I had devoted two earlier notes to discussions pertaining to the relationship
of farmer producer companies (FPCs) with its members and in managing business
in a capital-short FPC. READ: How some FPC balloons can become durable high flyers –
II.
In this note I shall try to address issues surrounding the interaction
between FPCs and the market. This note is intended to first lay bare the issues
and then to offer some actionable suggestions to help create a viable business
model for FPCs.
All promoters of FPCs need to disabuse their minds of the naivety that
by pooling the produce or input needs of members they can always improve their
bargaining power in the market and that it is necessarily good for the
producers.
It must be noted that size of virtually any produce in the market is
huge, much larger than the cumulative quantity produced by the members. Mere
pooling by 10 or 100 farmers can only marginally influence realized or paid
prices and that too in the short run.
Advantages of pooling
However, pooling can help one get better terms of trade, better
logistics in terms of time and place of delivery, changed structure of charges
for warehousing, different credit terms and the like. The main advantages of
pooling are in two respects.
The first pertains to reducing the asymmetry of information. Someone
more savvy and clued in on the market conditions is likely to handle the
transactions when commodity is pooled and she is more likely to have access to
more and more timely information, compared to an illiterate producer who may not
have a smart phone.
The second advantage is in sharing of costs among the producers. Instead
of each producer transacting individually with the market operators and thus
spending time and money in the process of travel, only one or two members, or
better still, an employee of the FPC does it. Thus the remaining members are
able to save their money and apply themselves to other tasks.
Similarly, handling, transportation and cost elements could perhaps be
shared, hence reducing the cost for a member. This tends to happen particularly
where the charges are fixed per transaction and not unit linked.
Challenges in pooling
There are three caveats to this wishful advantage of pooling.
- The
first lies in pooling and aggregating all the risks: risk due to adverse price
movement, risk due to hazards, risk due to accidents in movement, risks due to
mala fide behavior of the market agent or even the representative or FPC
employee and so on. When tomatoes of one farmer gets damaged due to a road
accident, only she suffers. When the vehicle carrying tomatoes of 30 producers
gets damaged in a road block by the Naxals, everyone loses. Such risks that were
diversifiable across producers when individuals did their transactions, are now
pooled.
- The
second caveat is that reduction of costs and improved realized prices occur
simply because of poor logistic connectivity, this advantage is just as durable
as the adverse logistic condition. As soon as roads improve and become safer,
private trade jumps in, increasing the competition and reducing the advantage
of pooling.
- Seldom
do proponents of FPCs like to bring up the third and very important caveat to
pooling. This pertains to moral hazard in the form of deliberate mischief done
by producers: prompted by narrow self-interest, producers are likely to sell
the best portion of their produce on their own and bring only the second quality
or poor quality produce to the FPC. When such produce gets mixed with the bulk
of materials brought in by others, the chances that buyers would offer a much
reduced price are higher, resulting in everyone getting a lower price. This
reinforces their motivation to separate the material at least on visible
parameters of quality, take the best one through individual marketing route and
bring the rest to the FPC. Thus unless rigorously checked, the average quality
of pooled materials will tend to steadily decline. Rigorous quality check
before allowing members to pool their produce in the FPC and undertaking every
possible step to minimize opportunistic behavior of members is a very critical
and fundamental business principle.
Procedural formalities
With this rather long prelude, let me come back to the issues faced by
an FPC in its engagement with the market.
The first and critical issue that separates an FPC from other market
players is that it is legally and organizationally compelled to adopt formal
procedures and processes in its market operations. For its clean and
transparent management, an FPC requires invoices and bills for every service.
Being subject to multiple levels of scrutiny, it will need to document all its
transactions.
Thus unlike a typical market player in markets of farm produce, it
cannot operate in a faceless manner in shadowy zones. The need for elaborate
documentation and at times decision making may make it stodgy and slow. The
typical market player is and will remain much more nimble.
Furthermore, unlike FPCs, such a market player can adopt varying stances
in relation to different customers, often within minutes of each other. While
the market player can differentiate between buyers and sellers the way he
wants, FPCs cannot.
Market players
The second and substantive issue is that often through his social
network, the market player in rural markets combines and interlocks multiple
markets: market for inputs, for produce, for consumption goods and for credit.
He may have intermeshed familial, social and business relationship up
the market channel in terminal markets or with processing industry. He thus has
a strong and durable relationship with his clients. He has multiple degrees of
freedom and levers while dealing with the average farmer.
FPC has a very economic interaction on very few fronts with the members
and hence has fewer degrees of freedom and levers with its membership. As
markets formalize, and logistic and information bottlenecks loosen their grip,
the grip of the market player on rural clients possibly slackens, but he
usually has an advantage over the FPC.
Customer interest
Given these two aspects noted above, the question is in dealing with the
market on their behalf; what does an FPC offer its members that is distinctly
superior to what the private players offer. Hence the question of unique member
allegiance proposition (UMAP) becomes very important.
The mirror image of UMAP in the market so far as potential customers are
concerned is the unique selling proposition (USP) of the FPC. Why should
customers care to engage with an entity that is perhaps stodgy, slow in
decision making, inflexible in its terms of trade and quite possibly acting in
a holier than thou manner?
Why should the customer care whether they are buying from an entity
owned by farmers themselves? Should or will they not be more concerned with the
produce attributes, quality, time of delivery, its shelf life, price,
incidental services offered, etc.?
Sale strategy
This issue therefore has to be thought through by segments of the
market. Perhaps ability to pool produce of many people at lower costs than they
would normally face is its USP with state procurement agencies. Traceability of
the produce to individual farmers could be the USP with choosey buyers wanting
to claim responsible farming or organic tags on their produce.
Excellent price-quality bundling could be the USP for retail consumers.
Such USP would need to be thought through , developed into being credible and zealously
guarded for building the FPC brand. Without such an USP, the FPC would find it
difficult to be a long term player in the market.
The final issue of relevance deals with FPC learning about, complying
with and in due course tweaking to members’ advantage the governing principles
of market institutions. Can it acquire a seat in the governing board of the
local regulated market institutions? Can it influence the entire marketing
system to shift from visual, heap based close hand transactions to weighment
based, formal quality governed open bidding process?
Market interface
Based on the above, the to-do list for a sound market interface would
be:
- Evolve
a UMAP that encourages members to engage with the FPC on a continuing basis
- Evolve
norms to curb potentially opportunistic behavior of members without diluting
the above UMAP
- Evolve
USP for each segment of the market
- Thoroughly
understand the norms of the local market institutions and evolve internal
standard operating procedures compatible with them
- Evolve
internal norms regarding delegation of powers to empower the personnel engaged
in markets to take expeditious decisions so that the FPC does not lose to
private market player due to their nimbleness.
Admittedly achieving the above is not easy. But there does not seem to
be any option!
Sanjiv
Phansalkar is associated closely with Transform Rural India Foundation. He was
earlier a faculty member at the Institute of Rural Management Anand (IRMA).
Phansalkar is a fellow of the Indian Institute of Management (IIM) Ahmedabad.
Views are personal.