How Agra became India's cold storage hub and what impact it has on price of potatoes

parijataka · 18-08-12, 12:18 PM

Interesting read on cold storage in Agra that accounts for 7 % of all India cold storage and how it happened.

How Agra became India's cold storage hub and what impact it has on price of potatoes

Agra may be famous for its monuments, but it also holds 7% of India's cold storage capacity - more than in the whole of Punjab. Almost all of it is used to store potatoes. How did the city and surrounding areas become India's cold storage hub and what has it meant for the price of potatoes?

Earlier this month, West Bengal chief minister Mamata Banerjee called for a ban on the movement of potatoes out of the state due to rising prices there. West Bengal is the second biggest producer of potato and such a move would almost certainly impact the prices across the country.

Farmers in the rest of India are likely to benefit, with prices moving north. Few will track the potential fallout of the chief minister's decision more closely than a group of entrepreneurs and businessmen in the district of Agra.

Agra now has a cold storage capacity of around 2.2 million tonnes, according to the Agra Cold Storage Owners Association (ACSOA). Almost all of it is used to store potatoes. The district now has 7% of the cold storage capacity in the country which is more than in the whole of Punjab. Or more than the combined cold storage capacity of Madhya Pradesh, Maharashtra and Karnataka put together.

"We have certainly benefited from the growth in cold storages," says Vijay Pratap Singh, a farmer of Garhi Purani village, about 30 km from the city. He grows potatoes in about 13 acres of land. "Earlier farmers had to sell produce at once - now they can wait till they get a good price."

Agra's cold storage success story is all the more dramatic given the lack of success elsewhere. That such a huge chunk of cold storage capacity should be concentrated in just one district of the country is not necessarily a good thing - especially when other parts of the country are starved for such storage. This despite the government having spent around Rs 557 crore on subsidies to increase cold storage capacity between 2008 and 2011.

Experts and policymakers have long lamented the lack of cold storage capacity in the country. They point to the sharp fluctuations in prices around the year, with vegetable prices slumping to as little as a few rupees at harvest time and then soaring manifold during the off-season or around festival time.

Build a network of cold storages, the argument goes, and it saves the farmer from having to sell off his highly perishable produce at harvest time, when prices are low. The ability to store the produce gives farmers more leeway in choosing to sell the produce in a controlled way throughout the year, rather than all at once.

But as anyone who has checked out the price of potatoes in the local market knows, this is only part of the story. Depending on where you are, the price of potatoes is around Rs 20 a kg or even higher, compared with about half that, till a couple of months ago.

Three-fourths of India's cold storages, with a capacity of about 21 million tonnes, are used to store potatoes only - this capacity amounts to about half, or more of the total potato crop. So why has this growth not helped mute the sharp spikes and fluctuations in the price of the staple vegetable?

THE BOOM TIME

Till the '80s and '90s, Agra was an industrial city with hundreds of small-scale units and foundries which produced metal castings. But by the late '80s, the industry was in a state of decline and industrialists began exploring new areas - the expansion in potato farming around Agra district and the demand for storage capacity meant that setting up such storages was one such investment opportunity.

But veterans of the business remember that the real take-off of the cold storage industry in the area occurred in mid-'90s, due broadly to four reasons.

In December 1996, the Supreme Court passed an order requiring that polluting units in the historic city be closed, if they didn't switch to cleaner fuel. This accelerated the decline of the foundries in and around the area. Then in 1997, in her short six-month stint as chief minister of Uttar Pradesh, Mayawati removed the controls on the rent that cold storage owners could charge farmers to store produce.

"Till this time, banks did not fund cold storages, and didn't see them as viable," says Shanti Swaroop Goel, another cold storage owner. "But this removal of the cap on cold storage rental rates instantly made cold storages more attractive to finance."

The third trigger at the time, remembers cold storage owner Rakesh Garg, was another bumper crop in 1997, coupled with a major lack of capacity. "Over 40% of the crop rotted in the open," says Garg. "Many industrialists sensed an opportunity and entered the business. There was a huge boom in cold storages in the area, in just one year." Garg set up his cold storage unit in the district in 1988.

In 1999 a further fillip came in the form of central subsidies, following the infamous onion price boom, widely seen as having brought down the BJP government in Delhi in elections that year. An entrepreneur can now get as much as 50% of the cost of plant and machinery to set up a cold storage as subsidy from the government.

"Potatoes effectively became a cash crop for the farmer," says Rajesh Goyal, director of GT Cold Storage and secretary, ACSOA. "Farmers can now decide to sell potatoes as and when they need the money - for a wedding for instance."

It is this ability - for a farmer to cash in his crop when he needs which is a key transformation. And cold storages and their owners are not merely passive players in the food supply chain, content with storing potatoes. They are a key financing link between banks on the one hand, and farmers on the other.

POTATO ECONOMICS

The potato crop in Agra and across the north comes in around February to March, and goes into cold storages till October - a period of eight months. It is around the beginning of February that banks open their funding window for the trade by providing cash credit, not to the farmer, but to the cold storage owner.

They typically finance about 25-40% of the price of a 50-kg sack of potatoes (the standard unit in which prices are quoted). So if the price at harvest time is Rs 200 per 50-kg sack, banks could give a loan of about Rs 70 per bag, repayable by the end of the year. Banks reportedly finance over Rs 400 crore worth of cash credit in Agra district alone.

It is this cash credit, which the storage owner onlends to the farmer as an advance at the beginning of the harvest season. For farmers all over India, and for any crop, money at harvest time is crucial to pay off crop loans, or to pay for pesticides and other inputs. Over and above this advance, which is repayable when the potatoes are actually sold to traders, the cold storage owner also charges a flat rental rate per sack for the eight months or so that the potatoes are stored.

These advances and rental rates vary with production. Potatoes, like many other crops, follow a boom-bust cycle - two years of a bumper crop and low prices (such as 2011), followed by a year of bad harvest but high prices (2012).

As Singh, the Agra farmer, points out: "The cost of production for a 50-kg sack for me is about Rs 350. This covers the cost of fertiliser, labour etc. However, last year, potato prices per sack had fallen to as low as Rs 150 per bag, and even Rs 80. This year, prices are far better - as much as Rs 550 per bag."

In a year when production booms (such as 2011), when there is a big oversupply of potatoes well in excess of total capacity, cold storage owners have the upper hand at the beginning of the harvest season and can get away with paying lower advances or charging higher rents, or both since supply is greater than storage capacity. In a year when production declines (like 2012), it's the farmers who have the upper hand.

"Advances to the farmer at the beginning of the season can rise to about Rs 150 per sack," says RK Jain, an Agra-based chartered accountant, who advises new entrants into the cold storage business. In March 2012, at harvest time, cold storages in Agra were filled only to the extent of 80% or so.

Excess capacity is a loss to the owner, and he can compete with other owners to offer better terms to the farmer. But given that the farmer is now in hock to the cold storage owner, who needs to recover his loan, who decides when to sell the potatoes: the cold storage owner or the farmer?

WHO'S IN CONTROL?

Ask a cold storage owner this question, and their answer is ambiguous: the potatoes belong to the farmer, who sells them 'in consultation' with the cold storage owner.

"The cold storage owner is the custodian of the goods of the farmer," says a bank manager in the area who does funding of cold storages. "The cold storage owner facilitates the marketing of potatoes." Many owners tie up with traders and mandis to sell the potatoes at the premises of the storage itself.

"We perform three roles," says Garg. "We rent space, we provide loans and we facilitate selling of produce after deduction of charges," he says. "A lot of the risk is borne by us."

"There has been a shift in the business model from a warehousing model to a trading one," observes Bijay Kumar, managing director, National Horticulture Board, the body through which a large chunk of subsidy for cold storages is channelled. "It is this which is affecting the final price of the potato in the market."

What this implies is that it is the cold storage owner who is in control of the decision of when to sell or release potato into the market. When the farmer enters the market at harvest time, prices typically are low - a few rupees a kg. It is based on this rate that advances are given to farmers, though again, it also depends on how much leverage the owners have at that time.

But as prices creep up during the course of the year, it is owners, looking to recover their dues and make a profit, who determine when to sell, thus affecting the price faced by the end-consumer. "But there have certainly been reductions in the post harvest losses of potatoes [from the growth in cold storages in the area]," says Kumar.

It is the control over the cash credit advanced by banks to cold storage owners that is critical. The NHB would like the money lent out by banks to go directly to the farmer - under the proposals, farmers who store their produce in accredited warehouses, which meet minimum quality norms, can receive warehouse receipts, which can be used to raise loans from banks. "Ultimately we would like banks to reduce funding of non-accredited warehouses," says Kumar.

Ironically, if it is indeed storage owners who are in control, then we are back to the situation prevalent earlier, when farmers exited the market at the worst possible time - when prices were low.

But it is also undeniable that cold storage owners fill a need that banks are less suited to provide - quick, hassle free, if not necessarily cheap credit to the farmer when he needs it. "its all about easy access to credit," points out Goyal. "There is no bureaucracy involved."

drkrn · 18-08-12, 04:32 PM

7% of Indian total cold storage capacity..
that's great.helping the farmers to get good price for their crop is the best part.

wish my state too help farmers by increasing cold storages

parijataka · 18-08-12, 04:41 PM

/\/\
Actually that part is not clear from the article, it seems the cold storage owners become middle men but it is helping farmers to some extent as the entire crop does not get wasted. I wonder if cold storages can be started in co-operative mode by farmers themselves.

How Agra became India's cold storage hub and what impact it has on price of potatoes

parijataka

drkrn

parijataka

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