How farming can be brought back from ‘take home’ to ‘reap the value’ model

Updated: September 26, 2019 7:13:44 AM

Appropriate awareness around FPOs, their formation process and their demonstrated benefits must be spread amongst farmers of states with lower penetration.

Collective operations in Indian agriculture have a century-old history, with the enactment of the Cooperative Society Act 1904 that enabled formation of agricultural credit cooperatives.Collective operations in Indian agriculture have a century-old history, with the enactment of the Cooperative Society Act 1904 that enabled formation of agricultural credit cooperatives.

By V Shunmugam & Tulsi Lingareddy

Indian agriculture sector, despite the sharp reduction in its contribution to GDP from 58% in the 1950s to 18% in 2010s, continues to support the livelihood for half of country’s population. The dependence of the population on agriculture has resulted in fragmentation of farm holdings, not only rendering them uneconomical, but has also put them on weaker pedestal in terms of bargaining power. The average farm size in India stands much smaller at about 1.3ha, against 169ha in the US, 53ha in the UK, 52ha in France and 45.7ha in Germany. The fact that 86% of total operational holdings in the country are of small and marginal farms (size less than 2ha, Economic Survey 2019) indicates the reasons for the perpetual indebtedness and low incomes in Indian farming. A World Bank report (2019) on Maharashtra Agricultural Competitiveness Project, conducted during 2011-18 to increase productivity, profitability and market access of the farming community in the state, suggests that aggregated marketing through FPOs increased profitability to about 45%. Besides enhancing bargaining power, FPOs bring the advantage of economies of scale in both pre- and post-harvest farm operations, enhancing profit margins, and can also establish forward- and backward-linkages that can bring back the value of services such as warehousing, quality standardisation, finance, etc, from the existing opaque, dilapidated and inefficient value chains for most agricultural commodities.

Collective operations in Indian agriculture have a century-old history, with the enactment of the Cooperative Society Act 1904 that enabled formation of agricultural credit cooperatives. The momentum in formation of FPOs gained following the amendment to the Companies Act 1956 in 2002. Among the 5,000 FPOs registered in India during the past decade and a half, about 3,200 are registered as FPCs, while the rest as cooperative societies (NABARD 2018). NABARD and the Small Farmers’ Agri-Business Consortium (SFAC) are actively promoting FPOs, apart from state governments and other Indian and international funding agencies.

Despite efforts to promote FPOs, the progress has been limited primarily due to operational and structural issues. Most operational constraints are due to lack of adequate financial resources and infrastructure facilities, inability to establish forward- and backward-linkages, lack of skills and professional expertise, inadequate awareness amongst farmers as well as financial institutions about FPOs, etc.

Inadequate finance, indicated by many field studies, turns out to be the single largest impediment for success of FPOs. Though the Equity Grant and Credit Guarantee Fund Scheme under SFAC covers FPCs with a minimum membership of 500 farmers, those FPOs and FPCs with smaller memberships would be deprived.

Interest rate subvention, similar to that provided to crop loans, should be provided to reduce the cost of financing to all FPOs\FPCs.

A prerequisite for the success of FPOs is adequate access to regulated warehousing so they can store their produce till they get remunerative prices, while meeting their immediate financial requirements by connecting to the institutional financial system through warehouse receipts. At present, warehousing capacity is estimated at 158.5 million metric tonnes (mmt), significantly lower than the required capacity of 252 mmt (at 80% of 315 mmt) of foodgrains and oilseeds produced annually in the country. Regulated warehouses within the existing warehousing capacity are much smaller at about 8 mmt.

A concern area is lack of awareness amongst farmers and inadequate infrastructure facilities for meeting required quality and standards of agricultural produce so that their farm produce can fetch a better price. At present, most of the crop output is sold to traders without even grading and standardisation due to lack of facilities and awareness amongst farmers, leading to less price realisation. In this regard, the World Bank report (2019) indicates that simple adoption of sorting and grading practices had increased farm profits by 15% on an average. In addition to creation of infrastructure for quality standardisation and grading, awareness of the same and its benefits such as better price realisation for their produce and access will help them adopt techniques and practices whose adoption will help them produce to market expectations.

Skill development is another area that needs to be addressed. Majority of the existing FPOs have been involved in the areas of aggregation for marketing and sales, followed by input procurement and to some extent processing. In this regard, it is essential to ensure there are adequate facilities for skill development in FPOs to take the farmers’ produce through various stages of supply chain. In addition, adequate facilities shall be provided to impart entrepreneurial skills amongst farmers, particularly officiating members, so that FPOs can be managed professionally.

The distribution of FPOs is skewed to seven states (Tamil Nadu, Karnataka, Madhya Pradesh, West Bengal, Maharashtra, Rajasthan)—50% of total FPOs in India.
Appropriate awareness around FPOs, their formation process and their demonstrated benefits must be spread amongst farmers of states with lower penetration.

Apart from operational issues, we need to address structural problems through consolidation of the ecosystem within which modern-day FPOs operate in.

Recent success stories show that FPOs can be the ultimate model for increasing farmers’ incomes and empowering them through collective operation and better bargaining power to gain larger share in consumer price. One such success story is Nashik-based FPC Sahyadri Farms, set up in 2011, which has grown to be the largest FPO in India with 8,000 farmer members and having a turnover of Rs 3,000 crore.

The only way the farming sector can be brought back from the ‘take home’ to ‘reap the value’ model is through collectivisation of farmers’ interests through FPOs, and what better it can be if a statutory authority provides for their enhanced presence, connecting them to financial sources and institutions, and the ability to move them up the value chain.

Authors are head, Research, and senior analyst, respectively, MCX. Views are personal

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