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Food and agri-business set to undergo unprecedented transformation
The food & agri sector is seeing double digit growth primarily buoyed by the export of processed food and the expansion of organised food retail brands in domestic market. For Processed Foods sector, the drivers for supply chain transformation are extremely compelling. Of fresh fruits and vegetables, only 2-10% of total produce is processed. Meat and poultry processing is approximately 10%, processing level in milk is 35%, and processing levels for grain & oilseeds almost 100%. There is a huge unrealised opportunity to deploy low grade produce into value-added products (e.g. pickles, pastes) and to enter value-added food markets through new product development.
FIG 1.1-1.3: Snapshot of food processing sector growth and segmentation (shares as % of GDP)
Sources: IBEF, GOI State of Agriculture 2013, MOFPI, DGCI&S
Processed food exports have grown faster than both the manufacturing and the agriculture sector alone over the last few years.The Government of India has launched a number of initiatives related to supply chain transformation of food sector to enable this growth. An overview of these initiatives, along with indicative size, has been given below.
FIG 2: Government initiatives related to supply chain transformation of food sector
Source: cKinetics analysis
To sustain this growth, the country needs to ensure a) policy, infrastructure and energy costs are not barriers to growth, and b) subsequent growth does not diminish India’s long term agricultural productive capacity
F&B has both organised and unorganised sub-sectors – in fact, after textiles, F&B is the second largest group of MSMEs (by product). Double digit growth is seen in the number of registered food processing units, and this growth will continue.
FIG 3.1-3.3: Food cluster segment, size and FDI inflow
Sources: IBEF, GOI State of Agriculture 2013, MOFPI
Despite compelling growth prospects, the food processing sector is structurally inefficient at present
The Indian supply chain for food processing is fragmented, and production of any given product is disaggregated, both at the farmer and processor levels.
This fragmentation makes it extremely difficult to achieve economies of scale for infrastructure required during collection, transit, storage and processing. Further, fragmentation means that quality is not uniform and processors face a variation in inputs, which is passed along further into the value chain as a variation in product outputs.
Indeed, a fragmented industry is one of the key reasons why many Indian food exports do not meet international standards for food quality and safety.
Other reasons include a lack of awareness of foreign export requirements; the absence of robust domestic standards, a lack of reporting & disclosure on food supply chains, and limited working capital and technology to implement good food practices.
Immediate agricultural produce is not well-aligned with short-term demand, and some of this is due to price distortions in government regulated commodities markets. Too much perishable food is being produced in some instances. Since cold storage infrastructure is not sufficient, and processing as a percentage of production is low, these perishables are wasted. Further, opportunities to develop new high-value products are lost.
Food processors and retailers are simplifying supply chains to help reduce inefficiencies
At present, the supply chain is under-going compression through:
- Backward linkages - where large food processing brands and/ or large food retailers are simplifying their supply chains
- Contract farming - farmer cooperatives & private aggregation centers are attempting to consolidate food production, and
- New market places (such as terminal markets and e-markets), which directly connect farmers to consumers/exporters
FIG 4.1: High level food processing value chain, selected stakeholders, examples of typical business models
Source: cKinetics analysis
These trends will accelerate. However, forward / backward linkages and consolidation will not generate requisite value unless resource-use during aggregation, transit, sales and channel distribution are lowered – cold chains are central to achieving this. Using Edelweiss cost breakdown data along the food value chain in India, below is an illustrative summary of underlying cost levers.
FIG 4.2 :Value chain breakdown for processed food
Source: Edelweiss India Food Guide 2012, cKinetics analysis
Capacity distribution and meeting energy requirements of cold chains will be key to unlocking FPI growth
The Government of India has encouraged the emergence of an organised cold chain sector and has tried to create movement towards PPP models for cold chain development. With a large number of small land-holdings and limited cooperative farming, the number of farm-gate collections makes it expensive to implement a cold-chain infrastructure.
While large companies and exporters have developed captive facilities, there is an un-even distribution of capacity of existing cold chains and concerns abound on ways in which these cold chains will be powered.
FIG 5.1-5.2: Cold Chain Storage Availability and Value Drivers Overview
Source: cKinetics analysis, cold chain capacity data from MOFPI and Kumar, A. ‘Presentation at the NHB India Cold Chain Show 2012’
FIG 5 indicates value drivers influencing the feasibility for deployment of cold storage faciltities for a particular agri-produce. Of these drivers, the case for using absorption systems, biomass or solar fuel sources do have implications for upfront CAPEX, on-going savings potential and total refigeration capacity of the system – however, these price-points will change considerably depending on what type of local supply model, crops and market conditions are considered.
Energy interventions for food processing units is a critical first step
The regulatory environment must promote an efficient food processing industry. India is in a prime position to set advanced standards on sustainable agri-infrastructure before inefficient or wasteful infrastructure is deployed. There is an opportunity to:
- encourage use of captive renewable energies for heating and cooling needs of the food processing sector
- encourage efficiency for agri-equipment – both in energy and water use/recycling
- eexplore sustainable options for refrigeration, transport packing, and end-user packaging
- enable labelling to brand and recognise produce of sustainable clusters / food parks / collectives
FIG 6.1-6.3: Food Processing Clusters are Export Oriented & Require Technology Up-gradation
Source: UNIDO, BEE and NPC Report on ‘State-wise Electricity Consumption & Conservation Potential in India’, BEE SME Programme, MOFPI
TERI estimates around 10%–15% of food processing production cost is related to energy, and these energy costs are relatively controllable. Typical gains vary, but industry expects 5%–10% energy savings through efficiency measures for processing units:
FIG 7: Illustrative electricity savings potential of energy efficiency interventions in food processing units
However, a 5%-10% energy saving is unlikely to help the food sector address energy challenges during a growth phase. Hence a more fundamental supply chain transformation – including a greater uptake in distributed renewable energy – is required.
FIG 8: Examples of green energy pilot interventions underway in key opportunity areas
Source: cKinetics research
Solar drying and dehydration projects applicable to tea, fruits and vegetables, spices and fish have been set up in Mizoram, Orissa, Tamil Nadu, Andra Pradesh. Heating applications for diary and seafood industry have pilots in Uttar Pradesh, Punjab, Maharashtra, Madhya Pradesh, Gujarat, Bihar, Rajasthan and Andhra Pradesh.
FPO incubation will help achieve traction towards sustainability goals
Behaviours promoted by farmer producer organisations (FPOs) in the long run will determine the extent to which India’s long term agricultural productivity is secured.
Primarily, cooperatives help farmers in achieving scale. This makes it viable to implement energy, irrigation, water and chemical management programmes. Farmer producer organisations behave like private companies and are less limited by regulation appying to other types of cooperatives.
Further, it provides opportunities to intensify production using technology, which will be critical to increasing output in future, while reducing energy costs per unit output, as shown in graphs below.
FIG 9: Energy and food production intensification (Source: Department of Agriculture & Cooperation, National Portal on Mechanisation and Technology, Khambalkar, V. ‘Energy and Economic Evaluation of Farm Operations’, 2010.)
Other benefits of FPOs to the FPI sector include:
- aggregating and localising processes where possible, and hence reducing the costs associated with packing and transport
- connecting producers directly with processors and retailers, reducing food waste and production cost
- enabling supply transparency, and stimulating opportunities to highlight and invest in long term sustainability.
The Ministry of Agriculture estimates that for setting up an FPO involving 1000 farmers (at minimum), covering 15-30ha of land, with 3 years of intervention has a total cost of Rs.3526 per farmer per year. This cost falls between 10-20% of the average income of a rural houshold, which is still affordable given an incremental income beneft of Rs. 15 000 targeted per farmer /year for an established FPO. Promoting sustainability will mean working with FPOs to diseminate the right technology, obtain access to working capital and creating market linkages. The biggest challenge is that partner organisations may need to incubate FPOs until it has earned strong relationships with local farmers; it can attract the right business talent and develops processes to become profitable within 3-4 years.
Image credits: CIAT