Marketing of agricultural products in rainfed regions
P Parthasarathy RaoPrincipal ScientistGT-IMPI, ICRISAT
Key note address at the 23rd National Conference on Agricultural Marketing, CRIDA, Hyderabad
12th November, 20091
Importance of rainfed agriculture, India
65% of cultivated area80% of oilseeds, pulses, and coarse cereals production75% cotton, and 50% fruits and vegetables production50% of large ruminant and poultry populationMore than 50% of small ruminant population50% of human population and the incidence of poverty is relatively high
2
Agricultural growth and poverty reduction
There is a close correspondence between agricultural growth and poverty reductionThe transmission mechanisms include:Higher rural incomesCheaper foodOpportunities in non-farm sectorShift from primary crops to allied sectors
Markets are vital for the transmission mechanisms to bring about poverty reduction
3
Importance of markets:Markets and agricultural productivity
Not only do HYVs and inputs (fertilizer, irrigation) increase agricultural productivity, but market density, well-connected road networks, and other infrastructure also promote aggregate agricultural productivity
Free trade across regions within a country also contributes to higher aggregate agricultural productivity. For example, the elimination of Food Zones in India
Continued…
4
Markets and agricultural productivityRegions/sub-regions with good market access have higher productivity per unit of land compared to areas with poor market access
Higher productivity is due toDiversified cropping patternsBetter access to inputsBetter informed cropping and marketing decisions
Thus, investments in markets, related infrastructure, and removal of trade restrictions would enhance agricultural productivity over space and time
5
6
Traditional market characteristics
Localized and thin Smallholder dominated– low individual marketed surplusesPrice discovery process often times is non-transparentPrice is a function of instantaneous demand and supplyMulti-level with many intermediaries; high transaction / marketing costsInterlinked markets (credit/input and output markets)Lack of storage facilitiesQuality specification not standardized / lack of gradingLack of information on market intelligence
Distress sales, high transaction costs,& low prices
Post harvest losses of food commodities
Type of food commodity
Proportion lost of production (%)
Monetary value of loss (Rs. in crores)
Durables (cereals, pulses, etc)
10 23,000
Semi-perishables (potato, onion, etc)
15 1,800
Perishables (fruits, vegetables, milk, etc)
20 63,000
Total 14.8 87,800
Losses occur at various stages including marketing, storage, and transportationSource: Kachru ???
7
Low level of processing in perishables
Product Organized(%)
Unorganized(%)
Total(%)
Fruits & Vegetables
1.4 0.8 2.2
Dairy products 13 22 35
Buffalo meat 21 - 21
Poultry meat 6 - 6
Marine products 8 - 8
8
Constraints to food processing
Poor capacity utilization (<50%): inadequate raw material supplyCumbersome procedures discourage the entry of potential agro-processors (20 laws; 12 ministries)High excise and sales duties on processed foodSome food commodities still reserved for the small scale sector which are unable to exploit economies of scale and have no incentive to cultivate farm-firm linkagesHigh tax incidence (15-21%) and packaging cost (12-20%) Stringent SPS measures for exports
9
Changing food basket
Rural Urban1983 2004/05 1983 2004/05
Cereals 49.5 32.8 32.9 23.8Pulses 5.8 5.8 5.8 5.3Edible oil 6.2 8.4 8.2 8.1Sugar 4.3 4.3 4.2 3.5Dairy products 11.5 15.4 15.7 18.6Meat, egg, fish 4.6 6.0 6.1 6.4Fruits & Vegetables 9.3 14.5 12.0 15.8Beverages 5.0 8.2 11.6 14.6Total HVCs 30.4 44.1 45.3 55.3Food share in total 65.6 55.0 58.7 42.5
Year
Percentage of different food types to total household expenditure
Commodity
10
Changing commodity shares in VOP
14.5
12.83.4
32.6
5.33.6
18.7
16.7
4.3
26.2
7.64.1
0%
20%
40%
60%
80%
100%
1 2
Fruits and vegetables MilkMeat FoodgrainsOilseeds Sugar
TE1981/82 TE2005-06
11
Changing context of marketsA move away from subsistence agricultureIncreasing marketed surpluses with more than half being marketedDiversification of agriculture to horticulture, livestock, fisheries, cash crops (demand driven)Niche markets (pre specified or organic products, basmati rice, vegetables)Alternative uses of coarse cereals (poultry feed , alcohol)Plough to plate linkages (Cost and quality imperatives)Emergence of supermarketsExports (gherkins, grapes)Consolidation of the processing sector
12
Factors driving changes
Population growthIncome growthIncome and price elasticity of demandUrban population growth (urbanization)Change in tastes and preferences
13
Income and animal protein consumption
y = 1.311Ln(x) - 0.1871R2 = 0.53
0
1
2
3
2.0 2.5 3.0 3.5 4.0Income per capita (US $ )
Anim
al p
rote
in
per c
apita
Data on 19 zones in India (SAT (log scale)), 200014
Global urban population projections
Source: UN, World Population Assessment 2002
0
1
2
3
4
5
6
1950 1960 1970 1980 1990 2000 2010 2020 2030
Billi
on p
eopl
e
Urban
Rural
expectedactual
35 to 40% of the population in India will live in cities by 2020
15
Urban population and poultry activityData on 19 zones in India (SAT (log scale)), 2000
y = 1.6194Ln(x) + 1.708R2 = 0.5562
0.5
1.5
2.5
3.5
4.5
0.5 1.5 2.5 3.5
Urban population (million )
Pou
ltry
activ
ity
(mill
ion
rupe
es)
16
Organized food retailing is taking off
600000
610000
620000
630000
640000
650000
2004 2005 2006
Tota
l mar
ket s
ize
(Rs.
Cr.)
2500
3500
4500
5500
6500
7500
Orga
nize
d m
arke
t (Rs
.Cr.)
Total market size Organized markets
Organized chain stores are emerging and expanding rapidly, but at present account for only about 1 percent of food sales.Retail food market estimated at $133 billion, small “Pop & Son” shops still dominate retail food sales in India
Source: Gulati (2007)
17
An efficient marketing system shouldReduce post-harvest lossesEnhance farmers’ realizationReduce consumer pricesPromote grading and food safety practicesInduce demand-driven productionEnable higher value additionFacilitate exports
Marketing is the key not only to catalyze agricultural development but to foster inclusive growth
18
Emerging commodity marketsContract farming (several models)Direct marketing (rythu bazaars, apni mandi) Cooperative marketing (milk)Bulk marketing (farmers’ associations)Forward markets / futures markets ICT enabled supply chainsSpecialized wholesalers
Horizontal and vertical integration to reduce transaction costs and improve market efficiency
19
Consumer driven supply chains
Product oriented (push) vs. market oriented (pull) supply chainsProduct oriented or consumer driven supply chains require product homogeneity, continuous deliveries, quality upgrades, large volumes
Supplying the right product, of the right quality and quantity, at the right place and right time
Such chains are successful when organized in a flexible, responsive and efficient way
20
Dynamics of coarse cereal utilizationDecline in food usePoultry sector in India expanding at 10% per annumRising demand for grains in poultry feedProspects for alternative uses (poultry and cattle feed, alcohol, ethanol etc.) on the increase in recent yearsSmall and scattered production, low productivity, poor quality and lack of assured supplies may constraint non-food industrial uses Link production with processors through innovative supply chains
How to link supply with demand centers?
Common paradox: Buyers complain of inadequate supply while farmers complain of lack of markets
21
Efficiency of coarse grain marketing chain
Questions1. Does the regulated marketing system for coarse cereals
represent a constraint on increased utilization of the crop as a food grain?
2. Could the regulated marketing system constrain utilization with prospect of much increased demand for from industry (starch, feed, alcohol, etc)
Answers1. No evidence that food grain utilization is compromised by
regulated marketing system2. Some capacity for expansion given existing marketing
arrangements, However as industrial demand increases, marketing system will have to change: new institutions linking producers will be required.
22
Plough to plate interventions
Past Interventions
Improved Cultivars
Production technology
Increase in Yield
Bulk marketing
Better prices Reduced MKTcosts
Input linkage
Output linkage
Credit linkage
Improved seeds and production technology
Increase in yield
Quality standards
Crop and warehouse loans
Cheaper capital
Cash need after harvest
23
Farmer 1
Farmer 2 Farmer 3
Bulk marketing: Innovation in production-supply chain
24
Farmers Federation
Bulking and grading
Poultry feed manufacturers
Input linkage
Farmers Associations/
groups
Credit linkages
Warehouse/Community storage structure
Poultry producers
Poultry Federation
Crop Research institutes
Poultry nutrition
Fruits, vegetables, and livestock productsThere are common characteristics that link the marketing of livestock products (milk, meat), fruits, and vegetables. These are Highly perishableProduction located close to demand centers (urban orperi-urban areas) (milk is an exception)Very dependant on basic infrastructure (roads, cold storage, packaging), implying that diffusion to remote areas is not viableSeasonal fluctuations in prices
25
Contract farming for perishablesPerishable markets are transforming from an open to vertical coordinated structures, like cooperatives, producers’ associations and contract farmingMain advantage of contract farming, is an assured access to market and pricesFirms provide quality inputs, technology, extension service and credit to producers and thus contribute to improving production efficiency.
26
Contract farming: Vegetables
SAFAL (now MDFVL)- an integrated supply chain(i) to cater to the growing demand for fruits and vegetables in Delhi Metro, and (ii) adequate returns to producers.
The chain is depicted here:
Farmers - Producers’ Associations - SAFAL complex -SAFAL retail outlets - Consumers
Encourages farmers to form associations forHighly perishable commoditiesLess perishable commodities
27
Economics of contract spinach productionContract Independent %
differenceYield (t/ha) 8.6 8.3 4.0
Production cost (Rs/t) 1,485 1,630 -8.9Transaction and marketing cost (Rs/t)
35 437 -92
Total cost (Rs/t) 1,520 2,067 -26.5
Price (Rs/t) 3,311 3,074 7.7
Net revenue (Rs/t) 1,791 1,007 77.9
Source: PS Birthal et al 200528
PoultryMarkets for poultry are better organized but the number of intermediaries is largePrices of broilers and eggs are largely determined by market forces. There is considerable seasonality in demand for poultry products, and their prices fluctuate considerablySmall scale poultry production is becoming unviableContract forming has emerged in a big way, providing an assured market and returns to the small-scale producers
29
Contract farming in broiler production
Contract Independent % difference
Marketing cost (Rs/t)
38 90 58
Net revenue (Rs/t) 2,255 2,003 13
CV across production cycles (%)
3.4 69.5
40% broiler production is under contract with Tamil Nadu, AndhraPradesh, Karnataka and Maharashtra as the leading states
Source: PS Birthal et al 200530
31
05
1015202530354045
1-Jan
1-Feb
1-Mar
1-Apr
1-May
1-Jun 1-Jul
1-Aug
1-Sep
1-Oct
1-Nov
1-Dec
Rs/kg
Sharing price riskBroiler prices
MilkNearly 45 per cent of the milk produced in country is marketedMilk, in India, is largely consumed as raw milk (about 60 % of output) Two-third of market surplus is sold in informal markets and rest through cooperatives and private sectors.Vendors and milk dealers dominate the informal market. Vendors operate on small scale.Only 15 per cent of the milk output is commercially processed.
Continued..
32
Economics of contract milk production
Contract Independent % difference
Milk yield (kg) 11.9 11.4 4.4
Production cost (Rs/t)
5,586 5,782 -2.5
Marketing cost (Rs/t)
100 1,442 -93.1
Total cost (Rs/t) 5,686 7,170 -20.7
Price (Rs/t) 9,337 8,991 3.8
Net revenue (Rs/t) 3,651 1,821 100.5
Source: PS Birthal et al 200533
Milk (dairy cooperatives)
Gujarat, Maharashtra, Karnataka and TamilNadu account for two-third of the milk procured by cooperatives The share of these states in total milk production in the country is only about 25 per cent.In most other states, cooperatives procure less than 5 per cent of milk output like UP, Punjab and Haryana, here private sector has a sizable presence in milk market
34
Contract farming – some issues
Contract farming is partnership oriented not transaction oriented
Economic rationale alone would sustain such models in the long-term. This could be through
Higher productivity and better value realization for farmers and sponsor
Lower overall risk for farmers and sponsor
Good communication and trust building
35
Markets for live animals
Live animalsMarkets not well developed.- Segmented, thin and irregular markets, - Lack of associated activities like housing for animals, and basic facilities Considerable proportion of live animals are exchanged amongst livestock producers, between producers and itinerary traders Data on prices and numbers transacted not recordedDirect sale to slaughter houses and butchers
36
Importance of crop residues (fodder)
Straw pricesStraw to grain price ratio Seasonal variation in straw prices Straw value in total value of production (20 to 50%)
Crop residues constitute50 to 70% of total feed in India.
37
Feed and fodder marketsLivestock revolution driving fodder / feed demandFeed prices raising faster than milk and meat product prices Considerable seasonal fluctuations and regional variation in fodder prices Thin markets for grasses and forage crops Markets for crop residues -- informal and located in urban centers
38
Share of straw/stover in total
76.00
56.16
42.80
28.31 25.49
83.15
0
10
20
30
40
50
60
70
80
90
Gumalkunta Jalalpuram
Paddy Sorghum Groundnut
Data from Anantapur village
Anantapur dist. Village survey39
Sorghum stover marketing: HyderabadSorghum fodder arrivals to Hyderabad takes one the following channels:Un-chopped sorghum stover coming from a distance of 50-100 km on carts and from 100-150 km on lorries and sold in informal fodder markets located in 3-4 places through middlemen. Chopped sorghum fodder in lorry loads from 400-500 km.The chain that is followed is commission agent –trader- diary owners/ retailers
41
Upgrading livestock and fodder markets
Bring the existing markets under a proper regulatory frameworkImprove facilities related to infrastructure, animal feed and healthBring transparency in transactionsEstablish a few model markets for further replicationMaintain records of transactions (prices, animal characteristics, etc.)Establish rural meat production centresRegulate the slaughterhouses
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Scaling upScaling up of emerging market linkages should be possible if political, institutional, legal, and regulatory environment are market orientedPolicy initiatives under agricultural marketing
Model Marketing Act 2003Agmarknet portalInternet connectivity between wholesale marketsConstruction of rural warehousesStrengthening marketing infrastructure, grading and standardizationSFAC venture capital
43
Model Marketing Act, India, 2003Key additions and improvements:Setting up of new markets by private or other parties Separate markets for special commoditiesDirect marketing by farmers to agro-processors Provision for contract farming Futures or forward marketing Prohibition of commission agency in transactions with producersFormation of Farmers’ Associations for bulk marketingPledge financing and instituting a system of negotiable warehouse receiptsEnsuring complete transparency in the pricing system and transactions Providing market-led extension services to farmers
Continued…
44
Model Marketing Act, India, 2003Dissemination of market intelligence information (arrivals and prices data) Promote public–private partnerships in the management of agricultural marketsWider role of State Marketing Boards in training & extension in market related areasConstitution of Standards Bureau at State levelMarket committees are permitted to establish required infrastructure facilities in market yards using their fundsImposition of single-point levy of market fee on the sale of notified agricultural commodities in any market area
Several states amending marketing acts to include provisions of Model Marketing Act
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Role of governmentBuilding efficient marketing networks
Implement Model Marketing ActDismantling government monopoly
Increasing investments in infrastructureRoads, cold storage, bulk coolersFoster improved linkages between rural-urban markets
Setting up information kiosks on prices, arrivals, quality standards, etcPromoting horizontal and vertical integration through innovative institutional linkages
Harness private sector innovations in food marketingEstablish effective mechanisms for dispute settlement
Continued…
46
Role of government
Adding value through processingSimplify procedures for setting up food processing industries Reduction in excise on processed food products duties
Incentives to agro-processing industry to strengthen backward and forward linkages
Market fee, taxes on processed foods Enhancing access to formal credit
Enhancing access to formal credit and insuranceEnabling public-private partnershipsEstablishment of Agricultural Exports Zones
47
Smallholders are a big deal
56.0
19.3
22.8
10.5
62.8
17.8
18.1
7.4
69.7
16.3
13.2
5.0
0%
20%
40%
60%
80%
100%
1981/82 1991/92 2002/03
Upto 1.0ha 1-2 ha 2-4 ha Above 4haN
umbe
r
11.5
16.6
23.6
48.3
15.6
18.7
24.1
41.6
22.6
20.9
22.5
34.0
0%10%20%30%40%50%60%70%80%90%
100%
1981/82 1991/92 2002/03
Are
a
49
Contract farming - Definition and models“Contract Farming" means farming by a person called "Contract Farming Producer" (farmer or association of farmers) under a written agreement with another person called "Contract Farming Sponsor" to the effect that his farm produce shall be purchased as specified in the agreement
Various models possible:Centralized modelNucleus estate modelMulti-partite modelInformal or individual developed modelIntermediary model
Source: Eton & Shepherd, FAO 2001
50
Model Marketing Act, India, 2003
In 2000 Ministry of agriculture appointed an Expert Committee and an Inter Ministerial Task Force to review the present system of agricultural marketing and recommend measures to make the system more efficient and competitive.
A Standing Committee of State Ministers was constituted to review the recommendations in January 2003.
The committee finalized the draft model legislation titled the State Agricultural Produce Marketing (Development and Regulation) Act, 2003.
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Enabling policy environment‘Operation Flood’ initiated in 1970 by the NDDB to provide market access to the producer through cooperativesDairy industry de-licensed in 1991 Milk and Milk Products Order enacted in 1992 to regulate the production and maintain the quality of milk and milk productsThe import of dairy products was de-canalized during 1994 under WTO regimeLicensing procedures have been simplified. Quantitative restrictions (QRs) on all dairy products removed from April 2001In 2002 removed restrictions on setting up the new capacity Other reforms - Creation of export promotion zones - Reduction in tariffs and custom duties on
machinery etc
52
Contract farming -models
Centralized model
Sponsor purchases crop, processes it and markets the productDistribution of production quotaQuality tightly monitored
Examples in India
Practised in sugar, gherkin, bought-leaf factories in teaAppachi Cotton
53
Contract farming -models
Nucleus estate model
Sponsor demonstrates through his own operationsTransfer technology and management to ‘satellite’ growers
Examples in India
Stevia,& medicinal plants, grapes for wine
54
Contract farming -models
Multi-partite modelJoint participation of farmers, sponsors and statutory bodies
Examples in IndiaPunjab Agro-Industries Corporation Limited – UBL in barley
55
Contract farming -models
Informal or individual developed model
Individual or small companies make informal short term contracts on a seasonal basisBulk of contract farming in the Indian context follows this
Examples in IndiaFood World – for fruits and vegetablesTomato purchase by individual or small companies inBangaloreTinna Oil on soybean
56
Contract farming -models
Intermediary model
Sponsor is not in direct contract with farmers but in association of farmers
Examples in IndiaKASAM – NGO in Phulbani, Orissa on Turmeric
57
Poultry Production
Small-scale poultry production is becoming unviable due to high production and market risks
Reduce feed costs through technology/alternative feeds/price interventionsReduce production risks by imparting skills to the producers for better managementIntegration of small poultry with agriculture production of millets in rainfed areasEncourage contract farming/cooperatives/producers’associations for risk sharing Poultry activity should be appropriately placed either as an industrial or agricultural activity
58
Broiler and Egg Marketing
Producers are exploited by intermediaries in the supply chain. Seasonal fluctuation in prices also act against the producers.
Increase competition in the domestic marketVertical integration through contract farming Horizontal integration of producers Standardization and grading of produceInfrastructure for reducing losses, better price management and value addition NECC should improve its coverage Create a web-site for dissemination of information on prices, production and quality
59
Export markets
At present India’s trade in livestock products is miniscule, but is growing
Check import threats through suitable fiscal and regulatory measuresIdentify a few value added products with niche markets for exports and chart out a road mapImprove efficiency in production and processing to improve competitivenessExplore new markets and quality standards required by importing countriesExplore possibilities for organic production and exports
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