Farmer Producer Companies and operational challenges

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Image Source: Livemint

In the last week of January, I sat through an Farmer Producer Company ( FPC) ‘s annual review meeting. This FPC* is based out of Tamil Nadu. The company was formed in 2010. The FPC as it is right now is stable and profitable. The FPC has attained a reputation wherein, the coconut prices set by the FPC is now the reference for all coconut farmers in the locality. That is no trader or a mandi is anymore able to  undercut a coconut farmer. If anything a farmer may get a maximum difference of  INR 0.50( per coconut ) than the price set by the FPC . This in itself , is a huge achievement in improving farmer incomes. The variation in price no more swings in a large bracket of  Rs 3 -Rs 4 ( per coconut) from the actual mandi price of the day of procurement.

Seeing this FPC in operation provided me an opportunity to understand the nuts and bolts of what it takes to run one and the realtime challenges faced in running one. Many of this will never be perceived by someone writing a policy note from doing a desk review, as most of the challenges will be negated by basic assumptions that lay foundation to any policy.Nonetheless the laws that are in place to facilitate formation of the FPC is quite good. Since the initial days of this statute in 2002, it has slowly picked up across the country. Now the idea of formation of producer company is common place and many progressive and aware farmers are coming together to form a company to benefit from the provision of the statute.

The broad areas of FPC’s activities are that of aggregation of produce, on-farm services to aid improvement in production/ harvesting/ post harvest etc. The FPC that I observed was engaged in on farm harvest service provision as well as aggregation of produce from the farmers of the company and other non-member farmers of the company. This FPC’s primary focus is coconuts. The service they provide is harvesting of the nuts, and they aggregate the coconuts. 

When I heard about this FPC- the image that comes to me after listening to the one line scope of the FPC is  that of: All the stakeholder ( farmers) of this FPC , avail the harvesting service of FPC and sell all their coconuts to the FPCs. I was too naive to assume and expect farmers to not exercise choice like any other stakeholder of a company  a publicly listed company or a customer in a retail shop. To explain how naive my expectation was , sample this: You hold shares of Videocon company and therefore I expect you to  buy Videocon TV, Videocon satellite tele and all other products that Videocon produces that meets your need.  No shareholder of any company behaves like that, instead people buy what they consider is good quality/ value for money or with which they have any sentimental attachment. Isn’t it?  This freedom for a farmer gives way to challenges in running a FPC profitably.

In the case of the coconut FPC that I observed let us look at their pool of farmers they cater to. I try to ilustrate the group of farmers with notations below.

Let, farmers who access harvesting services  from FPC can be denoted as FH and farmers who sell their coconuts to the FPC as FC, and farmers who access both harvesting service and sell their coconuts to FPC as FHC. Lets say the total shareholders of the FPC be X. Nonmember farmers that access the FPC’s  harvestingservice is denoted as  FNH, and nonmembers who sell coconuts is denoted as FNC.

Ideally one would have assumed that in this FPC ,

FHC = FH=FC = X, That is all stakeholder farmers use both harvesting service and sell their coconuts to the same FPC.

FH: But in this FPCs case, the farmers who access the harvesting service,  need not necessarily sell to the FPC, and they are not necessarily stakeholders either. They are farmers who grow coconut and have their farms in the neighbourhood. The farmers who access the service are less than 20% of X(the total FPC members) .

FH<= 20% of X, this includes few FNH too.

FC: The farmers who give the coconuts to the FPC is less or half of the total FPC members and some of the farmers selling to the FPCs are non stakeholder members too.

FC= <=60% of X.  This includes a good number of FNCs too.

FHC : The farmers who access both harvesting service and sell the coconuts to FPC make an even more platy number.

FHC <= 10% of X.

There are two major takeaways from the above observations:

  • All members/ stakeholders need not participate in the FPC by accessing either harvesting service or selling their coconuts.
  • And the corollary is also true- Non member farmers are not restricted from accessing either the harvesting or selling to the FPC.

So if the FPCs profits are to be improved then the all member farmers should access the service and sell their produce to the FPC, and the number of nonmember farmers accessing both service and selling has to improve. To be able to do this, the FPC took up an exercise to understand the reasons behind the farmer behaviours.

The following are the broad reasons for the observed pattern :

  1. Pre-existing ecosystem of services and procurement of coconuts
  2. Bottlenecks in harvesting service
  3. Payments

1. Preexisting ecosystem: The coconut famers who are now the stakeholders of the FPC have been engaged in coconut farming for decades. Although they chose to become stakeholders of the FPC, they still have their social ties to the traders whom they sold to earlier or a moneylender or a relative  and therefore do not want to severe ties. One must not read these relationship in a negative light.  That is a trader or a money lender need not be the evil guys all the time. That is if not for the traders a farmer might not have had access to markets at all.  A trader also provides access to harvesting or transportation service along with buying the coconuts. Of course many times they have taken advantage of the information asymmetry  lie between them and  the farmer. But this in the past has worked for the farmer. And one cannot discount it. Also a farmer will take his time in understanding and trusting  a new entity like an FPC. This bit only accounts for a small portion of farmers who do not sell to the FPC. And when there is no easy way  for a farmer to access credit in the times of urgency a money lender comes to his help. There again the farmer may be showing his loyalty by selling his produce to the lender.

But the FPC by its sheer presence has made sure the coconut farmers in the locality of the FPC do not get exploited by establishing the price of the nuts.

2. Bottleneck in harvesting service: The harvesting service provided by the FPC is made available by allocating labourers skilled at harvesting. The FPC has been struggling to service the existing demand. That is when a request for harvest is placed it takes them few days before they service it and this leads to cancellation of  these request. This slack in harvesting leads to non selling of coconuts by a group of farmers too. That is many times harvesting service and uptake of coconuts is provided by all other traders or other service providers in a package. There are not many harvesters who just harvest and go.

3.Payment : Firstly, Many member and nonmember farmers who would wish to sell to the FPC end up not selling due to the fact that FPC do not pay the farmers in advance. This advance request (counterintuitively) is usually from the large farmers.  It remits money to the farmers into their bank accounts within 24 hours after the procurement. Secondly, many medium and large farms are managed by managers and not the farmers themselves. There exist a manager -trader nexus where the manager and trader  seem to have a certain cut in the profits by underquoting the number of nuts sold.

When the FPC addresses the above listed concerns it may be able to improve the number of farmers who access their service and also sell their coconuts to them. While some concerns listed above especially the preexisting ecosystem or payment expectations cannot be met by the FPC, the FPC can work on expanding the services that they provide and begin to engage in value added services like production of virgin coconut oil or other products from the nuts. . Along with it the FPC may also try to tweak and amend their bylaws to ensure the new and existing stakeholders are mandated to sell the produce to the FPC with specific terms and conditions elaborated in them.

 

* The name and details of the FPC  is not revealed to respect the confidentiality of the company.

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Food, enough and nutritious , for the producer! What about wellbeing???

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Old lady farmer from a village in Andhra Pradesh

 

 

 

 

 

 

 

 

 

 

I have always wanted to understand why a farmer, who produces food, and his family went hungry. I found it cruel and completely unacceptable that a producer of food had to go hungry, and not even feed his children. This and the fact that they resorted to suicides is even more saddening.

I am trying to understand if  in the current world context, the problem of food production and that of farmers – soil loosing its organic nutrition ( due to use of chemical fertilizers), water scarcity, salinity increase in soil etc can be addressed by organic farming, or sustainable farming or climate smart farming.

All these words organic, sustainable and climate smart seem to be synonymous to me. But they are not to be so. I am looking up Food and Agriculture Organization documents, International Federation of Organic Agriculture Movement, policy documents n organic farming by many states in India. From the readings until now the following is what the picture looks like:

  1. High yielding variety of seeds actually yield high produce, but are high on inputs ( fertilizers, pesticides, herbicides  and water) compared to organic farming in certain geographies. But one of the inputs required – water is becoming scarce. Also pests are becoming resistant to pesticides and yada yada.
  2. But when the world was going through food crisis especially in the developing world in the 1960s these high yielding, high input crops helped in increasing the food produce without destroying virgin forest to expand production. At that time the input demand of the cropping did not pinch as the exploitation of resources had just began and the limits of exploitation were not known to us.
  3. There is biomagnification of pesticides ad other chemical inputs in the food produced from this method. This is harmful for health. This is true. But the gravity of the issue is something I am yet to explore.  I do not want to dwell into it without concrete proof. Nonetheless, there is a lot of hue and cry about the health effects of chemical farming.
  4. Chemical farming in short is now perceived as a problem in the world. Even agencies like FAO are proposing organic farming at large scales.(Save and Grow).
  5. Organic farming definitely has very little negative health effects as the input that goes into it is all natural. Verdi compost, cow dung, leaf mulches.
  6. But the yield of it is less than the irrigated high yield varieties. The organic produce yield is less than chemical by 9-25% according to few studies. This is only in the case of irrigated high yield fields.
  7. When it comes to rained areas, organic yields better than chemical and this is consistent with many studies.
  8. Organic’s yield is better than chemical farming even in case of irrigated field during the period of drought.

The questions that I have running in my head are:

  1. Can small/ marginal farmers actually shift to organic farming gainfully? Right now there is very little support from the governments for them. Whereas chemical farmers have input subsidy. There is no such thing for organic farmers.
  2. With very little ecosystem to support a organic farmer and his risks,is it right to push these small guys towards it?
  3. What about the yield, the high yield and GMO proponents scare the hell out of people by saying when we move to organic we won’t be able to feed the world. How true is this?
  4. Generic farmer insurance ecosystem is very bare minimum with only crop insurances made available to them. Will the existing financial ecosystem make way for organic farmers too or not?

In short does both ecology and economics suggest our move to organic or only ecology? If one can prove with numbers that its both ecology and economics, then the shift should not be that difficult.

This apart there needs to be political will to move in that direction too. Chemical fertilizer and pesticide firms have huge cloud and therefore ensure that the politicians are well taken care off. So if the science and numbers say yes, still there is this huge irrational- illogical ( for the larger nation, not the politician. For the politician it is rational and logical to gain from this disputed situation from the huge firms) hurdle to be crossed.

And yes! How can one forget the agreements we sign up to. The Agreement on Agriculture with WTO and similar such multilateral agreements we sign as a nation. They may also try to restrict us even if economics and ecology permit our organic endeavor.

So, I will share more… as I know more of it….

 

2013 : The year that was

It has been more than 4 months since I wrote any post. Most of what I wrote in 2013  have been in spurts. A period of writing followed by a lull and lull alone! I maintain an idea notebook especially for TMN, where I keep writing down things I want to write about. But I ended up writing none of them. This year, I resolve to write at least once in a week. 🙂

2013, has been a rewarding  year in which work has begun to take a new shape and some major shifts in ways we function.

A pontoon bridge with pilgrims flowing across the river,Kumbh Mela

Along with a year long consulting with a water agency, we did assignments that were interesting, meaningful and some ways different. We documented Maharashtra drought and how people faired on the ground, we were at the Kumbh Mela to study the overall sanitation situation and how a particular product worked, we also took up Disaster Risk Reduction analysis of WASH situation in Odisha post Phailin.

One of the water tankers criss-crossing the dry and parched landscapes of Maharashtra, during the peak of drought in summer 2013

A village devastated by cyclone Phailin in Ganjam district, Odisha

We also took up some work outside the WASH space. This was an exciting bit for me personally because the thought of expanding our work into other areas of development has been on my mind for a year now. We worked on legal data analysis and we closed the year with a new assignment working on a land governance project.

With all this work came a lot of traveling which was all the more rewarding. Year 2014, we look forward to having a firm incorporated, work on more consulting projects and do some actual enterprising projects. Consulting has been paying our bills and has facilitated a lot of understanding of real issues contexts. Its time we shift gears and start participating in real development as entrepreneurs.

‘Paving the road to hell with agricultural productivity’ -Part II

A farmer family going back home after a days work. Yadgir district, Karnataka

In the post ‘Paving the road to hell with agricultural productivity’, my colleague Sachin wrote about the new policy study we both have got onto. Our observation as Sachin states is:

Focus on increasing agriculture productivity as an intervention in alleviating poverty across the less developed and developing countries, particularly of Africa and Asia has had reverse effect of pushing people further down into economic crisis.We begin a small study this week where we explore the consequences of large agriculture programs which are focused on increasing agricultural productivity of farm sector, for a variety of staple crops, cash crops as well as horticultural crops. The increase in productivity is treated as end in itself. Whereas, in practice, the productivity rise is not realized as increased income for the farmers but works adversely works on pushing the prices of that crop further down. What is proposed is that increased agri productivity will lead to increase in income of the farmers. In practice, what happens is that the increased flow of agri-produce in the market pulls the price down and neutralized the gain of the producer….

And after describing what is the problem in this approach he adds on that:

… development sector programs in agriculture, domestic as well as international agri-commodities trade and poverty are linked very closely and in a direct fashion.

To be able to make a case for this argument, we need to look at the three aspects that have been mentioned above in more details. In this post I look at the issues with present argi-commodities trade situation that contributes to the problem.

A little history of why and how Agri-Commodities trade begun:

All producers, produce their commodities so that they can meet their own needs by using part of the produce and selling the remaining of it to make money that will allow them to buy other commodities and services of their need. Over the centuries this producer- consumer transaction has become more nuanced and complex with different layers of institutions and individuals distancing the producer from the consumer. All of this started in the interest of the producer in the early 1840s in USA, where farmers used to load their grains on barges and send it up a river to Chicago market. If they did not find buyers or if the prices were too low, they would dump their grains in the river rather than transport it back, as the losses they incurred there tremendous. To address this came Chicago board of trade. This helped the farmers trade virtually across geographies and in time ( also known as futures). All of these mechanisms was to reduce the risk a producer bears.[1]

Situation of farmers in Asia and Africa today

This has translated beneficially to the farmers in the developed nations. But the lesser developed and developing nations still grapple with the issues the American farmers faced in the 1840s. Farmers in India even today dump their produce instead of transporting as that would mean a heavy loss to them in certain periods of the year. The situation has not improved yet.  But the same produce within few weeks time appreciates in price upto 400%. And the farmer never realizes the profit from this appreciation.

The reasons for such losses are [2]-

  1. Due to better technologies agricultural production has increased. This has lead to trends of longterm price fall and short term price instability.
  2. Demand of agricultural commodities has reduced due to slower population growth.

There have been enough initiatives nationally and globally to address these two issues regarding the agri-commodities trade that have failed in the past, to count a few:

  1. Diversification of products vertically into more value added products and horizontally into non-agri products was tried out. But this had limited impact, as to do both  ways of diversification other supporting infrastructure, standards and mechanism need to be in place.
  2. Due to donor  thrust on deregulatory and liberalizing, government spending and desire to intervene in these markets have gone down. This has made the position of the produce only weaker than what it earlier was.
  3. There have been attempts at supply management through national and global mechanisms.  While nationally the state marketing boards were good at providing ancillary services, they failed at their main job of price setting,quality management and in providing it all efficiently. Internationally commodity agreements were made in 1970s and 1980s to maintain physical buffer stock to influence world price. They did maintain prices for a while for few agri-commodities, but these agreements eventually collapsed. That was largely due to withdrawal of support from consuming countries, due to difficulties involved in influencing price especially in an environment where supply expansion brought about by increased agri-productivity and limited financial resources.
  4. Along with supply management complementary international initiatives that made financial transfers to national governments as a compensation for fall in commodity prices and therefore export earning. But these had little impact as these were response post a crisis (ex-post), another drawback was, they imposed conditions and had strict eligibility requirements. All of this made this effort turn out to be of little use in addressing the “commodity- crisis”.
  5. Another shot at addressing commodity crisis was by changing the focus of the donors towards market based risk management tools like derivatives and insurances. These instruments still have limites use in lesser developed and developing countries sue to the cost associated with them.

I will write more of what has gone into agri-commodities trade nationally and internationally as a followup to this post. But looking at what has been done in past, it looks like the interventions have tried to only address the symptoms of the problems associated with this space and not uproot the problem itself.

                                                           

[1] Eleni Gabre-Madhin: A commodities exchange for Ethiopia

[2]Rethinking Tropical Agricultural Commodities, DFID