Agri Warehousing in India

Indian economy is an agrarian economy with over 70% of the population engaged in activities related to agriculture. Indian food grain production has grown at an average rate of 1.20% over a period from 1994-95 with production of 192 million metric tonne (MMT) to an all time record output of 232 MMT in 2010-11 (15 years) and with the expectation of good monsoon in FY12 the uptrend is likely to continue. A major part of the food grain production consists of rice at about 94 MMT (41%) and wheat at about 82 MMT (35%). Further, production of Rabi and Kharif crops is now almost equal on account of growth in Rabi crop due to increased production of wheat, rice, cereals and pulses. All these taken together have drastically increased the need for storage capacity in India

Due to insufficiency of covered storage capacity of food grains, which was around 47.55 MMT as on March 31, 2000 and due to progressively increasing government stocks, considerable amount of food grains had to be stored under open Cover and Plinth (CAP) storage and to an extent in hired capacities, mainly during the year 2000 to 2003. But with the falling procurement levels between 2002-03 and 2006-07, the additional capacities hired by FCI during higher procurement levels in 2000-01 and 2001-02 had to be released due to idle capacities.

The years from 2007-08 to 2009-10, saw highest ever levels of procurement of food grains by Government agencies, resulting in severe strain on the available storage capacities. Higher minimum support price (MSP), better reach and consequent higher procurement helped ensure better and remunerative prices to farmers. However, it caused strain on available storage capacities with the State agencies involved in procurement.

Before 2000, private sector interest in warehousing industry was low due to its capital intensive nature and high uncertainty over revenue generation.

Bottlenecks

Even with significant development of storage capacity sanctioned under NABARD and NCDC schemes, it is estimated that around 20-30% of the total food grain harvest is wasted due to inadequate storage capacity, regional imbalance in warehouses, lack of adequate scientific storage and inefficient logistic management in the country. It is said that each grain bag is handled at least six times before it is finally opened for processing which leads to higher storage & transportation charges and also increases to wastage of food grain during transit & handling.

Further, the storage capacity available with State agencies are primarily used for keeping central stock of food grains for the buffer stock, public distribution systems and other Government schemes which co nsequently leaves only a marginal capacity for other players to store their produce.

Food grain (mainly wheat & rice) is the main commodity stored, while the other major crops storable in the godowns include oilseed, spices and cotton. Though the government has started focusing on building storage capacity through various schemes, the focus is still largely on the storage of wheat and rice which are considered as staple food in the country.
Also due to the existing regional imbalance the government’s capacity to procure produce is limited outside

Northwest India, which has recently led to fall in wheat prices and compelled the farmers to sell their produce below its MSP.
With all these issues, much needs to be done to built additional storage capacity, renovate existing warehouses and implement a robust system of NWR to make available more funds to farm producers and simultaneously provide security to the lenders.

Way ahead

1. Capacity of warehouses to be built:

Though the storage capacity has increased at a CAGR of 6.7% during the last decade till March 2010, the irony remains that around 20-30% of the total food grain harvest is wasted due to lack of availability of storage capacity, regional imbalance in warehouses, lack of adequate scientific storage and i nefficient logistic management in the country. Albeit, with adequate storage capacity in place, a normal handling loss of around 5-7% is expected to continue.

Two things needs to be addressed at this stage, 1) to build additional storage capacity and 2) upgrade the existing state owned warehouses. Most of the warehouses owned by state agencies are over 15-20 years old and hence the same needs upgradation to contain wastage levels. With present state owned capacity of 37 MMT and renovation cost of around Rs.1,000 per metric tonne, the total required capex is expected to be around Rs.37-40 bn.

In order to balance food grain production to consumption (for both Kharif and Rabi crops), a total peak storage capacity required works out to be around 70% of annual production. With annual food grain production of 232 MMT the required storage capacity is around 162 MMT which indicates a deficit storage capacity of 70 MMT at present levels. The same could be verified by taking base of wastage level. So with the wastage level of around 30% (with production level of 232 MMT), the deficit storage capacity works out to be around 70 MMT.

As per the recently sanctioned projects under NABARD for some private players rated by CARE, the construction cost for the modern warehouses was in the range of Rs.4,000-6,000 per metric tonne of capacity created and hence the total construction cost for building of 70 MMT storage capacity would be around Rs.350. Assuming that all the godowns are supported by capital subsidy the total capital subsidy outlay would be around Rs.84 bn. Further, considering wastage of around 70 MMT, the foodgrain loss is also to the tune of Rs.70-100 bn.

This indicates that the capital subsidy burden for new warehouses and for renovating the existing sta te owned warehouses would largely be compensated by the savings in food grain in two-three years. Hence, it makes sense to extend the Rural Godown Scheme beyond 2012 with more focus on building capacity in consumption centres as only 22% of the total storage capacity is available in the consumption states.

2.Need to focus on other commodities also

The major storage capacity of government agencies are occupied by wheat and rice which leads to acute shortage for storage capacity for other food grains and agri commodities. With production of 40 MMT of coarse cereals (bajri, jowar, corn, etc.), 16.51 MMT of pulses, 27.85 MMT of oilseeds, 336.7 MMT of sugarcane and 33.93 million bales (1 bale = 170 kg) of cotton more focus should also be given for efficient wareh ousing of such commodities to minimise wastage.

Over the years warehousing business has been transformed to a great extent from merely a storage infrastructure to a one stop shop for supply chain management through the entry of private sector. Nowadays the goods are stored as per the scientific methodology to protect them against the quantitative as well as qualitative losses occurring due to unavoidable circumstances such as floods, pest attacks, etc. Hence, ‘warehouse performance indicators’ should be introduced to check the efficiency of the warehouses which nwshould include quality parameters like ability to control wastage, pest control measures, provide wide range of testing, grading and certification services which can help in ascertaining the value of the commodity deposited and bring transparency among all interested entities.

3.More warehouses to issue NWR

Generally, at the time of harvesting, the price of agricultural commodities tends to be lower because of positive supply situation and farmers often do not get adequate price for their produce. By depositing their produce in a registered warehouse and obtaining NWR, farmers can use it as collateral for obtaining short-term borrowing for their working capital requirement for the current sowing season from banks. Further, when the prices become favourable, the farmer can sell the same, repay the loan and get a surplus income.

The introduction of NWR system in the country would not only help farmers to avail better credit facilities and avoid distress sale but would also safeguard financial institutions by mitigating risks inherent in credit extension to farmers. The pledging /collateralization of agricultural produce with a legal backing in the form of NWR would lead to increase in flow of credit to the rural areas, reduce the cost of credit (due to certainty of recovering credit by the bank) and would spur other related activities, like standardization, grading, packaging and insurance services in the agricultural sector. With the increased requirement of quality storage, warehousing industry would also get a boost in rural areas. This would also fill gaps in the logistic chain of agri-business in the rural sector.

Apart from individual farmers, cooperative societies and Self-Help Groups (SHGs) would also be able to assist their members particularly small and marginal farmers by aggregating their surplus produce and keeping the same in registered warehouses. An established NWR system would also act as an incentive for farmers to produce goods of quality and specification amenable to standardization and storage in registered warehouses.

Apart from all the infrastructure and subsidy support the farmer community need to be educated to form cooperatives and organise into larger bodies which would construct storage capacity and various production pockets. Further, such cooperative can negotiate with organised retail for selling their produce in bulk reducing the storage capacity and lesser movement of goods. In future, it may take shape in the form of contract farming for organized retail, which is presently being done mainly for fresh vegetables.