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Soon after I announced my ABM Townhall on making FPOs investable assets, an acquaintance snided that making FPOs investable assets is like teaching ants (instead of elephants) to lift stones to build temples. Wouldn’t investors look for elephants instead of ants? He wondered.
Fair question indeed. Now consider this experiment.
What happens when you bring together investors who have funded FPOs; agribusiness founders who have embedded cooperatives in their organisational structures and have received external impact capital; bankers who sit on the boards of FPOs and FPO financing organisations and last but not least, eminent scholars who have been diligently studying the emerging model of farmer producer organisations all in one room?
Can this wicked challenge be collectively addressed with an eminent panel with a rich biodiversity of mental models and experiences to not just discuss the challenge at hand, but also seed possibilities of creating pathways of investment?
This was the experiment I attempted last week in the most recent ABM Townhall.
Panelists:
1. Rahul Rai, Partner, Incofin India Investment Management which led the capital round for Sahyadri Farms, India’s First Farmer-Led Organisation;
Emmanuel Murray, Investment Director Caspian and someone who sits on the boards of several FPOs and farmer finance organisations.
Shambu Prasad, one of the finest scholars from IRMA - which has a rich tradition of studying farmer organisations in India- recently co-wrote a terrific book, “Farming Futures, Reimagining Producer Organisations In India” along with Ajit Kanitkar.
Guests:
Krishnaiah Kodimela from Pasidi Panta which has received funding from Upaya Social Ventures and managed to incorporate a mutually aided cooperative society in his organisational structure.
Mariappan Ramarathinasamy, Ex-Practice Head, NDDB
Eminent Scholars who have been studying FPOs from the Managing Sustainable Transitions Community
At one level, as Rahul nicely put at the start of the panel, what stops from taking the leap is largely the fear of the unknown. This is not to belittle the challenge at hand, given where Farmer Producer Organisations are today in their infancy stages.
If one image could sum up a thousand words on the current state of Farmer Producer Organisations in India, this annotated image (below) from the Indian epic Mahabharata could be a strong contender.
Would you like to hear a story?
An elephant was chasing a man in a forest. With no place to hide, he climbed a tree. He slipped unfortunately and could thankfully manage to hold on to a branch.
He looked up and found that the elephant was waiting to devour him and two rats, one black and one white, were slowly nibbling the branch he was hanging on to.
The branch would soon fall to the ground.
As the man looked down, he discovered that there were many snakes. Suddenly a drop of honey fell on his face.
He licked it.
There was a honeycomb atop the branch he was holding. As he held the branch and shook it in fear, the bees were enraged and were out to sting him. Albeit, he got to taste the honey oozing from the comb.
Could this be the precarious predicament of farmer-producer organisations in India, tasting the eternal cooperative spirit that has been taken for granted, although with political machinery working its way to break the traditional political fiefdom of rural India, creating two separate policies of Farmer Producer Organisations and Cooperatives, while envisaging M-PACS (Multipurpose Primary Agricultural Credit Cooperative society, further highlighting the growing chasm between cooperatives and farmer producer organisations in a microbiome of competitive federalism that is constantly seeding conflict between the Center and the State?
Given India’s agrarian DNA, Farmer Organisations have co-evolved with India's political economy. If you don’t mind my proclivity to use Bollywood Matinee Amitabh Bachchan as a motif here, you could broadly categorize the evolution of cooperatives in India into three phases.
Until the nineties, India had a strong cooperative movement. After India's 1991 liberalisation moment, the stronger need to integrate markets with farmer organisations led to the birth of farmer-producer organisations - the intrepid love child of private companies and cooperative societies.
In the "Doubling Farmer Incomes Report" which marked a seismic shift towards focusing on farmer incomes to renaming the Department of Agriculture to include farmer welfare, there were 280 references to "farmer producer organisations".
In 2021, keeping in mind the reversal of globalisation and the rise of neo-local economies, cooperatives are coming back to the fore with the Ministry of Cooperation aiming to create multi-purpose, multi-state Primary Agricultural Credit Societies (PACs) that will be digitised and monitored closely from the top.
With the Indian agritech ecosystem at an interesting juncture where private investors are unable to find good ventures to back on, can the funding be redirected towards FPOs?
So what did I learn from this ABM Townhall? Here are some of the insights I learned from this eminent panel. All the pointers below have been paraphrased from the original conversations that emerged during the ABM Townhall.
Whether it is Rabobank or IFFCO, global and Indian cooperatives have always had private companies as subsidiaries and have partnered with well-known institutions in creating these subsidiary structures.
When FPO becomes a holding company, on the FPO end, they manage the farmer organisation and back-end creation, including inputs and loans, while the subsidiaries focus on the commercial side of the business.
Addressing the conflict of interest between the subsidiary organisations and the FPO is crucial, besides installing guardrails and transparent mechanisms on pricing for a farmer joining an FPO and what the farmer would eventually get out of an FPO.
Restricting share capital contribution only to farmer members has limited the capital structure of FPOs, especially those which have the potential to scale quickly. Even the legislation doesn’t have provisions for subordinate debt, preference capital and other kinds of equity structures.
Opening up FPOs to private equity while keeping cooperative principles intact and the question of exit hasn’t been deeply addressed so far in the policy discourse. When it is time for an investor to exit, who will buy out the investor's stake? It’s important to remember that the nature of capital is unlikely to be inclusive.
Every FPO need not become an MNC. It could remain a member of another entity which does things for which an FPO has limitations. Not all FPOs are going to be large corporates, many of them will remain localized institutions. (Do check my counterpoint: FPOs as Corporation and Corporation as FPOs for more nuance around this)
Linear models of scaling producer organisations are largely unnecessary, especially when they could be small and participate/network with others.
Debt products and debt structures haven’t yet been designed appropriately for FPO businesses. Guarantees are hypothetical. While institutional equity-based investors are limiting themselves to managing the execution risk, in the case of debt, lenders are largely limited to safe lending.
If a startup is burning cash like mad and still is investable, why an FPO which has a marginal loss is not debt-fundable? Conventional finance metrics (including CIBIL Scores for evaluating FPOs) need to be rethought for funding FPOs.
When dealing with FPOs, it is important to get the typology right. On the one hand, as Prof. Tushaar Shah pointed out, there are swayambu (sui generis) FPOs such as Sahyadri. And the other end, you have milk-producer companies that have followed, as Prof. Tushaar Shah put it, “Anand Patterns” with power not so much with the members as much as with the professionals.
It is important to distinguish between Type 1 FPOs and Type 2 FPOs. The latter could be a federation of FPOs or a joint venture between FPOs and private entities working on slightly different design principles.
Primer on Type 1 and Type 2 FPOs:
“It is necessary to design at least two different types of FPOs with different mandates, business models and organisation designs. The institutional structure and evaluation parameters for these two types of FPOs will also need to be different. Type 1 FPOs could consist of 300 to 1000 members (in tribal areas the Gram Sabha could double up as type 1 FPO). These FPOs will deal with the production or wholesale procurement of seeds and other inputs, providing agri equipment on rent, extension activities for various agriculture operations for relevant crops, and promotion of individual or group enterprises for activities like bioresource input production. They will also undertake aggregation of output, quality checking, and primary processing like grading, cleaning, packing and selling to large buyers or Type 2 organisations. These Type 2 organisations will buy from type 1 FPOs, store, process, export, brand and sell in B-to-C format or in B-to-B format depending upon the commodities. Potentially these Type 2 organisations could be larger FPOs or Federations but also social enterprises like Safe Harvest, Earthy N Green, Manyam grains etc.” - From Shirish Joshi and Shambu Prasad’s Blog on Type 1 and Type 2 FPO Typology
How do we design the new generation cooperatives in India? Are FPOs the new generation cooperatives? The discussion in agricultural cooperatives in the US and other countries has many mechanisms to address these questions. We have hardly scratched the surface in India to explore these possibilities among farmers.
Amul Model cannot be mindlessly emulated: Owning the end-to-end value chain happened during pre-liberalized India. We need to be mindful of today’s realities.
Ideally speaking, we need to move to a certain stage where reverse pitching ought to happen while forming FPOs. Let the farmer members decide whether they want to form a cooperative, a producer company, or a mutually aided cooperative society. Otherwise, we end up creating institutions that are based on the principle of exclusion. No, a farmer need not tie up his life with an FPO.
Conditions for FPOs to exist, irrespective of form and structure: a) When there is high cost or production on a per-unit output basis; b) when there is a technical type of production; c) when there is deep sociality between members and management with frequent transactions. Is there a commercial rationale for creating additive value, irrespective of formal, informal or FPO structure, that remains fungible and negotiable?
If you are a producer company, you cannot become a member of National Co-operative Organics as it is restricted as per law. Some of our institutions are not designed for our contemporary requirements. We have to rethink the design principles of building cooperative institutions.
The FPO movement has led to small farmers expressing themselves more freely in board rooms, unlike the case of cooperatives, where there was significant elite capture.
FPOs and Cooperatives will coexist, especially with 20-25 % of the FPOs doing well. Policies are working towards federating these institutions while the Ministry of Agriculture deals with the former; keeping hands off from the Ministry of Cooperation which is dealing with the latter.
Today, CSR Funds cannot go directly to an FPO. How do we change this? What would it take to include FPOs as a potential recipient of the social stock exchange? Grants are typically not used to derisk trade activity. They are used to create farmgate infrastructure.
Unlike in the case of milk, where milk producer companies can procure all milk and sell it, FPOS cannot do the same. Similarly, FPOs could very well be open enough to service their orders by working with non-members as well.
Company structure allows the possibility of mergers and acquisitions and the producer company has greater flexibility to change forms depending on business objectives. FPOs also have the potential to use expert directors on the board who may not have voting rights.
If you do not have a significant turnover, it is probably not a good idea to go for producer company registration and bear the cost of compliance.
FPOs mentioned during the conversation in the context of investments:
Rang Sutra - one of the earliest cases where a private equity investor came into FPO.
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Making Farmer Producer Organisations (FPOs) Investable Assets