Agri Value chain - Agriculture Business - Lecture Slides, Slides for Botany and Agriculture. Birla Institute of Technology and Science

Botany and Agriculture

Description: This lecture is from Agriculture Business . Key important points are: Agri Value Chain, Dairy and Horticulture, Indian Farm Reality, Supply Chain, Organized Processing and Retailing, Logistics and Intermediation Costs, Production Costs, Product Pyramid
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Value Chain management

Understanding Agri Value chain for Dairy and Horticulture

WHAT IS VALUE

Porter defined value as the amount buyers are willing to pay for what a firm provides.

He also conceived the “value chain” as the

combination of nine generic value added activities operating within a firm – activities that work together to provide value to customers.

Understanding Indian Agri Value chain systems

Indian farm reality Fragmenting farms and swelling bottom

0%

20%

40%

60%

80%

100%

1970-71 1980-81 1990-91 1995-96 2000-01

Area of Holdings-India

Less than 2 hectares 2-4 hectares 4 and above hectares

0%

20%

40%

60%

80%

100%

1970-71 1980-81 1990-91 1995-96 2000-01

Number of holdings-India

Avg Size 2.3 1.82 1.55 1.41 1.37

HOW VALUE CHAIN IS DIFFERENT FROM SUPPLY CHAIN

Consolidation of Organized Processing and Retailing

Source: Value Chain Survey, The World Bank

Farmer, 13.5 Intermediary, 5.4

Exporter, 24.2

International freight & insurance, 53.6

Importer, 23.5

0

20

40

60

80

100

120

1Different stages of the supply chain

R s

pe r K

ilo gr

am

Farmgate price=Rs.13.5

Retail price= Rs.120.3

CIF price= Rs.96.8

FOB=Rs.43.2

Wholesale price=Rs.18.9

Logistics and intermediation costs are much higher than production costs

High wastage reflects inefficiencies in the delivery chain

Fragmented and Costly Supply Chain

Producer / Farmer: Price Rs. 2.00; Wastage: 20%

Consolidator: Price: Rs.2.20; Wastage: 8%

Market Wholesaler: Price Rs. 2.50; Wastage: 5%

Semi-Wholesaler: Price Rs. 3.33; Wastage: 5%

Retailers: Price Rs. 8.20; Wastage: 10%

Source: S. Raghunath and D. Ashok; June 2004 (IIM- Bangalore)

Product Pyramid

Raw Produce

Raw Produce

Minimum Value Addition

Semi Finished

Finished Scale, tech, finance

Higher skill, technology, finance

Low skill, high volume, sold to intermediary

Smallholders and Business • No marketable surplus • No local level value addition to increase the price

realisation • Lack practices of mixed cropping/rotation of crops

to maintain the soil fertility as well as income • Soil testing missing • Organized trading • Storing • Agriculture not a business – the mindset • Lack loan planning - purposeful utilization of

loaned money • Insurance of crops

Retailer

Processor

Input supplier

The need of each segment in the Chain

Small producers

Retailer

Processor

Input supplier

Strategies to increase the income of poor and to make value chains inclusive

• Contract farming – partnership with private sector

players

• Collective marketing by CBOs

Small producers

Contract farming

Collective marketing

What is the best way to empower farmers ?

By providing him knowledge

Example of Reconfiguring the Value Chain

Collect Milk From

villages

Transport to The plant

Near the town

Convert to milk powder

Export and sell

Old Way:

Feeder Balancing Dairy

Save on shipping costs by 10 times Utilize cheaper non-union rural labor

New Way:

e Collect milk Make powder in the plant near

village

Sell and export Milk powder

directly

Example of Reconfiguring the Value Chain

Put cost property at city on rent

Issues related to Indian horticulture

• Developing Market linkage for exports

India is among the largest producers of horticultural products

Production (million MT)

64 56 24 5 3

149

76 35

6 5

502

127

44 8 7

0

100

200

300

400

500

600

China India Brazil South Africa

Chile

1980

1990

2004

Source: UN COMTRADE, 2005

Yields are still low by international standards

Source: UN COMTRADE, 2005

Fruits

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

China India Brazil South Africa

Chile

1990 2004

Vegetables

0

50,000

100,000

150,000

200,000

250,000

300,000

India South Africa

Brazil China Chile

1990 2004

(Yields per Hectare)

India is a relatively low cost producer / exporter …..

1,188

669

805

455 455 463

911

227 189

863

630

444

316 288 222

175 155 91

-

200

400

600

800

1,000

1,200

1,400

Fresh grapes Peas, fresh or chilled

Guavas, mangoes and mangosteens

Bananas, including plantains,

fresh

Lemons and limes, fresh

or dried

Apples, fresh Tomatoes, fresh or chilled

Onions and shallots,

fresh or chill

Other potatoes, fresh or chilled

World

India

Average Price in $/MT (2001-03): India vs. World (Price prevailing at the originating ports)

Source: UN COMTRADE, 2005

…but it has an insignificant share in global trade

Source: UN COMTRADE, 2005

0.5%

0.2%

0.2%

0.5%

10.8%

0.2%

0.1%

0.9%

11.1%

2%

2%

7%

8%

10%

12%

21%

22%

38%

Grapes

Apple

Tomato

Potato

Onion

Lime/lemon

Banana

Peas

Mango

India's share in global production and exports

Production Exports

Commodities Surveyed

Apple , 60

Banana, 100

Grapes, 98

Mango, 110 Mosambi, 102

Okra, 106

Onion, 100

Peas, 95

Potato, 101

Tomato, 100

Vegetables

Fruits

Source: Value Chain Survey, The World Bank

Main finding: Logistics and intermediation costs are much higher than production costs

Source: Value Chain Survey, The World Bank

Farmer, 13.5 Intermediary, 5.4

Exporter, 24.2

International freight & insurance, 53.6

Importer, 23.5

0

20

40

60

80

100

120

1Different stages of the supply chain

R s

pe r K

ilo gr

am

Farmgate price=Rs.13.5

Retail price= Rs.120.3

CIF price= Rs.96.8

FOB=Rs.43.2

Wholesale price=Rs.18.9

Factors Impeding India’s Exports A Combination of External and Domestic

Factors

High Cost of Delivery between the Farm- gate and Retail (in the Foreign Market)

High Transport Costs (Inefficiencies in specific modes of

transport)

Inefficiencies in Domestic Logistics and Intermediation

Tariffs Abroad, Quality and Standards

India exports mostly to proximate markets

Source: UN COMTRADE, 2005; CEPII

But successful exporters like Chile have broken the ‘distance’ barrier

Source: UN COMTRADE, 2005; CEPII

India’s international transport costs are higher than those of competing countries

655 476

1338

874

167 88

649 958

315

785

505 479

0

200

400

600

800

1000

1200

1400

1600

1800

Pakistan India Chile India Netherlands India

Difference in the price betw een originating port and the destination port (Specif ic countries)

Price at the originating port (All countries)

Mango UK ($/per MT)

Potato Saudi Arabia ($/per MT)

Grapes Netherlands ($/per MT)

Source: UN COMTRADE, 2005

Transport costs as a barrier ranks high in the exporters’ perception

Barriers to Export

4.3

5.0

5.4

6.0

6.1

6.1

6.2

6.7

0 1 2 3 4 5 6 7 8 9 10

Anti-dumping issues

Volatility of demand

Lack of Indian brand name

Competition from others

Non-tariff barriers

Payment problems

High custom duty

International trasport cost

Index measuring the magnitude of the barrier [0= Not a barrier; 10= Most critical barrier]

Source: Value Chain Survey, The World Bank

Air Transport

• Costs are high because of

– Excessively high taxes on fuel and airport charges – Restrictions on ownership and entry – Inadequate and under-utilized infrastructure (A Road Map for the Civil Aviation Sector, GoI)

• Imbalances between exports and imports (to Europe

and North America)

Maritime Trade

• Inefficiency of ports is a bigger problem than inadequate capacity

• Maritime sector faces the following challenges to

improving performance (10th Five Year Plan, GoI):

– Delays in project implementation – Inflexible functioning of major ports – Lack of multi-modal transport – Cost-plus tariff policy

Surface Transport

• Road transport – Cost is not high in nominal terms but is high in effective

terms (including wastage, storage, and handling) – Travel speeds are low (only about 200-400 km per day) – Movement of containers on the Indian roadways is limited – Refrigerated trucks are few and expensive

• Rail rates in India are very high in relation to costs

Variation in prices reflect segmentation of the domestic market

Difference in prices between the cheapest and the most expensive city for different commodities

127% 138% 141% 145% 149%

160% 172% 188%

234% 252%

0%

50%

100%

150%

200%

250%

300%

Banana Oranges Potato Onion Grapes Okra Apples Mango Green Peas

Tomato

3.1 4.2 4.5 4.4 4.9

10.9

5.7 8.2

15.6

32.1

0

5

10

15

20

25

30

35

Mumbai Hyderabad Kolkata Bangalore Chennai

Transportation costsplus handling charges from Delhi (Rs. per Kg)

Difference in the wholesale price from Delhi (Rs. per Kg)

Apple -2002

High wastage reflects inefficiencies in the delivery chain

Fragmented and Costly Supply Chain

Producer / Farmer: Price Rs. 2.00; Wastage: 20%

Consolidator: Price: Rs.2.20; Wastage: 8%

Market Wholesaler: Price Rs. 2.50; Wastage: 5%

Semi-Wholesaler: Price Rs. 3.33; Wastage: 5%

Retailers: Price Rs. 8.20; Wastage: 10%

Source: S. Raghunath and D. Ashok; June 2004 (IIM- Bangalore)

Commodity- Tomato; State - Karnataka

Mark ups in Indian Grain sector

COMPANY CUSTOMER CONSUMER

©2004 TGVC

CUSTOMER VALUE

benefits

derived in return for sacrifices

made.

VALUE ADDED

sales price minus cost of

ownership

VALUE ADDED

sales price minus cost of

resources

COMPANY

COST OF RESOURCES

CUSTOMER CONSUMER

©2004 TGVC

MINDS MONEY MAN POWER MACHINES MATERIALS

©2004 TGVC

COST OF RESOURCES – Sacrifices MINDS

People with a higher education and/or high level of creativity.

MONEY Own financial resources or access to financing

instruments.

MANPOWER Skilled, proficient or experienced workers and

availability of training

MACHINES Agricultural equipment, accessories and other

technical production means. MATERIALS

Raw materials, produces, seeds, ingredients and/or intermediate products.

COMPARATIVE ADVANTAGES

BUSINESS BUSINESS CONSUMER

COST OF RESOURCES

COMPANY

COST OF RESOURCES

TECHNOLOGY PRODUCTION LOGISTICS MARKETING SUPPORT

CUSTOMER CONSUMER

©2004 TGVC

VALUE ADDED

©2004 TGVC

VALUE ADDED – Benefits

TECHNOLOGY Activities to create new, or develop existing products,

choice of raw materials, formulations, machines and applications

PRODUCTION Transformation of inputs into a final product;

growing, manufacturing, assembly, testing and packaging; by means of nature, machines,

infrastructure, and labor LOGISTICS

All in-bound, internal and out-bound movement of goods, and the administrative consequences of these

movements; supply chain management MARKETING

All activities to attract new customers, and maintain loyalty amongst existing customers; promotion,

branding, customer relation and sales management SUPPORT

All pre/after sales activities, application information, maintenance, repair, personalization of processes

BUSINESS BUSINESS CONSUMER

COMPETITIVE ADVANTAGES

COST OF RESOURCES

VALUE ADDED

COMPANY

COST OF RESOURCES

TECHNOLOGY PRODUCTION LOGISTICS MARKETING SUPPORT

CUSTOMER CONSUMER

©2004 TGVC

VALUE ADDED

MINDS MONEY MAN POWER MACHINES MATERIALS

COMPETITIVE ADVANTAGES

COMPARABLE ADVANTAGES SALES

PRICE

COMPANY

COST OF RESOURCES

VALUE ADDED

CUSTOMER CONSUMER

©2004 TGVC

COST OF OWNERSHIP

COST CHRONO CHANGE CHANCE CONFLICT

SALES PRICE

PURCHASE PRICE

©2004 TGVC

SA CR

IF IC

ES

CUSTOMER VALUE

BUSINESS BUSINESS CONSUMER

COST OF OWNERSHIP Sacrifices-Intermediary

COST Factory sales price on a DDP basis

CHRONO Time involved in purchasing process,

control and corrective actions CHANCE

Purchasing risk as defined by number of potential suppliers and/or reliability of

supply as a result of large geographical distances, political stability and/or entry

barriers CHANGE

Resistance to change to new products, processes and/or suppliers, cost of

adaptation CONFLICT

Sources of disputes in business relations, like overall incompetence of

employees, unresponsiveness to solutions, inflexibility on requests and

non-transparancy in transactions

CO ST

O F

O W

N ER

SH IP

COMPANY

COST OF RESOURCES

VALUE ADDED

CUSTOMER CONSUMER

©2004 TGVC

COST OF OWNERSHIP

VALUE ADDED

TECHNOLOGY PRODUCTION LOGISTICS MARKETING SUPPORT

COST OF OWNERSHIP Benefits-Intermediary Social Financial

Commercial

COMPANY

COST OF RESOURCES

VALUE ADDED

CUSTOMER CONSUMER

COST OF OWNERSHIP

©2004 TGVC

SA CR

IF IC

ES VALUE ADDED

PRICE PEOPLE PLANET

©2004 TGVC

BUSINESS BUSINESS CONSUMER

PRICE Market price as paid by consumers or end

users exclusive of discounts or other sales promotion

PEOPLE Occupational health and safety risks in the production and/or handling of the

product; exposure of consumers’ safety and/or health in using the product or

service and/or its packing PLANET

Damages done to the environment and/or animals in the production, handling,

transport, usage or disposal of the product, service or packing

SACRIFICES –B2C

SA CR

IF IC

ES

COMPANY

COST OF RESOURCES

VALUE ADDED

CUSTOMER CONSUMER

COST OF OWNERSHIP

©2004 TGVC

SA CR

IF IC

ES VALUE ADDED

PRICE PEOPLE PLANET

SALES PRICE

PURCHASE PRICE

SALES PRICE

COMPANY

COST OF RESOURCES

VALUE ADDED

CUSTOMER CONSUMER

COST OF OWNERSHIP

©2004 TGVC

SA CR

IF IC

ES VALUE ADDED

BE N

EF IT

S

DESIGN QUALITY SPEED IMAGE SERVICE

©2004 TGVC

BUSINESS BUSINESS CONSUMER

BENEFITS – B2C DESIGN

Uniqueness of design –shape, color, taste- and/or packing design; performance; product features

QUALITY “Fit for use”: durability, reliability, and consistency of

products; process related

SPEED Availability and/or delivery time of product or service

as well as convenience of purchase

IMAGE Derived self esteem or recognition as perceived by the

consumer or end user

SERVICE The perceived level of support on pre- and after sales

activities, as well as customization of processes

BE N

EF IT

S

COMPANY

40 10

CUSTOMER CONSUMER

60

©2004 TGVC

90 20

1 0 0

COMPANY

COST OF RESOURCES

VALUE ADDED

CUSTOMER CONSUMER

COST OF OWNERSHIP

©2004 TGVC

SA CR

IF IC

ES VALUE ADDED

!

BE N

EF IT

S

CUSTOMER VALUE

TECHNOLOGY

PRODUCTION

LOGISTICS

MARKETING

SUPPORT

D ES

IG N

Q UA

LI TY

SP EE

D

IM AG

E

SE RV

IC E

PR IC

E

PE O

PL E

PL AN

ET

BENEFITS SACRIFICES VA

LU E

AC TI

VI TI

ES

ITS – A case on organic farming

TOTAL

VARIET Y QUALITY SPEED IMAGE

SERVIC E PRICE PEOPLE PLANET

OBSER VATIO

NS

TECHNOLOGY 15 17 0 18 17 9 15 19 110

PRODUCTION 18 19 10 17 0 15 14 19 112

LOGISTICS -12 -13 -19 -8 -7 -1 1 -1 -60

MARKETING -7 -14 -13 -14 -11 -7 -7 0 -73

SUPPORT 0 -9 1 -5 -3 2 -8 -2 -24

14 0 -21 8 -4 18 15 35

Cumulative Confrontation matrix for ITS Product : Organic Mangoes Segment : Speciality Importer of Organic fruits

Find focus (S/O) It is needless to say that the main focus of ITS is with their quality and Supporting technology for rowing organic mangoes. Their technology is so unique that it helps in improving the yield on one and quality of soil on the other hand. Their technology which is at the verge of getting patented is also highly Environmental friendly and assures optimum utilization of available resources with minimum carbon consumption. They are already certified with an internationally recognized certifying agency for their soil on various specified locations .

Challenges (W/T)

• As shown in the matrix the key challenging area is meeting the customer’s requirement at EU level.

• The firm is not good at logistics and confirming the speed of delivery.

• The company has further to learn more in managing an International pack house for their produce.

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