Changing Agribusiness and Agriculture Organization: Implications for Reforms in Karnataka

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

2. 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

3. 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)

4. Huge Market Growth Potential from Poverty Reduction Source: World Bank. World Development Indicators database

5. 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

6. Farm pyramids: Opposing Structures of holdings and area (global) Percentage of farm holdings Percentage of farm area 100 6.2% > 5 ha 80 8.9% 87.1% 60 2-5 ha 40 84.9% 20 <2 ha 6.8% 6.1% Source: von Braun 2005 (FAO) Source: Gulati,et.al. 2005 (FAO)

7. 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

8. 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

9. Common Marketing Channel for Commodities Coops E X P O R T Processing Exporters Producers Primary Wholesalers CA Secondary Wholesalers B Distributors Semi- Wholesalers B Retailers B Consumers

10. 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

11. 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

12. 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

13. Decision Variables Conventional Agriculture Contract Farming - Market security Thro’ buyback arrangement Imperfect market for - Quality is pre - specified output - Pricing and payment - Availability scheme known before - Quality season Market Price - Price Level and Risk - R&D and Extension Revenue departments take care of Imperfect market for the information needs of Production Technology Yield Level the far mer - Information and Risk - Contingency contracts takes care of natural factors Natural Factors Net Returns Levels of Inputs Imp erfect market for - Seeds supplied by Cost Inputs company (Seeds, Production and - Credit facilitation by Protection inputs, Credit) Price of company - Price Inputs - Inputs supplied by - Quality company - Availability Risk and returns in Agriculture & contract farming

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

15. 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

16. 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

17. 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

18. 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

19. Partnering with Farmers