Note: This blog post was originally published on the MIT Public Service Center website. It’s the sixth post in a blog series sharing findings from a research project I’m working on throughout the month of January.
January 18, 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.
India is one of the largest wheat producers in the world, with the most recent harvest bringing in over 80 million tons of grain. As we’ve mentioned in previous posts, the government buys a significant portion of each year’s harvest and distributes it to the poor through ration shops. As part of this program, the government also maintains a grain reserve as a food security measure, and provides farmers with purchase guarantees at a minimum support price. As a result, massive stocks of wheat are kept in government storage every year – 17 million tons was held by the program’s agency, the Food Corporation of India, at the beginning of 2011.
The inadequacy of government operated storage is often cited in the media as a major cause of food waste in the country. The Food Corporation of India has little modern storage such as grain silos, and instead maintains its stock of grains in outdoor depots scattered throughout the country.
As we drove through the countryside of Punjab and Haryana we saw hundreds of government-run grain storage compounds. We expected to see warehouses or at least covered enclosures, but instead most commonly observed 20 foot stacks of 50kg burlap sacks sitting in parking lots and covered with plastic tarps to keep out the rain. Most facilities are open air and offer no protection from humidity, birds or pests – common food waste causes. In many cases, the tarps don’t even fully cover the grain, and we’ve heard reports of entire grain depots spoiling after being hit by an unexpected rainstorm.
We did see one government warehouse near a local wholesale market which had a roof, but that was the extent of the protection.
Experts estimate that as much as 20% of the grain stored in these conditions goes to waste. The absolute wastage is worst in years when free market prices collapse and the government is forced to buy excess supply at the minimum support price.
When interviewing farmers and Commission Agents, we were also told many stories of corruption. Although unverified, we heard from cynical farmers about a supposedly well-known scheme: corrupt government depot operators will sell a portion of the stored grain on the black market, and then intentionally allow a portion to rot, covering up the illicit sale by over reporting the wastage.
The government, pressured by recent food waste scandals and increased media attention, is slowly beginning to act. One promising model is to build modern storage infrastructure with the help of the private sector. One recent project, arranged by the World Bank’s International Finance Corporation (IFC), recently added 50,000 tons of modern silo storage capacity. The facility was built and will be operated by a private company, and to facilitate the deal, the government of Punjab agreed to a set storage price for a decade, guaranteeing the company a return on its capital.
Experts at IFC told us that the public-private partnership model to build silos is economically viable if storage losses exceed 2.1% annually, far below current loss estimates. However, the government seems to be hesitant to move forward and often maintains that little to no waste occurs in their facilities.
Another hurdle to these types of projects is attracting private partners, as many prospects dislike working with government agencies such as the Food Corporation of India or their state equivalents. It’s not uncommon for these agencies to fall behind on their bills, and there would be little recourse for the companies who operate the facilities. To overcome this particular challenge, state governments are beginning to step in to guarantee the payments.
Notwithstanding these problems, the public-private partnership model to improve storage facilities is a promising solution, and additional deals are in the works. Other potential solutions include limiting the amount that the government purchases, and therefore has to store, by adjusting the minimum support price, and allowing for more exports in bumper years when there’s excess supply. However, all of these options require effective policy changes, and most of the supply chain participants we’ve spoken with remain skeptical, at least in the near-term.