The food systems in South Asia have been undergoing significant transformation. This transformation in this region poses several challenges. Raising farm incomes and getting farmers integrated in high value chains objective is dependent on the outcomes related to different product attributes comprising quality and food safety.
Ministry of Primary Industries and the Institute of Policy Studies of Sri Lanka in collaboration with the International Food Policy Research Institute are organizing two day conference on Emerging Food Safety & Quality Risks in South Asia: Challenges & opportunities for Sri Lanka on May 8-9, 2017 at the Ministry of Primary Industries Conference Hall, Battaramulla, Sri Lanka.
The aim of the conference is to examine the South Asian food systems comprising rising urban consumption and diversification in production and consumption portfolio and the associated growing pressures for policy changes for adoption of more stringent food safety and quality standards.
Did you know, milk contributes one-fifth to the gross value of agricultural output which is larger than the value of output of rice and wheat put together. In the past four- five decades, India’s dairy sector have seen a significant grown, despite poor access to markets and institutional credit, this progress was possible by millions of small-scale producers in this sector.
A recent IFPRI discussion paper titled “Formal versus Informal- Efficiency, Inclusiveness, and Financing of Dairy Value Chains in India” examines the efficiency, inclusiveness, and financing of dairy value chains using household-level data from Punjab state. The study finds that, on an average, a dairy household sells 88 percent of the milk it produces. About 62 percent of the dairy farmers representing 69 percent of the total sales are associated with formal sector value chains driven by cooperatives and private processors. Cooperatives however are the most preferred channel in terms of both sales and suppliers. But, smaller dairy farmers are more associated with informal value chains, while larger dairy farmers prefer selling milk to formal value chains, driven by cooperatives, multinationals, and private domestic processors. Small dairy farmers though outweigh large farmers in formal value chains numerically their share in milk sales is not large. Hence, it does not seem that formal buyers do not prefer partnership with small farmers.
Further, while exploring the impact of choice of a value chain on milk yield and farm profits the study does not find any significant difference in them across value chains. However, across farms, larger farmers have been found to realize higher profits perhaps due to their better bargaining power in obtaining price terms.
The study also addresses the issue of financing of value chains, and finds that more than half of the farmers borrow credit for dairying related activities both from formal and informal financial sources. The incidence of borrowing is higher among those who are associated with informal value chains. But, chain-based financing is limited to only one-fourth of the borrowing households. Financing by commercial banks is limited and largely to those having larger holdings of both land and animals. Smallholder farmers depend more on social networks of relatives & friends and moneylenders for their financial requirements. This implies that financing decisions of the commercial banks or other financing institutions are largely driven by creditworthiness. The findings of this study have implications. A value chain with its product market orientation can serve as collateral and financial institutions may think of using contract as collateral. Also financing through a value chain is an important means of reducing the transaction costs and lending risks associated with asymmetric information. Financial institutions in India treat credit to dairy as investment credit while farmers need funds for meeting operational costs. The study thus argues for provision of short-term credit to dairy farmers on the lines of ‘crop loan’ through innovative financial products, such as ‘dairy credit card’. This would enable farmers adopt yield-enhancing technology and inputs and also to scale up their dairy activity.
IFPRI recently organized a five day study tour on contract farming and value chain analysis in India for a delegation from Nepal. The program was designed to analyse the conditions for success of contract farming and to assess the business environment for contract farming. The study tour aimed to demonstrate the benefits of contract farming under what would be a similar environment in Nepal. The objective of the tour was to show the participants the prevailing best practices in contract farming for pomegranates, grapes, and poultry, as well as onions and other vegetables, and teach them state of the art techniques.
The study tour began with the team visiting the Dr. B.V. Rao Institute of Poultry Management and Technology at Uruli Kanchan in Pune district on August 19, 2015. This was followed by a meeting with a grape farmers association called Mahagrape organization and other farmers in the district, to understand the opportunities for and challenges of contract farming.
The delegates also visited the Krishi Vigyan Kendra (KVK) at Baramati to understand the promotion of modern agricultural technologies and good agricultural practices among farmers, such as bio-fertilizers and bio-pesticides, certification of farmers’ seeds, custom-hiring facility for agricultural equipment, soil testing, poly-house techniques, water conservation, and water harvesting techniques.
Later in the week, the team visited the Baramati Farmers’ Producer Company and the Jain Research Institute located in Wakad village of Aurangabad district. The delegates interacted with the scientists to learn more about technologies like drip irrigation, solar power, tissue culture techniques, and water harvesting. This study tour concluded with a week-long training in New Delhi on contract farming and value chain analysis. This study tour is part of the ongoing USAID-funded Policy Reform Initiative in Nepal.
Most smallholder farms are family-based—of the world’s 570 million farms, 88 percent are family farms while 84 percent are small. Smallholder farms, with an average size of 2 hectares or less, provide not only livelihoods to 2.5 billion people but also 80 percent of the food consumed in Asia and Africa south of the Sahara. Nevertheless, with emerging challenges such as climate change, price shocks, agricultural-related risks to health, and limited access to finance and capital, smallholder farmers will suffer the most.
In the light of these challenges, strategies are needed that are tailored to different types of smallholders and a country’s level of transformation, said IFPRI Director General Shenggen Fan at last month’s M.S. Swaminathan Research Foundation’s campus in Chennai, India, where he spoke on “Enhancing the Profitability of Family Farms” at the Asia-Pacific Regional Consultation on the “Role of Family Farming in the 21st Century: Achieving the Zero Hunger Challenges by 2025.
According to Fan, research shows that smallholders with profit potential should move up from subsistence to profitable farming systems and that already profitable smallholders need to scale up commercial activities. Conversely, farmers who lack profit potential should move out of agriculture and into non-farm employment.
Policies should reflect a country’s stages of transformation: from increased productivity among smallholder farmers to institutional reforms, leading to high-value agriculture and improved links to global and urban markets.
Using the example of India, Fan said that linking farmers with a dairy grid connected over 13 million of farmers—over 25 percent of whom were women—which not only increased their bargaining power but it also helped to provide demand information and reduce costs and risks.
Fan concluded his presentation by outlining next steps to enhance profitability of smallholder family farms, which includes
Institutional reforms that strengthen land rights and help facilitate land transactions (particularly though rental markets),
Increase linkages between smallholders and value chains,
Pallavi Rajkhowa is Senior Research Assistant at IFPRI’s New Delhi office
Despite being the largest producer of mangoes, adding to about 40.5 per cent of world production, the mango value chain in India suffers from inefficient markets, unavailable formal finance, low prices to farmers, and infrastructure bottlenecks etc. Even today, the traditional mango value chain moves from mango grower to contractor, village trader, commission agent, distant traders, processors, retailers/exporters before it reaches the end consumers. Not to forget, even regulated market such Azadpur Mandi (New Delhi), Asia’s largest fruits and vegetable market is ill equipped to handle perishables such as mangoes due to absence of basic amenities such as (i) Lack of roads and parking space (ii) Poor traffic management (iii) Lack of drainage and (iv) Insufficient marketing space etc.
IFPRI’s on-going study on ‘Innovative Financing for Agriculture and Food Value Chain in India’ is focusing on various mango marketing channels and sources of financing of the value chain in two major mango producing hubs i.e. Andhra Pradesh (AP)and Uttar Pradesh (UP). The study aims to understand the various financing methods in existing value chain. The sample size of the survey is 400 covering all players in the mango value chain in AP and UP.
Financing the value chain
Mango value chain in India is primarily financed through short term informal finance whereby, advances are made from buyers within the value chain to farmers or contractors. IFPRI researchers in the on-going field survey found that in these markets, commission agents usually use their own equity or borrow money from informal brokers to drive the value chain. These credit flows are generally called trade credit, or chain credit. They consist of short-term, tailor-made loans to ensure assured supply of products and maintain long-term relationships. These contracts are usually verbal based on trust and repayment is done in cash or kind. The main objective of this kind of finance is to improve chain efficiency rather than earnings from interests. Most players prefer this mode of financing rather than formal financing due to lack of collateral, access to quick, tailor made loans and flexibility of repayment.
Due to unavailability of cold storage and to increase the shelf life, most contractors pluck the fruit before they ripen and use calcium carbide, a banned substance to ripen it. Researchers found that Uttar Pradesh has a few pack houses exclusively for mangoes in Sahranpur and Lucknow. They are equipped with pre-cooling chamber, cold chamber and ripening chamber. However, these pack houses are currently not utilized to its full capacity. This is because contractors are obliged to sell their produce to commission agents who are also their financiers. Lack of short term, tailor-made formal finance has led to increased dependency on commission agents for finance, which in turn has resulted in underutilization of the mega pack house. Also, mango is a seasonal crop therefore the pack house is only functional for 2 months.
Though the final report is yet to come, but based on field visits to Andhra Pradesh and Uttar Pradesh some preliminary suggestions are as follows. It was observed that mango orchards are mainly contracted to reduce marketing and price risk, which has resulted in use of inefficient cultivation practices as contracts are for short durations and contractors’ sole aim is to make profit without investing in the orchards. There is need for greater awareness of best practices for contractors and farmers such as (i) rejuvenation of trees; (ii) timely pruning and management of canopy; and (iv) introduction of new varieties of mangoes.
Moreover, mango being a perishable requires efficient marketing facilities. Lack of infrastructure has led to adoption of malpractices such as use of carbide to ripen the fruit, therefore focus should be to create adequate infrastructure. Also, to utilize the existing facilities to its full capacity, other perishable commodities should be brought after harvesting to the existing pack houses.
Finance plays a vital role in smooth functioning of the value chain. Most actors in the mango value chain prefer informal sources of finance due to its hassle free, quick and tailor-made nature. Such informal financing are opaque transactions and it increases the possibility of exploitation. Formal financial instruments such as short term and smaller sized loans, warehouse receipts and weather insurance by formal institutions to actors within the chain by creating a triangle of cooperation between the seller, the buyer, and the financial institution can not only enhance the efficiency of a value chain but also assist in transforming traditional value chains to modern value chains. This kind of triangle of co-operation brings in product flow, finance flow, information flow and risk management.