A Look at India’s Agricultural Supply Chains

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.

Kotla market in Delhi:

A truck carries a shipment of wheat from a wholesale market:

A cow stands in the street outside a marketplace:

A man sells produce in a community market:

Police Corruption in Delhi

There’s quite a bit of security in Delhi. I can’t comment on its effectiveness, but it’s definitely all over the place. When you drive around the city, every couple kilometers or so you’ll come across a police checkpoint where a few officers stand and spot check vehicles for, presumably, anything suspicious. The checks can range from a look in the window to a more thorough search in the trunk or through any bags that are in the car.

Once the sun goes down, though, the checkpoints seem to serve a different purpose. I’d always heard that India’s a pretty corrupt place, and got to see it first-hand last night.

I was in a car with four other people, and we approached one of the checkpoints. An officer waved us to the side, informing us that he wanted to check our car. Not a problem. We hadn’t done anything wrong. We weren’t speeding, the driver hadn’t consumed a drop of alcohol, etc.

The officer first asked the driver to come out and talk, so he did. Then another officer approached the passenger window and said they wouldn’t be able to let us go because the driver didn’t have his license. The passenger, who is from Delhi by the way, said that they should write us a ticket then. The officer changed the subject. He said he wasn’t sure the car was up to emissions standards, which was another violation. It was a brand new European car. About a year old.

And an emissions standards violation? Don’t get me wrong, I applaud the idea, but this is a city where it’s legal to start bonfires in the street. I’m pretty sure I could dump diesel on a pillow and set it on fire without anyone raising an eyebrow.

Clearly, the officers didn’t want to write us a ticket, but they also wouldn’t let us go. After about 5-10 more minutes of back and forth banter, our friend in the passenger seat paid them off, giving them about 500 rupees (roughly $10). They then walked away and let the driver come back to the car. It turned out he had his license the whole time, which is why they wouldn’t write us a ticket. They had nothing on us, and they could get in trouble for issuing a ticket for nothing. But there’s no proof of them taking a bribe.

After we drove away, I was pretty annoyed at the whole situation. If everyone pays them off, they’ll be more encouraged to keep asking for bribes, which will encourage them to pull more cars over for nonsense violations, and so on. I was convinced there had to be someone we could call to report the incident. Everyone else convinced me that there wasn’t.

Update: Just to clarify, in case it wasn’t clear – my frustration had nothing to do with being stopped or with the amount of money that was paid to the officers. It’s really about trust. Corruption, in most forms, likely slows growth because people can’t trust that laws and agreements will be honored. I wasn’t surprised by the incident, and it was obviously small and meaningless in isolation. But collectively these problems probably add up and result in a broad mistrust of the government. This incident was a symptom of an obviously much larger problem. After all, there a plenty of articles about the challenges created by corruption in India, and the recent anti-corruption measures considered by the Indian congress. So I thought I’d share this small, anecdotal experience.

India’s Cold Storage Capacity

Note: This blog post was originally published on the MIT Public Service Center website. It’s the third post in a blog series sharing findings from a research project I’m working on throughout the month of January.

January 14, 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.

Cold storage facilities, essentially refrigerated warehouses, can reduce agricultural price volatility, helping to minimize food waste and increase income for various supply chain stakeholders. The benefits of cold storage are simple: most types of produce have shelf lives ranging from just a few days to a couple weeks when kept at room temperature. Farmers and traders are forced to quickly get their produce to consumers, even if there’s too much supply in the market. This can result in low prices that often don’t even cover the price of production and transport. In the most extreme cases, when the market is flooded with a particular item, it makes more economic sense for farmers to just let certain crops rot in the field, rather than spend the time and money to harvest them.

Cold storage can extend the shelf life of produce for months or longer, buying farmers and traders valuable time. Fruits and vegetables can be stored while prices are low and there’s little demand, and then released into the market when prices rise again. Since this process regulates supply, it helps stabilize prices over time, which is one of the reasons produce prices in developed countries are less volatile than those in developing countries.

India lacks sufficient cold storage for the majority of the country’s produce. However, in recent years there’ve been significant investments made by both the private sector and the government to increase capacity. While this is a positive trend, enormous challenges remain. We met with two privately owned cold storage trading companies based in Delhi, and learned something interesting. Since cold storage can be so expensive, as it requires capital investments and large amounts of energy, it’s most profitable to use the capacity to store high-value imported goods that are generally consumed by the more affluent customers.

We took a tour of one facility, a giant nine story refrigerated warehouse in North Delhi, and were surprised by what we saw. Imported products such as apples from Washington State, tangerines from China, and kiwis from Italy filled the majority of the shelves. These products sell for as much as fifty times the value of many locally grown products, and as a result, paying to store them to avoid waste and maintain quality makes economic sense. There are exceptions though. One of the firms we met was investing in state of the art cold storage facilities to store and ship Indian-grown apples and other fruits from the foothills of the Himalayas to the rest of the country.

For less expensive products – such as potatoes, onions, and tomatoes – that are prone to rotting and are staples for the majority of the lower income population, the cost of cold storage can exceed the value of the goods. The government has stepped in and subsidized storage in many areas, but this support often doesn’t address the problem.

Potatoes are a perfect example. A couple years ago there was a potato shortage in India, and prices spiked. In response, many farmers grew potatoes in the following seasons, and as a result, there’s now too much supply and prices have plummeted. Many potatoes have ended up in subsidized cold storage facilities; however, in some regions, prices are so low it’s not even worth harvesting them. In protest, many farmers have been leaving piles of rotting potatoes in the streets to show the government their dissatisfaction.

While cold storage has clear potential to reduce food waste, it’s apparent that without innovation, price reductions, thoughtful policy, and subsidies, the storage capacity will not be filled with the low-value crops that are both food staples across India and are also most likely to go to waste.

Paul and Regina stand with boxes of imported fruit in a nine story refrigerator:

Apples shipped from Washington state sit in a cold storage facility in Delhi:

Refrigerated trucks deliver cold produce between locations:

More on Azadpur Mandi

Note: This blog post was originally published on the MIT Public Service Center website. It’s the second post in a blog series sharing findings from a research project I’m working on throughout the month of January.

January 10, 2012

Paul Artiuch and Sam Kornstein are graduate students at the 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.

Soon after arriving in Delhi, we took a walk over to a local market and spoke with a man who runs the community produce stand. We asked him where he buys his fruits and vegetables. “I take my truck to Azadpur Mandi every day at five in the morning,” he said. “Is that where all of Delhi’s markets get their produce?” we responded. “Just about, except for the government-run shops.” We probed a bit more about seasonality, food waste, and prices, but found that his operation is fairly simple, and nearly nothing gets wasted at the retail level. Even if food becomes damaged someone in the community finds a use for it.

Azadpur Mandi turns out to be the largest wholesale produce market in all of Asia. Covering 80 acres in North Delhi, it not only supplies the city and its surrounding communities with fresh produce but also serves as a hub for the rest of India. We took a ride over to Azadpur at the break of dawn the following day, and walked around for a few hours talking to traders, truck drivers and storage managers. There were colorful trucks being unloaded everywhere, stacks of vegetables in bags being stored under tin roofs, and thousands of traders, commission agents, storage vendors and buyers haggling over quality and prices. It was chaotic, and messy, but it all seemed to work even though Azadpur Mandi is significantly over capacity.

We asked people where their produce had come from and found peppers that had traveled 24 hours from Gujarat, chilies that had been hauled for 17 hours from U.P., and onions that were grown only a few hours away. In short, Azadpur Mandi is an aggregation point for produce grown in virtually every corner of India.

Despite its dilapidated appearance, and with thousands of tons of produce moving through it each day, the market was remarkably efficient with minimal edible food waste. The highest quality goods get sold to high end markets, restaurants, or are exported. Medium grade items make their way to markets in less affluent areas. Finally damaged or irregular produce, even if discarded by larger traders, is picked through and sold in push carts on the street. The whole system works quickly enough that it’s rare for food to spoil once it arrives at Azadpur.

There was however quite a bit of inedible food waste generated by the estimated 12,000 tons of produce that moves through the market every day. Once produce shipments are received, leaves, husks, and clippings are typically removed before the items are sold. The approximately 2 000 tons of waste need to be moved from the market daily to make room for new produce to come in. The market operator, a government agency, loads it onto carts and dump the waste into sectioned off enclosures, where cows and dogs pick at it until dump trucks come twice daily to haul the waste off to the city dump.

Here we saw an opportunity. Organic waste can be converted into compost and bio-gas, useful commodities, using a process known as bio-digestion. This is often done on a small scale in villages, and has been successfully completed on a commercial scale in many places around the world, including by the Massachusetts based company Harvest Power. To do this commercially, you need a large, reliable, and constant supply of organic feedstock – exactly what we saw in Azadpur Mandi.

While we found untapped value in the form of an agricultural waste stream, value that could be recognized by communities surrounding wholesale markets, we still haven’t observed the massive quantities of edible food waste that is known to be present along the supply chain. In a few days we’ll be traveling outside the city to some rural parts of Punjab. We’ll be speaking with farmers, traders and logistics companies to see what happens between the field and the arrival of produce at wholesale markets such as Azadpur Mandi.

(See photographs in previous post on Azadpur).

Delhi’s Azadpur Mandi Vegetable Market

Last week, my friend Paul and I explored Delhi’s Azadpur Mandi vegetable market. We were there gathering information for a food waste research project we’re working on, trying to understand where the food comes from, and what happens to it once it arrives. If you’re interested in learning more about our project, check out our recent blog posts on the MIT Public Service Center website.

Azadpur is the largest wholesale vegetable market in all of Asia. It spans 80 acres in North Delhi, and receives over 700 truckloads of produce every day. We learned that the trucks come from all over India, with some trekking 72 hours from the south to drop off their shipments.

It was chaotic. It was overwhelming. It smelled. And yet it was fascinating.

I’ve included some highlights below.

A man with his cabbages:

Corn shelling:

There were lots of cows, just walking around:

A man selling some peppers:

The lemon district:

These guys thought we were from a magazine:

Traders cleaning up cabbage leaves that were pulled off heads that were shipped:

Hundreds of tons of onions are unloaded from a truck and stored in the market:

Garlic storage:

Buy my peppers please:

Organic waste is thrown in this enclosure to be picked up by dump trucks twice a day. This girl is adding garlic husks to the pile:

Cows lighten the burden on the city waste removal service by eating some of the waste before the trucks show up:

A man hauling some cargo across the market:

A man sells bananas to some people outside the market:

Battling Food Waste in India

Note: This blog post was originally published on the MIT Public Service Center website. It’s the first post in a blog series sharing findings from a research project I’m working on throughout the month of January.

January 9, 2012

Paul Artiuch and Samuel Kornstein are graduate students at the MIT Sloan School of Management. Throughout the month of January they are in India researching market-oriented approaches to reducing agricultural food waste.

Last fall, we each participated in the Development Ventures course in MIT’s Media Lab. The objective of the course was to identify ways to leverage for-profit business models to tackle some of the world’s most pressing international development challenges. As we both had an interest in finding ways to reduce or extract value from waste that occurs in the supply chains of many developing countries, we teamed up to think about how we could make an impact. In the process, we learned something staggering: research shows that 20-40% of the food grown in India ends up spoiling before it ever reaches consumers.

Sam Kornstein & Paul Artiuch

This problem isn’t unique to India. Many developing countries struggle to modernize and upgrade their agricultural supply chains to match the efficiency of those found in more advanced economies. Poor road quality, unreliable and expensive electricity, insufficient storage capacity, and uncoordinated logistics make it difficult for many countries to avoid food losses between farms and markets. However, we found India’s challenges to be particularly interesting for two reasons.

First, with one of the largest agricultural sectors in the world and a population exceeding 1.2 billion, India’s farming yield has a meaningful impact on global food-security. Studies suggest that in 2010 as much as 16 million tons of Indian-grown grain was lost to spoilage, enough to feed an estimated 118 million people for a year. Even a small improvement could save lives and stabilize food prices in a country that battles chronic mal-nourishment and double-digit food inflation.

Second, as a result of demographics and legislation that limits farm sizes, India’s agricultural sector is surprisingly fragmented when compared with other countries. The average farmer works with just a couple of acres. This means that while efficiency improvements could benefit farming communities rather than large agricultural corporations; typical farmers don’t have the scale or capital to make necessary technology and infrastructure investments that could bring about these efficiencies. This type of fragmentation occurs further down the supply chain as well with transportation companies, traders and wholesalers.

These two factors inspired us to learn more about what could be done and to think about how new business models or technologies could help address the significant waste and inefficiency that occurs. After speaking with dozens of researchers, start-up companies, and non-profit organizations, we kept hearing the same thing: there just isn’t enough accurate data about the supply chain breakdowns, incentives, and economics to fully understand the nature of the problem. And it doesn’t make sense to try and solve a problem that isn’t fully understood.

So we’ve come to India with the goal of understanding and characterizing the food waste problem. Over the next few weeks, we’ll be speaking with farming communities, traders, market operators, consultants, shipping companies, storage companies, policy-makers, and researchers. We hope to return to MIT at the end of the month with actionable information that can be leveraged by the broader academic and business communities to develop new technologies, appropriately disseminate existing ones, and craft business models that can address this enormous challenge. Over the coming weeks we’ll periodically report back on what we find and look forward to your comments.