WASTAGE IS GOOD – INVEST YOUR ONIONS ….a thought for food

Two days back I participated in a big debate on impact of recently announced FDI in retail on cold chain infrastructure in India. A specialty magazine for the distribution and logistics scene in India had organized this debate at one of the chambers of commerce in India. Three gentlemen including a self-proclaimed cold chain specialist, an omnipresent agribusiness consultant, a retired CMD of a nationalized bank, apart from yours truly, debated on the subject which was moderated by the editor of the said magazine. Cameramen captured the hot and cold moments of the proceedings for posterity.

Like always since 1987, the year I entered the organized fruit and vegetable industry, the discussion on the subject invariably turns to proverbial 30-50% wastage of fruit and vegetables in India because of absence and / or suboptimal presence of cold chain industry in India. This wastage story is so sticky that it has now become ingrained in minds of every one who has anything to do with food and agriculture in India. No points for guessing – FDI in retail was the only panacea for this ill called f+v wastage as per our self-styled cold chain specialist and the agribusiness consultant. But this is not what I want to discuss here. Though I have always contested the 30-50% figures as physical wastage for the simple reason that everything (all qualities and grades) sells and have a market in India. Overall value loss – yes, agreed or product specific wastages – like onion stored in a traditional way –yes, agreed.

Yes, it was the onions with documented 30% plus wastage during storage that started a chain of thoughts while I started driving back to my office. What follows are my instincts derived through my sectoral experience of fresh produce wholesale and retail in India.

Let’s come back to the title of this post. ‘Wastage is good”… Just visualize and try to create a scenario on what would happen if one fine day in Year 1 the wastage in onions during storage in Maharashtra / Gujarat etc somehow (let’s say because of technology intervention) gets down to zero to from 30%. What could logically happen?

  • 30% additional onion would be available in the onion trade pool.
  • Additional 30%, a huge quantity indeed, could theoretically crash the wholesale prices.
  • The dipped prices could perhaps be lesser then the production cost of onion resulting in huge trading loss to farmers. More suicides perhaps! (I recalled what a Malegaon farmer told me when I did a onion research for NCAER / IDFC last year. His exact words were – No one in Cities has ever died of eating costly onions but low onion wholesale prices have definitely taken lives in Maharashtra).
  • Reduced storage capacity and unemployment in people associated with onion storage.
  • Extended storage could reduction of interstate movement of onion as geographical arbitrage would be missing which will also reduce the onion areas in States like Rajasthan from where onion starts arriving when onion in stores ends in Maharashtra.
  • Excessive onion dehydration because of excessive availability and resultant bubble as equilibrium of flakes market will be broken.

Till I reached my office I continued to weave plethora of scenarios around excess onion supply. You can perhaps add more. Eventually I could only reach to one conclusion that “Wastage is good” in case on onions in India. May be it is not the lack of capital, knowledge and resources that has prevented Indians into investing in Onion storage mechanisms that reduce wastage but have a potential to disturb the market mechanisms.

How I wish some econometric algorithm could churn up the most likely scenario in a situation of excessive onion in the market. Are you listening NCAER?

In a way the issue of more onion supply in not much different from excessive money supply. Excess money (current chairman of Federal reserve in USA would calls it quantitative easing – printing more money in bank’s printing presses at the most base level) can solve most of the issues at individual level but on a higher level, say a nation, more money can create as many complications not only for the nation but also global sometimes. There are many instances in history where too much money led to serious and damaging consequences, such a hyperinflation and assets bubble. The bubble in the property market in USA in 2008 that caused a butterfly effect across the World, was one such consequence of excessive money supply leading to lower interests in USA. Excessive onions are no different from more money supply.

I once again repeat – above said is based on my instincts. I have seen potato and onion rates crashing at the macro and micro level because of excessive supply in the wholesale markets. Many a times instincts derived through experience are more accurate than research. I remember reading somewhere that test methodologies called agile and rapid, has lot to do with decisions based on instincts made on the fly. These are very effective methodologies. I just see a huge pool of information on food wastage which we need to mine to create more thoughts for food, particularly food for the farmers and by the farmers.

What FPOs and farmers’ Coops can learn from Mandies? – 7 important learnings from a brief case study on Onion Trade in Maharashtra.

 

1.  Non availability of economic loads at farm location. – Availability of onion is widely scattered in Maharashtra. Land holding of onion growers is very less. Most of the farmers own less than 1.5 acre land and due to unfavorable weather conditions even one vehicle of 15 MT is not available with a single farmer field at a given time. Non-availability of full truck load of fresh onions at a farm has led to concentration of onion trading at market yards. Ready availability of desirable onion lots at a market yard in case of a shortfall to make a truck load, is another big plus point. Secondly, procurement cost of small lots in a scattered environment works out to be very steep. So market yards and traders help in pooling of produce and provide infrastructure for standardized sorting / grading at one central location.

2.  Marketing produce as per grade necessity of a particular market. Each market has its own grade requirement for Mahrashtra onions. While eastern / Bangladesh / Bhutan / Nepal markets prefer small sized onions, North and West Indian markets prefer bigger sized onions. Traders buy small lots from the market yards and pool the produce for sorting / grading at their pack houses and sends different grades to different markets all over India depending upon the grade requirements and price at a particular market. Onion trading involves huge risk and in depth knowledge of distant markets. Lack of trading expertise, market knowledge and risk bearing capacity has prevented most of growers or their organizations to make a significant dent in onion trading in Maharashtra. So, most of the trading is in private hands.

3.  Local mandies act as a reference market to small growers. Since Maharashtra onions have an almost year round pan Indian and export clientele, no market including Bangalore, is big enough to act as a price leader. Farmers generally take reference of the local mandies rates, while traders compare rates of all mandies, including major distant and export market and then decide where to send their produce of a particular grade. Significantly, most of the growers Coops handling onions are located in Market yards where their members bring produce for auction under supervision of local APMC’s. These Coops at best act as a commission agent operating from market yards. In case they have tie ups with retail organizations like

Safal, Nature’s Basket, Bigbasket etc, they buy produce from market yards from arrivals of their own members or from arrivals at other commission agents. However, their in ability to market rejections / commercial grades through organizations like us (because of reason # 2) or at distant markets has resulted in their losses and eventual discontinuation of supplies. Due to this reason, retailers end up with relying on its onion supplies from Maharashtra traders since so many years.

4.  Non sustainability of exclusive onion Coops / Associations / Producer Companies. Because of various agro-climatic reasons, onion belt in Mahrashtra is actually a scattered chunk of large number of smaller sub belts, crisscrossing a distance of almost 1000 Kms plus. It starts with Karnataka border on one side and continues till MP / Gujarat border on the other end. It almost covers all western Maharashtra and Marathwada region. For a particular distant market, for example Bangalore, most of these sub belts are active for a short period as far as fresh onion flows are concerned. Active period in some cases is only a fortnight or a month. Because of this reason, exclusive onion coops / associations have not been successful as short period of business can’t sustain their year long expenses. Many coops were organized for the purpose of purchasing / selling onions but over a period these coops have taken other businesses (credit and inputs) and onion trade because of above said reasons have been relegated to the back ground leaving field open only to private traders. In my view, multi F+V items would have succeeded as unlike onions, revenue could be expected to flow round the year. (I am anticipating sustainability problem for the Associations that few retailers or processors has formed or may form in future over the years. Selling other F & V items like tomatoes, grapes, fresh vegetables etc. through Bombay / Delhi platform shall definitely help.

5.  Concentration of large storage capacities with traders. For historical and market reasons, large storage capacities for onions has remained with private traders. State Govt. and Central agencies have promoted small sized storage structures at farms which are not conducive to standardized sorting / grading at central locations by trained labor. Usually growers do sorting / grading on their own, using family and farm hands and are prone not only to errors but smaller throughput. Our recent experience of supervising sorting / grading at many locations simultaneously has not gone well from logistics point of view. Traders can buy the whole stored lots and provide sorted / graded produce to us as per our requirement at their risk and cost. We are trying to pass this role to Coops in addition to facilitating storage capacity build up at Central locations. Finance for establishing such facilities, working capital and risk bearing capacity of Coops / FPOs will have to be taken care off. (A separate post in this regard is being put up in coming weeks). Till then we may have to rely on traders or live with short supplies and / or poor quality produce.

6Non availability of sorting / grading facilities with Co-Ops / FPOs at farm locations. Generally traders purchase un-graded produce from Mandies, then they do sorting and grading. Efforts are being made to establish sorting grading centers with some identified Coops in local market yards but it will take some time. So to ensure quality and standard packing, material has to be arranged from the traders.

7Non availability of sale proceed in time – Can’t help but include this reason though it is very much under both organizations’ control. Major reason for antagonizing farmers or their organizations in not supplying their onion to retail organizations / processors is that they are not being conveyed sale proceeds sometimes even after 10-15 days. At Mandies they get the sale proceed (even lot wise) on the same day. In such a situation even traders will not be willing to give their produce for sale if we do not convey their sale proceed immediately on reaching of their vehicles at retailers’ end.

Looking at the situation I think it is pertinent that there are organizations who should provide advisory and service to farmers organizations in countries like India with small holdings to help them bridge these few bridgeable gaps.

Buyers, sellers and Brokers of Farm produce with the best information shall ultimately make best decisions and make the most money.

Advances in information technology have generated enormous efficiencies in many industries, including retail, hospitality, transportation, communications, entertainment, manufacturing and financial services. Yet in marketing of agricultural produce, the largest industry of them all, innovation has lagged as growers, traders, agents, brokers, warehouse operators, logistics service providers, experts, and input suppliers have been slow to adopt new technologies.

This is because agriculture in general and marketing of agriculture produce in particular is often considered a relationship business. Indeed, the markets for agricultural produce could not function without networks of human force who have built trust working with each other over many years.

However, marketing of agricultural produce also is an information business, where transactions depend on the steady flow of data between buyers and sellers, and traders with the best data ultimately make best decisions and make the most money.

There is no good reason for Agribusinesses to operate without the benefits of faster and more accurate data, or the efficiencies afforded by workflow automation and online collaboration.


Fortunately, things are changing. Startups like Vegfru (backed by Wingify) have plans to democratize fruit and vegetable trade information by providing online access to buyers and sellers of fruit and vegetables in India. If Vegfru plans are to be believed, the founders are talking about not only supplying market information, credit, insurance, quality control, logistics and assorted services to sellers and buyers but also equipping them with software platforms to harness that data and run their businesses more effectively and efficiently. Growers, traders and agents with the best data ultimately make the most money.

Future is not hard to foresee. Suppliers and their agents who relied on pen and paper or static spreadsheets shall be able to access real-time information in cloud-hosted databases, and collaborate more effectively with buyers based on a common system of record. In addition, workflow automation software shall make them more efficient by eliminating the need for repetitive tasks that they previously did manually. Ultimately, these tools save them time and money, leading to leaner and more profitable businesses.

The Myths and Realities of Onion Price Spike 2010 in India: and what it didn’t teach stakeholders to prevent a similar spike in 2015.

Why spike happened and some buzzwords that surrounded that spike?

First, some classical theory that explain such spikes in food commodities anywhere….

“Factors that could affect any food commodity prices can be broadly classified as either supply or demand. Total supply for any given period, a.k.a. the “amount on hand,” has two components: the new harvest and the storage from the previous period. While the amount of storage carried forward reflects some optimal decision from the previous period, the new harvest depends on the area planted and the current yield. The yield in turn reflects both technological advances and idiosyncratic factors, such as weather and seed / fertilizer cost etc. Demand also has two components: consumer demand, both domestic and export for current consumption and speculative storage demand driven by the prices at the time of storage, the storage cost, and expected future prices”.

My take – Onion price spike 2010/11 happened exactly as per the above written script.

1. Rabi storage in April / May was lesser than normal as prevailing prices in April when onion is stored were high.

2. Rains damaged the new harvest

3. Exports continued as if onion business was normal in 2010. Imports didn’t happen.

The buzzwords coined during the spike…

Onion Cartels

One need to find some evidence that supports the allegation that onion merchants anywhere in India colluded to hike the price which is necessary to prove a violation under our or any competition law. Direct evidences such as records of meetings, agreements by way of concerted action suggesting conspiracy, the fixing of prices, and the intent to gain a monopoly or restrict/eliminate competition, could have established the existence of cartelization. Sadly none of the agencies, Government or otherwise including media could provide that evidence during Onion crisis 2010/11.

Hoarding

That onion price spike happened during a period when the stored onion finishes and new fresh crop is arriving. It is a common knowledge in onion trade circles that fresh crop can’t be stored and the already stored crop which is at fag end of storage period can’t be stored further without additional damage, particularly in the traditional onion storage setups of India. Reportedly, simultaneous raids at all major onion production and trading centers by resource rich Govt agencies did not yield any evidence of trader collusion or any other misdemeanour like hoarding. You know what happened because of these raids – Here’s a secret or shall I say truth – Traders stopped onion trading, got the loaded trucks stooped mid-way, for fear of consequences. When you know that even 10 bags at one site would constitute hoarding, you are not a fool to be seen selling one truck (200-300 Bags) Result – dropped supplies – high prices.

Weather

Without an iota of doubt rains played the main spoil sport in onion price spike from November 2010 onwards. However, decline in the production by about 20% in the three major growing states during 2009-10 and 2010-11 due to unseasonal rains does not give a true picture of price spike.

The sharp rise in the prices of onions can be attributed to a decline in Kharif (Monsoon Crop) production on account of unseasonal rains at sowing, transplanting and harvest time in many production pockets in the major onion producing states across India was mainly responsible for price hike.

Though cursory rain fall data analysis for Maharashtra of that time supports this view, even the rainfall data, as presented by India metrological department doesn’t yield much clues as it is the rainfall intensity, its geographical spread, frequency of downpour and timing that matter most for rain fed Kharif crops.

Any significant shortfall or excess in rainfall intensity, its geographical spread, frequency of downpour and timing will spell doom for the onion crop.

Just to give an example if the rains come on time in June and then disappear for the next two months, and then again there is a heavy downpour in August, the average performance of monsoons would be termed near normal. But in the process, the entire freshly sown crop would have withered away necessitating either re-sowing at a higher seed cost or, for many abandoning the Kharif crop altogether.

On the other hand, excessive rains, as was noticed and reported by hundreds of farmers in four onion growing states, is equally true.

In my view onion price spike during December 2010 was a short-run price fluctuation which can be attributed mainly to sizeable, shock, significant weather related shock, captured by the deviation of actual market arrivals from expected arrivals of onion in assembly markets.

Exports & Price Spike

Right entry time and right exit time is important for any business. Onion exports from India no exception. Relation of exports with onion price spike fits perfectly with this contention.

A policy decision was taken by Govt on 2nd November 2010 to reduce the minimum export price (MEP) of onions to encourage exports, in expectation of a drop in the prices of onions during the Kharif harvest. On the contrary, unseasonal rains in Maharashtra, Karnataka and Rajasthan damaged the Kharif crop, resulting in lower arrivals. This resulted in a spurt in onion prices leading to a decision to increase the

MEP (Minimum Export Price) declared by NAFED (Govt. of India backed agency) on 15th November 2010 to curb exports.

To increase the supply of onions in the domestic market, another decision was taken on 20th

December to significantly increase the MEP and the exports of onion were banned until 15th January 2011 due to the sudden spurt in prices. Further, on the next day, an export ban until further orders, was imposed by the directorate general of foreign trade. The ban on onion exports was subsequently lifted on 18th February 2011.

Ordinary decisions taken by extraordinary Govt. mortals. Right! But a careful look at above said dates shall reveal a lot about our lackadaisical approach towards onion export management and raises many questions like:

· Why MEP that was reduced on 2nd Nov was increased just 13 days later?

· Was expectation of price drop due to enhanced arrivals based on pure gut feeling or solid production facts (read crop damage due to rains) or some other reason that fitted well with vested interest of exporters / Govt servant

· My evidence at that time suggested it was crème de crème of onion export agencies that recommended cut in MEP. Those who recommended also included officials of agencies like NHRDF and NAFED who are supposed to be on top of everything related to onion production, arrivals and prices both domestic and overseas.

Media –  the proverbial whipping boy

Other than market integration, the simultaneous increase in the prices of onion across India can also be attributed to a phenomenon known as ‘price parallelism’. Price parallelism is a mirroring effect where traders independently pursue their ‘unilateral non-cooperative best response’ in view of what other rivals are doing. Therefore, there is neither an explicit agreement nor a tacit understanding among the traders.

Media played a very big role in promoting this pan Indian ‘price parallelism’, which eventually was played to hilt by all retailers.

Even otherwise media’s bias towards crisis that hit the demand side is clear as prices of onion crashed to Rs 6 to 8 a kg in the wholesale at Pimpalgaon (No 2 onion market town in India) during second week of February 2011 (just few weeks after the crisis) that farmers blocked roads and staged sit-ins for 10 days following a drastic downturn in the prices. Strangely this never made national news. Read the media role whatever way you want.

Central & State Govt Agencies – Were they also responsible for the spike?

Failure in predicting and preventing the onion price spike is how I would like to sum up in nutshell about their role.
To elaborate: With thousands of extension staff and machinery at disposal of State Agriculture and horticulture departments, MOA (Ministry of Agriculture) GOI (Govt. of India), these agencies could have predicted the reduced area under cultivation, arrivals and exact periods of shortage and taken corrective measures like reducing exports and initiating imports.

Who benefited most from Onion Price Spike? Good question!
All crises are good for business– Invest your onions.

Farmers

· Those who had the balance physical stock from last Rabi in hand. Not much though.

· Those whose fields had not damaged due to rains or water logging because of heavy rains. Majority of the farmers had however suffered extensive damage to their crops.

· Those farmers whose had planted late and their harvest came about during the crisis time.

· Those farmers harvested immature bulbs to make best use of crisis.

Incidentally this last factor also aggravated the crisis as immature bulbs have very poor shelf life and can’t be transported far away.

Retailers

· In my view they made the maximum money as their mark-up from wholesale prices were exceptionally higher and continued for prolonged period even when the wholesale prices had come down. Being price inelastic, there was no dip in demand.

· Just for example, Safal’s price (read price at quasi Govt shops) on 8th February 2011 in Delhi is Rs 23 a Kg when average price in Pimpalgaon on 8th Feb is just Rs 8.75 a Kg, an eye popping mark-up of 263%.

Wholesalers at assembly markets

· Those who had the balance physical stock from last Rabi in hand. Not much though.

· Those who might have re-traded the onion stock in assembly market itself without physical transactions and outside the APMC mechanism. No evidence though. You’ll need to think hard to visualize this phenomenon usually played in stock markets during old days.

Buying agencies to support Govt’s relief measures.

· Mandated by Central and State Govts to provide relief to customers by subsidizing onion prices, the agencies that purchased onion from assembly markets for organizations like NAFED and NCCF might also have made mullah from the crisis. It was alleged by many that that agencies responsible for buying this onion bought bad quality onion at higher prices. Circumstantial evidences also indicated that one of the agency responsible for purchase of subsidized onions had linkages with some Directors of NAFED.

How to prevent price spikes in future? Let’s do it some other time. As of now enjoy the crisis and let everyone invest their onions.

Introducing Vegfru.com – a virtual marketplace for fruit and vegetable trade that is coming soon

Over last couple of years, in addition to occasional consulting in fresh produce domain, I’ve been handling the legal, financial, accounting and admin work at Wingify Software Pvt. Ltd. which my son founded in 2010 with my active support as a Founding Director and presently as a CFO as well.

With our teams’ hard work and continued support of our patrons, Wingify, http://wingify.com, through its flagship product http://vwo.com, has now become a multinational software product company. We now have a wholly owned US subsidiary with an office in NY, few US acquisitions in our kitty and customers in 100 plus countries. In the process we have also now acquired good technology understanding and marketing experience for building and selling SaaS (Software as a Service) Products over internet, more so in B2B (Business to Business) environment.

Well, banking on my recent experience in establishing a 100 people – multiple locations – technology product company and my past experience as a domain expert in fruit and vegetable sector, I thought let’s marry these two strengths and give back the underserved fruit and vegetable category a modern technology lift.

The fresh produce sector has remained underserved by technology because of the trade complexity (read long chain of intermediaries, perishability, opacity, price volatility, liquidity, lack of standardisation etc), trade barriers of various kinds (trust and quality assurance apart legal and regulatory aspects), insufficient information on product and service availability, infrastructure bottlenecks and lack of right knowledge at the right time at the right place but more so because of low availability of people who could understand the finer nuances of both fresh produce trade and modern technology platforms and have the requisite match making skillset and expertise to build something for fresh produce business using technology.

Let me introduce the VEGFRU platform which is coming soon over Internet.

Our goal is to create a virtual World where anyone can freely trade products and services related to fruit and vegetables irrespective of geographic, cultural, regulatory, or logistical boundaries.
We aim to empower a new generation of traders and entrepreneurs to benefit from the wonders of trade over Internet by dramatically simplifying the process of discovering products and services related to fresh produce and their transactions while bringing down the overall cost and time.

We are going to be only tech-driven fresh produce company offering linkages to wide array of services related to sector – right from farm to kitchen in fruit and vegetable sector.
Backed by Wingify.com, India’s most promising software product venture, with footprints across 100 plus countries and 4000 plus customers including the likes of Microsoft, GE, Mitsubishi, ICICI Bank, Timesgroup, we’re a small team of technologists, fresh produce experts and customer experience fanatics operating out of a beautiful office in North Delhi.

We are currently pre- registering traders and service providers in following categories;

• Order Suppliers of Fruit and Vegetables for retail, QSRs, processors and others
• Consultants in food and agri domain
• Supply chain, Distribution and Logistics Services specialists
• Liaison specialists for Govt. Financial Schemes and Subsidies
• Crop Production experts of Fruit and Vegetables – all crops and discipline
• Agri Input suppliers
• Packaging experts for fresh Fruit and Vegetables / Processed and semi processed products
• Export / Import Facilitators
• Machinery and Equipment Suppliers
• Quality Control and Assurance specialists
• Cold Storage Space providers
• Dry Warehouse Space providers
• Agri Entrepreneur / Business Development experts
• Hi tech Agri Applications / Technology Platform
• Agro Finance and Financial services specialists
• Crop insurance specialists
• Fresh Produce Retail / e-tail companies and consultants
• Events and exhibitions.
• Agrometeorology and weather forecast
We have already started pre-registrations in the above said categories. My dear visitor if your profile fits into any of the above said categories than please feel free to call or email to Pooja Gupta for queries and pre-registration at following contact details.

Landline: 011-43401563

Mobile: +91-8527267888

Email: pooja.gupta@vegfru.com

Feel like dropping a mail to Founder…, please mail me, Anil Chopra at anil.chopra@vegfru.com