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Horticulture Supply Chains in India:A Private Sector Perspective
S Sivakumar, ITC Limited
SASKI & SASSD BBL Seminar @ World BankWashington, 26th March 2007
Composition of Diet is diversifying across consumer groups…
120.810.64.8100.03.81.9Meat,Egg,Fish
30.7117.289.730.620.515.7Milk
148.418.26.4162.54.21.6Fruits
39.390.865.249.753.936.0Vegetables
87.713.77.376.94.62.6Edible Oil
-6.216.617.7-9.26.97.6Pulses
-20.4154.6194.3-10.0132.4147.1Cereal
%Change
1999-2000
1983%Change
1999-2000
1983
Upper Income Group (30%)Lower Income Group (30%)Annual Per Capita Food Consumption (Kg)
Source: Kumar & Mruthyunjaya (2002) using NSSO Data
…induced by
Ø Sustained economic growth and rising per capita incomesüSupporting affordabilityüDemanding quality & safety
Ø Urbanisation and globalisationüSeeking variety & convenience
Production System Responded well…
1.71.81.4Red meat
4.03.02.6Fish
44.435.932.5High-value
3.22.21.6Poultry
17.615.412.9Dairy
17.913.514.0Horticulture
6.78.56.6Oilseeds
26.831.833.0Foodgrains
TE2002/03TE1992/93TE1982/83% Share of VOP
Source: Birthal et al 2006 using CSO data
…despite a predominantly small farmer base
81.0
12.26.8
0.7
2.74
6.97
0
10
20
30
4050
60
70
80
90
Small Medium Large0
1
2
3
4
5
6
7
8
% households land holding (ha)
…with the base continuously expanding
2.3 1.82 1.55 1.41 1.37Ave Size
Source: Gulati (IFPRI) using data from Agricultural Census Division, India
0%
20%
40%
60%
80%
100%
1970-71 1980-81 1990-91 1995-96 2000-01
Area of Holdings
Less than 2 hectares 2-4 hectares 4 and above hectares
0%
20%
40%
60%
80%
100%
1970-71 1980-81 1990-91 1995-96 2000-01
Number of holdings
Indeed, horticulture is more attractivefor small farmers…
Ø e.g. Vegetable crops yield higher and more regular returns, and more labour intensive too
020406080
100120140160180200
Ric
e
Wh
ea
t
So
rgh
um
Mill
ets
Pot
ato
Tom
ato
On
ion
Ca
ulif
low
er
Ca
bb
ag
e
Eg
g P
lan
t
Labour Use Mandays / Ha
Source: Joshi et al (2002)
…but, with some inherent limitations too
Ø Higher capital outlay, requiring access to low-cost credit
Ø Higher food safety & quality standards, requiring more knowledge on crop management
Ø Higher production costs & risks, requiring access to crop / weather insurance
Ø Higher market risks due to product perishability and consequent extreme price volatility, requiring more information & coordination along the value chain with processing / retailing
First, let’s look at the routes forValue Creation in this sector
1. Innovation at the Consumer end of the Chain:ü Product & Purchase experience improvements
through processing, packaging & retail format innovations > delivering variety, quality, food safety, shopping convenience, better shelf life, ready to eat etcð Demand growth, price premiums
2. Efficiency along the whole chain:ü Lower industry cost structures through integration,
coordination, disintermediation, infrastructure investments etcð Pricing flexibility, traceability
Multiple farming models co-exist around the world
and multiple farm-market linking mechanisms
IndependentFarmer
FarmerCooperatives
FarmManagement
CaptiveFarming
Main Driver of the ChainFarmer Corporate
AuctionsContractFarmingeChoupal
Main Linking MechanismFarmer Corporate
Which model & mechanism will work well in which context depends on…
• Type of crop• Intensity of technology• Length of value chain• Stage of market evolution• Risk transfer mechanisms• Social infrastructure• Strength of regulatory system
When will contract farming work?Ø Crop & Market : (No Zero Sum Game)
üNatural Reciprocal Dependency (Produced to special specs, highly perishable, early stages of technology adoption, early stages of market evolution)
üMature Risk Transfer Mechanisms (Price Risk through Derivative Markets, Yield Risk through Crop / Weather Insurance)
Ø Environment : (Regulate opportunity to exploit)
üStrong Regulatory Framework (Create Competition, Quick Dispute Resolution)
üConducive Social Infrastructure (Farmer Awareness Levels i.e. Informed, Bargaining Power i.e. Empowered)
ITC Horti at the Backend:Happy Farmer with Better Quality Produce
•Name: Bhupal Reddy (ITC Lead Farmer near Hyderabad); Land: 2 acre•Farming experience: 20 years•Tomato Yields: Increased from 10-15 ton/acre to 25-30 tons/acre•Saved 40 percent on fertilizer and pesticide costs•Saved 10 % on commissions, etc. paid to mandi traders through direct selling to ITC
Policy Goals for Indian Agriculture
Demand Side
Food & Nutrition Security
Meeting the changing Food Habits
Supply Side
Global Competitiveness
Ecological Sustainability
The Means and The Ends
Effective linkages of production systems with processing and consumption
Employment Generation & Poverty Alleviation
Caveats
Ø Majority of the farmers are small & resource-poorü they need to be inducted in to the new structure
responsibly
Ø Physical infrastructure & new market institutions are still evolvingüThis needs to be appropriately factored in
Ø Understanding of most of the agri business players is insufficientüGovernment has a significant role to play
Reform Agenda
Ø Global Trade Integrationü Imports managed through tariffs
Ø APMC Actü Direct Marketing, Contract Farming, Private Markets
Ø Taxationü Uniform across States & Moderate
Ø Food Lawsü Move away from Recipe to Restriction & Labelling
Ø Risk Managementü Futures & Options, Weather Insurance
Ø Creditü Warehouse Receipt Negotiability, SHG / mFI