February 4, 2023

Curious nature of agri-commodity logistics

Exploring the intermixing of Logistics and agriculture domains

Logistics node outlined in the Map of Interest v2 post has been covered in some of the previous posts. It’s intersections with entrepreneurship, product development and marketplaces have been explored.

In this post, I will try to explain the parlay between agriculture and logistics. I have spent the better part of my career in this field and we have written about it more technically in official sites. One such example is how we reimagined the logistics of post harvest tomato supply chain.

I tweeted a thread commenting on the work we did in this space. This was triggered due to a post written on tomato supply chains losses

I tweeted about the problem in Tomato supply chain.

The solution we devised and the way we came about it.

Numerous trade-offs we had to take in order to execute our model.

Instead of documenting many such interventions and tweaks to commodity logistics we have done. I wanted to focus on why this happens in agri commodities supply chain.

Trade Terms of Logistics Supply chains

Globally, multimodal logistics supply chains are devised with three factors cost, risk and insurance. These terms are devised basing on who shares the responsibility once the cargo is ready to dispatch from the supplier to the buyer.

Logistics as a field is pesky for its terminology so there is an International commerce of chambers that works on standardising them. We call them Incoterm®️.

The above terms and colourful bars showcases who takes the costs, risk and insurance of cargo during a shipment.

In mature global supply chains, buyers prefer FOB (Free on Board) to get cost of goods and invest in logistics of their supply chain through specialised logistics service provide to build a moat and develop resilience.

When the terms are standard and the entities that share the 3 factors is well documented. Logistics service facilitation is possible. We have a legacy of service providers in the form freight forwards, fleet operators, surveyors and warehouse operators who are helping suppliers and buyers move cargo. I wrote about the service bent of the logistics sector in 3C’s of logistics post.

The peculiarity of agri supply chain logistics comes due to lack of standards in trade in terms of who is responsible for which factors.

Agri-trade Logistics

There are multiple versions of this trade but I will stick to basic logistics chain when it comes to agri-trade. The proliferation of middle agents who buy and sell commodities is because there is gap in sharing of risk.

In produce logistics it gets even more complicated because the cargo degrades in transit as well. So, it has different prices at different place. It is a feature not a bug.

The incentives are mis-aligned for trade to happen with just supplier or buyer. Thus, enabling the need to have agents who take the risk and facilitate trade. To top it off, produce trade is non-taxable so no trace of transaction history. If there is a dispute , there is no process for conflict resolution.

Thus, financing the trade(insurance), facilitating the movement(logistics) and enabling transactions(building platforms) are improbable unless you trade(buy and sell) across the supply chain.

I keep saying to everyone I can find that agri-trade has always been sufficiently organised but never formalised enough.

Illustrating the logistics of agri supply chain

We will use the example of produce logistics from farm to eventual retailer as the example upon which we can overlay the 3 factors of cost, risk and insurance.

This mental model helps clarify the problem of trying to optimise without formalising the trade. The simplified version of this flow is illustrated over here.

Farm to closest mandi/warehouse. These mandi(s) can be private trader facilities, collection centres or govt. mandi(s). The commodity further moves to buyer location of mandi/warehouse. Eventually from here the cargo reaches the retailer.

To understand this supply chain better, I would encourage you to read our official blog post of subjimandi.app. We cover how the production mandi and consumption mandi are different and delve into the flow of process.

The cost of logistics is hard to gauge due to trade taking place among farmers, traders and buyers.

First let us look at how the traditional trade flows.

We have farmers moving and selling the cargo to traders. Subsequently, traders moving the cargo and selling to the buyer. In produce trade, the retailer comes to the mandi/warehouse to buy the produce and moves the cargo to their location.

The costs and risk are shared by the entity that is moving the cargo. The price of produce when sale happens between farmer and trader does not match the sale price when it happens between buyer and trader. The trader takes the additional risk of selling commodity and moving it for the buyer. Hence the premium to the costs of moving the cargo.

The challenge of serving this trade as a logistics service provider is that the value of commodity is not standardised, unlike an SKU in e-commerce. The buyer can reject the cargo or devalue it by a certain percentage without any prior intimation. The quality or grade parameters are subjective. Also, why no formal entity invests in insuring such trade. Traders baking this risk and form different practices(trading with known people) to insure their risk.

This form of non-organisational and formal involvement leads to the belief that one can make it more efficient by integrating it. Such is the common motivation behind “New Entrants” foraying into this agri supply chain.

The challenge is operationally intensive with multiple moving parts of first mile, grade management, middle mile and last mile. It creates a complicated process that needs long term investment and fundamental interventions. The “New Entrant” purchases the commodity from farmer and sells it to retailer at their location. The margin of difference between prices of commodity at both locations are not sufficient to cover the cost, risk (operational challenges) and insurance.

From a logistics service standpoint. Serving these companies would be a viable approach but it is not sustainable because of overheads and margins being non-feasible.

I wrote about how cashflow is king in a previous post and why it is hard to change their flow. Similarly, in order to sustain in agri-space we need to change how trade happens. “New Entrants” looking to change the flow of trade are rare and many have died trying, our own story.

If “New Entrant” survives long enough and transitions to a mature entity without changing the trade flow. It then morphs into an entity which finances the trade and insures its loss.

Summing it up

The possibility of logistics service providers to proliferate and agri commodity supply chains to optimise will increase once this trade formalises.

It could start form multiple avenues. We could be formalising trade flow through taxing the transactions. Or we could create fundamental interventions to change how the commodities move. Or we could work on changing how farming is being financed by its participants.

The complexity of domains intermixed with complicated trade practices is the crux of what keeps this space bereft of silver bullet solutions.

Signing off till next time,

Vivek , hungover by working at the interesection of agri and logistics.