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India grows a large range of wheat varieties, but they often get comingled along the outdated supply chain system.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

Connecting Small Producers to Global Supply Chains: Importance of Local level Logistics - ITC eChoupal Case

A summary of the presentation made at World Bank, Washington DC on 6 May 2010

Customers served by the global supply chains look for consistent quality products that are cost competitive and delivered on time.

To meet these expectations while connecting small producers to global supply chains, four components of the local level logistics need to be managed. I will use agriculture to illustrate my arguments, but the same logic applies to several other non-farm outputs of small producers e.g. handicrafts.

The Local Components of Global Supply Chains:

Two of these are targeted at improving efficiency

1. Logistics Costs
2. Farm Productivity

And, the other two enhance effectiveness

1. Produce quality aligned to market demand
2. Safety in production and supply chain

Default characteristics of each of these components, in the emerging economies, constrain the small producers from achieving the desired objectives:

1. When farmers sell their output to agribusinesses, avoidable additional logistics costs are incurred because the price is discovered only after quality check is done at produce consolidation points i.e. mandis (auction centers) that are some 25 km away from the farm gate. From mandis, the produce then moves to the warehouses of the processing units. This system is in vogue for nearly half a century, as there was no other go when the farmers are small, they live in widely dispersed villages and each one’s quality is different given the heterogeneity of farming conditions.
2. For the same reasons of fragmentation, dispersion and heterogeneity, the delivery of agri extension (crop management knowledge) and other farm inputs viz. information, credit, seed, nutrients, crop protection chemicals, insurance etc., are uncoordinated. And, typically, this delivery is seen as a “last mile challenge”; hence there is no focus on building solutions for individual farmers keeping their unique contexts in mind. As a result, farm productivity tends to be much lower than the potential.
3. On the quality front, these supply chains are great illustrations of “lemons problem”, where the real quality of the produce is not objectively factored into pricing at the mandi, eventually driving out the quality consciousness among the producers. The intermediaries, who make up for the missing infrastructure, act as Principals to transactions further aggravate the problem by blocking market signals & information flow along the chain.
4. The product loses identity along the chain, due to indiscrete aggregation of the produce (of multiple producers) done by the intermediaries to maximize value for themselves. Varieties and grades get mixed up, giving no opportunity for the processors to determine blending ratios based on consumer preferences.

ITC eChoupal factors all these challenges and connects small producers to global supply chains efficiently and effectively:

1. Quality factored price discovery in the village itself, by leveraging the power of Information & Communication Technologies and by co-opting a local farmer as Choupal Sanchalak to facilitate quality assessment.
2. Bypasses the traditional intermediaries in the flow of information and market signals, yet leverages their physical handling capability in a weak infrastructure context, to manage the flow of goods & cash more efficiently, by co-opting them as Samyojaks.
3. Using the same ICT platform to gather the crop management problems of individual farmers, builds “first mile solutions” in collaboration with experts at the back end
4. Preserves product identity through the supply chain by defining the stack specifications, having already eliminated the vested interest of the intermediate principals by converting them into service providers.

Impact of ITC eChoupal on the four components of local logistics:

1. Since the price is discovered within the village, the produce is now moving directly to ITC’s warehouses bypassing mandis, thereby eliminating non-value-adding handling expenses.
2. With the context specific farming solutions offered, together with farm inputs, best practice adoption increased, thereby raising farm productivity and / or reducing the costs of farming.
3. Since the quality is objectively factored into pricing, farmers are incentivised for improving quality. Free-flow of market signals on ICT infrastructure, is enabling production system to respond to consumer demand in terms of variety and quality.
4. Since the sourcing is now directly from farmers, product identity is preserved along the chain with complete visibility provided to customers to determine their blends based on final consumer demand.

The result is a more efficient & effective connection of small farmers to the global supply chains, increasing their incomes and improving their ability to respond to markets.