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:

Summary
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.

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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 15^th 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.

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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.

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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:

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