Today, I and a few colleagues spoke with a consultant for Metro Cash and Carry India, a agricultural wholesaler, that triggered my desire to write about the difficulties farmers have getting their produce to the marketplace.
Typically, farmers need to transport their produce to mandis, government-run markets, where government agents buy the produce at set prices. The government agents then transport the produce to larger marketplaces (e.g., metro cities) and sell them at a large premium to kirana stores and small groceries. Along the way, farmers incur several costs, including:
1) Transportation of produce to the government-run mandi (often 20-30km away)
2) Taxes (e.g., in Uttar Pradesh 2% mandi tax to have a place in the market, .5% education tax)
3) Bribes – About Rs. 5 per sack according to farmers in this article on Reliance being pushed out of Uttar Pradesh in 2007
Moreover, this distance from the marketplace, and little choice in finding a buyer for bulk produce, translates into farmers receiving payments for their produce 10-15 times below the price paid by urban consumers. The middlemen are the ones earning a nice profit margin, while the farmers struggle.
Interestingly, some private players, such as Metro Cash and Carry and Reliance Fresh, have begun to compete with the existing mandi system by creating a direct route from rural farmers to urban markets. By getting rid of extra distribution layers and buying produce directly from rural farmers at their doorsteps, farmers and end-consumers benefit too. Farmers get a little more for their produce, 10-20% according to the Cash and Carry consultant I spoke to today, and end consumers often receive similar benefits. According to this IIM Bangalore presentation on improving the agricultural distribution system (html version), tomato prices fell about 20% and cauliflower prices by 10% when Cash and Carry entered Bangalore.
However, there are losers in this game too. Small mom and pop shops stand to struggle against big guns like Reliance and Metro, and middle men such as mandi government agents, would lose out too. Maybe because of this fact some state governments, such as Kolkata, have made life difficult for Reliance and Metro. Metro’s Kolkata store was delayed for almost a year due to the state’s Agricultural Produce Committee’s refusal to issue a key produce license, as mentioned in this article.
I am not an agricultural expert, but I hope that the entry of private players, and their efficient supply chains, into the Indian agricultural system thrives and expands. Farmers make more money by working directly with these companies, and hopefully mandis (which will not go away anytime soon!), will run more efficiently to compete with these new players.
To learn more about Metro Cash and Carry Indian operations, check out the two links below:
Interview with James Scott, Metro’s Asia Regional Operating Officer
Metro’s Website in India
I look forward to other people’s thoughts on this issue. I am sure I left out some important points!
7 comments:
Indeed removing middlemen from the supply chain, will improve the efficiency and bring down the price of F&V and in turn give more returns to farmer.
Going by this concept, many of the retailers started running their outlets in India.
But, the true fact is that, majority of the retailers are still procuring from Mandis. None of the organized retailers, following any supply chain in India are making profits.
Middlemen are an important link in the supply chain. We should not forget that even if their are 3 to 4 middlemen in the existing supply chain, still the chain is very efficient. Just ignoring them, will lead to no fruitful result.
A midway model, used by ITC e-choupal exemplifies, how these middlemen, procurer and the farmers all can exist in the same chain and create a win-win situation.
Taking out the middle man from the chain does not guarantee a higher realization of price for the farmers. There is evidence that, some of the newer models of procurement at the village level like Reliance Fresh have not been successful, even though they offer more than the mandi price. Farmer’s Bazaar or Raytu Bazaar in Andhra Pradesh is a new concept of direct marketing between producer and consumer. Terminal markets are running at low capacity utilization even though it offers so much of value addition in terms of grading, processing, storage. The only model which has achieved some measure of success is the ITC e choupal in which the role of the middle man was redefined and not taken out of the chain.
What are the reasons for all these failure?? In these newer models there is no one who takes care of the finance which is critical for the farmer especially the pre harvest finance. The middle man plays a very important role here by providing finance to the farmer. There are arguments that the middle man is exploiting the farmer by charging high interest rate and also that the farmer is forced to sell the produce to the middle man but he provides finance to farmer when it is required, procures from the farm level, gives extra credit to meet the house hold needs of the farmer. The farmer knows that he is not getting the best price from the middleman, He is fully aware where the mandi is even in the mandi he has to sell to commission agent so why not sell the produce in the village itself without the hassle of additional transportation cost.
In the case of perishable commodities, the Farmer has lesser bargaining power. Government has schemes of financing the farmer at 7% but no farmer has access to such schemes and amount of finance available is totally disconnected from the actual necessity. Banks in rural areas have low penetration because of which transaction costs are higher more over farmers are apprehensive of availing loans from banks because of hidden charges and documentation process. So unless we devise a mechanism of providing finance to farmer with low transaction cost and compete with the middleman at what he has done so well removal of middle man from the chain will not add any value to the farmer or the end consumer, and in fact may indeed be exposing him to harsher realities of the market place (What if Reliance Fresh were to collapse one day, leaving the farmer high and dry, or if it one day decides to alter its pricing policy?).
An additional realization with the direct corporate purchase model, is lack of clarity in quality and grading, due to which a substantial portion of the produce is rejected. In contrast, the commission agent procures whatever the farmer has produced (price may be lower but there is no rejection) and then assumes the responsibility of finding a buyer for that variety, quality and grade. The only issue in a commission agent structure is that over time he assume a fiduciary role over the farmer and starts a cycle of exploitation.
A good starting point for resolution appears to be - storage facility at the farm level, backed by option of finance linked to a transparent pricing mechanism for all quality levels.
In India, if anyone tries to eliminate the intermediaries in the supply chain there is always a counter force which will counter the push comming from the other side. Hence middle men cannot be eliminated but can be reduced to bring about efficiencies in the value chain. They need to be part of the chain rather been looked upon as a threat. However the entire value chain can be looked at from a holistic view and to create synergies intermediaries can be reduced which benefits the entire value chain. A win-win situation needs to be created.
There are success stories in which corporates have procured directly from farmers through contract farming.Under this, the farmer is required to plant the corporate's crop on his land and harvest and deliver a quantum of produce based on the contract and at a pre determined price.
For instance, contarct farming in Wheat is being practised by HUL, Rallis and ICICI in which Rallis provides the agri inputs, ICICI finances the farmers on credit and HUL procures it for its processing.
The above model is succesful as the farmer gets finance from ICICI. Hence the critical part being finance and credit which the farmer gets from middlemen is absent in most of the corporate arrangements which acts as a hinderance. Hence big retailers can either form an alliance with Financial institutions or they should be ready to provide credit to farmers.
Even the classic case of Pepsi Co's procurement of tomato seeds, the company provided high yielding seeds on credit and supported the farmers. They also tied up with Punjab Agricultural Univ and other local bodies to gain trust among farmers.
One of the most critical issues is that when retailers/corporates want to procure directly from farmers the trust needs to be created and local bodies need to be taken into confidence.
Take the case of Reliance Fresh in UP, there was a huge backlash as the company never took the middle men into confidence and middle men being a powerful entity with strong political connections resisted Reliance retail in UP and eventually they had to close down shutters.
In F&V space the most critical aspect is back end,as it is the only place costs can be controlled and the benefits can be passed on to customers.( Wal-Mart being classic case which follows EDLP due to strong back end)
The other factor is that it is too premature to comment on whether the retailers would be succesful in creating a strong back end network. The penetration of Organized retail is a mere 4% and it is growing at 30% per annum.
Retail is a long term game and all the corporates who have ventured have deep pockets to sustain themselves. With the increase in penetration and creating awareness among farmers I forsee a sucessful model emerging in years to come.
Another case is Future Group,which has started procuring directly from farmers and have floated Future Logistics tp provide logistics soloutions due to inefficiencies in Logistics. Even though it is not a listed entity but reports suggests that they have undergone tremendous learnings and are rationalizing the supply chain. It also provides 3PL to other small retailers. I think it will emerge as dark horse from the stable of Future Group.
I have learned a lot from all the above comments, and write to summarize and quickly add a couple of my own thoughts.
To summarize, between organized retailers that are buying directly from farmers and the ITC e-Choupal initiative (which provides farmers future prices and other important pricing information), the role of middlemen is slowly being redefined. With more competition in this space, and options for the farmers, there is a possibility for farmers to benefit with regards to prices received for their produce. That said, entrenched middlemen backlash against ambitious retailers (e.g., Reliance Fresh) that try to eliminate their role.
My own thoughts: with the number of new players in this space, I hope over time more options, besides the mandi, make there way to the typical farmer. I don't think the Mandi system should be eliminated altogether. Instead, I think increased competition (and farmers' access to pricing through initiatives such as the ITC e-Choupal initiative)would force the Mandis run more efficiently and also provide better pricing to farmers.
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