Agriculture linkages for improving food value chain performance

Rajat K. Baisya

Processed food industry suffers from cost disadvantage. The modern trade retailers are trying to improve the supply chain efficiency and are forging alliance with the farming community.

In spite of having limitations in our infrastructure, modern trade retailers as well as new format cash & carry operators like Metro are desperately trying to bring in improvement in the supply chain efficiency. They want to compete in market place with small retailers to give better value for money for the staples and grocery products as well as for fresh produces. Depending on the size of the store and also number of stores that they own as a cluster in a particular territory big retailers are trying many options to build linkages with the farmers. The current practice of procurement of fresh fruits and vegetables is through auction of the stock that farmers bring everyday in the designated market controlled by state agricultural marketing corporation. Only the members with valid license can participate in these auctions everyday. The modern trade retailers participate in this market to procure their daily requirement through middleman who takes some commission to provide this service. For example, Hyper city in Mumbai who has two large (about 150000 sq ft of floor area) stores – one in Malad and the other is in Navi Mumbai (Vashi) owned by Rahejas follows this method to bring in stock at the stores premises everyday in the early hours to clean, grade and pack the stock before these are put for sale at the stores premises. It has been said that when they started the operation the losses were up to 35%, which gradually came down to about 20-25% now. Over a period they have gained experience and now they are able to place order on the middleman well in advance for purchase through out the month on pre-agreed quantity and price. They have gained enough experience to take such decisions on quantity and price over a large variety of fresh produce for a month's requirement. The stocks are delivered early morning at the back room facilities of the store for cleaning, grading and packing. Bharti Wal-Mart, which has set up six stores in Ludhiana, on the other hand, takes the cleaned, graded and packed stock from the licensed vendor based on predetermined and agreed quantity and price valid for short term and to be revised after experiencing the actual performance of earlier fortnight of the store as well the price movement in the market.

The success of any business depends on its ability to produce products at a lower cost in relation to its competition and when in these days competition is from global players cost management is a big issue. Our processed food industry suffers from cost disadvantage particularly for the basic agro- inputs, the cost of which is higher and also fluctuates because of high incidence of spoilage as well as for the poor infrastructure. Better linkage with the farmers will help to solve this situation. The modern trade retailers are trying to improve the supply chain efficiency and are forging alliance with the farming community. Another set of such initiatives is community and cooperative farming bringing large acreage under one management control to improve the farm level productivity. We have two key tasks in hand to manage here. We need to improve farm level productivity and we also need to establish a linkage between farmers and industry. Producers' organization models such as co-operatives are established to provide members with economic benefits in terms of access to dynamic markets. This is what we can call a producer driven model. They have had a mixed record of performance in terms of economic benefits to the producers, but collective action remains an important strategy for the small and marginal farmers to get an opportunity to participate in an emerging modern markets. Steps to improve the effectiveness of producer organizations in providing business-oriented services are thus critical to their growth and prosperity.

Buyer driven models will seek efficiencies in the value chain for the benefit of the processing and retail chain. These will have elements of bringing in more effectiveness in the entire value chain and even small farmers can also become a part of that linkage. Contract farming has been used by businesses successfully to link small producers to modern markets where capital, technology and market access constitute key limiting factors. There are therefore, key advantages when these linkages are established by the buyers rather than farmers forming cooperatives to have collective bargaining power. We have seen the new models that are emerging in terms of rural retailing, which has attempted to organize this trade. For example, Hariyali Kissan Bazaar, is emerging fast as a new model models of such linkage. If we accept that rural consumers are also poor then this model uses what we call 'bottom of the pyramid' approach for integrating poor producers with poor consumers bringing in great deal of efficiency for both ends of the value chain. Besides, working with small farmers is also a means to build community goodwill giving a sustainable opportunity for the retailers. The issues of antagonism and suspicion of traders involved in the game as experienced by large retail players will not get much support of the political system if from the linkage small farmers are also benefited.

The intermediaries playing the role of service providers to bring in the linkage between the producers and markers often play games to hold the price line to their advantage. This is another model largely in place at present. But this model will soon be replaced by the more effective alternatives that the farmers and businesses are experimenting with. We thus have basically three models- producer driven, buyer driven and middlemen driven. With the emergence of buyer driven models the middlemen will have to find different role to play and essentially that has to be that of a knowledge provider in the entire linkage.

The cumulative effect of the initiatives taken by the players in the modern retail will be much larger if there are skill-sets available. These initiatives will also help creation of farmer owned rural businesses. Several reviews of successful farmer owned rural businesses, farmer market linkages and farm-industry linkages reveal that there is an urgent need to skill development in the following areas:

  • Market linkages for goods and services
  • Internal and bridging social capital
  • Professional business and technical management capabilities

But development of these skills requires access to effective support and financial services, alliances with other actors in the chain and an enabling environment. Other imperatives will include the policies to improve roads and marketing infrastructure, which is essential in facilitating farmers’ participation in modern marketing channels. Relevant public policies to maintain a competitive market and to oversee the working of contract laws and contractual enforcement are also central guiding principles for providing an enabling environment. Recent work of the World Bank on agricultural innovation system identifies a range of options for the public sector to support market linkages and knowledge management for innovation.

The nature of the business models for linking farmers and small businesses with modern markets and agro industries is one of the most important determinants of how value is created or lost by supply chain actors including small holders of farmland. Effective business models really help farmers and other actors in the supply chain by building alliances and linkages by all participants in the value chain. This however, does not happen automatically. Sustained level effort from all stakeholders can only make it possible. Together then additional value will be created, captured and delivered to all to share.

-- This article was first published in "Processed Food Industry" monthly magazine.




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