Agro-based industries are important for a developing country for its economic prosperity. It leads to the creation of forward and backward linkages in the development process on a large scale by making agriculture and industries mutually beneficial to each other. On the other hand, the development of agro-based industries can help realise various linkages or inter-relationships between industry and agriculture. This article explains the nature and classifications of agro-based industries, the importance of agro-based industries for a developing country, the best location, and key success and failure factors of agro-based industries. In addition, the status of agro-based industries in the Sri Lankan context is also presented. Therefore, this will help the reader to understand the nature, importance and factors determining the sustainability of agro-based industries in detail.
Nature of agro-based industries
Industries which have either direct or indirect links with the agriculture sector are considered as agro-based industries. Therefore, industries which are based on agricultural produce and industries which support agriculture come under agro-based industries. There are a number of classifications for agro-based industries.
Agro-based industries can be divided into four main sub-sectors based on the final product as follows:
Agro-produce processing units: These industrial units simply process the agriculture produce. They do not manufacture any new products, but the bulkiness of the produce is reduced. They simply process raw materials so that it can be preserved or transported. Rice mills are a good example of this sector.
Agro-produce manufacturing units: These units manufacture entirely new products based on agricultural produce as the main raw material. Therefore, the finished goods will be entirely different when compared to the original raw material. Tomato processing factories can be categorised under this sector.
Agro-input manufacturing units: These industrial units produce goods either for mechanisation of agriculture or for increasing productivity of agriculture. These units are directly linked with agriculture as they support agriculture at various stages.
Agro-service units: These are the workshops and service centres engaging in repairing and servicing of agricultural implements and machinery.
Agro-based industries can also be categorised into three groups based on their scale of production and are presented here.
Village industries: These industries are owned and managed by rural households with very little capital investment and a high level of manual labour.
Small-scale industries: These industries can be characterised by medium investment and semi-automation.
Large-scale industries: These industries involve large investments and a high level of automation.
Another way of classifying agro-based industries is the level of processing. The processing level can be at the primary, secondary or tertiary stage.
Primary staged agro-based industries: The output will be a semi-processed item.
Secondary staged agro-based industries: The output will be a fully processed item.
Tertiary staged agro-based industries: Branding and packaging the product will be carried out at this stage and the output will be ready for use by the consumer.
Further, the level of processing and manufacturing in an agro-based industry can also be classified into three groups as manual, mechanical and chemical and a combination thereof.
Importance of agro-based industries in a developing country
Agro-based industries help create new markets for agricultural produce, provide a stable income to the farmers, reduce post harvest losses, generate new employment opportunities on a large scale mainly in the rural sector, provide consumer choice for the consumables, improve both social and physical infrastructure, and finally increase the Gross Domestic Product (GDP) of a country with a value added income. Consequently, economic prosperity of a country can be achieved by developing agro-based industries.
Agro-based industries mainly comprise the post-harvest activities of processing and preserving agricultural products for intermediate or final consumption. It is well-known, particularly in the context of industrial development that the importance of agro-based industries relative to agriculture increases as economies develop. It is also emphasised in the present food consumption scenario that ‘food’ is not just produce. Food also encompasses a wide variety of processed products. Hence the agro-based industry is an important and a vital part of the manufacturing sector in developing countries and the means for building industrial capacities.
The global market is looking forward to processed spices, vegetables and fruits. Further, food processing has a wide scope that transforms raw and semi-processed agri-produce into specified consumables providing the consumer a qualified choice. The competitiveness of the processed food industry is totally dependent on its ability to successfully access and manage its supply chain downstream to the producer and upstream to its consumer. Therefore, the processed food industry plays an important role in the national economy by linking the rural producer base to the national and international marketplace while adding value and creating off-farm employment.
The increasing environmental concerns also provide further stimulus to agro-based industries. Jute and cotton bags which have begun to replace plastic bags are good proof. It is the right time to engage in mass production of low-cost jute or cotton bags to replace plastic bags. Therefore, this indicates that agro-based industries are not only to produce food, but also to produce other usable items.
Only with mass production coupled with modern technology and intensive marketing can the domestic market as well as the export market of agro-based products be exploited to the fullest extent. On the other hand, large-scale investment and adoption of the latest technologies, intensive marketing efforts, brand name and international collaborations are important to capture a high demand in the local market and obtain a fair share of the export market.
Agro-based industries appeared to offer important commercial opportunities for the private sector too. However, the private sector is yet to actualise the full potential of the agro industry. At the same time, at present, the lack of linkages between production, processing and marketing is the primary factor constraining the development of the industry and this constraint has a large impact on small-scale farmers as those farmers generally have no reliable markets for their goods.
The best location for agro-based industries
Establishment of agro-based industries at a particular place is mainly based on the availability of raw material. Therefore, it is feasible to set up these industries in rural areas where raw materials are available in plenty. On the other hand, establishment of agro-industries in rural areas helps developing the rural economy. They provide employment opportunities to the rural population and will generate income and thereby improve the economic conditions of the people. This in turn will create potential for demand-based industries too. Other benefits of establishing agro-based industries in rural areas are reducing the exploitation of producers by middlemen, assuring a better price for producers, bringing more areas under different crops, reducing the transport costs of produce and thereby the price of the finished products, and reducing wastage of perishable agricultural commodities.
At the macro level, establishment of agro-based industries in rural areas helps decentralise and disperse industries, bring the rural economy on par with the urban economy, achieve a balanced growth of industry and agriculture, improve infrastructure facilities in rural areas and create potential for the establishment of other industries in rural areas, and develop backward areas preventing the migration of people from rural areas to urban areas.
Key success factors of agro-based industries
A list of success factors of agro-based industries can be identified and some of the main factors are presented here.
1. Strong controls on the purchase price of raw material need to be observed. Generally, supply of raw material is not stable throughout the year and as a result, there can be huge variations in prices. It is therefore recommended to estimate the raw material requirement for the year and this should be contracted in advance with the suppliers to avoid drastic changes in the prices of raw materials.
2. The entire production process has to be monitored very closely. Special attention should be paid to appropriate technology, technical feasibility of raw materials, and accessibility of raw materials.
3. Quality maintenance will play an important role as it is evident from the behaviour of the general consumers that they are more specific towards health issues than ever before.
4. Waste production should be kept at minimum.
5. Advance orders for sale can ensure the success of the business.
6. The cost accounting system should be strengthened to monitor the entire process and determine the reasons for major variances in the process, such as material, labour and factory overhead variance.
Agro-based industries: failure factors
Similar to success factors, a list of failure factors of agro-based industries can also be identified and the main factors are presented here.
1. A main constraint leading to failures of these industries is the non-availability of raw material throughout the year. On the other hand, agro-based industries are in a vulnerable state mainly due to irregular supply of raw materials.
2. Changing cropping patterns can make the factory defunct.
3. Failure of the monsoon may hit the supply of raw material.
4. Lack of proper guidance for entrepreneurs.
5. Difficulties in financing certain capital-intensive agro-based units by institutions.
6. Inadequate promotional activities by governments and departments.
7. Uncertainty about market demand due to absence of information regarding the market.
8. Absence of a proper integration and coordination mechanism among various relevant institutions and agencies.
Agro-based industries: Sri Lankan context
Other than a few large, medium and small-scale companies, most of the agro-based industries in Sri Lanka comprise a multitude of self-employed proprietorships. At the same time, the industries registered in the formal sector are prominent in the export and local market though they are small in number. Most of the self-employed manufacturers carry out small-scale operations and the quantity of produce is not up to the satisfaction of leading importers of products in the international market. However, these producers are playing a key role in the rural market.
Researchers have identified the strengths, weaknesses, threats and opportunities pertaining to agro-based industries in Sri Lanka and the identified factors are presented here.
Strengths
1. Small country with easy access and communication facilities to any part. This helps to have a feasible and efficient management of any project.
2. Suitable climate for year-round production.
3. Availability of literate, trainable, skilled and unskilled workforce.
4. Availability of a quick-to-respond farming community.
5. Experience and knowledge available in the support systems
such as the Agriculture Department, universities and research organizations.
6. Reputation achieved by Sri Lankan tea and coconut products in the international markets. This could be taken an advantage in marketing other processed fruits and vegetables in the international market.
7. Strategic location close to sea level Weaknesses
1. Low productivity
2. High cost of production causing the products to be not competitive in the market
3. High levels of post-harvest losses and inadequate assistance
and incentives to minimise post-harvest losses
4. Weak supply situation or no investment in cultivation of crops for the processing industry
5. Crop surplus during the harvest season is inevitable. However, the high cost of transport and storage are disincentives to the processing sector to increase purchase during the harvest
season.
6. Poor flow of information to relevant stakeholders.
7. Lack of coordination between regulatory bodies and industry.
8. Lack of policies, incentives and development funds for the sector.
Threats
1. Lack of a conducive environment.
2. Competition from other developing countries.
3. Availability of cheap imports in the local market.
4. Availability of well-financed promotional programmes
for imported and junk foods.
5. Difficulties to compete with imported products.
Opportunities
1. The British made Sri Lanka as the tea garden of the world.
It is a good opportunity for us to explore the international
market.
2. Changes in food habits.
3. Increasing Asian population in the developed markets.
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