Towards newer FPO Designs for Rainfed Areas - I
The Amul model of collective enterprises is an important pilgrim’s spot for seekers of successful collective enterprises. However, its application for seasonal commodities, especially in rainfed areas requires not replication but a reinvention of alternate business models. The first in a series of policy ideas for differentiated, and robust, FPO.
Many recent landscape reports on the state of FPOs in the country have highlighted that, barring a few exceptions, many FPOs are stillborn with little scope of growth after the project period. These exceptions, and celebrated successes, often belong to irrigated areas or have had the significant support of agencies like the National Dairy Development Board for milk producer companies and more recently the state livelihood missions. Differentiated data on FPOs based on perennial products like milk, meat, fish etc. in comparison to FPOs based on seasonal products like grains, fruits and Non-Timber Forest Produce (NTFP) is currently unavailable. Even as there are calls to replicate the Amul model in pulses and other crops, it is important to recognise, and plan for, the complex challenges that FPOs face in rainfed areas in non-perennial commodities.
Why rainfed FPOs need alternate business models?
FPOs in the rainfed regions cannot easily overcome the Complex, Diverse, Risk (CDR) prone nature of rainfed farming. This has bearings on its business models too for the following reasons.
The first deals with seasonality and volatility of produce. Seasonal products like grains are harvested in a few months and lead to the accumulation of relatively large quantities as compared to perennial products like milk. Farmers are generally desperate to sell these quantities at one go to release cash and pay off their debts for seeds and other agriculture inputs. If the farmers / FPOs want to sell it in tranches, they need both larger storage and working capital. These products are inherently volatile. Typically, if a crop say like soybean or onion attracts a good price in a year more farmers shift to that crop in the next season. Shifting costs, to use a business lingo, is negligible in comparison to horticulture or even cattle rearing. Oversupply and crashing of prices can lead to farmers shifting away from the crops in the third year with another cycle of scarcity and prices going up.
In addition to inter-year volatility, there is also with-in year or seasonal volatility. For most perennial products like milk, meat, and vegetables there have been successful technological interventions to manage volatility. For example, milk production increases in winter and reduces in summer. Technological interventions like converting milk into milk powder can help in managing the milk supply in winter and increasing it is summer through significant capital investments. These kinds of technologies are not prevalent in non-perennial products.
In rainfed areas, the possibilities of crop failure due to erratic rain are higher. Crop diversification is thus a desirable strategy in rainfed areas. However, the consequence of crop diversity is relatively lower quantity available for sale per crop. This makes the trading/processing operations more diverse and complex.
Managing expectations and negotiating markets
Small and marginal farmers need institutions that provide voice and are governed in such a manner that they feel less alienated. They should be able to influence the functioning of FPOs, especially relating to the diversification of crop-mix. Promoting institutions often overburden these nascent FPOs with expectations. These include demands for social inclusion and farmer empowerment to ensuring commercial profitability, demonstrating entrepreneurial zeal and maximising the value to the farmer by directly reaching to the final consumer etc. This hybridity makes the management of FPOs extremely complex and the financial and human resource support to manage this transformation is often limited. The salary structure does not allow the recruitment of well-educated professionals and FPOs have to deal with these complex challenges with under-resourced support in a very limited period.
One of the allures of the Amul model is the vertical integration and end-to-end ownership of the value chain. This was however built over decades and was not an option for FPOs since late 1990s. There have been fundamental changes in the strategic orientations of business organisations since then with business organisations aiming to minimise complexity through a few core competencies or capabilities to remain competitive in the market. An FPO embracing the entire value chain from procuring seeds to selling value-added products directly to end consumers is inherently ill-suited for Indian markets today. While there are demands to replicate the celebrated Amul model for FPOs, the modes of aggregation through farmer-owned institutions are unclear and significantly under-invested. With neither the capital nor the capability FPOs are expected to find significant value by taking on all operations or realise better prices for their producer by linking with corporates in an unequal market space.
Search for alternative models beyond Amul
It is necessary to design at least two different types of FPOs with different mandates, business models and organisation designs. The institutional structure and evaluation parameters for these two types of FPOs will also need to be different. Type 1 FPOs could consist of 300 to 1000 members (in tribal areas the Gram Sabha could double up as type 1 FPO). These FPOs will deal with the production or wholesale procurement of seeds and other inputs, providing agri equipment on rent, extension activities for various agriculture operations for relevant crops, and promotion of individual or group enterprises for activities like bioresource input production. They will also undertake aggregation of output, quality checking, and primary processing like grading, cleaning, packing and selling to large buyers or Type 2 organisations. These Type 2 organisations will buy from type 1 FPOs, store, process, export, brand and sell in B-to-C format or in B-to-B format depending upon the commodities. Potentially these Type 2 organisations could be larger FPOs or Federations but also social enterprises like Safe Harvest, Earthy N Green, Manyam grains etc.
For a country as diverse and complex as India, we need many pilgrim spots even as some, like Amul, will maintain its primacy and pride of place. In future blogs, we shall delineate the salient design features of Amul se Aage collective enterprises for the large rainfed regions of India.
Shirish Joshi works as 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