6. Case Studies:
Indian Tomatoes: Adding Value and Reducing Losses through Processing
India ranks second in the world for both total agricultural land and farm output.2 The country benefits from highly diversified climatic and soil conditions, and agriculture is a core part of its economic, political and social constitution. A long period of agricultural expansion began in the 1970s, but the slowdown in agricultural growth has become a major concern.3 The Government of India is now prioritizing efforts to reduce poverty through increases in agricultural productivity. However, there is a need to shift away from an over-regulated, subsidy-based model towards healthy fundamentals, achieved through efficiency gains along the supply chain.4 Better post-harvest transport and storage of crops is an important piece of the puzzle: one-third of food losses in India occur during storage and transit.5 Improved back-end supply chain processes and better cold-chain facilities could reduce food loss and save up to US$ 15 billion annually, apart from securing over US$ 5 billion in additional export revenue.6
Tomatoes, the second most-widely grown vegetable in India after potatoes,7 provide a good perspective on the post-harvest challenges facing the country’s agriculture. India is the second-largest tomato producer worldwide, with about 17 million tons produced in 2010-11 and behind only China (about 40-50 million tons).8 Indian tomato production has doubled in the past decade.9
Despite this overall growth, yields are low at around 20 tons/hectare (ha),10 compared to the world average of 33 tons/ha and China at about 48 tons/ha.11 Though there are some regional disparities,12 the main reasons for low yields are the lack of knowledge about agricultural best practices and limited access to inputs (e.g. seeds, crop protection, fertilizers, irrigation).13India’s tomatoes are primarily sold on the fresh domestic market.
The processing industry represents only about 1% of total production, versus approximately 14% in China.14 Only around 1-2% of Indian tomatoes were exported in 2011,15 but interstate trade within India is significant.16 This is driven by variations in production per capita across states (e.g. from 70 kilograms (kg)/capita in Andhra Pradesh to 10 kg/capita in Bihar17), as well as varying harvest seasons.18
2. Indian Tomato Supply Chain19
Indian tomatoes are usually produced and harvested by smallholder farmers. Farmers stuff tomatoes in plastic boxes and then transport them to mandis, where tomatoes are traded in open markets. Traders purchase the farmers’ merchandise and sell it at the mandis to local retailers or to traders from other states. When tomatoes are sold to traders, they are transported to another mandi and the same iterative process occurs. Otherwise, when sold to local fresh distributors, tomatoes are transported directly to the retail location. Despite the fragmented value chain with multiple middlemen, evidence shows that tomatoes are a profitable crop for farmers. In 2011, the cost for producing tomatoes in Uttarakhand state was around 1.5 Indian rupees (Rs)/kg20 (US$ 0.03), while the 2011 average wholesale price was 11.7 Rs/kg (US$ 0.25).21
Parallel to the fresh-tomato value chain, a small but growing22 percentage of the tomato production is taken to facilities for processing. According to an Indian tomato expert, “the processing industry currently cannot afford to purchase tomatoes for more than 4 Rs/kg, so depending on market conditions and prices, it might be hard for processors to secure sourcing of tomatoes.”23 There is therefore a mixed situation between an established fresh market and a developing processing industry (details on food loss across the value chain are covered in the Box and Figure 18).
Figure 18: Food Loss in Indian Tomato Value Chains (Estimates)
Note: (*) Primary and secondary processing are typically at different places but, in its paste format after being primarily processed, there is no loss due to its long-term perishability and the mode of transport used (i.e. in metal barrels) (**) South and South-East Asia data for fruits and vegetables
Box 1: Food Loss in the Indian Tomato Value Chain24
Note: Food loss figures are estimates only. Figures are based on secondary research, supplemented by a limited number of primary interviews.
The amount of food loss in the supply chain highly depends on the length of the tomato journey. Although tomatoes used for processing and for fresh consumption come from the same production sources, losses differ at the harvesting stage.
Fresh-tomato value chain
Harvesting: Tomato harvesting is done manually in India, which reduces food loss. Labourers can pass through fields 10 to 12 times, picking only the tomatoes that have achieved the ideal level of ripeness.25 Despite the losses that manual harvesting avoids, handling damages, quality sorting, pests and diseases drive losses of about 10% at this stage.26
Post-harvest: The main sources of losses for tomatoes are during transport and handling. Poor road quality, exposure to unfavourable environmental conditions like heat and sunlight, suboptimal packaging quality, long distances and the high number of touchpoints drive losses of about 15-20% at this stage.27
Distribution/consumption: Main sources of distribution losses are damages in transport and storage, unmet standards or inadequate remaining shelf life due to poor stock rotation. It is estimated that losses of 15-20% are incurred in India at this stage.28 In South and South-East Asia, 7% of fruits and vegetables purchased are wasted at the consumer level.29
Processed-tomato value chain
Overall, the processed chain enjoys fewer losses thanks to a shorter journey and increased flexibility on quality.
Harvesting: Generally, harvesting losses are similar across the two value chains, with two important exceptions. First, given less strict specifications for processed tomatoes (e.g. size, colour, damages), farmers’ knowledge and efficiency of farms,30 fewer tomatoes are discarded during harvest versus the fresh-tomato supply chain. Second, processors represent a good alternative for farmers in oversupply situations, so tomatoes that otherwise may have gone unsold have a route to market.
Post-harvest: Processed tomatoes benefit from a shorter supply chain. Indeed, processors typically source directly from the farmer or from the local mandi, which mechanically reduces the impact of loss drivers. Although not quantified, evidence from interviews indicates that the journey to processors generates fewer food losses than the journey to fresh end-markets.
Processing: The extent of losses in tomato processing depends on the equipment and technologies that are used. In general, processing technologies are quite close and therefore opportunities for losses are limited.
Distribution/consumption: Once processed, tomatoes are packed aseptically, and their shelf life can be extended for about 2 years. This further reduces the losses at distribution and consumer levels compared to tomatoes for fresh consumption.
3. Impacts of Supply Chain Barriers and Potential Solutions
Transport and Communications Infrastructure
Plastic crates minimize losses during transport
As a result of Indian government support (e.g. 50% subsidy in Maharashtra) and private-sector involvement, farmers are using plastic crates (Figure 19), which reduces losses by up to about 75% (Figure 20)31 Although the costs for this type of packaging can be recovered in 10-20 trips,32 farmers cannot afford it due to cash constraints and external support has been required.
Figure 19: Farmers in India Use Plastic Crates for Tomatoes
Figure 20: Price and Food Loss Estimates for Different Types of Packaging33
*in 2004, for a 27 kg box Source: http://www.wbkllc.com/Tomato_Profile.pdf, accessed October 2013
In the future, a new generation of packaging could reduce losses even further. Pilots are currently being conducted by Unilever and CHEP to test the costs and benefits of these new solutions. In addition, foldable plastic packaging or nestable containers could be introduced. As current plastic crates cannot be folded or efficiently stacked, backhauling becomes an inefficient operation, reducing truck utilization rates and the overall profitability of tomatoes.34
Lack of cold-chain infrastructure generates significant food and value losses
Cold storage for Indian tomatoes could only be realistic in the very long term, and only for high-end consumers who are willing to pay a premium for fresh tomatoes. However, the case of Indian cold-chain development for potatoes, a higher-value crop with a longer shelf life, provides an interesting perspective on the complexities of post-harvest loss reduction.
At present, Indian cold-storage capacity is only around 30 million tons, while requirements are about 60 million tons.35 Due to the limited profitability of cold storage projects, investors must have a long-term horizon, which is challenging for the private sector in high-risk, developing-country environments. To overcome this situation, the Indian government has subsidized up to 50%36 of the cost of building cold-storage facilities (mainly for potatoes) in the Agra region. Once they have been constructed, local private actors have taken over ownership and operations, and have managed to achieve profitability.
Aside from availability of long-term financing, another barrier to the adoption of storage technologies is cash constraints, which farmers face at harvest time, forcing them to sell quickly. To overcome this, the Indian government first removed price-fixing regulations, allowing cold-storage owners to set prices freely. This flexibility reassured banks of profitability and freed up loans. These loans are offered to the cold storage operators, amounting to 25-40% of the current price for a 50-kg sack of potatoes.37 The cold storage operators then lend this amount to farmers. Once the potatoes are in storage, the decision to sell is taken mutually by the storage operator with the farmer. After sale, the farmers pay a flat rental rate for having stored the potatoes. As Bijay Kumar, Managing Director of the Indian National Horticulture Board, says, “there have certainly been reductions in post-harvest losses of potatoes [from the growth in cold storages in the area].”38In the tomato industry, farmers have adapted their harvesting strategy to deal with this lack of infrastructure. They pick their tomatoes when green instead of red-ripe,39 so that the tomatoes can be sent on longer distances as they will take longer to ripen (Figure 21).40 Moreover, farmers have introduced new tomato varieties that are more resistant to transport bumps and handling.41 In the long run, the tomato supply chain could marginally benefit from the operationalization of the cold chain, mainly to serve the emerging Indian upper class.42
Figure 21: Green Tomatoes Take Longer to Ripen Once Harvested
Source: WFLO, 2011. “Identification of Appropriate Postharvest Technologies for Improving Market Access and Incomes for Small Horticultural Farmers in Sub-Saharan Africa and South Asia”
Absence of large trucking fleets drives inefficiencies in tomato transport
Logistics costs account for 6-10% of average retail prices in India, higher than the global average of 4-5%.43 High transport costs are a key driver of this gap.
Variations in taxation across Indian states drive fragmentation in the market. India is divided into more than 30 states (including the seven union territories),44 each with its own taxation specificities. According to one large Indian transporter, “each state tries to encourage investment in warehousing by giving tax deductions. The resulting landscape of small distribution centres is one of the reasons why large transporters tend not to enter the perishables sector.”45 Because of the taxation rules, most logistics companies end up having small stocking points in all states where they operate, rather than the hub-and-spoke distribution model prevalent in many other large countries. Consequently, large logistics companies cannot benefit from scale and therefore lose their competitive advantage when compared to smaller transporters.
Moreover, many midsized Indian cities – usually Tier 2 or Tier 3 – have enforced “truck curfews”, prohibiting trucks from accessing the city during daytime. If trucks arrive after dawn and before dusk, they have to wait outside the city, generating long delays and losses due to overripe tomatoes.46
All of these factors present risks to the transport of perishables and discourage larger trucking companies from entering the market. This impacts the tomato value chain overall because it benefits neither from the companies’ investment capacity (e.g. refrigerated trucks, high-quality vehicles, maintenance), nor from their scale and expertise in transport and logistics (e.g. backhauling, capacity utilization across networks).47
Certain structural improvements would contribute to efficiencies along the value chain, and should be encouraged through collaboration between the public and private sectors.
Develop the processing industry to improve efficiency and reduce losses
Experience from other countries shows a high correlation between GDP growth and development of the tomato processing industry,48 and the Indian government is supporting this development. As the Indian middle class grows, consumption habits change and shift towards more processed food.49
Processors can create an environment that enables better yields for farmers and reduced food loss. First, processors help farmers gain access to inputs, equipment and training on good agricultural practices. Hindustan Unilever’s public-private partnership (PPP) in Maharashtra has demonstrated that professionalized farms can achieve higher yields and lower waste than unskilled farms.50
Furthermore, processing significantly shortens the tomato’s journey from farm to end customer, in terms of distance and number of intermediaries. In Maharashtra, one primary processing facility is not more than a two-hour drive from farms. In contrast, tomatoes sent from this same farm to the large markets in Delhi take three days to arrive after being handled, transported, graded and repacked twice. Shorter journeys mean lower costs and, in most cases, reduced losses. Processing also increases the shelf life of tomatoes from weeks to years.51
The main reason why the tomato processing industry has yet to successfully develop is that processors have not managed to obtain reliable and consistent sourcing of raw materials at the required cost and quality.52
Volatility in production levels and variations in harvest timing contribute to dramatic price swings. For instance, average prices in Mumbai declined by over 60% from January to February 2011 (Figure 22).53 As a result, processors are usually only able to source their tomatoes during the peak season. Furthermore, firmness, sugar content and colour are the most important factors for determining tomato quality for processing. The primary objective of processors is to have varieties that maximize sugar and solid content, and the traditional varieties grown in India are not optimal for this, which is not necessarily the case for the fresh market.54 Thus, processors are affected by lower processing efficiency.55
Figure 22: Interstate Trade Triggers Price Volaility
Source: http://www.wbkllc.com/Tomato_Profile.pdf, accessed October 2013
Vertical integration can help to circumvent challenges in raw-material supply. Currently, a PPP in Maharashtra involves the state government, a local primary processing company and Hindustan Unilever.56 This primary-processor, wide-ranging programme aims to improve farming techniques, yields and product quality. Ideally, the benefits that farmers get from this collaboration will create long-term trust, and encourage farmers to supply the local processor and respect contracts.
Attract large retailers to modernize supply chain efficiency
Local small-scale retailing, the prevalent distribution method in India, also struggles to overcome the impact of barriers. Fragmented local retailers lack the experience, scale and capital to professionalize distribution through investments like cold-chain facilities. When multinational retail chains enter developing markets, their investments reduce costs and food loss along the value chain. A 2008 study shows the impact of bringing a modern supply chain with consolidation points, where losses are reduced by 50-60% compared to traditional vegetable supply chains in India.57Legislation can either encourage or discourage this type of foreign investment.
Exports of Indian tomatoes are very limited; therefore, the tomatoes do not face international border-crossing issues. Domestically, many permits and various documents are needed to use different roads.58 According to interviews, however, tomato transporters are able to cope well with this barrier, and it was not cited as a major concern.59
Given the low level of international trade for Indian tomatoes, market access challenges are not highlighted in this study.
4. Conclusion and Next Steps for Industry Stakeholders
Based on this initial case study, a list of initiatives has been drafted (Figure 23), along with a high-level assessment of expected benefits and ease of implementation. While this exercise is intended to be directional only, two initiatives emerge as high-priority and merit further discussion. The first – investing in a new generation of plastic packaging and related supply-chain enhancements identified by mapping – could be considered a quick win due to the relatively high ease of implementation. The second initiative – developing the processing industry – is a longer-term opportunity with possible high value (e.g. fewer food losses, potential to export) but more challenging implementation requirements.
Figure 23: Potential Initiatives to Reduce Tomato Supply Chain Barriers
Note: (*) Ease of implementation is assessed based on the number of stakeholders, nature of stakeholders, time for implementation, investment required, need to adapt/change the legal framework, and contentiousness of reform. Sources: Bain & Company analysis; interviews
Quick win: invest in new-generation plastic packaging and improved logistics
Unilever and CHEP are collaborating on a pilot to test further improvements in packaging technologies and logistical arrangements. For example, before a packaging solution was identified, a discussion and mapping effort were executed in order to understand the pain points in the supply chain. From this, the decision was made to compare the performance of nestable crates with foldable crates. As part of the loading and unloading processes, crates are usually thrown onto the ground for sorting. Farmers identified that, during this step, mud can become stuck in foldable crates due to the open cavities in the base of the container. The nestable solution was preferable in this regard.
Future trials defined by Unilever and CHEP will work to identify the best crate and will include the following:
- Test crates over varying distances and storage times to quantify impact on food loss
- Evaluate robustness of the selected crate to meet supply chain conditions
- Determine potential cost savings from the selected crate (beyond reduced food loss)
In addition to container selection, there are other potential benefits of an overall supply chain solution. Optimized crate storage, for example, can allow for space-saving and protection from the elements during the off season. In addition, as volumes increase, tomatoes will need to be transported further than the current 50-km radius, so a supply chain solution incorporating equipment pooling may become more viable (Figure 24). In this model, a service provider retains ownership of transportation equipment (e.g. pallets, reusable plastic containers), and manages the network, providing customers with equipment when necessary. This model allows farmers, processors, manufacturers and retailers to utilize the equipment without having to make a capital investment. Other efforts are underway to optimize the packaging and movement of semi-processed tomatoes, such as using 1,000-litre intermediate bulk containers (Figure 25).
Figure 24: Equipment Pooling Solutions along the Agricultural Supply Chain
Source: Brambles Ltd
Figure 25: Intermediate Bulk Containers Are evaluated for Indian Tomatoes
Finally, standardization of supply chain infrastructure will be a critical step along the path to modernization, especially as labor costs increase and mechanization becomes more attractive (Box 2).
Box 2: Australian example of standardization as a supply chain enabler
Australian supply chain infrastructure was first regulated decades ago, and benefited from the 1,165 millimetre (mm) x 1,165 mm pallet already being a de-facto standard for a unit load device. Accordingly, truck-trailer widths and lengths, warehousing racking dimensions and forklift specifications were all developed to efficiently optimize the seamless interaction of all elements of the supply chain infrastructure. In an emerging or non-standardized economy such as India, such issues should be considered within policy-makers’ broader, aligned interests.
Long-term priority: develop the processing industry
The current PPP in Maharashtra provides promising evidence of the potential benefits of a developed processing industry in India.60However, to be sustainable, the private sector needs a push from the government in order to establish proof of concept. Farmers, seeing improved yields and reliable streams of higher revenues, would want to take advantage of this opportunity. Eventually, processing could not compete with the fresh market for harvested tomatoes, but rather on land utilization (i.e. which tomatoes to grow, processing-dedicated or fresh-dedicated). The final aim would be to have the land profitability converging between processing-dedicated and fresh-dedicated tomato varieties.
One critical enabler for developing the processing industry is a business-friendly environment for established companies that can provide expertise and investment. For example, companies like BASF, Bayer or Unilever can facilitate access to better-suited inputs and technologies (e.g. seeds, crop protection, soil treatments) and train farmers on good agricultural practices.
Despite the promising progress to date, the processing industry will require time to develop. The government can further ensure that the necessary elements are in place to ease progress. First, creating a conducive policy environment to facilitate investment is critical. In addition, continued support of multistakeholder platforms like the World Economic Forum’s New Vision for Agriculture initiative can help to disseminate best practices and identify opportunities for collaboration along the value chain. Finally, investments in underlying infrastructure and distribution networks provide the backbone for private sector companies like Unilever and CHEP to continue innovating towards more efficient movement of goods. These companies are working closely with the government to define initiatives and policy that best support growth in the sector.