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 in MarketLeveraging the ITC Group wide Strengths

ITC Horti in Market: Choupal Fresh Retail in India

ITC Horti in Market: Choupal Fresh Exports

ITC Horti in Market: Branded Processed Foods

ITC Horti in Market: Processed Food Exports in Private Labels

ITC Horti at the BackendSupported by GMED (set up by ACDI / VOCA

with USAID’s assistance)

ITC Horti at the Backend:Crop Calendaring for Farmers in the Cluster

ITC Horti at the Backend:Area Specific Improved Varietal Selection

ITC Horti at the Backend:Support through Equipment

ITC Horti at the Backend:Quality Improvement through Nurseries

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

A few thoughts on Policy Issues before closing…

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

Thank You