Agriculture as business: Moving up the value chain

Bill Gates this week has raised the issue of 'agriculture as business' in India and how it could transform; Bill Gates foundation and his personal blog "Gatesnotes" is replete with examples of how farm transformation is at the core of poverty alleviation.

The agricultural value chain in India has 99% of farmers holding the lowest end of the chain where the value they generate is close to nothing as the price they transfer their produce to the local satrap or mediator almost equals the total cost of produce if one factors in all the costs, the financing cost, local transportation, cost of seeds, fertilizer, and of course the different forms that wage is made of, or not made of.

Moving up the chain first and foremost must start with productivity as that is the primary driver which will change their ability to create value. This could come in many garbs, using less water per acre, less hands per acre or producing more per acre through use of technology, selective breeding or even diversifying produce including animal husbandry are some of the ways.

Almost all of this would need financing and as a business where prices remain unknown whereas costs hit you in the face every instant, it would also need forecasting and other information systems to facilitate.

The farmer on the other hand, 99% of them, are actually the embodiment of wage labor, toiling in the small tracts is what their daily routine would be comprising of. It is very hard work if it is wet rice farming, for example.

The other very difficult problem for him is that he hardly knows what the market is for his produce and what varieties would have a better price. Moving his produce to the real market is where his value could be gainfully realized but he is constrained by a host of things like transportation costs, mediation in the value chain and finally power in the value chain.

Power in the value chain rests with those who have the endowments like proximity to markets, information and finance and who have the wherewithal to market the produce, with or without branding.

Majority of farmers operate in soils which may not be the ones that are ideally suited for the variety they are producing, unless some adjustments are made, either in the process or the paraphernalia. Seeds are the most vulnerable ones and the communication regarding the changing tastes of the final consumer reaches the farmer at a phase lag, any course correction is always late.

Water availability is the fundamental issue and it is volatile and this volatility influences decision making. Information is never perfect and asymmetries of all kind impacts his costs and delivery. They live in a paradox that when water is plenty there is over production leading to lower prices and when there is absence of water in pockets, the farmer simply is straddled with his debt.

The whole business of farming somewhat resembles contract manufacturing where the farmer is the wage labor who has little wherewithal to maneuver either in terms of prices or in terms of costs.

But all of this could change and is changing as well albeit slowly with the advent of better information systems that is provided by internet and proliferated by mobile phones. The whatsapp groups help to create communities who can converse and know about costs and prices which are vital for the farmer. He is not alone now, he has tools with which to connect with the market on both sides.

The farmer is getting integrated with the market on both sides. On the buying side he is aided by the information on weather, seeds, water, fertilizer, almost every input and on the selling side he is getting closer to the market information he seeks.

Financing also could be aided by mobile phones which eliminates the long walk to the nearest bank, anyone who goes to Google maps will see how widely spaced are our ATM counters in the rural sector. The maximum thrust needs to be put on mobile banking, which thankfully has moved to the second gear.

Productivity improvement would also mean diversification and the ushering of industrialization in farm produce in a scale that we have not seen so far. But it will create many other unintended consequences, if only one third is employed in farming imagine the pressure it would put on the urban centers of India.

Is India prepared for such a leap is the question? How many more urban centers would be needed that can simply house this displacement?

The traditional value chain with the farmer in one extreme of the pole is already toppling for the better, but is the rest of the ecosystem getting prepared for the change is the question to ask.