Mrunal » [Food Processing] Edible Oil_ Supply-Chain, Upstream, Downstream, Onion-Crisis and ofcourse Desi-liquor » Print

10/5/13 Mrunal » [Food Processing] Edible Oil: Supply-Chain, Upstream, Downstream, Onion-Crisis and ofcourse Desi-liquor » Print

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[Food Processing] Edible Oil: Supply-Chain, Upstream, Downstream,Onion-Crisis and ofcourse Desi-liquor

1. Prologue

2. Edible oil: Scope-Significance

1. Edible oil: Location

2. Upstream issues

1. #1: Low supply of oilseed

2. #2: Oil palm cultivation

3. #3: Improve yields per hectare

4. #4: Rice Bran

5. #5: Tree borne oilseeds (TBO)

3. @processing level

4. Downstream issues

1. #1: Tax Uncertainty

2. #2: Health concerns

3. #3: Adulteration

4. #4: Unfair trade agreements

5. #5: Soybean export

3. Onion Crisis

1. #1: Low yields

2. #2: Nuisance of Middleman

3. #3: Lack of onion cooperatives

4. Export policy

5. Lack of Irradiation

6. NAFED & Onion Crisis

7. Solutions?

4. Basmati

5. Bread-Biscuit

6. Liquor Industry

7. Mock Questions

Prologue

UPSC GS MAINS SYLLABUS TOPICS IN THIS ARTICLE

Government policies and interventions fordevelopment in various sectors and issuesarising out of their design and

fodder point on how Government taxsops are hurting edible oil sector andhow MSP for wheat-rice hurts oil seedcultivation.

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implementation. How Government’s SSI reservation hasprevented growth of edible oil sector

cropping patterns in various parts of thecountry

for onion

storage, transport and marketing ofagricultural produce

for onion

Food processing and related industries inIndia-

For edible oil.+Some passing referenceto bread-butter and liquor industry(because they too use agricultureinputs!)

This article marks ‘the end’ of food processing series from my part but shouldn’t markthe end from your side because nothing prevent UPSC from asking any other topicsnot covered in these articles. Keep an eye on newspapers, you can never know whenyou’ll get lucky.

Edible oil: Scope-Significance

1. India is the world’s fourth largest vegetable oil economy after US, China andBrazil

2. India is blessed with many agro climatic zones- allows us to cultivate Groundnut,mustard/rapeseed, sesame, safflower, linseed, castor seed, coconut and oilpalms.

3. Edible oil industry in India has made an investment of Rs 10,000 crore andemploys around 5 lakh people.

4. Andhra and TN has good scope for oil palm cultivation.5. Since India is the second largest producer of rice in the world next to China,

there is good scope for rice-bran oil production.6. Good scope for Tree Borne Oilseeds (TBO).(more details in middle part of this

article)

Edible oil: Location

Oilseeds area and output is mainly concentrated in Central and southern parts of India.

oilseed top 3 states (2011 data)

Groundnut Gujarat, Tamil Nadu, Andhra Pradesh

Rapeseed & Mustard Rajasthan, Madhya Pradesh, Haryana

Soyabean Madhya Pradesh, Maharashtra, Rajasthan,

Sunflower Karnataka, Andhra Pradesh, Maharashtra

Total Oilseeds Madhya Pradesh, Rajasthan, Gujarat

REGIONAL PREFERENCE:



edible oil Preferred in ____ India

mustard/rapeseed North-east

Soybean North

groundnut west

Coconut oil south

In terms of overall consumption: Palm oil (mainly imported) >>soybean >>mustardoil>>groundnut oil.

Upstream issues

#1: Low supply of oilseed

From late80s to mid90s, the oilseed production in India was good because

1. Government had launched Technology Mission on Oilseeds (TMO) program toboost oilseed production.

2. During that time, MSPs for grains were kept in check (now they’re quite higheroilseeds)

3. Government controlled imports = low imports of edible oil.

But in later years, oilseed cultivation declined because:

1. In ‘94, government liberalized edible oil imports=> consumers shifted to cheapvarieties like Palm oil and Soybean oil.

2. In recent years, Government has raised the minimum support prices (MSP) forfoodgrains more than MSP for oilseed. Farmers find it more lucrative to growwheat/rice than oilseed. Although Government shouldnot Increase in the MSP ofoilseeds, because it’ll lead to corresponding increase in the market price of suchproducts=>both consumer and oil refiner will suffer.

3. Hardly any agri-research on developing new varieties + contentious issue of GMcrops=> Indian oilseed yields are 50% of the global average and one-third of theworld’s best.

Result?

1. Domestic oilseed cultivation is insufficient to meet desi-demand of edible oil.2. More than 40% of edible oil demand met through imports. Leads current

account deficit = rupee depreciation.3. In 2011 alone, we imported edible oil worth more than 45,000 crore rupees.

(=~2% of import)

#2: Oil palm cultivation

Palm oil forms significant part among the imported edible oil. We need to becomeless dependent on imports. Solutions?



1. Focus on Andhra Pradesh, Karnataka and Tamil Nadu enhance local production.2. Oil palm has long gestation period (4-5 years) =farmers are hesitant to shift to

oil palm because of the fear “what will we earn during those 4-5 years?”=>Government should promote intercropping (Banana, Maize , Chilies andVegetables in the first three years), to make oil palm plantation more sustainableand economically viable.

3. Government should declare Minimum support price for Oil Palm.

#3: Improve yields per hectare

Under the current MSP regime, economics are superior for wheat and rice thanoilseeds. (from farmers’ point of view)=> it is difficult to get more area under oilseedcultivation. Solutions?

1. For different agro climatic zones of the country, develop early maturing anddisease resistant varieties of oilseeds with higher oil content.

2. Encourage private sector participation and direct farmer processor linkages. This would ensure adoption of superior crop management practices.

3. Promote selective mechanization in farming e.g. Groundnut digger anddecorticator, sunflower harvester, scotching machine for linseed etc.)

4. Promote oilseed cultivation in areas with low-irrigation, salinity problems.5. Develop warehouse receipt based financing. It’ll allow farmers to store the output

and sell it at favorable prices.6. Integrated nutrient management, bio-fertilizers, micronutrients, drip irrigation,

farmers training etc.

#4: Rice Bran

Rice Bran Oil is obtained from the outer brown layer of rice.Rice Bran oil is ‘Heart Friendly – Healthy Oil’.We’re the second largest producer of rice in the world next to China, withpotential to produce about 1 million of Rice Bran Oil per annum.But rice-bran oil production hasn’t pickedup the momentum yet.There is need to modernize the huller rice mills => easy separation of husk andbran. Then bran can be used as raw material for rice-bran oil.

#5: Tree borne oilseeds (TBO)

Examples?

1. Sal2. Mango Kernel3. Mahua4. Neem

5. Karanja6. Jojoba7. Chura

8. Kokum9. Kusum

10. Tung

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TBO: significance?

1. Tree borne oils grown in forest, non-agricultural land= less harmful to ecology(Compared to fertilizer, pesticide based farming.)

2. generates employment in tribal areas3. helps rural and cottage industries

TBO product can be used as

Neem and karanja cakes manure with pesticide properties.

De-oiled meals of sal and mahua Cattle feed.

Vegetable fats from sal, mangokernel, kokum, dhupa etc

as cocoa butter in the chocolate industry

oils and fats from all of theseTBO

soaps, lubricants, paints, varnishes, bio-diesel,hair oils, cosmetics and medicines

There is a growing trend among international chocolate manufacturers, to use TBOsfats from Western Africa/Indonesia. This highlights the export potential for IndianTBO. Following should be done to utilize this potential:

1. increase awareness among tribals about TBO2. improve collection facilities3. Improve marketing network, export linkages.

@processing level

Unnecessary tax exemptions

Many state governments offer tax-exemptions to new oil processing units.Result=>Old units (which have outlived the tax-exemption period)= theybecome uncompetitive.Thus new units keep adding despite existing industry-wide surplus capacity.The average profit margins for oil-processing in edible industry are low (<5%).Therefore, the government should not provide any tax incentives, which create anon-level playing field for existing players vs new players

Economies of Scale

Edible Oil production involves three stages

1. crushing and expelling (separating oil from the solids),2. solvent extraction (to chemically remove residual oil from the oilcake solids)3. oil refining

In EU, US, China above three processing stages are done in one vertically integratedplant= shorter-compact supply chain=economies of scale.



But in India, the Crushing of groundnut, rapeseed/mustard , safflower and sunflower=reserved for the small scale sector. These small scale institutes make up more than75% of edible oil industry.

Result?

1. poor economies of scale.2. Lack of significant investments in large, integrated processing plants.3. lower oil recoveries from oil seeds (because outdated equipment technology)

Solution?= Dereservation would allow for crushing of seed and solvent extraction ofcake to be carried out in the same complex. This will increase oil recovery. As perindustry sources, due to economies of scale, the cost price for the final oil producedwould be lower by 2%.

PLAYER TYPES:

GhanisGhanis are small traditional (cottage industry) crushers, mainly in ruralareas.Covered by SSI policies.

Smallscaleexpellers

relatively modern facilities than Ghanis.

Solventextractors

They crush and process “hard” oilseeds with low-oil content such assoybeans and extractors cotton seed as well as chemically extractresidual oil from the oilcake processed by above SSI players

OilRefiners

These plants refine solvent-extracted oil. However, oil refiners areusually not integrated because of the SSI problem.

NOTABLE PLAYERS

EdibleOils

National Dairy Development Board (Anand), ITC Agro- Tech(Secunderabad), Marico Industries (Mumbai), Ahmed Mills (Mumbai)

VanaspathiHindustanLever (Mumbai), Wipro (Bangalore), Rasoi (Calcutta), AviIndustries (Mumbai)

Oil brands Sundrop, Dhara, Saffola, Sweekar, Postman

1. Wilmar, the largest palm oil conglomerate in the region, already owns one ofIndia’s largest oil refineries in collaboration with the Adani group.

2. Bunge Agribusiness India, bought Dalda Vanaspati from Hindustan Lever Ltd

Entry of foreign players

100% Foreign Direct Investment ( FDI)is allowed in Indian vegetable oils andvanaspati in industry through the automatic route.

Past few years, foreign players have setup port-based edible oil refinaries in India.



Location factor?

RAWMATERIAL

MNC players source oils/oilseeds from other countries where theyhave a sizeable presence.This reduces the cost of raw materials andimproves their competitiveness.

TRANSPORTPort location= can import crude edible oil/oilseeds, refine anddistribute it.Refined oil is then transported by rail.

TAX

duty differential between crude and refined oils makes itadvantageous to import crudeoil and refine it in India.Port-based refineries also enjoy tax concessions for a few years incertain states.

Downstream issues

#1: Tax Uncertainty

2001: import duty on both sunflower oil and safflower oil increased from 35%to 75%,Result: MRP of those two oils increase and consumers started shifting tocheaper varieties e.g. soybean oil. =this type of quick shifts are bad for desi oilproducers.Thus Frequent change in import duties increases operational complexity anduncertainty for the domestic oil processing industry.we Need stable taxation policy for edible oils @both union and state level. LahiriCommittee Report on Edible Oils said the same thing.

Price

Indian consumers are very sensitive to prices. Price of edible oils is the biggest driverfor consumption. We can see it from following evidences:

1. Only a small percentage of edible oils are sold in branded form. (Becausebranded oil attracts more taxes=>more expensive)

2. The penetration of branded oil is barely ~30% in Urban areas and ~10% in ruralareas.

3. Soybean oil, Palm oil => cheaper than other varieties. In recent years, theirimport+consumption has increase significantly.

4. Consumption of olive oil (mainly imported) = negligible, due to high prices.Olive oil mainly used by high income families and premium hotel/restaurantsonly.

#2: Health concerns

Exports get rejected because:

1. Aflatoxin in groundnut and cottonseed,



2. glucosinolate in rapeseed / mustard

Because Local oil businessmen lobby (and their election funding) => most stateGovernments are not stringent about edible oil quality.

Recent innovations by edible oil companies:

INNOVATION how

PACKAGING

Branded players have improved the packaging for customerconvenience e.g.

1. Tetra packs,2. easy-to-pour pouches,3. taps on 15-litre containers

BLENDEDOIL

Companies are launching blended oils, combining the healthbenefits of two types of oils. e.g. a blend of Sunflower oiland Ricebran oil in the ratio 20:80Some of the leading blended oils include: Soybean +Sunflower, Ricebran + Sunflower, Ricebran + Safflower ,Corn + Safflower etc

#3: Adulteration

Crude palm oil=>refine=> Palm oil + by-product StearinStearin is non-edible fat, and used for soap manufacturing. Can also be importedat a very low custom duty.Thus, some bogus players use (imported) stearin for making fake vanaspati oil.This is bad for both

consumer healthother businessmen that manufacture real vanaspati oil.

Solution

Increase custom duty on cheap stearin import + Increase vigilance.

#5: Unfair trade agreements

1. Under the current free trade agreements with Sri Lanka / Bangladesh / Malaysia /Indonesia, crude palm oil is imported @0% duty. Then used for making palm oil.Result=>desi palm farmers don’t get good prices.

2. Malaysia and Indonesia-the two biggest exporters of palm oil- give subsidy totheir refiners.

3. On the other hand, Indian government has moved in the opposite direction-imposing more and more duty on desi refiners.



4. Already one refinery has shut down while many others are struggling- leadingNPA problems for banks.

5. When edible oil refineries shuts down=>negative impact on soap industry aswell, because Stearin is keyinput for soap making. Stearing is generated as a by-product during the edible oil refining process.

6. To counter this, and to protect its own refining industry, the Indian Governmentshould levy higher import duty on Refined Palm Oil/Palmolein coming fromMalaysia, Indonesia.

#6: Soybean export

Because of the concerns over genetically modified food, many customers in Europe,Japan prefer non-GMO soybean products. Indian Soybean is non-GMO= we’ve goodexport potential. But following needs to be done:

1. Government + industrial associations need to make focused promotioncampaigns in US/EU to highlight that Indian Soybean is non-GMO.

2. Government should provide transport subsidy for soy meal exports because mostof the processing units are located in the hinterland.

3. Soybean Meal needs to be classified and included in the “Vishesh Krishi UpajYojana” (Special Agricultural Produce Scheme) to boost exports. By the way,this scheme was started to promote export of fruits, vegetables, flowers, minorforest produce and their value-added products. Exporters of such products shallbe entitled for duty credit scrip.

Onion Crisis

Onion crisis is too clichéd-blow-out-proportion topic, hence the chances of getting aUPSC Mains question=very low. But still here it goes:

India produces all three varieties of onion – red, yellow and white.

REGION ONION GROWN DURING ___ SEASON

North India winter (Rabi)

South and Western India both winter (rabi) and rainy (kharif) seasons.

TOP PRODUCERS OF ONION (2010 DATA)

World India

1. China2. India3. USA4. Egypt5. Iran

1. Maharashtra2. Karnataka3. Gujarat4. Bihar5. MP



#1: Low yields

Although India is second largest onion producer, our per/hectare yield is significantlylower than other countries such as Korea, USA, Spain and Netherlands. Why?

1. Poor irrigation facilities, irregular monsoon.2. use of local variety seeds,3. small land holding and poor economic background of farmers,4. lack of use of improved method of cultivation,

#2: Nuisance of Middleman

FINANCIALDISTRESS

Small and marginal farmers are compelled to sell their produceimmediately after the harvest because

They needs instant cash repaying earlier loans, familyexpenses, purchase of inputs for next season.Cannot afford the transport cost to bring their onionsdirectly to markets in metropolitan areas, nor they canafford the storage costs in warehouses.

ASYMMETRYOFINFORMATION

Farmers generally take reference of the local markets’rates before selling their onions.But traders compare rates of all markets, including majordistant and export market and then decide where to sendtheir produce or just hoard it until prices rise up.

OLIGOPOLY

Commission agents and wholesalers have huge turnovers.This creates oligopoly like situation in the market, andrestricting entry for new entrants.Even during APMC-auctioning they collude together andkeep the bidding price low.

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Middlemen

Onion Traders wear many hats by bending (not breaking)the APMC rules.Same individual simultaneously works as

commission agent cum wholesalersorder suppliers,forwarders cum store ownerssome are even transport or railway agent too!

They have different firms with or without licenses tohandle same function!Result? =They make lot of money through commission,control the supply of onion, and thus the retail prices.

STRIKES

Whenever government tries to reform APMC mandi, theseagents and Market functionaries often resort to a strikewhich finally ends up in market closure.Farmer from distant part has to go empty handed / hisproduce gets wastage because of such strikes

Storage

For historical and financial reasons, large storagecapacities for onion have remained with private traders andthat too in Nasik belt= they can hoard the onions and createartificial scarcity to increase prices.

#3: Lack of onion cooperatives

In the dairy article, we saw how dairy cooperatives saved the farmers from exploitationand empowered the women and weaker sections of the society. Then why can’t samestory repeat with Onion cooperatives?

1. Due to various agro-climatic reasons, onion belt is in actually a scattered chunkof large number of smaller sub belts. This prevented liaison and coordinationamong farmers of various tehsils.

2. Farmers don’t have the trading expertise, market knowledge and risk bearingcapacity- hence their cooperatives haven’t been successful in onion business

3. Onion traders with deep pockets, can maintain yearlong expenses even in leanseason- farmers’ cooperatives can’t.

4. Consumers in different regions of India have different requirements of Onion

REGION Consumers PREFER

eastern India / Bangladesh small sized onion

North and West Indian bigger sized onion

Traders buy onions small lots from the market yards and pool the produce for



sorting / gradingThen, they send different grades to different markets all over India.But Individual farmers/ farmers’ cooperatives lack the training and resources todo this.

Export policy

1. Government’s export policy on onion has been unpredictable.2. Unseasonable rains in late Sept and Oct 2010 destroyed the onion crop. Yet the

government agencies allowed traders to export more than 1 lakh tonnes of onionin October 2010.

3. Nowadays, whenever onion prices begin to increase, government bans the export(without fixing he fundamental problems) still exporters manage to sell onionsthough fake documents.

4. As a result, Indian traders and farmers lost their credibility in the export marketsas unreliable suppliers. Foreign buyers prefer onions from other countries overIndia.

Lack of Irradiation

Food irradiation= foods are exposed briefly to a radiant energy source such asgamma rays or electron beams. This kills harmful bacteria and increases theshelf life of the crop.food irradiation increases onion shelf life by stopping sprouting which causesthe crop to spoil.BARC had setup a food irradiation unit in Lasalgaon in Nasik district ofMaharashtra.This Lasalgaon plant can irradiate 10 tonnes of onion per hour.But In the last four years, not a single onion has been irradiated here. Irony ismany of the farmers in this area are not even aware of this facility-. “I do notknow what happens inside. But my friends tell me that it is a facility used tomake and test bombs,” says Nandu Kor, an onion farmer from nearby village!

Current Onion crisis (Sep’13) is blamed on following:

1. Much of the stored onions of last year’s crop are exhausted= hence shortage.2. Onion districts of Maharashtra were facing severe drought. Farmers had to hire

water tankers and brought water from 30 and 40 kilometers to their onions. Thus,cost of input increased=>MRP also increased.

3. The ongoing rains have also stopped the arrival of fresh crop from Rajasthan,Madhya Pradesh, Andhra Pradesh and Tamil Nadu because of transport andlogistic problems.

4. New crop from South India is yet to arrive in the Northern cities of India. (mostprobably in October)

5. From Sept 7 to 15: Lasalgaon market (Asia’s largest wholesale market foronion) was closed for five days due to holidays and weekends. This led to



decline in onion supply in the market =Price rise.6. Traders with political affiliation are hoarding onions to raise prices and create an

issue before state assembly elections

NAFED & Onion Crisis

NAFED functions:

1. National Horticultural Research and Development Foundation2. Was setup under the Multi State Co-operative Societies Act.3. To promote Co-operative marketing of Agricultural Produce to benefit the

farmers4. To undertake import, export , wholesale or retail of agricultural, horticultural,

forest and animal husbandry produce.5. manufacture of agricultural machinery and implements6. Marketing of manure, seeds, fertiliser, agricultural machinery etc.7. Act as warehouseman under the Warehousing Act.8. Construct its own godowns and cold storages.9. marketing research-analysis, International collaboration, PPP, HRD, R&D and

other fancy things.

ROLE IN ONION CRISIS

1. NAFED is responsible for fixing the minimum export price (MEP) of onion incollaboration with DGFT (Director General of Foreign Trade).

2. When there is shortage of onion in desi market, NAFED will increase theMinimum export price (MEP) to reduce the export of onions.

3. Example: In August-2013: the MEP for onion was $650 a tonne. Meaning as anexport you cannot send onion abroad for a price cheaper than $650 (althoughmany exports fake documents and send onions anyways)

4. NAFED intervenes in the domestic marketing whenever there is glut in themarket and prices reach uneconomical levels. In such situation, NAFEDprocures onions from farmers and traders.

5. In extreme case, it also imports onions from abroad. E.g. during currentSeptember crisis, NAFED floated a global tender to import onions fromPakistan, Iran, China and Egypt to boost domestic supply and curb prices.

Solutions?

PANCHAYATIRAJ

1. Under 11th Schedule of constitution: the markets and fairsfall under the purview of Panchayats. State governmentsshould empower the Panchayats to carry out this functionefficiently. (rather than relying on the APMC mechanism)



DESTROYOLIGOPOLY

2. Encourage free entry of new commission agents and traders(including private companies).

3. Mandate NAFED to procure onions directly from farmers.4. Promote direct sales of farmers to retail chains.5. Weed out market intermediaries that are engaging in unfair

practices (like low price bidding; collusion; hoarding tocreate artificial scarcity etc. Cancel their licenses, put finesand penalties,

6. Since APMCs seem to be largely dominated by traderslobbies, APMCs need to be reformed and strengthened toavoid collusions and hoardings in the markets.

EXPORT7. Discouraging export ban on onion and arbitrary fixation of

MEP as these will have long run effect on marketfunctionaries as also farmers

INFRA

8. Encourage farmers to use the food irradiation facilities.9. Improve the weather forecasting system in the major onion

producing area. This would help in taking appropriatedecisions about onion export.

10. R&D, new farm technology irrigation etc.

Basmati

just some fodder points

1. India is the largest producer and exporter of Basmati rice in the world.2. At present, Haryana accounts for over 50% of total basmati rice production in

India, Punjab accounts for 15% and the balance is cultivated in Uttaranchal andUP.

3. Key export markets for Indian basmati are the Middle East, Europe and theUnited States.

4. Middle East accounts for bulk of basmati exports because of the large SouthAsian expatriate population.

5. Small players account for a significant proportion of India’s rice exports, someof whom do not adhere to the requisite quality requirements. This creates anegative perception, not only about specific players, but also about the countryof source i.e. India.

6. Negligible focus on identity preservation. (Indian basmati rice or India durumwheat). In US/EU the marketing focus must be on how Indian varieties are “non-GMO”.

7. Therefore, it is essential that the Government via APEDA, undertakes necessarysteps to educate exporters and ensures compliance with norms.



Bread-Biscuit

Just some fodder points.

BREAD

The bread industry is expected to register rapid growth driven byconsumers’ need for convenient food options for breakfast as wellas increased propensity to ‘snack’Bread-based foods such as burgers, sandwiches and pizzas, arebecoming the key food offerings of most restaurants.White bread dominates market but brown bread demand growingdue to ‘health’ benefits.

BISCUIT

For long, the biscuit industry was reserved for the SSIsector=hampered the growth and economies of scale. But after de-reservation, the biscuit industry has picked up the growthmomentum, SSI units have joined as franchisees of large biscuitmanufacturers.

Factors contributing to growth

1. Aggressive TV marketing2. Product differentiation through convenient packaging, (smaller

packs at affordable price points of Rs.5, 10)3. Product innovation (such as ‘Little Hearts’, and ‘Good-day’ brands

of Britannia and ‘Hide and seek’ brand of Parle) has resulted inincreased sales and superior price to manufacturers

4. Growing income levels and increased consumer spending on highvalue food items.

Two types of wheat

Bread Wheat Durum Wheat

Grown NorthIndia

Central And South India

largest area undercultivation

less

soft to medium very hard

less high protein and high gluten strength

lessIndian durum varieties have a high level of resistance to leaf rustand other diseases

not muchMiddle East, South Africa and Mediterranean countries are thepotential clients for Indian durum wheat.



Challenges:

There is negligible on-farm cleaningno permanent storage structures available at the field level.The grain is handled manually. Impurities and moisture levels translate intohigher losses along the chain.

click to enlarge

Supply Chain Britannia

UPSTREAM

EDIBLE OILCrude palm oil from Malaysia andIndonesia=> Kandla port ->refined ->sent toBritannia plants.

SUGARSugarmills in Maharashtra and Bangalore-prepare specialized syrup and sucrose forbiscuits.

WHEAT

From UP, Punjab, Haryana, Raj.,MP,Gujarat and Bihar=>goes to organizedflour mills such as Krishna floormillin Bangalore.These mills make flour for Britanniaas per the requirements of bread andbiscuits.

PROCESSINGHas units in WB, Delhi, Uttaranchal and TN.Almost 1/5th of its output is generated byfactories in Tamilnadu.

DOWNSTREAM GENERALDistributors=> Kirana, Provision stores,

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(RETAIL) shopping malls

INSTITUTIONAL via hotels, airlines, canteens, hospitals.

MSP problem

(Although highly debatable if you don’t believe in free market economy.)

From Government’s point of view:

FARMERS

Announce high MSP (minimum support price) forthemProcure wheat/rice from them via FCI anddistribute it to poors via PDS shops.

POORS Give them cheap / free rice and wheat via PDS.

MIDDLECLASS ANDRICH PEOPLE

Collect taxes from them to run this MSP-PDSstructure.

This MSP-PDS structure is bad, because:

1. FCI is becoming the first and often “the only” buyer of wheat. But FCI godowns=small-scale, low-quality structures=> grain rotting. Food Corporation of Indiashould be the buyer of last resort.

2. Farmers shifting to wheat. Cultivation of sugarcane, oilseeds, and pulsesdeclined. Sugar and edible oil prices increased=food inflation=middleclasssuffers.

3. In global commodity business, the wheat prices go up and down significantly butIndian wheat price remains always high (because of high MSP). Hence, price-wise India wheat is not competitive in exports (compared to Americans andCanadians.)

4. Desi Bread-Biscuit industry also suffers because outdated APMC act=they haveto procure wheat through APMC mandis=nuisance of middleman=high cost ofraw material.

Therefore, MSP-PDS system should be removed. Instead government should dofollowing:

1. Instead of MSP, give Income support system to farmer through Kisan CreditCards.

2. Remove APMC middleman. Encourage direct linkage between farmers and foodentrepreneurs.



3. Remove PDS shops. Just give them direct cash transfer to poor families so theycan buy from normal shops.

Taxation

Bread-Biscuit Industry subjected to variety of indirect taxes.Via GST, there is need to streamline all indirect taxes (Centre as well as State)across the supply chain for grain and grain based products.=benefit to bothconsumer and producer.Essential Commodities Act (ECA) leads to several hindrances including easyinter-state movement of food grains and essential food items.90s: central government announced its policy to treat the entire country as asingle food zone. However, there is ambiguity with respect to the governmentpolicies as State Governments continue to impose restrictions on movement andstorage of agricultural produce.

Need for innovation

Most companies in India produce bread or biscuits of a single variety; such aswhite bread and sweet glucose biscuits respectively.But a variety of products can be made by changing the shape, recipe, and byincorporating other ingredients or processing conditions.In countries such as West Germany as many as 200 varieties of breads are made,both in large and small scale bakeries.Similar product innovation is necessary in India, to become export competitive.

Liquor Industry

Although this is not really a food processing industry and there is low chance UPSCwill ask something about liquor industry ‘supply chain management’ given its taboonature. But just for timepass and “educational” purpose, here it goes:

Upstream issues

BEERBeer is made from malt. But good quality malt not available easily.Need APFC reforms to promote direct purchase arrangements withfarmers growing barley vs beer manufacturer.

WINE

All wine manufacturers have faced capacity constraints, largely onaccount of lack of availability of raw material (grapes)For every lakh liter of wine produced 35 acres of vineyard is required.Although 75,000 acres of land is under grape cultivation, wine grapesaccount for under 2000 acres currently.Maharashtra is the largest producer of wine grapes in India, and



Karnataka second.Need to have direct farmer vs wine processor linkages be facilitatedthrough amendment of the APMC Act, to encourage farmers tocultivate wine grapes.

Processing

BEERThrough merger acquisitions, small players are gone, and the top 2 beerplayers in India account for about 75% of beer sales=>economies of scaleachieved.

WINE

1. The cost of wine-production in India is comparatively high sinceeconomies of scale have not been achieved yet

2. Wine bottles, corks and shrink caps are usually imported, eitherbecause of non-availability or cost.

3. Therefore, the cost of bulk wine of average quality from India works ismuch higher than Australia, Chile, Italy and France.

4. There are no institutes which offer training/educational programmesfor wine manufacturing

Taxation

The duty structure on beer is complex and varies across statesBeer is subjected to excise duty, interstate transportation: Import taxes, chargedby the destination state and export tax (levies) charged by the producing state.Mahrashtra and UP= all these taxes raise beer MRP by 40% =>leads tosmuggling, illegal sales, mafia-police-politician nexus to evade taxes.SOLUTION: need to rationalize taxation structure for wine and beer.Experiences from other countries reveal that lower taxes can result in greatercompliance and therefore higher tax revenues

Downstream: Liquor Retail- 3 models

(Common for wine and beer)

Open Market /Free Market

State Government decides on the number of wholesalersand retailers and gives licenses for a pre-defined price andtime period.Liquor companies can appoint their distributors andretailers.Pricing is market-determinedExcise is payable when the goods leave the manufacturingunit or warehouse.Example: U.P., Maharashtra, Goa, J & K, Madhya Pradesh,



Assam, West Bengal

AUCTIONMARKET

Private distributors participate in an auction to win license.Distributors establish their own retail network and sourceproducts directly from liquor companies. (Notice thedifference: in first model, Liquor Company can appoint itsdistributors, here distributors have freedom to pickcompanies.)Pricing is determined by syndicates.This model leads to a high degree of cartelization andliquor-mafia elements.Example: Punjab, Rajasthan, Bihar, H.P., Haryana

GOVERNMENTCONTROLLED(“Communist”model? lolz)

State Government controls the wholesale segment, throughits agencies.In certain states, even retail segment is also controlled bythe Government.State agencies purchase directly from liquor companies.Excise is paid either by the manufacturer or the StateagencyPricing is fixed by the state.This model restricts entry of new brands.Example: Tamil Nadu, Andhra Pradesh, Kerala, Delhi,Chandigarh, Karnataka, Orissa.

Export: Beer

Chinese beer market has about 400 brewers, of which the top 10 account foronly 45% of the market. This has resulted in low profit margins for Chinesebeer companies.In contrast, the top 2 beer players in India account for about 75% of beer sales inIndia and the industry will undergo further merger-acquisition in the nearfuture=economies of scale for Indian beer makers.Thus, there is an opportunity to capture Chinese market though cheap Indianbeer.

Export: Wine

PREFERENCE

Wine is mainly consumed in urban India, with a highproportion being in the large metros.Red wine is the single largest type of wine consumed,followed by white wineGoa, being a favorite tourist destination, also account for a



significant proportion

EXPORT

The willingness of western aficionados to try out differenttypes of wine is likely to be the major driver.The success of New World wine makers in Chile and SouthAfrica should be an excellent example to the Indian industry.

Mock Questions

5marks

1. NAFED2. Tree borne oilseeds3. Rice bran oil

15marks

1. The recent Onion crisis is the result of market inefficiencies, weak supplychains and monopolies in the market. Examine this statement and suggestremedies

2. The hike in minimum support prices of certain crops is blamed for the foodinflation and declining area under cultivation of pulses and oilseeds. Shouldgovernment do away with MSP-regime? Yes/No/Why?

3. Despite favorable agro-climatic factors, a significant demand of edible oil is metthrough imports. Examine the upstream factors responsible and suggestremedies.

4. (GS4) Article 47 of the constitution says: “The state shall endeavor to bringabout prohibition of the use except for medicinal purposes of intoxicatingdrinks and of drugs which are injurious to health.” then is it unethical for thestate agencies to sell liquor? Yes/No/Why?

Essay

1. A politician thinks of the next election. A statesman, of the next generation.2. Democracy is a form of government that substitutes election by the incompetent

many for appointment by the corrupt few.

URL to article: http://mrunal.org/2013/09/food-processing-edible-oil-supply-chain-upstream-downstream-onion-crisis-and-ofcourse-desi-liquor.html

Posted By Mrunal On 30/09/2013 @ 13:51 In the category Economy

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