Agriculture's Second Wind
It has never been an easy relationship between corporate India and farmers. Yet, as emerging retail chains scour rural India to replenish their store shelves, this is poised to change.

By Shalini S. Dagar

It takes savvy to survive: Aulakh has been associated with Pepsi for seven years and wants to grow exotic vegetables now

Sukhjit Singh Aulakh, 43, is no mascot for Indian agriculture plodding along at 1 or 2 per cent growth rates or even for despair and debt-laden farmers driven to suicide. A prosperous farmer in Jalowal area of Punjab, Aulakh has around 50 acres of land under his production-partially his own land and the rest leased from others. Apart from staples wheat and paddy, he has grown potatoes, chillies, tomatoes and groundnuts in the past. He is now mulling growing baby corn and exotic vegetables on his fields. "In the coming season, I am planning a trial of baby corn on half an acre," he says softly.

How does he manage to stay ahead of the curve? Well, for one he is well educated and a confident risk taker. For another, he has been associated with PepsiCo for the last seven years. The association spans the entire gamut of functions-sourcing planting material and taking cropping advice from agronomists and sometimes even selling the produce to the company.

In a nearby district at Ladowal, close to Ludhiana, Bharti Enterprises' joint venture with Rothschild, FieldFresh, is assiduously growing exotic vegetables such as cherry tomatoes, bell peppers, snow peas and sugar snap peas on a 300-acre farm leased from Punjab Agricultural University. The baby corn trials that farmer Aulakh is contemplating are driven by this FieldFresh farm. Bharti is trying to leverage the relationships that Pepsi has built with farmers over the past 17-odd years of its presence in India to set up a captive base for the agri-produce it needs.

Elsewhere, Reliance Retail is said to be bringing state-of-the-art technology to potato cultivation. Although the retailer is tight-lipped about it, people in the know say that it intends to take contract farming to another level by not just helping negotiate better seed prices for its farmers, but also improving farm productivity through nifty strategies such as growing tubers in nurseries and transplanting them to the farms to cut crop cycle time. On an average, it takes about 90 days for the potato to reach a stage where it can be harvested. By growing tubers in nursery, Reliance can cut down the amount of time the crop needs in the farm.

Fruits of enterprise: Bharti's Mittal is partnering with farmers to export produce

Indian farmers can do with such help. Although nearly 700 million Indians depend on agriculture for their livelihoods, the sector accounts for just 20 per cent of the GDP and has been struggling to grow consistently. In fact, agriculture's patchy growth is one reason why the Indian economy hasn't been able to breast the 10 per cent mark. Why is the sector a laggard? The reasons are well known. They range from fragmented holdings to poor irrigation and a complete absence of modern supply chain to antiquated regulations. Therefore, although India is among the world's largest producers of foodgrain, fruits and vegetables, it is also among the most inefficient. An estimated 25-40 per cent of farm produce worth $12 billion (Rs 50,400 crore) rots every year even before it reaches consumers, thereby squeezing both ends of the chain-namely, the farmer and the retail consumer.

Farmer's New Friends

All that may soon change. A handful of companies is positioning itself along different parts of the farm-to-fork supply chain. Those include new retailers such as Reliance Retail and Bharti (FieldFresh) and produce exporters' such as Gautam Thapar's Global Green Company and Mahindra & Mahindra (Mahindra Shubhlabh), and consolidators such as DCM Shriram (Hariyali) (see India Inc. on the Farm). The entry of private companies will lead to two things that will enhance value in the sector. One, it will result in greater investment in farm technology, be it in the form of better seeds and irrigation techniques or crop care. Two, and this is perhaps more important, it will aggregate demand, thereby allowing direct sourcing from farmers. With corporate buyers around, farmers may be better able to raise loans from banks to invest in farm equipment, seeds and fertiliser.

Take PepsiCo, for example. At Jalowal, the American company has in a joint venture with the Punjab government set up the world's largest citrus nursery with an annual capacity of 4 million plants. At the facility, hardy varieties of citrus plants (root stock), which are already acclimatised to the Indian weather conditions, are injected with stubs of exotic plants (known as bud wood) such as tangerine and mandarin oranges to get saplings that are ready to be planted in open fields of the farmers. The process, which takes around 18 months, is partially done in glass houses and net houses, especially at the earlier stages of growth.

Looks good: ITC's Choupal Fresh focuses both on retail and procurement

The planting material is given to the farmers for free. And in order to support the farmer for the initial three-four years when there is no fruit, there is a rental income. The farmer contributes through his land and his effort. Subsequently, when the plant bears fruit, the citrus JV and the farmer split the profits. The initial batch of saplings from the nursery has yet to be planted. With the help of the Punjab government, the Citrus Council has managed to bring in 6,000 acres under citrus cultivation in the last few months. Pepsi intends to use the produce from this region as a sourcing base for Tropicana juices for the entire Asia-Pacific region.

An equally big benefit to farmers is the resulting disintermediation. "Disintermediation itself can be a business model," says Abhiram Seth, Executive Director, PepsiCo India Holdings. Typically, the retail price of farm products, say, melons in summer, can be marked up several multiples the farm gate prices due to the presence of various levels of intermediaries. "There is usually at least a 10-15 per cent increase in retail prices due to intermediation," says Arvind Choudhary, CEO, Food Business, Pantaloon Retail. Pantaloon, of course, has a mix of sourcing options ranging from accessing produce directly from the farmers to the relying on other aggregators such as Adani AgriFresh, ITC's e-choupal and DCM's Hariyali. "The loading of margins at each level would still be acceptable if there is some value addition at these intermediate stages, but there is none," points out Dipankar S. Halder, CEO, Spinach, Wadhawan Food Retail.

An older player in the sector is Mahindra Shubhlabh Services, a subsidiary of Mahindra & Mahindra. It eschews any sort of retail ambitions, both on the urban and rural side, and intends to provide farm-related services and procure from farmers. "We intend to remain at the back-end of the supply chain with a firm rural focus," says Vikram Puri, CEO, Mahindra Shubhlabh Services. The famed ITC model of 'choupals', however, has a strong retail angle despite its primary focus on procurement. Not only does it provide the company a platform to push its own FMCG products, but it is also able to offer complementary end-to-end services through amenities such as petrol pumps and bank ATMs.

Ready to retail: Baby corn from Bharti's FieldFresh

DCM Hariyali, part of the Shriram Group, though not a substantial direct consumer of farm produce itself, is also banking on an ITC-like model to position itself as a farm aggregator for emerging retail chains as well as a delivery platform for companies wanting to offer goods and services to rural farm and non-farm consumers. "Our model is to provide to rural India the right inputs at the right time, right place, and the right cost," says Ajay S. Shriram, Chairman and Senior Managing Director, DCM Shriram Consolidated.

Most players have models that overlap in parts. However, in a bid to ensure loyalty of the farmers almost all the corporates are engaging in what is technically known as "extension services". This ranges from information about weather, soil and water conditions, seeds, and pests. Most of these rural centres have agronomists who advice the farmer on these issues. Finance Minister P. Chidambaram had also flagged off the significance of extension services in his Budget Speech for 2007-08.

Though the advice may be somewhat simplistic, it is often critical in terms of better crop practices. Chandrashekhar K. Vaidya, MD, Godrej Agrovet, part of the Godrej Group, recounts how sub-optimal agricultural practices were leading to low yields (25-30 tonnes an acre) for the sugarcane farmers in Maharashtra when even 100 tonnes an acre was possible. "Based on the advice given and limited changes made by the farmers given their economic conditions, the yields improved by 8-15 tonnes an acre," he says.

Increased investment by the private sector, whether in building actual physical infrastructure or in providing goods and services, can only augur well for the farm sector. Over the last many years, as pointed out by M.S. Swaminathan-chaired National Commission on Farmers, agriculture has remained an area of under-investment. However, traditionally the farm sector has not been an easy area for companies to operate in. "It is a matter of centuries of mistrust. The problem runs too deep... the divide between Bharat and India, and it takes time to build trust," says Godrej Agrovet's Vaidya.

Uneasy Co-existence

"The private companies won't deal with more than 5 per cent of farmers-mainly the large farmers. What about the 70 per cent of the small and marginal farmers? In any case there is no level playing field between small farmers and big companies," says Swaminathan, father of India's Green Revolution, articulating the farmers' fears. The mistrust has been heightened by some failures in contract farming agreements in recent years. Farmers at Kotkapura in Punjab point out that basmati rice companies reneged on their contracts with pre-fixed prices of Rs 1,300 per tonne a few years ago when the prices in the open market went down to Rs 1,100 per tonne. "They picked up nothing," complain the farmers.

Industry officials privately agree that there have been slippages on the corporate front, and not just on the part of the basmati companies. However, the farmers too have been guilty of selling part of their produce in open markets when prices go up or of bringing their neighbours' and relatives' produce as their own when the prevailing market prices are low.

However, then in many cases, "the contract has been used for the wrong commodity," reckons S. Sivakumar, Chief Executive (Agri-business Division), ITC. "For a contract to be successful there has to be a reciprocal dependency between the farmer and the buyer," he says. This dependency could be due to perishability or geography considerations. For instance, sugarcane farmers and factories share this symbiotic relationship.

Or it is a very specific type of production that requires the farmer to follow specific protocols. Global Green, with its emphasis on gherkins, is a case in point. G.V.G. Rao, Vice President (Agri-operations), Global Green, says: "Contract farming works well for gherkins since there is no local demand for the product." Last year, the company crossed Rs 100 crore in revenues and following the acquisition of Belgium-based Intergarden Group, its topline has crossed $100 million. However, ITC's Sivakumar says there are ways around the problem. "Rather than a pre-fixed, non-market linked price, there could be price referenced to the market. Also the fixed price could be only for a part of the harvest."

A mixed bag: DCM's Hariyali aims to be a farm aggregrator

What about the Small Farmer?

Some of these issues get accentuated where small and marginal farmers are concerned, as they have limited investment capabilities and low cushions against loss. So, is the small farmer on his way out? Certainly not, say most people involved in agriculture. Horticulture, which is people-intensive, is certainly an option for marginal farmers. "Farm incomes rise by as much as 30-40 per cent by growing fruits and vegetables as against traditional crops of wheat and rice," says Rakesh Bharti Mittal, Vice Chairman, Bharti Enterprises. Also there are some advantages that are typically the small farmer's. For example, in case of harvesting, the small farmer probably does it with his family, whereas the large farmer will pay labour.

An additional model that could well evolve and that probably needs a lot more cultural education is that of the leased farms. The small farmer could well derive his income from lease rentals to large corporates or from large farmers and an additional farming wage component. However, this would also need counter-balancing checks which ensure that the system is not abused. Yet another could be the rise of farm cooperatives.

Experts aren't too worried about the small farmer's fate. "The Indian farmer is quite competitive. For him to compete effectively in a liberalised foreign or domestic arena, he needs to be free of the outside costs that currently hobble his performance," says World Bank's lead economist Aaditya Mattoo, pointing out that it is cheaper to get apples from Australia to Tamil Nadu than it is to transport them from Himachal Pradesh. The corporate sector can certainly help in driving such efficiencies. However, the efforts till date by the private sector, though laudable at best, scratch the surface. An enabling regulatory regime is one of the key requirements. "Going forward, corporate farming will be the key to the second green or the evergreen revolution," says Bharti's Mittal. The farmers are waiting.
-additional reporting by Kapil Bajaj