Aug 01 2012

From Rent-Seekers to Entrepreneurs?

In this Agri Affairs, the focus is on the ‘economic agents’ who run the perishable supply chain. Often described as intermediaries, middlemen, financiers, aggregators and traders, they are a vilified lot –for they are the ones who are held responsible by all and sundry for the rising prices, the supply chain deficiencies, and for giving a raw deal to both the producer and the consumer. What is said about them is not untrue – but it is not the whole truth.

There can be no denial of the fact that they have not changed their business practices to cater to the increased production and demand – and they have continued to work on business models which were based on low volume and high margins to cover the aggregation, transport, auction, wastage and bad debts. Over the last decade the volumes have grown manifold - but as the margins have not been suitably adjusted, there is no incentive to shift from the existing rent –seeking behaviour to an enterprise model costs will not be commensurate to the returns.

Scientific storage  & speed
However, if the sorting, grading and primary level scientific storage can be organised, the reduction in wastage can help create a virtuous cycle. If he can also arrange a refrigerated van to transport the produce, it would be much better.

If he can also have his own controlled atmosphere storage closer to the farmer’s field, he can schedule his deliveries to maximise his revenues. Thus if the pressure on getting the produce to the Mandi in whatever condition and within the shortest possible time is reduced, there will be a change in the way business is currently being carried out.

Commission agents have the resources; they also have the domain knowledge of the commodities, the producers and the consumers: what are missing are technology inputs and a long term vision to reinventing their business. Why should the onion wholesale dealers not develop their linkages with the farmers of Nashik and Lasalgaon directly, and facilitate the transport of onion? Why should they not create their own brands and offer pre-packaged bags of onions with clear indication of the MRP?

Making a proposition is easy. The tough challenge is to transform it into practice. How do we bring about this change? More importantly, why should the commission agent leave his familiar world, and step into the unknown. What can the state do to facilitate this transition?

Information technology
The main drivers of this change will be information technology, professional logistics, state support to FPOs, and the imminent trade liberalization.

Information Technology is the first driver. As mobile phones become cheaper, have in –built FM radios and pan India calls become the norm, farmers will be aware of the retail prices in different markets, and also the mark –ups at different levels of the value chain. Farmers will not be ‘dependent’ on the commission agent for price discovery. His ability to negotiate the terms of trade improves.

Good Transport system
Secondly, the expansion of the road network to production areas and the quality of trucks and pick –up vans has improved considerably. Transport companies have extended their networks to reach every nook and corner of the country. Many of them are also reinventing themselves as Logistics Company which offers an end-to end solution, including warehousing and CA storage facilities if required. Many transporters are adding refrigerated vans to their fleets. Thus commodities can move to different markets without having to stop at an intermediate point.

State Support
Another game changer is state support to Farmer producer Companies. As this column has reported earlier, farmers are being encouraged to aggregate their produce locally and undertake certain primary operations themselves. FPOs are nimble, flexible and do not require the complex organizational framework of co-operatives. Neither are they loaded with any ‘social responsibilities’.

They are also encouraged to form linkages with traders and intermediaries to reduce transaction costs at both ends. Thus unlike co-operatives which were often posited against the trader – the FPOs recognize the role of the commission agent, and are willing to enter into short to medium term understanding with them. While the advantages of scale become available to the farmer, they continue to do what they are best at doing – production.

Trade liberalization
Last but not the least is that trade liberalization is imminent. The commission agent also knows the writing on the wall. The clamour for removing perishables from the ambit of the APMC Acts is gaining currency, as also their exemption from Mandi fees/cess/levy. The creation of a pan India market for perishables is also underway. Aggregators would also like to participate in markets other than the ones in which they are currently registered. Why should the onion trader of Srinagar or Kolkata or Guwahati not have access to the markets of Nashik where most onion trading takes place?

As electronic auctions become the norm, business opportunities will become clearer, and many among the younger generation inspired to make the transition from traders in a local Mandi to pan India, and maybe global entrepreneurs. Given the right thrust, some positive encouragement and a clear signal that market reforms are imminent, the transition can lead to a ‘win –win’ situation for all the stakeholders.