Food Inflation and Agricultural Supply Chain Management

1

1. Shri Kailash Singh, Managing Director, Teflas, Shri Ramesh Abhishek,
Chairman, Forward Market Commission, Dr. D. Bhalla, J oint Secretary,
Department of Food and Public Distribution, Government of India, Shri. Sushil
Goenka and Vijay Datta of the Solvent Extractors Association of India,
Shri. Sandeep Bajoria, Chairman, Globoil Organising Committee, Shri. Dinesh
Shahra, Dr. B. V. Mehta and other leaders from the edible oil and agri-commodity
trade industries, and distinguished delegates, both from India and abroad. It is
indeed a pleasure to interact with people from the agribusiness world, especially
at a time when the demand for food items are rising and is expected to continue
to rise for several years from now. I am sure people here who have greater
exposure and expertise can elucidate in much better way the ground level facts
about the current rise in food prices, particularly that of edible oil and challenges
that lie ahead in countries like India which are net importers of edible oil. I thank
both Globoil India and Teflas for inviting me. I wish to congratulate Globoil India
on its 16th Anniversary a long enough period for an organisation to grow out
from infancy and reach adulthood. Around 50 per cent of Indias domestic
consumption of edible oil is met through imports and India has an import share of
more than 15 per cent in the world market. Given this, Globoil has an important
role to play and I wish them all the best in their efforts. I hope the proceedings of
this event would help in improving domestic productivity, availability and
marketing efficiency of edible oils.

2. Taking a broader and generalised view of your industry, I shall be looking at the
role of agri-business in growth of the economy as well as inflation management.
In particular, I would be discussing the importance and potential of supply chain
management in the evolving scenario.

Growth and Inflation - Role of Agribusiness

3. Before discussing the role of agribusiness in growth and inflation, it would be
apposite to define and understand the concept of agribusiness. Way back in
1957, Davis and Goldberg
2
had defined agribusiness very lucidly as the sum
total of all operations involved in the manufacture and distribution of farm
supplies; production operations on the farm; and the storage, processing and
distribution of farm commodities and items made from them. Thus, agribusiness
essentially encompasses today, the functions which the term agriculture denoted
150 years ago and agriculture now is a subset of the larger superset called agri-
business.

1
Keynote address delivered by Shri Harun R. Khan, Deputy Governor, Reserve Bank of India, at the 16
th

Conference of Globoil India held in Mumbai on September 22, 2012. The speaker acknowledges the contributions of
Shri. Ajay Prakash and Shri G.V. Nadhanael of the Reserve Bank of India and the inputs from NABARD.
2
Quoted from King, Robert P., Michael Boehlje, Michael Cook, and Steven T. Sonka (2010) Agribusiness
Economics and Management, American Journal of Agricultural Economics, Special Issue Commemorating the
Centennial of the AAEA, Vol.92, No.2, April

Food Inflation and Agricultural Suppl y Chain Management

4. As far as growth and inflation is concerned, you may be aware that the weights
attached to objective of growth vis--vis that of price stability in choice of policy
measures vary according to the extant macroeconomic environment. For
example, during the Great Moderation, the policies all over the world were
focussed on growth enhancing measures. Presently, in view of the continuance
of low inflation and low or negative growth in the developed economies, the
policy measures, mainly in the form of liquidity enhancement and low interest
rates, continue to focus on augmentation of growth.

5. In India, however, the conditions are very different. Along with economic
slowdown, inflation is ruling significantly above the threshold level, beyond which
inflation turns inimical to growth. Under the current macroeconomic environment,
Indian policy makers have to think of various measures that can simultaneously
achieve the twin objectives of higher growth and lower inflation. Opinions differ
on the utility of different policy measures at the current juncture and you all may
be familiar with the current debate on the timing, sequencing and
complementarity of various measures. There is, however, near unanimity,
amongst all that agriculture and agri-business growth is a necessary prerequisite
for moderation of inflation, particularly food inflation, as well as for acceleration
and sustenance of inclusive growth.

6. The impact of agri-business on inflation is also both direct and indirect. The direct
impact of agribusiness is visible in the form of food inflation. With demand arising
from increasing population and prosperity outstripping the growth of agricultural
output, food inflation is likely to persist at the global level for the next several
years. OECD-FAO has predicted that a grim global food inflation outlook could
continue in the next ten years. The OECD-FAO Agricultural Outlook 2011-20
indicates that food prices may be higher in real terms over the five years 2015-
20. For example, prices of oil seeds are projected to be higher by 36 per cent
relative to the levels prevailed during the five year period 1998-2003
3
. High
prices at global level limit the use of imports as a tool for our domestic inflation
management. Even when global prices are low, the import option is limited as
mere news of entry of a large consumer like India entering the global market can
spike up prices. Further, higher imports would only add to the pressure on our
already high current account deficit.

7. The indirect impact of agri-business on inflation is reflected in the rise in cost of
living arising from high food inflation leading to higher wages, which, in turn,
contributes to generalised inflation through higher cost of production. This may
trigger a wage-price spiral. Hence, though food inflation or at least spike in food
inflation is normally a supply side phenomenon, it is monitored very closely and
remains one of the most difficult challenges for the central banks. The Reserve
Bank is presently grappling with this challenge of high food inflation as often
monetary policy has to act as the first line of defence, even if it is a persistent
supply side issue. However, managing food inflation from a medium-term

3
OECD-FAO Agricultural Price Outlook: http://www.oecd.org/site/oecd-faoagriculturaloutlook/
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Food Inflation and Agricultural Suppl y Chain Management

perspective would include measures to increase production, improve productivity
and enhance efficiency of supply chain management.

8. On the growth front, while service sector has been driving growth for the past
several years, acceleration of growth of the economy and its sustenance at
higher level critically hinges on the performance of agriculture sector in terms of
supply of food and food products, employment of large section of population and
providing a large and growing demand base for the other segments of the
economy, viz., industry and services. Given the strong backward and forward
linkages of agri-business with both the industrial and services sector, this sector
not only directly contributes to growth but also facilitates growth in the rest of the
economy. Also, the growth of agri-business has the potential to generate gainful
employment within the farm sector, which could help in reducing the incidence of
underemployment and disguised unemployment in agriculture.

9. The role of agribusiness has become even more important in the context of the
challenges that global economy faces in enhancing food production to cater to
increasing demand for food, fuel and feed. OECD-FAO estimates
4
suggest that
with world population touching 9 billion by 2050, agricultural production will need
to increase by 60 per cent over the next 40 years to meet the rising demand for
food. Additional one billion tonnes of cereals and 200 million tonnes of meat a
year has to be produced by the year 2050 as compared with 2005-07 levels. The
demand for bio-fuel production is also expected to double. Increased demand for
meat and meat products also require additional agricultural feedstocks. Given the
limited scope for expanding farmland area around the world and problems of soil
degradation and water scarcity, apart from over exploitation of fish stocks,
augmenting agricultural production has become a major challenge. Global
warming, climate change and extreme weather conditions have added further
uncertainties.

10. Increases in food prices across the globe have become a major issue in recent
years. The spike in global food prices that was witnessed during the period 2004-
08 had significant welfare consequences in terms of millions of people pushed
into poverty and hunger. The increase in prices was witnessed in almost all the
major commodities and edible oils have been no exception. Though prices have
been volatile in recent period, the forecasts suggest that the prices could
continue a secular upward trend, which could put pressure on inflation (Chart 1).
This is a critical issue for a country like India which is a major importer of edible
oils. Also, it has been observed that in India, the domestic prices are significantly
impacted by the trends in global prices of edible oils.

4
OECD FAO Food and Agricultural Outlook: 2012-2021
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Food Inflation and Agricultural Suppl y Chain Management

Chart 1: Global Vegetable Oils Prices


11. Incidentally, during the current year so far, inflation at the retail level in oils and
fats has been higher than at the wholesale level (Chart 2). While this
phenomenon can be attributed to a number of factors, improvement in supply
change management will certainly help in narrowing the gap. Also, the price
trends at retail level indicate that the price paid by final consumer for the edible
oil differs significantly across major cities within the country (Chart 3). While
some part of this divergence could be attributed to factors like transportation cost
and state specific taxes as well as quality of product, the difference of such
magnitude also point towards issues related to supply chain which is critical in a
country like India which has a large domestic market.

Chart 2: Comparative Inflation in Oils and Fats at Wholesale and Retail Level


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Food Inflation and Agricultural Suppl y Chain Management

Chart 3: Retail Price of Select Edible Oil (packed) in August 2012


Source: Price Monitoring Cell, Department of Consumer Affairs, Ministry of Food and Public Distribution

12. Hence, I shall now turn to the supply chain through which farm products move to
reach the final consumers and need to be upgraded in view of the growing
challenges mentioned earlier.

Supply Chain Management and Agri-business

13. It has been observed that there is a wide divergence between the farm gate
prices and retail prices of various food items. The usual reference to 1-2-3-4 in
supply chain is quite well known, where what the producer sells for one rupee, by
the time it reaches the final consumer fetches four rupees due to the presence of
intermediaries. The recently appointed Inter-Ministerial Group
5
on Inflation has
emphasised on the need to cut down the margin between farm gate prices and

5
Position Paper No.1 from the IMG on Inflation http://finmin.nic.in/workingpaper/IMG%20on%20Inflation.pdf
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Food Inflation and Agricultural Suppl y Chain Management

retail price. Improving supply chain is beneficial both for the producer and final
consumer as producers would get remunerative price for his produce and
consumer would be benefitted from the lower price. Therefore, increasing
efficiency of supply chain could help in bringing food inflation down and increase
the efficiency of our food markets and make our agriculture sector sustainable
and viable.

14. A well-known feature of current structure of food inflation is the sharp rise in
prices of protein food items. These comprise perishable items such as milk,
eggs, meat, fish, vegetables and fruits all of which require advanced and
effective supply chain management.

15. Different aspects of agri-business and the supply chain are undergoing
transformation which is likely to continue in future. Emphasis on processing,
trading and marketing is going to increase over time. Demand for protein rich
and other high value food like fruits, vegetables, edible oil and livestock products
are increasing. Demand for high quality, safe and convenient (frozen, pre-cut,
pre-cooked and ready-to-eat) foods is rising. Meeting these demands emanating
from within the country and from the growing Indian diaspora through more
efficient supply chain management is expected to facilitate growth and moderate
inflation.

16. Supply chain management and agricultural business are integral part of
agricultural marketing system. Efficient supply chain and business models are
necessary for creating efficient agricultural market which delivers agricultural
produce from the farmer to the consumer in the most efficient way. While output
and productivity are supply side factors, markets provide an intermediate link
between producers and final demand by consumers. Efficiently functioning
markets add to welfare of producers as well as consumers. Efficient agricultural
markets can also be a potent tool for poverty reduction.

17. Agricultural markets in India, in particular the supply chain management and
business models, are inefficient. In India, farmers produce is generally disposed
of in the village, rural/primary market or secondary agricultural market. The
challenges facing supply-chain management and agri-business in India can be
broadly classified into three, namely, 1) lack of accessibility to regulated markets,
2) lack of competitition under the Agricultural Produce Market Committee
(APMC) Act, and 3) absence of a nationwide common agriculture market. These
are challenges that run across the various channels through which the supply-
chain and agri-business models operate. These channels are (i) Producer-
Consumer, (ii) Producer-Retailer-Consumer, (iii) Producer-Wholesaler-Retailer-
Consumer, (iv) Producer-Commission agent-Wholesaler-Retailer-Consumer and
(v) Producer-Village Merchant-Wholesaler-Retailer-Consumer.

18. Agriculture markets in India are regulated through the model APMC Acts. The
number of regulated (secondary) agricultural markets stood at 7,157 as of March
2010 as compared to just 286 in 1950. There are also about 22,221 rural
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Food Inflation and Agricultural Suppl y Chain Management

periodical markets, about 15 per cent of which function under the ambit of APMC
regulation.
6
The model APMC Act allows States to collect market fees from the
buyers/traders on the sale of notified agricultural produce which are generally
high. The high incidence of commission charges on agricultural/horticultural
produce renders marketing cost high. There are other charges like entry
tax/octroi tax that vary across states as well as across commodities. These
charges prevent the emergence of a nationwide common market for agricultural
produce. Moreover, restrictions on the movement of goods under the Essential
Commodities Act remain in place in various states. These had inhibited free
access of agriculture markets. Most of the agricultural markets are also
characterised by dominance of cash based transactions where issues of cash
management also become important. Also, there are issues of weights and
measurements as well as the presence of brokers and commission agents.

19. There is reason to believe that regulatory barriers have constrained investments
in development of storage and processing facilities, hampered the development
of effective institutions, and lowered the capacity of agricultural producers to be
internationally competitive. India, for example, is the worlds largest producer of
fruit and vegetables but it has been estimated that inadequate post-harvest
storage and transportation cause losses of around 30-40 per cent, only 7 per
cent value addition takes place, and only about 2 per cent of production is
processed commercially. Road connectivity, development of horticulture, dairying
& other animal husbandry activities and expansion of cash crops, which provide
the necessary wherewithal for greater access of the farm sector to market
oriented agriculture are still lacking in the country. This is particularly important
for the segment of high value agriculture, where demand pressures are going to
be most intense in the coming years, and major investments will be needed in
the development of efficient value chains to save on high wastages and
intermediation costs. The inadequate facilities for storage of products also results
in considerable seasonal fluctuations in the prices of products.

20. The country needs a single point market fee system for facilitating free
movement of produce, bringing price stabilization, and reducing price differences
between the producer and consumer market segments. Use of Information &
Communications Technology (ICT) solutions (for example, pre-paid card based
payments at octroi posts) would facilitate easy movement of agricultural produce.
Besides boosting productivity on a sustained basis, cleaning, grading and
packaging of agricultural produce, would have to be popularized for greater
market penetration. The current fragmented marketing system and lack of
infrastructure are the serious constraints to the efficient functioning and
competitiveness of supply chains in India. An efficient supply chain would need to
integrate the supply chain with the value chain wherein at each stage within the
chain, significant value addition takes place. It is essential to link the farmers with

6
Average area served by a market is 115 sq. km while an average area served by a regulated market is 454 sq
km. According to recommendations by National Farmers Commission, availability of Markets should be within 5
km radius (approx. 80 sq km).

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Food Inflation and Agricultural Suppl y Chain Management

the markets with state-of-art infrastructure. Effective linkage can help remove the
constraints of logistics, quality maintenance and thus, help in efficient access,
delivery, price discovery and compete with global products. Linking small primary
producers with markets can help improve the livelihoods for millions of poor in
India. Banking and bank finance also plays a critical role in the entire
agribusiness chain.

21. As a result a broad consensus has emerged about the need for reforms in
agricultural market policies and important reform measures have been
implemented in recent years, as part of the ongoing policy reform process in
India, such as, amendments to the APMC Act as also the recent initiative to allow
Foreign Direct Investment (FDI) in the retail sector. At a more specific level,
introduction of negotiable warehouse receipt system, the scheme of bank
financing against such receipts, establishment of Warehouse Development &
Regulatory Authority (WDRA) and guarantee support scheme up to ten years for
construction of warehouses/storage facilities would provide much needed fillip to
efficient marketing management and price risk reduction for the producers.
Further, the disbursements under the Rural Infrastructure Development Fund
(RIDF) administered by the National Bank for Agriculture and Rural Development
(NABARD) with a special earmarking of ` 50 billion for the year 2012-13 for
developing cold storage and warehousing facilities in rural areas would also
provide boost to infrastructure development for marketing efficiency. External
Commercial Borrowing (ECB) for infrastructure to cover cold storages has also
been allowed. Considering the need to boost the supply and value chains in
certain critical agricultural products that have significant implications for both the
producers and the consumers, NABARD has initiated a few pilot programmes on
supply chain development for potato in West Bengal and Uttar Pradesh, onion in
Maharashtra and tomato in Punjab and Haryana. These projects, which would
involve the banks, the State Governments and the research institutes, are
comprehensive in nature and are expected to help the farmers in better
sorting/packaging, warehousing and marketing apart from helping at the
production stage by adopting better agricultural practices, involving quality inputs
and R&D support.

Measures to improve supply chain

22. The suggestions from various policy documents to strengthen the supply chain
can be classified into: 1) enhancing the capabilities of farmers, 2) strengthening
infrastructure, and 3) legislative interventions. By encouraging farmers to
organise themselves into groups growers groups, co-operatives, self-help
groups, joint liability groups, and producer companies given the preponderance
of small and marginal farmers in our country supply chains can be streamlined
as well as made more egalitarian. Recently, NABARD has set up Producers
Organization Development Fund (PODF), which could play a catalytic role in this
regard. Also, investments across the entire agro-value chain spectrum, such as
creation of cold chains, rural godowns, new agricultural marketing infrastructure,
and modernisation of existing markets could be promoted by providing them
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Food Inflation and Agricultural Suppl y Chain Management

fiscal incentives. As suggested by the Inter-Ministerial Group on Inflation,
perishables could be taken out of the ambit of the APMC Act to encourage
arbitrage activity by small traders and farmers by allowing them to freely trade
perishables through buying where it is cheap and selling where it is expensive.
Similarly from the long-term perspective of inflation management, it is crucial to
improve mandi governance with focus on transparency and efficiency by holding
regular elections of agricultural produce market committees as well as to bring
professionalism into the functioning of the existing regulated markets through
public private partnership.

23. Analysis of international market developments reveals that encouraging large
scale integrated players to develop the supply chains in various commodities with
latest technology infrastructure is the right approach suitable for Indian
conditions. The existing system of fragmented handling of various supply chains
should be converted into integrated handling systems so as to ensure better
realisation to the farmers. Contract farming and supermarket procurement
arrangements are two supply chain arrangements that are gaining ground amid
active debate in India. Recent experience in India indicates that contract farming
and supermarket procurement approaches will have to involve small-scale
farmers in the medium term, because the farm structure obliges them to do so.
Initiatives like the one in Argentina by the company El Tejar where the small and
marginal farmers are pooled together by taking the land on rent and providing
them wage employment could be experimented. In some countries, public-private
partnerships have been instrumental to the success of new supply chain
arrangements, for example, in providing extension and technical assistance to
improve the quality and safety of produce and accreditation of farmers. The
country needs a convergence platform at national, state and district level where
private players join hands with large number of farmers through various ongoing
schemes and programmes of Central and State Governments in a PPP mode.
Approaches to promote equitable participation by large-and small-scale farmers
who constitute more than 80 per cent of the rural farming community would
include:
Facilitating entry and competition among buyers, for example, improving
the rural infrastructure or establishing collection centers to reduce the
transaction costs involved in sourcing from small scale farmers;
Organizing farmers into formal or informal groups to meet the volume
requirements and strengthen farmers bargaining power;
Reforms in tenancy laws and legalizing tenancy farming to facilitate
establishment of production rights and credit flow;
Enhancing farmers capacity to adopt improved production and post-
harvest techniques to meet the required higher quality standards;
Assisting farmers to obtain the capital, in addition to short-term production
loans given by banks, to make on-farm improvements and other
required investments, for example, micro-irrigation, greenhouse,
grading, or cooling facilities and acquire essential national and
international certifications;
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Food Inflation and Agricultural Suppl y Chain Management

Efficient dissemination of market information to the producers by
leveraging ICT (for example, mobile phone based market information
propagation);
Training farmers and buyers about their rights and obligations under
contract farming arrangement and in the design of contracts; and
Developing institutions that assist farmers to settle contract disputes, such
as, commodity or market associations.
The Working Group of the 12
th
Five Year Plan on Agriculture Marketing
Infrastructure, Secondary Agriculture and Policy Required for Internal
and External Trade
7
has identified the following models of agriculture
marketing that should be emphasized during the Plan period viz., a)
greater responsibility to producer organizations; b) direct linkage with
retailers/processors/exporters; c) price discovery through virtual market
platform; d) direct marketing; e) organized retailing and removing
restrictions on FDI for greater competition; f) market access for small
producers; g) reforms in APMC Act; h) integrated value chain system
covering even areas like partnership, information and communication
technologies, leveraging networks, value chain financing, smallholder
policy, and contracts; i) promotion of innovative marketing models for
effective market participation, and j) PPP for efficiency and
effectiveness.

24. Finally, in the context of the role of public distribution system in cereals also
needs to undergo a transformation. There are two opposing views on the
desirable strategy of the PDS system. According to some, PDS should play a
stabilising role by releasing stocks when food prices are high, particularly during
periods characterised by supply chain manipulation. However, there are others
who opine that the PDS dilutes competitive market forces and the government
instead should focus on removal of supply chain rigidities. Given this rise in
demand due to urbanisation and migration, higher per capita incomes, changing
dietary habits, on one hand, and the huge costs and leakages associated with
PDS, on the other, it is considered desirable and imperative for competitive
market forces to play an increasingly greater role over time. The proposed
alternatives to PDS like cash transfers/food coupons would also be effective only
with the presence of a well integrated supply chain. Otherwise, the supply chain
manipulation could lead to exploitation of cash transfer beneficiaries and could
have implications for food inflation.


Concluding Remarks

25. I would like to conclude by saying that the world is destined to struggle with
shortage of supply of agricultural commodities vis--vis the growing demand for
several years. The pressure would be reflected, among others, in rising prices.

7
Report of the Working Group On Agricultural Marketing Infrastructure, Secondary Agriculture and Policy
Required For Internal And External Trade For The Xii Five Year Plan 2012-17
http://planningcommission.nic.in/aboutus/committee/wrkgrp12/agri/weg_rep_market.pdf
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Food Inflation and Agricultural Suppl y Chain Management

Apart from raising agricultural productivity, improvement in management of
supply chain would be critical for sustenance of overall economic growth and for
prevention of runaway rise in prices. Diversification into non-traditional areas like
biofuels, polymers, pharmaceutical/health products and feed for poultry and diary
to meet growing demand for protein food has major implications for supply chain.
Increase in complexity and decentralisation of agribusiness organizations would
guide the future changes in supply chains. It would also entail the need for
development of new concepts and techniques. I hope you all would deliberate on
these issues and suggest the way ahead.

I thank Teflas and Globoil once again for giving me this opportunity to share
some of my thoughts with such distinguished participants.
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