How farmer-led firms are vying for a fairer share of the consumer rupee9 min read . Updated: 14 Sep 2020, 09:32 PM IST
- In a volatile food price environment, hopes are being pinned on farmer-run companies. Can both the farmer and consumer benefit?
NEW DELHI : Ramprasad Arjunrao Nitnaware has let go of many opportunities in life. First was his childhood dream of becoming a doctor, then a chance to serve in the Indian Air Force, and, finally, the security of a government job. He now heads a farmer-run company. Despite donning the fancy hat of a chief executive officer, his salary is a fraction of what he could have earned as an officer in the Air Force or as an employee of the state government. But Nitnaware, born to a farmer who wanted his son to manage the family farm, has no regrets.
In rural Maharashtra’s Washim district, Nitnaware was instrumental in setting up a company owned by turmeric growers. The Rushiwat Farmer Producer Company Ltd (FPCL) now owns a seed and turmeric processing plant and a warehouse where the produce is sorted and graded. In 2019-20, the turnover of the company was an impressive ₹1.32 crore. And the 1270 farmer shareholders of the company not only received a premium price for the turmeric they grew, but also made a handsome profit from the production of certified seeds. Each farmer who owns ten equity shares also received a modest dividend of ₹1,500; the rest of the profit was reinvested in the company.
Over the past few months, Indian farmers have been living through a strange reality. With the onset of the covid-19 pandemic, prices of fruits and vegetables crashed in the wholesale markets, even as consumers began paying a hefty price. This disconnect—between what the farmer earns and what the consumer pays—has always existed. But covid has turned this gap into a chasm.
With agriculture likely to remain the only bright spot in the economy this year (recording a modest 3.4% growth in the first quarter of FY21), farmer-led companies like Rushiwat offer one mechanism to equitably share this rare domain of prosperity, at a time when it is most needed. The underlying model has a successful precedent in the Indian context: Amul milk cooperatives.
By aggregating and processing primary produce, farmer producer organizations (FPOs) can help bridge the gap between wholesale and retail food prices—for instance, tomato growers often sell at throwaway prices during the harvest season, while retail rates are 2-3 times higher. The price realization for farmers will improve if raw tomatoes are processed into puree. The critical requirements for this to work are: investing in a processing plant and market access, which small farmers can harness as part of an FPO.
Small and marginal farmers suffer due to a peculiar aspect of their business—they buy inputs like fertilizers, pesticides and seeds at retail prices, but sell their final produce at wholesale prices. They are so-called ‘price takers’ in both input and output markets. One way to overcome this lack of bargaining power—arising from their small size, fragmented holdings and limited production—is via aggregation by FPOs.
“It’s very satisfying when farmer members say my efforts have improved their lives," Nitnaware, who holds a master’s degree in agriculture, said over the phone. The future looks promising for his company, he said. Currently, the loose turmeric powder they sell fetches around ₹65 per kg—just a fourth of what consumers pay, but Nitnaware hopes member earnings will increase significantly once the company receives a license from India’s food safety regulator. The plan is to sell packaged turmeric powder with their own brand name.
The Rushiwat FPCL is among 7000 producer companies set up across India supported by non-profits, government agencies like the apex rural bank NABARD, and the Small Farmers Agribusiness Consortium (SFAC), a specialized agency of the agriculture ministry. The goal is to bring farmers together as a group to harness their collective bargaining power while purchasing inputs and to jointly market the harvest after primary processing—like selling turmeric powder instead of raw turmeric. When farmers add value to their produce, they also earn more.
In late-February, Prime Minister Narendra Modi launched an ambitious project to form 10,000 FPOs over the next five years in a bid to improve farm-gate prices and help growers earn a higher share of the consumer rupee. FPOs will help farmers transform from being mere producers to an active participant in the market ecosystem, Modi said during the launch.
The immediacy of the FPO project, on which the government plans to spend ₹5,000 crore, arises from the harsh reality of covid-induced supply disruptions which have still not been entirely resolved.
The idea behind the FPO project is to set up examples across the country and transform it into a movement, said P.V.S. Surya Kumar, deputy managing director at NABARD, which has so far promoted over 4000 producer companies. “As farmers benefit from their association with FPOs, they will put in more equity capital… their success will depend on the enabling role played by people heading the FPOs and the collective ability of the group to understand markets," added Kumar.
According to Pravesh Sharma, former managing director of SFAC and currently CEO of the startup Kamatan Farm Tech, the idea behind FPOs took shape around 2009 while trying to fix three hurdles faced by farmers: access to capital, technology and markets. “Although the policy push for promoting FPOs has been episodic (they did not come in a go), there has been a steady accretion of interventions over the years."
These include credit guarantee and equity grant funds, classifying FPOs under the priority sector for bank loans, tax holidays and recent initiatives like agriculture market reforms and setting up of an agriculture infrastructure fund which farmer companies can leverage. “But banks are still not interested (to advance loans to FPOs)… and that is a key which can unlock the true potential of the idea," Sharma added.
Access to capital
The process of institution building—small farmers coming together in a large group as a business venture—isn’t an easy task. It took the Rushiwat FPCL five years to develop a sense of ownership among farmers. And it was lucky to have the support of NABARD which opened up a credit line from a public sector bank—starved of working capital, most FPOs are unable to expand business operations.
For instance, the Rowmari FPO in Assam’s Barpeta district, which works with mustard growers, set up an oil mill and now sells mustard oil with its own brand name called RL Gold. But banks are not willing to lend to the company of 215 shareholders. So, farmer members have to wait for months for mustard to be milled and oil to be sold for payments. Lack of working capital has restricted the FPO from procuring from more farmers and scaling up operations. For now, it buys mustard seeds from traders at a price higher than market rates and returns the money after selling oil—an informal loan with a hefty interest rate.
After knocking on banks’ doors for more than a year we stopped, said Adul Malek, CEO of the company. “We need about ₹90 lakh to expand operations to 3-4 villages but banks want a guarantor," Malek added.
A March 2020 study by Richa Govil (and others) at the Azim Premji University flagged how severe the capital constraints are. The median paid-up capital (equity contribution by farmer shareholders) of 6,926 ‘active’ FPOs was just ₹1.1 lakh, the study found, limiting the ability of FPOs to raise term loans and arrange working capital.
According to the research, even a small (200 member) or an early stage FPO needs between ₹20-60 lakh for smooth operations (for supplying inputs, purchasing crops, and post-processing and marketing of harvest). This is in addition to the costs of regulatory compliance like filing audited accounts and payments for the CEO and office staff.
So, to access capital and generate revenues, FPOs are taking recourse to informal loans from traders, borrowing from Non-Bank Finance Companies at 15-17% interest rates (with personal guarantees from the producer companies’ CEO in some cases) and even running petrol bunks to supply fuel for farm machinery used by farmers (in Erode, Tamil Nadu).
After six years of running an FPO with over 1000 members, we are unable to cater to even 10% of farmers in the areas we operate, said G. Ajeethan, managing director of a banana growers’ company in Trichy, Tamil Nadu. “After the pandemic struck, we sold bananas for a song. We need capital to expand operations, and cost-effective refrigerated cargo to transport our produce to cities. It is easier to crown a farmer with the title of a CEO than market their produce."
The research study by Govil also uncovered a worrying trend: among FPOs which were ten years and older, 46% were defunct and therefore struck off by the Ministry of Corporate Affairs for failure to commence business operations or non-payment of share capital by members. 38% of the FPOs which were between 5 to 10 years were inactive and therefore struck off.
“The process of promoting and nurturing an FPO takes at least three years, but often farmers find it difficult to run the institution as market linkages take years to develop. This is the reason why many FPOs go defunct after a few years," said Satya Ranjan Pradhan who is currently heading a vegetable growers’ company in Angul, Odisha. Pradhan was appointed and paid by a non-profit which promoted the FPO and after the project ran its course, the FPO is scouting for a new CEO.
Pradhan, however, remains sceptical if the FPO will be able to bear the costs of hiring a CEO (as mandated under the Companies Act) who needs to be paid at least ₹15,000 per month and an accountant.
During a field trip to Madhya Pradesh in 2016, this writer had met several FPOs. Farmers were upbeat about their nascent association, but FPO managers faced a similar set of problems as they are facing today: the Mandla Tribal Farmer Producer Company used a ₹9 lakh equity grant support (from SFAC) and topped it with a bank loan to build a warehouse, and then mortgaged it to the bank to purchase a seed grading machine.
It still needed money to purchase inputs for its members and had to approach a women’s self-help group for a loan. Yet, Revati Tekam, a farmer member and President of the FPO, was proud of the institution despite grinding challenges. “We built this company with our blood and sweat to help each other," Tekam said, standing in front of a 500-tonne capacity warehouse.
In a recent strategy paper, SFAC put out a list of challenges faced by FPOs—their limited understanding of business and the need for incubation and hand-holding as well as constraints in raising equity capital. The agency also estimated that at best 30% of FPOs have viable operations while 20% are struggling; the rest comprise of companies in early stages: mobilizing farmers, collecting equity and preparing a business plan.
The guidelines of the new central scheme to promote 10,000 FPOs (between 2019-20 and 2023-24) addresses some of these hurdles. The government now plans to bear the management costs of running an FPO (for the first five years), including the cost of registration, plus a matching equity grant of ₹2000 per member (with a limit of ₹15 lakh per FPO) and an increased credit guarantee facility for loans up to ₹2 crore.
Since most FPOs are engaged in the low margin business of aggregation and trade of farm produce (and not value addition which requires high capital investment), it is imperative on the government’s part to advance loans with an interest subsidy component, said Yogesh Dwivedi who heads a state-level consortium of FPOs in Madhya Pradesh.
Apart from these, suggested Dwivedi, FPOs must also be tasked to do government procurement at support prices and have a regular quota fixed for the supply of inputs like fertilizer. This will help FPOs generate their own funds to expand operations. Only when farmers engage with an FPO multiple times in a year—while purchasing inputs and selling crops—would they value the efforts of building a company together, he said.