Why Don't Indian Farmers Directly Access Commodity Markets and How Farmer Producer Organizations Can Help

In the dynamic landscape of Indian agriculture, a critical issue stands out: how do smallholder farmers effectively participate in commodity markets? The path to direct market access is fraught with challenges, including the need for experience, scale, quality of produce, and timely delivery. Yet, farmer producer organizations (FPOs) and farmer producer companies (FPCs) provide a viable solution.

Challenges Faced by Individual Farmers

Individual smallholder farmers in India struggle with several challenges when attempting to access commodity markets directly:

Experience: Lack of market awareness and negotiation skills. Scale: Scattered production units often cannot compete in market terms. Quantity and Quality: Consistent quality and standardization of produce. Timeliness: Ensuring timely delivery of produce to meet market demands.

These factors significantly impede the integration of smallholder farmers into the broader commodity market ecosystem.

The Role of Farmer Producer Organizations (FPOs)

To bridge this gap, the concept of Farmer Producer Organizations (FPOs) and Farmer Producer Companies (FPCs) has been introduced. These organizations are designed to help farmers collectively leverage their strengths and overcome individual limitations. FPOs and FPCs aim to:

Organize farmers on a voluntary basis to form collectives. Collective bargaining for better prices and access to markets. Provide access to financial and non-financial inputs and services. Offer appropriate technologies to enhance produce quality and quantity. Reduce transaction costs and improve market entry.

Institutional Models and Legal Frameworks

In 2002, the Indian government enacted the "Producer Companies Act" by incorporating a new section IXA in the Companies Act 1956, based on the recommendations of the Y.K. Alagh Committee. This legislation provides the necessary legal framework for small rural producers to establish themselves as market entities. Some key aspects of this act include:

Legal recognition of producer companies. Formation of producer companies with equity contributions from members. Professional management oversight by a board of directors. Sharing of services and absorption of price risks. Facilitated capital and knowledge infusion through external sources.

This legal framework helps poor producers organize themselves as market entities without compromising on business credibility, embedding cooperative principles into contemporary business practices.

Advantages of FPCs Over Conventional Cooperatives

FPCs have gained popularity over traditional producer cooperatives due to several advantages:

More flexible organizational structure. Access to professional management. Reduced dependency on individual leadership. Broader scope for capital and knowledge injection.

Till August 2012, over 28 FPCs have been promoted, involving more than 50,000 small and marginal farmers in Madhya Pradesh (MP). Each FPC typically has an average of 1,200-1,500 small and marginal farmers (SMFs) as shareholders, represented by a board of directors (BoD). A professional management team supports the BoD in daily operations and decision-making, overseeing governance and management.

Business Models and Benefits of FPCs

The business models of FPCs are diverse and include:

Aggregation and sale of agriculture produce under contract farming. Production and sale of certified and foundation level seeds under contract farming agreements. Supply of agriculture inputs and implements, including financial and logistics services such as warehouses through tie-ups with collateral service management groups. Price discovery through spot exchange mechanisms, such as the minimum support price (MSP) procurement agency.

Key benefits to members include:

Timely and easy availability of fertilizers, seeds, and other agriculture inputs at reasonable rates. Better price realization and reduced cultivation costs. Extension services leading to higher productivity. Cash dividends and other services such as finance, warehouse, agricultural implements, and grading facility.

Averaged benefits for individual shareholders can amount to INR 8,000-10,000 per annum from various services rendered by mature FPCs engaged in multifarious activities.

Policy Support and Incentives

The government has brought several policy changes to support FPOs and FPCs. For example:

The GoMP (Governing Ministry of Public) provides management cost support for FPCs for a period of three years and a one-time working capital support of INR 25 lacs. GoMP has also supported in land and infrastructure allotment to some FPCs, primarily for those promoted under the DPIP (Diversified Productivity Improvement Programme) project. In April 2013, the Government of India issued national policy and process guidelines encouraging states to promote FPOs. The SFAC (State Farmers' Agriculture Coordination) has been designated as the nodal organization at the national level. Several state governments have come forward to promote FPOs, utilizing various schemes such as RKVY (Rashtriya Krishi Vikas Yojana), NFSM (National Food Security Mission), and NRLM (National Rural Livelihoods Mission).

The market is showing a positive response to this emerging scenario of aggregation in primary agribusiness markets, indicating a growing interest and potential for FPOs and FPCs to transform agricultural communities into thriving agribusiness entities.

Conclusion

The journey from small, individual farmers to organized producer organizations signifies a significant shift in the agricultural landscape of India. By leveraging collective strength and embracing modern business practices, FPOs and FPCs offer a promising pathway for smallholder farmers to directly access commodity markets, enhancing their productivity and economic standing.