The Way Forward in Traditional Farming

[Written by- Ankur Ghosh, Emma Bernal, Harald Schweitzer, Julie Colinet and Nidhi Kapoor Khetarpal]

Context

According to the World Economic Forum, Indian farms are setting national records producing over 260 metric tons (MT) of food a year! Yet despite producing around 30 MT above demand, the Government of India estimates that 40% of the food produced annually is wasted[1]. This in turn leads to higher prices for consumers and lost income for small farmers[2]. Fruits, Vegetables and Pulses are thought to be the main drivers of food inflation in India.

The main reasons for wastage are as follows:

• Rotting due to high humidity
• Wilting due to low humidity
• Damage during transport
• Unpredictable weather patterns affecting humidity levels during transport
• Lack of improper quality control across the supply chain[3]

Unpredictability of weather aside, another large portion of food wastage is caused by inefficient supply chain practices, and could be curbed dramatically with improvements to these practices. For example, since Indian farms are on average far smaller than those of the developed countries, it is more difficult for farmers to invest in modern technology that require economies of scale[4]. Any positive intervention must be promoted by large players in the supply chain (retailers, aggregators) or by the Government of India.

What are the social and environmental sustainability goals that could be designed for this industry?

Achieving the main objective of eliminating food wastage, would require changes throughout the value chain. Below are some goals that could be set for producers, intermediaries, retailers and consumers:

• Adoption of agricultural practices that avoid damaging fruits and vegetables while harvesting;
• Increased collaboration between retailers and producers, to improve demand estimates;
• Improved logistics and cold-chain technology. Which when attributable to poor infrastructure, it is the role of the governments to improve but the industry can lobby;
• Reduced aesthetic exigencies from retailers and customers, via an understanding that less beautiful produce is just as edible;
• Increased leftover donations to NGOs to redistribute to the less fortunate;
• Redistribution and alternative uses of food not suitable for human consumption, such as for animal feed, compost or biofuel;
• Education of consumers to reduce waste from better planning of meals and consciousness;

How do these goals compare to the industry’s current sustainability goals?

Current sustainability goals in the industry’s supply chain include:

• Reduction of product losses in transportation and storage: most of the largest companies in the country are already working to solve this in urban areas via implementation of cold storage infrastructure in their chains. Though aligned with our goals, this must penetrate deeper into rural parts of the country to achieve an optimal reduction of waste.
• Traceability of food: tracking and tracing of food in all stages of the supply chain to ensure quality, customer satisfaction and health in consumption, has been prevalent in the market for some time but only relevant in the past five years and only within the major suppliers; the goal is to achieve traceability with all suppliers irrespective of size.
• Transparency and data analytics: data is being collected by all players to take advantage of their facilities, market trends and harvest seasons. Which relates to our goal of better demand planning but because of the large number of players, collaboration is the important next step.

Are the current initiatives in this industry contributing towards achieving your sustainability goals?

Where do these initiatives fall short?

Yes, many of the current initiatives positively contribute to some of the sustainability goals, however they do not target all of them. The biggest challenge for the initiatives discussed above is the sheer size and logistical complexity of the country. Its geography allows for different vegetables to be grown in various parts of the country but the distances and relatively poor infrastructure create complex supply chain challenges. This also implies an imbalance of capital availability, large cities play an important role in the implementation of the initiatives and rural areas generally fall behind.

These rural areas are the basis of our proposal, we believe there are many business opportunities to improve logistics, reduce waste, and better predict demand to minimize variability and increasing the productivity of small businesses.

What are the traditional ways of matching supply and demand or providing the service?

Retailers have two ways of going about procurement, either by sourcing directly from the farmers with their in-house aggregator or by sourcing from external aggregators who in turn source from farmers. For small farmers, the main pathway to get their produce to market is via aggregators because even though retailers can incentivize farmers to supply to them directly with greater profit margins, external aggregators have larger networks. Irrespective of the sourcing strategy, there are issues getting produce to market in terms of final yield and quality.

Overall Food Value Chain in India

On average, food travels between 300-1,000 km from the farmers to the retailers, often transported in non-refrigerated vehicles to consolidation hubs, which destroys some of the food along the way[5]. The lack of quality control transporting the food, increases stress on farmers to produce more to maintain yield per ton of production to compensate for the losses[6]. Independent of ambient conditions, another key element to control are the moisture levels. Old methods of manually sprinkling water also damages quality and appearance.

Tonnes of fruit and vegetables rot each year before reaching consumers due to inadequate quality control (source: ft.com)

Our Proposal:

Our proposal is to create a new transportation company (either independent or belonging to the warehouses or retailers) that would use a fleet of vehicles fitted with technology (mostly DIY and low cost) that can help control or correct certain environmental factors such as humidity, so as to prevent and reduce as much as possible the damages that take place during transit. We suggest a 3-phase approach, by the end of which this company would function as the centralized collection and distribution agent of fruits and vegetable for the warehouses and markets to better match demand and supply, while sharing and reducing risk.

In Phase 1, the company would partner with retailers to purchase trucks, and retrofit them with the required technology to provide suitable transport of the food. Initially the company would work with non-refrigerated trucks as refrigerated ones are prohibitively expensive. However, drawing upon the guidelines of the American FAO, these retrofitted trucks would be designed with white canvased outer sides to recue heat inside the truck, and inner meshes to keep the goods safe. The key innovation would be the installation of humidity detectors inside the trucks, that would then raise or lower the canvas sides to control humidity levels (letting air flow into the truck) or turn on misting sprinklers. Controlling the humidity level should help reduce rotting or wilting of goods. The humidifiers with in-built psychrometers/hygrometers can activate and deactivate the humidifier with respect to the ambient humidity level versus the requirement for the crops. For example, since relative humidity requirements for green vegetables is between 95-100 percent in cold storage[7], the moisture content is crucial for maintaining quality, even when the produce is being transported.

Phase 2, would be to disrupt the current supply chain: buy out existing small transport players and create a larger distribution chain that would focus on efficiency through pooling and risk reduction (information and alignment) to the farmers and warehouses/retailers. Economies of scale, adoption of best practices, and the continuous implementation of technology will reduce wastage and add value to the distribution network. To create even more buy-in, current drivers would be retained in the new distribution company, leveraging on their expansive knowledge of the complex distribution networks.

At this stage, refrigerated trucks will be introduced to the fleet.

Phase 3, is to standardize the process. The company, with its own a massive fleet of trucks, could begin to ensure proper storage using simple, standardized crates; designed to evenly space out produce and improve airflow, thus continuing to improve the transport conditions.

As a centralized distributor, the disruption would be in the ability to match wholesalers demands with the existing supply, sending specialized trucks to pick up the products in the most cost-efficient manner and optimize pickup and delivery routes.

How does financial growth and social/environmental impact form a feedback loop?

The proposed business is so capital intensive, that it would require continuous reinvestment on PPE to incrementally improve quality of the transportation of goods, which would further reduce losses and increase gains to reinvest. Controlling humidity levels impacts the farmers’ revenues directly because produce can lose anywhere from 15 to 58% of its weight in water, and quantities of food are measured in weight upon delivery. Further, as already mentioned, reduced produce or loss in produce due to damage not only translates into lost income for small farmers but also in higher prices for consumers[8].

Our model attempts to solve this problem by investing in humidification technology, that can be significantly decrease losses (more than 10%) per ton of production. Greatly reducing supply risks for the retailers which is currently unevenly shared by both farmers and retailers. Farmers have high risk because of low crop diversity and uncertainty of how much of their produce will reach the buyers, while the retailers have the risk to miss-matching supplies to the demand from customers. Low crop diversity further increases the risk of crop failure and make the return on investment for the farmer more difficult. The new method, using the concepts of pooling, disrupts the fragmented small transporter and consolidates them into a single larger distributor in charge of the logistics and distribution. The new trucks with humidity controls will significantly reduce the information costs of not knowing how much of the produce picked up at the farm will make it to the wholesalers intact.

Finally, this will increase financial certainty for both the farmers and wholesalers. Reducing variation in humidity levels will result in reduced damage and hence increased quantity of produce. This would increase supply and hence control inflation. Everybody in the supply chain will benefit from extra income, leading to overall financial growth across the value chain. Once proven in an in an initial region, this can be implemented across the supply chain all over India.

Also, once the distribution is centralized, it would be easier to estimate the number of trucks required in the fleet to manage pick up and drops so that there is no excess of trucks on the roads and minimum environmental damage can be ensured.

The loop will function as a feedback loop because as farmers, retailers and other players in the value chain realize the value in using these trucks, they will be more willing to partner with the company and ensure that the services of the company are maintained thus leading to further improvements.

Further, there are many manufacturers in India who could provide the customized humidifiers for vehicles, since the parts are common and relatively cheap. These manufacturers can make batch products based on the requirements of clients. They will also be able to offer deals to the company once the magnitude of the orders grows.

The agriculture and retail sector is highly revenue driven with comparatively low margins compared to other sectors. Hence, the creation of and investment in any new process requires strong buy in from key supply chain players.

Why this could be game changing?

This method would initiate the progress towards security of supply through low cost technology interventions. If successful, this could reduce food waste due to improper quality control by at least 10% thereby bringing down the wastage of fresh produce in India from 105 to 95 MT/year, provided this process become a standardized approach across the country.

Moreover, this method would help create more wealth for farmers and help the development of rural India. Not only would this address the environmental concern of food wastage, it would also address the social need of modernizing rural farming practices further by developing the skills of a relatively illiterate section of the Indian population. As the Indian population urbanizes, food security is becoming a national priority and improved methods bring the country closer to meeting its needs.

Such practices are common in more developed economies and mature markets where the variability of the supply chain have been evened out through iterative process improvements.

One way to incentivize the adoption of said technology would be to establish a revenue sharing model till the method is proven. This would reduce risks for the retailers and the technology providers (retrofitting companies) and even potentially incentivize continual upgrades and maintenance.

Retailers would primarily benefit from improved reliability of the supply forcasts by reducing variability; leading to two benefits: reduction of overage (when too much stock is purchased to cover for wastage), and reduction of underage (when there is not enough supply).

Implementation challenges (costs and risks)

There are several key challenges to implement this idea:

• Buy-in from existing players
• Proper handling
• Technology theft
• Regulatory
• Lack of Backward and Forward Integration

Buy-in from existing players

The proposal needs varied degrees of buy-in from key players of the supply chain. Phase 1 focusses on retailers and their distributors. Since retailers hold more power in the supply chain with the money to invest in this intervention, it would be essential to secure buy-in from them to begin with, luckily most retailers recognize that they need to improve practices to reduce losses. The financial gains forecast for the retailers should be accurate for them to buy-in. Phase 2 would disrupt the livelihood of thousands of independent transporters or small transportation businesses. To mitigate this, these disrupted players should be incorporated into the new system. For example, the disrupting company could buy the transporters truck, retrofit the canvas sides and humidifiers and lease them back to the drivers who would now be employees of the company rather than independent. Additionally, it is believed that a regular salary rather than being reliant on seasonal demand would help attract more drivers into the company. This will have the dual effect of allowing the company to grow while reducing the existing competition.

Proper handling

Proper handling of perishable goods requires some care to ensure minimized waste. To do this, drivers should be incentivized with part of their pay being linked to the quality of goods on arrival. By simple weighing at the start and finish as well as visual inspection of goods signed by farmers and wholesalers for example. (We realize that literacy is an issue in India, using pictograms should be able to overcome this as well as education from our sales agents).

Technological theft

This risk is unavoidable, however by using simple technology and back fitting of equipment into existing trucks rather than having high upfront R&D or other investment costs, the risk should be minimized. Retailers and distributors will have to be aggressive in its initial expansion to gain market share before competitors appear.

Regulatory

With the Government of India making direct sourcing for retailers from farmers increasingly simplified with relevant policy development, the market is opening up for retailers to build their own collection facilities and network. This does pose a threat to smaller logistics players in the market. They will be merged or put out of business if this model is successfully implemented. This also poses a challenge in the ease of implementation as collectively smaller players can push the government to put regulatory blocks such as increased margins which might dissuade retailers from proceeding with the implementation.

Lack of Backward and Forward Integration

Due to the high fragmentation to the supply chain of the industry, there is a lack of linkage between the retailer and the farmer. Due to the farmers’ traditional reliance on the external aggregators establishing a strong link between the farmer and retailer is more challenging in the present scenario.

How to overcome Risks?

One way to overcome these challenges is through complete vertical integration of the supply chain. This must be driven by the retailer as it has the maximum capital power in the chain. If retailers are able to adopt this supply chain model, it will revolutionize the agriculture supply chain very well providing incentives for other players in the retail industry and the government to create policies enabling the industry further.

Is anyone in the world implementing this?

While there is a lot of research being conducted on the viability of technological advancement in agriculture worldwide, some of the more developed countries have already adopted and implemented various technologies and methods to improve the efficiency of their supply chain. Israel, owing to the water scarcity in the middle east, is one of the leading nations, along with USA, UK and most of continental Europe, to develop efficient humidification technologies to reduce risk in its agricultural supply chain.

[2816 words]

[1] https://www.weforum.org/agenda/2014/08/india-perishable-food-waste-population-growth/

[2] http://www.bbc.com/news/business-28139586

[3] http://www.hindustantimes.com/india-news/food-india-wastes-can-feed-all-of-bihar-for-a-year-shows-govt-study/story-qwV3C9YnJAoXn83b3htmsK.html

[4] http://news.mit.edu/2012/sustainable-approaches-to-reducing-food-waste-in-india

[5] https://www.greatlakes.edu.in/pdf/Herald/Vol4/Chapter3.pdf

[6] https://www.iima.ac.in/c/document_library/get_file?uuid=4fe25034-5e44-4cb1-b915-28d97bd45d14&groupId=62390

[7] Hardenburg, R.E., A.E. Watada and C.Y. Wang. 1986. The Commercial Storage of Fruits, Vegetables, and Florist and Nursery Stocks. USDA-ARS Agriculture Handbook Number 66 (revised) 136p.

[8] http://www.bbc.com/news/business-28139586