9 Aug 2013

Perishable Business concepts

Enabling Horticulture Trade

I am frequently asked to assess studies and the strategies that will help develop a revenue multiplier for farmers-producers, to save food wastage and safe guard national resources; truly a laudable Vision. This vision is typically presented alongside tactical options that will enable farmers to store their weekly or periodic produce, so as to avoid peak season price drops and distress sales that stem from low shelf life of perishable produce. Ergo the cold stores, conceivably offering safe storage and extending the sale opportunity onto a more favourable future date.

Sadly, the glorious vision cannot be served merely by storing produce, abiding to ‘time the market’ for the ‘right price’. This tactic lends itself to the core premise that the local buyer will pay a higher value at a later date, when supply patterns are low - the market remains the local buyer/mandis, specific to the growing region. This concept is true to an extent but does not leverage cold chain technology to the fullest. This is not an in-depth solution by far, and is a business notion that will perish!

Let us understand the main reasons for for a distress sale! The first is due to the perishable nature of the produce. The other, in tandem, is the fact that farmers sell into a monopolistic buyer market – the mandi closest to the farm. The first limitation is eternal; remember that even when within the cold-chain, the produce continues to have a closure date, its stays perishable! What does this mean…..that when the produce is timed to exit the cold store, it continues to be subject to the distress of a fast sale, even if this is at a delayed date. Any buyer will still assess own demand and will continue to affect final price realisation, intemperate to the seller.

Any strategic concept that primarily focuses on building term based storage for local produce will merely continue to serve the same local mandis (and only strengthen the exploitations at these mandis). The concept of delaying a sale through the medium of cold storage is purely short term strategy and precludes the modern concept of market linked supply chains. Simply put, a delayed sale is most likely a delayed recurrence. The distress situation is not fully alleviated and while the bargain might well be a price higher than first, the associated risk and inventory cost is also raised.

For India, the correct strategy to extricate from such adversely binding situations is to extend beyond the limiting barriers, to reach out to a larger market audience. Storage of perishable fruit is best applied when directly linked to a wider market demand – store only the volume that is surplus to the existing immediate sales cycle and only after first using all means to expand the scope of immediate returns. Specially as extended operations in cold-chain raises the ‘risk over time’ factor multifold.

The first strategic use of the cold-chain should be to link to a better paying market today; then next to assess to store any surplus for a market in the future! Farmers need not be conditioned with hopes about timing markets like commodity traders... (many apple storages find sufferance today since the chamber opening times are known and the local traders again manipulate the buying to the hoarder’s detriment – the complaint is that after exiting the storage, the shelf life is again limited and traders take advantage of the fact). In any case, the use of cold-chain is intended to ensure a steady state of food and health security and not to hoard to time demand gaps, playing off the producer against the consumer.

The faster you can sell off perishables, the faster you mitigate risk, better the cash flow, lower the credit burden. When immediate market options are saturated, store so as to take advantage of lull periods in the supply chain or to build capacity utilisation for larger volume export options. Getting a higher price in the future is not necessarily beneficial, getting the right price today is more important, especially when tomorrow is unsure for your perishables.

Clearly the prime focus should be market linkage and direct trade with distant markets at first instance, with supply side storage only as a strategic buffer to maintain supply continuity as per demand patterns. Think of cold-chain as a pipeline that guides the products that must keep flowing within. I propose that India use cold-chain links to connect the country, rural and urban alike, ensuring a regular and steady flow of food and medicines across sub-continental distances.

To reiterate, the trick in trading perishables is to sell first, store later and not store for the heck of it or for timing markets like speculators. Aim to dispatch production for immediate sale, surplus must be linked to demand across distances, use the shelf life extension to expand the market footprint, use the storage to feed and sustain the supply lines (market linked storage), then repeat the cycle.

Any strategic development must aim to mitigate known risks, ensure higher profitability and lead to a larger market share. By applying technology to only delay a transaction without expanding the market reach is highly suicidal.

The Vision is served best by strategising to expand reach and connecting all our production areas with all our consumption centres, by developing constant flow of goods across these links, by applying logical network designs that minimise the need to store valuable goods, by moving away from a storage bias to a distribution bias.

The cold-chain is all about motion!

-Pawanexh Kohli
*mandis: wholesale auction markets, for agricultural produce.


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