Agriculture: Twenty Years from Now...

Following is a summary of my remarks in an “Agri Panel” at the Global Entrepreneurship Summit earlier today, in response to the question, “What do you think will be game-changing about how we think about agriculture, twenty years from now?”

Soon after the panel moderator sent me this very interesting question a couple of days ago, the first thing I did was to post this question on Twitter, Facebook, and LinkedIn to crowdsource thoughts from my friends. There were nearly two hundred unique responses! They added up to twenty pages of text, without counting the number of pages in the links I received. Overwhelming, isn’t it?

All I am doing now is to simply synthesize those inputs and share with you J

The future of any system is shaped the current aspirations of the key stakeholders. Let’s take a look at the aspirations of the consumers, producers and the society at large…

Consumers want sufficient quantity of food (because we would be nearly nine billion by then, and on average richer than today), that is tasty (although, a friend did say in lighter vein, “since we will have nano-bots in our blood streams, and since our memories could be uploaded on to cloud, maybe we don’t need food and therefore no agriculture; we probably just need some electricity, or batteries, or just a few hours of exposure to sun ;-), is safe (you are all consumers here, don’t you agree that harmful chemicals in food is your topmost concern?), nutritious (scientists say that most of the world is suffering from invisible hunger), and all of these at reasonable prices!     

Farmers want higher incomes (as you know, per capita income of farmers around the world, especially in emerging economies, is far lower than the general per capita) with lower risk (weather and disease related production risks, price volatility). Their labour deserves more dignity (as it is, hardly any youth from the next generation wants to be a farmer) and they deserve better quality life (as in, the conveniences and comforts that are common in urban settings).  

Society at large would like agriculture to conserve natural resources (water and top soil, for example) and where possible, actually renew them. Agriculture needs to be resilient to climate change (the summer rains and warm winters, extreme climate episodes like heavy downpours on one hand and droughts on the other, etc), and again, where possible, positively impact climate change (sequester carbon, minimize greenhouse gas emissions etc).

An interplay of these different - at times conflicting - aspirations gives rise to three distinct scenarios, all of which will co-exist in twenty years. Let me label them: Farms as Factories, Homes as Farms, and Back to Basics!

Farms as Factories: By using the metaphor of factories, all I am saying is that the consistent quality of output will be produced, crop after crop, by leveraging the evolving technologies – both farming (like seed, nutrients, farm-equipment, agronomy practices etc) and digital (IoT, block chain, hyper-spectral imaging, GPS / GIS etc). A friend called them, “hardware, software, and liveware”). Another friend went to the extent of visualising a self-managing seed! These seeds will analyse the experienced conditions like soil, weather, water etc and invoke the necessary embedded features that would maximize the yield and quality. This may sound like fantasy today, but those of you who are familiar with experiments on seeds with multiple layers of coating in the past may very well say this could be a reality in twenty years!

Homes as Farms: I am sure, you have heard of vertical farming, balcony farming, kitchen gardens and such other names. Once supply chains are established to supply DIY-type mini production units, seeds, nutrients etc to the households, this phenomenon will expand more rapidly. This food is safe without any doubt in the consumer mind, and zero carbon miles! Business Models are also in the works for another kind of service. If you are not adventurous enough to grow crops in your backyard yourself, you can simply let out the space to Service Providers who can grow crops on a BOO model. Besides experts growing the crops in this model, a colony-level kitchen garden is more optimal than a household level garden. And a third model, which is not a ‘home-as-farm’ strictly speaking, is a partnership between a group of, say, five thousand, consumers and a community of, say, five hundred farmers. I know of several such partnerships across cities, built as WhatsApp Groups integrating even the e-commerce functionality.       

Back to Basics: Much of today’s ills of agriculture are due to chemical-intensive mono-cropping paradigm. A more sustainable future scenario would be an integrated farming system consisting of polyculture, permaculture, organic compost, bee-keeping, animal husbandry, renewable energy. In fact, I already see some farms where solar energy brings larger revenue than the conventional crops.  

As the panel went forward, there were other questions, but for now I am wrapping up this post without covering them.

As always, comments are most welcome J This is a live and lively topic! 

Nuances of the Agricultural Value Chains in India

Earlier this week, I gave a talk on the subject in a Workshop of Development Professionals. One of the participants prepared this summary:

Drawing upon his extensive experience of setting up and managing businesses based on value chains in agricultural commodities, Sivakumar took off from where the previous speaker left.  He said that he would reconcile the two seemingly conflicting points of views brought up in the previous session. On one hand, farmers as well as consumers feel that the intermediaries in the value chain are getting all the cream at their expense. The other was the large body of research which says that there is no evidence to conclude that middlemen in any specific commodity sector are making any more returns than justified by the value they add through capital they invest, the costs they incur and the risks they take. Once he had done that, he said, he would propose a sort of “tool kit” that the participants could use to address the inefficiencies in the value chains.

He said that the situation in India was characterized by small ticket size, large geographic dispersion, and lack of homogeneity on both the producer and the consumer end. To reach the agri produce to appropriate buyers located elsewhere, seeking products at different times, and in different form, required the middlemen to discover mechanisms such as larger than required risk cover, substituting skills for instruments and local knowledge for things like credit rating or quality testing or bank reach. They then instituted less than "global optimal" solutions. The research on market efficiency in whichever commodity focussed on "local" connections between two subsequent legs of a value chain and these were competitively shaped leading to the conclusion about market efficiency. Yet, from the point of view of global marketplace, Indian value chains were very inefficient since the summation of local optimal efficiencies did not add up to a global optimum for the whole value chain because of the non-value adding costs and unwarranted risks. This explained the simultaneous existence of "efficient markets" as tested by economists at micro level with gross inefficiencies in aggregate.

The adverse impact of the inefficiency – in terms of higher costs and risks – have been pushed to the weakest link in the chain, namely, the small farmer! As a result, the producer’s share of a consumer rupee remained low. Also, neither the full market opportunity from the evolving consumer preferences, nor the full production potential of India’s rich agro-climatic conditions have been realised.   

He therefore suggested that any work to improve the lot of small farmers cannot be a “point” solution; interventions are needed to improve efficiencies of the value chains as a whole, by transferring the costs and the risks to the most capable players along the chain.

Citing his own experience in setting up ITC e-Choupals, he laid out an approach to build the "tool kit". He then talked of two points that move along the value chain: the first is related to how much a producer would be willing to go down the value chain to reach out to the consumer and the other as to how much a consumer would be willing to go up towards production side. For the former, he talked of producers willing to push their “value offer points” by reaching out to the consumers in terms of vendor managed inventory. For the latter, he talked of contract farming as an illustration of consumer extending the “order penetration point” up the stream in the value chain.

By studying what he called the “transaction velocity” metrics, he said it would be possible to identify the non-value adding transactions in a value chain and then eliminate them through suitable interventions. ITC e-Choupals, for example, eliminated the physical movement of goods from farmers to APMC and then from there to the factories through competitive price discovery at farmer’s doorstep. Through different business models, ITC reaches out to 70000 villages in 220 districts across 16 states of the country giving them a competitive edge in sourcing.

Next he talked of “identity preservation” of the product along the value chain to mix & match the heterogeneity of production to cater to the heterogeneity in demand. Giving an example, he said there were 16 major wheat types grown in the country and 7 major atta types preferred by the consumers in different regions of the country. By setting up suitable sourcing, storage, and movement systems – both physical and information flow – to ensure that right wheat went to right mills and the right atta to market, ITC could capture and retain a huge market share in the Rs 5000 cr branded atta market.

Third he talked of “intensity of information” embedded in the products and using it for the purpose of deriving extra value for the producers. This comprised things like organic produce, responsible produce, IPM produced stuff etc. for which some segments of consumers are willing to pay more if there is evidence of the claim of the produce being what it claims to be.

Fourth he talked about moving from backyard production to collective production systems, wherever “mass production to production by masses” ratios are favourable. He gave the example of small animal holders coming together for collective dairy farming.

He strongly recommended that it would be more productive for new entrants as well – irrespective of their size of operations – to start thinking in terms of steps to move towards a “global optimum” in their value chains rather than either engaging in a zero sum game of deriving more value by reducing someone else's earning or by competing within the existing system alone.    

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.

Twinterview on Franchising

Avishek Gupta, a member of the Dairy Network Enterprises team interviewed me on Twitter about franchising. Here is a transcript

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Avishek_Gupta: What if I want to #franchise my business? What would a #franchisee look for?

S_Sivakumar: Actually just three things! RaRoI (to take home), Brand (to pull customers), SOP (to idiot proof execution)...

Avishek_Gupta: Thanks, that's precise!But, what if I don't have a brand? Will ONLY the other two work? My Query specific to small rural enterprises.
(Comment added later by Avishek to this transcript - assumption behind the question was that it will take some time to create a franchisable "brand" across different remote rural locations and hence the "lack" of brand for a relative newcomer like DNE)

S_Sivakumar: If not brand, something else to "pull" customers. Say, a unique product or service. Otherwise it's partnership, not franchising!

Avishek_Gupta: Partnership v/s Franchising!!...Thanks a LOT for the insight! :)

S_Sivakumar: When you franchise, you bring everything to the table except last mile. In partnership, you combine complementary strengths

Avishek_Gupta: How to get a rural entrepreneur set up a franchisee? How does he get to know about it? What can convince him, it works? Local NGO?

S_Sivakumar: As to who can convince your prospect depends on the profile of your prospect. Local NGO, Bank Manager, School Teacher.. Best would be to conduct a village meeting (aided by an AV showing Franchisee at Work) and create "pull" for applications

Avishek_Gupta: Is minimum revenue guarantee for start-up period an intelligent way to go to convince entrepreneur? Or is it absolutely foolish?

S_Sivakumar: Minimum Guarantee is a useful tool. Ideally you should link the guarantee to efforts on part of franchisee, not a free ride!

Avishek_Gupta: So true! And our job would be to be clear about how we would "measure" the efforts of the entrepreneur in initial periods of little revenue.

S_Sivakumar: The inputs that drive the desired outcomes will define the efforts...

S_Sivakumar: Yes, in any case you can't design reliable SOPs before running the business for a while

Avishek_Gupta: So, Franchise Package = SOP + min guarantee (proxy indicator 4 ROI) tied 2 efforts + a great service /product! Awareness thru AV of franchisee at work!