Opinion

Pandemic highlights risks of chasing of economies of scale in food sector

G Chandrashekhar | Updated on June 30, 2020 Published on June 30, 2020

Centralised operations — be it in dairy, poultry or piggery — may be profitable in normal times. But when disease strikes, the adverse consequences are huge, requiring large-scale culling and even closure of the farm

In the last two decades, from time to time, the world food system has witnessed instances of epidemic or disease outbreaks affecting animals — Bovine Spongiform Encephalopathy aka Mad Cow disease, Avian Influenza aka Bird Flu and, more recently, African Swine Fever. The economic costs of the diseases have invariably been enormous.

Most painfully, millions of animals had to be culled to prevent further spread of the disease, and to ensure the safety of the food system and consumers. Insurance compensation is usually a poor consolation for the kind of medical, economic and social challenges these disease outbreaks pose.

Even during those times of disease outbreak, there always emerged arguments about ‘economies of scale’. Without doubt, large scale gives the entrepreneur — be it in dairy, poultry or piggery — the operational advantage of automation and technology infusion as well as economic advantage of reduced costs and higher bargaining power, especially with vendors.

So long as the ‘going is good’, large scale or centralised operations may be profitable as per-animal costs reduce, giving the entrepreneur better competitive advantage in the marketplace.

However, when tragedy strikes in the form of a disease — and we have seen it invariably does from time to time, if history is any guide — the adverse consequences of centralisation are also large. In large farms with large number of animals, disease tends to spread rapidly.

To contain the spread of disease, the entire operations at the farm are shut. More often than not, animals are culled in very large numbers to contain the risk. In other words, the operations at the animal farm can come to a standstill until things are cleaned up.

Centralisation vs de-centralisation

So, there is a debate about the desirability of chasing scale economies. Should economies of scale and its attendant economic benefits be the sole or principal objective or is there any other way?

Decentralised facilities are another way. Decentralised operations are essentially not very large but modest in size and are spread in many locations. Especially in case of risks such as disease, decentralisation allows for isolation of the facility and quick action to contain the negative fallout.

The Covid-19 pandemic has once again brought to the fore the debate over the merits of centralisation versus decentralisation. In a large economy such as the US where scale seems to be everything, the current debate is whether the country’s food systems should be dependent on one large national manufacturing system or whether smaller, multiple food manufacturing spread across geographies would be most appropriate.

The debate has found renewed resonance because it is not about animals in the case of the ongoing pandemic — it is about the involvement of humans including workers in food factories and people in the supply chain. Even if a single worker in a food factory is found Covid-positive, the whole factory may face the risk of a shutdown.

In the event, food supplies can be compromised if the factory happens to be a large scale centralised system. So, going forward, there would be a serious rethink on the merits of over-centralisation. It is not just about food security but also about the security of people associated with food system.

Capacity to bounce back

By their very nature, decentralised food systems have the capacity to bounce back sooner than the large centralised ones. They will have the agility and the ability to return to work sooner. In other words, one can expect greater resilience.

In our country, we have always bemoaned lack of scale economies end-to-end in the farm sector. We have fragmented landholdings that apparently deny scale economies. We have established far too many primary and secondary processing factories dotting our landscape which too often suffer from scale dis-economies.

Unlike the US, there’s surely a case for consolidation of facilities in our country that will prevent ‘dis-economies of scale’; but over-centralisation must be guarded against. Importantly, food in our country is more regional than national, which may also be the reason for production facilities spread across the landscape.

Another trend that the world is likely to witness post-Covid is increasing automation in the farm and food system, especially in developed economies. Adoption of artificial intelligence, blockchain technology and robotics will accelerate.

Consumers will opt for healthy foods and healthier lifestyles. They would want to know from where exactly and under what conditions their food is produced. Traceability will take centre-stage.

The writer is a policy commentator and agribusiness specialist

Published on June 30, 2020
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