Commodity Options: New-age MSP mechanism that can trigger a Rainbow Revolution

Options can certainly be a win-win instrument not only to hedge farmers’ risk effectively, but also by replacing expensive subsidies with an efficient market-based mechanism.

A new future for Indian farmers dawned in 1960s with the Green Revolution. Another such turning point is emerging today, with an opportunity to craft the next leap for Indian agriculture. An instrument that played a pivotal role in translating the green revolution technologies into increased food production was the Minimum Support Price (MSP) assured to farmers. Institutions such as Food Corporation of India executed this instrument, complementing the research and extension services rendered by the ICAR-led public research system.

That was half a century ago. Rapid globalization since then, coupled with increasing purchasing power, have made today’s consumers seek a variety of food products, such as vegetables, fruits, meat, and milk, going beyond the green revolution crops, namely, rice and wheat. For the farmer, this requires a paradigm shift to bring consumer-preferred traits into crops, in addition to further improvements in productivity. This implies new risks for the farmers, which cannot be dealt with by the MSP that covers only a few commodities in a few states. 

If the cost of implementing MSP in two crops and three-and-a-half states itself is so taxing on the exchequer, one can only imagine the massive resources that would be required to support at least a dozen crops spread across not less than 15 states. A new “Rainbow Revolution” is now required to take the baton from a tiring Green Revolution. Technology already exists for such a revolution; we just need a new MSP-like instrument that can cover many more crops and several states. Instead of relying on a government-administered subsidy alone, a more efficient mechanism would be to create a market-based instrument as also build and strengthen institutions that can take such an instrument to the farmers. Market-based instruments will reduce the need for the state to engage in commodity operations directly, yet giving government the power to intervene and influence prices in the public interest by participating in such a market whenever required.

Commodity derivative markets offer such an instrument. Even though there are opponents to derivatives such as futures and options, the fact remains that they provide the best safeguards to farmers, simultaneously facilitating a swifter alignment of production with demand. Today, farmers make planting choices based on the prices received for previous season’s crops. There couldn’t be a more inefficient way! Derivatives open up new possibilities for farmers by assuring them of a post-harvest price before they take a decision on what to sow.

Trading in futures is currently permitted, but it doesn’t really help the farmers manage their risk, as it ties them down with an obligation to deliver at the contracted price, even if the market moves up after harvest. Farmers are looking for an MSP-like instrument, where they are assured of a minimum price before planting a crop, and still have the choice of taking advantage of the market if prices go up later. Options provide such flexibility. By buying a put option, the farmer gets a right to sell at a pre-determined future price, but without any obligation to deliver if the market moves up. This assurance not only provides the best hedging solution to farmers, but also builds their capacity to invest in productivity-enhancing and quality-improving technology and practices, in turn raising production and containing inflation without bringing farmer incomes down.

To make this happen, the Forward Contacts (Regulation) Act needs reform to permit “options”. The high premia typically charged for options can discourage farmers from extensively participating in the derivatives market. This can be dealt with by permitting exotic derivatives like caps and collars. The government could also step in to popularize the use of options for hedging or subsidize the premia since that would entail far less an outgo than direct subsidies (see box). Given the small lot sizes of farmers, as well as the complexities involved in operating in the derivative markets, it is also important to recognize “aggregators” under the Act who could offer the simpler “options-embedded Over the Counter (OTC) contracts” to farmers.

Options can certainly be a win-win instrument not only to hedge farmers’ risk effectively, but also by replacing expensive subsidies with an efficient market-based mechanism. Do we really have a better option than permitting “options” to achieve a rainbow revolution?

Farmers Hedging in Mexico After joining the North American Free Trade Agreement in 1994, the Mexico government moved to liberalize the agricultural sector. The government designed a sustainable programme of guaranteed minimum price through the use of options to transfer risk from growers to international markets. The Support Services for Agricultural Marketing Agency (ASERCA), a decentralized body providing commercial support to farmers, offered the farmers a chance to participate for a fixed fee in a programme guaranteeing minimum cotton price. ASERCA offered a guaranteed price and hedged its own risk by using the fee to purchase a put option on the New York Cotton Exchange (now ICE Futures US). The put option gave ASERCA the right to sell cotton on a specific future date at pre-specified price ( that is, strike price). When the prices dropped, ASERCA paid farmers the difference between the New York price at harvest and a minimum price (equivalent to the payoff value of put option). If prices rose instead, ASERCA made no payment to farmers. By paying a fee and participating in the programme, a farmer purchased insurance against a drop in prices below a certain level. ASERCA, in effect, acted as an intermediary between producers and commodity brokers. The Mexican government, through ASERCA, subsidized 100% of the premium payment in 1994. Source: Innovative Agricultural Insurance Products and Schemes (by Kang, M. G.)

First published in Economic Times on 5^th August 2014, at http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=COMMODITY-OPTIONS-NEW-AGE-MSP-MECHANISM-THAT-CAN-06082014005017

Decoding the Union Budget 2104: Agri Sector

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

Indian agriculture is heavily dependent on rainfall, with just about a third of the total arable area being irrigated. In recent times, temperatures as well as the variability in rainfall have been increasing, adversely impacting the farm production.

Consequently, the policy agenda must aim to contain food inflation, yet making farming profitable; make agricultural production and the farmers more resilient to weather variations; improve productivity of the subsidy spends, and minimise their market distortion impact.

Regrouping the proposals along the above lines will help decode the Budget.

Contain food inflation, yet making farming profitable:

Since this objective has an inherent conflict, the Government is using five different strategies to tackle the complexity, viz (1) funds have been allocated to set up two more research institutions of excellence, two additional agricultural and horticultural universities, and a Kisan TV, (2) substantial resources have been provided for upgrading the warehousing and agri-tech infrastructure, besides creating a corpus for ‘Long Term Rural Credit Fund’ to boost investments, (3) financial support has been extended to Bhoomi Heen Kisan through NABARD, and to set up a Producers Development and Upliftment Corpus (PRODUCE) to build the capacity of the producers organisations, (4) promised that the Central Government will work closely with the State Governments to reform the APMC Acts, and (5) proposed to establish a Price Stabilization Fund to mitigate the distress from price volatility.

Make agricultural production and the farmers more resilient to weather variations:

Besides giving impetus to watershed development through a new programme called Neeranchal, a new scheme called Pradhan Mantri Krishi Sinchayee Yojana has also been announced. If the Sinchayee Yojana is implemented as well as the earlier Pradhan Mantri Gram Sadak Yojana that made a significant difference to the rural road, we can hope for better days ahead in irrigating farms. Funds have also been allocated to establish a National Adaptation Fund to mitigate the challenges arising out of climate change. One would have liked to see some funds allocated to a reworked crop / weather insurance scheme too. That didn’t happen.

Improve productivity of the subsidy spends, and minimise their market distortion impact:

Quite rightly, it has been announced that MNREGA will now be substantially linked to agriculture and allied activities. Shortage of labour during the peak agricultural operations was a major problem of the farmers so far. It is also good to see the Government’s commitment to restructure FCI, and improve the efficiency of food grain management in the country. Perhaps the most important announcement related to agriculture in the Budget is the scheme to provide to every farmer a soil health card in a Mission mode. This will go a long way in scientifically rationalising the fertiliser usage and reducing the subsidies.

In sum, all of these steps will put more money into the hands of the farmers!

 

First published in the Rural Marketing Association of India's Special Budget Edition at http://www.rmai.in/pdf/rmai%2021-07-2014.pdf

Curb food prices without harming the farmers

Various measures have been deployed to combat food inflation. Subsidies on food and fertilisers, imports of food as well as regulations to prevent hoarding of farm produce did succeed in stabilising prices from time to time. But such crisis management has been able to provide only short-lived relief, and prices have gone up from 2007.

Bringing down food inflation will benefit the consumer, but make prices unattractive to farmers. This will accentuate poverty. Unremunerative prices discourage investments in agriculture, causing supply-side shortages, fuelling inflation further. So, the most effective way of tackling this issue is to focus on bringing down consumer prices, ploughing a larger share of the consumer spend back to the farmer.

First we need to lower transaction costs. The Agricultural Produce Market Committee (APMC) Acts mandate all farm produce should be brought to mandisfor auctioning, making these platforms virtual monopolies. The farmer pays to transport his produce over long distances, before knowing the price at which his produce would be sold, or whether any other market would have paid a better price.

The journey from farm to consumer involves multiple levels of transportation, handling expenses, commissions of agents and a mandi cess, adding nearly 20% cost to food prices. This absurdity was acknowledged years ago, and anew Model APMC Act recommended by the Centre in 2003.

This Model Act must be implemented in all states. Unless farmers have the freedom to sell at farm-gate or other transparent platforms directly to buyers, transaction costs will remain high and drive consumer prices higher. Next, we need to cut wastage. Anywhere from 5% to 40% of food is wasted along the chain, depending on the perishability of the crop and the season. First, market instruments must empower farmers to produce as per tomorrow's demand, rather than be guided by yesterday's prices.

If the Forward Contracts Regulation Act (FCRA) is amended to permit trading in options, farmers are assured of a minimum price when sowing, based on future projections simulated by a market consensus. This will align production volumes to future demand conditions and minimise wastage. We need large investments to set up climate-controlled infrastructure to enhance the shelf life of farm produce. The private sector has the capacity to invest and add value to such infrastructure.

But regulations like the Essential Commodities Act (ECA), which impose stock limits and curb movements, create uncertainty, acting as a deterrent to such long-term investments. We need to add value to farm produce by facilitating food processing on a much larger scale. Food processors do not find it worth their while to engage with farmers directly due to APMC restrictions. And the ECA does not distinguish between hoarders and genuine market players. The risk management capacity of food processors is squeezed, because options are not permitted under FCRA. So, reforms in APMC, ECA and FCRA are critical to mobilise investments in the food processing sector.

India's agricultural yields are far below the best-in-class. Depending on the crop, productivity improvements can range from 20% to 100%. Though Indian farming has seen progress, induction of technology and mechanisation is still below par. Agriculture is still exposed to high climate variation risks. Given that around 65% of India's total sowed area meets its requirements from rainwater alone, it is imperative to invest in technology to make agriculture climate- and weatherproof.

These include introduction of specially-developed seeds that withstand extreme weather, diverse soil conditions and various biotic stresses. Solutions like crop and weather insurance are also essential to whet the risk-taking capability of the farmer, who can then invest to step up productivity, participate more effectively in agricultural value chains and garner alarger share of consumer spends.

Market-distorting subsidies have to be rationalised to make agri-business more viable and bring investments into the sector. Private enterprises engaged in agribusiness must focus on research and innovation to make agriculture remunerative to farmers and ensure the products are relevant to consumers.

First published in Economic Times on 27th June 2014 at http://economictimes.indiatimes.com/opinion/curb-food-prices-without-harming-the-farmers/articleshow/37280685.cms
 

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

 

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?

          

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 :)

Investment Opportunities in Indian Food & Agri Business Sector

Here is a summary of my talk at the BRIC-IBSA Business Forum in Rio De Janeiro on 14 April 2010

Investment Opportunity in Indian Food & Agri Business Sector is founded on Four Pillars

1. Large Sector with further tremendous upside

2. Indian Consumer is seeking new products

3. Production system has potential to supply those new products

4. The Business environment is very conducive

Pillar 1: Large Sector & Further Upside

• Size > US$ 200 Billion

• 50% of household expenditure is on Food

• 50% of workforce is engaged in agriculture

• That rest of the economy is outgrowing agriculture, is a signal for investment opportunities in agriculture

Pillar 2: The Consumer Dimension

• More than 1 billion consumers

• Rising incomes & rapid urbanisation changing the profile of consumption

• Global experience: US$ 1000 per capita is the sweet spot for shift in food consumption patterns, from basic to value added food

• Consumer is looking for new value: quality, variety, safety, convenience etc.

• Besides this domestic opportunity, there are export prospects too in several products

Pillar 3: The Production System

• Large arable area > 150 million ha

• Rich & diverse agro climatic zones

• Characterised by small farmers

• Good scope for productivity enhancement through technology induction

Pillar 4: The Business Environment

• Significant private participation after policy reforms in the last decade

• Traditional farm labour seeking new jobs

• Large infrastructure investments in the recent past: roads, telecom, irrigation etc

• Thrust area for Government as a strategy for “inclusive growth”

The Investment Opportunities

• Innovation at the consumer end of the chain (Processing, packaging, retail formats)

• Effectiveness at the farmer end of the chain (Productivity, quality - pre & post harvest, labour saving technologies)

• Efficiency along the whole chain (Integration, coordination, infrastructure)

• Cross BRIC-IBSA collaboration imperative (Food Security, Climate Change)