Research Project: Four Problems with India’s Food Supply Systems
This post is the ninth in a series sharing findings from a research project Sam Kornstein and Paul Artiuch are working on throughout the month of January. Paul Artiuch and Samuel Kornstein are graduate students at the MIT Sloan School of Management. Throughout the month of January they are in India researching market-oriented approaches to reducing agricultural food waste.
Part VIII can be accessed here: Smaller Markets in Rajasthan
By Samuel Kornstein and Paul Artiuch
Note: This post was originally published on the MIT Public Service Center website and subsequently reproduced on Sam Kornstein’s personal blog somethingsbrewing.com. We are greatful to Sam and Paul for sharing their experience and research project with InPEC. All photographs included in these series are courtesy of Sam Kornstein.
January 24, 2012
We’ve spent the past three weeks in India researching agricultural supply chains to see if we could uncover the reasons why an estimated 30-40% of food grown in the country goes to waste. Over this time we’ve had a chance to speak with many stakeholders to gain their perspectives on the issue. Not surprisingly, the landscape that’s emerged is quite complex. At the risk of oversimplifying some of India’s largest agricultural challenges, we’ve outlined four of the main problem areas.
The infrastructure challenges look different depending on both the region and crop grown. We spent time in Punjab and Haryana, where much of the country’s grain is grown, and found the roads to be in reasonably good condition. The close proximity to a major market, greater Delhi, also makes transportation logistics relatively simple.
However, storage is a serious issue. As we mentioned in a previous post, the government purchases and stores a large proportion of each year’s grain crops to be distributed later as part of public programs. Since the country lacks modern storage infrastructure such as silos, the grain is stored outside under plastic tarps, which provides little protection from humidity and pests. As a result, crops often spoil before they can be moved to other parts of the country for distribution.
In more remote parts of India, where transportation infrastructure is problematic, there’s often no effective means to transport crops to market in the first place. Poor roads, a lack of tractors and trucks, and long distances to city markets collectively make it difficult for farmers to extract fair prices. Further, the extra cost of getting to market means that in bumper crop seasons, when prices fall, it’s often uneconomical to harvest in the first place. As a result, crops are left to spoil in the field.
Sam and Paul with two Professors from Punjab Agricultural University
2. Government Purchase and Distribution Schemes
Bureaucracy and corruption are well known problems in India and food supply systems are not immune. As we mentioned in a previous post, the Indian government buys certain food products at set prices and distributes them to the poor through ration shops. This massive program involves a number of government agencies and intermediaries. Farmers and Commission Agents told us that corrupt officials running storage depots often rig weighing scales to indicate less grain coming in, siphoning off the excess to the gray or black markets. We also heard that officials will sometimes allow, and then over-report, wastage in an effort to sell the excess supply. Similar issues arise during transport when portions of shipments have been known to go missing.
Most of the farmers we’ve spoken with were quite cynical about the government’s role in assuring food safety while simultaneously helping farmers make ends meet. Many mentioned that the private sector was much better at ensuring that food does not go to waste, as managers typically won’t be able to gain from sustained illicit transactions.
Sam and Paul with Mr. Rena, a farmer in Punjab
3. Middlemen, Bargaining Power, and Price Transparency
Before food gets from a farmer to a consumer, it’s typically exchanged through a number of intermediaries: Traders buy and ship produce and Commission Agents arrange transactions between farmers and traders. Since the typical farmer only works a couple acres of land and is not an important supplier to Trader and Commission Agents, these middlemen have an advantage in terms of information and bargaining power.
Farmers often won’t know the price for their product before they get to the wholesale market. Once at the market, the Commission Agents can dictate the price as it’s not economical for the farmer to take the goods back in order to wait for a better price. We’ve heard that sometimes Commission Agents will even leave a load of rotting produce near the market as a warning to farmers who do not accept the offered prices. Commission Agents have little incentive to prevent waste as they are compensated based on the total transaction value, without ever taking ownership of the product. Since they generally receive only a 2.5-6% commission on sales, it makes little sense for them to invest time to find traders offering marginally higher prices – they can earn more income by completing many deals as quickly as possible.
Further along the supply chain, traders also have few incentives to minimize waste. It is easier for them to deal with fewer goods at a higher price than more goods at depressed prices. As such, waste often occurs when these middlemen collude to boost prices and lower shipment quantities.
Paul Stands with two Commission Agents
4. Price Volatility
All of these factors contribute to price volatility, or extreme and somewhat unpredictable fluctuations, which compounds the waste problem further. When future prices are difficult to estimate, farmers cannot plan to grow the most economically efficient crops. This is problematic for two reasons. First, farmers will often choose to grow crops that were profitable over the past couple seasons. When this herding behavior occurs, prices then plummet, and it becomes uneconomical to harvest. This is what happened to potatoes this year. Secondly, when farmers cannot estimate their income in the coming year, it becomes much more risky to make long term investments that would improve future efficiency.
Peppers in a Rajasthan market
Broadly speaking, these four themes appear to be significant contributing factors to the food waste problem in India. To address food spoilage, both thoughtful policy and innovative technological/entrepreneurial solutions are needed. With farming and food subsidies being politically sensitive issues in India, any changes or new schemes are viewed with suspicion and take a long time to enact. Technological solutions, such as low cost infrastructure, entrepreneurial initiatives such as affordable methods to process and preserve food, and improved information transparency, may have a greater potential impact, especially if they are disseminated through private sector initiatives. In a subsequent post, we will discuss these ideas.