Farmer Producer Organizations to Improve Farmer Livelihood: A look at Karnataka

S3IDF
S3IDF
Sep 11 · 10 min read

By Julia Bunte-Mein, S3IDF 2019 Intern

More than half of India’s 1.3 billion people rely at least partially on agriculture for their livelihoods. The profession can be risky and demanding, and many struggle with debt incurred from challenges related to the increasing costs of inputs, drought, and crop price volatility. A number of economists and politicians alike argue for a decentralized, self-reliant, market-oriented approach to improving the lives and livelihoods of small and marginal farmers (farmers with landholdings under 2 hectares). This path toward financial self-sufficiency has entered the political and agricultural scene in the form of Farmer-Producer Organizations (FPOs). FPOs first came onto the radar in the 1956 Companies Act in which India’s Department of Agriculture and Cooperation identified FPOs as the most appropriate institutional form around which to mobilize farmers to build their capacity and collectively leverage production and marketing strength. Could FPOs be the solution to the perennial farmer crisis in India?

The Salugatte Farmer Producer Company

One such group S3IDF is working with, the Salugatte Farmer Producer Company, was registered in 2016 and is a type of farmer collective that aims to increase the profit of its farmer members by capitalizing on economies of scale and direct market linkages. Farmer Producer Companies, FPCs for short, are nested under the broader umbrella term ‘Farmer Producer Organization,’ which includes both cooperative and company structures. The recent emergence and promotion of FPOs in India grew out of an urgent movement to support struggling smallholder rural farmers. Shockingly, since the mid-1990s, more than 290,000 Indian farmers have committed suicide, and in the last five years, the numbers have reached even more worrisome heights in the southern state of Karnataka. Farmer welfare is now at the forefront of electoral debates and policy reforms as well as state and NGO development initiatives.

In order from left: MOTHER representative, president of the FPC, Director of the FPC, Shareholder Farmer

The Department of Agriculture Cooperation published a 2018 report outlining key strategies and challenges for increasing farmers’ incomes. It lists the number one strategy as strengthening market linkages. Essentially, this means reducing the number of actors separating the primary producer from the end buyer, with the idea that this will give a higher return to the farmer. What does that look like in practice?

Re-Engineering the Food Supply Chain

Let’s start with a bit of context. The main hindrance for farmers to capture greater value for their produce is entrenched in the way goods are bought and sold in today’s globalized market. The average smallholder farmer in India receives only a fraction of the final value sold at the marketplace, often as low as 20% of the price the consumer pays. This incongruity is a result of gaps in the supply-chain system.

Along with inefficient price signaling from government-subsidized grains, the limited reach of markets, and information asymmetries, one of the key challenges is the large number of actors separating farmers from consumers. The issue is that farmers are geographically far from markets, and the increasingly long chain of intermediaries has resulted in a wide gap between the price received by producers and those paid by consumers. It’s like a game of telephone, except the secret message is a price tag onto which each player tacks another zero.

The vast majority of trade takes place in government-sponsored marketplaces, called APMCs (Agricultural Produce Marketing Committees), or more commonly mandi’s. APMCs were established in the 1960s by the central government to increase transparency in the supply chain, and employing commission agents to oversee deals. Despite the laudable intentions, the 7000+ market yards in India have had varying degrees of success. Often, small farmers sell their crops below market rate due, in part, to a lack of information available to them regarding crop prices, and in part, because they may not have the financial resources to hold out for a better price. Alternatively, the larger farmer or trader, who has access to more storage and credit, can cash in when the time is right. In an interview, one organic food store retailer in Bangalore expressed to S3IDF his frustration that a farmer can grow a crop for six months but the trader who handles it for six hours makes more money.

Their small scale of operation makes these farmers particularly vulnerable. Not only do they have less access to finance, but also less information and communication links to wider markers. This is a serious problem for India, as small and marginal farmers make up the largest group of agricultural producers. Indian farmers have smaller landholdings, on average than anywhere else on the planet. According to the 2016 census, the average landholding size in India is 1.15 hectares, over one hundred times smaller than in the United States.

The solution to this problem seems simple on paper: shorten the supply-chain! But a single farmer on his or her own does not have the capacity to uproot the whole system, nor are they likely inclined to jeopardize their long-standing relationships with buyers in their local mandi. In order to gain the networks, resources, and infrastructure to overcome supply-chain obstacles, farmers need to come together. Collectivization is built upon the idea of power in numbers. Small farmers leverage economies of scale with their shared finance, knowledge, and resources. Together they have the volume, in both inputs and produce, to capture a higher shared value.

Shortening the Supply Chain is Easier Said Than Done

Collective farmer groups have been present in India’s agricultural economy since the early 20th century, usually in the form of farmer cooperatives, yet FPOs, or the subset of Farmer Producer Companies (FPCs) represent a shift away from this model. The main goal of FPOs is to increase farmer income through market means, not simply to expand access to rural credit, as was the emphasis for cooperatives.

Through the aggregation of their produce, the FPO can have greater bargaining power vis-a-vis large actors to get a fair price in input procurement as well as the sale of output. They capture a better price than when previously at farm gates, sold to middlemen at low prices. Beyond bargaining power, the FPO also assists farmers in backward linkages for inputs like seeds, fertilizers, credit, insurance, knowledge and extension services, and forward linkages such as collective marketing, processing, and market-led agriculture production. The privatization of farmer collectives is meant to encourage farmers to be entrepreneurial and self-reliant.

That being said, FPOs are still a nascent addition to the complex Indian agriculture context and will take time and oiling to develop into a smoothly functioning system. Change is slow in more remote agricultural contexts, where education and information are more difficult to access. Some FPCs, such as Sahyadri Farms have over 8,000 farmers and a robust marketing and processing infrastructure, but the majority of FPOs are still at the beginning stages of development with much room for improvement. The 2018 DTI report emphasizes the development of agri-logistics infrastructure to strengthen the link between farmers enterprises and processors. In its current state, however, many barriers exist for farmers to collectivize into FPOs and for them to function successfully.

FPO’s From the Retail Perspective

In our communication with leading food marketers and retailers in India, Varun Gupta, CEO of Pro Nature, described being ‘very dissatisfied’ with his company’s experience procuring from FPOs: “They need to be better in service and quality standards. Too many follow-ups were required. A lot of awareness building and training on timeliness, quality consistency, and understanding market buyer standards is required.”

In a similar vein, Naveen Seri, founder of a start-up aimed to help small farmers get better prices through transparent supply chains, expressed regret at the current status of FPOs. In our interview, he told me, “The initial model of TruTrade was to work with FPOs and collectives, but I then quickly realized that while FPOs are a good concept, I can’t be sitting back and waiting for such a [long] gestation period in grooming FPOs. The situation was so dire for us that we had to get moving, so we decided not to wait ten years for FPOs to get to an adequate level. That is the reason TruTrade went [backward] and put their own training officers in the field, with their own internal inspection control practices.” Rather than working with an FPO, TruTrade has essentially become the FPO itself — aggregating produce from small farmers and determining its distribution, pricing mechanism, and marketing. Seri and Gupta expressed a common attitude of market buyers, complaining of lack of consistent quality, traceability, transparency, and communication with newly formed FPOs.

Meeting industry standards in professionalism and execution are areas that will come with increased experience. Other areas, such as quality consistency and increasing farmer income — the ultimate goal of FPOs after all — require investments in technology, finance, and human capital development. This is where development organizations, like S3IDF, can be useful.

In 2018, S3IDF facilitated Canara Bank’s first-ever interest-free loan to an FPO of INR 5 Lakh (~ $7,000 USD). This loan was extended in large part due to the partial loan guarantee of close to INR 3 Lakh (~ $4,000 USD) put up by S3IDF on behalf of the Salugatte FPC. This kind of de-risking mechanism was critical for securing the loan, as the cost of due-diligence for evaluating such small borrowers outweighs the ROI for most financial institutions.

With the funds, the Salugatte FPC invested in a new millet processing machine (pictured left). This mill offers enormous cost-saving self-sufficiency potential to the farmers. Without having to outsource processing, the FPC can now take quality control into their own hands while saving money. The Doubling Farmers Income report confirms that increasing post-harvest investment and logistical training is critical for increasing value capture.

The Potential for FPOs

What is the potential for FPOs? Most successful FPOs are doing well either because they have a lot of help from POPIs (Producer-Organization-Promoting Institutions) like MOTHER, or because they have young, eager agriculture entrepreneurs working on their side. It may take ten years, or more, for FPOs to feasibly become independent market players without these aids, but the handful of success stories show that it’s not impossible. It is an exciting time for farmers, as this movement is really about bringing power into their hands. FPOs are run and owned by its shareholder members so farmer interests are at the forefront of its decision-making.

Of course, there are limitations too. The very nature of FPCs being private, corporate bodies poses risks. As stated before, their focus is on commercial success, not necessarily welfare. We must consider social factors like diversity and inclusion impacting wellbeing. For example, the leadership must be devoted to equity for all their shareholders and transparency in their own salaries and activities. Furthermore, it is possible that the largest landholding farmers, usually men from the highest castes, will have their voices heard more than the small landholding, low caste, or female voices. It is important to establish new checks on power through the structural set-up of these private bodies.

Technology for Traceability and Transparency

Above all else, increased traceability and transparency for both producers and consumers are critical for the long-term success of FPOs. Increasingly in food stores, consumers can scan a QR code on produce packaging to view the precise breakdown of the final price they are paying. Jivabhumi, a mission-driven food retailer, recently released a blockchain-powered agri-tech platform called Food Prints. Among many things, it provides a digital receipt displaying the breakdown of transportation, processing, retail costs, and most importantly, how much money goes back to the farmer. TruTrade provides a similar service. Mission-driven sellers such as these two organizations ensure that at least 60% of the final value returns to the farmers, much better than the 10–20% industry standard in India.

Beyond sharing how much value goes back to their shareholder members, FPOs can increase transparency by recording and making publicly available information on their management structure, the salaries of board members, and demographic profile of members. One example would be mandating board representation from all regions, castes, and genders included in the FPO.

FPOs have a distinct market advantage over other suppliers in that they are catering to mission-driven buyers. Because of their ‘by-the-farmer, for-the-farmer,’ model, buying FPO produce means, or is meant to mean, ethical sourcing. Similar to selling at a local farmers’ market, conscious consumers are willing to pay a premium for supporting a good cause. Without transparency and traceability, though, it is challenging to prove to the consumer that the extra few dollars are worth it. Buyers’ skepticism around even officially labeled organic produce just goes to show how technology for transparency is in dire need of an upgrade. Thankfully, this is an area ripe with innovation. Bangalore, the tech-hub of India, is brimming with start-ups and social enterprises employing blockchain technology to streamline and increase transparency in the supply chain.

What Next?

Farmer Producer Companies are not the panacea for all farmer problems. Anything as complex with as many stakeholders as the food supply chain, improvements to one element will always leave the other lacking. Yet, as Tushar Jagtap, the Sahyadri Farm FPC senior manager emphasized, “Ultimately, this value chain has to be controlled by the farmers”(NYT) and FPCs provide the framework for that to happen. Sahyadri Farm FPC is an example of large agri-business in India that has overcome the management and logistics obstacles hindering many smaller FPCS. One way forward is to continue scaling up, similar to the dairy model in India, and set up, as Anil Nadig from Jivabhumi suggested, an FPO- parallel to the National Dairy Development Board set up as an act of Parliament. Adhocism of FPOs is not a good match to a country with so much land fragmentation, yet it is a fine balance. Increasing the scale and streamlining the supply chain, at the same time as increasing transparency through new technologies and maintaining competition. The community-supported agriculture model requires local engagement, diversity, and checks and balances on power from a local to national level.

Most importantly, we need young minds to care about the food system, which they are. Agri-prenerus, policymakers, artists, and community leaders are questioning norms to re-engineer a way of living in greater harmony with the changing world.

S3IDF

People cannot escape poverty by living and working outside of the mainstream society and economy. We remove barriers to their inclusion by leveraging private sector resources and mitigating the risk in business transactions between local players.

S3IDF

Written by

S3IDF

S3IDF is an international nonprofit organization that builds inclusive market systems to promote equitable economic and social development. More here: S3IDF.org

S3IDF

S3IDF

People cannot escape poverty by living and working outside of the mainstream society and economy. We remove barriers to their inclusion by leveraging private sector resources and mitigating the risk in business transactions between local players.

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