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
2









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 Producers 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.
Companys 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
8

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 9
th
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.