INTRODUCTION
Food inflation rate has been consistently rising in India. This is especially a cause for alarm because India is a developing country. Rising food costs will hit India in primarily two ways, as prices of food items increase, availability of nutrition to the poorer sections of society consisting of labor class will decrease which in turn will affect the productivity of the entire country. Also increasing food prices will increase the subsidy being given by the government. In current time of economic turmoil, increased spending on subsidies would adversely affect the country’s economy. This phenomenon is especially disturbing because the average annual growth rate of total food grain production has increased from 1.28% in 10th plan (2002-03 to 2006-07) to 3.8% in 11th plan (2007-08 to 2011-2012) as per data from Ministry of Agriculture. There are a number of factors which explain this anomaly. The most important one being highly inefficient logistics in agri supply chain which lead to rising cost and increasing wastage. FAO in its 2011 report has estimated this wastage to be 45% of produce. In a country like India where hunger and poverty are still the topmost problems, this is just unacceptable.
Agri Supply Chain
The supply chain in Indian agriculture is basically of two types, one under government control and another under private control. The farm produce is sold by the farmers in government controlled markets called Agricultural Procurement and Marketing Committee mandis. This transaction is handled by Commision Agents who charge around 3% commission. The crops which are covered under the minimum support price program are bought by the Food corporation of India and stored in their godowns till they are distributed via the public distribution system. Produce like fruits and vegetables are mostly bought by private parties. The traditional private channel has around five middlemen.
Food inflation rate has been consistently rising in India. This is especially a cause for alarm because India is a developing country. Rising food costs will hit India in primarily two ways, as prices of food items increase, availability of nutrition to the poorer sections of society consisting of labor class will decrease which in turn will affect the productivity of the entire country. Also increasing food prices will increase the subsidy being given by the government. In current time of economic turmoil, increased spending on subsidies would adversely affect the country’s economy. This phenomenon is especially disturbing because the average annual growth rate of total food grain production has increased from 1.28% in 10th plan (2002-03 to 2006-07) to 3.8% in 11th plan (2007-08 to 2011-2012) as per data from Ministry of Agriculture. There are a number of factors which explain this anomaly. The most important one being highly inefficient logistics in agri supply chain which lead to rising cost and increasing wastage. FAO in its 2011 report has estimated this wastage to be 45% of produce. In a country like India where hunger and poverty are still the topmost problems, this is just unacceptable.
Agri Supply Chain
The supply chain in Indian agriculture is basically of two types, one under government control and another under private control. The farm produce is sold by the farmers in government controlled markets called Agricultural Procurement and Marketing Committee mandis. This transaction is handled by Commision Agents who charge around 3% commission. The crops which are covered under the minimum support price program are bought by the Food corporation of India and stored in their godowns till they are distributed via the public distribution system. Produce like fruits and vegetables are mostly bought by private parties. The traditional private channel has around five middlemen.
CHALLENGES
Exploitation by dealers, middlemen
Increasing number of dealers and middlemen have led to long complicated marketing channels. These intermediaries not only increase the cost of produce but also prove detrimental for perishable items due to increased time being spent across these middlemen.
Commission paid to commission agents
This increases the overhead cost. Also this hampers both the consumer and the producer. These commission agents do not add any value to the agricultural produce but they do decrease the amount of money that a farmer would get for his crop and the increase the amount charged to the consumer for that product.
Lack of storage facilities
Currently 71mT of storage capacity is available in government system including FCI, central warehousing and state warehousing. Apart from this, 25mT is available in the private domain. Still there is a gap of 35mT between the agricultural produce and the available warehousing capacity. Another crucial point is that cold storage facilities which are especially important for fruits and vegetables have a capacity of only 25mT which covers only about 10% of our fruit and vegetable production.
Lack of accessibility to regulated markets
Most of the farmers in India are small and marginal. With their scale, it proves uneconomical for them to travel around 12km to reach the nearest APMC mandi. This is the major cause why they sell to the intermediate dealer who charges a high amount of commission just for transporting the produce. If the farmers have an easy way to access the mandis themselves, this whole set of intermediaries can be done away with which will help both the farmers and the consumers.
Absence of nationwide agricultural market
Different types of taxes like octroi tax discourage the emergence of a nationwide agricultural market. Also the Essential Commodities Act imposes restrictions on the movement of agricultural produce across states.
Lack of collateral management options
Goods stored at warehouses can be used for financing, one of the ways is collateral management. This is estimated to be upto INR 3500 cr.
SOLUTIONS
ICT
One of the biggest problem outlined in the previous section is the lack of a nationwide market. To promote that we can use information technology.
Transactions: The government should introduce centralized paying mechanism for increased transparency and easy of transfer of goods across states. A prepaid card could be brought in. This will be useful for payment of octroi taxes and other dues for movement of goods.
Logistics : Using RFID tags, it will be very easy to track and trace produce. This will help in reducing wastage and labour cost.
Virtual Market : Currently there is no formal platform for transfer of produce from area of production to different areas of consumption. An online portal can be introduced where trading can be done. This will help in dissemination of information and proper management. This will be a virtual marketplace which will help save transportation costs, labour costs and capital costs.
Online Portal for Farmers : An online portal for farmers should be created at a national level by borrowing the idea of ITC’s eChoupal. Using this farmers can be made aware of weather conditions. They can be also be taught the new and advanced methods of farming including pest management, disease control.
Knowledge Management : By analyzing the data, trends can be established. These trends will help the farmers in proper planning and choosing which crops to sow. If they sow crops that have a demand, these crops will not rot in the warehouses and farmers will also get paid for their produce.
Linking Supply Chain with Value Chain
We need to bring the supply chain and value chain together so that at each stage of the supply chain, value addition occurs. For progress, we need to bridge the gap between farmers and markets by providing them good infrastructure. This will help in removing the bottlenecks of logistics and quality maintenance which in turn will help in increased access enabling to compete on the global stage.
Policy Reforms
In the retail sector, amendments to APMC act and introduction of FDI are positive signs. Other reforms required are introduction of negotiable warehouse receipt system, scheme of bank financing against these receipts, establishment of warehouse development & regulatory authority and plans to provide support for upto 10 years of construction of storage and warehouse facilities.
Farmer specific solutions
Improving rural infrastructure or establishing collection centers will make it cheaper to source from small scale farmers. For improving the bargaining power, farmers can be organized in groups. Bringing technology closer to farmers will improve production to meet higher quality standards.
Financing options for Agri Logistics Firms
Data by Venture Intelligence shows that PE firms have invested INR 940 crores in the agribusiness sector in the last three years. Companies functioning in the domain of agri logistics and cold chain are looking forward to raise 15-100 crore. This optimism stems from the fact that revenue growth for these companies is between 20-100% annually. The capital is needed to scale up operations. This sector suffers from basic problems as most of them are family run and hence not open to outside control. Also even though the growth in high, gross margins range only from 5-6%. Increased domain expertise and technical knowledge will reduce these problems.
Exploitation by dealers, middlemen
Increasing number of dealers and middlemen have led to long complicated marketing channels. These intermediaries not only increase the cost of produce but also prove detrimental for perishable items due to increased time being spent across these middlemen.
Commission paid to commission agents
This increases the overhead cost. Also this hampers both the consumer and the producer. These commission agents do not add any value to the agricultural produce but they do decrease the amount of money that a farmer would get for his crop and the increase the amount charged to the consumer for that product.
Lack of storage facilities
Currently 71mT of storage capacity is available in government system including FCI, central warehousing and state warehousing. Apart from this, 25mT is available in the private domain. Still there is a gap of 35mT between the agricultural produce and the available warehousing capacity. Another crucial point is that cold storage facilities which are especially important for fruits and vegetables have a capacity of only 25mT which covers only about 10% of our fruit and vegetable production.
Lack of accessibility to regulated markets
Most of the farmers in India are small and marginal. With their scale, it proves uneconomical for them to travel around 12km to reach the nearest APMC mandi. This is the major cause why they sell to the intermediate dealer who charges a high amount of commission just for transporting the produce. If the farmers have an easy way to access the mandis themselves, this whole set of intermediaries can be done away with which will help both the farmers and the consumers.
Absence of nationwide agricultural market
Different types of taxes like octroi tax discourage the emergence of a nationwide agricultural market. Also the Essential Commodities Act imposes restrictions on the movement of agricultural produce across states.
Lack of collateral management options
Goods stored at warehouses can be used for financing, one of the ways is collateral management. This is estimated to be upto INR 3500 cr.
SOLUTIONS
ICT
One of the biggest problem outlined in the previous section is the lack of a nationwide market. To promote that we can use information technology.
Transactions: The government should introduce centralized paying mechanism for increased transparency and easy of transfer of goods across states. A prepaid card could be brought in. This will be useful for payment of octroi taxes and other dues for movement of goods.
Logistics : Using RFID tags, it will be very easy to track and trace produce. This will help in reducing wastage and labour cost.
Virtual Market : Currently there is no formal platform for transfer of produce from area of production to different areas of consumption. An online portal can be introduced where trading can be done. This will help in dissemination of information and proper management. This will be a virtual marketplace which will help save transportation costs, labour costs and capital costs.
Online Portal for Farmers : An online portal for farmers should be created at a national level by borrowing the idea of ITC’s eChoupal. Using this farmers can be made aware of weather conditions. They can be also be taught the new and advanced methods of farming including pest management, disease control.
Knowledge Management : By analyzing the data, trends can be established. These trends will help the farmers in proper planning and choosing which crops to sow. If they sow crops that have a demand, these crops will not rot in the warehouses and farmers will also get paid for their produce.
Linking Supply Chain with Value Chain
We need to bring the supply chain and value chain together so that at each stage of the supply chain, value addition occurs. For progress, we need to bridge the gap between farmers and markets by providing them good infrastructure. This will help in removing the bottlenecks of logistics and quality maintenance which in turn will help in increased access enabling to compete on the global stage.
Policy Reforms
In the retail sector, amendments to APMC act and introduction of FDI are positive signs. Other reforms required are introduction of negotiable warehouse receipt system, scheme of bank financing against these receipts, establishment of warehouse development & regulatory authority and plans to provide support for upto 10 years of construction of storage and warehouse facilities.
Farmer specific solutions
Improving rural infrastructure or establishing collection centers will make it cheaper to source from small scale farmers. For improving the bargaining power, farmers can be organized in groups. Bringing technology closer to farmers will improve production to meet higher quality standards.
Financing options for Agri Logistics Firms
Data by Venture Intelligence shows that PE firms have invested INR 940 crores in the agribusiness sector in the last three years. Companies functioning in the domain of agri logistics and cold chain are looking forward to raise 15-100 crore. This optimism stems from the fact that revenue growth for these companies is between 20-100% annually. The capital is needed to scale up operations. This sector suffers from basic problems as most of them are family run and hence not open to outside control. Also even though the growth in high, gross margins range only from 5-6%. Increased domain expertise and technical knowledge will reduce these problems.