I had devoted two earlier notes to discussions pertaining to the relationship of farmer producer companies (FPCs) with its members and in managing business in a capital-short FPC. READ: How some FPC balloons can become durable high flyers – II.
In this note I shall try to address issues surrounding the interaction between FPCs and the market. This note is intended to first lay bare the issues and then to offer some actionable suggestions to help create a viable business model for FPCs.
All promoters of FPCs need to disabuse their minds of the naivety that by pooling the produce or input needs of members they can always improve their bargaining power in the market and that it is necessarily good for the producers.
It must be noted that size of virtually any produce in the market is huge, much larger than the cumulative quantity produced by the members. Mere pooling by 10 or 100 farmers can only marginally influence realized or paid prices and that too in the short run.
Advantages of pooling
However, pooling can help one get better terms of trade, better logistics in terms of time and place of delivery, changed structure of charges for warehousing, different credit terms and the like. The main advantages of pooling are in two respects.
The first pertains to reducing the asymmetry of information. Someone more savvy and clued in on the market conditions is likely to handle the transactions when commodity is pooled and she is more likely to have access to more and more timely information, compared to an illiterate producer who may not have a smart phone.
The second advantage is in sharing of costs among the producers. Instead of each producer transacting individually with the market operators and thus spending time and money in the process of travel, only one or two members, or better still, an employee of the FPC does it. Thus the remaining members are able to save their money and apply themselves to other tasks.
Similarly, handling, transportation and cost elements could perhaps be shared, hence reducing the cost for a member. This tends to happen particularly where the charges are fixed per transaction and not unit linked.
Challenges in pooling
There are three caveats to this wishful advantage of pooling.
- The first lies in pooling and aggregating all the risks: risk due to adverse price movement, risk due to hazards, risk due to accidents in movement, risks due to mala fide behavior of the market agent or even the representative or FPC employee and so on. When tomatoes of one farmer gets damaged due to a road accident, only she suffers. When the vehicle carrying tomatoes of 30 producers gets damaged in a road block by the Naxals, everyone loses. Such risks that were diversifiable across producers when individuals did their transactions, are now pooled.
- The second caveat is that reduction of costs and improved realized prices occur simply because of poor logistic connectivity, this advantage is just as durable as the adverse logistic condition. As soon as roads improve and become safer, private trade jumps in, increasing the competition and reducing the advantage of pooling.
- Seldom do proponents of FPCs like to bring up the third and very important caveat to pooling. This pertains to moral hazard in the form of deliberate mischief done by producers: prompted by narrow self-interest, producers are likely to sell the best portion of their produce on their own and bring only the second quality or poor quality produce to the FPC. When such produce gets mixed with the bulk of materials brought in by others, the chances that buyers would offer a much reduced price are higher, resulting in everyone getting a lower price. This reinforces their motivation to separate the material at least on visible parameters of quality, take the best one through individual marketing route and bring the rest to the FPC. Thus unless rigorously checked, the average quality of pooled materials will tend to steadily decline. Rigorous quality check before allowing members to pool their produce in the FPC and undertaking every possible step to minimize opportunistic behavior of members is a very critical and fundamental business principle.
With this rather long prelude, let me come back to the issues faced by an FPC in its engagement with the market.
The first and critical issue that separates an FPC from other market players is that it is legally and organizationally compelled to adopt formal procedures and processes in its market operations. For its clean and transparent management, an FPC requires invoices and bills for every service. Being subject to multiple levels of scrutiny, it will need to document all its transactions.
Thus unlike a typical market player in markets of farm produce, it cannot operate in a faceless manner in shadowy zones. The need for elaborate documentation and at times decision making may make it stodgy and slow. The typical market player is and will remain much more nimble.
Furthermore, unlike FPCs, such a market player can adopt varying stances in relation to different customers, often within minutes of each other. While the market player can differentiate between buyers and sellers the way he wants, FPCs cannot.
The second and substantive issue is that often through his social network, the market player in rural markets combines and interlocks multiple markets: market for inputs, for produce, for consumption goods and for credit.
He may have intermeshed familial, social and business relationship up the market channel in terminal markets or with processing industry. He thus has a strong and durable relationship with his clients. He has multiple degrees of freedom and levers while dealing with the average farmer.
FPC has a very economic interaction on very few fronts with the members and hence has fewer degrees of freedom and levers with its membership. As markets formalize, and logistic and information bottlenecks loosen their grip, the grip of the market player on rural clients possibly slackens, but he usually has an advantage over the FPC.
Given these two aspects noted above, the question is in dealing with the market on their behalf; what does an FPC offer its members that is distinctly superior to what the private players offer. Hence the question of unique member allegiance proposition (UMAP) becomes very important.
The mirror image of UMAP in the market so far as potential customers are concerned is the unique selling proposition (USP) of the FPC. Why should customers care to engage with an entity that is perhaps stodgy, slow in decision making, inflexible in its terms of trade and quite possibly acting in a holier than thou manner?
Why should the customer care whether they are buying from an entity owned by farmers themselves? Should or will they not be more concerned with the produce attributes, quality, time of delivery, its shelf life, price, incidental services offered, etc.?
This issue therefore has to be thought through by segments of the market. Perhaps ability to pool produce of many people at lower costs than they would normally face is its USP with state procurement agencies. Traceability of the produce to individual farmers could be the USP with choosey buyers wanting to claim responsible farming or organic tags on their produce.
Excellent price-quality bundling could be the USP for retail consumers. Such USP would need to be thought through , developed into being credible and zealously guarded for building the FPC brand. Without such an USP, the FPC would find it difficult to be a long term player in the market.
The final issue of relevance deals with FPC learning about, complying with and in due course tweaking to members’ advantage the governing principles of market institutions. Can it acquire a seat in the governing board of the local regulated market institutions? Can it influence the entire marketing system to shift from visual, heap based close hand transactions to weighment based, formal quality governed open bidding process?
Based on the above, the to-do list for a sound market interface would be:
- Evolve a UMAP that encourages members to engage with the FPC on a continuing basis
- Evolve norms to curb potentially opportunistic behavior of members without diluting the above UMAP
- Evolve USP for each segment of the market
- Thoroughly understand the norms of the local market institutions and evolve internal standard operating procedures compatible with them
- Evolve internal norms regarding delegation of powers to empower the personnel engaged in markets to take expeditious decisions so that the FPC does not lose to private market player due to their nimbleness.
Admittedly achieving the above is not easy. But there does not seem to be any option!
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.