Linking small farmers to modern retail through producer organizations – Experiences with producer companies in India

Food Policy 45 (2014) 35–44

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Linking small farmers to modern retail through producer organizations – Experiences with producer companies in India Anika Trebbin ⇑ Department of Geography, Philipps-University Marburg, Deutschhausstr. 10, D-35037 Marburg, Germany

a r t i c l e

i n f o

Article history: Received 10 August 2012 Received in revised form 14 December 2013 Accepted 27 December 2013

Keywords: Producer companies Supermarkets Value chain governance South Asia India

a b s t r a c t Since the early 2000s, India’s agro-food sector has undergone rapid transformations towards greater market share of modern food retail. This has impacted Indian agriculture and farmers as supermarkets reorganize supply chains towards more explicit forms of coordination. Compared to other developing countries, little has been said in the Indian context about what role farmer organizations can play to help smallholder farmers specifically, improve their position in those emerging value chains. In this paper, I address this gap and demonstrate that producer companies are a promising tool to strengthen famers’ position in their relationship with supermarket chains in India, but one which needs further improvement. Ó 2014 Elsevier Ltd. All rights reserved.

Introduction Supermarket chains are regarded as pivotal change agents in agricultural production systems today, especially in developing countries where modern food retail1 became widespread two to three decades ago. This spread of supermarkets2 and the internationalization of supermarket chains from western economies into developing countries has been described in a model of waves by Thomas Reardon and colleagues (e.g. Reardon and Berdegue, 2002, p. 81; Reardon et al., 2007). According to this model, modern food retail began to spread to Latin America, Eastern Europe and South Africa in a first wave in the early to mid-1990s, and continued to South and South East Asia, South East Europe and Central America in a second wave in the late 1990s. India, where major transformations in the retail sector in general, and the food retail sector specifically started to pick up speed in the early 2000s, is classified as part of the third wave of supermarket spread together with countries in Eastern and Southern Africa, Russia, and China (Reardon and Minten, 2011b). ⇑ Tel.: +966 545792443; fax: +49 3212 1410231. E-mail address: [email protected] Characteristics mentioned in literature to define what modern retail is involve the following: (a) self service, (b) certain scale of operation (the store itself, the size of the chain, or both), (c) the owning entity is a corporate entity but can also be state, cooperative, or private, and (d) foreign or domestic, (e) use of modern management techniques (Reardon and Minten, 2011b, p. 138; Sengupta, 2008, p. 691). 2 The terms ‘modern retail’ and ‘supermarkets’ are used synonymously throughout the paper. 1

0306-9192/$ - see front matter Ó 2014 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.foodpol.2013.12.007

The emergence of modern retailers in a country’s food retail market also affects agricultural production and farmers, as supermarkets build new supply chains or modernize existing ones to facilitate the enforcement of stringent quality standards. This transformation of supply chains often goes in hand with tighter governance structures and increasing direct cooperation between supermarkets and farmers (Berdegué and Reardon, 2008). Generally, such transformations present greater challenges for smallholder farmers3 in the countries concerned as they often find themselves in unfavorable bargaining positions with supermarket chains if they are at all considered as part of their supply chains. Against this backdrop, there has been a re-emerging interest in Farmer Producer Organizations (FPOs) in recent years from governments, donors and non-governmental organizations alike, who see them as appropriate institutions for building capacity among smallholder farmers and for helping them participate in more competitive and globalized market environments (Rondot and Collion, 2001; World Bank, 2007). Regarding the Indian context, a growing literature has come up in recent years which addresses the supermarket-led transformation in the retail sector and its potential impacts on consumers, the traditional trading system, and farmers (see for example Chari and Raghavan, 2012; Franz, 2010, 2012; Harper, 2009; Minten et al., 2010; Neilson and Pritchard, 2007; Pritchard et al., 2010;

3 Although there is a huge heterogeneity among smallholder farmers, in this study a smallholder farmer is simply defined as a farmer who works on less than two hectares of land.

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A. Trebbin / Food Policy 45 (2014) 35–44

Reardon and Minten, 2011a,b; Sengupta, 2008; Trebbin and Franz, 2010). Surprisingly, the debate on how farmers may be affected has not been connected to the abovementioned debate on the new role of farmer organizations. Such studies, however, were conducted in other countries, where modern food retail is a recent phenomenon, for example in China (Jia and Huang, 2011), Vietnam (Moustier et al., 2010), Honduras and El Salvador (Hellin et al., 2009), Peru and Ecuador (Devaux et al., 2009), Nicaragua (Michelson et al., 2012), Kenya (Fischer and Qaim, 2012) and Uganda (Kaganzi et al., 2009). This paper aims to join the debate on the role of FPOs in linking smallholder farmers to modern retail with an analysis of the current status of so-called producer companies in India. The concept of producer companies was initiated by the Indian government in 2002 at the sight of ongoing agro-food transformations in the country. A decade after the first producer company was officially registered in India, I aim to look at the current potential producer companies have to integrate their members into modern retailers’ supply chains. To do so, I embed my discussion of the producer company model into the already existing theoretical framework of value chain governance and link it to the general debate on the role of FPOs in contemporary agro-food networks in developing countries. I aim to address two gaps that currently exist in literature: The first is the conceptualization of FPOs within the framework of value chain governance. This theoretical concept has already been widely applied in agro-food network studies which examine the relationship between multiple actors such as farmers, input providers and supermarket chains. However, it has not yet been applied to look at the effect FPOs might have on improving the position of smallholder farmers in developing countries in their interactions with large corporate buyers such as supermarket chains. The second gap in literature which I will address in this paper is the role of FPOs in the Indian retail transformation. Following this introduction and a section on methodology, the theoretical background deals with the current debate on supermarket expansion in developing countries. This debate is being embedded into the theory of value chain governance and then linked to an outline of the renewed interest in FPOs. Transformations in the Indian food retail market gives background information on the development of modern retail in India. The potential of producer companies as new interface structures between smallholder farmers and modern food retail in India deals with the concept of producer companies and their potential to link smallholder farmers in India to the emerging modern food retail sector. In the final section I draw conclusions and discuss policy implications. Methodology The results presented in this paper are part of a study on producer companies in India within the frame of the author’s PhD thesis in human geography. The main objective of the research was to understand the nature of links between India’s smallholder farmers and the emerging modern food retail sector in the country and what role FPOs – and producer companies in particular – play in these relationships. To achieve this, the author applied both quantitative and qualitative research methods, with an emphasis on the latter. The quantitative research work focused on data collection from all 263 identified producer companies (see Fig. 1) through a questionnaire. Qualitative research was carried out via a total of 60 expert interviews with representatives of producer companies, modern retail companies, farmers and farmers’ associations, non-governmental organizations (NGOs) and state agencies. In addition to this, eight producer companies were studied in detail via field visits of one to three weeks each. The material, on which this paper is based, was gathered over a period of several months in 2010, 2011 and 2012 and through a

review of secondary data and literature. While interviews and site visits with major modern food retail chains were undertaken to understand their supply chains and the role producer organizations play therein, the field studies on eight producer companies were carried out to understand their operations on the ground. During these visits, company staff and farmers were interviewed and company records reviewed. The case studies were selected according to their activities which – following the main research question – had to be preferably in food production. As the total sample size was unknown at the time when research started, the first sites for field studies were selected according to advice from expert interview partners. Further into the study, the author aimed to reflect the regional distribution of producer companies in India in the sample. Therefore, six out of eight field studies were conducted in the states of Madhya Pradesh and Maharashtra (see Fig. 1). The interviews were later transcribed and their contents analyzed using MAXQDA. The quantitative survey of all 263 producer companies known to the author at the time of the study was done via e-mail and telephone. Due to a lack of contact information and/or response from a number of producer companies, the complex questionnaire could be completed by only 79 of the 263 producer companies. Nevertheless, the quantitative approach revealed information on more than 200 producer companies in India as shown in Tables 1 and 2. Data from the quantitative survey was analyzed applying descriptive statistics and mapping tools.

Theoretical background Over the past two decades, transnational retail chains have increasingly spread into developing countries where food retailing has been traditionally dominated by wet markets,4 neighborhood shops, and street hawkers. This supermarket spread has had significant impact on existing food supply chains, consumption patterns, and agriculture within these economies. In the countries which experienced this supermarket expansion, retail chains today account for a considerable share in the food retail market, similar to western economies from where much of the retail internationalization emanated (Reardon et al., 2004). Large shares in food retail sales are giving retail companies tremendous influence over the organization of food supply chains, the food processing sector, and also over farmbased production. This is often manifested in the re-organization of supply chains away from fragmented, decentralized procurement to centralized supply systems with large, integrated procurement catchment areas and the use of specialized/dedicated wholesalers and logistics firms instead of traditional wholesalers and spot markets. Often, it is also accompanied by an increase in use of preferred suppliers operating under de facto contracts (Berdegué and Reardon, 2008; Henson and Reardon, 2005). The re-organization of supply chains, aim in particular, to implement and enforce stringent quality standards. These are generally used as a means to guarantee food quality, safety, traceability, and originality, and are a response to growing consumer awareness of these issues. But private standards also serve as competitive barriers against the informal sector or competitor products (Coe and Hess, 2005). They also represent entry barriers for small or less capable producers (Altenburg, 2006). From a value chain governance perspective, higher product standards lead to higher product or asset specificity which means that more information needs to be exchanged in value chains. This adds to the transaction costs. Besides transaction costs, there are other factors that determine how transactions are being executed. Amongst these are, asset specificity, environmental uncertainty 4 The term ‘‘wet market’’ generally refers to (open) fresh food markets in Asia where fresh fruits and vegetables, fish and meat are sold.

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Fig. 1. Status of producer companies in Indian states as of April 2012.

Table 1 Activities of producer companies in India. Source: author’s survey. Broad areas of activity of producer companies in India

(n = 263)

Agriculture Handicrafts Energy (bioenergy) Fishery Forestry Not specified

181 10 7 4 1 60

Table 2 Areas of specialization of agricultural producer companies in India. Source: author’s survey. Areas of specialization of producer companies engaged in agricultural production*

(n = 105, answers from 78 producer companies, multiple answers possible)

Fruits and vegetables Seed production Spices (primarily chili) Dairy Cotton Soy Medicinal plants Pulses Grains (wheat and rice) Nuts (cashew and coconut) Poultry

20 14 12 11 9 8 8 8 6 6 3

* Note: 17% of these producer companies apply organic production methods, 23% are engaged in post-harvest processing, and 32% also trade agricultural inputs.

and complexity, frequency and scale of transactions and behavioral uncertainty (for example potential opportunistic behavior of trading partners) (Bijman and Wollni, 2008; Stockbridge et al., 2003). Value chain governance theory names asset specificity, supplier capabilities, and the ability to codify transactions as the three main

factors that determine how transactions between trade partners are being made or, in other words, how value chains are being governed (Gereffi et al., 2005). Gereffi et al. (2005) distinguish between five different types of value chain governance: (1) market, (2) modular, (3) relational, (4) captive and (5) hierarchy (Gereffi et al., 2005, p. 87). In the market-based type, the need to coordinate value chains is low, as asset specificity and complexity of transactions are low. Here, trade partners meet on a rather level playing field to do the transactions. In the remaining four value chain governance types, the complexity of transactions steadily increases as asset specificity grows. When the capabilities of the supplier base cannot keep pace with the increasing requirements for specific products, the buying firm needs to execute tighter control in value chains. In these cases, captive or hierarchy forms of value chain governance occur and buyers exert more control and pressure over their suppliers. Intermediate forms of the two extremes of governance are the relational and modular governance types. Here, asset specificity is also high but the supplier base is more capable of delivering such specific products. Therefore, the degree of explicit coordination from the buying firm is lower as are power asymmetries between actors (Gereffi et al., 2005). Applied to the agro-food sector, higher asset specificity leads to higher degrees of explicit coordination in value chains if it is not accompanied by an increase in supplier capabilities (Gereffi et al., 2005). The most explicit type of value chain coordination in agro-food value chains is referred to as vertical integration (Humphrey and Memedovic, 2006). Contract farming and outgrowing schemes are examples of vertical integration in agricultural value chains. They match the governance types of captive or hierarchy (Stamm, 2008; Trebbin and Hassler, 2012) and are more likely to occur in product groups where there is the greatest need for consistency and quality, such as fresh and perishable high-value agricultural products. However, in the agro-food sector, there are examples where value chain governance can move in the direction

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of modular or relational value chains. These cases usually go hand in hand with increasing supplier capabilities. Gereffi et al. (2005) take the value chain between UK supermarkets and Kenyan fresh produce suppliers as an example of a modular value chain. Here, supermarket chains increasingly rely on African exporters as suppliers that have specific capabilities and with whom they work jointly on product development, logistics and quality issues. If there is mutual dependence between buyers and suppliers or when both parties are committed to common values, modular value chains can evolve, for example in fair-trade or organic products (Stamm, 2008). Altenburg (2006) uses the value chain governance framework in an attempt to assess the diverse development impacts of different governance types. He adds more factors to determine which form of governance is chosen in agricultural value chains. I believe that four of them are particularly relevant to understand how direct cooperation between modern retail chains and smallholder farmers in developing countries are organized. These factors also help to highlight the potential role of FPOs to contribute to a positive effect of such cooperation on the livelihoods of smallholder farmers. Similar to Gereffi et al. (2005), Altenburg (2006) also singles out supplier capabilities as one of the major factors that determine a firm’s make-or-buy decision. He argues that firms in locations with a lack of competent suppliers need to interfere, i.e. control, more in order to ensure their supplies needed. Low levels of supplier competencies are among the main reasons why value chains do not produce win–win situations. Suppliers with low capacity levels can be easily substituted and have a weak bargaining position. Additionally, Altenburg (2006) identifies relationship-specific investments and institutional framework conditions as factors influencing the type of governance chosen in agricultural value chains. Relationship-specific investments are necessary investments for a firm to enter into a trading relationship with another party. In the case of cooperation with smallholder farmers, such investments could be knowledge-transfers in the area of production technologies. According to Altenburg (2006), relationship-specific investments favor vertical integration because they increase the cost for the investor to switch to other trading partners. However, institutional framework conditions might not allow the buyer to legally enforce vertical integration. This is the case in India where formal contracts between corporate buyers and farmers are not legally enforceable. In such cases, informal institutions such as social bonds, trust and reputation may act as substitutes to formal contracts. As has been observed during field work in India, smallholder farmers who received considerable amounts of training and support from the buying companies, often feel obliged to sell to them. FPOs address a number of these issues. One of their main benefits is their ability to create scale economies through horizontal coordination, aggregation and marketing of the farmers’ produce in larger units. The same advantage of scale economies applies to input purchases. In both cases, FPOs can negotiate better prices because of an improved bargaining position. Regarding the most critical point of supplier capabilities, FPOs can assist their members in areas of technologies and inform farmers of potential markets and buyers, prices, as well as quantity, quality and timely requirements. Through vertical coordination, FPOs can also participate in value-adding processes such as grading, processing, and packing. This increases their bargaining power. With regard to the institutional framework conditions, FPOs can regulate compliance with an agreement between many farmers and the buyer through internal group mechanisms. They can also bear the risk of non-compliance towards the supermarket chain, even when there is no legally enforceable contract existing between the two parties. Additionally, FPOs can reduce the cost of seeking information, both for their member farmers and for potential buyers of produce. In a group,

the farmers increase their visibility and credibility as suppliers. Negotiating with farmers organized in a FPO becomes easier as compared to the same number of individual smallholder farmers because interested buyers can address a single contact point. From the perspective of a supermarket chain, FPOs also facilitate the passing on of specific product requirements to the individual farmers, hence, making the transactions easier. With regard to all these factors mentioned in theory, the aim of research was to find out: (1) whether producer companies in India fulfill these functions and (2), whether farmers who are organized in producer companies are able to enter into trading relationships with supermarket chains. The main assumptions deduced from the framework above were that producer companies – as one specific type of FPO – would (1) increase smallholder farmers’ capabilities as suppliers of high-quality agricultural produce, (2) reduce the need for relationship-specific investments from buying companies, and (3) alleviate uncertainties stemming from the institutional framework conditions and the behavior of trading partners through internal group mechanisms. Other case studies that examine the relationship between FPOs and supermarkets suggest that farmer organizations are, in many cases, successful in linking smallholders to more sophisticated markets, but conditions for success cannot be generalized. They depend on a number of factors such as the specific regional and market context, costs in traditional marketing channels, product groups traded and the actual terms of agreement between the FPOs (Hellin et al., 2009). According to these case studies, the emergence of agreements between supermarket chains and FPOs is more likely in high-value products with high perishability and a high frequency of production (Fischer and Qaim, 2012; Hellin et al., 2009). Supermarkets are also more likely to enter into an agreement with an FPO when the specific group organizes the bulk of the production of one product in a region (Jia and Huang, 2011) or when the group provides required branding or certification of members’ produce which is not otherwise available with individual farmers but important for the marketing process (Moustier et al., 2010). The case studies also suggest that FPOs with higher levels of skills and capabilities are more successful in negotiating agreements with supermarket chains (Hellin et al., 2009; Moustier et al., 2010). Because of their empowering potential for smallholder farmers in value chains, FPOs have gained renewed interest in recent years from governments, donors and NGOs alike who see them as appropriate institutions for building capacity among farmers and helping them participate more competitively in globalized market environments (Rondot and Collion, 2001; World Bank, 2007). Farmer organizations are nothing new, but the forces that are driving transformations in agricultural marketing systems worldwide also appear to affect the types of FPOs that are operating today. Generally, FPOs can take many different forms, varying in size and the services they provide (Trebbin and Hassler, 2012). They can be formal cooperatives, associations, societies, or informal village selfhelp groups, and commodity interest groups. The new types of FPOs that are being discussed in contemporary literature as a means for improving smallholder market access are radically different from those that traditionally exist in rural societies. The latter are inward-oriented, often informal and operate autonomously among rural communities to regulate the relations between their members. Their bonding function and welfare orientation are the main attributes of these types of FPOs. The new types of FPOs, in contrast, are outward-oriented, their main purpose being to perform a bridging function and act more as interface structures between their members and the external world. They are more formal types of FPOs, organized on economic principles but rooted in local customs. Compared to the inward-oriented type, they are run in a more professional way and are more exclusive with regard to their membership (Onumah et al., 2007; Rondot and Collion,

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2001). However, informal groups often still form the basis onto which formal groups are built to connect a larger group of farmers to a targeted market. The new concept of producer companies in India corresponds well with this new form of farmer organization. Producer companies are basically farmer-owned micro-enterprises which can be regarded as hybrids between private companies and cooperative societies. Their way of membership organization and participation is similar to that of a cooperative, while the integration into corporate law allows greater professionalism and flexibility in their business activities (for more details on producer companies see Trebbin and Hassler, 2012). The primary goal of producer companies is to link smallholders to markets, i.e. to larger corporate buyers. The model was created at the sight of increasing corporate investment in the food retail and food processing sector in India which has a direct impact on Indian farmers. Without such ‘effective organization, Indian farmers are likely to face either a life of continued poverty and exploitation at the hands of those controlling value chains, or progressive isolation from active involvement in economically viable agricultural activities’ (Croucher, 2010, p. 6). Transformations in the Indian food retail market Direct cooperation between farmers and large-scale corporate buyers plays an increasing role in India’s changing agro-food sector. Supermarket retailing was virtually non-existent in the country only a decade ago. However, since the early 2000s India’s retail sector is experiencing notable transformations with the rapid growth of modern retail. For the past decade the country is being hailed as one of the most attractive destinations for retail investments globally and was ranked three times (2006, 2007, 2009) in A.T. Kearney’s Global Retail Development Index as the most promising target for global retail investments (Kearney, 2010). The pace of modern retail growth in India was five times higher than GDP growth in the past years and among the fastest in the world (Reardon and Minten, 2011b). Despite the rapid growth in the food and grocery segment, which accounts for 68% of India’s total retail trade, this segment has, to date, the lowest share within the entire modern retail segment in India with 1.3% of sales country wide and 5–6% in urban areas (Images Group, 2010, p. 85). Food retailing in India still lies

in the hands of the traditional sector, i.e. millions of small shopkeepers, traders on wet markets, and street hawkers. To many of them, retail trade represents one of very few income options. For buying fresh fruits and vegetables, Indian consumers still rely on the traditional retailers who provide freshness and low prices at the doorstep and to whom often longtime relationships exist. However, the food and grocery segment is not neglected by modern retailers in India. In contrast, it is this segment which has received most attention from retail investors and which has grown at the fastest rate of all retail segments with growth estimated at 49% annually from 2001 to 2010 (Reardon and Minten, 2011a, p. 134). In Indian supermarkets the share of fresh fruits and vegetables of total food sales is between 18% and 24% (Reardon and Minten, 2011b, p. 155) (see Table 3). Considering the early stage of retail development in India and the fact that usually, modern retail tends to penetrate first into staple and processed foods where supply chains are much easier to organize, these figures are surprisingly high (Reardon and Minten, 2011b). Sourcing fresh fruits and vegetables is not only a key concern for modern retailers in India but also for the food processing industry. Facilitating direct linkages between these industries and the farming community has become a key focus area for the Indian government in the past two decades. The hope is that such direct interactions would lead to a modernization of supply chains, efficiency enhancements and technology spillovers, and would open up alternative and more remunerative marketing channels for farmers (McKinsey and Company, 2013). The traditional marketing system for agricultural products in India contains substantial costs, especially for smallholder farmers and in fresh and highly perishable foods. Vegetable marketing chains can contain up to eight intermediaries from village-level consolidators, transporters, wholesalers and commission agents in state-regulated government markets (APMC markets) to retailers. This long chain of intermediaries inflates the prices paid by the end consumers – often as much as 200–300% more than what the farmers receive. Farmers often find themselves in very unfavorable bargaining positions as their holding capacity and market information are low (see Theoretical background) and local traders and moneylenders are often one and the same person. Lack of transparent trading practices in the government markets through trader collusion and improper or no weighing procedures, lack of

Table 3 Major modern food retail and wholesale companies in India. Source: Images Group, 2010; Reardon and Minten, 2011b; company websites. Company Retail Future Group Reliance Retail Shriram Group (acquired Vishal) Aditya Birla (acquired Trinethra) RPG Group REI Agro Limited Tata Trent & Tesco (UK) Bharti Retail Landmark Group (Dubai, UAE) & Spar International Wholesale Metro (Germany) Bharti Walmart (India/USA) Carrefour Group

Store name

Number of outlets

Turnover in 2010 in million USD (growth rate 2009–2010)

Percent food sales of total sales in 2010 (percent fruits and vegetable sales of food sales)

Big Bazaar, Food Bazaar, KB Fair Price Reliance Fresh, Reliance Super, Reliance Mart Megamart

>600

1717 (33%)

25 (21%)

>750

682 (28%)

81 (20%)

>150

400 (9%)

More

>610

380 (55%)

61 (24%)

Spencer’s 6 TEN Star Bazaar Easyday Spar

>200 >345 10 >110 30

213 (8%) 204 (55%) 103 (75%) 97 (259%) 73 (247%)

34 (20%) 86 (20%) 46 51 (18%) 39

281 (32%) 116 (427%)

55 (18%) 54 (18%)

–

–

Metro Cash & Carry BestPrice Modern Wholesale Carrefour Wholesale Cash & Carry

10 17 2

4

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market infrastructure such as pre-cooling facilities, as well as inadequate transport and logistics infrastructure leads to wastage that can amount to up to 30% in fresh produce supply chains (Chari and Raghavan, 2012; Trebbin and Franz, 2010). To encourage private sector investments in agricultural and food supply chains, the Indian government successively reduced restrictions against foreign direct investment (FDI) in these areas. Regulations on FDI were first relaxed for the food processing industry in the early 1990s (Landes, 2008). Around the same time, the wholesale, retail, processing and logistics sector were taken off a list of sectors in which only small and medium enterprises were allowed to operate, thus admitting also large companies in these sectors (Reardon and Minten, 2011a). Additionally, in 2003, the Agricultural Produce and Marketing Act of 1951 was reformed. This had previously restricted the wholesale of agricultural commodities to state-regulated markets. The amended act allows direct marketing, the setup of markets and collection centers by the private and cooperative sector as well as the direct procurement of private companies from farmers (Reardon and Minten, 2011a). While the Indian retail sector remained closed to FDI until the mid 2000s, companies from the food processing industry such as Pepsico, Hindustan Unilever and McCain were among the first to enter into direct interactions with the farming community. With quality and safety requirements of paramount importance to them, they face similar challenges sourcing a consistent supply of high quality produce as modern food retailers. Nevertheless modern food processing is growing rapidly in India. The Indian government plans to raise the share of agricultural produce that is going for processing from 10% to 30% in the coming years (McKinsey and Company, 2013, p. 50). Although this paper is not reviewing India’s food processing industry it is important to keep in mind the demand from this sector when discussing the functions and potential benefits of producer companies in farmer-industry interactions in The potential of producer companies as new interface structures between smallholder farmers and modern food retail in India. Within the food trade, 100% FDI is allowed in the wholesale sector and, since 2012, also in single-brand retail.5 Multi-brand retail6 was opened for FDI for the first time in 2012, allowing up to 51% foreign ownership. In addition to these specific reforms in India’s agro-food sector, the general economic liberalization process that was started in India in 1991 triggered rapid economic growth which provided the opportunity for modern retail to take off. As incomes continue to rise, the growth of the Indian middle class7 and the spread of more urban lifestyles also continues. This brings about changes in consumption patterns and consumer demands. Satisfying these demands is one of the main pull factors for investors in the Indian retail market. This combined with the sheer size of the retail sector (around 462 billion USD), and low penetration by modern retail (8% of the total, around 1% of the food segment) (Images Group, 2010) makes it a very attractive investment opportunity.

5 Single-brand retailers are those selling only products of a single brand. These products are branded during the manufacturing process and sold under the same brand name internationally (Chari and Raghavan, 2012, p. 81). 6 Multi-brand retailers are all retailers that stock and sell products of multiple brands, for example large retail companies like Walmart and Carrefour (Chari and Raghavan, 2012, p. 81). 7 There is no official definition of the middle class. Classifications and numbers range widely. The global management consultant McKinsey & Company estimates its current size at around 50 million people with annual incomes ranging between 200,000 and 1 million Indian Rupees (3600–18,000 USD) (Ablett et al., 2007, p. 12). Indian sources claim that between 100 and 250 million people belong to the Indian middle class (Ravallion, 2010, p. 446).

Critics of increased investment by modern retailers in supply chains, however, justifiably highlight negative effects on the traditional trading system and the exclusion of smallholder farmers (Franz, 2012; Trebbin and Franz, 2010). But it also needs to be taken into account that smallholder farmers who work on up to two hectares of land, account for 80% of India’s farmers (Datanet India, 2010). For them agreements with food processors or retailers are often the only source of inputs and assistance, especially because government extension programs are highly inadequate. Furthermore, considering that modern food retail in India is still largely an urban phenomenon, the retailers’ sourcing areas of fresh products are rather defined by the time in which fresh produce can be transported from the fields to the centers of demand, rather than by the size of farms. In other words, with the vast majority of farmers in India being small or marginal farmers and lack of transport infrastructure being a major constraint in sourcing fresh products, modern retailers often have no choice but to source from smallholders if they wish to source directly from farmers. In this regard, the Indian case is different from those presented in other studies (see Theoretical background) in the sense that the question here is how (i.e. with what kind of outcomes and benefits for them) smallholder farmers are being integrated into supermarkets’ procurement systems rather than if they are integrated at all. This implies that in the Indian case, there is a strong incentive for smallholder farmers to get linked to organized value chains. Against this background, it is of particular importance in the Indian context to prepare smallholder farmers for a potential collaboration with retail chains to ensure their best possible bargaining position. The following section discusses whether producer companies – as a new form of FPO – can, and will be an important vehicle to achieve this aim.

The potential of producer companies as new interface structures between smallholder farmers and modern food retail in India At present, supermarket chains in India follow diverse strategies to source fresh products for their stores whereby they apply a mixture of establishing new supply chains and using the traditional trading system. Generally, there are fresh products which can move over larger distances, such as apples, pomegranate, grapes, oranges, potato and onion. As stated by Reliance Fresh, one of the major food retailers in India (see Table 3), product groups that move across the country account for about 7% of the fresh foods assortment basket. Another 17% travels around 500–750 km to the stores, 24% from within the vicinity of 250–500 km and around 50% of the produce comes from within 100–250 km. Compared to the product groups that can be traded over larger distances, organizing the daily supply of highly perishable products that constitute the majority of the retailers’ assortment baskets, is a greater challenge. Here, supermarket chains either operate through (1) a centralized system of collection and distribution centers with or without direct support for the farming community, (2) so-called ‘contact’ farming arrangements where produce is being picked up from the farms and often inputs are supplied to the farmers, or (3) the renting-out of retail space to concessionaires and purchasing agreements with traditional traders. In all of these strategies, the retail chains still rely on the traditional wholesale markets as a kind of backup or reserve source of products in case the other channels do not deliver as expected. Future Group, for example, which is the leading corporate retailer in India but which has a relatively low share of fresh food sales, currently purchases 80% of the fresh produce

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through its system of farm collection and distribution centers, and 20% from the APMC markets (interview with Future Group in 2012). Reliance, which has a much greater share of fresh food sales, buys around 60% of their requirements from farmers in a similar system of collection centers, and gets the remaining 40% on the APMC markets (interview with Reliance in 2012). Mother Dairy, which sells exclusively fresh fruits and vegetables in its outlets called SAFAL in and around Delhi, procures around 60% of its supplies from farmer associations, 20% from village aggregators, and another 20% from the APMC markets (interview with Mother Dairy in 2012). For all retailers in this study, the current APMC market prices remain the benchmark in the price discovery process between any of these companies and the supplying farmers. This was also found in a similar study by Punjabi and Sardana (2007). In most cases, the direct contact between farmers and retailers in India remains rather lose and few retailers are yet active in establishing forms of governance in their supply chains that would allow them to execute stronger control over farmers. The main reason for this is that fresh food sales in Indian supermarkets are still relatively low (see Table 3) as are the absolute volumes of fresh fruits and vegetables that supermarket chains sell across the country. As stated in interviews with retail chains and also found by Reardon and Minten (2011b) the average amount of fresh fruits and vegetables sold per modern retail outlet lies around one ton per day. Applying this estimate to the 2800 stores listed in Table 3 the total annual volume of fruits and vegetables sold through supermarkets in India lies at around one million tons. This, in turn, is equivalent to only 0.55% of India’s total production of fruits and vegetables and to 0.69% of the 10 most important fruits and vegetables, which account for 80% of fruits and vegetables produced in the country (FAO, 2012). This leads to the rather surprising finding that, in India, the small volumes required by supermarket chains are the major limiting factor in direct buying relationships between farmers and supermarkets. This is contrary to what was found in the case studies on famer-supermarket interaction cited in Theoretical background. ‘‘The current situation is that we are not able to source everything from the farmers because of our small scale. That is the problem’’ (interview with Walmart India in 2012). ‘‘Now the farmers want to join our model but our capacity is still too small compared to the supply we could have’’ (interview with Future Group in 2012). However, even in procuring these relative small volumes, supermarket chains are facing problems which are mainly related to product quality. The quality requirements put forward by supermarket chains in India are generally higher than in the traditional supply chains (see Theoretical background). At the same time, farmers’ capabilities as suppliers are low as they are not well informed of the standards required by supermarkets and, even more critically, they do not know how to achieve these standards. The most common strategy to tackle this problem by modern retailers in India is to make relationship-specific investments (see Theoretical background) in the form of so-called ‘contact’ farming. This comprises the training of farmers on production methods and new varieties, guidance in input use and application, and sorting and grading of produce. Often, these advisory services are carried out by a third party, such as an agro-chemical company (Trebbin and Franz, 2010). They are given to farmers free of cost, who in turn are expected to sell to the company. However, due to India’s specific institutional framework conditions (see Theoretical background) farmers cannot be forced to do so as agreements between retail chains and farmers are not legally binding. On the other

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hand, retail chains are also not obliged to buy a farmer’s (entire) production and frequently reject produce which does not comply with their quality requirements. Hence, there is uncertainty and risk on both sides. In this scenario, producer companies could develop into competent trading partners for supermarkets in India. The concept of producer companies was introduced by the Indian government in 2002. The new legislation ensures that producer companies maintain unique elements of cooperatives while the regulatory framework is similar to that of other company types, creating a hybrid type of FPO between a regular company and a cooperative. In contrast to cooperatives, only persons directly engaged in primary production can become members (i.e. shareholders) of producer companies. The aim behind this legislation is to prevent government interference in this new type of FPO – a problem that has hugely contributed to the decline of the cooperative sector in India. The minimum number of founding members for producer companies is 10 individuals or two institutional members such as selfhelp groups, cooperatives, or any other farmer organization. The seed capital for the company is generated through an initial sale of shares. The producer companies studied, made it an obligation for farmers interested in becoming a member to buy at least one share in the company. The share value, on average, is very low, ranging from 50 to 200 Indian Rupees, as it is difficult to raise high levels of capital stock among small-scale producers. Compared to traditional cooperatives, producer companies have a much stronger focus on establishing market linkages through a professional management of the company. A chief executive officer (CEO) is appointed from outside the member community by the company’s board of directors. His main job is to create market linkages, i.e. gather information about markets, negotiate with potential buyers, and also plan production and ensure the financial viability of the company. Producer companies also have more freedom with regard to the regions in which they operate – which can be India-wide. They are more flexible in developing linkages to potential business partners and can enter into alliances or joint ventures and form subsidiaries. However, company shares cannot be sold outside the producer company thereby restricting investment from outsiders and preventing possible take-over from business entities that are not part of the direct farming community. Until April 2012, 263 producer companies were registered in India. Although the possibility to form them exists since a decade, their development was rather slow until 2008. This was mainly due to a lack of knowledge of this new type of FPO and a general lack of support and incentive to create producer companies. Most of the producer companies operating today were formed between 2010 and 2012 (see Fig. 1). The leading states with regard to the absolute numbers of producer companies are Maharashtra and Madhya Pradesh. The Western zone with the states of Maharashtra, Gujarat, Rajasthan and Goa and the Southern zone with Tamil Nadu, Kerala, Andhra Pradesh and Karnataka account for over 50% of all producer companies in India, while the northern and eastern states are underrepresented. As of now, the number of producer companies that have direct agreements with corporate buyers, such as supermarkets, is low. Purchases from retailers happen only sporadically and in limited volumes (for a case study example see Trebbin and Hassler, 2012). However, fieldwork suggests that four types of producer companies can be tentatively distinguished – see Fig. 2. The circles in this figure are an approximate estimate of the distribution of producer companies in India across the four types. This typology has been developed based on the detailed field work done with producer companies in India, the expert interviews and the quantitative survey (see Methodology). However, it has to be noted that this typology also has a dynamic element as the assignment of pro-

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Fig. 2. Typology of producer companies in India.

ducer companies to a specific type can change over time, which is described in the figure as the producer company’s evolution. One direction of evolution is from an inward- to an outward-oriented type of producer company (change from type A to type B, or from type C to type D). The other direction of evolution is from being a producer company, focusing on trade with agricultural inputs to one that focuses on marketing its members’ produce (change within type C or type D). The main parameters of distinction between the four types of producer companies in Fig. 2 are (1) who promotes these producer companies or, (2) whether they are inward- or outward-oriented (see Theoretical background for different types of FPOs). Most of the producer companies existing in India today are promoted by an NGO (types A and B). Only a few of them, represented by type A, are only concerned with community internal issues. Type A also represents early stage of type B as most producer companies concentrate on internal group organization first and later evolve into developing market linkages. Type B producer companies often start with less capital intensive activities like trading and supplying inputs to the members by getting dealership from input suppliers. This allows these companies to earn margins, overcome the costs of administration, and earn profits. Building on this, they can start to develop market relationships and move to becoming procurement companies for example for a retail chain, also undertaking some value addition like grading and packing (type B). Compared to the number of producer companies whose setup is supported by NGOs, to date, fewer are being set up by the corporate sector, such as supermarkets, input suppliers or food processing companies. In a very few cases, for-profit promoters set up producer companies they are not intending to do business with (type C). These are, in most cases, early or experimental stages of type D producer companies or failed attempts from the corporate sector of organizing farmers into a producer company for later business purposes. Here, the main reason for failure is trust, either from the farmers’ side in the company’s intentions, or, from the company’s side in the farmers’ ability and willingness to abide by mutual agreements.

Type D producer companies are still less common than type B but this type is steadily growing in numbers because firms have by now had the chance to learn about the producer company model and have seen first success stories. Monsanto, for example, is currently developing 15 producer companies in the state of Maharashtra and has invited large Indian seed and irrigation companies, McDonalds and Walmart into the consortium to better understand this new model of farmer organizations. Their plan is to develop producer companies into business hubs through which inputs sales and product purchases can be channeled. Reliance has built up a vegetable producer company in Madhya Pradesh to source products from its farmers for retail their stores. Generally, the challenge for all types of producer companies is the balance between inward and outward orientation. While the types A and B, which are promoted by NGOs, often lack the business skills to develop effective market linkages, in types C and D, the promoter might be too aggressive in building market linkages and fail to understand social dynamics within the group or develop long-term welfare effects. Although many producer companies are not yet functioning perfectly – i.e. actually managing to contribute to more farmer-friendly interactions between the farming community and corporate buyers – many producer companies in India are fulfilling a couple of important functions. First of all, producer companies fulfill bridging function between their members and the market. Their main objective is to tap remunerative markets successfully by increasing their members’ capabilities as suppliers of high-quality produce. Most producer companies spend extensive time and resources in training their farmers on production methods and technologies and ensuring the timely availability of quality inputs. Here, it has to be noted that type B producer companies have a higher degree of independence since they often supply the inputs of their choice to their member farmers through their own outlet, or even produce them in-house. In contrast, type D producer companies are often being supplied with inputs from the promoting company (or the consortium of companies). They are integrated into tighter forms of value chain governance as buying companies have a higher degree of

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control over the production process. On the other hand, especially in the early stages of producer company development in India, type D producer companies might, for this reason, have a higher chance of entering into stable trading relationships with large corporate buyers as the latter have greater insight into, and control over, the production process and can be relatively sure of the quality of produce they can source from the producer company they support. In this regard, producer companies also reduce uncertainties for buyers of produce. Regarding the necessity of relationship-specific investments mentioned in Theoretical background, producer companies reduce the need for the same as they offer interested buyers access to a large number of farmers that are more capable of producing according to specific requirements than individual, unorganized smallholders. As stated by the retail companies interviewed, most of them would welcome the services of a producer company, given that they can ensure the timely supply of quality produce required by the retailer – but would not pay substantially higher prices for the same. ‘‘We cannot pay higher to the producer organization because we also have to compete with the market. A producer company will produce 1% of the total production, but we have to compete with the 99% people in modern retail. If my prices will go up who will buy from me? So what benefit can producer companies get? I think the main benefits are through increasing crop intensity [productivity], working closely with the retail chains, and improve in pre- and post-harvest. They can increase their earning by saving the 25–30% that is normally going waste’’ (interview with Reliance in 2012). Generally, fieldwork suggests that, as in the Indian case, agreements between producer companies and modern retailers are more likely in high-value and more specialized products such as rare or exotic vegetables. If the issue of a serious shortage of working capital is resolved they may be able to vertically expand their activities in the value chain, for example by building storage and cooling infrastructure or organizing their own transport. Being less dependent on such services being born by the buyer of produce, also in this regard farmers’ bargaining position can be improved.

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entering the Indian market will put an even stronger focus on quality standards as they have to retain an international reputation and therefore, asset specificity will increase further. Additionally, new and foreign entrants into the Indian food retail market might find it more difficult to work in the specific Indian environment and establish relationships with, and build trust among, traders and farmers. These new actors, therefore, will possibly be looking for capable business partners whom they can formally integrate into their supply chains to do the sourcing of fresh products for them. A well managed and professionally run producer company might undertake the role of such a partner. In order for such a scenario to become reality, government support for producer companies that started to pick up pace in 2012, has to be continued. This does not necessarily have to include financial support, although this is also vital in the first years of company establishment. In the first 10 years of producer company development in India, information about this new type of FPO was hard to find and no complete register of existing producer companies or their activities was available. This made it hard for producer companies to learn from each other, for the government to evaluate them, or for interested farmers and others to acquire greater knowledge about the concept. Therefore, the government should undertake greater efforts in making information on producer companies easily available for all parties interested as well as extend financial support during their start-up phase. Regarding the entities that are best suited to promote producer companies, experience so far suggests that a mixed promoter consortium of NGOs, input suppliers, and potential buyers might be a possible solution to ensure a balance of interest between welfare and business orientation of producer companies. Once tested in the field, a respective clause might be included in the producer company legislation. At the same time, and to stir greater interest and motivation among corporate buyers, the legislation on food retail in India might in the future include a clause on a certain percentage of fresh produce that has to be procured from farmers groups. Here, however, it needs to be stressed that producer companies are not the only possible option of collective action in India and that other well functioning forms of FPOs should be treated equally.

Conclusions and policy implications

Acknowledgements

From the above, it became clear that there is scope for producer companies to become part of modern retailers’ supply chains in India but that only relatively few have succeeded in doing so to date. On one hand this can be attributed to a lack of capabilities among the producer companies. However, it also has to be taken into account that it takes an average three to five years to build a producer company that can successfully operate its marketing business while, at the same time, managing its internal and production related issues. Not many producer companies in India have reached these stages yet. On the other hand, the low number of successful links between producer companies and modern retailers can be attributed to a lack of targeted support for this new form of farmer organization. Therefore, the overall experience of modern retailers with producer companies are oftentimes negative and the expectations of what producer companies can deliver with regard to product quality and timely aspects of supply are low. Another factor which is, to date, inhibiting stronger relations between producer companies and modern retailers is the low quantity requirements of modern retail in the area of fresh products, but these can be expected to grow in the future. Regulations on FDI for both single, and multi-brand retail, have been further relaxed in 2012 and the Indian government is heavily promoting FDI in the food processing sector. It is likely that multinational actors

The financial support of the German Academic Exchange Service (DAAD) is gratefully acknowledged.

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