OCTOBER 2014 WORLDBANKGROUP SmartLessens I5FC 'Fiac Crploration ABOUT THE AUTHORS Producer Companies in India: a Senior Agricultural Specialistincreased Productivity based in New Delhi, India, was- part of the MPDPIP-II task team andand Profitability of Poor Smallholder Farmers analysis of the producer companies. She is also a member- ofIn 2002, the "producer company model emerged to benefit poor farmers in India. This teams that are advancing the producerSmartLesson, based on the World Bank's growing experience with producer companies in India, builds on lessons learned from the First and Second Madhya Pradesh District KevinPoverty Initiatives Projects, which initiated 18 agriculture and livestock companies, Development Specialist, Task Team involving 46,500 poor small farmers in over 1,550 villages in 14 districts-with 100 percent women shareholders in the livestock companies and 25 percent women owners in agriculture. Together, these 18 companies had an annual turnover of more than $9.5 million in 2011/12. Background inputs (quality seeds, fertilizers, and farm implements) at the local markets; and they With a population of over 1.2 billion and areunabletograde their produce andnsecure an increase in disposable income, India is direct market links for better prices, which experiencing a growing demand for food, forces them to bank heavily on middlemen but productivity remains among the lowest in local markets. in the world. And most of the more than 60 percent of the population engaged in Stakeholders in India have tried to resolve agriculture remain in economic and social these issues with the cooperative model distress. Most of the agriculture and livestock to connect farmers to the value chain. production takes place on small farms (less However, with some notable exceptions in than two hectares) that are dispersed and the dairy industry, cooperatives generally fragmented. These small and marginal have not been successful because of political farmers lack organizing capacity and are interference, elite capture, and corruption. often unaware of programs and options Legal reforms to address these issues resulted available to them or how to access them. in the emergence of the producer company Women, who account for about 70 percent (PC) model in 2002 via an amendment to the of agriculture and livestock production, have 1956 Companies Act. an even more marginal role in markets. The reasons for the plight of farmers are several, What Is a Producer Company? interlinked, and often complex, and even though demand for their commodities is Owned by primary producers, a producer rising, farmers are locked in a perpetual cycle company is a legal entity that provides of poverty an organization for poor farmers, to help them integrate into a larger market value Poor farmers face a number of challenges to chain to improve their livelihoods and economicgrowth and improvement: theyare to allow the PC and members to thrive unable to benefit from economies of scale independently in a competitive agribusiness because of their small size; they lack market environment. Producer companies deliver information and are prone to distress sales social and economic benefits to members (below market rates) to repay loans; they and nonmembers. For example, they result face unavailability or high prices of critical in the following: SIVARTLESSONS - OCTOBER 2014 * economic gains from increased productivity and income influence policy and government programs. from backward and forward links; * economies of scale and timely access to quality inputs at The Project discounted rates; * aggregation of produce, processing, value addition, Madhya Pradesh (MP) is one of India's leading agricultural and marketing support (storage, transportation, grading, states, where agriculture contributes over 25 percent of packaging, market information, and market timing); the state GDP and engages more than two-thirds of the * access to production technology, credit, insurance, working population. MP was part of the World Bank's initial advisory, and other service support that reduce risk; and trilogy of livelihood projects in India. Given the prominence * warehousing, which enables farmers to access credit on and scope for improvement of agriculture, the upward receipts based on future market prices. federation of common interest, and self-help groupsto form producer companies, the Bank provided financing for the The entire community benefits from productivity PCs under two phases of operation of the Madhya Pradesh enhancements through increased availability not only of District Poverty Initiatives Project (MPDPIP). The project quality seeds produced by shareholders but also of food, became effective from March 2001 in 14 districts of MP, and which enhances food security and nutrition. PCs create jobs the second operation began in 2009. Implemented in 2,902 and potentially reduce migration. Women (who often are villages, the project emphasized creating and improving responsible for a majority of production labor but excluded opportunities for the poor and the vulnerable, especially from markets) benefit when companies build human women, by mobilizing them into grassroots institutions capital; furthermore, productivity-enhancing and labor- that follow the principle of aggregation-forming small saving efficiencies from group access to mechanization groups, networking them, and then federating upward to for planting and harvesting can be particularly beneficial enable better strength of voice, collective bargaining, and to women. PCs also become a focal point for advisory economies of scale. support for agro-advisories and training as well as access to government programs. The World Bank financed start-up capital in the form of a loan, while each company raised share capital from members. Timely planting and harvesting support adaptation to The Bank also provided advisory support for governance climate change. Organization also enables producers and operations arrangements, including backstopping to benefit from environmental sustainable practices- support from nongovernmental organizations (NGOs), and increasing productivity, reducing the environmental helped catalyze convergence with government programs. footprint, and making bonus payments available through The project support unit and specialized NGOs provided certification programs such as the Responsible Soybean handholding and helped PCs progress through the program. These companies also benefit from association preparation, start-up, and incubation phase, and several with the international agency Solidaridad, which provides have achieved partial autonomy and maturity. (See Figure technical and financial support as part of the Roundtable 2.) All PCs formed both backward and forward links; half of on Responsible Soy Association. Federated producer the PCs have formed at least seven or more links with input companies provide a powerful voice for small producers suppliers. All but four provide storage facilities, processing, to engage more effectively with state governments to and grading. Figure 1: Producer Companies Link Farmers to the Value Chain * fSrmrr M Pfarmer Pradesh ( is one o Ia di gc l farmer T working pouain MP was par of thWolan'nta triog ofE lieiho projects inIniacGvestesroinnc -farmE r -farmer - fa rmerMaktn -farmer insurance providers 2 SMARTLESSONS - OCTOBER 2014 Lesson 1: Governance should include representatives Lesson 2: Skilled, knowledgeable, well-networked, from the producer as well as expert board members, and trusted professional staff who are adequately whose appointment is based on capability. Strong supported is an essential component of the PC model training programs also should be provided. Companies may have a minimum of five management The basic governance and organizational structure of a PC staff-including the vitally important CEO, who needs consists of a board of 5-15 people, elected or appointed. to demonstrate skills in business and in management of Up to 20 percent of the board members can be expert both people and technical processes, be well-networked directors, and the CEO serves ex officio. Board members can to suppliers and buyers, have good negotiation skills, and be reappointed for no more than one additional four-year be trusted by the producers. Attracting and keeping such term. a multi-talented person is challenging. One option was to recruit graduates from major reputable institutions, Board training and retraining to apprise directors of their such as Institute of Rural Management, Anand. Turnover responsibilities and to support skills development are of CEOs has been high-on average, two years or less- important, as is the establishment of minimal education because of 1) frustration with the limited financial and requirements: 12th grade for men and 10th grade for technical capability of farmer board members and 2) salary women, whose representation thus far generally remains and bonuses that were not competitive with market rates. poor. The appointment of professional directors (at least These problems are alleviated by 1) imposing expert and one in addition to the CEO) also provides capacity building minimum educational requirements on board members and for the producer board members and support to the CEO. 2) developing a human resource strategy that formalizes Producer companies hold an annual general meeting that salary and bonuses packages and professional development requires participation of two-thirds of the members-a opportunities. challenge, given an average of 2,500 members, and a deterrent for membership expansion. Capital constraints meant that key staff positions often went unfilled. For instance, all but one company had a marketing director-a key position to lead the final stage Figure 2: Stages of PC Development, Duration, and of the company's development. The other critical position Characteristic Activities During Each Stage was commissioned agents, who are critical for aggregating demand for inputs and outputs, disseminating basic information, linking farmers to other service providers, *(assumesSHG alreadyformed) and expanding membership. Commissioned agents either *Feasibility study were farmers or were drawn from the community and *Farmer mobilization/awareness Trainingmaterialspreparedtrusted by them. Most successful companies also employed *Exposurevisitsandtraininglead farmers production managers-graduates trained by the company! incubator-who could provide both technical and business *FederatingSHG/awarenessbuilding/training *PC registration/ licenses mngmn die *BODand staff selection/train ing *Annual meeting Lesson 3: Clear performance targets should encompass *Businessplan development both the economic and social objectives of the PCs. *Seed capita I acquisition *Input bulk purc hasing/ servicesadvisory *Procureassets,storage,equipmentforweighing,bulking Clear targets, although not set initially, have evolved to include livelihood benefits to shareholders. They measure *Aggregation/ buIking,weightinggrading/sorting increase in agriculture/ivestock productivity, increase in *Market informatin/markettimining strategy gross margins from crop/livestock products, and increase *agging/bask packaging in the producer share of the wholesale price. Women's *Advisory services expa nsion/SWIS Profitparticipation (and how they benefit) also needs to be EvaluatedArbdonperformancea entmonitored. Business indicators include annual turnover, Vi.abl., chieesbreakeven operating margin, working capital requirement, bonuses! ncreasingeberdividends declared, and credit and repayment from Exprndingservic-, dealarship. Expandingaggregation&valuadditncommercial banks. Inputstorage, bulkingwhan priceanre lowver Staffturnoverreducedto3-5yraverage The commercial banking sector had little experience Evaluatedconsistntlywith producer companies. Assessment of PCs' business -SelfSustainabla, not relianton government programs, nor handholdingsupport performance was fundamental to their ability to attract Recognizble brand packaging& processngcapwityort- additional loans from banks. The international Crops effective buy-back progra mn MarkeResearch Institute for Semi-Arid Tropics (ICRISAT) developed Sharevaueincreed,bon paidtmembe an agribusiness incubator (ABI) that was contracted to prepare case studies on the top six best-performing companies, to build confidence of commercial banks to release loans. Performance targets were important SMARTLESSONS - OCTOBER 2014 3 Box 1: Women's Poultry Producer Companies Take Flight Madhya Pradesh Women's Poultry Producers Company Pvt Ltd. (MPNPCL) started in 2005 with 300 shareholders and has grown to include over 3,750 women from tribal areas. ft generates annually Rs. 998 lakh (about $1.8 million) in member income and a further nearly 20 percent in dMdends per share. The company has captured 20 percent of the commercial broiler market in the state. Before becoming shareholders in the company, women like Choti Bai had limited livelihood options. Many were engaged in hard labor with little income and struggled to feed their families; they had little social standing in the community and were pushed from place to place. Now they are businesswomen, active shareholders, and board members of this thriving company. The company is becoming more vertically integrated by securing input name feed production and hatcheries to supply quality chicks. The PC which with its affiliate cooperative employs 300 staff, received start-up investment from the MPDPIP and has been incubated by PRADAN. Now it attracts bright young graduates like Ms. Kusum from business and veterinary schools in India. Choti Bat, one of the largestshareholdem who produces 5000 broilers annually and Ms Kusum, an MPWPCL staff member (Photo by the author) for providing relevant capacity-building support. The the World Bank is financing initiatives that provide aim of having 15 of 18 companies sustainable may comprehensive handholding and peer support: ACCESS be overly ambitious, given industry expectations that provides extensive handholding and is establishing Small only 20 percent of start-ups are viable three years later. Producers and Agribusiness Resource Centers, which work Performance standards are required for farmers, such with PCs at the member, management, and governance as sustained quantity and quality of produce supplied. levels; the ABI at ICRISAT is building the capacity of business The most profitable company implemented a total support units on 10 agriculture university campuses around quality management system with performance indicators the country; the National Dairy Development Board throughout its business operations-human resources, has established National Dairy Services, a not-for-profit production, purchasing, marketing, financial. (See Box 1.) company, to supportthe formation of PCs underthe National Dairy Program; and most recently, the government of India Lesson 4: Companies require handholding (including identified and selected the Small Farmers' Agribusiness longer-term peer support) for five to six years to Consortium as the key body to provide advisory support promote the PCs during several stages of development. to producer organizations. PCs could also evolve through public-private partnerships, with state governments State- and district-level support units provide assistance to supporting the initial stages of development, as it is in agri-focused PCs, while Pradan and Srijan assist livestock the interest of the private company to gain access to bulk PCs. Any group of producers can set up a company, but supply of consistent quantity and quality. it requires a promoter to build awareness, organize producers, and facilitate the PC's evolution (see Figure Lesson 5: Major challenges include raising capital 2). Community mobilization can be time-consuming, so (although several options are possible) and achieving recruiting shareholders from existing self-help groups can reforms related to taxation and land ownership. shorten the process. Registration and licensing, setting up systems and processes, staff recruitment, and establishing MPDPIP provided a start-up loan of 25 lakh, and producers forward and backward links require strong business skills. paid 10-100 Indian rupees per share, based on commodity. Membership in consortia is another source of peer Patronage-based share packages are an option. With PCs support. Nine PCs joined the Roundtable on Responsible having an average membership of 2,500, share capital has Soy Association and can access technical and financial thus far been limited, and PCs under MPDPIP have been support through the international certification agency reluctant to expand membership, pending access to bank Solidaridad. As part of the project exit strategy, the project loans to expand their business. For start-ups, this is not an management unit plans to establish an apex organization option, as banks require three years of balance sheets. at the state level to support business development, further aggregation, and marketing. While the National Bank for Agriculture and Rural Development is mandated to provide credit and other Through the National Agriculture Innovation Project, facilities for various operations in the agriculture sector, 4 SMARTLESSONS - OCTOBER 2014 there are few examples where loans have examples in the country. In many respects the been issued to PCs. The Small Farmers' MPDPIP producer companies face challenges Agribusiness Consortium commissioned an common to most private companies- analysis of each of the top six agriculture- attracting and keeping good staff, capable based PCs under MPDPIP to encourage governance, and accessing capital-as well as commercial banks to release loans, with some additional challenges related to their social success for companies assessed as mature. role. Infrastructure support has been sourced through government programs. Several other Bank-financed projects in India-including agriculture competitiveness Other options include partnerships or projects in Maharashtra, Assam, and alliances with other private companies, Rajasthan-are planning or implementing financing through venture capital funds, PCs and other producer organizations. grants from national and international The largest is the National Dairy Support sources, or financing through corporate and Project, where the objective is to improve private foundations. The new Companies productivity and market access of 1.2 million Bill, whereby companies allocate 2 percent smallholder farmers, about half of whom will of profit to corporate social responsibility be organized into producer companies. Over initiatives, is another option. Other options 100,000 farmers have already been organized to raise capital without diluting the ethos into PCs in two of India's leading dairy states, of the PC could be to issue class B shares to with plans to establish companies in other nonproducers, with dividends but no voting leading dairy states as well as to expand rights, membership in cooperatives. Further reforms are also necessary to give PCs access to tax breaks and land leases that cooperatives often currently enjoy. For example, cooperatives can lease government land at very low rates. Conclusion Agriculture in India, as in many developing countries, is characterized by small-scale and often widely dispersed farmers who lack organizing capacity to increase productivity and access markets. PCs are still a new concept, and the PC model financed by the World Bank under MPDPIP represents some of the earliest prrojct io srs OCTOBER 2014d5 Rajasthan-are planning ord implementin PCs~~peaios and oterprdueroranzaios The largestd i isi thee Natona Daiyoupor Project,o wher theo(s obeciv is tonmpov productivityaril andec marke access of12milo beorganized into producer companies.iOver 100,000th farmersv havecalready benhrgnie into ~~ he PCsesnt inC twos ofIda'oedngdiyttts withasum plan topniblt esabis copaishnote leadingpetees dair statesc as welasthepn rights.maio membership in cooerties Furthercuent reforms are also neesarrtmgv that~~an ooperative ofte currntlyenjo.rFo example, cooperatives canac lesegvenmn landra at veryt lownsrates.g Conclusion OTOER204