16. supply chains for rice in chennai
TRANSCRIPT
Supply chains for rice in Chennai
Mohan Mani, Gautam Mody and MeghnaSukumar1
November, 2013
Working Paper no 16
http://www.southasia.ox.ac.uk/resources-greenhouse-gases-technology-and-jobs-indias-informal-economy-case-rice
In this paper we look behind the retail labour process (WP11, here) to scope the
supply arrangements through which Chennai is supplied with rice with a view to
evaluating possible changes in employment conditions along the supply chain
that might accompany the entry of large retail conglomerates. So rather than
focussing on commodity contracts, value added, rents and technological
upgrading as is usual in supply or commodity chain analysis, we take a labour
perspective and evaluate the current and likely future impacts of organisational
change – involving new scale of capital and new buyer-driven power – on the
existing supply arrangements.2
For this, as trade union researchers, we have studied managers and employers in
order to scope the several private supply chains ‘backwards’ from retail to rice
milling as well as the public distribution system comprising state agencies and
contracted private firms. Our method is based on case studies, a method
established as appropriate when research questions are new and when existing
1Centre for Workers’ Management
2See Gilbert 2011 for a critique of value chains analysis from a work perspective: P Gilbert 2011 Frontiers of
Commodity Chain Research Anthropology of Work Review vol 32 no 1 pp 43-45
research is thin on the ground, which is the case here.3 Findings are based on
detailed interviews with 10 managers and owners in four large retail chains,
three medium-sized retail outlets, and three small retail outlets; one wholesaler
in Chennai; a large rice miller on the outskirts of the city, supplying rice to large
retailers and wholesalers; plus managers in two mills contracted to the PDS –
fourteen in total. 4 In this working paper, we analyse the logistics of the private
supply chains – and then their labour arrangements backwards to the rice
milling stage; we then follow the same format for the public distribution system.
Large business houses in retail trade
Today a number of large corporate houses have seen it profitable to enter retail
trade. Prominent firms include Reliance Fresh, with over 700 Reliance Fresh
Stores across the country, annual turnover of Rs.7599 crores and a pre-tax loss
of Rs.342 crores for the year 2011-12; Future Retail, with 204 Big Bazaar and
Future Bazaar Stores, annual turnover of Rs.11793 crores and a pre-tax profit
(PBDIT) of Rs.702 crores for the year 2011-12; Birla retail with 560
supermarkets, and a turnover of Rs.1650 crores in 2010-11; and the Tata Group-
owned Trent Hypermarket which owns the Star Bazaar chain of mega
supermarkets - with 15 supermarkets, a turnover of Rs.785.91 crores, and pre-
tax loss of Rs.76 crores for 2012-13.5 While there is substantial interest in the
3M Abraham forthcoming/2014, The new co-operativism : a study of emerging producers organisations in
India, PhD Thesis, Copenhagen Business School4
The data for the large retail supermarkets was obtained through interviews with key managers in Chennai;for the medium stores and small stores from direct contact with the stores owners/in-charges and subsequentinterviews; for the Public Distribution System through interviews with the General Secretary, LPF Union inTNCSC, permission from the MD, TNCSC through the intervention of the General Secretary, LPF Union,interviews with managers in Commercial, Quality Control and General Marketing in TNCSC, factory interviewsat the private rice mill on contract to TNCSC for PDS and a rice mill owned by the TNCSC, and interviews withtransport contractors with the TNCSC. Application under the Right to Information was used to supplementdata collected from direct contact.5
Data for Reliance Retail and Future Retail from articles.economictimes.indiatimes.com; for Birla Retail fromwww.rediff.com; and for Star Bazaar from www.mywestside.com.
sector, with large investment in building a sales infrastructure, the sector is still
to start yielding returns for most of the large companies.
Supply chain logistics, costs and returns – large retail and wholesale
Table 1 gives details of the procurement chain for rice for four large retail
chains, and for a major wholesale dealer supplying rice to many small and
medium retail stores of the kind whose labour force we have researched6. From
the interviews a number of distinctive characteristics of the rice supply chains
became evident.
6Mohan M., G. Mody and M. Sukumar, 2013, ‘Employment and Working Conditions in the Retail Sector –
Chennai’, Working Paper 11, http://www.southasia.ox.ac.uk/working-papers-resources-greenhouse-gases-technology-and-jobs-indias-informal-economy-case-rice#sthash.iyhLdi05.dpuf
Table 1: The private procurement chain: large corporate retail and neighbourhoodwholesale firms
Large retail Wholesale
Chain7 Large-B Large-E Large-A Large-F WS
No. of outlets 1 6 74 56 1
Vendors One - Red Hills Centralisedrice purchaseat Guntur,Chennai,Bangalorethrough sistercompany. Ricefor Chennaioperationspurchasedmostly fromRed Hills
Rice boughtfrom 4-5vendors in RedHills inChennai,Pondicherryand Salem.
Rice bought from tenmillers. Boiledrice:Tindivanam,Arani,Kanchipuram, RedHills and NelloreRaw rice:Nellore andNaidupettai
Rice boughtfrom 25 millersthrough 2-3brokers inAndhra Pradesh– Nellore,Guntur,Naidupettai;Karnataka –Raichur,Tumkur; TN –Arani,Tindivanam,Kallakurichi.
Estimatedmonthlyturnover
20MT permonth all rice
varieties
(1 store)
15MT permonth Ponni
rice
(6 stores)
180 MT permonth Ponni
rice.
(74 stores)
Ponni boiled 90MTper month; Ponni raw
130 MT per month(56 stores)
300MT permonth Ponnirice
(1 outlet)
Warehouse No Yes Yes Yes Yes
Source: Discussions with private sector managers, owner of wholesale rice business,2013
First, contrary to the supposition that large supermarket stores sell more staples
than small ones, the table shows first that procurement operations for rice in
large multi-product retail chains are in most cases substantially smaller, and less
7None of the workers in the sample were from the supermarkets Large-E and Large-F. Also, the managers in
the supermarkets Large-C and Large-D refused to be interviewed or participate in the study.
complex than for the neighbourhood wholesale dealer. Only the retail chains
Large-F, belonging to a large Indian business house, with 56 retail outlets in
Chennai and Large-A belonging to another large business house, with 74
outlets, even approach the size of the wholesaler. Large-F procures an estimated
220 MT per month of Ponni rice (raw and boiled) for its 56 outlets in the city,
and Large-A around 180 MT per month for its 74 outlets, as against 300-450
MT per month Ponni rice procured by the wholesale dealer. The other two
major corporate supermarkets do not approach this operational scale.
We also know (see WP11) that the turnover of rice from a large supermarket is
only around 3-4 times that of a medium retail store, or 15-20 times a small
store. The difference between the large supermarket and the smaller stores for
rice sales is therefore not as significant as would be expected given the
respective differences in overall size.
Second, the local wholesaler8 scopes supply so much more extensively than
does large retail that the rice market appears to be logistically segmented. The
wholesaler’s purchase system covers a much larger set of millers (25 as against
10 for Large-F and 4-5 for Large-A), and from much more widespread regions
in Tamil Nadu, Andhra Pradesh and Karnataka. In the case of Large-E, while
purchase is centralised under a sister company, covering all Large-E stores in
Tamil Nadu, Karnataka and Andhra Pradesh, in practice most of the purchases
for Chennai are sourced from Red Hills. Large-B with a single supermarket
outlet procures all its rice from a single miller in Red Hills. It does not even
have a warehouse, instead paying on a ‘just-in-time’ basis for cleaned, packed
rice which is supplied directly to the store premises.
8The wholesaler in Red Hills explained procurement as the complex part of the rice milling exercise. The profit
of the wholesaler depended on his ability to access the right market at the right time, with a good knowledgeof the seasons. The market determined procurement price could vary by as much as Rs.10 - 20 per 25 kg bag ofrice. He said that this optimum procurement was at the centre of the wholesaler’s business, and was anintegral part of the routine for all wholesalers.
While all three small stores in the sample purchased rice from wholesalers, 2 of
the 3 medium-sized retail stores did not depend on a wholesaler for their rice
purchases, going directly to the millers. One of them, Medium-N in Ambattur,
specified that they made their purchases from millers in Arni (115 kms from
Chennai) as the millers there used old technology for drying rice, resulting in
better quality. This medium store therefore had a more complex structure for
purchase than Large-B, which purchased rice from one miller in Red Hills.
Third, the large retail chains all hire trucks rather than operating their own fleet
of trucks, similar to wholesale dealers. However, while Large-E has a dedicated
transport service for costly white goods, all its bulky low-cost commodity
purchases are transported using hired vehicles.
Fourth, the wholesaler deals solely in rice, and makes a reported net profit
margin of around 5% from that commodity. The wholesaler’s retail costs are
likely to be significantly lower than for corporate retail. The shelf period and
inventory are likely to be low as the wholesaler deals with a smaller number of
customers, its customer being retail stores. Each of these buy fixed quantity of a
limited set of products (different varieties of rice) at reasonably predictable and
fixed schedules. The wholesaler is likely to deal with a more limited number of
transactions each month as compared to the large retailer which caters a larger
number of retail customers with a highly varied product range and varied
buying preferences. This leads to lower transaction costs and overheads for the
wholesaler due to its much simpler business model. For the large retailer
however, rice is a small fraction of the total turnover, with low profit margins.
The large retail chains gave their gross mark-up on rice as between 2-5%9. This
would hardly cover their cost of inventory, shelf space, and the overheads
apportioned to rice. The fixed cost for shelf space would also be significantly
higher for the large retailer. As the Manager at Large-B explained, “the profit
9This margin is much lower than for small retail.
margins are deliberately kept low for certain essential items like rice , pulses,
spices, eggs etc because customers will purchase other items if they feel that
prices are generally lower.” In effect, for these large retail stores, rice along
with other staple commodities is a loss-leader, being cross-subsidised by other
products. Rice attracts customers, while other high value items provide profits.
Logistics, costs and returns:
Paddy-Rice Milling
Further down the supply chain is the paddy milling stage – with a single case
study. The rice miller (CRM)10 in Red Hills gave the following details of the
rice milling operations. The 500 MT rice per month mill has been in operation
for the past 70 years, and was modernised in 2009. All operations were
mechanised except for packaging. Around 80% of the rice processed was
parboiled rice, the remaining 20% being raw rice.
The sourcing of different varieties of paddy was done on a daily basis
depending on the demand from 4-5 private wholesale grain mandis (commodity
markets) in Red Hills. Certain types of paddy were available only seasonally.
Unusually, the mill had no medium term storage warehouses, and so paddy had
to be milled within the week.
Loading and unloading:
Loading and unloading activities in mandis are highly organised, with strict
rules governing entry. From interviews with loading workers in one of the
mandi at Red Hills, the respondents were found to be members of an association
10Assumed name. The names of all mills are assumed, for the sake of maintaining anonimity.
of loading and unloading workers, registered in the year 1982 with a current
membership of 171. Each member registering with the association had to pay a
deposit towards membership; current membership rate was Rs.50000 per
person. Regardless of their age and strength, members all shared equally from
the day’s collection. The oldest member in that association was 80 years old.
There were set timings of work: the day shift was from 5AM to 5PM, and the
night shift from 5PM to 5AM the following day. Work was piece-rated, with the
piece-rate renegotiated every three years. The negotiations were bipartite
between the association and the mandi, and there was no state or party political
involvement. The prevailing rates at the time of interview were based on
negotiations conducted in February 2012, and some of the rates were as follows:
Rs.3.30 for a 75kg rice bag; Rs.1.30 for a 25kg rice bag; Rs.5 for a 75kg bag of
broken rice. Day and night shifts had equal pay rates. The respondent said he
made Rs.800 on a good day, and averaged around Rs.400 per day for six days in
a week. There was a weekly compulsory saving of Rs.100 through the
association, used to give loans to members. Each member received a festival
bonus of Rs.3000 for Deepavali and Pongal from the collective savings of the
association and the interest earned on those savings. In addition, the association
also used the savings to support any member unable to work because of ill
health or injury.
The respondent also reported hazards at work. Bran and husk loading was
dangerous because of the dust particles. Loading paddy could lead to skin
allergies, from the pesticide used with paddy cultivation. Accidents could also
happen from muscle sprain and dislocation of bones because of the heavy loads
handled.
Processing:
The miller supplied processing costs as in Table 2 below. There was no inward
transport cost as paddy was purchased locally, and delivered by the mandi
paddy trader to the miller’s premises.
Table2: Case study of rice milling 2013
Parameter Amount
Capacity (MT rice/month) 500
Normal production
- parboiled rice 80%
- raw rice 20%
Cost and estimated profits
- Sale price (fine Ponni Rs/kg) 48.00
- Purchase price of paddy (Rs/kg) 24.00
- Transport cost (Rs/kg rice) 0.60
(range of Rs.0.50 to Rs.0.70/kg)
- Packaging rice
-1 kg pack 0.30
-20 kg pack 0.70
- Processing and milling (Rs/kg) 1.60
(miller gave cost as Rs.120/75 kg rice)
- of which Labour cost (Rs/kg) 0.40
(labour cost is part of processing cost)
- Estimated total cost of processed rice 39.00
(at very low estimate of 65% outturn)
Profit from rice (Rs/kg)11 9.00
Estimated monthly profit (Rs) 4,500,000
(at 500MT rice production)
Source : data from CRM Chennai
The distribution of costs at this stage in the supply chain is as follows: the
purchase cost of paddy is about 77% of the wholesale sales price for rice.
11This estimated profit is only from rice sales, and does not include valuable by-products like rice bran and
husk.
Milling contributes 5 %. Packing and transporting rice contributes another 2%.
The estimated returns from milling are quite substantial compared with those
from downstream retail activities (see WP11, here).
Implications for Large Retail
Such rates of return are incentives to a new scale of national capital. Set against
these profits, entrants would have to compete with the entrenched interests of
existing millers whose supply networks result from long-standing and in-depth
knowledge of local crop patterns and marketed surplus. If a new large scale of
capital enters the milling stage of the supply chain, large business houses might
also seek to modernise the networks and relations of supply. They have the
financial capacity to sustain such investment on their own.
At present however, the interests of big retail in establishing direct backward or
‘upstream’ linkages in this region of India appears low. The proportion of
business comprised by rice is too small to justify the transactions costs of entry.
This is a specialised business, involving procurement at the paddy stage. For
success, it requires a good understanding of farming practices, the crops
available in a season, the prediction for the season of paddy yields, and hence
price of paddy, and the quality of paddy to be expected. CRM mills referred to
their experience over 70 years of procuring paddy and engaging in rice milling.
Further, any miller would also have to deal with the by-products of rice milling,
including rice bran which has a high value but a low shelf life, and rice husk
which has multiple uses as a cattle feed, fuel, and raw material for the
manufacture of particle boards. As against this, the large retailer is content to
deal with the milled product (rice), and not to bear the costs of engagement with
the procurement chain from the earlier stage of paddy or the additional
complexities of dealing directly with the farm produce and its by-products from
milling. This view of the restricted interest of big retail in establishing
backward linkages in rice appears to be corroborated by CRM mills, which
reported having been approached by Walmart with a view to procuring supplies
of rice from them. Even the mega supermarket, whose entry into retail is feared
by many in the industry, as it is expected to have the power to change the
structure of retail and force out of business existing supply chain players, seems
content to abide by the methods adopted by existing large corporate retail
players in the country, at least with respect to rice.
Supply chain logistics and employment
Currently, the entry of large retail business houses has had little impact on
employment relations in activities related to the supply chain of rice. We have
details of employment in Large-E at their warehouse in Red Hills. This
warehouse dealt with a wide range of commodities, with only about 25% of the
space devoted to storing rice.
The warehouse has two managers, 1 commercial person looking after
administration and stocks, 3 as store vehicle escorts, and 2 to supervise loading
and unloading. All actual transportation, loading, unloading activities are done
by contract workers. In 2012-13, purchasing operations did not create many
regulated jobs. By comparison, the specialist rice wholesaler in our study
employed five workers, all on daily contract.
The milling operations also did not employ regular workers. The mill employed
five daily wage workers, paid on piece rates. The workers came from the Irular
tribe, and the miller did not want to discuss details of employment and payment
terms, as the issue of bonded labour among the tribe had already been
investigated in some of the rice mills in the area.12
The public distribution (PDS) for rice: logistics, costs and returns
The rice procurement for the PDS is of a totally different order of magnitude,
with the scales involved dwarfing the purchasing systems in the private sector.
In Tamil Nadu, the Tamil Nadu Civil Supplies Corporation (TNCSC) projected
its monthly procurement of rice as around 3.2 lakh (320,000) MT.13 This is
more than a thousand times the quantity of rice procured by the large, multi-
branch corporate retail chains in Chennai.
12I Guerin 2009 in (Eds) Breman, Guerin and Prakash’ India's Unfree Workforce: Of Bondage Old and New, New
Delhi, OUP13 http://www.commodityonline.com/news/india-govt-proclaims-msps-for-2013-14-kharif-season-
crops-55184-3-55185.html
Table3: Costing of rice procured by TNCSC
Percent
Item of incidentals Raw rice Par-boiled rice eco-cost
Common Grade A Common Grade A Parboiled
Rs/quintal Rs/quintal Rs/quintal Rs/quintal common
A. Acquisition costs(.68outturn)
Minimum support price (MSP) 1250.00 1280.00 1250.00 1280.00 80.8%
Mandi labour charges 4.06 4.06 4.06 4.06 0.3%
Transport to mill 12.32 12.32 12.32 12.32 0.8%
Driage @ 1% MSP 12.50 12.80 0.00 0.00 0.0%
Commission to societies (2.5%) 31.25 32.00 31.25 32.00 2.0%
Custody & maintenance charges 8.32 8.32 8.32 8.32 0.5%
Interest charges 51.42 52.65 51.42 52.65 3.3%
Milling charges (incl 8km transport) 15.00 15.00 25.00 25.00 1.6%
Administrative charges (1% MSP) 12.50 12.80 12.50 12.80 0.8%
Cost per quintal milled rice 1397.37 1429.95 1394.87 1427.15 90.2%
Out-turn ratio 0.67 0.67 0.68 0.68
Sub-total (cost at mill head) 2085.63 2134.25 2051.28 2098.75 90.2%
Transport miller to warehouse 14.12 14.12 14.12 14.12 0.6%
Cost new gunny bags 70.86 70.86 70.86 70.86 3.1%
Gunny bag depreciation 28.34 28.34 28.34 28.34 1.2%
Acquisition cost for rice 2198.95 2247.57 2164.60 2212.07 95.2%
B. Distribution costs
Storage costs (2 months) 8.58 8.58 8.58 8.58 0.4%
Handling charges 4.47 4.47 4.47 4.47 0.2%
Interest charges (2 months) 43.51 44.46 42.82 43.76 1.9%
Transit and storage loss (0.35%) 7.35 7.52 7.23 7.40 0.3%
Administrative charges (2.5%MSP) 46.64 47.76 45.96 47.06 2.0%
Total distribution cost 110.55 112.79 109.06 111.27 4.8%
Economic cost (A+B) 2309.50 2360.36 2273.66 2323.34 100%
Source: Provisional economic cost of custom milled rice for Kharif 2012, Govt of Tamil
Nadu.
The TNCSC makes a district-wide allocation based on which the Food
Corporation of India (the central government agency for procuring rice) gives a
release order through the 40 depots in various localities in the State.14 In Tamil
Nadu alone a decentralised purchase system is present through which the Tamil
14Sometimes an ad hoc allotment may happen - approximately once every six months.
Nadu Civil Supplies Corporation can procure paddy from farmers on behalf of
FCI. This is done by opening Direct Purchase Centres in each district where
paddy is procured directly from the farmers at the Minimum Support Price
declared by the Central Government.
Table 3 gives Government estimates for costs along the procurement chain. The
percent costs take into account the conversion from paddy to rice, with the
corresponding reduction in weight resulting from the out-turn ratio. The
percentages for parboiled rice are based on 1 quintal (100 kg) paddy being
processed to 68 kg rice.
Broadly the distribution of costs along the procurement chain is as follows: The
procurement cost of paddy is, as in the private sector, about 80% of the final
economic cost of rice at the PDS store. At the stage of milled rice the cost
increases by 10%. The cost of packing rice and transporting it to the FCI or
TNCSC warehouse contributes another 5%. Final distribution costs complete
the last 5%. However there are hidden subsidies in the process, especially at the
milling stage, which will be discussed later.
In the PDS system, the cost of paddy, the “minimum support price”, is 80.8% of
the economic cost of milled rice; as compared to the private sector, where the
miller estimated paddy cost as 77% of the wholesale price for rice. We see that
contrary to general notions of the inefficiency of the government run PDS, in
this case, the government system appears to have a lower mark-up over the
purchase cost of paddy for its economic cost of rice, compared with that for
wholesale price of rice over the purchase cost of paddy in the private system.
These figures indicate that the economics for the PDS are at least as efficient as
in the case of private distribution for rice.
One significant advantage from the large scale of operations of TNCSC is in the
costs of transport. Most of the transport of paddy from the procurement to
milling stage is done by rail. As per TNCSC data for the kharif of 2012, the cost
of transporting paddy by rail from Thanjavur to Chennai (336km) was Rs.540
per MT: Rs.1.61 per km-MT of paddy. The corresponding road haulage cost for
a private wholesaler15 is almost twice as great: Rs.1500 per MT from Raichur
to Chennai (500 kms) i.e. Rs 3 per km-MT of rice. 16
The large scale of operations also allows the TNCSC to engage large
transporters on annual contract for transporting paddy from the rail head in
Chennai to the miller. This has also given the Corporation significant
advantages of scale in driving a good bargain. According to the transport
contractor for 2012-13, he was paid at the rate of Rs.90-140 per MT for
paddy/rice transported from the rail head at Salt Cotaurs in Chennai to Egmore
(around 6 km) and Royapuram (around 10 km). This worked out to around
Rs.15 per km-MT for short distance city transport. In contrast WS Wholesaler
paid Rs.10 per 25 kg bag from the mill head at Red Hills to his premises (10
km): around Rs.40 per km-MT for transport within the city. As per the TNCSC
rules for the contract the contractor had to own at least 15 trucks. This reliance
on larger transporters and ability to negotiate on a greater scale has also ensured
better reliability of transport.
Labour in loading and transport:
According to the transport contractor, the work load varied between around
40000 MT per month during peak season (February, March, April) to 15000
MT per month during the lean season. When a train load arrived, around 120
15WS Wholesaler (name changed – refer to WP(11))16 Corroborated by Large-E : road transport costs through its subsidiary were said to range fromRs.1500-2000 for the procurement of rice from Raichur and Bellary. This works out to Rs.3-4 per km-MT. We should also take into account that the road transport data for the private enterprises wasfor milled rice which has a smaller bulk than paddy, and can hence be packed better. Transport costfor paddy would be higher than for rice.
daily wage migrant workers were employed, in order to clear the railway yard in
the minimum possible time and avoid any demurrage. The workers were paid
Rs.1.50 per 40 kg bag of rice or paddy. A worker loading 10 MT in a day on to
the truck from the railway wagon would earn Rs.375. Drivers were paid Rs.500
per day, plus Rs.100 as mamool17 for a single trip, and Rs.300 if he made two
trips to and fro. During the peak season the driver could even make three trips,
and earn a mamool of Rs.500 in addition to the Rs.500 fee for the day.
Labour in PDS rice milling:
Table 4 gives labour cost estimates for PPP Modern Rice Mill, Red Hills, a
private miller contracted out to the TNCSC for PDS rice and TUV Mill, one of
the 23 mills owned by the TNCSC18. The data for PPP Modern Rice Mill is
based on interviews with the owner, while data for TUV Rice Mill was derived
from the actual monthly working results for July 2013. Both mills are of
comparable size, and milling capacity.
The TNCSC mill and the private mill differ in their use of contracts: for
tenured/ regular and contract/casual labour. The details are as follows:
Private milling (PPP):
4 mill operators were employed on 12 hour shifts. The production norm was
48MT rice per shift. The mill employees were:
2 women at Rs. 225 per day
1 man at Rs. 350 per day
1 operator at Rs. 300 per day
In addition the operators were paid Rs.150 per day for food and tea.
17A routine bribe (Tamil)
18Names of rice mills are assumed names.
15 daily wage workers were employed for the handling of bags. They were paid
on a piece rate basis, with the rate fixed at Rs.2 per 40kg bag of paddy; and
Rs.2.50 per 50kg bag or rice.
6 monthly paid staff were engaged as follows.
1 manager at Rs.12000 per month
2 supervisors at Rs.8000 per month
1 accountant at Rs.10000 per month
2 security guards at Rs.5000 per month each.
In addition the monthly rated workers were paid two months’ wage as
bonus19
TNCSC owned milling (TUV):
27 technical staff were deployed as follows.
3 shift engineers
4 operators
2 electricians
2 boiler operators
2 assistant operators
1 assistant store keeper
12 helpers
20 administrative staff
Plus an unknown number of security guards for a total monthly expense
of Rs.44,300
Casual labour was engaged for the handling of bags. These were paid according
to a complicated schedule, including 12 separate payment rates for various
19This is an annual bonus
tasks. Even within the PDS the labour in the state-owned mill works on more
formally regulated terms than its equivalent in the private owned mill contracted
to the PDS. It is significant that both the mills were of comparable production
capacity.
Consequently the ratio of piece-rated wages to the total wage bill in the private
mill was 92%, as compared with just 28% in the TNCSC mill. The cost of
labour per kg rice in the TNCSC mill at full rated mill capacity ( 1751 MT rice,
the equivalent of about 2500 MT paddy), was about 50% higher than for the
private mill that is contracted-in (private mill costs were estimated for the same
assumed production of 1751 MT raw rice). In fact, the private mill costs
confirm the data for the Red Hills private miller, CRM, operating in the private
supply chain to private retailers. The miller gave labour cost as Rs.30 per 75 kg
rice: Rs.0.40 per kg rice milled (see Table2). We may assume that the details of
labour costs here are broadly in line for all large, modern, private rice millers.
Table 4: Comparison of labour costs in milling
Category Private TNSC owned
miller Mill
Capacity (MT /month) 2700 2500
Assumed production of rice (MT) 1751 1751
Monthly rated
Staff salaries (Rs/month)
-4 admin in pvt 38000.00
-27 technical+20 admin in TNSC mill 594514.00
- security staff 10000.00 44830.00
Total monthly rated 48000.00 639344.00
Piece rated
Daily rated (pvt for 1751MT)
- Mill staff (2 women, I man, 40127.08
I operator)
Casual labour
-piece rate in pvt for 1751 MT rice 496975.00
- public for 1751MT rice 253118.00
(Note: in TNSC mill technical staff
includes 12 helpers, who would
also do some casual tasks)
Total piece rated 537102.08 253118.00
Total for 1751MT rice 585102.08 892462.00
Labour cost per kg rice 0.33 0.51
Ratio of piece rate to total wage 92% 28%
Source: Interviews with PPP Modern Rice Mills, Red Hills, private miller contracted out tothe TNCSC for PDS rice and actual milling cost data for TUV Rice Mills, one of the 23 millsowned by the TNCSC.
We see that in the TNCSC mill the labour cost per kg is significantly higher.
However there would be some extra built-in labour costs in the working of a
public sector mill, especially due to the high component of administrative staff.
The mill has 20 administrative staff on its rolls, as compared to 4 in the private
mill. If we factor in the likelihood that administrative staff component in the
public establishment might be excessive, and allow for a leaner establishment, a
private mill contracted to the PDS could, within its present profitability
parameters absorb the increased cost of a regular workforce employed on better
terms and conditions.
Labour in the profit structure: the distributive share
It is difficult to establish the profitability of milling, let alone the relation
between wage costs and profits. Table 5 gives details of the milling accounts for
mills operating within the public distribution system. The figures for the
TNCSC mill are actual costs and working for July 2013, while those for the
private mill are estimates based on the data available. What is immediately
evident is that the milling charges allowed by the TNCSC are totally inadequate
even to cover the labour costs. Based on the milling of raw rice, the accounts
reveal that the private mill has an operating deficit of around Rs.6.2 lakhs on a
month’s production. However, this does not factor-in the by-products of milling
that are available to the mill to sell.
Table5: Economics of rice milling under PDS
TNSC owned Private
Mill(permonth)
Miller(permonth)
Milling charges for 1751 MT raw rice 257500.00 257500.00
(Rs.10/quintal paddy)
Labour costs (estimates for private) 892462.00 585102.08
Power (private=22 units/MT@ Rs.6.50/unit) 473350.00 250393.00
Other costs (estimates for private) 38910.00 50000.00
Operational margin -1147222.00 -627995.08
Rice bran sale (estimates for private) 1423888.00 1534700.00
(4% bran @ Rs.14900/MT)
Operational profit 276666.00 906704.92
Rice including brokens in excess of20 141.63
milling norm (average yield=73.5%) (MT)
Paddy husk (average yield=21.2%)21 (MT) 540.75
Source: Actual working results of TNSC owned mills for July 2013 and estimates for private
miller
Table 6: Standard yield of rice and by-products from milling
Rice variety Yield (%)
Milled Husk Bran
rice
White Ponni raw 71.3 23.0 3.9
White Ponni parboiled 72.7 21.8 1.8
Average (15 varieties) raw 73.5 21.2 4.5
Average (15 varieties) parboiled 74.4 20.1 2.7
Source: “Milling characteristics of raw and popular rice cultivars”, Armugachary S. et al,
International Rice Research Notes, 20(3), September 1995
20These are standard yields determined in field testing with lab scale milling equipment (results shown in
Table6). The actual milling results in commercial operations might vary substantially from the results.However, the results do suggest that a well run mill can get substantially higher rice yields (whole and brokenrice) than the specified norms of the TNCSC. Some broken rice may emerge with the husk and may not beseparable.21
Rice husk has a ready market, and is used as cattle feed, raw material for particle boards, and fuel inburners. It has a ready market. According to the Technology, Information Forecasting and Assessing Council,Government of India, rice husk price varied between Rs.300-800 per MT in 1993 (www.tifac.org.in).
Table 6 above gives standard yields of rice and by-products during rice milling
undertaken in field testing conditions. The milling of raw rice yields an average
of 4.5% rice bran. Assuming a bran yield of 4% and price of Rs.14,900 per MT,
which was the actual bran price for the TNCSC mill in July 2013, the sale of
bran alone affords the private mill an additional income of Rs.15.3 lakhs. This
would more than sufficient to cover the apparent operational deficit on rice.
We have not taken into account here other costs of finance and depreciation,
and these might still add up to a significant figure. The cost figures given by
CRM Mills, the mill dealing with private retailers, indicated that the total
milling cost was four times the labour cost (see Table 2). This would mean an
additional Rs.15 lakhs cost, over that of labour. However, if we consider the
standard rice-milling yield, the private mill would have generated around
141MT of rice during the month (whole and broken), more than the standard for
production of 67% for raw rice prescribed by the TNCSC. This additional
revenue at even a low price of Rs.15 per kg could give the miller around Rs.21
lakhs. In addition, the paddy husk also has a ready market. In 1993, the
estimated sale value of paddy husk was around Rs.300-800 per MT. As stated,
the returns from rice milling within the PDS system would therefore afford the
mill a substantial return, even though the milling charge given by the TNCSC is
not sufficient to cover labour charges This however is before we have taken into
account the potential returns from paddy husk which also has a commercial
value as a fuel. We can therefore infer that within the system, the mill can, if all
products are taken into account, afford to bear a much higher operational cost.
With regard to the quality of work, it is definitely possible for the private mill to
afford the increased costs of a permanent workforce with labour rights. .
Conclusions – implications of the supply chains for employment
As of 2012-3, the activities in the rice supply chains upstream of big and small
retail do not create substantial regulated employment. The entry of big retail
also appears to generate neither institutional nor employment multipliers. Their
current operations seem to mirror existing purchasing practices, incorporating
reasonably high degrees of operational efficiency, with supply contracts that
allow retailers flexibility with low inventory plus the benefits of multi-sourcing.
In this context, and given the low contribution that rice makes to turnover and
profits, incentives to large corporates to invest substantially in modifying the
supply chain are low.
Three aspects of the rice trade would suggest that a large corporate company
might not find it easy to develop the backward integration of paddy milling,
even if it afforded reasonable profits. First, as explained earlier, paddy milling is
a complex operation. It involves dealing directly with farmers/grain traders. The
existing rice mills would have built their custom over a long period, with
linkages of trust in rice output and quality. Further, the mills would also have to
deal with other by-products of rice milling to obtain returns from the business,
sufficient to cover costs fully.
Second, the scale of operations for a modern rice mill is very high. The two rice
mills studies in the PDS system were of 2500MT per month milling capacity.
This represents around five times the size of monthly rice purchase even for a
large operation like Large-A, with 74 retail stores in Chennai. A rice mill run by
a large corporate would therefore have to get into branding and selling through
other distribution channels not owned by the corporate, in order to fully occupy
its capacity and maximise returns.
Third, rice and staples do not presently seem an important priority for large,
corporate retail. As explained by several managers in the sector, the turnover
from rice was less than 5% of the total turnover. Our own estimates with Large-
B indicated that the annual sales from rice represented only 2% of the total
business of the supermarket. Further, the opinion from managers was also that
staples were not seen as contributing to profits, but were “loss-leaders”,
maintained in order to attract custom of other, more profitable goods. In this
context it seems doubtful that the management in the sector would look consider
investing significantly in backward integration and/or improving returns from
rice in their business model. The only probable exception in our sample was
Large-E, where the group had a sister concern, a wholly owned subsidiary
which handled all sourcing of staples. This model, where an independent
subsidiary was tasked with the procurement business, might see business sense
in exploring profitable backward linkages.
It is possible that corporates could adopt another business model – that of
custom milling by private rice mills. This could give them control over the
quality of rice, better determined at the stage of paddy, together with lower
costs of procurement. They could follow the model adopted by the PDS system
in order to achieve this. However, this would mean having to deal both with
renting-in only part of the capacity of the rice mill, being able to negotiate
returns from by-products into the contract for custom milling.
The analysis of the public distribution system raises important issues in supply
chain management with implications for labour. First, the large scale of PDS
operation allows it both economies of scale and flexibility for cost cutting,
particularly in transport of paddy and rice over long distances. The transport
cost as proportion of total costs (1.4% of the final economic cost of rice as
estimated by the Tamil Nadu Civil Supplies Corporation (TNSCS) is not
significant - at least to the stage at which milled rice reaches the local
warehouse. Second, milling for the PDS is reasonably profitable, depending
upon the economic returns from bran and husk, the by-products of rice milling,
and the profits of informally traded rice that might accrue to the miller from the
difference between the actual milling outturn22 and the lower one stipulated by
the TNCSC.
The rates of return that we have estimated from mill accounts suggest that
workers in private mills within the PDS system could bargain for better pay and
working conditions without threatening the current viability of these mills. The
current system is dominated by low wages and the regular flouting of
employment law, so future bargaining will have real benefit for workers..
Finally, the figures obtained suggested that the paddy procurement and rice
milling and distribution operation under PDS was as cost effective as in the
private sector. This calls to question the position held by proponents of market
efficiency that large-scale state interventions in public service delivery are
necessarily inefficient and essentially ill-advised. We should add the caveat here
that our conclusions for the private sector were based on discussions with one
case-studied rice miller, albeit a miller with a declared 70 years’ experience in
the trade. We should also add that PDS in Tamil Nadu is acclaimed among the
most efficient in the country, and may not represent typical practice. 23
22The proportion of milled rice obtained per unit of un-milled paddy
23See for instance The Hindu, August11, 2010, “Behind the success story of universal PDS in Tamil Nadu”; and
“Brief 101: Trends in Diversion of PDS grains” Centre for Development Studies, Delhi School of Economics,Working Paper No. 198, March, New Delhi Khera, Reetika (2011), www.ifad.org/drd/agriculture/101.htm