DRAFT

Perspectives and Problems of Primary

Producers Companies

Case study of

Indian Organic Farmers Producer

Company Limited, Kochi, Kerala

2009

National Rainfed Area Authority,

Ministry of Agriculture, Government of India,

New Delhi

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Correct Citation

NRAA (2009); “Perspectives and Problems of Primary Producers Companies -

Case study of Indian Organic Farmers Producer Company Limited, Kochi,

Kerala”; National Rainfed Area Authority, New Delhi, India.

Year of Publication

May 2009

Published by

National Rainfed Area Authority,

Ministry of Agriculture, Government of India,

NASC Complex, DPS Marg

PUSA Campus

New Delhi – 110 012

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FOREWORD

Growth in demography, urbanisation and industrialisation calls upon

highly dynamic food and income security system in the pre-dominantly

agrarian economy of India. Enhancing productivity and marketable surplus by

delivering latest technologies, quality inputs, credit and value addition by

aggregating primary production of more than 80% small and tiny holders is a

very unique and indigenous business process. Innovative, alternative and

regionally differentiated institutions are called upon to establish public-private-

small primary producers’ partnership. Primary Producers Ltd. Companies (PPC)

are quite unique since they eliminate deficiencies in the existing systems of

supply of inputs, credit, collection and processing. There is a lot of interest

among the corporate, trans-nationals and joint ventures to establish contact,

contract and corporate farming in the food supply chain especially fresh fruits.

Organic farming and branding by organising small primary producers for

realizing premium prices is another emerging opportunity of reducing

environmentally un-desirable inputs and practices. Export of Indian spices,

condiments, beverages, nuts and confectioneries is well established.

Registering of Indian Organic Farmers Producers Company Ltd. in Kerala in

2004 was the most appropriate decision. The principle of one vote per member

irrespective of number of shares, the office bearer has to be a primary

producer, sharing of the profits proportionate to the transactions made and

patronage proportionate to the number of shares is very progressive for the

sustainability of the institution. However 596 individuals and institutional

shareholders, 1356 members covering 12,793 acres of plantation could not

harness benefits due to some important limitations. PPCs do not have enough

tangible assets and they are not able to raise loans in the market. PPCs being

substitute of cooperative societies should be extended initial hand-holding in

the form of start-up capital by NABARD, NDDB, AFC, NFDB, SFAC etc. Matured

self-help groups, users groups, common interest groups and other loose

voluntary organisations of the watershed development programme can also be

converted into PPCs for linking with rainfed agriculture. The undersigned was a

part of focussed group meeting and I appreciate the sincere work done by Dr.

K.S. Ramachandra, Technical Expert (Animal Husbandry and Fisheries) of NRAA.

(J.S. SAMRA)

CEO, NRAA

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Introduction:

Alternative innovative institutions are called upon to meet emerging

challenges of enhancing income and reducing poverty especially in the under

invested rainfed region. Initially cooperatives served the rural sector very well

particularly in dairy sector and credit and its services degraded subsequently

due to several reasons. In order to improve upon the existing institutions, Part

IX A of the Companies Act (1956) was amended in 2002 to establish Primary

Producer Companies (PPC). This was primarily done for retaining the desirable

basic structure of cooperatives while at the same time enabling the primary

producers to have the flexibility, freedom and efficiency of a private limited

company. The elements of politicization, veto power of the establishment and

large emphasis of cooperatives on welfare has been resolved in the PPC. One

vote irrespective of number of shares of a member, non-tradability of shares

and sharing bonus in proportion to transactions are other redeeming features

of PPC. Since the amendment made in 2002 about 150 producer companies

have been established in different parts of the country covering a host of

commodities ranging from agriculture and plantation crops to milk, poultry,

meat, eggs and handicrafts. However, the spread and growth of primary

producer companies has happened at a limited pace. For understanding the

reasons for the stagnation in growth and examine various issues involved for

successful implementation of the concept of PPCs, NRAA analysed a case of

Indian Organic Farmers Producer Company Limited (IOFPCL) based at Kochi,

Kerala. More than 90% of the agriculture is rain dependent and a brief

outcome of the study is presented in this brief.

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Profile of the Company:

IOFPCL was the first PPC to be established in India in September 2004 with an

authorised share capital of Rs. 50 lakhs divided in to 5000 equity shares of

Rs.1000/- each. The company has been registered as an Inter State Producer

Company under the amended Companies Act 1956. Provision of two types of

share holding has been made in the company

a) Individual share holder who has to purchase at least one share of

Rs.1000/- each

b) Institutional shareholder who has to purchase a minimum of 10 shares

of Rs.1000/- each

The PPC which started with a group of 10 share holders in individual capacity

purchasing 110 shares has achieved a considerable growth in a short span of

four years and as on 03.4.2008 the company had a total of 596 shareholders

(590 individual share holders and 6 Institutional share holders) with a total

membership of 1356 members and a share capital of Rs. 13.56 lakhs. There

are 8 Directors of Board, full time paid CEO (@ Rs.12,000 per month) and three

other paid employees. The company has also set up drying and processing

units investing Rs.40 lakhs.

The patronage offered by the company to its members is Rs.40,000/- per

share. A member with one share can market his produce through the PPC to an

extent of Rs.40,000/- in each year. The patronage value increases

proportionally with increased share holding.

The company is also strictly following the safety provisions of the amended

Part –IX A of the Primary Producer’s Company Act viz. (a) adhering to the one

member – one vote policy irrespective of the number of shares held by a

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member (b) Non trading nature of shares in the stock exchange and (c) Shares

can only be sold at par to the company or transferred to another producer

member with the prior approval of the company.

Triggering factor for formation of Producer Company:

Members of IOFPCL are basically dealing with organic farming of high value -

low volume commercial crops viz. Pepper, cardamom, vanilla, coffee, cocoa,

nutmeg etc. Organic farming is being pursued by the PPC for the following

reasons

a) earlier experience when the pepper plantation was almost wiped off due

to indiscriminate use of inorganic pesticides and other chemicals

b) high incidence of cancer cases in the area was attributed to pesticide

residue (Furadan) and

c) premium price of the organic produce in the domestic and export

market can offset the low productivity.

High volatility of prices due to high productivity of pepper and coffee in

Vietnam and Indonesia and flooding Indian market via islands and

neighbouring countries is an important challenge.

Area of Business

IOFPCL is basically dealing with low volume – high value organically produced

commercial crops with a vision of empowering the farmer, enabling eco-

sustainability and ensuring safe food.

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The total area of land cultivated by the Share holders which is mostly rainfed is

about 12,793 acres with an average small holding size of 2.98 acres. The main

crops grown in the area of operation are

� Wynad : Coffee, Pepper, Ginger, Turmeric, Vanilla

� Kannur: Cashew, Coconut, Pepper, Vanilla, Ginger, Cocoa

� Palakkad: Coconut, Cocoa, Pepper, Vanilla, Rubber

� Idukki: Pepper, Cocoa, Vanilla, Nutmeg

The company has been able to achieve significant growth both in terms of

membership and business turnover in a short span of four years. Membership

increased from just 10 members in 2004 to 1356 by 2008 and similarly the

business turnover grew from nil business in 2004 to Rs. 5.52 crores during

2008-09.

Company’s products have been branded as “JAIVA” and marketing

arrangements developed both domestically with companies like Hindustan

Unilever and export traders (Cadbury) and international companies in

Switzerland, Canada and Germany for different products.

Capacity building

Empowering of its members with knowledge, technologies, providing advice

and services and imparting training at different levels has been the focus of

IOFPCL. As a result of that, some of the farmers are retaining total amount of

rainfall within the farm by making rings around trees, digging trenches,

terracing, mulching etc. Since the company does not have the required

professional manpower and infrastructure presently, it has a working tie up

with another organization “Foundation for Organic Agriculture and Rural

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Development” based at Kochi. It was observed during the field visit that the

capacity building is still at the formative stage. However, through a well

developed Internal Control System (ICS) the farmers have been made fully

aware of farming practices to be followed and procedures needed for getting

their produce as organically certified.

Product aggregation for processing and marketing

Developing a well structured system for aggregation of small holders’ produce,

working out an efficient and cost effective logistic mechanism is critical for

efficient working of any producer company.

IOFPCL has developed member groups in different areas where it is operating

with a well developed Internal Control System (ICS). Each major group in a

particular area has several groups of 10-15 primary producers each with a

group leader. The produce is at present being collected at the individual farmer

level. The produce is initially processed by the farmer himself as per the

guidance given by the ICS group and stored as per prescribed procedures.

Collection is made on a particular day(s) through a collection vehicle going to

individual houses. Prior intimation is given to the members about collection

days and aggregated produce is stored in warehouses.

However, IOFPCL has still not been able to develop and put in place a

structured and efficient logistic network of minimum transaction cost.

The company has adopted a procedure of making immediate payment in case

of small farmers at the time of collection and partial payment as per previously

agreed terms to large farmers. This was corroborated by the primary

producers during interaction with them.

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The company has

been able to pay a

higher price to its

member than the

prevailing in the open

market inclusive of

the premium for

organic certified

produce and also the

fair trade premium.

During the year 2008 the company paid a basic price of Rs.104/- per Kg of dry

cocoa bean. An additional amount of Rs.6/- as fair trade premium and Rs.4/- as

organic premium per Kg of dry bean was paid over and above the basic price.

The final price of Rs. 114/ Kg dry bean was 14 percent higher than the

prevailing open market price of Rs.100/Kg.

The farmers of the region perceive considerable benefit from the

establishment of IOPCL especially for marketing of cocoa beans. It was

informed during the discussions with the Directors of the PPC and was also

corroborated by the primary producers during the field visit that prior to 2004,

the procurement of cocoa beans was monopolised by Cadbury Company and

farmers had to invariably accept terms of the company without any premium

for organic produce. The situation has considerably changed with

establishment of the PPC. The Cadbury Company enhanced procurement price

of dried cocoa beans to Rs. 96-100/ kg from the earlier price of Rs.70/Kg after

intervention of IOFPCL in the market. It was also informed by IOFPCL Directors

that they have certain degree of synergy also with Cadbury Company and at

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times when the PPC has not been able to sell the aggregated produce of cocoa

beans in the export market, the same was purchased by Cadbury at fairly

decent price.

Certification mechanism:

Certification of the process is the key component of companies dealing with

organic produce. IOFPCL has a strong tie up with “INDOCERT”, Kochi which is

an internationally approved and recognised agency for certification of organic

produce, fair trade and UTZ certification. IOFPCL is obtaining the group and fair

trade certification for the produce of its members through INDOCERT at a lump

sum amount depending on total acreage. The ICS group are charging Rs.300/

acre from individual members for organic certification out of which Rs.150/- is

being retained by ICS as internal charges and Rs.150/- is paid to INDOCERT.

With the operationalisation of the National Horticultural Mission (NHM) in the

state, a subsidy of Rs.150/- per acre is being reimbursed to the farmers for

organic certification. As such, currently the ICS groups are charging only

Rs.150/acre from the farmers. This was a classic example of dovetailing a

developmental scheme to activities of PPCs.

The Internal Control System has a set procedure for inspection of individual

farms, monitoring, providing advice, external inspection by INDOCERT, and

penalty clause for defaulters. Each producer member is maintaining a farm

record book detailing farm layout, crops grown, inputs provided, production

and marketing data for different crops.

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The farm record is to be produced

to the inspectors during inspection

and defaulters are penalised as per

prescribed procedures. It

appeared that ICS system has been

working efficiently in the region

and farmers are satisfied with their

services.

Processing and Value addition:

Cocoa is the only produce so far

where value addition has been

attempted by the company to

access international market. The

growing demand for certified and

fair trade organic cocoa beans by the Swiss chocolate industry has provided an

opportunity for the PPC to tap the export potential at a premium price. The

demand by the Swiss chocolate industries for organic cocoa beans is estimated

at almost 4000 tonnes per year and IOFPCL is currently able to export only a

miniscule of this huge demand.

The PPC has earlier suffered rejection of the export consignment of processed

cocoa to Switzerland due to improper processing and quality assurance. Lack

of adequate professional and technical support in the PPC matching

international standards is a bottleneck.

In Pepper no value addition is being attempted at present and only some

processing and sorting is undertaken at the primary producer level and after

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aggregation of the produce by the PPC. Pepper is being directly marketed to

the export traders and other domestic agencies.

Productivity enhancement:

Low productivity of the crops was a major constraint which the farmers of the

company have been facing. The average per acre productivity of 200kg for

pepper and 600 kg for coffee is uncompetitive. The farmers of the Wayanad

region expressed that average productivity of rainfed pepper which used to be

1000kg/ acre till 1990 has declined over the years to the present level of

200kg/acre largely due to the outbreak of Wilt or Foot Rot disease since 1995.

Most of the primary producers with small land holdings of about 2.0 to 3.0

acres are following the practice of mixed farming rather than mono culture.

They generally plant

400-425 plants of

coffee, 400-425 plants

of pepper, 50 coconut

trees, 50 arecanut

trees, 400-425 vanilla

plants and some

banana plants in one

acre of land. Most of

the plantations are rainfed and in situ conservation of rain and runoff is

important. Open wells and bore wells have also been installed by some of

them. For providing the organic manure, 1-2 cows are also maintained in the

Mixed farming system being followed by Primary producers

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farm as against the recommended 2 cows / acre. In terms of productivity the

following issues needs to be looked into

� The benefits derived from mixed farming as against mono culture in

terms of overall total income per acre of land

� Risk coverage and safety net aspects provided by mixed farming

� Pests and diseases dynamics in mixed farming system compared to

mono culture

� Alternatives for cow dung as organic manure when the farmer is not

able to maintain required number of cattle due to lack of fodder. Paddy

straw is being purchased @ Rs. 5 to 6 per Kg to feed the cattle

The climate change over the years has also been attributed as a major factor

affecting the productivity of crops in the region. The reduction in the average

total annual rainfall and change in distribution pattern has also been one of the

causative factors. In coffee cultivation two showers i.e. the blossom shower

and setting shower are critical. The blossom shower has to occur during the

month of January and the setting shower has to occur within next 21 days

except on the 9th

day after blossom shower for effective seed setting and

higher productivity. Similarly a good rain in the month of May is critical in

pepper cultivation for effective pollination by the drenching rainwater.

Diversification:

Considerable crop diversification has been witnessed in the region of

Wayanad. The yield factor and market price realisation by and large

determines the choice of the crop cultivated by the farmer. At current prices

one acre of rice returns Rs.15,000, pepper Rs.21,000, coffee Rs.45,000 and

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banana Rs.120,000 and farmers are replacing rice with banana wherever

feasible. It is anticipated that in general, the yield of organic produce would be

comparatively lower than the crop grown with inorganic inputs and the margin

of reduction is related to a host of other factors also. However, the reduction

in yield is normally offset by the premium price which the organic produce

fetches. The observation of farmers in the region was that the reduction of

yield in organic farming ranges from 20 to 50 percent. The constant lower

yields of pepper crop and higher price potential for coffee and vanilla have

triggered diversification to coffee and vanilla crops.

Working capital and credit:

Inadequacy of the working capital or liquidity has been the main bottleneck for

expansion of the activities of the PPC and is even affecting the procurement of

the produce from member farmers. During 2008 the total production of coffee

seeds and black pepper by the members was to the tune of 100 tonnes each

and the company procured only 18 tonnes of coffee seeds and nil quantity of

pepper for want of funds and lack of assured market. Presently, the

procurement from the members is linked to having a firm order from the

indenting company. The company has also taken a loan of Rs.20 lakhs from a

nationalised bank at an interest rate of 13.75% per annum as working capital

to meet out the procurement expenses. It was informed that the Directors of

the company had to even pledge their individual properties for raising the loan

as financial institutions do not normally come forward for extending the loan

facility to PPCs.

IOFPCL is purely a primary producer company promoted by small and medium

farmers and the company does not have linkages with any large corporate

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institutions. As such, the company has to entirely depend upon the capital

raised through membership and accrued profits of business made. Non

availability of credit facilities has virtually stagnated the growth and expansion

of the company.

It was informed that village panchayats provide 50% of the value of produce as

loan against warehouse receipts. However, at the time of release of goods

from the warehouse the loan obtained from the panchayat has to be repaid in

full along with the interest whereas, the indenting company would make

payment to PPC only after receipt of goods. This puts the PPC in a ‘catch-22’

situation.

PPC do not have any fixed or tangible assets to pledge for raising trading loan

in the open market. They are large groups of small holders and should be able

to avail group financing. PPCs are alternatives of cooperatives and may be

looked after by the NABARD at par. In MP the government transferred offices

and other assets of World Bank aided DPIP scheme in addition to a start up

capital of Rs.25 lakhs and hand holding during initial three years. Genuine

demands of PPCs who have been properly constituted and are functional can

also be supported out of NHM or RKVY schemes by setting up some criteria.

Issues for future consideration:

The following issues emerged for future consideration during case study of

IOFPCL and the interactions with the primary producers

1) The establishment of PPCs is generally considered as formation of a

group of small holders/ producers for enhancing productivity generate

marketable surplus, aggregate, add value and market at premium price.

Well tested models have been developed in Madhya Pradesh under DPIP

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for supporting PPCs initially. There is an immediate need for working out

a mechanism for providing the critical support to PPCs in the form of

start up capital and working capital either in the form of government

grant or through some independent institutional mechanism.

2) PPCs dealing with agricultural commodities have to essentially focus on

productivity enhancement for creating marketing surplus especially of

small producers

3) There is a need for exploring the possibility of dovetailing new initiatives

of the government like RKVY, NHM etc with activities of the Primary

Producer Companies for delivery of programmes, funds etc.

4) There are approximately about 40 lakh SHGs set up in the country.

Possibilities of converting / up-scaling SHGs and User Groups which are

basically loosely formed units in nature to PPCs should be explored with

scaled up support

5) Considerable scope exists for harnessing Watershed development

programmes as a platform for promotion of PPCs. In the first one day

round table meeting on role of producer companies held at New Delhi

by AFCL the following was one of the recommendations “For achieving a

quicker spread of the PCs, it would be ideal to focus on promoting PCs in

areas where watershed projects are being initiated in different states.

This would certainly help in reducing the time lag in community

mobilization, formation of CIGs / SHGs and having large cluster. The

watershed projects being implemented as per the new common

guidelines aims at having contiguous watersheds with greater emphasis

on livelihood activities and microenterprises”

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6) PPCs formed exclusively by primary producers without any corporate

linkage needs to be supported through hand holding at least in the initial

stages through institutions like NABARD, NDDB, AFC, NFDB etc.

7) The guidelines of Small Farmers Agribusiness Consortia (SFAC) needs to

include the provision of providing seed capital to PPCs without insisting

on bank linkages

8) For effective spread of PPCs time and cost bound interventions in the

form of credit / subsidy etc. has to be provided

9) For low volume and high price commercial crops where considerable

volatility of price is encountered in the market, a suitable institutional

mechanism has to be created for price stabilization

10) Channelising of Venture Capital Fund for supporting the activities of

PPCs would enable PPCs to expand their activities in a more professional

manner

11) The PPCs formed so far in the country are by and large through the

initiative taken by social activists or enthusiasts acting on the board

voluntarily and NGOs. For effective formation and wide spread of the

concept, the momentum has to essentially come from professionals. PPCs

essentially have to be developed as self sustaining business models.

Presently there is hardly a public institution which owns the concept of

PPCs and pushes this concept and creation of such an institution is

essential for promotion of PPCs

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12) It is essential for extending the enabling provisions to PPCs also at par

with cooperatives for their sustenance and growth especially during the

initial period of their formation

13) Policy decision needs to be evolved for enabling PPCs to get some

income tax exemptions for certain years like any other business

enterprise

14) Capacity building at different levels in the PPC is a key component for

increasing the efficiency of operation. The existing institutional set up like

KVKs and ATMAs should be effectively utilized for providing capacity

building support

15) IOFPCL may diversify into the marketing of non-organic produce also

Acknowledgements

The information provided by the Board of Directors and Officials of IOFPCL on a

host of issues ranging from functioning of the PPC to the aspirations and

problems of primary producers is gratefully acknowledged. Thanks are due to

Mr.Mathew Sebastian, executive Director, INDOCERT for briefing elaborately

the mechanism of organic certification being followed. The cooperation

extended by Mr. Chackochan, Director, IOFPCL and organic farmers of

Mullankolly Panchayat, wayanad during the field visit is highly appreciated.

Thanks are also due to Director and staff of Indian Institute of Spices Research,

Calicut for providing useful information on different aspects of spice crop

cultivation in Kerala and adjoining states.