Farm Acts and agritech: Is the time ripe for the agri sector to bloom?

04 March 2021

Vivek runs an agritech start-up out of Bangalore. Set up in 2014, the start-up is a fresh food aggregator that seeks to combine precision agriculture, predictive analytics and a seed to plate platform that allows fresh foods to be sold quickly and directly with minimal wastage. In 2020, Vivek raised funds from venture capital firms including a Japanese investor. He has a clear thesis for the US$ 250 billion (bn) fresh food market in India and how it needs to be transformed. His start-up represents one of several agritech firms seeking to innovate and disrupt the oldest industry in India - farming.

It was not all smooth sailing for Vivek. In 2011, Vivek graduated from Indian Institute of Technology (IIT), the prestigious Indian engineering college. Like so many of his friends, he had an offer from a reputable FMCG (Fast Moving Consumer Goods) company. However, his heart lay in agriculture since Vivek’s grandfather was a successful farmer having grown from a small landholding to several hectares of farms in Kerala. As with so many farmer families, his parents moved away from farming to become professionals and the link with farming was lost. But Vivek was determined to give farming a try and with a small contribution from his parents, he decided to run his agri-business on some of his ancestral farm land. Quickly, he realised that farming is not an easy business in India. He struggled with getting seeds, had issues with pesticides, hardly had access to markets, if he grew something he found it hard to store the produce and these were just some of these problems. Within a year he was forced back to his FMCG career, but the agri-bug kept on pushing him to try things again. After multiple attempts and failures, he finally came up with a model that finally started clicking for him. He focused on horticulture - it was unregulated by the State agricultural produce marketing laws, offered higher margins and was increasing in demand as urban Indians moved to a more health-conscious life style. He understood the importance of data and analytics to connect supply and consumption and built a platform that allowed farmers with small landholding to sell their fresh produce to consumers. His start-up represents a new wave of start-ups that are tackling the problems that have plagued agriculture with new and innovative solutions.

Small farm holdings

India is a land of small farmers. In 1970, the average farm holding was 2.3 hectares (Ha) and that number stands at ~1 Ha in 2017. Farms have consistently been fragmenting and this is one of the fundamental causes for farm issues. With small land holdings, such farmers never achieve the economies of scale required in this industry. Most small farmers are unable to afford mechanised tools for their farms, make poor cropping choices, have little or no access to good quality seeds, raw materials or services and, as a result, suffer severe credit and financing issues.

Low price realisation by farmers

The Government has recognised the issues with small farm holdings and has encouraged growth of ‘Farmer Producer Organisations’ (FPO). Under the FPO model, farm producers come together to form a legal entity in the form of a cooperative or member association, for sharing profits and benefits among the members. FPO provide benefits that are achieved through scale to small farmers by procuring inputs in bulk and making sales in a consolidated manner. In the area of milk, the FPO model has been very successful. NABARD and other government institutions are promoting FPO model in rural India. However, we understand basis our conversation with industry experts, one of the challenges that FPOs face in India is lack of available talent in rural India to manage and run such member associations. This has kept the number of successful FPOs to a relatively low number.

Lack of agri-data

The other issue that farmers and agri-supply chains suffer from is the lack of agri-data. Information relating to agriculture can be divided into two broad buckets: (a) demand-side data and (b) supply-side data. Over the years, demand-side data is stable and relatively well understood. For example, by now, it is known how many tonnes of vegetables will be consumed in Delhi on any particular day. Traders have experience of what produce is likely to be in demand in which time period during a year - such as dry fruits in winter, citrus fruits in summer and so forth.

On the other hand, supply-side data can still be spotty. Unlike consumption, which is a daily phenomenon, supply of agricultural produce comes in spurts in short periods of time. Different crops have different harvest times and most of the produce gets sold immediately on harvest. With lack of data about what other producers are growing and harvesting, poor storage facilities and anecdotal information about what is being sold in the markets, both farmers and traders suffer from unreliable supply side data. Even the farmers do not receive relevant information about weather and rain patterns, have few updates about projected river flows (including dam related information) and water supplies, or do not know about cold-chain and storage facilities that can help them get better pricing in the markets. The agricultural produce also suffers from poor quality and traceability data as the goods move through an opaque supply chain. All this leads to inconsistent supply leading to spurts in prices of agricultural produce in the market.

Lack of agri-credit

Agri-finance and credit is another issue that Indian farmers suffer from immensely. Nearly 60% of the small farmers still do not have access to institutional credit. With unorganised financing and no security to offer, the interest on loans provided to farmers can be as high as 40%. At such rates, farming for a lot of the farmers tends to be high risk. This is one of the reasons that modernisation at farm levels continues to lag behind as investment costs tend to be very high. The Government then is required to support the farmers through subsidy and farm loan waiver schemes to keep the sector going.

Low price realisation by farmers

The fundamental problem that Indian farmers face is low price realisation. For instance, on an average, an Indian farmer realises only 8-10% (with respect to processed food items) of the final price of the produce that reaches the end consumer. This is far below the price realisation of farmers in developed markets which is upwards of 30%.

This typically means that the Indian farmer has to work with much lesser amounts as compared to farmers in other countries. This low price realisation impacts various choices that the farmer ends up making. The Indian farmer is not able to procure quality seed of high yield varieties and modern agro-chemicals. Similarly, the Indian farmer has limited access to agri-services and data and instead makes decisions based on his or her experience and perspective.

The potential cause behind depression of farmer price realisation is the costs pertaining to selling of agricultural produce. Agricultural produce markets are regulated by respective State laws that provide for creation of regulated market yards where farmers can bring their produce to make sales. But the associated costs with such market yards can be substantial for most farmers. This has been one of the key reasons for a significant amount of transactions (~40% of sales) happening outside the regulated markets maintained by the States. The problem of low price realisation by the farmers is discussed in detail in the ensuing section - “Current problems with the APMR Model”.


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