Farmed out to Big Retail

It’s mid-day and dozens of middlemen are milling around the vegetable mandi in Venkatagiri Kota village. The mandi is the biggest in the Kuppam belt, a key vegetable growing region in Chittoor district of Andhra Pradesh. Vegetables and plastic crates lie strewn about. Glum-looking farmers sit in groups, waiting for buyers. On a lucky day they may get a good price, but often they have to settle for whatever is offered, for it is not worth carrying all the produce back home.

While the mandi scene at Venkatagiri Kota is typical of the Kuppam region, a contrasting trend is quietly taking roots.

Take the case of S. Rajendran, one of the 250 farmers corporate retail chain Hyderabad-based Heritage Foods, has teamed up with. The farmer and the retailer are together in what the chain calls ‘relationship farming,’ distinct from ‘contract farming’ where the terms are more rigid.

Marginal farmers such as Rajendran from 30-odd villages in this belt, who farm some 300 acres, are advised on what Heritage would like to buy, with the promise of buying 75 per cent of what the farmers produce. The ‘crop plan’ is supported by providing agricultural inputs that Heritage can bulk buy, cheap. And also with technical support and market information. No profit-making here, says G. C. Manjunath, General Manager (Procurement), Heritage Foods India.

Rajendran may not get the top price, but he prefers the assured offtake and the prompt payment. The produce is also picked up at the farm gate, so none of the hassles of transporting it. Today, Rajendran’s chief worry is not the market, but water. That’s another story, though.

So, is the future of Indian agriculture tied to Big Retail?

From West Bengal and the National Capital Region to Andhra Pradesh, Business Line 's reporters fanned out to meet a cross-section of farmers and their relationship with Big Retail. Has direct procurement by retailers made a difference to their lives; has it benefited them? Are they happy with the arrangement?

The crux of the debate on foreign direct investment in retail is how these funds can strengthen the supply chain and cut the losses in transporting fruits and vegetables to the market. India loses about Rs 50,000 crore every year because of the shaky post-harvest infrastructure. This is even before any big foreign retail puts serious money into food back-end, which is likely to happen only after clarity emerges in FDI in retail. Sunitha Raju from the Indian Institute of Foreign Trade points out, in a paper, that the direct procurement format raised farmers’ net income by 8 per cent, while consumers paid 6 per cent less and transportation wastage fell by 7 per cent. All this can improve further if supply chain logistics are strengthened.

Several large Indian organised retail chains such as Heritage and Reliance and even the government-owned Mother Dairy have made the farmer connect by setting up direct procurement centres. Multinational food companies located in India have also reached out to farmers. As has soft drinks major PepsiCo India, which sources almost 50 per cent of its total requirement of potatoes for its Frito-Lays brand of chips through contract farming. West Bengal alone accounts for more than a fourth of the company’s total procurement that stood at 2.4 lakh tonnes in 2012. The company has tied up with 24,000 farmers across nine States, including West Bengal, Punjab, Gujarat, Uttar Pradesh, Maharashtra, Karnataka and Bihar.

Big retail honeymoon

Even as the retail FDI debate rages on, farmers are quietly enjoying the honeymoon with Big Retail. Gopal Sadhu Khan, a 44-year-old potato farmer of Abhirampur village in Hooghly, 90 km from Kolkata, is unperturbed about a possible price crash owing to an oversupply of the tuber this year. Khan has sowed the ‘Atlanta’ variety of potato, supplied by PepsiCo, on more than a quarter of his holding. And, a price has already been set for his produce.

Khan is not alone; nearly 10,000 farmers in West Bengal have entered into a contract farming arrangement with PepsiCo for the ‘Atlanta’ and ‘Chipsona’ varieties of potato. “Last year, I sowed PepsiCo seeds on less than 5 bighas (1.65 acres) out of my total land area of 20 bighas (6.6 acres). This year I have increased it to over 6 bighas (1.98 acres),” says Khan.

The extreme volatility in potato production and prices over the last three years seems to have convinced an increasingly expanding section of growers in the State to accept a steady return through contract farming than wait for an elusive windfall.

For much of 2012, the price of the common Jyoti variety of potato ruled at Rs 900-1,000 a quintal because of a dip in production. In contrast, farmers who had tied up with PepsiCo earned only Rs 580-600 a quintal (Rs 6 a kg) on average after paying for transportation, grading and loading.

“Though Jyoti was fetching a higher prices this year, the yield was relatively lower. Moreover, the returns from Jyoti potato vary from year-to-year depending upon the yield and other factors, whereas in the case of PepsiCo we get an assured price,” said Sahu Sufi Mondal, a farmer of Abhirampur.

Key buying centre

On Delhi's border with Haryana lies the nondescript Bhaktawarpur village, hardly the place where retailers like Mother Dairy, Reliance Fresh, Walmart, More would hotfoot it to. But the sleepy village is a hive of activity from 7 a.m. till about noon with farmers making a beeline for the procurement centres set up by retailer-appointed vendors, who aggregate the farm produce and forward them to the retail chains.

Mother Dairy follows the cooperative model, procuring vegetables from an association of farmers, while Reliance Fresh operates through its own channel. The others follow the vendor model.

Birender Paswan, a 48-year-old migrant farmer from Bihar’s Purnia district, is a man with multiple choice. Besides the traditional mandi — the nearest being Delhi’s Azadpur, some 30 km from his farm — Paswan can sell to any of these retail chains.

Paswan, who has taken four acres on lease at Rs 38,000 an acre annually to cultivate vegetables, says he has been enlisted by Reliance Fresh as a supplier of leafy vegetables. Based on the indent for a specific quantity placed by the company, he harvests and brings the produce to the procurement centre.

Paswan, who manages six crops of spinach a year, sells the remaining greens either at the Mother Dairy outlet or at the mandi. The total returns vary from Rs 60,000 to Rs 1 lakh a year. “For spinach, I get Rs 2 a kg less than the mandi rate. Assuming transportation and handling costs and taxes, the returns are less by Re 1 a kg. But, unlike in a mandi, I don’t have to wait for a buyer here at the centre,” he adds. Retail chains that have set up procurement centres at Bhaktawarpur largely offer prices similar to that of government-owned centres. The private centres pick up around 30,000 kg of vegetables every day from the area alone depending upon the demand.

Transparent pricing

Fifty-eight-year-old Dharam Pal swears by Mother Dairy's co-operative model of creating growers' associations. Not because he works part-time as an accountant overseeing payments to farmers, but because of the procurement model adopted by the growers association.

The indent or the quantum of order placed by Mother Dairy for a particular vegetable gets distributed equally among the farmer members, so that each one benefits. “Moreover, the pricing is transparent and the handling charges are fair,” Dharam Pal adds.

Farmers Business Line spoke to elsewhere in the country too have taken to organised retail. For instance, N. Bhaskar Reddy of Ontimamidi village in Medak district, who grows vegetables and paddy on his 10 acres, is one of the quick converts to Big Retail. From selling his produce at a local mandi, he now supplies just to Reliance Fresh.

He talks the lingo of Internet money transfer and mobile messages to get market prices and procurement orders. “I am not at all bothered about the ups and downs of prices at the local mandi. Nor I am bothered about the time I send the produce to the procurer. I get a price quote and quantity of vegetables the previous evening. I deploy labour accordingly,” he says.

Reddy is among the dozen farmers in the village who supply fruits and vegetables to organised retailers. “In the first year (about six years ago) itself, I saw a benefit of Rs 2,000 every day. I used to get an average income of Rs 4,000 for 500-800 kg of vegetables I sold in the mandi. When I switched to Reliance Fresh, I got Rs 6,000-8,000,” he says. “In that year, I got Rs 2 lakh more. I never again thought of selling the produce in the mandi where prices fluctuate widely with no scientific pricing methods,” he says. Three years later, Bhaskar says he bought an apartment for Rs 6 lakh, mostly funded by the additional income he got from his sales.

Sunita, 48, who has an 18-acre grape farm at Advivi Majid in Mulgu mandal of Medak district, stopped exporting in 2008, when she suffered huge losses due to heavy rains. It was a tough call for Sunita — whether to continue with exports or to depend on middlemen to sell the produce in local markets. “Just around that time, I happened to meet executives from Reliance who were scouting for tie-ups with farmers to source vegetables. I immediately accepted,” she says.

For her, organised retail chains are godsend. “I supply 80-140 tonnes of grapes to them. I usually get the order the previous evening. If I feel there is more produce, I look at other players. But that happens in small quantities,” she says.

A Reliance executive says the company sources vegetables and fruits from eight procurement centres in Andhra Pradesh. “We have arrangements with about 10,000 farmers. Each day, about 700 farmers sell their produce to us. We get vegetables from neighbouring States too to meet the demand in AP,” he says.

More varieties

Heritage Foods buys from Kuppam belt farmers 15 tonnes of vegetables that are pooled, sorted, graded and packed at the ‘pack house’ and sent to Chennai and Bangalore. The pack house facility also features several large cold rooms for storage (some are rented out) and a fruit ripening room, where a shower of ethylene quickens ripening.

Farmers whom Business Line met say that earlier Kuppam produced only tomatoes, potatoes, beans and cabbage, but today thanks to the assurance of offtake and help with inputs, 30 different kinds of vegetables are grown — ridge gourd, snake gourd, beetroot, radish, onion, sweet corn, capsicum and a range of leafy vegetables.

Besides Heritage, FieldFresh Foods Pvt Ltd (a joint venture between Bharti Enterprises & Del Monte Pacific Ltd) also procures sweet corn, beans and chillies from these farmers. These are sorted and graded at Heritage Foods’ facility and exported to Tesco, UK.

Big Retail has indirectly helped other farmers too. These better hybrid seed varieties, practices and technology introduced by these companies have trickled down to other farmers who are not tied up with the retailers.

Expanding lineup

It’s not just Heritage. After the evolution of modern retail in India in a big way in 2006-07, and the emergence of new formats, other big retail chains such as Reliance Retail, More, FoodWorld and Nilgiris too have started procuring vegetables and fruits directly from farmers. This has transformed the lives of many farmers in some districts across the country.

Coca-Cola, for instance, has in a tie up with Jain Irrigation rolled out a training programme in ultra high density plantation techniques for the mango farmers of Chittoor district. A hundred demo farms are planned to train 50,000 farmers and help them double their mango yields in this Rs 11-crore project. Coca-Cola’s fruit drink Maaza, which is among the largest juice brands in the country with Rs 1,500 crore in retail sales, is made from a blend of totapuri and alphonso mangoes, grown in this region. Over 60 per cent of the 50,000 tonnes of mango pulp a year it needs is sourced from the Chittoor region, a bulk of it from Jain’s processing plant.

Hesitant still

However, most big retail chains are still aggregating. They have not invested too much on farmer training. A few of them have built demo farms as a part of their CSR activities. Says Bijendar Dahiya, a farmer, and Secretary of the Bhaktawarpur Fruit and Vegetable Producers Association, “Big companies don’t have trained staff and ground level infrastructure and can’t deal with small farmers.” Recounting the experience of Subhiskha and Big Apple retail chains, which have shut down their centres, Dahiya says big chains are reluctant to get into direct procurement on their own.

Says a retailer who did not wish to go on record, “The logic of back-end integration as a cost saving tool would work better if farmers were large and could deliver to retailers, or if retailers had enough scale to substitute the mandi. As of now we use it more for freshness than serious price advantage as the overheads in running this eat away procurement cost savings.”

But they have made a beginning. Metro Cash & Carry India says it has invested Rs 60 crore in supply chain and employee training at its Vijayawada outlet, engaging deeply with farmers and suppliers in Andhra Pradesh. Walmart says it intends bringing nearly 35,000 farmers under its procurement programme over the next couple of years. Heritage Foods has invested around Rs 35 crore on its cold storage warehouse in Kuppam which other companies can also use paying a rental.

V. Rajesh, an expert on Indian retail, who has worked with all major chains, says the biggest constraint in the Indian agriculture story is the lack of a proper connect between the farmer and the consumer. He suggests contract or corporate farming is always a good step forward in India for a variety of reasons — consolidation of capability at the farm level, infusion of technology and best practices, and investment in key infrastructure such as storage and transportation.

“The ITC experiment with sunflower farmers in Andhra Pradesh is a good example,” he says. Farmers can actually benefit from such farming arrangements. This is contrary to the hype that farmers will be affected by corporate retail, especially when FDI will bring multinational companies in the retail business. They will not only get better price realisation, but also technical support and various farm inputs, he says.

too early to exult

But critics of the honeymoon between farmers and retailers point out that one should guard against unalloyed exultation. Shekar Swamy, visiting faculty, Northwestern University, US, who also writes extensively on the retail industry, says the best way to ensure good prices to farmers, is to have a structure where the farmers’ access to the end consumer market is not blocked by a few retailers. Likewise, the only way to ensure good prices to consumers is to have a plethora of choice in terms of outlets from where the consumers can purchase their items of daily consumption.

Rajesh believes that good prices are assured simply because the current price buffer is huge and if wastage is curtailed and supply consistency is established, retailers can generate good margins even after paying the farmers better and maintaining the current price levels if not lowering the same.

small is big

Big box retail will appear to benefit farmers in the beginning as they work with a few contract farms to stock their shelves. “The only way to assess the impact on farmers is to look at countries where Big Box retailers dominate the market, and see how the entire farming community has fared,” says Swamy. Big Box retail in the West and elsewhere functions on a simple business model.

Grow bigger and bigger till the market becomes an oligopsony, “a situation where a small number of buyers exert power over a large number of sellers,” he explains.

The UK food retailing industry, for example, is now dominated by just four supermarket chains that together account for over two-thirds of retail food sales. Likewise, the top five chains in the US account for over 60 per cent of food sales. This results in the retailers exercising enormous control over their suppliers, including farmers. “At this point, farmers become captive and will be victims of lower pricing that is dictated by these retailers,” says Swamy. And consumers feel the pinch of higher prices. This is the real threat to the Indian marketplace at large, he says.

With inputs from Shobha Roy Kolkata; Vishwanath Kulkarni, Bindu Menon, New Delhi, and K. V. Kurmanath, Hyderabad.