My name's Kathy Baylis, I'm a Professor in Agriculture and Consumer Economics here at the University of Illinois. I wanted to talk a bit about an economist view I guess of postharvest loss. Now I think when most people think about postharvest loss they're thinking about piles of grain in the field, maybe grain falling off the back of a truck, or mice and rats getting into a grain and a storage bin or something like that. And that quantity loss is not trivial. People have estimated it, they're talking about volumes, something like 5 to 10% of volume quite often gets lost from farm to the first market. And people think about solving this by dropping in better storage technologies and then keep out the rats. So they can keep out the bugs, and all of this is good. But I want to step back and say, well that's important, but there's another really big part of postharvest loss that we'd ignore if we're only looking at that kind of grain lost along the way. For example, imagine one other big area where you might lose a lot of value, isn't just quantity but it might be quality. So, maybe the grain gets moldy, maybe it's not being eaten by rats, but you're harvesting it in a way that is breaking up the kernels and so the farmer's getting a lower price for it. Or, maybe they're selling it at the wrong time, or to the wrong market. And by that I mean a market where they're getting a much lower price than they potentially could, or a place where it's valued less. So what I want to think about postharvest loss is I guess maybe something a little broader than just quantity, and even broader than just quantity and quality. But I want to think about it is lost value. So basically, any kind of lost value from a farm all the way to the end consumer. And that can end up being a lot bigger than just, again, the lost quantity. So what we care about is that there's some kind of maximum value that a small holder farmer in rural India, for example, could possibly get for their grain. And that would be determined by whatever the end user wants in terms of quality attributes, in terms of timing, in terms of location, in terms of quantity as well, and how much it costs to get from point A to point B. And all of those things turn out to be a little tricky especially in a developing country where infrastructure is bad. Often markets don't often exist. Information doesn't often exist. In India for example, most folks, at least at the farm level, don't actually know the quality attributes that the end buyer wants. Further, even if they knew it, they couldn't get paid for it because mostly they're getting a minimum price provided by the government so even if they knew it and even if information were perfect and they could get it to the end buyer in a perfect condition. There's no incentive for them to do so because they're just paid based on some, again minimum average qualities. As long as it meets that, they're good. And how that minimum average quality is determined is not precise. Let's put it that way. So you could often have traders in the market that kind of dip their hand into the pile of grain, look for foreign matter, and say, yeah that's good, no that's not good. If the government buyer is there they might be a little more generous with what meets quality. If the government buyer is not there, a lot less stuff mysteriously is determined to be of sufficient average quality. But in any case, people aren't being paid for a specific protein content, or other kinds of ash content. Other kinds of stuff that we might care about, and certainly the end user probably cares about. So you can think of each of these pieces, quantity, quality, timing, transactions costs which includes all transportation cost and information to be needed essentially to ideally for the farmer to be able to maximize the value of what they're already producing. Let's talk just a little bit about each of those in term. So, let's think about quantity for a second, cause that's clearly a big part and one of, again, the solutions for trying to deal with quantity as mentioned is this idea of trying to improve storage. On-farm storage, so just again, make it a little more insect-proof, rain-proof, make it more accessible for the farmer, that kind of thing. And all of that's good, other things that people talk about, improving transportation, things like that, but let me use India as an example here, just because it's an area that I know a little bit better than some others. And the problem is that even if you dropped in the world's greatest storage bin, farmers would firstly need to be able to hold back their grain, so i.e., not rush to market it. They would have to also have a place to market it six months down the road. In so doing, that means again they have to have access to credit. They'd have to have, again, access to information. So where can I market it six months down the road, what price am I going to be getting it, and be able to take that sort of financial risk, essentially, to holding onto their grain. And it's not that people are unwilling to, but the problem is each of those pieces is missing. So credit markets are imperfect to put it lightly. What happens, a lot of people are using informal credit markets and what happens there is that those creditors insist on getting basically paid as soon as harvest comes around. because that's when they know that the farmer's getting paid. That's when we need our money. So, even if farmers could sit on the grain, they can't. because they gotta pay back the lender. What that means, of course, is that they're getting prices that are as low as absolutely possible throughout the year. Because everybody's selling right at harvest, that's when you suddenly get this flood of grain coming on the market, pushes prices down, so nobody's kind of able to capture those higher prices down the road. So credit is a big issue and just talking with people anecdotally it sounds like it's explaining a fair bit of why people market right after harvest. Lack of storage is definitely an issue. People were mentioning that and were mentioning in as much as there is storage that they could rent people are worried that just it's not good quality storage and so people don't really want to use that. The other issue is that, this is access to markets question and just looking at market data for India, local markets called mundies. What you find is that there are no transactions basically a month after harvest. So again I could sit on my grain. I'm being savvy. I know the prices are going to go up in theory. Six months later my local market's shut, most of my local markets in the area are shut. There's probably somewhere I could sell it and there's somebody who would like it but I don't know who that is. I might have to drive to deli or I might have to get my buddy who has an ox cart to help me with this kind of stuff. Long story short, it's not an easy way to sell the grain down the road and be able to make that premium from not selling right at harvest. The other thing that happens right at harvest is, there's a little bit of a premium to be first on the market. It's what you get of these crazy sort of rush to market kind of stories which means people are harvesting as absolutely soon as they can which means maybe the grain isn't dry enough quite yet or it hasn't fully ripened quite yet. Everyone's on the roads at the same time, there are literally accidents and stuff like that, so that's sort of a literal postharvest loss when you get grain dumped on the ground, right. So you get all of this going on, these people try to rush to market, but what happens is everybody showing up to market at the same time and again nobody's, or very few people are able to capture that price premium. So it's this real, in economics we would think of this as kind of a collective action problem in a sense, is that if people could coordinate and we could figure out, you can go first, you can go second, you can go third. We'll all maybe share those premiums, etc., that'd be great, but as it is we've sort of created this system where we're basically creating incentives for postharvest loss. Creating a system that's geared to not get the sort of best quality of grain at the right time, that's going on. Now, the issue here was that this system was put in place, really to help farmers essentially. It's them saying, well hey, we're going to give you a minimum support price, and so you're guaranteed a price, you don't need to worry about these sort of vagaries of the market. You've definitely got a price. Everyone's got their local markets and so that's arguably a good thing. I remember we were talking to people about, do you ever think about selling to the market that's a little further away? And by a little further, we're talking 20 kilometers versus 10, so this isn't a huge distance. So people say, yeah, there'd been times where I've heard through the grapevine you might be able to get a better price there, but no, well, see, because people weren't sure and they didn't know the traders there and all of this. So, there's that kind of information uncertainty that goes on, even with, even though everybody's sort of back-stopped, if you like, by this minimum support price nominally. And nominally, I say that because again it depends on you meeting this minimum average quality standard. So you've got the other piece of the puzzle. There's many pieces of the puzzle in India. But one of the other big ones is that the government offers this minimum support price to buy a bunch of grain and then they turn around and sort of sell that grain to the food corporation of India who then sells it at a discount to the poor, essentially. Now when we talk about transactions costs, in just a minute or two, or you can even think about these as being straight up transportation costs. The system is inefficient in a sense because it's taking grain from one location sending it to essentially a central location. From that central location some grain, usually not the same grain, goes back to the same area to be sold to the same folks in the same villages but at very steep discount. You understand the idea behind it was to give farmers a guaranteed price but also make sure there was a subsidy going to rural and urban poor folks in terms of food. But the system built in all sorts of kind of funky inefficiencies which just means that the grain gets moved a lot more places. It gets stored in big government warehouses where there is also a whole pile of storage loss that kind of thing going on. To me this is one of the big issues I guess in postharvest loss is that these institutions, these government policies matter a lot and so that partially just to comeback to observe the example. You can give drop to the storage bin. You can deal with the technological problem but if you still have these, the sort of the system in place. They create snow incentives to store. People aren't going to be using it. Or they'll be using it for something totally different. Back to the quality piece. So there's a bunch of things that a farmer can do to improve quality. Some of them are before planting, so you might not think of them as postharvest loss but maybe things again like picking varieties that might be higher quality or might have certain quality attributes that the end consumer carries about. Some of them are postharvest and that just it both in terms of handling types of even both types of harvesting that can try and minimize breakage and things like that, but also the things like drying. And this isn't high technology, it's a stuff that is used in sort of rural US. Certainly, wheat, I know a lot of wheat producers that have a small dryer to try and improve the quality of the grain, but again, there's no incentive to do so. So think of this as sort of loss. It's certainly a financial loss to the farmer if they could get a premium for this. And it's certainly a financial loss to the system. This is something that's basically taking we're reducing the value potential if you like, to the grain and to the farmer's production, by not allowing for creating incentives for or facilitating in terms of technology, those kind of postharvest activities that could improve quality. So quantity, quality, timing. So I already kind of mentioned this rush to harvest thing. If you had a perfectly functioning market, we would expect that prices would still be lowest at harvest. But they would go up and they'd go up by cost of storage, but also rate of interest. So the idea here being that, two months after harvest, the price of the grain should be the price at harvest plus the cost of having stored it for two months plus the cost of basically the rate of interest on that value. because the idea is I could of sold it at the time, could have sold it at harvest and got a certain amount of money, put that money in the bank, earned a rate of interest on it. Or, I can sit on my grain if I think that's a better deal. So in equilibrium we'd expect lowest price at harvest, and then sort of march up over time at again, cost of charge plus cost of interest until the next harvest. So this kind of saw tooth pattern. Now, usually prices are noisier than that, but that's sort of the basic story. By the way, for non-storable goods, it's even, you can imagine, the effect's even bigger, the big drop at harvest. Things like tomato, or brinjal, which is eggplant, in Hindi. You definitely see this big price crash in that new market. So there are all these questions which are even more important, in a sense. So long story short, we would like for farmers if there are these arbitrage opportunities. If there are some benefits for them to be able to hold onto the grain and make more money, we would like to be able to facilitate that. The trick is again that they don't just need the storage facilities. They would need things like access to credit. They would need the financial incentives and they would need access to market and so again it's never just sort of one thing, it's all of these pieces put together. And then again there's these transaction costs issues. You can think of transaction costs, as certainly including things like transportation costs, but it's more than that. It also includes things like search costs, and by that, trying to find a buyer. So again, if your local market is closed, how much is it going to cost me to figure out who to sell this to negotiations cost? Kind of straightforward. I don't really know what my brain is worth in the market, so I'm negotiating with this trader who I've never had dealings with before and I want to make sure I don't get fleeced. This is a costly enterprise, including, I'd want to try and figure out what's appropriate? What's the appropriate price for me to bid and all that kind of thing. Then questions of sort of monitoring and enforcement costs. So maybe I cut a deal beforehand and say if I sell it to you in a month, you'll pay me a 10% premium on what I would've gotten at harvest. That's great. Well, then I show up with my grain a month later, and the trader says, [SOUND] that 10% thing, maybe not? So there is this, that kind of uncertainty. And sort of how I enforce that. All of these things are again affected by institutions, both sort of government policies, but also by institutions. I'm thinking of things like information, market information. That kind of stuff. And we're in a place like the U.S. where we've got futures markets, and we've got easy access to what is the price today in Chicago, the Chicago mercantile exchange? What could I get six months from now if I forward sell this product? That's not the case in many developing countries, and so you're really going by what your brother said or the neighbor, or kind of the trader that you know well. That kind of thing. So all of these things are risky and costly, potentially. These are just a bunch of the pieces one needs to have in place to really try and limit postharvest loss. Technology is important but it’s only going to work if you also have the profit marketing institutions and place. If you have things also like access to credit, access to information, access to market. That's not that it's insurmountable? People recognize this as a big problem, and you can also take an optimistic view in terms of, think of all the potential value that could be added to food systems in developing countries. And particularly to rural smallholder farmers in developing countries, if we can work to solve some of these problems. [SOUND]
