Value Chain in Food Processing
Agribusiness is a very common word and many a time it ties to cascade farming with manufacturing without realizing that the manufacturing sector is not the same as farming sector and high tech manufacturer cannot go to the field and grow the raw material. However, farmer, the first entrant has to be supported with all that he needs in farming to get the highest production and productivity and must be ensured profit sharing as much from the chain…
- Mahesh Kumar, BVC Mahajan
There is a great diversity of agro-processing worldwide and in some countries it accounts for more than 60% of the employment. Many people start agro-businesses at a small scale, often working from home and selling to neighbours and friends via a roadside stall or in a local marketplace. Characteristically, small-scale production is labour-intensive as there is rarely sufficient money to invest in specialized processing equipment. The quality of products may vary and small enterprises often do not have consistency of supply and so cannot cater for wholesalers or retailers who require guaranteed deliveries of consistent quality. Small-scale processors also may not have contracts with raw material or packaging suppliers but buy materials from local markets. There are number of these businesses in emerging economies, and with advice and assistance some of them can develop into larger scale enterprises. When small scale processors try to scale up operations a series of issues may be encountered. For example, products may be in direct competition with those of other processors when displayed on retail shelves and so the quality of the packaging becomes much more important. Retailers may negotiate lower prices than processors have experienced when making direct sales to consumers. Any scaling up of operations brings new challenges: typically these businesses employ more people and the owner must have staff management skills; more careful control is needed over business finance, especially, production and distribution costs; business management and financial planning skills are required to stay ahead of competitors; investment decisions are needed for both new equipment and improved packaging. The larger production volumes require production-planning skills and may create a need for environmental protection through waste management. Other issues, such as market research, product development and the business image may also increase in importance.
The degree of processing can vary tremendously, ranging from the cleaning and grading of fruits to the milling of rice, to the cooking, mixing, and chemical alteration that create a textured vegetable food. As shown in table 1.0, agro industries can be roughly categorized according to the degree the raw material is transformed. In general, capital investment, technological complexity, and managerial requirements increase in proportion with the degree of transformation. The purposes of transforming raw food and fiber are to create an edible or usable form, to increase storability, to create a more easily transportable form, and to enhance palatability or nutritional value.
Processed foods far from being a luxury can significantly enhance an economy by freeing the work force (especially women) to more productive activities rather than preparing and serving food in the house. In addition to preserving perishable crops, processed foods can improve health esp. of children, increase incomes, reduce sickness and improve quality of life. Food spoilage is wasteful, costly and can adversely affect trade and consumer confidence. People have the right to except the food they eat to be safe and suitable for consumption. Everyone including farmers, growers, manufacturers and processors, food handlers and consumers has a responsibility to ensure that food is safe and suitable for consumption.
Figure 1.0: Postharvest losses in the supply chain
Half a century ago, green revolution provided the first big leap for Indian agriculture and food security. The country became self-sufficient in food and from a net importer of grains, it transformed into an exporter. The Government’s strong interventions in creating minimum support price assured farmers of definite marketing. Institutions like FCI supported then government and farmers in this regard. Further, R&D institutions like ICAR, SAU with strong extension complemented the efforts. A public distribution system created fair price shops to sell essential food items at affordable prices. However, over the last 50 years, the context for food and agriculture has changed. Now, tiring public infrastructure, serious water stress and growing threat of environment change necessitate new thinking towards market driven approach that will support sustainable agriculture and ensure remunerative returns to the farmers. The corporate sector can add a unique dimension, given the power of private entrepreneurship, its capacity to innovate, its wide variety of skill as well as its ability to reach markets more efficiently. Today’s consumer is seeking superior nutritional and taste benefits, better hygiene and convenience. Increasing awareness of health and well being is also generating demand for wider variety of grains. This calls for a change in farming system from selling whatever is produced to producing what the consumer wants. Increasing crop production alone is not sufficient to raise farmer income if markets do not support such production. India’s agri waste is estimated to be Rs 92000/- crore. A big fraction of this wastage is in perishables. A higher level of food processing can create quality agri commodities thereby, reducing farm wastages. This requires cold chain infrastructure as well as branded products that can win the consumer confidence. An integrated network of refrigerated buildings and vehicles to transport produce from farm to shop quickly and in good condition is must. Growing middle class in big cities is hungry for high quality fresh and processed food products. If India develops a nationwide cool cold chain, it would connect farmers with these premium markets and raise their income. As per International Institute of Refrigeration, if developing countries had same level of refrigeration infrastructure as developed, they would save 200 million tonnes of food or around 14% of their food supply. In India, NCCD estimated that country has meagre (15%) control temperature transportation facility and less 1% of pack houses that pre-condition the produce for onward transportation. This lack of infrastructure means just 4% of country’s food is moved through cold chain. So, main missing link is seamless control environment supply chain, comprising on farm pack houses, pre-cooling, distribution hubs, refrigerated transport and marketing vital to move the fresh produce swiftly from farm gate to consumption centers. The country needs to adapt the solution that worked and delivered throughout the world. Cold chain does not just reduce the post harvest losses but also allows the farmers to earn more by maintaining the quality of their produce by marketing it to distant cities. Recently, Surinder Kumar of Abohar has successfully marketed his kinnows from Punjab to Bangalore using the cold chain like waxing, grading, pre-cooling, packaging and transportation in reefer vans. This has not only reduced the wastage but also raised his profits ten-fold. So, entrepreneurial farmers or farmer cooperatives can move right up the value chain by developing its own processing activities and products that serve the society as a whole. The following few points could guide and help in this regard.
First step towards operating a successful food processing plant is to have a good idea. You also need to find out whether idea is feasible and if necessary to convince financial backers (friends, family members, banks or shareholders) to support the idea. It is not always easy to get started but with persistence, help and determination, almost anyone can start a small processing business. However, poor planning can lead to production stoppages. (Planning is thinking ahead to make sure that everything is in place to produce the required amount of product in the time available.)
Aspiring entrepreneurs may have an idea about the type of food product that they would like to make. This can come from seeing others successfully producing a food and wanting to copy them or from talking to friends and family members about products that they think they could make. However, an idea for a business is not a sufficient reason to begin production straight away, without having thought clearly about the different aspects involved in actually running the business. To reduce this risk of failure and losing money, potential producers should go through the different aspects of running their business in discussions with friends and advisers before they commit funds or try to obtain a loan. This process is known as doing a feasibility study and when the results are written down, the document is known as a business plan.
Once a potential producer decides that he wishes to start a business, the first thing to do is to find out what is likely demand for the food product that he or she wishes to make, by conducting a short market survey. There are two types of information that are needed:
1) Information about the product and its quality
2) Information about how much people will buy, how often and for what price. (Survey of market size and value)
The questions in Table 1 needs to be answered by a feasibility study.
Each of these aspects should be looked at in turn. When all the information has been gathered and analyzed, it should be possible to make a decision on whether the proposed investment in the business is worthwhile.
Once an entrepreneur has found information about potential consumers, their requirements and the likely share of the market that could be obtained for a new product, it is then necessary to assess whether production at this scale is technically feasible. The series of questions below is helpful in deciding the technical requirements of the business:
• Are enough raw materials available of the correct quality when needed for year-round production?
• Is the cost of the raw materials satisfactory?
• Is the correct size and type of equipment available for the expected production level and at a reasonable cost?
• Can it be made by local workshops & are maintenance and repair costs affordable?
• Is sufficient information and expertise available to ensure that the food is consistently made at the required quality?
• Are suitable packaging materials available and affordable?
• Are distribution procedures to retailers or other sellers established?
• Is a suitable building available and what modifications are needed?
• Are services (fuel, water, electricity etc.) available and affordable?
• Are trained workers available and are their salaries affordable?
It takes into account the following issues:
Start-up costs, Operating costs, Cash flow, Profit potential and Loans
The start-up capital is the amount of money that is needed to buy facilities and equipment to register and licence a business and get necessary hygiene certificates.
Working Capital includes costs of raw materials, packaging, staff training, product promotion etc that have to be made before a business begins to generate income from sales of a product. The requirement for working capital also continues as the business develops.
There are two types of operating (or production) costs: those expenses that have to be paid even if no production takes place and those that depend on the amount of food that is produced. The first types are known as fixed costs and the second type are variable costs.
Agribusiness is a very common word and many a time it ties to cascade farming with manufacturing without realizing that the manufacturing sector is not the same as farming sector and high tech manufacturer cannot go to the field and grow the raw material. However, farmer, the first entrant, has to be supported with all that he needs in farming to get the highest production and productivity and must be ensured profit sharing as much from the chain. Currently, we have one way movement of raw materials and one way movement of finished good and it must change to two way movements of commerce and money between farmer and consumer.
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