Occasional Publication 17

THE LOGIC OF FARMER ENTERPRISES

Ajit Kanitkar

The occasional paper series provides an opportunity to academics and/or practitioners

to share their ideas and insights on contemporary issues of Rural Management. Please
share your comments and inputs with IRMA and the author/s.

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January 2016
 The Logic of Farmer Enterprises1

Ajit Kanitkar2

Abstract

This essay presents an overview of recent experiences with regard to promoting,

managing, and growing farmer enterprises (FEs) while highlighting the need for
promoters of FEs to plan their interventions depending on the stage of growth of these
enterprises.It is based on a reflection and synthesis of ideas and insights gained by the
author from promoting and managing FEs and duringconversations with field-based
promoters pertinent to the challenges and opportunities of managing FEs in twenty-first
century India. The paper maps the current ecosystem for FEs and then highlights missing
links in need of strengthening for the emergence of strong and vibrant FEs. The paper
suggests that rather than treating an FE as a successful finished product an openness to
see it as a work in progress offers opportunities forboth academicians and practitioners to
collaborate towards co-creating a live learning laboratory that will be beneficial to
primary producers.

1
An earlier version of this paper was commissioned as part of the project Alliance for Advanced Research
and Development Initiatives (AARDI), Chennai led by Dr. C. S, Sundaresan, funded by the GIZ, India
office. Dr. Sundaresans detailed feedback and AARDIs support was followed by the encouragement from
Prof C Shambu Prasad and the Dr. Verghese Kurien Centre of Excellence (VKCOE) at IRMA to rework
this into an occasional paper. I gratefully acknowledge his facilitation in the process and formotivating me
to reconnect with IRMA after 1995 when I was member of the faculty as well as the comments of the
reviewers. Usual disclaimers apply.
2
Dr. Ajit Kanitkar (kanitkar.ajit@gmail.com) is a development consultant based in Pune (7 Sevanand
Apartment, 892, Sadashiv Peth, Pune 411030) and has served in various capacities with grant-making
organisations in the domains of livelihoods, microfinance, farmers organisations, and entrepreneurship in
the past; he was a faculty member at IRMA.

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1. INTRODUCTION

There have been many attempts, since Indias independence, to promote collective action
of farmers with the goal of economic and social well-being of the farming community,
especially the small and marginal farmers. The more notable among these include the
Amul led and NDDB (National Dairy Development Board) supported white revolution
of the 1950s, 1960s, and 1970s. More recently, there has been a concerted and accelerated
effort to strengthen the FE movement bypromoting FarmerProducer Organisations
(FPOs) and, following the amendment of the Companies Act of 2003, Farmer Producer
Companies (FPCs) (Singh, 2008; Singh and Singh, 2014). The Small Farmer
Agribusiness Consortium (SFAC) of the Ministry of Agriculture (Government of India)
has been leading the FPC movement in the country in the context of increased
globalisation of trade and agriculture increasingly influenced and impacted by domestic,
regional, and international agriculture / commodity markets (Sharma 2015).

Why Farmer Enterprises?

In literature, as also in practice, one hears a common phrase: Making markets work for
the poor. This description largely captures the reasons for organising farmers through a
farmer enterprise (FE). The rationale behind promoting a new and organised entity lies in
enhancing the farmers ability to deal with the markets more efficiently. It would be
wrong to assume that FEs connect farmers to the market. Farmers of all types small,
marginal and large are connected, to both the input and output markets. There is a bleak
side to all this, however. Experience has shown that these relationships with the market
extending over many years often lead to situations that are unfair and exploitative from
the small farmers standpoint. Small farmers are, typically, dependent on market
intermediaries who are either larger farmers or traders in the vicinity. These middlemen
double up as both suppliers of inputs (seeds, fertilisers, pesticides) as well as buyers of
agricultural outputs. In the absence of formal financial institutions in rural areas and their
general reluctance to transact with small farmers, the latter have no option other than
depending on the same intermediaries and/ or informal financial arrangements including
moneylenders, particularly during personal emergencies. The input suppliers donning the
role of financiers, lending at exorbitant rates of interest, often enter into a buyback
arrangement at prices that are much below the market price at the beginning of the
harvest season as a loan recovery mechanism.

An FE is conceptualised in theory and practice to overcome some of the disadvantages of

the small farmer as described above. Collective action by hundreds of small farmers is
expected to result in cost efficiencies as demonstrated in the

Input: aggregation of demand for input supplies resulting in reduced costs

Output: Aggregation of produce for supply to the market leading to better prices
consistent with the quality measured through transparent and fair processes
Throughput: Peer exchange of knowledge and information for productivity
enhancement practices

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 Risk reduction as a result of the collectivisation efforts.

An FE is expected to help small farmers establish fairer and greaterbeneficial interactions

vis--vis other stakeholders including market intermediaries, government extension
systems, and formal financial institutions. Clarification with regard to the goals of a FE is
in order. The normative goal of collective action (as against Tragedy of the Commons)
provides a favourable atmosphere or logic for the promotion of an FE. But this alone is
not sufficient. The ultimate goal of an FE is the economic betterment of its members over
other (laudable) social objectives including participation, ownership, governance, and
empowerment. One of the key indicators underlying the success of a well-functioning FE
is whether or not it leads to higher net economic benefits to its participating members. For
instance, assuming that a small farmer is able to realise a net income of Rs. 1500 per ton
for the sale of cotton/soybean/pulse through the existing intermediary (mandi commission
agents, adtya etc.), a new intervention like an FE must ensure a benefit of, at least,
Rs1500 to its members. The FE is also expected to provide the same set of services or
more than those offered by the current alternatives. Increasing returns on the members
produce is the underlying reason for collective action and FE promotion.

2. THE EMERGENCE OF FEs IN THE LAST 100 YEARS A QUICK

OVERVIEW

While it is not easy to review a centurys history and evolution of FEs in this essay, we
have attempted to present five broad trends discernible overthe last century with some
highlights in each stage.

1904 1947

i. FEs focussed around credit and inputs were largely organised under the co-
operative act enacted during the British rule in India

1947- 1975

ii. Expansion of the FEs mentioned in (i) was conducted with the patronage and
active intervention of the Government of India and state governments.

1947-1990

iii. Piloting and scaling up of FEs in agricultural commodities (dairy, fisheries, silk,
poultry) and other sectors (handloom, handicrafts, NTFP) were strongly backed by the
Governments co-operative departments and autonomous institutions.

1990 2010

iv. Demands for progressive co-operative legislation to organise the FEs while
freeing them from the stranglehold of government control and interference resulted in the
enactment of the Mutually Aided Cooperative Societies (MACS) Act, first in Andhra
Pradesh and later in 10 other states.

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2000 onwards

v. A discussion on a suitable legal format regarding organising FEs; a backlash on

MACS on the part of some state governments led to reverting to the earlier co- operative
legislative framework. Exploration of an alternate legal framework under the Indian
Companies Act encouragedthe formation of Farmer Producer companies.

The current ecosystem is, thus, dominated by the co-existence of FEs in co-operative,
federation, Producer Company, and the private enterprise legal format. There is, besides,
an ongoing discussion regarding the possibility of having a separate SHG and Federation
Act in place. The UNDP (United Nations Development Program) is leading the
consultative process on this theme along with the National Rural Livelihood Mission
(NRLM) of the Government of India.

In the first part of the 20th century, during British rule in India, the first co-operative act
was legislated. The Co-operative Societies Act, the first all-India Act, was passed in
1904, which envisaged the formation of village credit societies. In 1912, the Act was
amended to enable the formation of other types of societies for activities related to sale,
purchase, production, housing etc. This Act also provided for the creation of federations
of primary societies and for the supervision, audit, mutual control, and overall
development of the co-operative movement. In 1919, the subject of co-operation was
transferred to the provinces (state governments) with most provinces enacting their own
laws to regulate the working of co-operative societies. This was first and most popular
legal format that many FEs chose to adapt. It was, essentially, seen as a legal framework
supporting the democratic functioning of an FE with One Member One Vote as the key
principle of its governance. Members, irrespective of their capital endowment, had the
same voice and stake in forming and, later, controlling the fate of their enterprises. This
was distinctly different from other dominant paradigms of those times where numbers of
votes were directly proportional to the equity investments of promoters. The latter
paradigm,naturally, revealeda bias towards including those capable of contributing a
greater share capital to the FE. (One Share One Vote).

Another major difference between the company and co-operative formats of an FE was
that co-operative FE members were also producers/service providers/users of FE services
unlike in investor-owned enterprises where ownership and usage were clearly divested
(Shah, 1996). Thus, in a dairy FE not only did the farmers own the co-operative enterprise
but also actively contributed to the promotion of the enterprise by pouring milk regularly,
buying cattle feed for their animals, and so on. Similarly, in a credit enterprise, members
contributed deposits to their FE and availed loans from it. This unique blending of
ownership and centrality of the FE activity with their own livelihoods made the co-
operative legal format more popular in terms of organising an FE. The FEs were,thus,
organisedfor financial services (saving and credit co-operatives) and, later, for
commodities like milk, oilseeds, sugar, fisheries, rubber, tea, coffee, even fruits and
vegetables. After 1947, the governments, both in Delhi and the states, actively
encouraged the formation of FEs.

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The government, overstepping its boundaries, began contributing equity capital to the FEs
reducing, thereby, their autonomy and freedom. The co-operatives and their business
activities were, in reality, an extension of the government. This fact encouraged the
degeneration of co-operative FEs. Many FEs became centres of inefficient business
activities, a convenient tool for passing over governmental largesse and for exerting
political and bureaucratic pressure and privileges. Elected boards of directors in well-
functioning co-operative FEs were superseded for, apparently no reason; to be staffed,
later, with government appointed officials from the office of the Registrar of
Cooperatives. The downfall of those years is well captured in the often-quoted remark
from an evaluation study: "Co-operatives have failed but Co-operation must succeed!"

A move towards the enactment of a progressive co-operative act was, essentially, in the
shape of a reform aimed at overcoming undue governmental interference in the
functioning of FEs and granting the autonomy and independence back to the
members/farmers.

The Andhra Pradesh Mutually Aided Cooperative Societies Act 1995 states in its
preamble that it is an Act to provide for the voluntary formation of cooperative societies
as accountable, competitive, self-reliant business enterprises, based on thrift, self-help and
mutual aid and owned, managed and controlled by members for their economic and social
betterment

The enactment of MACS was debated and challenged in the Supreme Court of India with
farmer representatives and government functionaries debating on the pros and cons of
both the Cooperative and the MACS acts. The MACS act did generate new interest in
promoting FEs even though some state governments did, later, amend or even revert to
the earlier co-operative act.

The enactment of a special section in the amended Indian Companies Act 1956 led to the
possibility of registering an FE under the Companies Act of 1956, which was impossible
under the earlier provisions of co-operative legislations enacted by state governments.
The amended law stated that the objects of the Producer Company shall relate to all or
any of the following matters, namely : - (a) production, harvesting, procurement, grading,
pooling, handling, marketing, selling, export of primary produce of the Members or
import of goods or services for their benefit. Thus, the idea behind floating Farmer
Producer Companies (FPCs) was an attempt to create hybrid institutions that would retain
both the positive elements of a co-operative structure (one member one vote; ensuring,
thereby, democratic member control) and the private company format (for registering
with the registrar of companies) for introducing ease and efficiency in business
operations.

The FEs offered in its design a higher level of autonomy necessary for responding to in a
dynamic economic context compared to the older co-operative model with its inherent
statist orientation and dependency syndrome. The Fes, perhaps, were also in sync with the
post-liberalisation era signalling a closer integration with the market forces.

5
Two major changes in the macro-economic context maybe cited as additional drivers that
prompted interest in exploring alternate institutional structures regarding organising small
farmers. First, the larger context of commercialisation of Indian agriculture over the past
two decades and exponential rise in risks for small farmers has necessitatedthe
exploration of new forms of organising. The move from food crops to cash crops for a
significant number of farmers, especially in irrigated regions of the country coupled with
an increased and changing consumption basket of urban and semi-urban consumers, has
led to higher growth rates both in the production and consumption of high value products
(such as horticulture, poultry, livestock, dairy, fisheries etc.). Thus, significant changes
both on the production and marketing frontsoffer possibilities for farmer-owned
enterprisesto become attractive options for producers and also the direction in which they
are likely to grow. For instance, the composition of the agricultural Gross Domestic
Product (GDP) has transformed over the past two decades with over 75% of its value now
contributed by high value agricultural produce.

Simultaneously, the nature of value chains (e.g. cotton, vegetables, poultry products) has
changed, necessitating collaboration betweenproducers on a much higher scale than
earlier to address production and marketing issues (compared to when staples cereals and
pulses dominated the agricultural GDP composition). New institutional mechanisms such
as contract farming, warehouse receipts, forward trade in commodities, and the
emergence of spot exchanges have altered the dynamics of interactions between the
producers and market players. At the same time, issues that challenge the small and
marginal farmers continue to remain largely unaddressed in the emerging dynamic
economic context.

It is estimated thatmore than 1000 FPCs have been promoted in the last ten years after the
enactment. The Government has been actively supporting and promoting FEs through this
legal format with SFAC taking the lead. There have been announcements in the Union
Budget of the governments contributing equity capital (as grant) to strengthen FPCs.
There is also a credit guarantee fund to encourage banking institutions to lend to FPCs.
These support interventions are critical in the light of the design constraints faced by
FPCs. In the subsequent section, we have documented 'weak capital base' as one of the
three critical challenges faced by the FEs in general and FPCs in particular.

In spite of the three dominant legal formats (co-operative, MACs and FPCs) certain
questions remain unresolved. The role of the promoting organisation, the need to mobilise
capital, the issue of ownership, autonomy, and governance are issues that are still being
debated. While the government is keen to promote FEs as a 'Public Good', experiences
indicate that once the government gets 'interested' in promoting certain forms of activities
and backs it with its own financial resources a 'control and govern' mind set is to be
expected invariably. Hence, institutions formed to promote famers interests remain
subservient to those of the government and its officials. Decline of the primary
agricultural credit co-operatives is a stark example of institutionswhich, instead of serving
their members, turned into departments of the government and were used for the delivery
of services decided not by members but the regulatory authorities.

6
Another unresolved and complex issue is the need for apex tiers of institutions to support
FE-related activities. Typical dairy FEs are equipped with a three-tier structure with
village-level enterprise activities managed by local (co-operative) enterprises which, in
turn, are federated into bigger structures, usually at the district level. The district
enterprise typically handles value addition activities such as milk processing and product
manufacturing. The district enterprises are then federated into a state-level entity that
provides a common marketing platform to the district-based enterprises. This three-tier
federated structure has been successful, by and large, in the dairy sector. On the other
hand, examples abound in other sectors of apex structures existing and thriving despite
weak primary and lower tier structures, sometimes even thriving and surviving at the cost
of theirown primary and district-level enterprises.

3. LIFE CYCLE OF A FE AND DIFFERENT ROLES / TASKS THAT NEED

TO BE PERFORMED

An FE, like a for-profit private sector initiated enterprise activity or, for that matter, any
enterprise activity goes through, broadly, the following stages of growth in its life cycle.
These are

3.1 Pre-promotion and promotion (12 to 18 months)

3.2 Start-up phase (18 to 36 months)

3.3 Growth-Expansion-Consolidation (36 to 60 months)

3.4 Decline leading to liquidation (if the FE does not perform well!)

The timeline mentioned against each stage ofthe life cycle is indicative of the tasks
involved and the time potentially required for accomplishing those tasks. The timeline
and stages, not set in concrete, are likely to change depending on the context. However,
an FE is generally expected to achieve a break even within 3 to 5 years of its
incorporation and to start delivering tangible returns to its
promoters/investors/shareholders/farmer members within this reasonable time frame since
its incorporation (unless the FE or any enterprise is engaged in an infrastructure-based
activity such as airlines, port, mining, steel etc. thatare not part of the discussion of this
paper). Based on this assumption, the subsequent paragraphs elaborate the essential tasks
that need to be performed at each stage. We also discuss who is currently performing
those tasks and who actually should be performing the same, in an ideal scenario of a
well-functioning FE ecosystem.

3.1 Pre-promotion and promotion of an FE

This phase lays the foundation forany enterprise. In a private enterprise, typically, it is a
group of promoters or an individual entrepreneur with the vision and dream of starting an
enterprise around an idea so that the product and/ or services offered by that enterprise
meet the unmet demands of the consumers at large. In the process, the person also expects
to generate a reasonable return on his/her investment. Convinced of the ideas potential to

7
reap dividends, the initial promoters invest their own money or raise resources from like-
minded individuals/shareholders, test the market, create a formal organisational form and
structure and set in motion an enterprise activity. This process generally holds true across
all sectors and in different geographies.

The typical pre-promotional and promotional activities of an FE have beencaptured well

in a highly popular film of the 1970s, Manthan, directed by Shyam Benegal with the
participation of renowned actors like Smita Patil, Naseeruddin Shah and Om Puri. The
film, essentially, traces the struggles and challenges of organising small milk producers
(otherwise connected to the market through an exploitative middleman and influential
dairy owner of the village) and motivating them to form an alternate organisational entity,
a milk co-operative society (an FE), that is not only inclusive but also offers fair and
transparent prices to the milk supplied by hundreds of unorganised small dairy producers.
Besides,economic returns governance and leadership functions of the FE are vested in
farmers hands. The film shows a team of professionals as the Spear Head Team (SHT)
organising the promotional activities of the FE in villages of Gujarat. The term spearhead
team captures the essence of all tasks associated within the promotional stage of an FE.
Someone has to spearhead efforts in order to organise
producers/farmers/women/cultivators/the tribal community to form the FE. While farmers
are, individually, parts of a societal ecosystem where different forms of co-operation and
collaboration mechanisms are already in place, an FE demands a new form of coming
together necessitating significant efforts towards educating and awareness building of the
farmers, a task undertaken on behalf of the promoters. As far as Indias dairy sector is
concerned, social leaders like Tribhuvandas Patel formed and led spear head teams. They
would move from village to village around Anand championing the FEs cause.
(Kanitkar, 2011)

Dr. DR Gadgil and Mr. Vikhe Patil in Maharashtra undertook similar educational efforts
for a number of years. Their efforts paved the way for the emergence of a number of
sugar co-operative FEs. Under the governments Operation Flood programme NDDB
took it upon itself to promote several FEs after the initial successes in Gujarat. NDDB
appointed several SHTs in different parts of the country replicating the dairy FEs. In
recent times, many NGOs including PRADAN, BAIF, CDF, ASA, SRIJAN, and
AKRSPhave been promoting new FEs with the support of national institutions like
NABARD and SFAC.

It is essential that a proposed entity of a FE offer value proposition to its members. It is

only when members become convinced about the value proposition of a new entity vis--
vis the existing arrangements will they become interested in joining the new entity.
Experience has shown that farmers have to be cajoled to become members of a new FE. It
is a long and hard process of communication aimed at winning trust and friendship
leading to participation and empowerment on the part of farmers, who are and should be,
at the centre of the enterprise. Most of the time, participating farmers are likely to viewa
new FE with caution and scepticism. This is because they might have been duped in the

8
past by many outside interventions initiated by the government, NGOs, private companies
and even individuals.

Building trust and cohesion is just one of the many core tasks pertaining to promotional
activities. Promoters are also expected to educate farmers regarding the functioning and
organisation of an FE, which is a new institution of the market that they have never
dealt with before. Another critical task is building concrete financial stakes of the farmers
in the proposed FE by mobilising equity capital in the form of shares/membership
deposits. Another task has to do with seeking commitment regarding patronising ones
own FE, a concept that was discussed by Tushaar Shah in his research on co-operative
FEs (Shah, 1995). He argues in favour of incorporating strong design principles in the
formation and management of an FE that encourages and rewards member centrality and
member patronage. The members have to agree to transact a certain amount of minimum
business such as supplying milk for at least 180 days to the co-operative dairy FE or
selling a significant part of agri-produce in the initial years of activities of the FE. It is
important for an emerging FE to undertake some aggregation activity even on a trial/pilot
basis to demonstrate the feasibility of such operations to its own members in the initial
time period.

While all the above activities may require a minimum of at least 12 months although
some could be expedited if the intervening agency had some history of interaction with
the community including having undertaken watershed development projects in that
geography or some other engagement with the community. Short circuiting or hastening
promotional activities is like constructing a building with a weak foundation. (Please refer
to the challenge of weak capital base in subsequent pages).

3.2 The start-up phase

This is an extension of the promotional phase where the membership of an FE is expected

to grow. The FE is expected to establish its own systems for procurement, quality
assurance, weighing, payment to members, recordkeeping, and interacting with tax
authorities to obtain the requisitelicenses for undertaking business activities etc.
Duringthe start-up phase the FE also needs to educate its expanding memberbase and
ensure that systems of proper governance,including organisingmeetings of Board of
Directors,are in place. It also needs to appoint key staff and hire office space among other
things. Thus, in the start-up phase, it is expected that the business activities of the FE will
start rolling. For a dairy FE the daily collection of milk is the expected natural outcome of
an extensive promotional activity. Along with milk collection what needs to be organised
is a system of fat-based milk testing, record keeping, member payment, milk collection,
storage and transportation.

Being an agriculture related FE its members are expected toundertake aggregation

activities for buying critical inputs like seeds, pesticides, and fertilisers needed for
agricultural operations. Some pilot market linkage activities, such as weighing with the
help of electronic weighing scales (against the non-transparent weighing scales of

9
traders), will certainly add to the confidence level of members. In a well-functioning FE
members are likely to anticipate announcements regarding annual dividends and other
surpluses. Organising general body meetings could further strengthen their faith in the
FEs functioning. For all this to happen it is critical that an FE establish simple yet robust
accounting, payment, audit, information, and recordkeeping systems so that information
about the business activities of the FE is accessible to members and the management on a
real time basis.

3.3 The Growth and the Expansion stage

During its growth, expansion, and consolidation phase an FE is poised to expand

operations with regard to both inputs as well as outputs. A typical dairy FE might think
of startingacattle feed unit to boost the cattle productivity of its dairy farmers or to
explore opportunities for starting a processing unit to capture a better value of the end
product for its members. Activities to build a stronger value chain, either by forward or
backward integration in the business activities, could be aimed at strengthening the FEs
market share and dominance. It could aggressively build a brand name for its product;
expand its member base in terms of both quantitative and geographical coverage while
exploring linkages with other FEs to establish economies of scale and scope. Coming
back to the dairy enterprises of Gujarat in the 1960s, the evolution of a common brand
name AMUL and the formation of a common marketing federation as an apex entity
(Gujarat Milk Marketing Cooperative Federation or GCMMF) with exclusive rights over
the AMUL brand name is a clear example of growth, expansion, and consolidation
strategies. Recently, there has been an attempt to federate all FPCs in each state and form
an apex company of all producer companies. The objective is to aggregate the strengths
of all FPCs not just for efficient business operations but also for increasing voice pitch
during policy-regulatory discussions, especially during interactions with the government,
banking institutions, taxation authorities etc. The expansion of an FE is not a linear
process ensuring that it will reach its growth phase in its fourth or fifth year of its
operations. Life cycle and growth depends on a number of internal and external factors,
yet the logic of enterprise strategy anticipates that any FE needs to attain a critical
business volume within the first five to seven years of its operations.

3.4 Decline and liquidation of an FE

This stage in the life cycle of any enterprise, be it an FE or a corporate enterprise, is

inevitable given the dynamic economic conditions, changing nature of technology and
consumer preferences, emergence of competitors, and availability of alternative products
and services,among other things. FE management needs to be continuously agile and
responsive to the ever-changing business environment. There are innumerable examples
of flourishing business entities becoming extinct in less than a decades time for all or
some of the reasons mentioned above. The much talked about sugar co-operatives (FEs in
Maharashtra, UP and parts of Gujarat) vibrant in the 1990s and 2000s are faced with a
series of crisis in recent times. Some of them are in the real danger of being closed down
or liquidated. Many continue to remain vulnerable to not just local but global

10
phenomenon including the emergence of bird flu in South Asian countries or price
fluctuations in global commodity markets. Price variations in corn (maize), wheat, and
soya in other countries can exert a negative impact on FEs in India. Drought conditions
and surpluses in European countries can decimate or provide opportunities for growth to
Indias dairy-based FEs, on the other hand.

Apart from economic and market factors, FEs could undergo internal transitions and
changes in leadership, management, and their membership profiles exerting a negative
impact on even well-functioning FEs. About 20 years ago, the management of AMUL
realised the need to undertake a massive member education programme having
discovered that most of its members were second generation ones with little knowledge
of the philosophy and history underlying the formation of AMUL. As the co-operatives
and their federated structures mature and as leaderships in both the executive and the
memberships go through transition and the non-political space is likely to be threatened
by vested interests it becomes utmost critical to protect and reenergise the spirit of the co-
operative organisation. Gujarat and many other states would need to handle these
transitions.

4. THE TASKS THAT NEED TO BE PERFORMED

During the promotion and start-up phase of an emerging FE, all related tasks are
performed either by a charismatic leader or by well-meaning promoters of an NGO, by
professionals from organisations like NDDB and SFAC or by government functionaries,
as in the case of FPCs promoted in Madhya Pradesh and Rajasthan under a World Bank
supported project. The promotional activities of external agencies during the initial years
are expected to build the foundation on which an FE is expected to move ahead in its life
cycle. To that effect, it is anticipated that the FEs professional managers and Boards
elected representatives will shape the growth of the FE.

Several FEs in the dairy, sugar, and other sectors have undergone such handing over and
capacity building of local leadership. These FEs have continued to function and thrive
even after the withdrawal of promotional agencies and out movement of deputed
professionals or SHTs. The elected Board of Directors and the professional management
staff of the FE are empowered and trained to conduct business activities. However, failure
stories abound regarding genuine and long-standing promotional efforts that didnt lead to
a vibrant FE ecosystem. NDDB promoted oilseed FEs did not grow in their business
stature as did the dairy FEs. Many FPCs promoted by SFACsand NGOs over the last five
years continue to remain dependent on both financial (grant) resources as also staff
capacities on external entities. Their operational self-sufficiency has also not been
established yet, rendering them vulnerable to all types of business shocks.

5. THE ABIDING CHALLENGES IN PROMOTING AND TRENGTHENING

FEs

While it is desirable to have thousands of small, decentralised and farmer-centric

enterprises in reality the experience of the last ten years especiallywith regard to

11
promoting FPCs has thrown up some abiding challenges intrinsic to the process of
strengthening FEs. We highlight three key challenges in the following paragraphs -
capital, management, and governance challenges.

5.1 Weak capital base:

FEs are born weak and they continue to remain capital deficient in their entire life cycle
of activities. The following hypothetical example illustrates the capital deficiency of a
typical FE.

Year 1

Number of members/ farmers : 1000

Initial equity capital contribution/member : Rs.1,000

Share capital : Rs.10,00,000

Year 3

Number of members : 1000

Additional capital contribution every year : Rs. 1,000, Rs. 3,000

Share capital : Rs.30,00,000

The experience of practitioners promoting FEs suggests that it is extremely difficult to

mobilise a share capital of Rs.1,000/- from small and marginal farmers in the initial years.
By and large, any agriculture-related promotional activity by an external entity is viewed
with suspicion and riddled with an attitude of What is in it for me? and What schemes
have you brought for us? Except for a few notable exceptions of CDF promoted savings
and credit co-operatives in the (erstwhile Andhra Pradesh) Telangana region that were
repeated later in womens dairy enterprises, there are not many success stories related to
FEs with a strong capital formation. With a limited capital base ranging from Rs. 10 to
30 lakhs in the first three years of its operations, a question remains regarding the extent
of debt leverage an FE may aspire for. Given the trust deficit and ever-present cautious
attitude of financial institutions towards small farmers, it becomes harder to obtain
significant debt or working capital for even an ongoing aggregation business of an FE. In
this scenario, we have not assumed any investments in fixed assets of an FE (such as a
processing plant, a warehouse building or seed production facility.) If one were to
include fixed costs in addition to the working capital requirements of an FE, the financing
needs would be significantly high.

There is an argument in favour of FEs building on their capital base on the lines of for-
profit public limited companies that retain part of their annual profits pooling them into
general reserves strengthening, thereby, their balance sheet and ability to raise debts
against equity capital besides surpluses. However, in a typical FE, farmers/members have
clear expectations of immediate returns in the context of better procurement prices for
their produce and reduced inputs costs along with a share in the surplus generated through
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business transactions of the FE. Herculean efforts are required to persuade members into
retaining their surpluses in the FE as opposed to expecting dividends in the short run. This
is as difficult as asking those concerned to contribute their share capital in an entity with
untested business potential. Thus, a typical FE is capital weak at its birth and continues to
remain capital starved in the crucial first three to five years of its existence.

The legislative framework, too, acts as a barrier because, in an FE, members alone can
contribute to equity. Venture capital investors, philanthropists, or non-members are not
permitted to contribute equity capital. Significantly, during the Operation Flood supported
expansion of dairy enterprises much of the capital cost (needed for setting up milk
processing plants, milk powder unitsetc.) came from external assistance channelized by
NDDB. Also, loans to FEs were financed at concessional interest rates under the latters
aegis. In Madhya Pradesh it was the state government that decided to extend grants to
capitalise the FPCs. The Union finance budget of 2013 and 2014 provided promotional
grant assistance first, via SFAC, and later through NABARD. While this is a welcome
step towards addressing the genuine concerns of capital starved FEs, the quantum of
assistance proposed under this scheme of the government is far too low and delayed in the
life cycle of FEs.

5.2 Under managed FEs, perpetual management deficit

Many practitioners advocate that Festurn into farmer-owned and farmer-managed

organisations. FEs areas complex as other enterprises. Typically,an FEs activities
involve diverse managerial functions in an enterprise including procurement (purchase),
marketing, finance, human resources, regulatory compliances, and shareholder/member
relationships. Except for the individual production activities of farming FEs require the
same systems and processes as enterprises of similar scope and size. The following
hypothetical illustration depicts the size and scope of activities of an FE in its first three
years.

Year 1 Membership 1000

Input aggregation Rs. 5000 per member

Output aggregation Nil

Total Business (1000 X Rs5000) Rs. 50,00,000

Year 3 Membership 1000

Input aggregation Rs. 10,000/ member

Output aggregation Rs. 10,000/ member

Total Business (1000 X Rs.20000) Rs. 2, 00,00,000

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Adding services like crop insurance and seed production would be like expecting a newly
established FE to handle a business running into one to three crorerupees within a few
years of its launch. Add to this the dimension of social business dynamics including
managing conflicts between small and large farmers, educating members, forging a
cohesion in their functioning, retaining interest in theFE, maintaining mainstream
business compliances including registering for DIN and TIN in the context of board
members, conducting AGMs, and reporting and depositing taxes such as VAT etc. All the
above business functions require a team of at least three to four competent and
professionally trained staff to be led by a CEO/Managing Director as in other
organisations with similar business operations and size.

Identifying and placing professionals pose indomitable challenges with FEs lacking the
financial muscle to attract the latter at current market rates. Besides placing professionals
from outside, retaining their interest over the long term is another critical challenge
faced by FE promoters. There have been arguments in favour of training local resource
persons and developing management capabilities within the immediate environment and
ecosystem of an FE (including training local agricultural graduates and orienting them
with management functions). While this is a desirable solution the number of success
stories has been hardly encouraging. It needs to be noted, though, that innumerable dairy
FEs largely succeeded due to the robust human resource support provided for nearly
thirty years, initially, by NDDBs professional staff who were deputed for limited
durations at newly-formed FEs. Later, graduates emerging from premier institutions like
IRMA offered their services to many emerging FEs. As FEs get into complex business
activities beyond mere aggregation (examples includecheese manufacturing in a dairy FE
or setting up a dalproduction unit in an agricultural FE), these enterprises require the
specialised skills and expertise of professionals trained in various disciplines.

These skill sets are hard to acquire on the part of FEs, it being difficult to attract and
retain professionals in a Greenfield location away from glamorous job opportunities in
metropolitan areas. Thus, a permanent management vacuum exists in an otherwise vibrant
and potentially profitable FE. This vacuum is often, then, filled in permanently by staff of
the promoting NGOs who, while unequipped to manage complex Fes, learn on the job,
usually at the expense of the profitability of the fledging FE or on grant support from
philanthropists perpetuating its problem of weak management capacities.

To conclude, an FE is a dynamic business entity requiring top quality management inputs

at all times as illustrated by a recent news report from Sangli, Maharashtra. According to
this report, the Shetkari Sahakari Sugar Cooperative (a sugar FE) was promoted in the
early 1970s by a visionary chief minister of Maharashtra, Vasantdada Patil, himself a
grassroots farmer. A vibrant and well-functioning FE at one time it has had to put up 20
acres of its factory land under its possession on sale to overcome, ostensibly, recurring
losses from its operations. This FE,owned by more than 10,000 farmer members at one
time, was the countrys pride. It had a sugarcane factory with a crushing capacity of 5000
tpd. Something is likely to have gone amiss in the functioning of the FE to the extent that
this icon of the 1970s is now faced with a life and death situation. While changes in the

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economic and technological environment could cause an FEs downfall, the
managements inadequacyin the context of anticipating and dealing with shifting changes
is equally responsible.

5.3 Governance and ownership: Whose FE?

The third significant challenge faced by FEs involves the issue of governance and
ownership. Theoretically speaking, this question is irrelevant because an FE is a business
owned by farmer-members! However, this challenge is closely linked with the former two
challenges concerning weak capital base and management deficit.

More often than not, FEs are promoted not by the farmers but by those interested in their
well-being. This outsider perspective continues to haunt the functioning of Fessince
inception.Farmers need to be coaxed into coming together for collective action. This
becomes easier with someone like Tribhuvandas Patel, himself a farmer and political
activist of Kheda (Anand) in the 1950s, at the helm. Farmers need to be mobilised into
forming an FE; they need to be continuously educated about their own enterprise and
the responsibility they have towards governing it. In reality, this is easier said than done.
There are complex issues of underlying socio-cultural processes in a collective action,
capacities of both the outside promoters and the insider farmers, facilitating styles and
processes adopted by external promoting agencies, etc. All this, together, can create a
situation in which an FE is seen as an NGOs business even with farmers having
contributed share capital or signed documents with regard to incorporating the FE. There
are elected Board Members and protocols of governance of the management defined by
the Board. Yet the extent to which these protocolsare practiced in real life is a billion
dollar question. The issue of members capital is critical because if anFE is truly built by
channelizing members capital year after year, there are reasonable chances that it will be
governed well by members whose financial stakes are closely linked with the FEs
performance.

6. ECOSYSTEM TO PROMOTE VIBRANT AND DYNAMIC FEs

It is evident from the earlier discussion that promoting a large number of FEs is a
challenging task. To make this happen multiple stakeholders need to come together in a
supportive way. It is only when a supportive ecosystem is present or developed that the
challenge of promoting significant number of FEs may be overcome. We list below some
of the important constituents of this ecosystem.

Promotional agencies such as NGOs to work with farmers

Support institutions like the government, quasi government or social investors to
support the promotional and the start-up phase
Financial institutions for working capital and fixed capital including guarantee
mechanisms to increase comfort levels of banks regarding offering loan products
to FEs
Training and capacity building institutions for training both the leadership (Board
of Directors) and the management professionals of FEs
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 Auditors, company secretaries, lawyers, and other service providers for FEs
Infrastructure service providers for warehousing and transporters
Corporate sector for linking the FEs to input and output markets
Technology providers
Commodity markets and exchanges

All elements of the ecosystem need to be present, active, and supportive at the same time
with their actions synchronised. For instance, the current scenario with most of the actors
in the ecosystem functioning, underlines a weak link in the availability of funding for
promotional activities along with funds for the growth and expansion of FEs. Lack of
financial institutions is a critical bottleneck that could affect the growth of FEs. Besides,
there are no mechanisms to train the managers of FEs. This is another piece in the current
ecosystem that could weaken the FEs.

7. PERFORMANCE INDICATORS TO EVALUTE SUCCESS OF FEs

How does one assess the performance of FEs? In the following paragraphs we suggest
some indicators that could be used to evaluate the progress and success of FEs. Broadly
speaking, the performance indicators of any FE should incorporate both the Farmer
dimension and the Enterprise dimension. As suggested earlier, the sole purpose of an FE
is to create an entity that is farmer centric and can perform efficiently as an enterprise.

It is comparatively easy to develop indicators of success for the enterprise dimension of

the FE. These include operational self-sufficiency and financial self-sufficiency among
other things. Since an FE needs to perform like any other business organisation the
standard business indicators, as used by mainstream business organisations, also apply to
it.

The challenge is to evolve Member or Farmer related indicators. For instance, FE X

reported annual profit of 100 Rs and paid Rs 50 as price to the farmer members for their
produce. FE Y on the other hand, reported a profit of 90 Rs but paid Rs 70 as price to its
farmer members. Clearly, FE Y performed better compared to FE X by returning a higher
percentage of its profits to members/farmers. The dairy co-operatives are reportedly
paying 70 to 80 percent of the sales price received from customers to dairy farmers.

It is also necessary to evaluate members contribution and participation in the business of

the FE. In FE X, say, 200 members out of a total membership strength of 1000 contribute
to the turnover of, say, 1000 tons. And in FE Y, 500 members out of 1000 contribute to
the turnover of 1000 tons. In terms of participation of members in the business activity
(patronage) as an indicator, FE Y is doing better.

One can also evaluate the centrality of the FE members in terms of identifying the volume
of business they have transacted with the FE and non-FE stakeholders. Members might
contribute just 20 percent of their produce to the FE and the remaining 80 percent to
private traders. In this scenario, the FE is not central to the economic activities of its
members.

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Another possibility is that of evaluating the functioning of the Board and management
and the extent to which they are independently capable of managing the FE. Greater the
autonomy from the promoting institutions, the better the performance of the FE.

8. SOME CONTENTIOUS ISSUES IN THE ECOSYSTEM OF FEs

In spite of several attempts to promote FEs across India, all over the world in fact, there
are some issues around which the debate betweenpractitioners and academics continue to
rage on. We have prepareda list of such unresolved issues.

Should an FE be a single commodity enterprise or otherwise?

What is the ideal/optimum membership size of an FE? 1000-5000-10000
members?
Are FEs Swayambhu (self-propelling) or do they always have to be facilitated
by external agencies?
Which, among the different organisational formats, are the most suitable for FEs?
Co-operatives, producer companies, or public companies?
Should FEs be federated?
Does a federated structure, necessarily, add value to the primary FEs?
Whose responsibility is it to promote the FEs? Who bears the promotional costs?
How much and for how long?
Are FEs really inclusive in terms of membership?
Can FEs be equal participants in a complex value chain?
Do FEs contribute to famers incomeenhancement? If so, by what percentage? Is
this gain sustained throughout the year?
Can FEs be sustainable without promotional money or grant support?
What is a reasonable timeframe within which an FE can become operationally and
financially sustainable?

To conclude, this essay has made some observations on functioning of FEs and addresses
some issues as seen and experienced by practitioners. Much effort has been invested in
promoting new FEs offering hopes to thousands of farmers so that they can engage on
more equitable terms with the market. The effort is certainly a work in progress and no
conclusion can be drawn about the success of this effort. But it is important to critically
reflect on experiences gained so far so that the potential effectiveness of this newer form
of organisation is harnessed. The work in progress offers a genuine opportunity to both
academicians and practitioners to collaborate towards building a live learning laboratory.
It is hoped that future work on FEs would throw more light on these questions.

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REFERENCES

Kanitkar, Ajit. 2011. A for AMUL. http://agrariancrisis.in/2011/05/24/a-for-amul/

Sharma, Pravesh. 2015. Transforming Agricultural Markets and Value Chains in the 21st
Century: Farmer Producer Organisations and Policy Challenges. May 21.
http://www.ggk-irma.in/discussionforum/blogdetail.php?id=15&catid=2

Shah, Tushaar. 1995. Making Farmers' Cooperatives Work: Design, Governance and
Management.New Delhi: Sage Publications.

Shah, Tushaar. 1996. Catalysing Co-operation: Design of Self-governing Organisations.

New Delhi: Sage Publications.

Singh, Sukhpal. 2008. Producer Companies as New Generation Cooperatives. Economic

and Political Weekly, 43(20), 2224.

Singh, Sukhpal and Tarunvir Singh. 2014. Producer Companies in India: Organization
and Performance. Ahmedabad: Allied and Centre for Management in Agriculture
Indian Institute Management Ahmedabad.

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