Changing Agribusiness and Agriculture Organization: Implications for Reforms in Karnataka Gopal Naik Professor Indian Institute of Management Bangalore

Changing Market Environment Globalization and integrated markets By 2050 the world food demand is expected to double –Asia is the major source of demand increase Population increase Income increase

Dynamics of Food Demand Upto $2 per day (Rs 3000/month) – demand for staple food –cereals and pulses Between $2 and $9 per day ( Rs 3000 to Rs 5000/month) people eat more –animal protein, fruits, vegetables & edible oils, causing rapid growth in raw ag commodity demand After $10 per day (Rs 5000/month) people buy more –Processed and packaged food, variety ( Source: Thompson, 2005)

Huge Market Growth Potential from Poverty Reduction CountryPop’n (000)% < $1/day% < $2/day China India Indonesia Brazil Pakistan Russia Bangladesh Nigeria Mexico Source: World Bank. World Development Indicators database

Structure of Indian Agriculture Sector Large number of small/marginal farmers Poor market orientation in agriculture production Increasing risk in farming business Inadequate facility to address farm risk Need to evolve appropriate business models

Farm pyramids: Opposing Structures of holdings and area (global) Percentage of farm holdingsPercentage of farm area Source: Gulati,et.al (FAO)Source: von Braun 2005 (FAO) % 6.8% 8.9% 6.2% 84.9% 87.1% <2 ha 2-5 ha > 5 ha

Implications of Globalization Gear up the sector to compete effectively in the market –Market oriented production Quality of the produce Right quantity –Improve quality to address SPS concerns and compete in the international markets Production, Procurement, grading, transportation, storage and processing –Increase productivity Research and Technology Development Technology adoption Infrastructure – production, marketing and services Macro production management

–Alternative marketing formats Meet customer requirements Reduce transaction cost Enhance quality Expand market – Domestic and International Improve value addition Improve realization –Professional Management Plan, coordinate and execute market oriented production

Common Marketing Channel for Commodities Producers Primary Wholesalers Secondary Wholesalers Semi- Wholesalers Consumers Retailers Processing Distributors Exporters CA B B B Coops EXPORTEXPORT

Problems in the current value chain High cost Quality loss is high –Anonymity of buyers and seller –Absence of grading –Number of times packing, unpacking and handling done is high –Handled by unskilled people –Quality orientation is low Time requirement is high Wastage is high Inadequate information

Overcoming constraints Reduce transaction cost –Group financing (SHG mode) Joint liability group Farmers club –Credit rating Incentive schemes – KCC –Increase credit limit –Reduce interest rate –Encourage financing through contract farming –Bundle services Form - input supplies/output marketing Time/space – loan melas

Reduce risk Institutional support - facilitating structured commodity financing –Legal/policy support Contract farming –Grades and standards Appropriateness Institutional mechanism –Infrastructural support Network of warehouses Grading system –Warehouse receipt system Tradable warehousing system –Futures contract

Risk and returns in Agriculture & contract farming

Key Requirements for facilitating agribusiness Macro commodity sector management Integrated but efficient services to farmers Improve Agricultural marketing facilities Opportunity to high value realization

Macro commodity sector management –Matching estimated supply and demand Track of production commitment within and outside the state through a market intelligence service –Input supply tracking –Computerize information –Weekly commodity meeting –Forecast prices and make it available to farmers Action: Start a pilot for tomato and sugarcane on a PPP basis

Integrated Efficient Services to farmers Production Technology Inputs Credit Knowledge Marketing Market selection Prices Channel selection Action: Allow contract farming Set up Farm integrated services at APMC level on a PPP basis

Modernizing APMC Modernize Regulated Markets (Safal) –Electronic transaction –Grade based transaction –Infrastructure for grading and handling –Process simplification –Information on prices in different markets and different forms of product –Facilitate forward contracting and futures trading –Facilitate value addition –Facilitate market oriented production

Create Opportunity for high value realization Grade based transaction Value added product transaction : baled cotton –Packed product - mango Certification and certified product transaction: organic product

Partnering with Farmers