternative. Policies need to sharply target the subsidies to ensure social security but in a way that does not distort markets. In the current global and national economic context, market forces are key to unleashing the true potential of the agricultural sector.

While past investments in rural areas have enhanced the quality of hard infrastructure, such as roads, telecom and irrigation, we need to invest in the complementary ‘soft infrastructure’ now. It is important to create the equivalents of ITIs in the farm sector to train rural youth and enable better implementation of best practices. Investments are also needed in soil health and other natural resource management systems, as also in the emerging agri-services.

Orchestrated action for sustained resurgence

The policy priorities outlined here need to be carried out in a concerted manner to create a springboard that can propel Indian agriculture into a higher orbit.

The ITC e-Choupal experience in empowering millions of farmers lends confidence that a synergistic and integrated rural programme can significantly raise incomes and secure a better quality of life in rural India.

Given the right policy impetus and effective public-private-people partnerships, there is enough reason to believe that the giant agriculture sector can be re-energised to offer a new promise for tomorrow’s India.

 

This article was published in the Business Line print edition dated May 14, 2014 with modified sub-heads http://www.thehindubusinessline.com/todays-paper/tp-opinion/sowing-the-seeds-of-a-farm-revival/article6006734.ece

 

Inclusive Agriculture

Food and Agriculture Organisation (FAO), as a part of the process to prepare their Country Programming Framework 2012-17, organised a Workshop on Indian Agriculture, today, at the Central Research Institute for Dryland Agriculture (CRIDA) in Hyderabad.  

I was a panelist in the session on "greater inclusion of women and disadvantaged social groups, and marginalised areas", along with Dr Suman Sahai of Gene Campaign and Dr Geetha Kutty of Kerala Agricultural University.

This is a summary of my remarks:

Before we can figure out "what we can do to include these people", we need to understand "why they are excluded" and "how they are coping"...

There are multiple causes for exclusion and several ways in which people cope with the situation. So, the solutions also need to be varied, to be effective.

Based on the experiences from around the world, FAO may like to prepare a 'Tool Kit' to enable the practitioners easily analyse the context, and mix & match the solution themes, rather than starting with a zero base each time.

Here are the answers that came top of my mind, for each of these questions. 

  

Q1: Why are women, disadvantaged social groups, and marginalised areas excluded?

I think they are locked-up in a vicious circle by some centripetal forces. Such forces include

• historical and cultural reasons (especially true for women, and socially disadvantaged groups)

• vested interests that benefit by locking these people in a cycle of dependency, after helping them out of a tricky situation (eg. informal money lenders in the villages)

• natural resource constraints and other risks inherent to agriculture (eg. water scarcity in rainfed areas, challenges of hilly areas, commodity price risk).

While the efforts of the Government succeeded only partially to date, the markets have not been interested in these people either as producers (because of no marketable surplus) or as consumers (because of low income). As a result, most of these people stay locked in a vicious circle.

Q2: How are they coping?

• Some are resigned to their fate, while some are satisfied with a low-level equilibrium

• some resort to violence and extremism to change the situation, while

• some aspire for a better future and rely on their entrepreneurial energies

Yet, a large majority are still stuck in a vicious circle!

Q4: What are the solution themes?

Logically, the only way this vicious circle can be broken is by applying sufficient centrifugal force. Sources of such force include

• disproportionate deployment of resources at strategic points (currently the Government spends are spread across several initiatives, as a result they are not able to break the vicious circle anywhere)

• orchestrating synchronised interventions at multiple points through a collaborative effort (markets get interested as they now see profits in raising incomes of the poor, instead of competing for a share of small wallets. eg ITC eChoupal ecosystem)

• collective action by the affected people themselves (eg Amul, SHGs supported by SERP in Andhra Pradesh)

Several activities form part of these solution themes, such as:

• capacity building of the groups before investing in physical assets

• expand income streams that put cash in the hands of the women (dairy, agarbatti making)

• evolve institutions for risk management (insurance for weather risk, futures & options for price risk)

• leverage technology (ICT, micro irrigation, drudgery reducing - not labour displacing - farm equipment suitable for women and other labour)

Promoting Exports of Agricultural Products from India

A top of mind question anyone will have, when we talk of agricultural exports is, "what happens to the availability and prices of food in the domestic market?"

After all, India has 17% of world's population, but only 12% of arable land and 4% of fresh water resources... Should we be exporting at all?

But, exports not only have the potential to improve farmer incomes - an important necessity, given the low per capita GDP of the farm sector in India - but also, quite counter intuitively, can keep the domestic prices low and stable!

Such a possibility is real today because the world is transiting from a policy of self sufficiency at national level to a philosophy of resource efficiency at global level. Instead of all the countries trying to produce every food product they need - an approach started after the first world war and intensified after the second world war - each country is now moving towards maximising production of what they are good at, given their natural endowments, and importing what they have to. That's the only way to feed a larger, richer and more urban global population by 2050. In any case, the goal of self sufficiency is unsustainable - per an estimate, when the per capita food consumption of developing nations reaches today's global average (mind you, not the average of world's rich nations), we need two more earths to satisfy the demand even after factoring the productivity gains from all known technologies! 

India has a great opportunity in this backdrop, because (1) we have rich & diverse agro-climatic conditions, and (2) there is significant headroom for improvement in farm productivity.

But the game has to be played differently, to grab this opportunity. Today, we are less than 2% of global agri exports; of our own total exports, agri constitutes just about 10%; and, within agri, share of value added products is not even 10%

The new way of playing this game is to adopt a two pronged strategy, with three distinct action areas under each strategy...

Strategy 1: Focus on specific crops & products where India has comparative advantage.

This is key, because, to date, India has been an adhoc exporter of whichever commodities left over as surpluses after domestic consumption.

Action Area 1: Ministry of Commerce already has schemes such as Focus Product Scheme and Market Linked Focus Product Scheme. What is required is an institutionalised mechanism within the Ministry of Agriculture to select the products from the agri & allied sector. Such a mechanism could actively involve the exporters too, besides the representatives from the State Governments.

My first cut recommendation would include spices, marine products, processed cereal products, fresh vegetables and processed fruits, and meat products.

Action Area 2: As important as the task of selecting the products to be focused upon, and more important than offering some standard financial incentives to such products as is being done conventionally, it is critical to tailor-make country level strategies suitable to specific competitive contexts of those products.

For example, the Duty Draw Back on chilly exports from India is 1%, which does not even neutralise the incidence of direct and indirect taxes, while China offers an export subsidy of 5% on whole chilly exports and 15% on processed chilly products. The Tariff Rate Quotas imposed by the USA on leaf tobacco blunts the competitiveness of Indian leaf tobacco; and India is denied duty free access given by the EU to similar imports from the LDCs. India must take up such cases of discrimination strongly in the international fora.  

      

Action Area 3: Value added exports must be encouraged, to retain more value within India, rather than relying on basic commodities. A key first step in this regard would be to announce a stable export policy, instead of banning exports every now & then. Only then exporters will invest in product development and branding. To keep the domestic supplies in tact in years of shortage, the exporters could be asked to balance the stock by importing.

Additionally, differential incentives, as described in the Chinese chilly example mentioned earlier, for raw and processed products will help push value added exports and build Indian brands.

Strategy 2: Enhance the inherent competitiveness of Indian agriculture. In the focus products, to start with.

Action Area 1: Transform the current supply-driven value chains into demand-driven value chains. This requires transmission of real-time demand signals from the consumers to the producers, so that they are able to align production and quality to serve the market. New technologies need to be inducted to raise farm productivity. Active engagement of private sector in agricultural extension and marketing is essential to accomplish these two objectives. Reforming of APMC Acts allowing 'Direct Marketing' and 'Contract Farming' is a prerequisite to enable such an engagement.

Action Area 2: Reduce costs along the agricultural chain. This could be done by minimising tax incidence and improving infrastructure efficiencies.

Ironically, even the taxes exempted in spirit are incurred by exporters of agri products, given the agri-specific market dynamics, because of the way the exemption provisions are written. For example, sales tax is exempted on purchases made for export purpose; but, it is mandatory that the purchases must take place after procuring the export order to qualify for such exemption. In case of agricultural products, given their natural seasonality of production, purchases have to be made in season without necessarily having export orders on hand; otherwise one has to sell in distress. Or pay the sales tax!

Larger investments into agri infrastructure could be attracted by removing the caps on subsidies applicable to warehouses built under Grameen Bhandaran Yojana and the Scheme to strengthen Agricultural Marketing Infrastructure. Also, the Zero Duty EPCG Scheme may be extended to cover investments in the entire agricultural value chain.

Action Area 3: Reduce risks in farm production and output prices, by building institutional mechanisms such as Weather Insurance and Commodity Derivative Markets.

As per the RBI guidelines, corporates are allowed to hedge their price risks in the international commodity exchanges only if the position is backed by export / import contracts. In concept, this is very similar to the sales tax exemption procedure. Exporters of Agri commodities need to purchase raw material stocks during the season, not only for export orders on hand, but many times also in anticipation of future export orders. Thus the exporter who wishes to manage the price risk inherent in such domestic raw material purchases in advance, against fluctuating prices in international market, does not have an option to hedge on international commodity exchanges. As a result, the exporter is subjected to price risk till the time he obtains an export order for his product.

To reduce the price risk in exporting agri products, Indian exporters with an open stock position, even without prior export contracts should be allowed to hedge on the international commodity exchanges.

         

This is a summary of the presentation made to the Committee of State Agricultural Ministers on Marketing Reforms in Tirupati on Oct 30, 2012. 

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.    

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.