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Fruits & Veggies Cry for Cold Chains

India’s cold chain industry grossed a cool Rs 300-350 billion in fiscal 2019, as per CRISIL Research estimates. But the pie could be much bigger if more investment was incentivised to minimise the massive wastage in horticulture produce that happens even today.

Although India is a global leader in horticulture, post-harvest losses are 15-20 per cent of horticulture produce. CRISIL Research estimates around 70 per cent of this wastage stems from lack of end-to-end cold chain logistics.

And what is holding back growth of cold chains? Pricing.

Need cold chains badly, but can ill-afford
As things stand, temperature-controlled warehouses (TCWs) comprise 85-90 per cent of the overall industry. Of the TCW pie, again, multi-purpose cold storages comprise a dominant 80 per cent. And as of fiscal 2019, over three-fourths of the multipurpose cold storage volumes came from meat, seafood, dairy, and fruits and vegetables.

Now, a predominantly domestic unorganised trade in fruits and vegetables implies this segment incurs higher wastage compared with meat, seafood and dairy. In fact, over three-fourths of horticulture products moved across India is for domestic consumption; the balance is exported.

Export of fruits and vegetables face minimal cold chain-related wastage owing to necessary compliance with mandated regulations for overseas movement. Ditto for meat and seafood, which are also largely exported.

Dairy products are mostly consumed domestically, but incur minimal wastage as they are in a packaged form, can be stored in ambient conditions, and have a strong organised presence.

However, domestic movement of fruits and vegetables, which needs cold chains the most, suffers from a lack of these.

Regulations have reduced cold-chain-related wastage
In terms of wastage, the scenario is far more encouraging in exports compared with the domestic market.

The Agricultural and Processed Food Products Export Development Authority (APEDA) has prescribed export regulations that limit cold chain-related wastage. A case in point is grapes and pomegranates, where APEDA allows exports of these fruits if they are stored in cold storage at temperatures of 0-1C and 5-10C respectively. Data logger equipment attached to the cold store containing the consignment ensure the temperature is maintained.

Exporters also need to comply with international codes of practice for packaging and transport of tropical fresh fruits and vegetables. For instance, the produce that needs refrigeration has to be precooled prior to loading into transportation vehicles. Produce temperatures have to be taken and recorded in bills of lading as well.

Heavy tilt towards exports minimises losses
As per our interactions with market participants, about 65-70 per cent of seafood and meat is exported in volume terms from India as of FY19.

Typically, multi-commodity cold storages are located in and around a radius of 50 km near the ports exporting the key products (i.e. meat and seafood). These are also located near major consumption centres (Delhi/National Capital Region, Mumbai, Hyderabad, and Bengaluru). The key end-use players typically outsource the cold storage service to multi-commodity players near these centres.

We infer from industry interactions that there occurs 2-3 per cent of wastage in the meat and seafood supply chain. This could be attributed to a lack of cold storages, mostly in the domestic retail channel at consumption centres. Since utilisation at each consumption centre varies at the retail end, this dissuades players from investing in facilities at such centres, resulting in loss of produce.

Wastage in dairy products is also minimal, given the packaged form, and ability to store/transport shorter distances in ambient form.

Also, large organised players operate in the value-added segment, which enables them to afford storage facilities.

Organised players investing in
technology to augment shelf life/quality
Organised multipurpose cold chain players are increasingly using environment-friendly refrigerants such as freon and diverse technologies (CO2 scrubber, vacuum-pressured swing absorption nitrogen generator, etc), depending on nature of the commodity, type and stage of processing, and sophistication of value chain.

Typically, players exporting meat and seafood use freon-based technology, which is costlier than ammonia (initial capital investment is ~50 per cent higher). That’s because leakage of ammonia could cause deterioration in quality of stored produce, which goes against international trade standards.

Players are also investing in atmosphere-controlled warehouses, which reduce oxygen and carbon dioxide and increase nitrogen in the atmosphere. This delays oxidisation and increases the shelf life of products such as apples from six months to one year. Initial capex for setting up atmosphere-controlled warehouses, though, is 25 per cent higher than non atmosphere-controlled ones.

But fruits and veggies caught in a vicious cycle of low investment and high wastage
Domestic end-users are unwilling to pay higher prices for fruits and vegetables (the cost mounts if these are moved using cold chains). This deters the players from investing in cold chains.

Farmers, too, are unwilling to bear the cost of cold chain facilities. As per CRISIL’s interactions, this is mainly because farmers get only 15-20 per cent of the price paid by consumers for their produce. Small wonder the export price of a pomegranate, for instance, is about four times its domestic price.

Finally, cold storages near farm gates are few and far between as players do not get the desired rentals. Majority of cold storages are located near consumption centres, where operators make higher rentals. This makes it unviable for farmers to transport their produce in reefer trucks to cold storages.

This has created a vicious cycle, of low investment and high wastage that refuses to abate. The following infographics tell the story for apples and tomatoes, respectively.

A gradual shift towards the organised market, supported by government, can enable material reduction in wastage of fruits and vegetables that, in turn, can encourage more investments in cold chains.

Encouraging the food processing industry can also help reduce wastage. While this is a long-drawn process, incentives with a targeted approach can help farmers get good price for their produce.

(Credit: CRISIL Research)