CHAPTER 10

Agricultural Supply Chain and Food Processing Industry

This chapter describes two important aspects of agriculture and has two sections: Supply chain in agricultural products and food processing industry in India

Concept of Supply Chain

Supply chain means flow and movement of goods from the producers to the final consumers. It is a sequence of flows that aim to meet final customer requirements that take place within and between different stages along a continuum, from production to final consumption.

Supply chain not only includes the producer and its suppliers, but also, depending on the logistic flows, transporters, warehouses, retailers, and consumers themselves. In a broader sense, supply chains also include, new product development, marketing, operations, distribution, finance and customer service.1

The term supply chain management is relatively new. It first appeared in logistics literature in the 1980s, as an inventory management approach with emphasis on the supply of raw materials. Logistics managers in retail, grocery, and other high-inventory industries began to realize that a significant competitive advantage could be derived through the management of materials that flow in their inbound and outbound channels.2 Supply chain management is defined as the design and operation of goods in physical form , management information, and financial systems needed to transfer goods and services from point of production to point of consumption in an efficient and effective manner. Rais and Sheoran (2015) have said that

the entire supply chain management process is a value chain where bottlenecks, value adding factors and liability factors are identified and addressed, thus enabling the retail organization to have an efficient supply chain. The supply is the part of retail operations that ensures that the right product is in the right place, at the right time and at the right cost. The supply chain perspective can help the retailers identify superior suppliers and distributors and help them to improve productivity, which ultimately brings down customers costs.

Integrated supply chain management of farm produce is the only way the full value can be distributed right across the chain.

Importance of Supply Chain

Supply chain management plays an integral role in keeping business costs minimum and profitability as high as possible.

There are many factors involved in supply chain management of which flow is one of the most important factor. Flow includes the product flow, the information flow and the finance flow. The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs. The information flow involves transmitting orders and updating the status of delivery and the finance flow includes all the financial aspect such as invoices and payments (Rais and Sheoran 2015).

According to Kalidas et al. (2014), “Supply chain development not only benefits the private sector but also creates spin-offs that stimulate social, economic and environmental sustainable development in the region (employment generation, added value, minimization of product losses etc.)” This is shown in Figure 10.1. Therefore, supply chain management is the integrated planning, implementation, coordination, and control of all agribusiness processes and activities necessary to produce and deliver, as efficiently as possible, products that satisfy consumer preferences and requirements. Participants in agricultural supply chains are farmers, traders, processors, and retailers. It is important to understand that original good quality products can be subject to quality decay because of an inadequate action on the part of any of the participants in the process.

Figure 10.1 Supply chain in Fruits and vegetables industries

Some of the specific gains of efficient supply chains are as follows:

As the world is moving towards more safe food, healthy food, food as the medicine, climate change concern, environmental concern, animal welfare concern, it is only natural that farm produce is at the cusp of a phenomenal transformation, where rapid industrialization can happen only if we could work on making the supply chain efficient.3

Problems of High-Value Agricultural Produce

There is constant friction between all the actors as there is no integrated or coordinated or collaborative approach to problem solving, the fundamental driver of supply chain efficiency and costs.4 There is an enormous waste during postharvest storage and handling caused by improper bagging without crating, lack of temperature-controlled vehicles, and unavailability of cold chain facilities in various parts of country for preserving the produce. Infrastructure gaps in cold chain and processing units also lead to a large wastage of agricultural produce. The country lacks an efficient supply chain for the distribution of fruits and vegetables. Quality of a sizable quantity of produce also deteriorates by the time it reaches the consumer. Most of the problems related to the marketing of fruits and vegetables can be traced to their perishability. Perishability is responsible for high marketing costs, market gluts, price fluctuations, and other similar problems. This phenomenon is caused by various factors, among which economic and technological factors are important. There is no matching development in supply chain management or vertical integration of production with processing.

“The challenge in supply chain management is to maintain all three flows of ‘product, information and the finance’ in an efficient manner, resulting in optimal results for farmers, growers, wholesalers and customers” (Rais and Sheoran, 2015). It has been found that 30 to 40 percent of fruits and vegetables are wasted due to postharvest losses.

There is lack of basic as well as specialized infrastructure such as cold storages, refer vans, cool chains, ripening chambers etc. Also there is a missing link between production and research system and consumers. The system lacks in capacity building market information, research and intelligence. India is short by 10 million tons of cold storage capacity (Kalidas et al. 2014).

Some of the problems in the food supply chain are as follows:

I. Numerous stakeholders are working in isolation. The food supply chain is complex with perishable goods and numerous small stakeholders. The infrastructure connecting these partners is very weak. Transferring goods from one place to another where connectivity plays a vital role. The road infrastructure is not so good, and transferring food and other goods is a real big challenge.

II. Demand forecasting is totally absent, and the farmers try to push whatever they produce into the market. Demand forecasting is one of the important requirements for improving supply chain effectiveness. In the absence of proper forecasting, there is an imbalance between supply and demand. In some months, vegetables are not plucked from the farm due to lack of demand. In some regions, produce is not available and, as a result, prices shoot up.

III. There is a lack of sorting and grading methodology as farmers do it themselves and they have very little knowledge about the processes. Most of the agriculture is in remote rural areas and all the places are not provided with proper facilities of handling and packaging. There is a shortage of skilled labor to handle the different agricultural products.

IV. The supply chain is not designed and built as a whole in an integrated manner. The processes of new product development, procurement, and order to delivery should be well designed and well supported with the help of IT tools and software.

V. The supply chain that connects the farmers to both organized and unorganized retail is highly inefficient, with several intermediaries and manual handling. The result is lots of wastages. A large number of unorganized retailers who are linked with farmers through wholesalers or commission agents use obsolete supply chain practices, making the unorganized segment further inefficient.

VI. Supply of sufficient cold storage is unavailable.

VII. Processes and linkages in marketing channels are not efficiently linked. Proper marketing and information on related factors are not known. All these are needed for providing efficiency to the food supply chain.

Policy Intervention Needed

The Ministry of Food Processing Industries was set up in July 1988 to give an impetus to the development of the food processing sector in the country. Subsequently, this ministry was made a department and brought under the Ministry of Agriculture. It was again notified as the Ministry of Food Processing Industries in 2001. As of 2020, India is in a transformation path and must attempt to look at supply chain management with a holistic view to centralize and create collaborative structures for better management of supply at optimal costs. The governments play a leading role in formulating the policies for food and agriculture, which includes farming, production, processing, distribution, besides the financing and retailing of these activities. There are multitudes of departments which handled between both state and central governments. In view of the globalization of this industry, the decisions that are mutually reinforcing and consistent would be extremely productive.

State needs to educate the producers of the latest technology available and also help them by granting support to acquire them and proper supply chain management should be there in the country which would help prevention of exploitation of farmers and help increase their income (Rais and Sheoran, 2015).

The following policy steps would be helpful in strengthening the process of the supply chain:

I. Vertical coordination of farmers through cooperatives, contract farming, and retail chains would facilitate better delivery of output, reduce market risks, provide better infrastructure, attract more public interest, acquire better extension services, and create awareness regarding the prevailing and new technologies.

II. Customized logistics is an important immediate requirement to make logistics effective. This reduces the cost, facilitates the maintenance of quality of the produce, and fulfills the requirements of targeted customers.

III. Information system for better coordination among different stakeholders, from farmers to consumers, is needed. The Internet and mobile communication can also be used to enable information and financial transfer between the stakeholders.

IV. There should be recognition of significance of public–private partnership as a strategic solution. Supply chain activities like washing, waxing, grading, sorting, packing, precooling, handling facilities, insurance, finance, transport, and processing facilities would add value to the supply chain functioning.

Thus, there have to be structural changes at different levels—farmers, intermediaries, and consumers. The government, private, public–private partnership, cooperatives, technology providers can play a crucial role. Infrastructure like roads, transport, information and communication technology, and cold storage are basic requirements for better results in the supply chain (Rais and Sheoran, 2015).

Several policy measures are required

to solve the problems existing in the Indian food supply chain which includes allowing more organized retailers to enter into retail market, setting up of basic production factors, an optimal crop management system, developing a post-harvest infrastructure, entrepreneurial management and expertise and logistical infrastructure and finally by improving post-harvest operations related to handling, storage, and marketing of produce (Rais and Sheoran, 2015).

All such measures will ensure consistency in supply and provide recorded and demonstrated traceability of products, which will benefit the farmers with a reasonable remunerative price and consumers with good quality produce. India has a huge opportunity to become a leading global food supplier if only it has an agile, adaptive, responsive, and efficient supply chain. From disjointed grower networks to end consumer, it is the most complex supply chain one can imagine. This is exactly where India’s story remains the most challenging.

Food Processing Industry

Food processing has become an integral part of the food supply chain in the global economy, and India has also seen growth in this sector since the beginning of twenty-first century. Despite being one of the largest producers of agricultural and food products in the world, India ranks fairly low in the global food processing value chains. In fact this sector is largely unorganized and informal.

The income elasticity of demand for animal husbandry products like milk, cheese as also meat, chicken, and eggs being in the range of 1.5 to 2, demand rises by 10 percent or more with per capita income rising by 6 percent. This is also true for vegetables and fruits and for fish and forest products (Alagh, 2018). The agricultural sector is witnessing a shift from traditional farming to horticulture and to poultry and dairy production. The demand for fresh and processed products of all types is increasing as the population urbanizes, incomes rise, and consumption habits change. The growth of an efficient cold chain network, from farm to fork, will help curb the ongoing spoilage rate of agricultural output while helping producers capture value as products retain quality and give extra benefit to consumers.5

Processing can be delineated into primary and secondary processing. Rice, sugar, edible oil and flour mills are examples of primary processing. Secondary processing includes the processing of fruits and vegetables, dairy, bakery, chocolates and other items. Most processing in India can be classified as primary processing, which has lower value-addition compared to secondary processing. There is a need to move up the value chain in processed food products to boost farmer incomes. For instance, horticulture products, such as fruits and vegetables, carry the potential for higher value-addition when compared to cereal crops (Nagaich and Priyani 2019).

Importance of Food Processing Industry

As of 2018, the Indian food processing industry accounted for 32 percent of the country’s total food market. It is one of the largest industries in India and is ranked sixth in terms of production, consumption, export, and expected growth. It contributes around 8.80 and 8.39 percent of GVA in manufacturing and agriculture, respectively, 13 percent of India’s exports, and six percent of total industrial investment. According to the Department for Promotion of Industry and Internal Trade (DPIIT), the Indian food processing industry has cumulatively attracted foreign direct investment (FDI) equity inflow of about US$ 8.57 billion between April 2000 and December 2018.6

The food processing industry is of enormous significance as it provides vital linkages and synergies between the two pillars of the economy, that is, agriculture and industry. This industry has to help the economy through value addition and helping farmers receive better prices. Although still at a nascent stage, the sector has been growing at a robust pace. In fact, in 2016, 100 percent FDI in food processing units was allowed.

As of 2018, just about one-tenth of India’s agriculture produce was processed, and the government aimed to raise it threefold. The central government in 2017 launched the Pradhan Mantri Kisan Sampada Yojana (PMKSY) (Prime Minister Farmer Wealth Scheme) aimed at bridging the infrastructure gap with a financial outlay of `Rs.60 billion for four years. The program aims to build an efficient supply chain from the farm gate to the retail outlet by creating an integrated cold chain and value addition infrastructure and expanding India’s food processing and preservation capacities. PMKSY is aiming to leverage investments of over Rs.314 billion, handle farm produce worth over a trillion rupees, help about two million farmers receive better prices, and generate about half-a-million jobs by 2019–20 (Bera 2018b). With greater thrust on proper sorting and grading close to the farm gate, the wastage could also be reduced, leading to better price realization for farmers. Processing activities are of vital importance to expansion and diversification within the fruit and vegetable sector in that they increase market opportunities for fresh fruits and vegetables and add value while minimizing postharvest losses. Processing improves the viability, profitability, and sustainability of fruit and vegetable production systems by increasing farm incomes and generating rural employment and foreign exchange.

However, some experts say India’s cultural habits and geo-climatic conditions dictate what consumers prefer to eat, limiting the growth of processed food industry. In India, unlike in the West, 99 percent of fresh agricultural produce is consumed fresh and, therefore, the processing industry cannot match the size of that in the Western countries, where long winters require intensive processing.7

Food processing provides an opportunity to utilize excess production efficiently. Not just from a growth perspective, food processing is also important from the point of reducing food waste. “Instead of subsidizing the production, the government should look at buying the milk products and supply them to schools as part of mid-day meal schemes. Such a move will automatically boost demand and stabilize prices.”8 The NITI Aayog (2018) expressed its concern about annual postharvest losses.

The Central Institute of Post-Harvest Engineering and Technology (CIPHET), Ludhiana has estimated the annual value of harvest and post-harvest losses of major agricultural produces at national level to be of the order of ` Rs.92,651 Crore ($13 billion) calculated using production data of 2012–13 at 2014 wholesale prices.9

In this context, the NITI Aayog, in the Strategy for New India @ 75 document, recommended village-level procurement centers for perishables such as fruits, vegetables, and dairy. These procurement centers could then be linked to Gramin Agriculture Markets (GrAMS).

Food Processing to Boost Exports

As of 2020, India’s agricultural exports predominantly consist of raw materials, which are then processed in other countries, again indicating the space to move up the value chain. Despite India being one of the largest producers of agricultural commodities in the world, agricultural exports as a share of GDP are fairly low in India relative to the rest of the world. This proportion is around 4 percent for Brazil, 7 percent for Argentina, 9 percent for Thailand, while for India it is just 2 percent (Nagaich and Priyani 2019)

Although

there is ample evidence that much of Indian agriculture is globally competitive. But India’s restrictive policies constrain the private sector from building direct supply chains from farms to ports, which bypass the mandi (market) system. This leads to a weak infrastructure for agri-exports. The net result of all this is that Indian farmers do not get full advantage of global markets (Gulati 2019b).

Policy toward Promotion of Food Processing Industry

The following policy steps are needed to rectify the problems of the industry:

I. Gaps in the supply chain are perhaps the biggest challenge faced by this industry. Alagh (2018) welcomed Walmart’s agreement in Anand, Gujarat, because it was an addition to the supply chain. He said, “We need to welcome additions to the supply chain. This helps our farmers. The argument for regulating a supply chain in agriculture is necessary.”

II. Preprocessing losses occur due to lack of awareness and a dearth of storage and packhouse facilities close to the farm gate. The shortage of refrigerated vehicles is reflected through losses occurring at the transport stage. Losses occur at the storage level as well.

III. Variation in quality is another impediment. Lack of avenues to adequately grade, sort, and pack perishable produce is a major culprit in this regard. Therefore, packhouses are of extreme importance.

IV. There should be enough skills to be able to use the capacity. Skilling is required at two levels. First, at the farm gate, in promoting agricultural best practices and in processing activities. Secondly, revamped extension services are critical at the farm gate. Similarly, skill training in the food processing industry must be stepped up. The National Skill Development Corporation (NSDC) estimated the need to skill 17.8 million persons in the food processing industry by 2022 (Nagaich and Priyani 2019).

V. Backward linkages to farmers need to be made more robust. Contract farming is an attractive avenue in this regard. This would shield farmers from price volatility, subject to quality commitments. NITI Aayog’s (2018) the Strategy for New India @ 75 recommends that states should take the lead in passing enabling legislation on the lines of the Model Contract Farming Act, 2018.

In order to ensure sustained growth in the sector, the priority of the government is on enhancing the cold chain capacity, logistics infrastructure, proper ways of marketing commodities, farmer training, and skilling of the workforce. There is a need for consistency in government policies because sudden export bans or minimum export price restrictions create problems.

Food Industrial Estate

A food industrial estate was set up in 1980 at Mysore, Karnataka, and attracted a number of food processing enterprises. The Central Food Technological Research Institute (CFTRI) at Mysore provided technical support services for the estate, and the Technical Consultancy Services Organization of Karnataka (TECSOK) provided project management services (Rao 2006). The main objective was to promote agro and processing industries in specified locations (cluster areas) where there was predominant production of processable agricultural and horticultural products. These estates will also provide the infrastructural and common facilities that are essential for the sustenance of the industries, such as quality assurance laboratories; warehousing, including cold storages; common effluent treatment plants. There were a number of discrete advantages with establishing a dedicated agro-industrial park that will attract similar or complementary enterprises.

The concept of Mega Food Parks was launched in 2008 for strengthening the food processing industry. The scheme of Mega Food Park aims at providing a mechanism to link agricultural production to the market by bringing together farmers, processors, and retailers so as to maximize value addition, minimize wastage, increase farmers’ income, and create employment opportunities, particularly in the rural sector. The scheme was based on the cluster approach and envisages creation of state-of-the-art support infrastructure in a well-defined agri/horticultural zone for setting up of modern food processing units in the industrial plots provided in the park with a well-established supply chain. Mega food parks typically consist of supply chain infrastructure, including collection centers, primary processing centers, central processing centers, cold chains, and around 25 to 30 fully developed plots for entrepreneurs to set up food processing units. The Mega Food Park project was implemented by a special purpose vehicle (SPV) that was a body corporate registered under the Companies Act (2013). State government/state government entities and cooperatives are not required to form a separate SPV for implementation of the Mega Food Park project. Subject to fulfillment of the conditions of the scheme guidelines, the funds are released to the SPVs.10

India has seen large investments in the supply chain of apple by way of controlled atmosphere cold stores, in which oxygen levels are reduced from about 21 to 2 percent and temperature maintained at about 0 to 1 degree Celsius. About 135,000 tonnes of controlled atmosphere cold stores have been set up. Now, apple is available almost round the year, and farmers are realizing a higher price. The success of storage of potato in cold stores is well known and despite the crash of prices in glut years, farmers and consumers have benefitted. The supply chain of banana was improving, and farmers will realize better prices in the future. Every product needs a different strategy as physiological characteristics differ (Hussain 2018).

According to a study conducted by the National Centre for Cold Chain Development, at the all India level, the requirement of additional cold storage capacity was 3.26 million tonnes (mt), which was just about 12 percent of about 26.85 million ton capacity in 5,367 working cold stores as of 2014. India has just 12,800 reefer vehicles against the requirement of about 62,000. India needs about 70,000 packhouses, but has just about 350. Most losses take place immediately after harvest and can be reduced by precooling the crop (Hussain 2018).

While concluding, it is worthwhile to note that India’s food processing sector has experienced excellent growth over the years and is the sixth largest food processor in the globe.11 Every 12 months, India produces over 450 million tonnes of raw substances for food processing that are delicate, stored, and converted into safe to eat products. The food processing sector is vital to hold this level of manufacturing output. A report through the India Brand Equity Foundation (IBEF) 2017 revealed that the food enterprise’s price becomes USD 39.71 billion and is anticipated to grow at a compounded annual growth rate (CAGR) of 11 percent to 65.4 billion USD by 2018 and thereafter. India is the second-largest producer, after China, and the biggest client of food merchandise. In spite of the issues faced, a food processing era in India has continued to make consistent development in the direction of modernization. Some key drivers include the access of worldwide businesses, availability of a reasonably priced workforce, the growing demand for Indian products in international markets, and the need for processed foods.12

End Notes

1. “Supply Chain Management in Indian Agriculture,” October 9, 2017. https://www.civilsdaily.com/supply-chain-management-in-indian-agriculture/, (accessed on January 6, 2020).

2. Ibid.

3. Ibid.

4.P. Mukherjee, July 25, 2016. “Supply Chain Management of Farm Produce in India.” https://www.linkedin.com/pulse/supply-chain-management-farm-produce-india-procyon-mukherjee, (accessed January 3, 2020).

5. India – Agricultural Sector, August 5, 2019. https://www.export.gov/article?id=India-Agricultural-Sector, (accessed on January 5, 2020).

6. “Agriculture in India: Information about Indian Agriculture and Its Importance.” March, 2019. https://www.ibef.org/industry/agriculture-india.aspx, (accessed on January 5, 2020).

7. P. Sharma, former agriculture secretary of Madhya Pradesh, who also headed Small Farmers’ Agribusiness Consortium (SFAC)—a specialized agency under the agriculture ministry. https://www.kamatan.in/about-us, (accessed on January 5, 2020).

8. “Churning of the Milk Ocean.” The Hindu Business Line, July 31, 2018. R.S. Khanna, Chairman of Kwality Ltd., a private player in North India. https://www.thehindubusinessline.com/specials/india-file/churning-of-the-milk-ocean/article24555781.ece, (accessed on January 5, 2020).

9. Ministry of Food Processing Industries, Government of India. August 9, 2016. “Wastage of Agricultural Produce.” https://pib.gov.in/newsite/PrintRelease.aspx?relid=148566, (accessed on January 6, 2020).

10. Ministry of Food Processing Industries, Government of India, New Delhi. “Mega Food Park.” https://mofpi.nic.in/Schemes/about-mega-food-park-scheme (accessed on January 6, 2020)

11. “The Common Challenges Faced by the Food Processing Sector in India.” May 25, 2019. https://www.smeventure.com/common-challenges-faced-food-processing/, (accessed January 6, 2020).

12. IBEF (2020) : Indian food Processing : December 2 https://www.ibef.org/industry/indian-food-industry.aspx (Accessed February 28 2021).