Farming and the Diffusion of Markets for Food

By: N Chandrasekhara Rao
Tracing changes with new start-ups in the production and retail segments of the value chain, the article analyses diffusion and impacts of organised retailing on farming community and outlines policy implications.
Crops

Dualism and inequality worsen due to relative lack of technological innovations and reduced welfare in agriculture (Barrett et al., 2010). A modernising value chain, viewed in this theoretical perspective, is one of the development agendas for overall growth of the economy with no sectoral disparities in income.

Agri-food transformation has been going on in the world in waves after early nineties, first in Latin America, South East Asia, China and now in India (Minten and Reardon, 2011). India is said to be the last major frontier in this transformation along with China and countries from less developed parts of Africa. While diet diversification and globalisation of diets as a result of higher disposable incomes is at the core of this transformation, changing relative role of players and institutions led to what are called demand driven value chains in the world. Gone are the days when what is produced is automatically consumed.

Now, retailers at the end of value chains pass on signals from consumers to producers on what, how and how much to produce. In other words, markets have come to play a bigger role in farm decisions. Consequently, new generation start-ups have been emerging in the country since the last few years. These are entirely different from earlier waves of start-ups in the country as they are driven primarily by the information and communication revolution, globalisation and private initiative.

Broadly, these start-ups can be shown as rendering either input or output services in marketing and related jobs. BigHaat.com, Flybird, AgroStar, Stellaps, Kedut, EcoZen, MITRA, EM3, Skymet, YCook, IFFCOKisan, Aarav Unmanned Systems and CropIn are some of the start-ups involved in input services. There are several output services such as Ninjacart, TheAgrihub, SVAgri, Sabziwala, Flipkart and Big Basket. The input-based start-ups disrupt the upstream value chain by connecting farmers directly with input companies for seeds, fertilisers, pesticides and machinery. In contrast, some output-based start-ups connect farmers with the buyer of their produce. In some cases, such as Ninjacart and Big Basket, the produce is brought directly from farmers in collection centres such as supermarkets. Besides these start-ups, online retailing companies like Amazon started buying directly from farmers replicating the Amazon Fresh model for its grocery business that started in 2016 in a tie-up with 12500 kirana stores (Ganguly, 2016).

Organised distribution of food in India has been practiced since 1950s through more than 600,000 fair price shops in the public sector. This was followed by chains such as Mother Dairy in cooperative sector in the eighties. Though some initiatives by private players happened in the late nineties, development of supermarkets in India is a relatively new phenomenon with big players—  Reliance, Birla, Tata and others entering the market in the early years of the new millennium. Moving along the growth path, their progress has stagnated by 2009 after the financial crisis. However, they started to grow again, with some restructuring, in the last few years and along with China and Malaysia, India is back with top ranking in the global retail development index of AT Kearney in 2016 (Global Retail Development Index, 2016).

There has been some consolidation going on in the sector with Future Group merging with Bharti Retail and acquiring many small chains like EasyDay, Nilgiris, Heritage, Big Apple, Sangam Direct and expanding their network of shops across all states. Reliance, bolstered by its telecom foray, is trying to expand its footprint in grocery retailing through online entry. As of June 2015, there were 3499 modern retail stores, 413 convenience stores and 112 cash and carry stores (USDA, 2015). The contribution of these supermarkets (or organised retailers) in food segment is estimated to be 3-5 per cent of INR 360 billion food market.

It is likely to grow at a faster rate in view of the underlying demand side factors, domestic investment and FDI regulations. This can be an underestimate as it does not include online retail. For example, Big Basket did a business of INR 1800 crores in the year 2016-17. Online marketing referred to as e-tailing is progressing at a very high rate and estimated to be in the order of 20 billion USD at present (Rao et al., 2017). The huge interest by many of the retail behemoths like Wal-Mart, CarreFour, Amazon and others stems from the fact the already huge consumption is expected to reach one trillion dollars by 2020.

In the wake of such developments, there have been concerns about the sustainability of traditional retail with the entry of organised retailing in the form of supermarkets and consequently on the livelihoods of a large number of people working in the sector apart from resource-poor farmers. However, it has been argued that densely populated countries like India will continue to have both organised and traditional stores for a long time although entry of organised retail is likely to modernise the traditional sector too with increased convenience (Kohli and Bhagwati, 2011).

Direct marketing between retailer and farmer-producer has been a  defining feature of supermarkets although the standard definition never included online retailers. Now sale of fruit and vegetables as well as all processed agri-commodities is online. Big Basket, Grofers, and Pepper Tap are cases in point; the latest to join the race is Amazon. Some of these online stores are starting collecting points in selected places and most of the brick and mortar chains like Reliance Fresh are starting online businesses. Therefore, the situation can now be termed as fluid with several new players emerging every day and old players applying course corrections to move on with the trend.

Empirical evidences available so far on the impacts of value chains with regard to their influence on production decisions and consequent impacts on the farming community bring out two things. Higher net income and employment accrue to farmers through direct selling to organised retailers. On the downside is the higher probability of exclusion of small farmers in the absence of institutional support.

Policy Implications

There have been concerns about small farmers’ exclusion in modern value chains. There is, therefore policy interest in measures that can help the resource poor smallholder cultivators in taking advantage of the opportunities of selling to these modern value chains. Several studies conducted in developing countries of Latin America, Asia and Africa found conclusively that the major positive factors in this regard can be availability of irrigational facilities (Naveen et al., 2009), provision of short term credit during the time of crop harvesting to tide over delayed payments from the supermarkets (Rao and Qaim, 2011), transport options that can compensate for infrastructure bottlenecks and social networks in terms of membership in cooperatives and other farmers’ organisations (Fischer and Qaim, 2012, 2014). These findings are pointers to the relevant policy measures that can be contemplated to propel small farmers in moving up the value chain in countries like India.

Overall, the start-up activity in agriculture falls short of the total activity and accounted for just one per cent of total investment of 6 billion USD in 2015 (Mitra, 2016). Further, late stage funds for scaling up are virtually non-existent. This is not coincidental since studies in other countries show empirical evidence of market failures in entrepreneurial activity in agriculture and the need for the state to intervene. Therefore, certain amount of start-up funds may be earmarked for spurring innovative movements in food and agriculture.

The government can encourage innovative institutions such as small producer companies (SPC) to empower the smallholders and facilitate their participation in the supermarket driven marketing channel to increase the bargaining power of small farmers’ vis-à-vis the large companies. Their progress so far is not as impressive as expected and very few of them could forge links with supermarket procurement operations. Therefore, special attention is called for in addressing issues of access to working capital and credit by considering proposals for putting these companies on equal footing with other companies and according some of the benefits of cooperatives e. g., tax incentives for the initial set-up period and leveraging credit from some of the government sources. The example can be that of National Cooperative Development Corporation.

Innovative interventions have to be planned by understanding the dynamics of beneficial inclusion in other developing countries. The successful inclusion is facilitated by access to better education and higher asset position. Experience in Kenya reveals that the government on its own or in collaboration with private players and NGOs, can facilitate participation of disadvantaged farmers by making better provision of infrastructure and transportation and credit facilities. The Chinese government encouraged direct procurement by providing investment support for construction of distribution centres, cold storages and facilities for testing products procured directly from the farmer cooperatives. The central government needs to mull over these issues.

The enormous size of the retailing giants vis-a-vis the traditional retail and the small and medium enterprises in the procurement of goods and services can lead to unfair advantages to the retailing giants both local and foreign. Therefore, Indian competition laws have to be reviewed after carefully studying the experiences of other developed and developing countries. For example, USA has a Robinson-Patman Act since the 1930s to provide a level playing field to the traditional retailers in procurement. Zoning restrictions and other similar suggestions may be considered depending on local conditions, on a case-by-case basis.

Nevertheless, the most important intervention from the government can be to strengthen and help the traditional retailers in modernising and systematising their businesses to provide better services to the consumers and withstand competition from the organised retail. As the 68th round of National Sample Survey Organisation  (NSSO) data reveal that the food retail and total retail employ 18 million and 32 million people respectively, the state needs to act in assisting them in their transition by providing incentives for modernisation, enabling laws and training. This ongoing transformation of the agri-food system in the country and its likely impacts on sustainability of traditional retail and smallholder agriculture calls for rigorous and dispassionate research and analysis for effective policy making.

Endnote

The transformation of agricultural food system in the country is progressing at a faster pace akin to the process in most other developing countries with changing roles of actors. While consumers are likely to benefit from this, policy interventions are needed to prop the farmer-growers to grab the opportunities by making necessary improvements in their infrastructure and skill sets.

References

Barrett, Christopher B., Michael R Carter and C Peter Timmer. 2010. A Century- Long Perspective on Agricultural Development. American Journal of Agricultural Development, 92 (2): 447-468.

Fischer, Elisabeth and Matin Qaim. 2012. Linking Smallholders to Markets: Determinants and Impacts of Farmer Collective Action in Kenya. World Development, 40 (6): 1255-1268.

Fischer, Elisabeth and Matin Qaim. 2014. Smallholder Farmers and Collective Action: What determines the Intensity of Participation. Journal of Agricultural Economics, 65 (3): 683-702.

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Mitra, Sounak. 2016. Investments in agriculture, food sectors hit five-year low. Live Mint, October 25. Available at:http://www.livemint.com/Companies/Or23bQbrR4tag4eIFJk8qM/Investments-in-agriculture-food-sectors-hit-fiveyear-low.html.

Rao, E.J.O., and Qaim, M. 2011. Supermarkets, Farm Household Income, and Poverty: Insights from Kenya. World Development , 39 (5): 784-796

Rao, N Chandrasekhara, Rajib Sutradhar and Thomas Reardon. 2017. Disruptive Innovations in Food Value Chains and Small Farmers in India. Indian Journal of Agricultural Economics, 72(1).

Reardon, T and B.Minten. 2011. The Quiet Revolution in India’s Food Supply Chains. IFPRI Discussion Paper 01115 International Food Policy Research Institute, Washington D.C. Available at: www.ifpri.org

Sayan. C and Priyanka Sahay. 2017. BigBasket, Grofers target eateries to push their private    brands. Live mint. September 15.

USDA. 2015.GAIN Report: India Retail Foods 2015, GAIN Report No. IN5164, United States Department of Agriculture- Foreign Agricultural Service, New Delhi.

The Author is Professor, Institute of Economic Growth, University of Delhi, North Campus, New Delhi.
raonch@gmail.com

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