Agriculture Trade

We don’t lack infrastructure in agri trade of commodities, instead we lack thick markets due to fundamental nature of agriculture.

Mandi framework is localised clearing houses that work to cater to surrounding 100-150 Kms highlight why access over supply and demand determine the trade.

Here is a post on LinkedIn describing the scenario of agri trade in India from a well funded startup operator. I will break the post into parts and add commentary around few points.

The more time I spend understanding how agri trade in India actually works, the more I feel this market does not just have a discovery problem. It has an infrastructure problem.

Discovery is the process of finding the right produce but when you look at agriculture supply chain, crop gets harvested first and then a need for buyer emerges. This is still dominant mode in most agri-abundant countries.

Buyers have a normalised demand that doesn’t change each year. Whereas farmers or sellers of commodities have potential for very high variation due to the nature of production.

To provide a buffer in supply signalling in this access market coupled with logistics and financial services, Brokers become the main agent in executing agri trade.

A large part of the value chain still runs on brokers, traders and intermediaries who do much more than just connect buyers and sellers. They carry trust in the system - who is reliable, who will make payment on time, who will honour quality, and who can be counted on if something goes wrong.

This above statement is crux of the access markets problem. Instead of focusing on what is being traded, we focus on who and how the trade is happening. Brokers have an incentive to make transactions happen, so they are inclined to bring the buyer and seller on to same terms irrespective of what the underlying commodity is being traded.

From the outside, this can look like efficiency. But many times, it is actually a weak system being held together by individuals. And that is where the risk lies. Because when trust sits with people instead of proper systems, one failure rarely remains one failure. If a broker defaults, the impact usually does not stop there. It hits the trader, then the aggregator, then the supplier, and eventually the farmer.

In many ways, agri today still feels like capital markets probably did decades ago - before proper clearing, settlement and systems of trust were built. Back then, the broker wasn’t just an intermediary. The broker was the market. In large parts of agri, that still feels true…..

The weak system being described is instead a thin market. The broker or trader is driving the movement of commodity and he or she does that by placing themselves in between demand and varying supply.

.. The real challenge begins after the transaction is agreed. What exactly was promised? What counts as delivery? When should payment happen? What happens if one party fails? Until this part of the market becomes cleaner and more structured, a lot of what we call inefficiency in agri will simply continue. It makes me wonder whether agri today is where capital markets once were in the mid 90's and early 2000 - before systems replaced informal trust. If that shift happened there, will this industry eventually ask for the same infrastructure/ rails? Mehtab’s post

Broker/Trader is responsible for more than gatekeeping the access. Their main role is to provide logistics services. The commodity moves between regions when the brokers take risk and transfer ownership of the commodity to themselves during transit.

According to the post, the broker/trader defines how trade is experienced by other stakeholders. This is because of current market structure.

We have a fellow operator, Sanakhawan Hussain writing from Pakistan. He is talking about produce logistics which is a similar story in India as well.

…However, fresh produce transacts in a forward market. Relationships, credit, and trust built over time determine who supplies whom and at what terms. The middlemen's value was not his margin. It was his balance sheet and the trust it represented.

I rest my case. Brokers are selling their access to farmers once they built a reputation to prospective buyers.

This will be the case unless we make the market thick. Not just decimating information but also build a platform on standardisation.

And the way we go about starts with trading on grade. Things don’t change since most don’t attempt to solve for uncertainty.

…., many startups re-iterates the same discoveries without solving any new uncertainty. The dominant funding in this space rewards speed over velocity. The moat or edge of a startup is to better manage risk to navigate the complexity of agri-space, be it climate, capital or supply chain risk. 

So, when operators talk about the status quo without addressing the economy of agriculture trade. I end up writing a post like this to remind myself one more time that agriculture is access not demand led market.

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Round up

Agri-space is my index page for all my agriculture related writing.

I have written many posts on Agriculture in the past and would like to link to the anchor page for this week’s round up.

Start with masterclass in produce marketplace where I document the things we did as a startup. We tried to solve a novel uncertainty of trying to sell grade wise. The approach we should have taken was advocacy marketing . Many lessons learnt during the short stint covered in the past 2 of masterclass .

There two other topics that get me going, feeling bad for farmers and trying to pay more to farmers. Both of these are wrong goals to hit and I write about them.

Links that resonated

Claude’s system prompt leaked. Drew unpacks and shares lessons we can pick up in our prompting.

How Claude Code Builds a system prompt

Sign off

The main post is from one of the co-founders of the startup we joined post our acqui-hire. I did drop a note mentioning the need of platform service and a standardised commodity trade practice before we can envision a different economy of agriculture in his LinkedIn post. But wanted to take the route to say I agree with the cause but not with the analogy.

The markets in India and Pakistan are both highly efficient. They are also no information asymmetry left since the adoption of mobile and messaging apps. It’s not legible for the outsiders looking in and its resistant to change due to incentive misalignment. Hence, it’s what we call a legacy domain.

The change doesn’t start at the byte part, it starts at the physical commodity classification.

Signing off till next time,

Vivek, small detour to agriculture