Abstract
Addressing food security is a critical priority for development, particularly in India, where crop productivity is low and post-harvest losses reach 35%–40%, which is a considerable burden. One significant reason for these losses is the lack of storage facilities, especially in rural areas of Bihar. Micro-warehouse (MWH) company, recognizing this issue, took the initiative of introducing micro-warehouses as a solution. They focused on dealing with three commodities: paddy, maize and wheat, and also facilitated the connection between processors and farmers for selling their produce. This approach of micro-warehousing gained attention from investors, leading to funding for scaling up operations. The success of MWH company raises an important question: Can micro-warehousing be a viable strategy to address agriculture storage challenges in India? The founder of the company, considering this achievement, now contemplates expanding the business to other states.
Discussion Questions
Do you see micro-warehousing as a potential business for helping small and marginal farmers?
What strategy is needed to exploit the potential of this business?
Should the organization remain focused on the commodities it focuses on or diversify in other commodities?
Should the organization expand to other states to increase the scale of operations?
In 2012, the founder of the company started this Micro-warehouse (MWH) company in Rural Bihar. They were thrilled to witness the positive response and support for their idea of promoting micro-warehousing to solve storage issues faced by small farmers. They contemplated replicating this model in various locations.
In 2020, MWH company secured $14 million in funding, with contributions of $3 million from Chiratae Ventures, $8 million from funding company and $3 million from the UK’s CDC Group. To date, the company has raised a total of $20 million in equity and a small amount in debt. The recent funding brings both great responsibility and significant challenges. The founder of the company understood the need to demonstrate to the investors the positive impact their funds have had on small farmers, given their current operations in Bihar, where they operate across 174 locations and 14 districts.
Considering the immense market opportunity in Bihar alone, valued at $14 billion for maize, wheat and paddy from 10 million marginal farmers, there is ample potential for optimal utilization. Now, the crucial question for The founder of the company was whether to expand beyond Bihar. If yes, which states should he target? Additionally, he pondered whether to diversify into other commodities or continue focusing on the three major grains: wheat, rice and maize.
Status of Indian Food Grain Production
Approximately half of India’s population relied on agriculture as their primary source of income, and food grain had always been a crucial crop in the country’s agricultural system. According to data from the Directorate of Economics and Statistics, Ministry of Agriculture and Farmer Welfare, India’s food grain production had been steadily increasing.
In 1951–1952, the total food grain production was 50.82 million metric tonnes (MMT). Over the next two decades, it doubled to reach 105.17 MMT in 1971–1972, and then it took the next three decades to double again, reaching 212.85 MMT in 2001–2002. Since then, the production continued to grow, and post-2001–2002, it increased by another 40%, reaching 283.37 MMT in 2018–2019.
Breaking down the significant food grain production, rice constitutes almost half of the total produce at 115.63 MMT, while wheat production accounted for more than one-third at 101.20 MMT, according to the advance estimates from the authority.
Issues in Indian Agriculture
In India, the land was divided into small and fragmented plots. Over time, the land size decreased, going from 2.28 hectares in 1970
Average Size of Operational Holdings.
Looking at the types of land holdings (Table 2), the number of small and marginal holdings had doubled, while medium and large holdings decreased. This trend indicated the prevalence of smaller-scale farming. Unfortunately, these small farmers faced challenges in accessing credit, both from formal and informal sources (Table 3). They often turned to moneylenders for credit, which came with high-interest rates, reaching up to 60%.
Number of Holdings (in Millions).
Land Holdings and Sources of Agriculture Credit as of 2013 (in %).
The situation was further complicated as the inputs required for production were also subject to interest from input dealers, making the farmers vulnerable to market fluctuations. Consequently, they may be forced to sell their produce at a lower price, leading to desperate sales. Moreover, limited access to markets hinders their ability to sell their produce effectively. The small quantity and value of their products made it difficult for them to approach different markets for better opportunities. Hence, these small farmers faced not only limited access to credit but also restricted access to the market.
Furthermore, these small farmers did not benefit from economies of scale, which meant they missed out on the advantages of larger production systems. Additionally, the absence of a transparent price system resulted in them losing out on fair prices for their produce. They had to rely on intermediaries and merchants to sell their crops. Unfortunately, due to the lack of grain standardization and widely accepted quality standards, these intermediaries often offered lower prices to the farmers than their produce’s actual worth.
The situation became even more challenging as these middlemen themselves did not receive full payment for the products they sold to the next intermediary in the supply chain. As a result, they defaulted on the payment to the farmers, leaving the farmers with a smaller portion of the payment they were supposed to receive. This chain of intermediaries led to the farmers being unfairly compensated for their hard work and produce.
Status of Agricultural Warehousing in the Country
According to the Planning Commission of India’s report on ‘Warehousing Development and Regulation for the Twelfth Plan Period’, it was observed that over 65% of India’s food grain production was stored at the farm level. Unfortunately, this storage method resulted in farmers incurring losses ranging from a minimum of 6% to as high as 10% due to damage caused by factors like moisture, insects, rodents and fungi. This highlights the critical need for and importance of establishing a strong and scientific agricultural warehousing ecosystem in the country.
A report by Ernst & Young and CII further revealed that 20% to 30% of the total harvest in India goes to waste due to various issues such as insufficient storage capacity, poor logistics management, inadequate scientific storage practices and regional imbalances in warehousing facilities. These challenges underscore the urgency of addressing the country’s storage and logistics shortcomings to prevent significant food wastage and ensure a more efficient agricultural supply chain.
In a study commissioned by the Warehousing Development and Regulatory Authority, the National Institute of Public Finance and Policy found that agricultural warehousing constituted 15% of its total warehousing market (Report on Warehousing in India, 2015). The ‘Model Scheme for Setting Up Rural Godown’ bifurcated godowns based on storage capacity and called them small, medium and large. Small-sized godowns had a storage capacity of 50, 100, 200 and 250 metric tonnes (MT), medium-sized with 500, 1,000 and 2,000 MT and large-sized had a capacity of above 2,000 MT.
According to a combined study by Ernst & Young LLP and CII Institute of Logistics titled ‘India’s warehousing industry: an overview’ in 2014, the Food Corporation of India (FCI), Central Warehousing Corporation (CWC) and State Warehousing Corporation (SWCs) were the major players in the warehousing and storage domain in India, collectively running 40% of the agricultural warehouses. FCI utilized its warehouses, and the CWC and SWCs used theirs to meet grain procurement and distribution requirements. Some large traders used CWC and SWCs-owned warehouse capacity, but its access was practically out of bounds for the farmer community, and they had to depend on privately owned warehousing facilities if they existed in their vicinity.
According to ‘Evaluation and Impact Assessment for the Central Sector Scheme of Grameen Bhandaran Yojna’ (2012), the total existing storage capacity for agricultural produce in India was 109 MMT. Further, the report iterated that, at the end of the XIIth plan, the food grain requirement for food security in India would be 257 MMT. As per the report, the country needed to augment an additional storage capacity of 35 MMT to match that storage requirement. National Centre for Agricultural Economics and Policy Research (NCAP) projected 281 MMT of food grain demand in 2020–2021. By that time, by extrapolating the numbers, the government required a food grain storage capacity of 200 MMT. This showed the vast rift (have not) in the ‘have’ and ‘need to have’ scale of food storage capacity scenario in the country.
The government of India established the Warehousing Development and Regulatory Authority (WDRA) in 2010 to establish a Negotiable Warehouse Receipt (NWR) system in the country and make NWRs ‘a prime tool of trade’ and to enable financing against it. This instrument applied to all commodities, including agricultural produce. It improved the reputation and trustworthiness of farmers and was expected to increase liquidity in the countryside. WDRA (2019) estimated that the existing capacity of privately owned warehouses in India was around 77.68 MMT, 48% of the total existing capacity of 162.71 MMT. The warehouse registration process in India was going at a slow pace. It imposed many challenges in governing, estimating and reporting the exact status of warehouses in the country. In its report ‘Building Warehousing Competitiveness’ (2011), Price Waterhouse Coopers stated that only 1.65%, that is, 1.94 MMT of the total existing capacity of 117.57 MMT, were registered with WDRA (by 706 warehouses).
Comparison of Traditional (Bhuskar), Conventional and MWH Company Models of Storage
In the past, rural households commonly used a traditional storage system near or within their homes, which was low-cost (₹25,000 for 80 quintals). This type of structure required minimal maintenance expenses, but it resulted in high storage losses (10%–25%). Unfortunately, this method had no insurance coverage and carried a significant risk of theft and fire. Moreover, farmers could not obtain loans using these stored products.
On the other hand, conventional large-sized warehouses had more significant storage capacity (10,000–50,000 MT) and charged high rent (₹15–18/qt/month). These warehouses were primarily used by large traders, exporters and corporations. However, the procurement costs for these warehouses were also steep (10%–15%), involving multiple intermediaries (3–4) in the process. Both of these storage options had their inefficiencies when it came to addressing storage problems.
The micro-warehousing concept introduced by MWH company aimed to address the shortcomings of both traditional and conventional storage systems. These micro-warehouses had smaller capacities (200–2,000 MT) and charged lower rent (₹8–10/qt/month). Additionally, the company assumed the risk of the stored products (refer to Table 4). The agricultural sector had long struggled to establish efficient and dependable storage solutions. Traditional methods posed challenges with losses, while conventional storage facilities came with steep charges.
Comparison of Conventional, Bhuskar and Micro-warehousing.
To bridge this gap, MWH company developed the Grain Bank model. This innovative approach aimed to tackle the issues faced by both storage systems. The ultimate goal was to provide marginal farmers with a reliable and affordable storage solution, ensuring the safety of their agricultural produce.
Evolution and Genesis
The founder, who graduated from a well-known B-School in Pune (India) and worked for more than a decade with big Indian and multinational banks, always harboured a strong desire to make a meaningful contribution to the progress of his home state, Bihar, especially in uplifting its farming community. This deep longing led him to establish MWH company on 2 April 2012, inspired by a progressive village he encountered during his visit to Italy. Initially, his elder brother supported him in the venture, but he later moved on to focus on his other business.
The first two years served as an incubation period for MWH company. To gain a practical understanding of the commodity market supply chain, the company began by procuring major grains such as rice and pulses from farmers in Samastipur, Bihar. They supplied these grains to a company based in Tamil Nadu and a supermarket in Mumbai, alongside local millers and traders. This allowed them to explore the workings of the supply chain ecosystem and observe how companies operated large warehouses. Traders skilfully utilized clients’ funds to procure and store grains, making good profits with minimal risk. Through this process, they discovered the existence of multiple layers of intermediaries, and they recognized that farmers had no say in the pricing system, leaving them at the mercy of this complex arrangement.
In 2014, MWH company shifted its focus to micro-warehousing. Instead of investing in constructing and owning real estate assets, they adopted a ‘light asset model and decided to lease five godowns in the Samastipur district. Through this approach, the company managed to secure funding for the stock they stored in these godowns and offered loans to farmers against the warehouse receipt.
By the end of 2015, MWH company had successfully handled 800 MT of food grains in their godowns. This experience and experiment served as a significant boost, encouraging them to fully commit their efforts to establish MWH company as a player in the micro-warehousing sector.
Functioning/Operational Aspect of MWH Company
In response to the situation, MWH company developed an intervention aimed at assisting small and marginal farmers with a comprehensive one-stop solution, providing access to storage facilities, market opportunities and credit support. Initially, from 2012 to 2014, the organization focused on maize trading and offered farmers backward linkages through the supply of quality inputs. In 2015, MWH company introduced its implanted warehousing model, dealing with maize, wheat and paddy. By 2016, they began providing loans against warehouse receipts, facilitating market linkage. Over the following years, MWH company expanded its offerings, adding Mustard seeds in 2017 and Soya in 2018. In the same year, they installed grain ATMs near the warehouse to improve accessibility for farmers.
To establish its warehousing infrastructure, MWH company leveraged existing facilities and constructed several warehouses across villages. The government supported these efforts by providing subsidies of approximately 70%–80% through various schemes, allowing the organization to lease these godowns for 15–20 years.
To enable farmers to access funds, MWH company collaborated with Non-Banking Financial Companies (NBFCs) to fund those who deposited grain in the Grain Bank and planned to sell it later. Despite various government schemes promoting warehouse receipt financing, banks remained cautious, and their confidence in the system remained limited. As a result, MWH company opted to work with NBFCs, even though they offered higher interest rates (18%–20% PA). Banks showed little interest in providing small-ticket loans. To scale up and encourage greater involvement of banks, a more robust system based on improved technology would be necessary.
However, the loan for warehouse receipt financing typically spanned 4–6 months. During the shorter duration, the higher interest rates from NBFCs did not significantly impact farmers compared to their borrowing from money lenders at 4%–5% per month. The warehousing cost for 6–7 months’ storage amounted to approximately 3%–4% of the total value of their produce. Additionally, if they opted for a loan or advance for 4–6 months, the additional cost came to about 2%–3%. On average, this resulted in an increase of 5%–6% in the farmer’s overall cost (including storage and advance/loan costs). However, having their produce stored in safe hands could help them save around 25%–30% of potential production losses caused by inadequate storage facilities.
Another significant advantage for farmers was the flexibility provided by the organization in selling their products. They could access liquidity for even a single bag of produce whenever they needed it. MWH company offered highly attractive and customized packaged solutions to farmers based on their specific needs and plans. This approach helped minimize their cost of storage and advances, ensuring a more efficient and cost-effective solution for farmers’ requirements. Farmers pay rent for storage, end buyers pay for market linkages and aggregation, and NBFC and banks pay for sourcing and settling loans.
To reach the processor, a bag of grain passed through at least six conventional supply chain members (Figure 1). One significant challenge was securing a guaranteed market for the product. To address this, a comprehensive study was conducted to explore various local opportunities. The study revealed the presence of several flour mills and processing units in the districts. However, these units operated at their optimum capacity for only four months in a year due to the scarcity of quality raw materials in the nearby areas. As a result, they remained idle for the rest of the year.
Operational Model of MWH Company.
On average, there was an opportunity for 0.1 million tonnes of grains in each district. The organization capitalized on this potential by onboarding these mill owners after conducting their Know Your Customer verification process. These millers registered on the App and became buyers of the produce. They were willing to purchase the grains at the farm gate and were delighted to receive the delivery from the nearest warehouse. This collaboration provided an added advantage to the company, allowing them to directly save on operational costs associated with buying from farmers on the digital platform.
Going Digital
The promoters of MWH company proudly labelled it as an ‘agri-tech company’, where technology played a crucial role in delivering services to its clients in the agricultural sector. To fully embrace technology and enhance their offerings, they took a revolutionary step by introducing ‘Grain Bank ATM’ kiosks in villages. These self-service kiosks allowed farmers to access a range of services related to the grains stored in micro-warehouses. Farmers could use the kiosks to sell their produce, take advances against it, or even place requests for the purchase of agri-inputs and more.
Recognizing the widespread use of smart mobile phones in rural India, the company developed a mobile application called ‘e-batua’ or electronic wallet. This app provided quick, affordable and real-time services to its clients, further improving their convenience and accessibility to MWH company’ offerings. Through the integration of technology, MWH company aimed to empower farmers and enhance their overall agricultural experience.
HR Issues
MWH company had a successful strategy of hiring local graduates and undergraduates for the entry-level ‘Village Champs’ or VCs role. However, one of the major HR challenges they faced was hiring professionally qualified management cadres. Given that the organization operated in remote areas of rural Bihar, management graduates from reputable business schools were not enthusiastic about joining the organization at the ground level. Even if they did join, the attrition rate among this category of hires was very high.
To address this issue, MWH company changed its hiring approach and started recruiting people from local management colleges in Bihar. These individuals were given intensive training tailored to suit the organization’s requirements. This shift in hiring strategy proved to be successful, and attrition rates for ground-level positions dropped to almost zero.
The organization’s reputation received a significant boost with venture capital funding from several funding agencies. As a result, MWH company became more appealing to professionally trained agricultural business graduates from reputable institutes for senior-level managerial positions. These graduates were initially hired as interns and, after undergoing training for a few months, were formally inducted into the organization.
Additionally, the founders of MWH company utilized their network and personal contacts to attract and acquire professionals for leadership roles, as depicted in Table 5. This approach helped MWH company overcome its initial challenges and build a strong and competent team to lead the organization.
Staffing Pattern for Managing a Micro-warehouse Based on Capacity.
Finance Aspect
Regarding the financial aspect, the organization allocates 10%–20% of the total cost towards leasing warehouses. Additionally, they incur expenses for salaries and warehouse maintenance, including fumigation and cleaning.
The Venture Capital Funding
The turning point for MWH company came when it secured a substantial amount of funding from reputable venture capital firms. They received a total equity investment of USD 14 million, along with an off-balance-sheet debt funding of US$ 5 million from another finding agency. The funding agreement had an exit clause of 5–7 years.
The funding agencies, with a mission to foster development in backward regions of Asia, Africa and India, played a crucial role in providing the capital and nurturing the ecosystem to support MWH company’ growth and sustainability. The infusion of funds brought about significant responsibilities for the company’s founders. Consequently, the company’s board structure underwent changes, and the shares and ownership of the company were diluted.
MWH company decided to utilize the funding to establish a strong presence in the micro-warehousing business. They intended to position themselves to be acquired by a food giant, which would serve as a viable backward integration strategy for the buyer. Alternatively, they considered the option of launching an Initial Public Offering (IPO) in the future.
As of 2020, MWH company successfully raised additional funding, securing US$ 3 million from Chiratae Ventures, US$ 3 million from UK’s CDC Group Plc and US$ 8 million from Aavishkaar Capital. This funding further fuelled the company’s expansion and development.
After receiving funding from Aavishkaar, the company experienced remarkable exponential growth. By 2016, MWH company had expanded its operations significantly, hiring 11 more godowns and increasing its total storage capacity to 3,600 MT. This growth trajectory continued, and by 2018, the number of godowns had further increased to 28, with a total storage capacity of 15,000 MT.
As of February 2021, the organization made tremendous strides in its operations. It was actively engaging with 48,000 farmers, operating 174 warehouses and efficiently handling a capacity of 112,000 tonnes of grains, amounting to a total worth of 3 billion. The impressive numbers demonstrated MWH company’ successful journey and its significant impact on the agricultural sector, especially in rural areas of Bihar.
The Present
MWH company primarily focused on dealing with three essential grains: paddy, wheat and maize. These grains constituted the staple diet for a significant portion of the Indian population. The organization wanted to remain focused on these commodities as they had a very high volume, allowing them to achieve economies of scale. Additionally, these commodities faced market access challenges, making MWH company’ services even more critical for farmers.
The small ticket size loans below 0.1–0.3 million could be easily digitized, requiring no human intervention. However, for slightly higher value loans in the range of 0.1–0.3 million, human intervention was necessary. Interestingly, data showed that more than 80% of the loans fell below the 0.1 million threshold. To fully leverage this market potential and maximize the benefits for farmers, MWH company had to reevaluate its strategy and explore further opportunities in catering to the needs of this segment (see Table 6). This approach helped MWH company optimize its services and enhanced its positive impact on farmers’ lives.
Projected Growth of MWH Company.
The Future
The MWH company model had achieved considerable success, earning recognition such as the All-India Start-up Award from the Indian Council of Food and Agriculture in 2018. Encouraged by their achievements, the organization had plans to expand its operations to Maharashtra. This market was estimated to hold a potential worth USD 260 billion. Leveraging its existing infrastructure, MWH company believed it could scale up its operations to reach a value of USD 5–10 billion.
The investors were fully supportive of MWH company’ endeavours, and the organization could mobilize funding of up to ₹1,000 crore (USD 133 million) in the next 2–3 years before it went public with an IPO in 2025. This funding further fuelled the organization’s growth and allowed it to make a more significant impact on the agricultural sector, benefiting farmers and contributing to the betterment of rural communities.
Footnotes
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Ethical Statement
The case is written based on the data available in secondary sources and used data only till the year 2020. The name of the organization is disguised.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.