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Changing Agribusiness and Agriculture Organization: Implications for Reforms in Karnataka Gopal Naik Professor Indian 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 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 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 Country China India Indonesia Brazil Pakistan Russia Huge Market Growth Potential from Poverty Reduction Country China India Indonesia Brazil Pakistan Russia Bangladesh Nigeria Mexico Pop’n (000) % < $1/day 1299 16. 6 1065 34. 7 239 7. 5 184 8. 2 159 13. 4 144 6. 1 141 36. 0 126 70. 2 105 9. 9 Source: World Bank. World Development Indicators database % < $2/day 46. 7 79. 9 52. 4 22. 4 65. 6 23. 8 82. 8 90. 8 26. 3

Structure of Indian Agriculture Sector • Large number of small/marginal farmers • Poor market 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 holdings Percentage Farm pyramids: Opposing Structures of holdings and area (global) Percentage of farm holdings Percentage of farm area 100 6. 2% 80 8. 9% > 5 ha 87. 1% 60 2 -5 ha 40 20 84. 9% <2 ha Source: von Braun 2005 (FAO) 6. 8% 6. 1% Source: Gulati, et. al. 2005 (FAO)

Implications of Globalization • Gear up the sector to compete effectively in the market 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 – 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 Coops Producers CA Processing Exporters Primary Wholesalers B Secondary Common Marketing Channel for Commodities Coops Producers CA Processing Exporters Primary Wholesalers B Secondary Wholesalers B E X P O R T Distributors Semi. Wholesalers B Retailers Consumers

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

Key Requirements for facilitating agribusiness • • Macro commodity sector management Integrated but efficient 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 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 • 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 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 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 • Partnering with Farmers