From farmer to businessman
Article by Trilochan Sastry in Hindu
21st August, 2015
The fact that food companies prosper but farmers commit suicide shows that profits are in the market, not the farm. It is time to replicate the Amul story many times over In the ongoing debates on the new land acquisition bill, the potential of agribusiness to address agrarian distress has not been explored. There are several domestic agriculture companies, both listed and private, that are doing extremely well amidst an increasing number of farmers’ suicides.
The classic case is of suicides by cotton farmers. Of late, share prices of textile companies are performing extremely well and attracting huge private investment, but cotton farmers continue to be in distress. Even in staples such as pulses, rice and wheat, food companies do well but the farmers are in trouble. It is significant that all these foods are processed, but not by the farmer. The money is clearly in the market, and not merely in production.
Recognising this, several farmer-owned producer companies and new types of self-reliant cooperatives, broadly called Farmer Producer Organisations (FPOs), have recently been set up. They aggregate, sometimes process, and then market agricultural produce. The best example of such an FPO is Amul Dairy. Along with other National Dairy Development Board (NDDB)-promoted dairy cooperatives, they have brought millions out of poverty.
In this context, a cold, hard look is required at how agribusiness operates, and at the policy measures, if any, that need to be put in place to enable FPOs to thrive. However, non-dairy agriculture is far more difficult to handle. Prices and supply are volatile and vary at times by over 100 per cent unlike in the case of milk. This not only makes farming difficult, but agribusiness as well.
A look at the listed successful companies in food processing, if we exclude multi-national companies that focus entirely on semi-ready or ready-to-eat foods, shows the following: for listed rice and pulse mills, whole wheat, plain flour and semolina producers, and edible oil companies, net profit margins are low at less than 5 per cent but interest costs are often twice the profits. Debt-equity ratios are hovering at around 200 per cent. Taxes are over 50 per cent of net profits.
Most important, such companies, unless backed by deep pockets, take years to establish, based initially on promoter capital, and later, capital from the share market. Rice mills and processing units listed on the stock exchanges usually take 10 years or more to become successful with high market valuations, profits and dividends. Thus, we largely see private unlisted companies in this sector, outside the purview of public accountability.
What does this mean for farmers and the several hundred FPOs that have already been set up? First, the low margins do not really matter. If we take the profits not on the total value-added sales, but on the value of raw produce, the margins are much higher. For the farmer this is a significant increase in income, and is sometimes the difference between poverty and prosperity.
Capital constraints
However, there are several barriers that have to be overcome. First and foremost is the capital constraint. FPOs are initially not able to raise share capital from their member-farmers. They also cannot go to the share market to raise capital unlike the privately-owned food processing companies.
We ‘protect’ the FPOs from hostile takeover by not allowing shares to be traded. However, this effectively blocks them from raising capital from the share market, which even wealthy private promoters need. So FPOs in India are all taking the only route available — aggregating raw produce and selling it to the private sector, which then takes away the lion’s share of the profits. The next barrier is working capital. FPOs have to buy in cash as their member-farmers need the money desperately at harvest time to repay crop loans and run their households. They initially cannot demand cash from the buyers who often take a few months to pay. So FPOs need higher working capital than the private sector. This is where dairy cooperatives score since milk is produced and consumed daily and farmers can sometimes wait for a few days to get paid. Given current banking norms, non-dairy FPOs are simply unable to raise loans, as they lack an equity base and cannot provide collateral.
The third barrier is managerial capability. It is unreasonable to expect farmers to run the everyday business operations in an FPO, just as it is unreasonable to expect shareholders to run a listed company. As in the private sector, FPOs can hire well-paid professionals if they reach a certain scale as Amul and several other, large, successful cooperative dairies have done. So what is the way out? While initial share capital from farmers is very difficult to mobilise, it can be raised over three to five years as profits come in. But meanwhile there are fixed investments, working capital and interest costs, and costs of professionals.
Finance options
Bridge financing is required. An interesting idea followed in other countries allows cooperative-corporation joint ventures and different classes of share capital. Allowing trading in closed circles, clear exit clauses and allowing buy back by FPOs of outside investor shares, may help raise initial capital.
Unfortunately, joint ventures permitted in the Indian Producer Company Act allow very little outside share capital. Hence, innovative ways of providing working capital to FPOs are urgently needed. The highly successful collateral-free, self help group-bank linkage programme needs to be adapted for FPOs, based on a case-by-case business analysis and cash flows, rather than on collateral. The RBI is willing to categorise lending to FPOs as a priority sector, but banks are not willing to come forward without collateral. An alternative is a special fund outside the banking system. Finally, the huge interest burden on FPOs needs to be reduced. Unlike in microfinance, if interest costs are halved, profits are doubled in agribusiness.
Finally, there are taxes and regulations. While farm gate sales are tax-exempt for the farmer, FPOs with processing units have to pay VAT on the entire sales proceeds, effectively on the purchase of raw material as well. Hopefully, the proposed GST Bill will iron out this anomaly.
The combined effect of interest rate reduction and tax breaks can make these FPOs triple their profits and thus mobilise large numbers of farmers quickly — perhaps even faster than Amul did. The regulatory burden at the grassroots is far too cumbersome needing more than 20 permissions, each taking time and facing several obstacles. It effectively kills the growth of this sector. These need to be waived by giving SEZ type privileges to FPOs.
In spite of such odds, we still see the odd successful FPO running well for decades. The real question is not why there are so few; it is how even these few succeeded. The combined turnover of cooperatives in the U.S. is over $500 billion, and for Europe’s top 10 cooperatives, it is $110 billion. Our largest and only one has a turnover of $3 billion. Those countries have less than 10 per cent of their population engaged in farming while we have over 50 per cent. Surely we can do better.