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Agribusiness in India- Green shoots

Private investment is helping Indias farmers in a way governmentsupport cannot

INDIA is the third-biggest producer of potatoes in the world. The humble spudfinds itself stuffed into flatbread, encrusted in cumin seeds or tucked intopancakes. But the truckloads of large, oblong potatoes that arrive at the McCainFoods plant in the Mehsana district of Gujarat face a more exacting ordeal.Ferried by a conveyor belt and propelled by water, they are sized, steam-peeled,sliced, diced, blanched, dried, fried (for precisely 42 seconds in vegetable oil at199C), chilled, frozen, bagged and then boxed.

The 15kg boxes of fries that emerge at the other end of this pipeline supply thegrowing chain of McDonalds restaurants in India. When McDonalds first entered

India in 1996, the food-processing industry was confined largely to ice creamand ketchup. Even importing frozen fries was complicated by the fact that suchan exotic item did not appear on Indias schedule of tariffs and quotas. It tookMcDonalds roughly six years and $100m to weld a reliable supply chaintogether.

For fries, that supply chain begins with 2,000 acres of potato fields in Gujarat,cultivated by 400 farmers under contract with McCain Foods. These cultivatorsbelong to a profession which still employs about half of Indias workforce. InGujarat, agriculture is growing almost as quickly as the rest of the Indianeconomy. But elsewhere, agriculture is said to be in crisis. The average size offarmers landholdings is only about 1.3 hectares. If their fields are irrigated at

all, they are flooded wastefully, with water flowing down furrows on either sideof the crop, taking valuable nitrogen with it. India produces more tractors than

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any other country, but many farmers still use bullocks instead. They sell theirproduce at controlled prices in government mandis: marketplaces regulated bythe state with the aim of protecting farmers from exploitation by unscrupuloustraders.

State governments once took it upon themselves to spread know-how, marketintelligence and the fruits of agricultural research to smallholders. But theagricultural extension system is now in some disrepair. Public investment inagriculture has stagnated over the past few years as the governments subsidybill for food, fertiliser and fuel has risen.

In the absence of public investment, Indian agriculture is increasingly dependenton private outlays, which now account for three-quarters of total investment inthe sector. McCain Foods, for example, invested $25m in the Mehsana plant.And in the absence of government extension services, some private companiesare finding alternative ways to let farmers know what the customer expects, and

how to meet that expectation.

Hitesh Patel, for example, used to grow cottonseed on his six hectares in Idarvillage, about 125km (80 miles) from the Mehsana plant. Four years ago heplanted a hectare of potatoes at McCain Foods urging and under its guidance.Now he plants potatoes on all of the six hectares he owns and another 1.6 hehas leased.

McCain Foods offers him an assured price of 6.50 rupees ($0.14) per kilogram ofpotatoes, a better rate than the mandi. But they will not buy just any potato.Indias common varieties are too small, watery and sugary, caramelising when

fried.Potatoes fit for processing are usually grown in more temperate latitudes. Thetuber likes warm days and cool nights. Wherever are the best regions for wine,potato is not far behind, says Ghislain Pelletier, a McCain agronomist. Firmsbefore McCain had tried and failed to produce potatoes in India that weresuitable for processing into fries. Even Harrison McCain, one of the companysfounders, doubted it could be done.

But after several years of experimentation, McCain can now supply all ofMcDonalds needs in India, as well as producing some creations of its own, likeMasala Fries. We used to struggle for size; now we struggle to reduce the size,says Devendra Kumar of McCain India.

McCains agronomists would first visit farmers like Mr Patel every other day. Nowthey check in once a week. They insist that farmers give up flooding theirfurrows with water in favour of drip irrigation, which flows through a pipepunctuated with small nozzles laid along the crop-bed. Drip irrigation producesmore crop per drop, as Mr Pelletier puts it. It moistens the soil at each root,but leaves the ground otherwise dry. This in turn reduces the humidity thatattracts pests and blight.

This kind of contract farming began with Punjabi farmers growing tomatoes forPepsis food business in the 1980s. But its spread was hampered by tight

regulations at the state level on who could buy produce and how. Most stateshave now eased those restrictions, raising hopes that contract farmingwhich

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only accounts for a small fraction of Indias annual agricultural output of $220billionwill flourish.

As incomes in India rise, tastes are changing. Staples are receding inimportance. In 1983 food grains accounted for 32% of Indias agricultural

output; 15 years later they accounted for less than a quarter, according toAshok Gulati of the International Food Policy Research Institute. But food grainsstill occupy nearly 64% of Indias farmland and an even higher fraction ofgovernment concern and energy. In India, cereals are being increasinglyovertaken by fruits, vegetables, milk, eggs and poultry, Mr Gulati argues.

McDonalds, for example, recently introduced the Chicken McNugget to India,where it counts as a premium product: all white meat without any bone. Whenthe firm first entered the country, it struggled to find poultry suppliers who coulddebone meat. Because the chains products are delicate or perishable they mustbe handled with far more care than rice or wheat. Frozen fries, for example, areso brittle that they must be handled like eggs. But McDonalds also found that

the few refrigerated lorries in the country were mostly devoted to transportingice cream.

Investments by multinationals like McDonalds can spread into the widereconomy. McDonalds, for example, invited East Balt Commissary of Chicago,whose founder supplied buns to Ray Krocs first McDonalds franchise, to go toIndia to train the Cremica bakeries in Delhi and Mumbai. East Balt is what AbhijitUpadhye of McDonalds India calls a good system player. It also askedSchreiber International, which supplies sliced cheese, to tie up with DynamixDairy in India. As a result, many other companies, including Nestl, Unilever andPepsi, started doing business with Dynamix.

The economic benefits to Gujarats farmers will also spread. Mr Patel, for one,cannot wait to harvest his potatoes and receive his payment from McCain. Hewants to trade in his Maruti-Suzuki car for a grander model made by Honda.