From despair to hope in farming

Farming, especially in small and marginal farms that constitute 80 per cent of our farm holdings for the last many agricultural seasons, is returning negative incomes. The problem is aggravated in rainfed areas covering 55 per cent of our agricultural land, and contributing to nearly 40 per cent of farm output, including pulses and oilseeds. Lack of fair market access for a basket of commodities is foremost among factors making farming a non-remunerative proposition.

It has been rightly pointed out that farming is among the only businesses where the entrepreneur (farmer) buys retail and sells wholesale. This severely restricts her bargaining and negotiating capacities while battling borrowing, production and marketing risks.

A disproportionate amount of risks lie with the farmer; they remain alienated from the post harvest segment where much of the agricultural value lies, making for a skewed risk-reward situation.

In this backdrop, farmer producer companies are a powerful institution to confront issues faced by our farmers. Farmer producer companies were introduced through an amendment of the Companies Act, 1956 in 2002, that allowed for farmers to be organised as shareholders of enterprises they collectively own.

The enterprise can then undertake commercial activities related to agriculture, mitigating risks while adding and creating value.

Ramrahim Pragati Producer Company, an enterprise owned by 3,000 women and tribal farmers, was formed in 2012 to take up challenges confronting the farmer. These women belonged to over 200 self-help groups (SHGs). These SHGs became the shareholders of the enterprise. The advantage was that SHGs, which are also linked to commercial banks, channelise public finance at competitive interest rates to their members and also earn interest income from the differential in interest rates of borrowing and lending.

Unlike private microfinance institutions, this interest income belongs to the collective, and can be used for collective assets such as a grading machine or to even contribute to start-up capital required to form a producer company as in this case. The equity could then be leveraged for working capital and capital expenditure needed for aggregating, value addition and marketing of produce.

However, faced with mandi and entry taxes of 2 per cent and 1 per cent, respectively, taxes which are exempt for the farmer, and additional 2 per cent commission costs at the mandis , the producer company was forced to hold the produce till the time market prices would allow it could break even. This also entailed additional costs of storage and interest. Farmers stood completely exposed to market risks and possibility of windfall losses, in case prices fell post harvest.

To combat this, after a year-long process in 2014, RamRahim was able to get the required clearances from the Forwards Markets Commission to use the futures platform of the National Commodities and Derivatives Exchange. In May 2014, farmers through the enterprise were able to hedge and lock onto to soyabean prices at near-₹4,500 levels. When prices crashed by over 30 per cent post May, farmers of RamRahim did not lose a single rupee.

By 2015, the company had evolved a mechanism to use futures prices on the exchange as a minimum support price mechanism to insulate farmers from market volatility, which is high in primary agricultural produce.

Historically, it can be seen for most commodities that prices during the harvest season are at a trough. By taking positions ahead of the season on the futures exchange at prices agreeable to the farmer, producer companies can ensure a minimum support price to their farmers.

In case the prices rise during and post harvest, by taking long positions a producer company can pass on benefits of the price rise even after harvest.

This mechanism can also improve a farmer’s portfolio of crops, especially, pulses, and increase crop diversity in the local agro ecological zone. The current subsidy based model for wheat and rice procurement skews production in favour of these crops even in areas that are not suitable for them.

Crop diversification also brings down the risks of mono-cropping, a result of procurement of wheat and rice at MSP. Through the introduction of options in the commodity markets, farmers though producer companies can fully insulate themselves from downside risks while retaining their choice to sell higher.

While government based public procurement needs to continue, a good portion of subsides can be channelised for investments in public infrastructure like marketing and storage yards, instead of hard-to-phase-out consumption subsides.

The enterprise in October 2014 in partnership with NCDEX also made it possible for creation of a national level online marketplace for farmers and buyers, enabling listing for FPCs as members of the exchange. This created a scenario where farmers could exercise freedoms of where to sell, when to sell and at what prices to sell through mutually agreeable prices. The forwards platform along with the electronic National Agricultural Market can enable farmers to claim their fair share of consumer rupee spent, even while allowing private entities to procure, process and retail at lower transaction costs bringing down consumer costs as well.

Farmers are showing the grit to make markets and capital work for all. To borrow from Keynes, it is ideas which are more powerful than vested interests for both good and bad. And, the time for good ideas has come.

The writer has been living and working with women farmers since the last three years in the Narmada valley, helping them establish and build RamRahim Pragati Producer Company. The views are personal

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