Authored by: Avishek Gupta
The primary and persistent problem of the Food and Agriculture sector in India is the inefficiency caused due to the information asymmetry that exists at various levels. While on the buyer’s end there exists an uncertainty of what quality produce they will be getting for the price being paid; on the farmer’s end, he/she is worried about the price they will be getting for the cultivated crop sold. Both of these insecurities make the entire Agri supply chain to be more worried about supply-demand matching at the lowest price leading to a suboptimal efficiency. The focus should rather be on predictable and quality-based pricing of produce. The question is, how do we get there?
Popular recommendations on the Agri sector seem to imply that farmers need a lot of advice to do the basic job of cultivation well. However, the truth is that a Farmer is a specialist in cultivation but with very little resources and safeguards. Food and Agri companies, on the other side, are specialists at converting Agri commodities to value-added products for the appropriate consumers; but they do not control production and it has been practically difficult for them to work directly with farmers.
With both parties skilled in their respective areas, the issue arises during the communication and engagement between the two. Hence, in spite of several policy initiatives, we continue to have low farmer incomes and unmet consumer needs. If we are able to offer the right resource options and create a safety net around what the farmer cultivates, the farmer will very easily be able to deliver high-quality produce. At the same time, if we are able to enable the food & agribusiness companies to establish predictability of quality of supplies, the agribusinesses will easily be able to offer the best prices for what they procure.
However, both the Agribusiness corporations and the farmers are not specialised in making this happen, on their own, given the severity and depth of structural challenges. The puzzle has to be broken down into manageable pieces and solved. It is here that Farmer Owned Companies or Farmer Producer Organizations (FPOs) and Agtech companies, together, fill key missing pieces in this supply chain puzzle.
FPOs help in aggregating small farmers to voice-out and strengthen their bargaining powers as compared to an individual farmer. At the same time, they also make it easier for corporates/buyers to have direct conversations with farmers. Through FPOs farmers can have access to high-quality inputs/ information and trade directly with reseller companies/ large processors to get the maximum value out of their produce.
Agritech start-ups play a crucial role in filling the void of information asymmetry both on the upstream (supplies to farmers) and downstream (market linkage) side. With the advent of technology, availability of networks in remote rural areas, penetration of smartphones/tablets, cloud-based internet services, remote sensing possibilities, Agritech companies have an opportunity to address concerns in the agriculture sector, specifically faced by smallholders.
Recent regulatory changes/recommendations removing the monopoly of APMCs and stock limits under the Essential Commodities Act and policy push towards FPOs has created an opportunity which if utilised well by FPOs, Agritech startups and Agribusiness companies, India will be the food basket of the world with farming being a lucrative opportunity.
To leverage the benefit of aggregation that FPOs bring, there is a need to shift the primary focus of the entire supply from a demand-supply mapping context to a quality-based pricing context. In that context, Agtech companies can play the following roles:
There are various instances when bad quality gets sold at a higher price due to scarcity; and due to oversupply, good quality produce gets sold at a lower price. Agritech startups can play a significant role by making it easy to check and communicate quality across different key points in the supply chain, from collection/mandi centres to consumers. This will require not just the startups developing easy and dependable quality testing solutions but also working with the industry and regulators to identify what can be considered as standard tests for quality. A lot of these tests exist even today.
The challenge is to make those tests possible to be conducted remotely while ensuring that the results cannot be tampered with. The ability to measure and communicate quality will enable the supply chain to drive incentives for everybody in the supply chain to focus on quality. Hence, not only will the farmer focus on improving the quality or the uniformity of the crop that is produced, the other players in the supply chain will be incentivized to ensure less damage while in transit by adopting good practices presenting wastage. If this happens, pricing will not solely be based on supply chain demand-supply situations. Buyers will get the product at a price reflecting the quality of the produce and farmers will get their earnings as per their quality of produce.
Creating the safety net
In order for farmers to produce high-quality in-demand crops with lower risks and higher returns, farmers need to be provided with valuable information and supplies that range from seeds/fertilisers, tools, weather information, insurance etc. The Agritech companies need to tailor a bouquet of services/information which will be unbiased and will be easily accessible for the farmers. These services will in turn give rise to a confident and smart farmer who will not run into the risk of putting all of his savings at stake while being able to experiment with newer higher value crops that require higher investment. If done well, the farmer’s high dependence for advice on the biased sources (eg: input shops) will come down leading to potentially better earnings for the farmers. This is easier said than done. The farmers exist in a well-knit system and the dependencies are often valuable beyond just agricultural purposes. Moving them out of that is both a social and a political challenge. The government-driven extension services have not worked well in most places indicating the difficulty of doing this. However, with technology, this is more possible today than it was earlier.
Creating Quality specific supply “Lanes”
As an extension of the above point on the safety net, farmers need to have the assurance that whatever they produce will be procured in one place. At the same time, no matter what we do, there will always be different quality grades of produce within the same lot. Truth is, not all quality grades are suitable for all supply chains and each type of quality grade needs to be sent to the right supply chain to get the best price. Eg: An ill-shaped tomato will not be suitable for a fresh food retail chain but its demand will be as high as normal produce for the HORECA (Hotel, Restaurant, and Cafe) segment.
So, like in high-speed superhighways, there are dedicated lanes for different types of vehicles, Agritech companies connecting farmers to markets need to be able to create these quality “lanes” in agricultural superhighways to enable faster movement of produce without wastage. Agritech companies linking farmers with agribusiness companies or consumers, need to give the assurance of being able to procure everything that a farmer produces and then being able to offer the quality based price depending upon the quality “lane'' that the produce got moved to.
Once again, it is all easier said than done. FPOs are a great concept but difficult to implement. Entities like Amul (a farmer-owned co-operative) took several years of focused policy support and sophisticated-cum-patient professional management to see the benefits that we see today. The aggregation benefits of FPOs will play out only with patience and focused support and while Agritech companies can make it easier with the introduction of technology, the local social and political factors will play a significant role. It would be foolish to expect that by building a complex software application with AI/ML, all these problems can be solved or that these solutions will shape up in 3-5 years.
The food and agriculture supply chain is inefficient because of valid reasons and while technology is a great enabler, Agritech companies need to have a solid grip and strategy around the social and infrastructure issues. This is something that both Agritech companies and investors need to understand. At the cost of sounding alarmist, the “Move fast and break things” approach doesn’t work for building the bridge in food & agriculture, “Move steady and build things” works. Do you have the patience to build the bridge?
—Avishek Gupta is Investment Director, Caspian Debt. The views expressed are personal