Note: This blog post was originally published on the MIT Public Service Center website. It’s the fourth post in a blog series sharing findings from a research project I’m working on throughout the month of January.
January 15, 2012
Paul Artiuch and Sam Kornstein are graduate students at the MIT Sloan School of Management. Throughout the month of January they are researching market-oriented approaches to reducing agricultural food waste in India. They will be sharing their project scope and some of their findings in this blog series.
Over the past week, we’ve learned quite a bit about how food gets from farmers’ fields all over India to the plates of the country’s 1.2 billion people. What struck us most is the level of fragmentation across the supply chain, which hinders the country’s ability to plan and quickly make adjustments to the system when necessary. These challenges, coupled with the importance of India’s agricultural sector in feeding the population, have compelled the government to step in and regulate parts of the system. Sometimes this is a good thing – government programs provide food for millions of low-income families – however, these government programs can also be extraordinarily inefficient and wasteful, which we’ll discuss at length in later posts. In the meantime, we thought we’d share a brief overview of how the system works, which will hopefully provide some useful context for subsequent entries.
Agriculture in India contributes to just over 20% of the country’s GDP, but provides employment to over 50% of the population. Further, most land holdings are very small – averaging around just a couple acres – and are shrinking as properties are passed down and divided among children in subsequent generations. As a comparison, an average U.S. farm is over 400 acres. This lack of scale makes it difficult for the small farmers to invest in modern equipment and infrastructure, and as a result, most struggle to make ends meet.
There are two main types of agricultural supply chains in India – one which is highly-regulated by the government and another that is run by the private sector. In the 1960s, due to concerns over food security, the Indian government created special rules for five key agricultural products – wheat, rice, pulses, sugar and edible oils. Wheat is managed particularly closely as it serves as the majority of the government’s 55 million ton safety stock of food. Other products, such as fruits and vegetables, are generally unregulated and are handled almost entirely by the private sector. Both chains, not surprisingly, start on the farm.
Nearly all farmers sell their produce in government controlled markets, which are often just a few kilometers up the street from the farms. The transactions are handled predominantly by Commission Agents who negotiate prices with the farmers. The Commission Agents don’t own the produce at any point, but rather find a buyer, usually the government or a produce trader, and then charge a percentage commission which generally ranges from 2.5-6% of the transaction value.
The Commission Agents also often provide financing for the farmer throughout the growing period. This financing structure is particularly important because most farmers can’t get credit in excess of the value of their next harvest. Since most farmers have so little land, this means they can rarely afford to make investments that will increase efficiency and reduce waste.
At this point the supply chain splits between the government and the private sector. If the government is buying a regulated crop, the Food Corporation of India will transact with the Commission Agent at a regulated minimum support price. The Food Corporation of India, a government body, is by far the largest purchaser of wheat, as well as many of the other key agricultural products, which it stores and distributes to impoverished populations through the Public Distribution System. Most of the regulated produce is grown in Punjab and Hariana and moved by truck or train to the rest of the country. The Public Distribution System operates nearly half a million retail markets where government ration cards must be presented to receive subsidized food.
The private sector supply chain, which moves mostly fruits and vegetables, has traditionally been much more local and highly fragmented, especially on the retail side. The movement of a product from a farm to a market often involves 4-5 middlemen. The Commission Agents generally sell to one or more traders who arrange for the produce to be shipped to city wholesale markets. Once there, it is sold yet again to local retailers, who then sell the produce to consumers. Due to the lack of cold storage mentioned in the prior post, any disruption of this sequence can result in tons of food spoiling.
The recent emergence of larger food companies, often headquartered in other countries, is beginning to change this through direct purchases from farmers as well as investment in modern processing and logistics. However, these participants still play a minor role in the overall supply chain, as the government limits and regulates foreign direct investment in India.