The Makhana Value Chain in Bihar: An Assessment and Policy Implications

Introduction. As part of the National Agricultural Innovation Project (NAIP), a potato value chain study was organized in Bihar, in collaboration between the Indian Council of Agricultural Research (ICAR) in Patna, the International Fund for Agricultural Development (IFAD) and the International Food Policy Research Institute (IFPRI), as potatoes are one of the core crops that the NAIP project in Bihar are focusing on. Primary surveys were fielded with producers, traders, cold storages, and retailers at the end of 2009 on the rural-urban potato value chain in Bihar, more in particular from the disadvantaged districts part of the NAIP project (Vaishali and Samastipur) to urban consumers in Patna. The most salient findings are presented below. Upstream. First, potato production in Bihar is largely in the hands of smallholders: farmers from the smallest half of potato producers cultivate 0.5 acres of potato. This compares to 1.8 acres for farmers from the largest group. Second, farmers suffer from an important late blight disease problem. Actual potato yields in 2009 were two-thirds lower than the expected yields due to that disease. Despite the incidence of this disease, reported potato yields in the districts are as high as the national level, casting doubts on the national agricultural statistics in vogue which consider Bihar a lagging potato state. Third, farmers rely relatively little on seed markets and almost all farmers store their own seeds in cold storages. Only on 18% of the plots were purchased seeds used, indicating that seed replacement ratios are about 1 out of 5 years. However, larger farmers replace seed more often. Fourth, despite the low use of seed input markets, important changes have happened over time and the white potato variety has now become much more important than the traditional red variety that was usually grown. Especially the larger farmers have switched relatively more to the white variety. Fifth, larger farmers are able to obtain higher yields, possibly because of their more intense use of inputs. Sixth, 70% of the potato farmers are now empowered by a mobile phone. While some farmers use it to do market transactions, this is still only a minority (20%). Seventh, sales in the harvest season are almost all to a village broker while in the off-season, potatoes are mostly sold to traders at the cold storage. Wholesale market sales by the farmers are of less importance. Eight, an important reason why a number, and especially the smaller, farmers sell after harvest is the urgent need of money. Little credit or advances are used in market transactions and the major reason for the choice of a trader is when he pays immediately. Ninth, while almost all farmers participate in cold storages as to store their seeds, larger farmers store relatively much more for sale at an expected higher price in the off- season. Midstream. First, an important boom in cold storage capacity - and thus in potato production - has happened in the two studied districts. The number of cold storages in the last decade doubled or tripled and rapid up-scaling of cold storages led to an even faster total capacity expansion, i.e. a triple and five-fold increase over the same period. Second, the boom is associated with increasing commercialization of potatoes from the two districts as the share of storage for seed potatoes is relatively on the decline. Third, several triggers explain the boom in this area. The rapid emergence of cold storage is linked with the better provision of public goods (such as roads, electricity, and governance), the deregulation of the cold storage sector, the investment subsidies given by national and state government, and the availability and spread of new technologies. Third, the rapid emergence and the up-scaling of cold storages are explained by important profit opportunities and high rates of returns to investments. However, cold storages charge prices that are significantly higher than those practiced in the neighboring state UP (1.5 Rs/kg versus 0.9 Rs/kg) and charges are similar to those practiced in Bangladesh where no subsidies to cold storage investments exist and where input costs (e.g. electricity and diesel) are significantly higher. While the government subsidies might have helped the farmers to have more access to cold storages, the availability of subsidies has thus not brought down the effective price paid for storage by farmers, or traders. Fourth, cold storages are currently little involved in input and credit markets with farmers and despite linkages with the banking system, little credit flows down to the farmers directly. It seems that most of the advances given by the cold storages using potatoes as collateral are thus with traders. Downstream. First, Bihar is still relying on potato imports from other states, especially UP and West Bengal but also from the Punjab, to supply potatoes to their retail markets in the off-season. Second, consumers in Bihar prefer red over white potatoes and are willing to pay a price premium for that quality. Third, potato prices in 2009 were characterized by significant variability with retail prices in the off-season twice as high as on-season. While prices in the off- season are always higher, the price hike this season was exceptional. Fourth, as the APMC has been repealed in Bihar, potato sales have moved away from auctions to direct on-on-one deals with traders. The value chain as a whole. First, wastage levels are estimated to be - and potentially have become - lower than most conventional estimates done before. The wastage level in the value chain is evaluated at 8% in the harvest period and 9.3% in the off-season. While public policies have encouraged the setting up of cold storage to bring down wastage, this might however be only one factor in influencing overall wastage levels. Farmers are often making conscious choices on the wastage they will incur and varieties that show higher wastage levels might be preferred by some farmers (because of a preference of shorter-duration cultivation periods or of varieties with less dry matter and higher yields). Second, the cost of the cold storage in the final price contributes less than 10% of the final retail price paid off-season by consumers in Patna. The most important contributor to the final retail price in the off-season is a reward to storage, which account for 40% of the final retail price. Third, the farmers’ share in the final retail price is as high as two-thirds in the harvest period, much higher than conventional estimates. This however drops to one-third in the off-season, except for these farmers that are able to postpone sales through storage. Way forward. First, the study has shown the importance of appropriate policies as to stimulate the take-off of agricultural businesses in Bihar. These policies should focus foremost on the provision of public goods such as reliable electricity, road infrastructure, and good governance. Given the still existing large deficiencies, Bihar should make further investments in this area as to allow private business to further flourish and to allow farmers in these disadvantaged districts to become better integrated in the market economy. Second, policy makers should further stimulate increased investments in the cold storage sector, but not necessarily through subsidies. More competition in the cold storage sector is desirable as to drive down the cost of storage. The further spread of cold storages as intermediaries in the potato value chains might also open some important opportunities towards upgrading the potato value chains as cold storages can serve as focal points for the distribution of better seed varieties, extension advice, marketing advice, etc. This could especially benefit smaller farmers who, because of liquidity constraints, are less willing to sell after storage and benefit from the higher prices off-season. Third, Bihar might further be a good area for the cultivation of processing varieties given its unique agro-ecological potential for those. As it is one of the areas in India where the growing period is later and where the minimum temperature during the production period is relatively high, leading to the required higher production of dry matter, the region is better suited for processing varieties than most other states in India. Given such comparative advantage, it seems that the state could benefit from the increased presence of the private sector interested in potato processing. However, some of the processing companies that are currently active in India are bringing in potato varieties (e.g. Lady Roseta, Atlantic) which might be prone to diseases that might be more difficult to control in the Indian setting. Close collaboration with local research stations as to introduce the most appropriate varieties seems thus called for. Fourth, our data illustrate the devastating effects that the late blight disease has in Bihar. The development and spread of better suited varieties by public or private research institutions seem thus of utmost importance.