How some FPC balloons can become durable high flyers – I

From the title, tone and content of my earlier column, it is obvious that I am not a wild enthusiast of the farmer producer company (FPC) wave. I however note two things. The first is that the fever about setting up an FPC has gone viral, actively spread by massive infusion of funds from international donors and the state-supported programs mounted at their instance. READ: Farmer producer companies: let a thousand balloons float

The second is that there is a genuine need for farmers’ enterprises that work for their benefit. It is therefore incumbent upon any well-wisher of farmers to help them try and make the best of an indifferent opportunity. Hence I turn to the question as to what can minimize the chances of financial and business doom of an FPC, or if it helps the reader, what can maximize the chances of an FPC becoming durable in the absence of continuing, ongoing subsidies or financial doles.

In doing so, I acknowledge that some of the things written below borrow from public policy expert Tushaar Shah’s wonderful work on cooperatives, Catalysing cooperation: Design of self-governing organisations. It is relevant because, barring the legal format, scope for interference by State Registrar of Cooperative Societies and hence by local politicians and compliance intensity, there are no fundamental differences between the two forms of group enterprises.

Inter-related problems

There are four classes of problems that need to be addressed for an FPC to survive and fare strong. The first is related to membership and FPC – member relationship. The second pertains to hard issues of capitalization, working capital and business volumes. The third pertains to management of human resources who run the FPC. The fourth pertains to FPCs being in the market.

These problems are inter-related and have to be managed as a whole. Prudent and far-sighted management of all these issues involves someone assuming “surrogate entrepreneurship” on behalf of the farmer group owning the FPC and her incentives for doing so. I shall try addressing each of these classes of problems one by one. 

Variables and risks

My humble submission is that the texture and content of all these four classes differ between a set of FPCs that deal with a multiple-harvest commodity produced by farmers, and an FPC that deals with a single-harvest commodity produced by farmers.

Produce like grain, oil seeds, cotton and pulses are typically harvested only once a year. To manage them therefore one needs huge but short-term working capital, storage space, transportation, etc. The prices prevailing around the harvest time make or mar the fortune of the farmers. The business is therefore more tricky.

Produce like fruits and vegetables, milk, fish and poultry are harvested multiple times in a year. They are also marketed almost continuously throughout the year. Since prices of perishables are subject to far greater intra-year variations than those of cereals, etc., for them the question of price risk is of a somewhat sharper order. Also the perishable nature of produce makes stocking difficult but processing more suitable. With this background, let us address the four classes of problems.

Member – FPC relationship

To start with, I discuss the member – FPC relationship. The key question is what is it that an FPC provides that will make a farmer join it and do business with it. What specifically does it offer which is not on offer from anyone else? This is what Tushaar Shah calls unique member allegiance proposition (UMAP). Often FPCs fail to evolve such a UMAP.

All FPCs, whether their UMAP is compelling or not, are associations of members in one or more villages. Members come from diverse backgrounds in terms of caste, land holding classes, political beliefs, dependence on a specific activity for livelihoods, etc. There is an ever present social dynamics among them.

Income from crops or animal husbandry is of course private goods of an individual. But in creating a working and stable structure that offers a measure of security to members’ economic interests, FPCs create a shared common good for all the members. The issues of social dynamic as well as about incentives to become and remain members as well as to become and remain leaders in the FPC are shared by FPC with other classes of grassroots organizations.

The question for the first set of issues in summary is how does one make members make their social and political differences subservient to the shared economic interests. For the second set of issues, the questions pertain to creating an incentive structure that clearly distinguishes between members and non-members on the one hand and members and leaders on the other. The answers to both these questions are highly context specific and need to evolve in consensus with members.

Member loyalty

Unlike cooperatives that mandate one–member–one–vote and hence divorce a member’s ability to influence management from either capital contribution or business volume with the cooperative, FPC structure permits such a link. A member with a large contribution to the business of an FPC can influence it more, as she should be able to, than someone who contributes marginally. This therefore raises several questions.

When would members think it worthwhile to transact with the FPC? Potentially there are three stages of member transaction with the FPC. The first is about members continuing to invest equity capital in the FPC. The second is about members obtaining the production advice and inputs they need via the agency of the FPC. The third is about members marketing the produce via the FPC. Achieving an alignment between these three is the key management issue.

Typical FPC members are poor and have to manage their homes within the small incomes they get from their farms. The shrewd and nimble private trader, ever present in all produce markets, knows precisely how to play upon these weaknesses. Therefore effectively members will be myopic and have fickle loyalty in their association with the FPC is to be assumed.

Two other issues are important. When a membership drive is mounted at the time of launching the FPC, promises may be made about what the FPC will deliver. Members frame their expectations based on these promises. The actual performance and delivery on these promises will determine how loyal members feel. Hence the expected myopia and opportunist behavior will get influenced by gap, if any, between the promise and performance.

Appropriate strategies

Some strategies found appropriate and useful by diverse organizations engaging in business of member producers are summed below:

• Requiring members to pledge loyalty to the FPC; specifying the proportion of output they will market through the FPC. This is a common practice aimed at curbing opportunist behavior of members, but very often found tough to implement.
• Linking volumes of input supply with volumes of output accepted from members. This works best when a particular input is very expensive or difficult to procure and chances of its spurious supply are high.
• Enforcing strict quality norms on output brought in by members. Again, this is a common practice but tough to implement as powerful among the members have a way of influencing functionaries to suit them.
• Linking equity contribution made by members with volume of output accepted by the FPC. This helps in forming adequate capital always needed for making working capital to handle members’ produce. While necessary, this cannot be done initially since FPC management needs to achieve trust. This may be done by deductions in payments made to members.
• Staggering planting and hence harvesting time of horticultural produce so that overall risk across members is contained in a fluctuating market. Thus not all tomato comes during the same week but is staggered during a month or more. If by bad luck prices crash during a week, still much produce can fetch a reasonable price. This step is combined with a system of pooled price: members contributing during whole month receive an identical pooled price irrespective of the price prevailing when they harvested and sold.
• Requiring members to keep a portion of sales value of output with the FPC to help the latter build a price equalization fund as well as increase its equity capital. A better way to do this is to apportion a part of the “bonus allocable profit” to price risk fund.

None of these steps is popular, leave alone populist. They need to be brought in and enforced to bring in a measure of stability and sense in the FPC – member relationship. Huge efforts at explaining the rationale, and persuading the members about wisdom of these and such steps is essential for them to be adopted and enforced.

The cheap local politician masquerading as farmers’ messiah usually does not sympathize with the logic of long-term stability and hence will tend to incite farmers wherever an unpopular step is enforced. It is entirely fortunate that such a politician has a much reduced scope to interfere in the affairs of an FPC than she had to interfere in a cooperative. But the difference is only relative.

We will discuss the issues involved in the other three classes of problems in subsequent columns.

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.