There are a few government-funded programs that offer initial financial support for formation of farmer producers’ organizations (FPOs). This support usually provides for covering administrative overheads of the FPO for a few years. The purpose behind such support appears to be to provide a substitute route for providing services of inputs and also of pooled marketing to farmers in a contiguous block of villages, particularly after the death of the multipurpose or sale-purchase co-operatives set up in the bye gone era. In fact, FPOs established and supported this way are the most numerous.
The rationale offered by promoters of these FPOs is of a common genus — individual farmers have small bargaining power and knowledge. When they go to buy inputs for their crops, each of them has to spend on logistics, spend his time and then depend on the goods offered by the input supplier who considers him creditworthy. These suppliers are more concerned with the margins offered by the input producing entities rather than the quality of the inputs per se. Hence, the farmers end up buying indifferent quality inputs at exorbitant prices due to their small demand, remoteness and poor access to information.
The FPO undertakes purchase on behalf of a large number of farmers, pools the demand and can negotiate better and can also have the advantage of trained professionals who choose the right inputs for the farmers. An identical but mirror logic is used for the FPO’s service in regard to marketing of the commodities produced by the member farmers — a well-trained professional can do better price discovery with the much boosted bargaining power due to larger quantities reached through pooling, and of course, shared logistic costs.
Postnatal care required
This sounds good while the FPO is formed. Difficult problems soon arise and need postnatal care of these nascent FPOs. In the first place, even within a contiguous cluster of villages, the diversity of inputs such as seeds needed is significant. This arises due to differing objectives of different classes of farmers. There is also an amazing variation in soil and the degree of match between the soil and the water available for irrigation.
The FPO can possibly not cater to all this variety and tends to select a few seeds and a few brands of other inputs in which it will deal. In the process, a degree of responsibility regarding performance of these inputs shifts to the FPO. Recent experience in western Madhya Pradesh suggests that the FPO faces ire of the farmers if the seeds and inputs it provided fail to perform.
The second issue is that the logistic costs as well as information asymmetry faced by farmers arises primarily in a poorly connected marketed dominated by an oligopoly. When road networks improve (or when the quantities demanded by the farmers rise creating an incentive for many traders to enter), the oligopoly gives place to a near-competition and then the advantages of pooling of the FPO vanish. What happens is that, on one hand, the overhead costs of the FPO rise, while on the other, the volumes come under stress, putting its finances under strain.
Capital and risk
The problems on the output side arise primarily due the limited working capital the FPO can access and its complete inability to absorb risks of any trade process. The notion that pooling of produce of a few hundred farmers will enable the FPO to play a role to decisively influence market price is naïve and mistaken. Most commodity markets are much deeper than necessary for this possibility.
The question is on what terms does the FPO undertake marketing on behalf of the members. If it acts merely as an intermediary of a large procurement agency (such as the state agencies doing procurement operations), its financial commitment is as small as its real service. Even here, the question is whether it can negotiate and manage the inevitable valuation variations that arise due to differences arising at stages of weighing and quality assessment.
Here also is the issue of the fidelity of the staff of the FPO undertaking these operations. There is many an example where the staff favors one farmer and records both the weight and the quality favorably for him, and making compensating deliberate mistakes for another. Even if the staff does not do so, the difference between quality as assessed at the receiver’s end (for instance, a cooperative dairy plant) and the quality as recorded at the village level remains.
For commodities that the FPO buys, stocks and sells, the issues are more serious. It needs to manage the stocks properly without pilferage and without losses due to rodents, etc. It has to manage the variations in moisture loss, etc. And of course, it will have to make a part or full payment to producers at the time of receiving the goods, pay the rent and other costs associated with stocking, etc. And there is a real possibility that the prices will turn adverse, thus removing any possibility of covering all these costs.
The postnatal support that an FPO needs is in managing precisely all the above functions and minimizing the losses inherent in them. Experienced persons used to handling these logistic and merchandizing issues can provide such support. The promoting organizations or the financial supporters in government agencies lack that support or the necessary managerial powers to manage the function by absorbing inevitable risks and costs.
In fact, most young men and women who consider working with FPOs tend to be strong on social skills of building and managing community organizations and possibly on technical skills of agronomy, and are not market savvy. So there is a general dearth of manpower capable of managing business complexities involved.
Even when such skills are acquired, problems of under-capitalization haunt the FPO for a long time. Members are poor and hence unwilling to let go of any portion of their income. Private trade is ever willing to create doubt and schism about the long-term competence and viability of the FPO forcing a comparison on current distributed price on to members.
Risk aversion and force of current needs creates myopia among members, preventing them from seeing which way to a secure future. Extraordinary prudence and leadership is required to overcome member myopia and build the financial capital of the FPO by retaining a portion of payable price as additional share contribution of members.
Sanjiv Phansalkar is associated closely with Transform Rural India Foundation. He was earlier a faculty member at the Institute of Rural Management Anand (IRMA). Phansalkar is a fellow of the Indian Institute of Management (IIM) Ahmedabad. Views are personal.