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Every FPO should not be expected to be able to carry out end-to-end operations and realise full value in the value chain. Instead, depending on the capacity and market arrangements, FPOs should find the scale of operations suited to them. Having delineated the features of Type 1 FPOs, especially in rainfed areas, this article dwells on the need and design of a market facing Type 2 FPOs.
Not all ‘A’s for Amul: The need for Type 2 FPOs
Ground experiences indicate that not all FPOs can emulate the market linkages of an Amul or District Milk Producer Companies promoted by NDDB in 70s or a Sahyadri FPO of the last decade. While Type 1 FPOs work well from seed to primary processing making farmer produce ‘market ready’, there is a need for a Type 2 FPO that can procure from smaller FPOs and move up the value chain.
If multiple private sector players can come in, competition between private players can lead to better price realisation for farmers in type 1 FPOs. Only a few FPOs like Krushidhan are able to build on clusters and SHGs to establish stable market that works across multiple districts since the process takes several years. Similarly, FPOs like Ram Rahim have linked to a social enterprise, Safe Harvest, and able to generate produce that is market ready. These large (Type 1) FPOs may graduate to some of the Type 2 FPO activities but require sustained efforts and investments from promoting organisations that is clearly lacking in the ecosystem today.
There is thus a need for creating type 2 FPOs to support Type 1 FPOs. Typically, farmers in Type 1 FPO may have a mix of agriculture and allied livelihoods of cultivation of agricultural crops like grains, fruits and vegetables, Non Timber Forest Produce (NTFP), backyard poultry/ goat keeping/ dairy and non-food crops like cotton. Certain commodities e.g., Mahua flowers that are sold and consumed in nearby regions may not need large scale aggregation or processing. However there is a potential for moving up the value chain for other products that would require operating at scale, taking higher risk, undertaking further processing, reaching to distant urban markets and exports etc.
Understanding the multi-sided relationship of Type 1 and Type 2 FPOs
The Amul model is predicated on the critical linkage between the village dairy cooperative societies to the District Milk union and the apex marketing federation of these milk unions under GCMMF. This hierarchical, many to one relationship, does not work easily for non-perennial product FPOs. The competencies and capabilities needed for grains based Type 2 organisation like say Safe harvest are quite different from running a Type 2 organisation for dealing in fruits and vegetables like for example SAFAL. Thus, a Type 1 organisation may have to deal with many Type 2 FPOs. On the other hand, an organisation like Safe harvest may need to buy from many different types of Type 1 organisations to ensure that it has adequately diverse portfolio of staples. Thus, the relationship between Type 1 and Type 2 FPOs will be many to many.
This fundamental difference vis-à-vis the Amul model necessitates promotion of an ecosystem where both Type 1 and Type 2 have to be independently viable. The output per product per farmer in rainfed areas is expected to be low, as technically, farmers are expected to practise product diversification. This strategy can work if the number of Type 1 FPOs corresponding to one Type 2 FPO are large enough for Type 2 FPOs to achieve scale. As a thumb rule, possibly 3 to 4 Type 2 FPOs can correspond to 400 to 500 type 1 FPOs. The calculation will obviously depend on the specific product group, its business model etc.
Some risks that Type 2 FPOs could avoid
It is necessary to identify viable business models for Type 2 FPOs. Not all large FMCG giants like P&G, HUL, ITC open exclusive outlets. Amul and Patanjali haven’t fared well as single brand stores either. Generally, consumers prefer different products from different brands so Type 2 FPOs should be wary of opening single brand standalone shops.
Similarly, Type 2 FPOs need to avoid their own distribution till they have both quantity and variety. Value chain players bring in not just scale but also variety and capabilities. It is necessary to define the business model based on comparative advantage and manageable complexity.
One well-known NGO was very successful in promoting a dairy in a Tier 2 city few decades back where the concept of packaged milk was new to the consumers. A similar effort, however, to promote a dairy near a big metro a few years back led to a financial disaster. One of the key reasons was that this city has more than 40 milk brands and the NGO did not have the staying power to sustain losses. We tend to forget that Amul was promoted in an ‘underdeveloped’, pre-liberalised market where it did not face competition from multiple national and international private players. FPO promoters need to temper the “dream” of becoming branded B2C distant market players that is not necessarily viable.
Promoting viable models based on contextual capacities
There is a need for a closer examination of the business models to appreciate the comparative advantage built over years to see if they are truly replicable. Sahyadri (processing, contract manufacturing and exporting of high value fruits and vegetables) has mastered the art of exporting as per stringent western standards. They have utilised the facilities created for grapes storage and processing for yearlong processing of other fruits and exotic vegetables. FPO federations, on the contrary, have done well to act as procuring agency on behalf of the government for various price support schemes of the government. Based on these experiences they could be encouraged to take up buy, store, process, and supply operations for PDS and other schemes of the government. These entities can graduate to acting as aggregators for selling to large private sector players. Newer brands that are FPO friendly, like Safe Harvest, ABY Farmers could also play such a role.
Key factors beyond the business model
Market facing, Type 2 FPOs or FPO-like institutions, are critical for doubling farm incomes. Mere aggregation and sale to corporates may not help FPOs or the farmers and these Type 2 institutions can bring in greater market democracy. State support can be varied and could be in the form of processing plants like rice mills or pulp making or food processing etc. It may also be useful to explore the active promotion of joint ventures . These manufacturing units can produce for Type 2 FPOs as well as for private players in the market. If Type 2 FPOs outsource their manufacturing / processing operations, they are likely to remain more agile and competitive. Unfortunately, the current 10000 FPO scheme does not envisage a Type 2 institution and thus has no support for state FPO federations too. There is a need to go beyond a naïve expectation that all FPOs promoted would be market savvy to grow like a Sahyadri or even a Ram Rahim. The next blog will delve into policy recommendations for reimagining the FPO scheme for more effective delivery and outcomes.
Shirish Joshi works as an independent consultant for institutions and markets.
C Shambu Prasad is a Professor of Strategic Management and Social Sciences at the Institute of Rural Management Anand and coordinates the LFI project
nicely written. Type of 1 FPOs required working capital or Revolving fund from Type 2 so that they can use the funds for procuring the produce from farmers. -Raja shekar-CSA