1. Financing Agri-value Chain Development in India Constraints and OpportunitiesP K JoshiInternational Food Policy Research Institute South Asia Regional Office, Pusa, New Delhi 110 012 India E-mail: p.joshi@cgiar.org

2. Coverage 1. 2. 3. 4. 5. 6.Problems of agricultural marketing in India Evolution of agri-value chain development and its financing in India Illustration of few value chains Benefits of modern value chains to producers Constraints in financing agriculture and value chains Opportunities and way forward 3. I Problems of Agricultural Marketing 4. Low market development 5. Key problems in agricultural marketing Dominance of smallholders and small marketable surplus Dominance of informal sector in marketing Small quantity of marketable surplus High marketing and transactions cost Low bargaining power (traders exploitation) Low producers share in retail prices (30-50%) Lack of price discovery mehanismFragmented supply chain Adds to inefficiency in agricultural marketing Multiple and exploitative intermediaries Low producers share in retail prices (30-50%) 6. . problems in agricultural marketing Inadequate markets and marketing infrastructure Perishable nature of high-value commodities Inadequate market yards; storage, warehouses, cold chains; refrigerated vans Huge wastage of agri-commodity, especially perishable commodities (30-60%) Limited packaging, branding and certification Limited access to market information High risk (production & marketing: 60-70%)Food safety issue Unable to comply due to lack of information Pesticide residue 7. Growing demand for agri-commodities Increasing demand for agricultural commodities Changing consumption basket from cereals to highvalue & processed commodities Rising income, growing urbanization, unfolding globalization, changing tastes and preferencesNot only among rich & urban consumers but poor and rural consumers Demand of food grains increased by 10% and of high-value commodities much faster: milk 30%; vegetables 50%; meat, eggs & fish 100%; fruits 163%Growing and promising trade of agri-commodities Europe, Middle East and USA 8. II Evolution of Value Chains and Financing in India 9. Current popular supply chain in IndiaFarmerConsolidatorConsumerTraderCommission AgentRetailerWholesaler Unorganized, fragmented and inefficient High transaction costs and high losses Low processing and poor food safety concerns 10. Supply chain financing approaches (source: KIT & IIRP 2010)A. Chain liquidityB. Agriculture finance 11. (c) Value chain financing One or more financial institutions are engaged Product flow Finance flow Information flow Technology flow Risk managementActors Farmer Traders Processors Exporters Retailers 12. Key instruments of value chain financing Financing for buying inputs Financing for creating assets Land development, polyhouse development, machine, irrigation management (drip, sprinkler, micro-irrigation) Cold storage, warehouse, chilling plants, processing plant, animalsFinancing for risk mitigation Planting material, Chemicals, feed, chicks, packaging materialInsurance for production and transportation Agricultural commodity futuresWarehouse receipts Commodity futures market Price discovery and price risk management 13. Agricultural financing in India Nearly half of the farmers have no access to credit 27% have access to formal sources Those have no access; 88% are marginal farmers Agricultural credit in India, Rs billion YearSupplyDemandGap, %2002-03256226654.02003-04300432608.52004-05358338116.42006-074411494412.12006-075361674525.82007-085817774133.1 14. Sector-wise credit in India Growth in agriculture & allied credit 6.1% in 2011-12 7.5% in 2012-13 Processing sector has 16% share in total agricultural credit Growth in processing sector credit 18.3% in 2011-12 7.6% in 2012-13 Micro-financing has limited share 15. Financing cold storage & processing Cold storage and processing are the key areas for financing Source of financing National Bank for Agriculture & Rural Development National Cooperative Development Corporation Nationalized and private banks FDI in processingProcessing 12% interest of US$ 150,000 for 5 years repayment Washing, grading & peeling of fruits Juice extraction and filtration Standardization and packaging 16. Cold storage, their numbers and capacity CommodityNos. Share in Share in Nos, % capacity,Cold chain logistics%Potatoes3,02356.176.9F & Veg1582.90.5Meat & fish4828.90.8Milk + products191Others871.60.1Multipurpose1,44526.821.4Total5,386100.0100.03.50.3Constraints 95% of cold storage capacity is with private sector; co-op has 4% onlyPre-cooling facilities Cold storage Refrigerated carriers Packaging Warehousing Erratic power supply Uncertain market Uncertain policies 17. Modern Terminal market Producer/farmers and their associations Collection centers Direct selling Modern infrastructure facilities Electronic auction Processors; exporters; wholesaler/trader/retail chain operators Storage; cold storage; temperature control warehouses; ripening chambers Washing; grading; storing; weighing; quality testingServices available Banking institutions Settlement of payment; advisory on inputs; prices; transport; packaging 18. Foreign direct investment (FDI) Agro-processing 100 percent in equity Seed development and production Single brand retail 100% Multi-brand retail 51% Conditions for FDI in multibrand retail: 50 % in backend 30% procurement from SMEsFood sector received only 3.3% of the gross FDI flow in India between 2000 and 2010 Seed sector Cargill, Syngenta, MonsantoProcessing sector Britannia; Nestle; Kellogg; PepsiCo., Perry, etc.Major players in back-end Wal-Mart cash & carry Metro cash & carryFood service restaurants (single brand FDI) KFC; Pizza Hut; Dominoes; McDonalds etc 19. FDI inflow between 2000 and 2013 in food and agriculture US$ million) 20. Agri-export zone: 60 in 20 states Jammu & Kashmir: Apples, walnuts Uttar Pradesh: Basmati rice, potatoes, mangoes, vegetablesUttaranchal: Basmati rice, aromatic & medicinal plantsSikkim: Flowers, Cherry pepper Himachal Pradesh: Apples Punjab: Basmati Rice, vegetablesRajasthan: Coriander, cuminAssam: Ginger Tripura: Organic PineappleWest Bengal: Pineapple, litchi, Darjeeling tea, vegetablesGujarat: Mangoes, vegetables, sesame seeds Bihar: Lychee, Vegetables and honey Maharashtra: Grapes, Grape wine, mangoes, flowers, onionOrissa: Ginger and turmeric Madhya Pradesh: Onions, garlic, seed spices, lentilsKarnataka: Gherkins, rose, onions, flowers, vanillaTamil Nadu: Flowers, mangoes, cashew nutsAndhra Pradesh: vegetables, mango pulp, grapes, gherkins 21. PPP initiative in Maharashtra CropPrivate sectorFarmers coveredMaizeMonsento, Pioneer, Vankys6,000SoyaADM63,750PulsesRallies India64,500CottonNuziveedu Seeds3,423OnionJain Irrigation system3,423TomatoHindustan LeverPotatoPepsiCoGrapesMahendraSugarcane12 sugar factories618 1,207 200 1,200 22. Emergence of innovative institutions: contract farming, cooperatives, producers companies Public sector initiatives State level Agro-industries Corporation Cooperative sector initiatives Dairy sector; Safal Mahagrapes; Mahabanana Private sector initiatives ITC FieldFresh; Heritage Mahindra Subhlabh Nigger Agro; Goderej; Dabur Venketeshwar/Saguna/ Pioneer Multi-national firms Nestle, Pepsi, Britannia, Perry Opportunity for agri-input services KHB (DCM Sriram group) Mahindra & Mahindra Financial institutions Nationalized banks Private Banks Rise of Retail Chains Reliance, Foodworld, MORE Nilgiri, and many more.. Cash & carry Walmart, Metro Producers Companies Kaushalandera & 23. III Some Illustrations of Improved Value Chains 24. Cooperative model: AMUL milk model 25. Private sector initiative: tomato & potato by PepsiCoIn potato, CPRI, Shimla is providing technical support 26. Field Fresh Model for domestic and export market (Bharati and Del Monte Pacific) 27. Value chain & financing cut flowers by Tanflora CorporationFlowers exported to Europe, Middle & Far East, Australia, Japan 25:75 sharing of profit 28. Value chain & financing in poultry: Saguna 29. IV Benefits of Modern Value Chain to Farmers: Some Case Studies 30. Impact of improved value chain on farmers income (Birthal, et al 2007)Net profit (Rs/t)4500 3750 300036512250 15002255 18212003750 01791 1007Milk ContractBroilers Non-contractVegetable 31. Farm-level production and transaction costs of improved & traditional value chain (Birthal , et al 2007) MilkVegetable250080 00 70 00144243710050 00 40 00 30 00200055865728Unit cost (Rs/t)60 001500351000 1485163020 00500 10 0 000 C o n tra c tP ro d u c tio nN o n - c o n tra c tT ra n s a c tio nContractProducti onNon -contractTransacti on 32. Incentives in Wal-Mart: Cash and Carry Form self-help groups, work with civil society organizations and appoint field agronomist Provide expert adviseSoil testing and provide agri inputs Demonstrations in partnership with Bayer Crop Science and seed companies Benefits 20-30% higher yields 7-8% higher prices, and 3-5% incentives on quality Reduce marketing cost 10-15% 33. V Constraints in Financing Farmers and Value Chains 34. Problems in developing improved value chains Breach of contract Low bargaining power of smallholders Restricts change in production portfolioDependency on the firm in the long-run Low volumeAsset specialization Producer or the firm (mainly on output prices & quality)Access to market, information and technologyMonopsony in the long run 35. Major constraints of processing sector (source: Kucjru, 2012) Low capacity utilization Poor recovery of the finished product from the raw materials Problems of arranging adequate working capital and its management Low product quality Unreliable assured power support 36. Constraints in financing improved value chain Dominance of large number of small and unorganized farmers High transaction cost of the firm and financer Unorganized and fragmented agri-marketing Lead to inefficiencies and lossesUncertainty of default repayment Week legal framework Unstable business environment New pilot on how kirana shops can become bankersInstable policy environmentGovernment policies Strong bureaucracy, stringent regulations, political uncertainty 37. Drivers of value chain success (Source: Parthasarthy et al 2004)Success relies on road network and urbanizationPage 37 38. VI Way Forward 39. 5-point program Consolidate producers, their production & produce Develop markets and market infrastructure Agriculture Produce Market Committee (APMC) Act is a major obstacle Implementation of Model Market Act with cautionCreate business-friendly environment Improve existing markets, processing sector and develop new marketsReform markets Producers associations or cooperatives, self-help groupsConsistent and sustained policies Incentives for financial institutionsIncentives for investment in rural infrastructure Warehouses, chilling centers, ICT in agriculture Develop road network; stable power supply (new sources such as solar) 40. Thank youThank youPage 40