What’s the Matter with Small Biz?

The following is a guest post from Robin Bose.

There’s a truism that small businesses are the backbone of the American economy. I happen to think it’s true that small businesses make local economics more resilient to shocks and changes in the overall mix of market forces. If we accept that, then we should all be a little worried. A mildly alarming study The Brookings Institution published shows a 30 year decline in what the US census calls “new firm formation” (i.e., baby businesses getting formed) accompanied by no real change in “firm exits” (small business owners closing up shop). Some surprising highlights:

  • Troubling 30 year secular decline across multiple business cycles and political administrations
  • Trend is prevalent across all 50 states and all but a few of 360+ metros
  • No industry (not even high tech) has withstood the decline except financial services

I made a little slideshow pointing out some of the data the Brookings Institution used to make the case, as well as some of the reactions in the media trying to explain why this is happening. Will try to follow up with a post on my thoughts — feel free to leave thoughtful ramblings on why you think it’s happening.

Sustainable Approaches to Reducing Food Waste in India

About a year ago I spent a month in India working on an MIT research project focused on food waste with a classmate and close friend, Paul Artiuch. Throughout that month, we blogged extensively about what we learned both on the MIT Public Service Center website and on this site. Here’s a summary of what we wrote:

1. Battling Food Waste in India
2. More on Azadpur Mandi
3. India’s Cold Storage Capacity
4. A Look at India’s Agricultural Supply Chains
5. The Punjab Potato Party
6. India’s Grain Storage Problem
7. India’s Lack of Food Processing
8. Smaller Markets in Rajasthan
9. Four Problems with India’s Food Supply Systems
10. Pune: A (Nearly) Waste-Free City

Since we returned, we’ve generally received an email or two a week from researchers who are working on similar initiates and are interested in learning more about what we did and what we found. It’s great to see that the time we spent to understand the problem and more specifically the unique dynamics of food waste in India turned out to be a useful investment. Our main goal was to complete some ground-level research that others who might be interested in starting a business, NGO, or more extensive research initiative could build on.

The topic has recently gotten quite a bit of media attention, as a new comprehensive study on global food waste was just completed by the UK’s Institution of Mechanical Engineers. There’s a great article on it here, and WonkBlog had a nice post on the topic here.

Paul and I have been sending out a report we put together on the topic to anyone who contacts us asking for more information. Given the number of people who are interested in learning more, we decided it makes sense to just publish the report online. So here it is: Sustainable Approaches to Reducing Food Waste in India.

As always, if you have any questions, feel free to contact Paul or me.

Pune: A (Nearly) Waste-Free City

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

January 26, 2012

Paul Artiuch and Sam 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. They will be sharing their project scope and some of their findings in this blog series.

Until now, we’ve spent the majority of our time exploring upstream agricultural supply chains – learning about what happens to food between farms and markets, before it reaches end consumers. Unlike many western countries, Indian consumers waste remarkably little food, as a use is found for nearly all left-overs and food scraps. However, this doesn’t mean that there’s no waste, and Pune, a four million person city three hours southeast of Mumbai, is implementing an innovative initiative to change that.

The other day we spent our morning with Santosh Gondhalekar, an engineer, energy expert, and founder of a bio-energy start-up company, Gangotree Eco Technologies. We had coffee with Mr. Gondhalekar in a garden outside his office, while he enthusiastically described how Pune is on its way to being India’s first waste-free city.

Each day, Pune generates about 1,400 tons of waste – 800 tons of organic waste and 600 tons of dry waste (e.g., paper, plastic, glass, and metals). In addition to the city’s municipal waste collection agency, Pune also has a sizable waste-picking community, with over 2,000 individuals who work full time as part of a cooperative to collect and sort the city’s waste. Nearly all of the dry waste has value so it gets sorted out by the waste pickers before being sold to recycling companies. The organic waste remains, and historically has been placed in a municipal dump.

Just a few years ago, the Pune Municipal Corporation engaged in a number of public-private partnerships to extract value from this organic waste. Here’s how it works: the city puts up the required capital to build bio-digestion facilities that can convert organic waste to electricity. Private companies then operate the facilities, selling the electricity back to the city to be used to power street lights. Excluding the upfront capital costs, the operation is profitable for the private firms. And for the time being, the city is willing to invest the capital, essentially subsidizing the projects, as they reduce the city’s waste burden, lowering the cost of maintaining municipal dump sites.

Currently 10 of these bio-digestion plants are operational, each converting five tons of organic waste to electricity every day. Mr. Gondhalekar took us to one of the sites, where we got to see exactly how the process works.

Each morning, city trucks pick up organic waste, primarily from the city’s hotels, and deliver it to the bio-digestion facilities. The hotels are required by law to pay a fee for this service, which generally covers the transportation costs. Once the waste arrives on site, waste pickers sort it to ensure that it’s 100% organic as other inputs could disrupt the bio-digestion process. The waste, or feedstock, is then chopped up and put into the bio-digester, where bacteria converts it to methane and compost. At the end of the day, the gas is scrubbed to convert it to 99% methane, and then burned in a generator that creates electricity. The compost is given to local farmers.

So far the initiative has been very successful, and there are plans to have 20 additional plants operational by the end of 2012. Pune has 144 city wards, and if each ward had its own bio-digester, the city would be able to extract electricity from all of its organic waste.

Mr. Gondhalekar has been involved with the planning and execution of these projects, and showed his enthusiasm for the initiative’s success. However, his company, Gangotree Eco Technologies, is working a new project he finds even more promising. His plan is to convert municipal organic waste to what he calls green coal.

Green coal has been around for quite some time, and is essentially compressed bio mass that can be burned in place of coal in furnaces and power generators. It’s an effective substitute for coal, and large companies including Cadbury and Coca-Cola have recently converted furnaces in some of their Indian plants to now use 100% green coal. Historically, it’s been made from farm waste – inedible husks and stalks that are left over after harvests.

Gangotree Enterpises has developed a proprietary technology to make green coal from municipal organic waste, the same inputs used in the city’s bio-digesters. This feedstock is easier to acquire than farm waste, and transportation costs are lower since cities are geographically concentrated. And the economics are compelling: the upfront capital costs are half those of a bio-digester, and the green coal pellets can be sold for three times the value of methane. This means that green coal plants should be profitable, even without any capital investment subsidies from the city.

Mr. Gondhalekar told us that his firm’s pilot plant is nearly finished, and Gangotree Eco Technologies is planning to license the technology, using a franchising model, to businesses in the region. Between the bio-digester expansion and Gangotree’s green coal initiative, Mr. Gondhalekar is optimistic that Pune can be a nearly waste-free city, and believes this model could work in many other parts of India as well.

It’s clear, however, that while these types of projects offer promising methods to reduce waste in countries like India, the economics would not work in developed countries. The reason is simple: both the bio-digestion and green coal models rely on cheap labor to collect, sort, and process the organic waste. In developed countries, labor can cost twenty times as much as in India, which would prevent similar initiatives from being economically viable. For now, however, Gangotree Eco Technologies has plenty of work to do in India.

Large bricks of green coal:

Mr. Gondhalekar holds a green coal pellet:

One of Pune’s five ton bio-digestors:

This generators runs on the methane created by the plant:

Sam and Paul stand with Mr. Gondhalekar in front of the methane tank:

Four Problems with India’s Food Supply Systems

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

January 24, 2012

Paul Artiuch and Sam 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. They will be sharing their project scope and some of their findings in this blog series.

We’ve spent the past three weeks in India researching agricultural supply chains to see if we could uncover the reasons why an estimated 30-40% of food grown in the country goes to waste. Over this time we’ve had a chance to speak with many stakeholders to gain their perspectives on the issue. Not surprisingly, the landscape that’s emerged is quite complex. At the risk of oversimplifying some of India’s largest agricultural challenges, we’ve outlined four of the main problem areas.

1. Infrastructure
The infrastructure challenges look different depending on both the region and crop grown. We spent time in Punjab and Haryana, where much of the country’s grain is grown, and found the roads to be in reasonably good condition. The close proximity to a major market, greater Delhi, also makes transportation logistics relatively simple.

However, storage is a serious issue. As we mentioned in a previous post, the government purchases and stores a large proportion of each year’s grain crops to be distributed later as part of public programs. Since the country lacks modern storage infrastructure such as silos, the grain is stored outside under plastic tarps, which provides little protection from humidity and pests. As a result, crops often spoil before they can be moved to other parts of the country for distribution.

In more remote parts of India, where transportation infrastructure is problematic, there’s often no effective means to transport crops to market in the first place. Poor roads, a lack of tractors and trucks, and long distances to city markets collectively make it difficult for farmers to extract fair prices. Further, the extra cost of getting to market means that in bumper crop seasons, when prices fall, it’s often uneconomical to harvest in the first place. As a result, crops are left to spoil in the field.

Sam and Paul with two Professors from Punjab Agricultural University:

2. Government Purchase and Distribution Schemes
Bureaucracy and corruption are well known problems in India and food supply systems are not immune. As we mentioned in a previous post, the Indian government buys certain food products at set prices and distributes them to the poor through ration shops. This massive program involves a number of government agencies and intermediaries. Farmers and Commission Agents told us that corrupt officials running storage depots often rig weighing scales to indicate less grain coming in, siphoning off the excess to the gray or black markets. We also heard that officials will sometimes allow, and then over-report, wastage in an effort to sell the excess supply. Similar issues arise during transport when portions of shipments have been known to go missing.

Most of the farmers we’ve spoken with were quite cynical about the government’s role in assuring food safety while simultaneously helping farmers make ends meet. Many mentioned that the private sector was much better at ensuring that food does not go to waste, as managers typically won’t be able to gain from sustained illicit transactions.

Sam and Paul with Mr. Raina, a farmer in Punjab:

3. Middlemen, Bargaining Power, and Price Transparency
Before food gets from a farmer to a consumer, it’s typically exchanged through a number of intermediaries: Traders buy and ship produce and Commission Agents arrange transactions between farmers and traders. Since the typical farmer only works a couple acres of land and is not an important supplier to Trader and Commission Agents, these middlemen have an advantage in terms of information and bargaining power.

Farmers often won’t know the price for their product before they get to the wholesale market. Once at the market, the Commission Agents can dictate the price as it’s not economical for the farmer to take the goods back in order to wait for a better price. We’ve heard that sometimes Commission Agents will even leave a load of rotting produce near the market as a warning to farmers who do not accept the offered prices. Commission Agents have little incentive to prevent waste as they are compensated based on the total transaction value, without ever taking ownership of the product. Since they generally receive only a 2.5-6% commission on sales, it makes little sense for them to invest time to find traders offering marginally higher prices – they can earn more income by completing many deals as quickly as possible.

Further along the supply chain, traders also have few incentives to minimize waste. It is easier for them to deal with fewer goods at a higher price than more goods at depressed prices. As such, waste often occurs when these middlemen collude to boost prices and lower shipment quantities.

Paul Stands with two Commission Agents:

Traders sit in front of their truck in a marketplace:

4. Price Volatility
All of these factors contribute to price volatility, or extreme and somewhat unpredictable fluctuations, which compounds the waste problem further. When future prices are difficult to estimate, farmers cannot plan to grow the most economically efficient crops. This is problematic for two reasons. First, farmers will often choose to grow crops that were profitable over the past couple seasons. When this herding behavior occurs, prices then plummet, and it becomes uneconomical to harvest. This is what happened to potatoes this year. Secondly, when farmers cannot estimate their income in the coming year, it becomes much more risky to make long term investments that would improve future efficiency.

Peppers in a Rajasthan market:

Broadly speaking, these four themes appear to be significant contributing factors to the food waste problem in India. To address food spoilage, both thoughtful policy and innovative technological/entrepreneurial solutions are needed. With farming and food subsidies being politically sensitive issues in India, any changes or new schemes are viewed with suspicion and take a long time to enact. Technological solutions, such as low cost infrastructure, entrepreneurial initiatives such as affordable methods to process and preserve food, and improved information transparency, may have a greater potential impact, especially if they are disseminated through private sector initiatives. In a subsequent post, we will discuss these ideas.

Smaller Markets in Rajasthan

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

January 23, 2012

Paul Artiuch and Sam 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. They will be sharing their project scope and some of their findings in this blog series.

Earlier this month, we visited Azadpur Mandi, the largest wholesale produce market in Asia. We found that while the marketplace is extraordinarily chaotic, it’s actually quite efficient, and little food goes to waste once it reaches the city. Since then, we’ve spent some time in rural areas, meeting with farmers, commission agents, traders, academics, and start-up companies. It’s become clear that some of the most significant causes of food waste in India include inadequate storage facilities, limited processing capacity, government program inefficiencies, and as well as some economic challenges related to cold storage and capital investment capabilities.

As we made our way down to West India through Rajasthan, we visited the central retail market in Udaipur as well as the wholesale market located at the city’s edge. These regional produce hubs also proved be to well-organized and efficient, and despite a lack of cold storage facilities altogether, there wasn’t much waste to be found.

A man selling some herbs:

Piles of coconuts for sale:

A sugar salesman looks up from his paper:

This family weaves the baskets that are used in the market to hold fruits and vegetables:

Sam stands in the Udaipur market:

Baskets of vegetables in the Udaipur market:

She kept making herself laugh:

This man sells from a fruit cart a block away from the main market:

Sacks of pulses in the marketplace:

Onions recently unloaded from a truck are being prepped for storage:

Guarding the chili peppers:

India’s Lack of Food Processing

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

January 21, 2012

Paul Artiuch and Sam 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. They will be sharing their project scope and some of their findings in this blog series.

Fresh produce, such as fruits and vegetables, generally spoils quickly. As we’ve previously discussed, cold storage is an effective method of extending shelf life. In most cases, however, the cost of such storage is prohibitively expensive in India, stifling investment. Another way to preserve food is to process it into products, including juice, sauce, dried fruit, and jarred/canned vegetables. Processing can extend shelf life from days to years, and in many cases can add value to the product.

Countries such as the United States process as much as 70% of grown food, which is then sold under a variety of brand names in stores and supermarkets. India; however, currently processes less than 2%. This means that the vast majority of crops must be eaten by consumers within days or weeks of harvesting, and if there’s a supply and demand mismatch, prices become volatile and food goes to waste.

We met with International Development Enterprises India (IDE), a non-government organization that works on development projects throughout India. A number of years ago they completed a post-harvest processing project with tribal pineapple farmers in East India. These farmers work in remote areas, and twice each week would haul their pineapples by foot as far as 10 kilometers to the nearest road where they would sell their yield to traders.

Given the circumstances, the farmers didn’t have much bargaining power. If they didn’t sell their pineapples on the spot, they’d have to carry them back home, with the fruits likely spoiling a short time afterwards. The traders knew this, and would collude to offer only below-market prices. As a result, the farmers were barely getting by. We’ve heard that this problem is common across a variety of crops grown in remote regions throughout India.

IDE worked with the farmers for over a year to, among other things, train them to process the fresh pineapples into dried slices and juice. They also helped connect them with organizations that would purchase these items, therefore reducing their reliance on traders. The initiative was effective, but the project’s limited scope demonstrates just how much training and outreach would be required to replicate this success across other product categories.

A pineapple trader shows off his truckload in Rajasthan (unrelated to the IDE project):

On a much larger scale, the Indian government has also stepped in to increase the country’s food processing capacity. It operates a network of markets under the name Mother Dairy, selling both produce and processed items at affordable prices in many communities throughout the country. We visited a Mother Dairy processing plant in North Delhi.

Unfortunately, the head of security wouldn’t let us inside (apparently the process to get a visitor pass involves sending a letter to the Ministry of Food Processing and then, in all likelihood, waiting a few years for a response), but we were able to speak with a senior staff member who met us at the gate:

We learned that the government procures produce from all over the country. They then grade it when it arrives: undamaged goods get processed then sold under the Safal brand, lower quality items are rerouted to other markets, and spoiled food is dumped right into a bio-digester maintained on site which converts the waste to gas and compost.

This all sounds reasonably efficient, but obviously still doesn’t amount to much processing capacity when compared with large processing operations run by food companies such as Kraft or Dole. Scaling these government run organizations may also be an issue as they compete with other government programs for capital, and have less of an incentive than private firms to run efficiently and profitably.

For this reason, among others, the government has recently been considering allowing large international firms to increase their presence in India. These firms have logistics and processing expertise, and would in all likelihood improve India’s supply chain efficiency and food processing capacity. However, the government is worried that such changes could cause disruptions to stakeholders across the supply chain.

India needs to find its own balance between processing and supplying fresh produce. While processing can extend shelf life and therefore help farmers, it seems that only with an injection of foreign capital and expertise will processing capacity increase in a reasonable timeframe. The process may get slowed down by politics as well as the Indian preference for fresh food; however, it’s apparent that processing could go a long way in eliminating some of the waste that currently occurs in Indian supply chains.

India’s Grain Storage Problem

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.

The Punjab Potato Party

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

January 16, 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.

As we mentioned in our post on cold storage, this year there’s an excess supply of potatoes in India, and prices have plummeted. After spending a day speaking with professors at the Punjab Agricultural University, we learned that there tends to be a 4-5 year cycle for the prices of certain staple crops such as potatoes.

When potato prices are high for a season, farmers decide it’s a good idea to abandon existing crops and grow potatoes instead. After all, they seem to be a fairly lucrative crop. The problem is that everybody has the same idea so when the next season comes around, prices fall a little bit. But they’re still profitable, so the farmers double down and grow even more.

By the third year, farmers are barely breaking even, but it can be costly to switch crops, and with hopes that prices will rise, they keep growing potatoes. At this point the market is completely saturated with potatoes, and prices plummet to unprofitable levels. This is what happened throughout India in late 2011. Potatoes were selling at 1 rupee per kilo. At current exchange rates, that’s $0.02 per kilo, or less than a penny per pound.

At those prices, it’s not even worth the cost and effort for farmers to harvest their potato crops, so many choose to let them rot in the fields. Others harvest them, but only in protest of the government, as described in this December 15th article:

Residents and motorists in Jalandhar city and some other parts of Punjab were greatly inconvenienced as farmers dumped hundreds of quintals of potatoes on the streets to lodge their unique protest Thursday against falling prices.

Having announced last week that they would dump their bumper crop in Jalandhar and other places Thursday, the farmers brought nearly 300 tractor-trolleys towards Jalandhar Thursday morning.

With tight police security at all entry points of Jalandhar city being tight, only about 50 tractor trolleys were able to get into the city and started dumping their potato produce on the roads. This led to traffic being affected on these roads. The rest of the trolleys were stopped at the city’s entry points.

Potato growers in Punjab, led by the Jalandhar Potato Growers Association, are protesting against the failure of the government to help them after a bumper crop this year has brought a glut in the market and potatoes are being sold at Rs.1 to Rs.1.50 per kg.

We stopped by a produce marketplace outside Chandigarh in Punjab and, not surprisingly, found a pile of potatoes rotting on the ground next to other fresh produce:

We also came across quite a few potatoes still in the ground in the countryside. The farmer who owns this crop has to decide whether to invest valuable time and resources into harvesting the potatoes. Given the recent drop in prices, it may be more economical or to leave them in the ground and let them go to waste:

This problem is challenging. But it could be at least partially solved through a combination of investment, information dissemination, and thoughtful policy. Investments in food processing – to convert the potatoes into higher-value non-perishable goods such as potato chips – could increase the value of the excess supply while significantly extending shelf life. Additionally, if both the government and farmers had better information about the expected supply of certain crops in the coming season – which could be achieved through a combination of surveying, outreach initiatives, and analysis of historical trends – prices could be estimated within a range, and farmers might have better information when deciding which crops to grow. For the time being, though, the information flow continues to be extraordinarily inefficient, and some are predicting a potato shortage next year as farmers abandon the crop altogether.

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: