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Supply Chains for the Agricultural Produce: Integration holds the key

Procyon Mukherjee, Supply Chain Leader, Author & Founder Prep-Gen
26th December, 2020

Procyon Mukherjee, Supply Chain Leader, Author & Founder Prep-Gen

If you think the cost of agricultural produce is entrenched in the productivity of land, equipment and labor, or in the use of technology or supplements as in organic or inorganic farming, you have missed out the wood for the trees. From disjointed grower networks to end consumer it is the most complex supply chain one can imagine. This is exactly where India’s story remains the most challenging.

In fact the bulk of costs (logistics plus wastes) in agricultural produce are embedded in the supply chain that moves stuff from grower of basic crop to Mandis (local markets) where the basic crop gets sold to the processors and finally to the wholesalers and distributors (including consolidators and exporters).

There is constant friction between all these actors as there is no integrated or coordinated or collaborative approach to problem solving, the fundamental driver of supply chain efficiencies and costs. The growers are segregated into small producers, farmer groups or cooperatives to corporations. The intermediaries could include organized cooperatives or groups to plain individual entities. The processors could be corporations or small individual owners as are the distributors and wholesalers or retailers.

The solutions as in minimum support price also leaves many puzzles and may not be the solution; procurement quota systems by states also do not solve all challenges.

To top it all comes the role of policy that subsidizes one produce against the other, whereas demand and supply could be a completely different story. In absence of information, it is an uphill task for any of the constituencies to attempt a price recovery through the market forces of competition. The solutions as in minimum support price also leaves many puzzles and may not be the solution; procurement quota systems by states also do not solve all challenges.

This is a story of every country that has gone through the pains of slowly transforming itself from basic farming to agri-industrialization. India is currently in a transformation path and must attempt to look at supply chain management with a holistic view to centralize and create collaborative structures for better management of supply at optimal costs.

Let me take the easiest of examples, that of rice, in fact the sugarcane or wheat story is the same. The supply chain management of rice in India is the most de-centralized and uncoordinated attempt to match supply with demand where neither the supply information is known to the constituents nor the demand (including seasonal peaks and valleys) could be ascertained with a reasonable degree of accuracy.

The small Indian rice farmer has moved up the productivity frontier in incremental steps starting with 750 kg per hectares to 2250 kg per hectare, although it still remains far lower than the best. The amount of land under cultivation has grown phenomenally and is the highest in the world, far higher than China, although the total produce is much lower. This availability of land for rice cultivation has been prompted by policies that apparently incentivize rice over vegetables or other cash crops and is also the reason why rice in the average consumption basket is one of the highest in the world.

The farmer has to move his paddy to the Mundy, the intermediary would then aggregate to move it to the Rice Mills and finally from there the packed rice would be hitting the markets through distributors and wholesalers, which could be far and out in a country like India.

Matching supply with demand, if that is the fundamental purpose of supply chain management, then it is lost in the absence of information throughout the chain as the markets are not efficient in every section of the chain.

The value of farm produce needs to be first well distributed across the supply chain, followed by better information networks and capital allocation systems that would work on supply contracts that would be based on risk sharing.

If processors are near the potential markets, they are far away from the centers of production. This is an act of centralized coordination and collaboration that we have missed out. This is where integrated supply chains score over the traditional ones as logistics costs can be optimized from one milk-run to the other and the role of aggregation is paramount. Here both the first mile and the last mile in terms of aggregation efficiencies gain when integrated supply chains set out to work.

The payment systems and credit in the supply chain is the next big hurdle to handle and the losses and leakages in this uncoordinated approach leaves a lot to be desired. In absence of contracts, the credit and payment systems also have not progressed much. The modern supply chains of the world work on reducing number of intermediaries as well as number of levels, it is mostly direct business between farmer groups and super market chains, where processing is where the value add gets concentrated and that is what drives negotiating leverage.

India can hardly think of moving from traditional disjointed systems to such an integrated approach, but may be could learn from countries like Thailand or Vietnam, in their step by step approach to integration.

The value of farm produce needs to be first well distributed across the supply chain, followed by better information networks and capital allocation systems that would work on supply contracts that would be based on risk sharing. The icing on the cake would then be provided by centralized logistics systems that would create the optimum infrastructure by phasing out inefficient low quality high cost modes.

The Government must act to facilitate private investments such that ineffective management of trade barriers and quotas are acted on. Evolution of the right industry structure must be the next step that would act to dissuade unfair practices and collusion.

Inter-connectedness to the global supply chains is the final step in the journey.

When we talk of efficient supply chains in farm produce we must start with the market structure itself where currently we have small farmers and small trades who trade based on spot prices. This must move through vertical integration into farmer groups who create supply contracts with some pricing arrangement that is long term. The exchange relationship is crucial for success and as the contracts move to long term from short term, it helps to lock in both sides with a much firmer plan than the current volatility. Moving from public R&D to private R&D is the next step in the process that makes the farm produce move to the higher levels of differentiation.

The farmer by producing the same stuff to the same Mundi at the same spot price would never know the right stuff to produce or sell; it could well be that chances of price recovery actually existed but remained unknown to him. The logistics of farm produce cannot be left to each player organizing the activity; the world over centralization of logistics has been the only way to reduce logistics cost to the final end consumer.

As the world is moving towards more Safe food, Healthy food, Food as the medicine, Climate change concern, Environmental concern, Animal Welfare concern, it is only natural that farm produce is at the cusp of a phenomenal transformation, where rapid industrialization can happen only if we could work on the making the supply chain efficient. India cannot afford to miss out in this journey, especially when it is just about to take off in the logistics space with better infrastructure possibilities. Integrated supply chain management of farm produce is the only way the full value can be distributed right across the chain. ♦♦♦♦♦

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