IFPRI- P K Joshi : Financing Agri-value Chain Development In India – Constraints and Opportunities

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Dr. P K Joshi, Director-South Asia, International Food Policy Research Institute(IFPRI) presented on “Financing Agri-value Chain Development In India – Constraints and Opportunities” at the 27th National Conference on Agricultural Marketing organized by University of Agricultural Sciences, Department of Agricultural Economics, Dharwad

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IFPRI- P K Joshi : Financing Agri-value Chain Development In India – Constraints and Opportunities

  1. 1. Financing Agri-value Chain Development in India – Constraints and Opportunities P K Joshi International Food Policy Research Institute South Asia Regional Office, Pusa, New Delhi 110 012 India E-mail: p.joshi@cgiar.org
  2. 2. Coverage 1. 2. 3. 4. 5. 6. Problems of agricultural marketing in India Evolution of agri-value chain development and its financing in India Illustration of few value chains Benefits of modern value chains to producers Constraints in financing agriculture and value chains Opportunities and way forward
  3. 3. I Problems of Agricultural Marketing
  4. 4. Low market development
  5. 5. Key problems in agricultural marketing  Dominance of smallholders and small marketable surplus     Dominance of informal sector in marketing    Small quantity of marketable surplus High marketing and transactions cost Low bargaining power (traders’ exploitation) Low producers’ share in retail prices (30-50%) Lack of price discovery mehanism Fragmented supply chain    Adds to inefficiency in agricultural marketing Multiple and exploitative intermediaries Low producers’ share in retail prices (30-50%)
  6. 6. ……. problems in agricultural marketing  Inadequate markets and marketing infrastructure      Perishable nature of high-value commodities   Inadequate market yards; storage, warehouses, cold chains; refrigerated vans Huge wastage of agri-commodity, especially perishable commodities (30-60%) Limited packaging, branding and certification Limited access to market information High risk (production & marketing: 60-70%) Food safety issue   Unable to comply due to lack of information Pesticide residue
  7. 7. Growing demand for agri-commodities  Increasing demand for agricultural commodities   Changing consumption basket from cereals to highvalue & processed commodities    Rising income, growing urbanization, unfolding globalization, changing tastes and preferences Not only among rich & urban consumers but poor and rural consumers Demand of food grains increased by 10% and of high-value commodities much faster: milk 30%; vegetables 50%; meat, eggs & fish 100%; fruits 163% Growing and promising trade of agri-commodities  Europe, Middle East and USA
  8. 8. II Evolution of Value Chains and Financing in India
  9. 9. Current popular supply chain in India Farmer Consolidator Consumer Trader Commission Agent Retailer Wholesaler • Unorganized, fragmented and inefficient • High transaction costs and high losses • Low processing and poor food safety concerns
  10. 10. Supply chain financing approaches (source: KIT & IIRP 2010) A. Chain liquidity B. Agriculture finance
  11. 11. (c) Value chain financing  One or more financial institutions are engaged       Product flow Finance flow Information flow Technology flow Risk management Actors      Farmer Traders Processors Exporters Retailers
  12. 12. Key instruments of value chain financing  Financing for buying inputs   Financing for creating assets      Land development, polyhouse development, machine, irrigation management (drip, sprinkler, micro-irrigation) Cold storage, warehouse, chilling plants, processing plant, animals Financing for risk mitigation   Planting material, Chemicals, feed, chicks, packaging material Insurance for production and transportation Agricultural commodity futures Warehouse receipts Commodity futures market  Price discovery and price risk management
  13. 13. Agricultural financing in India • Nearly half of the farmers have no access to credit • 27% have access to formal sources • Those have no access; 88% are marginal farmers Agricultural credit in India, Rs billion Year Supply Demand Gap, % 2002-03 2562 2665 4.0 2003-04 3004 3260 8.5 2004-05 3583 3811 6.4 2006-07 4411 4944 12.1 2006-07 5361 6745 25.8 2007-08 5817 7741 33.1
  14. 14. Sector-wise credit in India • • • • Growth in agriculture & allied credit • 6.1% in 2011-12 • 7.5% in 2012-13 Processing sector has 16% share in total agricultural credit Growth in processing sector credit • 18.3% in 2011-12 • 7.6% in 2012-13 Micro-financing has limited share
  15. 15. Financing cold storage & processing   Cold storage and processing are the key areas for financing Source of financing      National Bank for Agriculture & Rural Development National Cooperative Development Corporation Nationalized and private banks FDI in processing Processing  12% interest of US$ 150,000 for 5 years repayment    Washing, grading & peeling of fruits Juice extraction and filtration Standardization and packaging
  16. 16. Cold storage, their numbers and capacity Commodity Nos. Share in Share in Nos, % capacity,  Cold chain logistics %  Potatoes 3,023 56.1 76.9  F & Veg 158 2.9 0.5  Meat & fish 482 8.9 0.8  Milk + products 191 Others 87 1.6 0.1  Multipurpose 1,445 26.8 21.4  Total 5,386 100.0 100.0  3.5 0.3  Constraints  95% of cold storage capacity is with private sector; co-op has 4% only Pre-cooling facilities Cold storage Refrigerated carriers Packaging Warehousing Erratic power supply Uncertain market Uncertain policies
  17. 17. Modern Terminal market   Producer/farmers and their associations Collection centers Direct selling    Modern infrastructure facilities    Electronic auction Processors; exporters; wholesaler/trader/retail chain operators Storage; cold storage; temperature control warehouses; ripening chambers Washing; grading; storing; weighing; quality testing Services available   Banking institutions Settlement of payment; advisory on inputs; prices; transport; packaging
  18. 18. Foreign direct investment (FDI) • Agro-processing • – 100 percent in equity • Seed development and production • Single brand retail – 100% • Multi-brand retail – 51% • Conditions for FDI in multibrand retail: – 50 % in backend – 30% procurement from SMEs • Food sector received only 3.3% of the gross FDI flow in India between 2000 and 2010 Seed sector – Cargill, Syngenta, Monsanto • Processing sector – Britannia; Nestle; Kellogg; PepsiCo., Perry, etc. • Major players in back-end – Wal-Mart cash & carry – Metro cash & carry • Food service restaurants (single brand FDI) – KFC; Pizza Hut; Dominoes; McDonald’s etc
  19. 19. FDI inflow between 2000 and 2013 in food and agriculture US$ million)
  20. 20. Agri-export zone: 60 in 20 states Jammu & Kashmir: Apples, walnuts Uttar Pradesh: Basmati rice, potatoes, mangoes, vegetables Uttaranchal: Basmati rice, aromatic & medicinal plants Sikkim: Flowers, Cherry pepper Himachal Pradesh: Apples Punjab: Basmati Rice, vegetables Rajasthan: Coriander, cumin Assam: Ginger Tripura: Organic Pineapple West Bengal: Pineapple, litchi, Darjeeling tea, vegetables Gujarat: Mangoes, vegetables, sesame seeds Bihar: Lychee, Vegetables and honey Maharashtra: Grapes, Grape wine, mangoes, flowers, onion Orissa: Ginger and turmeric Madhya Pradesh: Onions, garlic, seed spices, lentils Karnataka: Gherkins, rose, onions, flowers, vanilla Tamil Nadu: Flowers, mangoes, cashew nuts Andhra Pradesh: vegetables, mango pulp, grapes, gherkins
  21. 21. PPP initiative in Maharashtra Crop Private sector Farmers covered Maize Monsento, Pioneer, Vankys 6,000 Soya ADM 63,750 Pulses Rallies India 64,500 Cotton Nuziveedu Seeds 3,423 Onion Jain Irrigation system 3,423 Tomato Hindustan Lever Potato PepsiCo Grapes Mahendra Sugarcane 12 sugar factories 618 1,207 200 1,200
  22. 22. Emergence of innovative institutions: contract farming, cooperatives, producers’ companies     Public sector initiatives  State level Agro-industries Corporation Cooperative sector initiatives  Dairy sector; Safal  Mahagrapes; Mahabanana Private sector initiatives  ITC  FieldFresh; Heritage  Mahindra Subhlabh  Nigger Agro; Goderej; Dabur  Venketeshwar/Saguna/ Pioneer Multi-national firms  Nestle, Pepsi, Britannia, Perry      Opportunity for agri-input services  KHB (DCM Sriram group)  Mahindra & Mahindra Financial institutions  Nationalized banks  Private Banks Rise of Retail Chains  Reliance, Foodworld, MORE  Nilgiri, and many more….. Cash & carry  Walmart, Metro Producers’ Companies  Kaushalandera & ………
  23. 23. III Some Illustrations of Improved Value Chains
  24. 24. Cooperative model: AMUL milk model
  25. 25. Private sector initiative: tomato & potato by PepsiCo In potato, CPRI, Shimla is providing technical support
  26. 26. Field Fresh Model for domestic and export market (Bharati and Del Monte Pacific)
  27. 27. Value chain & financing cut flowers by Tanflora Corporation Flowers exported to Europe, Middle & Far East, Australia, Japan 25:75 sharing of profit
  28. 28. Value chain & financing in poultry: Saguna
  29. 29. IV Benefits of Modern Value Chain to Farmers: Some Case Studies
  30. 30. Impact of improved value chain on farmers’ income (Birthal, et al 2007) Net profit (Rs/t) 4500 3750 3000 3651 2250 1500 2255 1821 2003 750 0 1791 1007 Milk Contract Broilers Non-contract Vegetable
  31. 31. Farm-level production and transaction costs of improved & traditional value chain (Birthal , et al 2007) Milk Vegetable 2500 80 00 70 00 1442 437 100 50 00 40 00 30 00 2000 5586 5728 Unit cost (Rs/t) 60 00 1500 35 1000 1485 1630 20 00 500 10 0 0 0 0 C o n tra c t P ro d u c tio n N o n - c o n tra c t T ra n s a c tio n Contract Producti on Non -contract Transacti on
  32. 32. Incentives in Wal-Mart: Cash and Carry  Form self-help groups, work with civil society organizations and appoint field agronomist  Provide expert advise Soil testing and provide agri inputs  Demonstrations in partnership with Bayer Crop Science and seed companies  Benefits     20-30% higher yields 7-8% higher prices, and 3-5% incentives on quality Reduce marketing cost 10-15%
  33. 33. V Constraints in Financing Farmers and Value Chains
  34. 34. Problems in developing improved value chains  Breach of contract   Low bargaining power of smallholders   Restricts change in production portfolio Dependency on the firm in the long-run   Low volume Asset specialization   Producer or the firm (mainly on output prices & quality) Access to market, information and technology Monopsony in the long run
  35. 35. Major constraints of processing sector (source: Kucjru, 2012) • Low capacity utilization • Poor recovery of the finished product from the raw materials • Problems of arranging adequate working capital and its management • Low product quality • Unreliable assured power support
  36. 36. Constraints in financing improved value chain  Dominance of large number of small and unorganized farmers  High transaction cost of the firm and financer   Unorganized and fragmented agri-marketing     Lead to inefficiencies and losses Uncertainty of default repayment Week legal framework Unstable business environment   New pilot on how kirana shops can become bankers Instable policy environment Government policies  Strong bureaucracy, stringent regulations, political uncertainty
  37. 37. Drivers of value chain success (Source: Parthasarthy et al 2004) Success relies on road network and urbanization Page 37
  38. 38. VI Way Forward
  39. 39. 5-point program  Consolidate producers, their production & produce   Develop markets and market infrastructure    Agriculture Produce Market Committee (APMC) Act is a major obstacle Implementation of Model Market Act with caution Create business-friendly environment    Improve existing markets, processing sector and develop new markets Reform markets   Producers’ associations or cooperatives, self-help groups Consistent and sustained policies Incentives for financial institutions Incentives for investment in rural infrastructure   Warehouses, chilling centers, ICT in agriculture Develop road network; stable power supply (new sources such as solar)
  40. 40. Thank you Thank you Page 40

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