Creating and Evaluating Portfolio of Products in Multi-commodity FPOs
One-district-one-product (ODOP) is the current slogan for achieving economic goals of FPOs. However, if FPOs are to make significant impacts on incomes of marginal farmers (constituting 70% of farmers), one must think differently.
Multi-commodity-multi-location (MCML) FPOs are more inclusive and ecologically sustainable. They can cater to the needs of S & M farmers who typically produce a basket of agricultural commodities, including both food and cash crops. Krishidhan is one such FPO in north and central Gujarat operating in five clusters of four districts. In 2020-21 it had a a share-capital of Rs 44 lakhs and turnover of Rs 8.5 crores.
What are the advantages of MCML FPOs? A recent study shows that these FPOs build in resilience in different ways:
Share-holders invest in the company not so much for earning dividends as for changing the socio-economic present and future of their communities/ area(s). The total number of farmers benefitted through Krishidhan was 18,400, 4.5 times the share-holders in 2019 and still increasing. Non-shareholder beneficiaries represent future share-holders.
To be socially acceptable the company must be inclusive and meet the needs of farmers of different size, location and community. In Krishidhan for instance tribal farmers from Meghraj block supply maize produced by them to produce cattle-feed consumed by farmers in Himmatnagar and Modasa blocks, thereby benefitting both clusters.
It must have a diverse portfolio in order to promote diverse pattern of crops and varieties, so important for ecological sustainability. Krishidhan supports the diverse cropping pattern of its farmers which include food-grains like maize, wheat, paddy; oilseeds like castor and groundnut and cash crops like cotton and potato. New varieties of castor and wheat to deal with climate change effects, have been adopted by farmers in a big way.
Krishidhan FPO was incubated by Development Support Center, Ahmedabad, over a period of six years from 2014 to 2019. Thereafter, it has been financially independent and has managed to keep its head above the water. How is such a complex portfolio of MCML managed? The challenge before an MCML, is to select a portfolio of activities that balance social and commercial goals. Social goals include the requirement of various groups of farmers while commercial goals refer to the company’s need to remain financially viable if not sustainable – with reserves built up to meet future risks. To accomplish this, it may need one or more anchor activities that will ensure financial viability (meeting salaries of staff and overheads). An anchor activity can be defined as one that contributes profits towards commercial goals even if social goals are not very high. This can happen either with low-margin-high-volume or high-margin-low-volume activities. However, the risk factor should be negligible or zero in order to ensure financial stability. Examples include MSP for crops like wheat and groundnut and contract farming of crops like potato, as discussed below.
During the formative years the company’s portfolio was primarily driven by the felt needs of its members. This included supply of agri-inputs such as such as seeds, fertilizers, pesticides, farm-equipment for which the margins were rather low (2 to 10%). Since the company promotes “responsible farming”, the focus was more on organic fertilizers and pesticides that were produced by farmers themselves. Certified and truthful labelled seeds were produced by farmers in one region and supplied to other regions of the company. This activity provided better margins (5 to 15%), but the scope for scaling up was limited by the available staff for organizing sales. This activity holds promise for future as it can be scaled up by organizing sales more creatively or by creating linkages with private seed companies with contracts. According to Jaswant bhai, the CEO, a potential partner has already been identified.
As the incubation period began to come to an end, the company began to actively search for an anchor activity on the commodity side (collective marketing of farmers’ produce). MSP (minimum support price) proved to be an ideal option as the market risk was zero. Although the margin was low at 1%, volumes were very high with scope to increase in future. As a test case MSP for groundnut was taken up in 2017. The price realized was significantly higher than market prices. This made the company profitable while giving substantial returns to farmers. The activity was scaled up the following year. However, after 2018, this option became unavailable, as the state government banned FPOs, based on reports of a few cases of malpractices.
Hence the search for another anchor activity continued. Farmers in Himmatnagar cluster observed that the center for contract farming of potato was gradually shifting from Disa to their area. The company took up a contract with Iscon-Balaji on a pilot scale in 2019 with 100 MT seed. Encouraged by the outcomes Krishidhan scaled up the contract four times in 2020, which helped to cover more that 50% of its overheads and salary costs. Thus, contract farming has taken over the place of MSP as anchor activity.
Krushidhan has a portfolio of 15 product lines, which provide measurable economic benefits to farmers, in more ways than one. These include cost reduction (e.g. agri-inputs at discounted price and at door step of farmer), risk reduction (e.g. crop insurance to share-holders provided this year) and productivity increase (new improved varieties, new package of practices etc.), over and above better price realization due to aggregation and value addition. In each activity, the ratio of increased benefit to the farmers versus profits to company can be worked out.
In the case of MSP for groundnut, in 2018-19, a total of 3174.6 MT valued at Rs 14 crores was sold. The company earned a commission of 1%. With an average price difference (over market prices) of Rs 200/20kg, farmers benefitted to the tune of Rs. 3 crores. The ratio of farmers’ benefit to Krishidhan’s profit worked out to 22.5.
MSP is thus a good example of an anchor activity. The social benefits to farmers were high, while the company earned enough to make it profitable and build its reserves. In addition, the market risks were minimal, as the price was guaranteed by the government. This though is not sustainable, as there is no guarantee that MSP for a particular crop will be available on a regular basis. Portfolio evaluation helps indicate clearly, which activities should be pursued actively as anchor activities, which would cross-subsidize those that need to be taken up purely for social goals.
Assessing Performance of an FPO
Mr. Mohan Sharma, Director DSC and ‘expert director’ of Krishidhan for three years, believes that simply looking at the bottom line of the balance sheet does not bring out the financial worth of the FPO. Apart from the economic benefits mentioned above, which are measurable, there are other benefits that are intangible (not measurable or measurable over a long timeframe), but no less important. Krishidhan has made considerable impacts through intangible benefits such as risk mitigation in agriculture (dealing with climate change, improving soil health and sustainability, reducing negative impacts of chemicals on local micro-climate) and health of farming communities (reduction in problems related to cancer induced by chemical pesticides).
Since FPOs are primarily social change institutions, social returns on investment (SROI) rather than just profits, should be the yardstick for assessing their performance. However, this may require impact studies where assumptions made by researchers are often questioned and are not uniform. Pending reliable norms for measuring social goals, we suggest that the weighted average of portfolio ratios (farmers’ benefits over profits of company), be taken as a proxy measure of its performance. This would integrate financial benefits passed on to the farmers with profits made by the company for financial survival and sustainability.
Astad Pastakia is an independent development consultant. Sachin Oza is the Executive Director of Development Support Center foundation.