Producer Company

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Producer Company Model - Current Status and Future Outlook : Opportunities for Bank Finance EV Murray* In recent times, almost every major business house of the country is venturing in a big way into the agri-business sector, especially with regulations allowing corporates to now directly have contractual arrangements with farmers. One of the triggers for this newfound interest in agribusiness by the corporates is the change occurring in the retail markets, where consumers are making dramatic shift from purchasing at neighbourhood kirana stores to shopping at supermarkets, malls and food plazas, enabling development of food supply chains from the farms to consumers. Ironically, at this very time we get news that between 1995 and 2005, one and a half lakh farmers committed suicide across the country. A Situation of Farmers study undertaken by the National Sample Survey Organisation (NSSO) of the Government of India indicates that forty percent of farmers, given a choice wish to get out of agriculture. How is it that when the capitalists are rushing into agriculture in droves, the farmers are rushing to get out of it? With a population of over one billion and rising disposable income, the demand for food is only growing. Why then are the farmers in distress? Is there an explanation to this dilemma? One explanation for this is that value addition in agricultural commodities happen only post production. And since in the Indian context the farmer disposes off his produce in unprocessed form, there is no plough back of surpluses from value addition to the farmer. Can something be done to address this dichotomy? Producer Companies look to be one plausible solution. Expectation of Farmers from Agriculture The expectation of farmers while carrying on agricultural activities is, beyond meeting his consumption needs, to be able to get a reasonable return on the time and money invested by him. Also his desire is to increase his share in the consumer rupee. The structure of agricultural markets as they exist today involves a number of intermediaries and therefore, the producers share in the consumer rupee is small as can be see from Table 1, which is illustrative for a few vegetables and fruit but the same pattern exists in all agricultural commodities. Further, it is only when the commodity is processed and branded that value addition occurs. As the farmer exits from the scene after transacting in the primary market, he has no part in the surpluses that emerge post production. Only when agriculture as an enterprise in the long term generates surpluses or the farmer perceives deriving benefit would he ______________________________________________________________________ * Faculty Member, Reserve Bank of India, College of Agricultural Banking, Pune 411 016. The guidance provided by Shri. HR Khan, Executive Director, Reserve Bank of India in the preparation of the paper is gratefully acknowledged. The author can be contacted at evmurray@rbi.org.in or evmurray@yahoo.com

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make efforts to put back some of the surplus generated into the agricultural enterprise, creating further capital formation in agriculture. If not, he would divert the cash flows to other activities which he perceives to be more remunerative than his present engagement. As the farming community sees the general progress and all-round prosperity of the country through sustained growth of the economy at 7-8%, they also aspire for themselves and their future generations, improvement in their standard of living. Table 1: Inequity in farmers remuneration

Price paid by end consumer (Rs. per kg) Price received by farmer (Rs. per kg) Price realization by farmer as % of end consumer price Percentage mark up (price paid by end consumer to the price received by farmer)

Tomato 8.20 2.00 24 310

Potato 12.00 6.60 55 82

Cabbage Cauliflower 9.00 9.50 5.00 56 80 5.50 58 73

Banana 12.00 4.00 33 200

Source: Field Study by Profs. S Ragunath & D Ashok, IIM Bangalore...
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