Acquiring local farm produce does not make economic sense for the agro-industries unless a technological transformation occurs throughout the value chain.
This is because the best quality locally-grown agro produce are exported and the local industries cannot afford to pay at par with the export value. Sourcing fruit concentrate from other countries are found to make economic sense to the industries.
While the cost of production of fresh produce in Bhutan is comparatively higher than in India due to higher costs of inputs, labour and transportation, a study conducted by the Department of Agriculture and Marketing Cooperatives (DAMC) found that there is a general perception that Bhutanese farmers always expect a higher price than what it is really worth.
The DAMC has surveyed four local agro-industries.
Among the industries surveyed, Bhutan Agro Industries Ltd (BAIL) is the largest purchaser of locally grown produce, with procurement amounting to Nu 7.1 million in 2016. However, the company also imported almost Nu 10M worth of raw materials from India, mostly fruit concentrates.
This was followed by Bhutan Fruits Product Private Ltd (BFPL). Together, these two industries locally sourced produce worth Nu 8.61 million in 2016.
Zimdra Food Private Ltd (ZMPL) and Bhutan Milk & Agro Ltd (BMPL) are entirely dependent on imported raw materials and do not source locally. Their main imports are fruit concentrates, fruit pulp, sugar, fresh milk and powdered milk – most of which are not available locally or if available, in very limited volume.
From the growers’ perspective, for most commodities, the price offered by agro-industries is lower than other markets.
“The best apples and oranges grown in Bhutan are exported to Bangladesh and India while those that do not meet the export quality standards are normally sold locally or to agro-industries,” the report stated.
The average export price of apples according to the Bhutan Exporters Association in 2016 was Nu 33.45 a kg while farmers were paid around Nu 15 to 20 per kg for mediocre quality and superior quality fruits. The situation is similar for oranges.
The BFPL, for instance imported a vast majority of its fresh produce from India. In 2016, they procured only Nu 1.5 million worth of oranges, mango and potato locally while importing produce worth Nu 10.4 million. “It is obvious that Indian farmers are able to produce and supply fresh produce at a much lower cost as compared to Bhutanese growers.”
Even in case of BAIL, the report stated that the rates offered does not attract Bhutanese growers except when the growers find no alternative market.
“BAIL also purchased fresh chili worth Nu 0.09 million from India during 2016 probably because of the very high costs of chili in the local market,” the report stated. The average retail price of green chili at Nu175 per kilogrammes, is almost 950 percent over the actual cost of production.
To address this, the report stated that the concerned agencies are already determining the costs of production and disseminating information while also devising methods to keep production costs low through farm mechanization.
The study also pointed out a positive impact, if the local agro-industries that source locally move up the value chain, expand or diversify. “Among other things, the quality of the final product will be determined by the quality of the raw materials used,” it stated because a vast majority of our value-added products may fail to meet the high quality standards that are demanded in developed markets.
With technological transformation, agro-industries would be able to capture greater market share, increase their returns and eventually pay higher price for raw materials. This in turn would be a catalyst for Bhutanese growers to invest for higher farm productivity.
For instance, fruit concentrate manufacturing plants are extremely capital intensive and would require very large volume of raw materials and high capacity utilization to make it cost-efficient and may not be a viable option for a considerable period of time in Bhutan.
But pulp production is a fairly simpler and the investment costs are not prohibitive, though volume of raw materials available for processing and the capacity utilization is still a question.
However, the study pointed out that there is still ample scope for increased production of fruit pulp locally, by investing in better and higher-capacity technology.
The three large companies combined utilize approximately Nu 19.03 million worth of fruit pulp, from which only a miniscule of 1.51 percent is supplied by local fruit pulp manufacturers.