Big Retail, no panacea to food inflation woes

| Updated on November 10, 2017


Big retail may eliminate middlemen and help consolidate the post-harvest value chain. But will consolidation help narrow the gap between farmgate and retail food prices?

Every crisis begets magic bullet solutions proffered by assorted gurus, economists included. The latest one concerns food inflation, where there is understandable indignation over the presence of too many intermediaries between the field and the fork. Such an extended value chain benefits neither the consumers (who pay through their nose) nor the farmers (who hardly gain even when retail prices go up).

The obvious remedy to this lies in ‘compressing' the value chain. But how? This is where the consensus expert view is veering around to giving greater play to organised retail, including allowing 100 per cent foreign direct investment. It is believed that enabling big retail chains to buy directly from farmers and bypass the mandis would bring about the desired compression.

The case for organised retail could not, in fact, be stronger today, given the demonstrably poor conduct of the commission agents at Lasalgaon or Delhi's Azadpur mandi during the recent onion saga.

What the above argument misses, though, is an alternative possibility: Big Retail may well eliminate middlemen, thereby helping consolidate a fragmented post-harvest value chain. But would consolidation inevitably lead to compression — meaning a narrowing down of the gap between farmgate and retail food prices?

What growers reap

The evidence at least from the US — home to the likes of Walmart, Kroger, Supervalu and Safeway — suggests otherwise.

The chart shows how much of what American consumers spend on domestically-produced food actually accrues to farmers. In 1950, US farmers received over 40 cents for every food dollar spent at supermarkets. Today, that is down to about 19 cents.

Take milk. Currently, fresh whole milk is retailing at around $3.3 a gallon (Rs 40/litre). The farmer's share in this is just $1.45 (Rs 17.5/litre) or below 45 per cent. It is the same in eggs, where only $1.1 of the $2.7 store price for a dozen reaches the poultry grower. The ratios are lower at 31-32 per cent for meat products, 17-18 per cent for fresh fruits and vegetables, and 7-8 per cent on cereals and bakery items.

How does one explain the declining farm value shares despite the advent of Big Retail? One reason could be the very replacement of the earlier layers of intermediaries by a single Walmart or Safeway. This, probably, may have ended up conferring greater pricing power to these chains vis-à-vis farmers as well as consumers. The result: Consolidation sans compression.

But it is also a fact that modern retail, by itself, imposes an array of additional costs as the raw produce moves from the farmgate to the retail point. These include not just expenses incurred in handling, grading, cleaning, processing, packaging and transport of the product at each stage, but also its financing, insurance, warehousing, refrigeration, marketing, brand promotion, labelling and shelf display. Either way, the evidence points to a widening, not compression, of farm-to-retail price spreads.

Spreading it better

The spreads, if anything, are less in India in respect of many farm commodities. Dairy farmers of Amul get roughly Rs 26 on a litre of full-cream milk retailing at Rs 34 in Delhi and Rs 32 in Ahmedabad. Similarly, on the Rs 35 we pay for a kg of sugar, the cane grower in Uttar Pradesh realises nearly Rs 22.

Even on rice, bread or edible oils, the farm value shares would easily exceed 50 per cent. It is largely in fruits, vegetables and pulses that both growers and consumers get a poor deal.

How much of difference would the entry of Big Retail, then, make? To start with, they are unlikely to dispense with intermediaries, given the fragmented holdings and sheer number of farms in India – 130 million, as against 2.2 million in the US. The dependence on primary or even secondary-level produce aggregators will, hence, continue. Even if some rationalisation of the sourcing chain happens, it may not work to the farmers' advantage, as they would now be confronting more consolidated buyer pressure.

Compression from below

Instead of trying to compress the value chain from Big Retail downwards, a better way to do it, perhaps, is to start from ‘below' — from the farmers upwards.

This is precisely what the National Dairy Development Board attempted during the 1990s, when it set up 300-odd ‘Safal' retail outlets all over Delhi to market fruits and vegetables directly sourced from growers' associations a la Amul. But the project has failed to meet initial expectations: Of the 300 tonnes sold daily through its outlets, more than half is procured from the mandis, and only the rest comes from farmers.

The Safal venture has also been flawed in its emphasis on investing in large marketing and handling infrastructure in Delhi and Bangalore — rather than putting up more purchase centres, pack-houses and pre-cooling facilities close to where the produce is grown.

The resulting imbalance has led to its Rs 150-crore, state-of-the-art auction market in Bangalore running at barely 15-20 per cent capacity. The Safal National Exchange, billed as the first-ever electronic spot market for perishable commodities, was forced to even shut down two years ago.

Published on January 21, 2011

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