The government has this lofty goal of doubling farmers’ income by 2022. Among the different instruments to achieve this goal, promotion of new and scaling up of existing Farmer Producer Organisations (FPOs) have been given focus.

Given the extremely small landholdings, FPOs, through collectivisation, which leads to economies of scale, are supposed to address the problems and improve the bargaining power of farmers through backward (inputs) and forward linkages (marketing to processors and retailers).

However, numerous questions arise about the delivery on the promises made by FPOs. Have FPOs been successful in reducing input costs and bridging the gap between farm and market prices — a marker of farmers’ bargaining power? Have they been successful in providing more markets and eased credit constraints of group members? These questions beg answers based on data and sound empirical analysis.

Bihar study

To address these questions, the International Food Policy Research Institute (IFPRI) implemented a study of FPOs in Bihar, a State with many smallholders with limited market access. The results show some success but also several challenges.

The farmers seem to have tasted some success in getting information on crops and technology, inputs (seeds, fertilisers and pesticides) at cheaper rates, higher price for their produce, and linking with new markets.

Seventy per cent of the farmers reported getting information about crops, technologies, and inputs (mainly seeds). The figures on the side of reduced input costs are modest (16 per cent farmers reporting decreased input cost while 44 per cent farmers report no change). Approximately, 47 per cent farmers believe their gross income went up but, importantly, an equal percentage report no change in income.

Further, FPOs seem to falter in terms of risk mitigation. Sixty-five per cent FPO farmers rate sudden collapse in market price as their biggest fear.

One of the biggest challenges for FPOs is ineptness in accessing capital (mere 3 per cent farmers reported improved credit access post-membership), notwithstanding the move by some FPOs to convert into Farmer Producer Companies (FPCs), subjecting themselves to the Companies Act with all its formalities and associated costs.

One of the prime motives behind formation of FPO or FPC is to provide capital access. Around 59 per cent FPO farmers reported status quo in access to capital.

The other challenges are lack of proper monitoring, no or incomplete record of farmer members, no penalties for wrongdoers, no incentives for good performance, and other problems like free-riding.

Lack of proper monitoring and evaluation seems to be hampering the growth of FPOs. Many of them do not have records about members, and several farmers themselves do not know whether they are members or not.

The core of the problem could be the policy itself. By assigning subsidies for FPOs in the spirit of infant industry promotion, there probably is negative selection happening with some individuals/entities entering only to reap the subsidy and depart once it dries — quintessential rent-seeking like any other subsidy.

Also, the policy focusses on numbers, pushing for more farmers to join. With more farmers, chances of free riding and not doing one’s part go up. Size might not be a premium in monitoring and delivering on attributes like food safety and quality.

Several policy implications follow from our study. The FPOs need a proper selection mechanism for the promoters/organisation as well as members based on merit to avoid subsidy gouging. There are some technical guidelines too:

Optimal size determination : It is always convenient to monitor smaller group. Smaller sub groups, of 25-30 members, within a group could be easier to monitor and can also deliver better on attributes like quality and food safety. In Africa, vegetable exporters organised into smaller groups once standards were tightened in Europe and delivered better in terms of accessing European markets.

Optimal composition: Participation of members with different skills is important to reap the gains based on comparative advantage. Heterogeneity in that sense is desirable. Policy should try to minimise the entry barriers for farmers based on social, economic and political factors so benefits of different skills can flow.

Product differentiation : FPOs can maximise prices for farmers if their products are differentiated. In our survey, unfortunately most FPOs do not seem to have taken this approach; the focus is still on producing more and selling more.

If a tomato is taken as a tomato, price premiums cannot be availed of and fear of price crashes looms large. Instead, a graded, labelled and certified system for tomatoes can mitigate these problems to some extent. Product differentiation levers can be taken, such as freshness (plucked in the morning on day of sales), organic (small farmers hardly use fertilisers/pesticides for vegetables and fruits), and some local sourcing identifiers.

Such campaigns about food from local areas have been becoming popular in the developed world which can be a precursor for things to come in the developing world.

There can also be differentiation of products by packaging. Akin to ‘A book is judged by its cover’, if farmers start packaging their products properly, they can command a price premium.

In doing all this, the FPOs need to get the incentives right. Better performing farmers in a group need to be rewarded while activities that militate against the group’s interest need to face some penalty.

Devesh Roy is Senior Research Fellow, CGIAR Research Program on Agriculture for Nutrition and Health, and Vinay Sonkar is Research Analyst, International Food Policy Research Institute.