Agri Commodity World Online

Drafted by Dr. Panjab Singh, Advisor (Agriculture & Plantation) ETA STAR Group
Food security is a global threat to humanity and therefore cannot be ignored any more. The crisis will have negative effects worldwide, particularly, on the political, economic and social stability, if we don’t address the problem. The need for growth in agriculture and rural non-farm economy is needed to reduce rural poverty and to narrow the rural-urban divide. Needless to say that the corporate entry in agriculture(agribusiness) to reap the benefit of technologies, economies of scale and high profitability through investment in infrastructure development is the order of the day. This will generate employment in rural settings, check large migration taking place from the villages to the cities and help build social infrastructure from out of the profit in rural settings namely schools, hospitals, storages etc. Agribusiness is a generic term that refers to the various businesses involved in food production including farming, seed supply, agri-chemicals, farm machinery, whole sale, distribution, processing, marketing and retail sales.

Fortunately, Govt. of India’s new agriculture policy envisages that private participation will be promoted through contract farming and land leasing agreement to allow accelerated technology transfer, capital inflow and assured market for crop production including horticulture crops. Following this announcement a large number of agri business models have come up and Indian corporate and rural India has entered into corporate partnership through vertical coordination. The vertical coordination supply chain are supposed to eliminate the inefficiency in agriculture market which arise due to multi layer intermediaries, and will improve the basic availability of infrastructure as well as technology to the farmers. The common thread among all these initiatives have been in integrating and tightening the supply chain. Indian agriculture is bouncing back and it is scripting its own success story, thanks to rising private investment which will lead to fast growth and rising profit investments in agriculture today. Mahindra’s Shubhlabh Services, Tata Kisan Kendras, ITC e-chaupal, Godrej Adhar and DSGL Haryali are a few examples, who have emerged as new agri business supply chain model.

The major task in the process is to win the confidence of the farmers through regular interaction, liberal exchange of information on technology and markets. The farmers should be partner in this effort and they may be encouraged to actively participate and contribute with conviction. It has been a general experience that the farmers do not hesitate to pay fee for any additional return they get at the time of harvest. For, it is always “harvesting is believing”. Once farming becomes a paying proposition, there will be more and more youth getting into active participation. The spin-off of this process will generate more jobs in a healthy environment and also contribute to reversing the trend.

There are many models of business linkages some driven by producers, some by buyers and some supported by intermediaries including NGOs. The business model critically impacts on how value is created, captured or shared by farmers, SMEs and other chain actors. Factors which influenced sustained and equitable inclusion of smaller scale farmers and SMEs are producers organization, market co-ordination and intermediations business support and financial services, buyers behavior enabling policies of investors and infrastructure. There is a growing body of experience showing that “win-win” outcomes are possible through commercially viable agribusiness models - way of creating value within a market network of producers, suppliers and consumers-which involve small farmers and SMEs.

We must understand that our most farmers operate on a very small scale and are no way near the economy of scale needed to compete with the efficient global producers, nor have we invested in agro-technology and competencies. Most farmers suffers from their next generation not wanting to be in family business. The youth leaving rural areas in search of more glamorous white collar jobs in the cities. This situation needs radical action if we are to avoid a massive and unprecedented food crisis. This will call for providing corporate entities to invest in large scale agro projects for the local market, after which exports can follow. Especially, this will include agro enabling access to finances, land, and technology and to competency development. The Government must also play a pivotal role in food security, instigating food tractability systems that will allow excess to high value markets. It is implied that we need a cooperative model in which a small farmer still are part owners but exists with in a frame work of a large scale production model. It also implied that basic agro-commodity production will not be sufficient and we need to encourage value addition and continued movement up the value chain.

The private companies often prefer to work with organized farmers rather than individuals, despite the increased bargaining power groups can enjoy to overcome problem such as dispersion of producers, diseconomies of scale, poor access to information, technology and finance, inconsistent volume and quality, lack of traceability, and management of risk. Producers organization models such as cooperatives are established to provide members with economic benefits in terms of access to dynamic markets. These differ from social organization in their entrepreneurial focus, and may build on existing informal network of farmers and traders as well as inputs and support from buyers and other chain actors. Models that are driven and owned by small scale producers allow producers to market collectively despite widely differing farm assets. Specific arrangements include clustering around lead farmers, where by financially independent growers create market opportunities for small scale farmers. Steps to improve the effectiveness of producer organization in business oriented services provision are critical.

While talking of the Agri-business Model in small farmers and SMEs context, it will be appropriate to talk about Contract Farming/ Corporate Farming vis a vis agri-business. Contract farming is defined as a system for the production and supply of agricultural / horticultural products under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the producers/ seller to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer. Contract farming is a form of vertical integration where the farmer is contractually bound to supply a given quantity and quality of product to a processing or marketing enterprise. The buyer agrees in advance to pay a certain price to the farmer and often provides technical advice and inputs (the cost of the inputs being deducted from the farmer's revenue once the product has been sold to the buyer). Contract Farming involves the basic elements like pre-agreed prices, quality and quantity and acreage (minimum and maximum) and time. Contract farming has not so far resulted in a significant improvement in the livelihoods of small farmers in developing countries because buyers generally prefer to deal with large-scale producers who are better placed to meet the stringent quality and timeliness of the requirements.

Corporate farming on the other hand is a term that describes the business of agriculture, specifically, what is seen by some as the practices of would-be mega corporations involved in food production on a very large scale. It is a modern food industry issue, and encompasses not only the farm itself, but also the entire chain of agriculture-related business, including seed supply, agrichemicals, food processing, machinery, storage, transport, distribution, marketing, advertising, and retail sales. The term also includes the influence of these companies on education, research and public policy, through their educational funding and government lobbying efforts. "Corporate farming" is often used synonymously with "agribusiness" (although "agribusiness" quite often is not used in the corporate farming sense), and it is seen as the destroyer of the family farm. There had been several contract farming models being practiced by corporate but in all the contract farming, farmers’ participation remains limited to production in the field - seeds, inputs, technology packages and technical guidance through regular supervision are usually provided by the contracting company. Critics in the industry are of the opinion that the results are very promising in early years. Farmers benefit from improved technology and higher productivity, quality and production. The contract price does not appear to matter much in the early years. Once the farmers are confident of being able to deploy new technology, problems start cropping up. If the market price is more advantageous than the contract price, farmers renege on the contract. The present legal system makes it impossible to enforce the performance under contract. Contract farming models can sustain in the long run only if the initiative/empowerment comes from the farmers rather than the user (corporate). Another important point is that in the existing models, farmers are largely ‘price takers’, while the contracting firm makes the price. Other criticisms leveled against contract farming include less generation of employment, labour-saving farm practices, low level of commitment of corporate over rural development, lack of transparency and communication etc. Enforceability of the agreement, and standardization and operationalisation of contract farming agreements are the major bottlenecks plaguing contract farming ventures as up today. These needs to be seriously looked into and protected suitably.

Buyers driven models seek efficiencies in the chain to the benefit of processing and retail companies. Much has been understood about the contract farming which can be successfully used by business to link small producers to modern markets where capital, technology and market access constitute key limiting factors. These use a “bottom of the pyramid” approach for poor producers as well as poor consumers. Working with small farmers is also a means to build community goodwill contributing to company’s long term license to operate. The plus points with the contract farming are, higher productivity, the security of having sales and purchase prices set in advance, and better product quality, and the minus points are negotiation imbalances, information disparities, unequal distribution of business profits. With effective management contract farming can be a means to develop market and bring about the transfer of technical skills in a way that it is profitable for both the sponsor and the member farmer.

Intermediary models include a strong dose of service provisions – usually by intermediary organizations or specialized providers in order to balance the need of a small farmer and SMEs with the realities of emerging modern markets, in terms of quality and volume. Other key aspects of intermediation include increased knowledge management (to improve chain co-ordination and quality), closer links to buyers, and incentives for product and process upgrading. There are examples of producers organizations adding their own commercial intermediary in the form of consolidation and marketing units.

All these models identified above seek to improve farmer’s technical and managerial skills to ensure consistent volume and quality of supply to buyers and to develop stable trading relationship. The biggest challenge for private companies to work with small scale farmers and SMEs however is organizing supply, with a need to reduce transaction costs and ensure that trading agreements are honoured. Much can be done by business to ensure that their procurement practices works to the benefit of poor people. Action that might be taken include adjustment of reward system in procurement programmes, prompt and transparent payments, full access to information and shared decision making in regards to chain rules and price and quality structures. There are pro-small holders approaches to private sector standards, including good certification, use of local certification agency and participatory development of standards. Ensuring transparent and timely action to information including producers perspectives in rule setting and enforcement and developing effective mechanism to bridge gaps between producer capacities and market needs are important.

The priority area of intervention is that of enabling environment. Incase of small holders and SMEs participation in supply chains, the enabling environment refers to the consistent provision of key infrastructure services (roads, water, electricity, communication) and the existence of complimentary public investment such as agricultural research. Policies to improve roads and market infrastructure particularly in regions that are not endowed with the characters attractive to down stream agents in the value chain can be instrumental in facilitating farmers participation in modern market channels. Relevant public policies to maintain a competitive market, and to oversee the working of contract laws and contractual enforcement are also a central element of an enabling environment.

PROPOSED AGRIBUSINESS MODEL

Genesis

Policies of privatization, liberalization and accession to W.T.O in 1980 to 2000 were followed by a wave of investment by food manufacturers and retailers. Also rising urbanization and changes in consumer’s preference and purchasing power have led to growth of modern food processing and retailing which often have requirements of industry standard for quality and safety built on traceability and certification. Growth in agriculture and non-farm economy is needed to reduce rural poverty and narrow the rural-urban divide. Private sector investment, which is only 1% of total agriculture investment in the developing world, need to be increased substantially to lead to a sustainable agribusiness model. Most corporate sectors are already in agribusiness but have not delivered desired output due mainly to lack of scalability (economies of scale). Consistency, quality (due to inability of mass production), competition from their existing channel and the problem with the middlemen in the system. Problems of dispersal of producers, technology and finance, lack of traceability, inconsistent volume and quality, management of risk have added to the problems.

Market modernization offers increased economic opportunities for producers, small, medium-sized enterprises (SMEs), and other actors in the value chain, but there are also risks of local producers and domestic businesses being bypassed, or failing to meet costly market entry requirements which favour the better resourced. There is growing experience showing that win-win outcomes are possible through commercially viable agribusiness models-ways of creating value within a market network of producers, suppliers and consumers-which involve small farmers and SMEs. These business models for small

Farmers and SMEs must deliver essential services to producers and ensure reliable supply to buyers, while also addressing the high transaction costs and risks that buyers face when purchasing from large number of fragmented, cash-strapped small farmers and SMEs. Therefore, to achieve the multiple objectives of quality, safety and consumer’s assurance, reliability of supply, lower prices and sustainability, the agribusiness model should be built on principles of collaboration, co-investment and knowledge sharing among producers, suppliers, processors and retailers.

Agri-Business Model (ABM) steps

1. Select a group of farmers with an aggregate area of approx. 10,000 ha to conduct farming. Large holing will afford the economies of scale which is essential.

2. Contact state govt. bureaucracy and politicians to get over regulatory frame work and win farmer’s confidence for the proposed project.

3. Propose to land owners that they will register a company and make each farmer a share holder (unit/share) in the company.

4. To do the above select change agents from among villagers-say retired village administrative officer for confidence building.

5. Propose that their ownership of land will not undergo any change whatsoever and put their land through satellite on “demat” account for any sale or purchase.

6. Company can consider paying user rent for land owner. Govt. will benefit as there will be no loan seeker farmer.

7. Company can engage farmers and their dependents as employees on farm for wages depending on their qualities. This will arrest their migration to cities and also check growing naxalism.

8. Select as big area as possible as it improves workability manifold and also the commitment to economies to scale operated.

9. From surplus profit dividend could be generated which could be a third revenue stream for contract farming.

10. Besides agriculture corporate could take animal husbandry/ cattle farming, horticulture production and processing etc. These activities will slowly urbanize rural areas with urban facilities.

11. Build non-farm type of activities and create human resource in rural settings and empower them to take up challenges in agriculture and other sectors. This would lead to peaceful coexistence of the population in the villages.

12. With healthy revenue flowing the corporate will build hospitals, schools, storages, roads etc. in rural areas.

13. Besides agriculture and allied activities, financial and educational services are areas where private sector is poised to tap into the bottom of the pyramid. This will decentralize education system and also make it affordable.

14. Govt. can withdraw subsidies on inputs and electricity and company can pay out of its profit.

15. Company can find market for their other products in rural areas and thus diversify their activities and make whole operation more sustainable by wining the confidence of the farmers and others.

16. Commercially viable long term agribusiness regulatory policies must be enacted at the state and federal levels which should include provisions for solid incentives for corporate entities to invest in large scale agro-projects for local markets, after which export can follow. The incentives include agro enabling access to finance, land procurements and technology and competency development. We must know that there is no way the small farmers can be neglected any more. This model will lead to “win-win” situation for all and the boom this will bring about will be greater than any boom witnessed so far. The bigger beneficiary will be the government who will stop spending millions in agriculture.

ABM Partners

1. As an individual investor with 100% investment and operation by the company.

2. In partnership with local or other county government and / or private investor either on investment basis or both investments and operation together on agreed terms and conditions.

Agri Commodity World Online

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