Sentiment and success potential of farmers’ producer organizations: A systematic literature review

Contract farming (CF) and FPO

A study conducted by Gersch (2018) compares contract farming and producer organization models to address economic challenges in fragmented and small-scale agriculture. He found that contract farming benefits households’ economic risk, while producer organization improves income. According to him, both models supplement and can be used in combination. Participation in contract farming has been associated with welfare gains, but there is also a significant extent of contract noncompliance and dynamism in these value chains.

Which type of Producer Organization (PO) is (more) inclusive? The organization structure of farmers’ membership and participation in the decision-making process plays a major role in the ultimate success of FPOs. Another important aspect is which type of PO is inclusive-bargaining PO or producing PO (Mwambi et al., 2020). There is a significant trade-off between marketing performance and inclusiveness in Rural Producer Organizations (RPOs). For example, poorer farmers often avoid RPOs, despite indirectly benefiting from them, but are often excluded from decision-making processes (Bernard and Spielman, 2009).

FPO and agro-marketing

Smallholder farmers in developing countries are encouraged to join cooperatives to improve livelihoods and overcome marketing constraints (Mojo et al., 2017). However, in low-income countries, supermarkets and commodity-processing firms transform smallholder farmers’ marketing channels by transforming their relationships with firms (Barrett et al. (2012). Buxton (1979) and Imam et al. (2014) have identified five gaps in the field of agro-marketing that necessitate the involvement of merchant market actors for smallholder fresh produce producers. The gaps encompass temporal gaps, spatial gaps, quantitative gaps, as well as gaps in communication and knowledge. Consumers may lack knowledge of the origins of desired goods, whereas manufacturers may lack awareness of potential buyers.

FPO toward agri-diversification

The role of FPOs in enhancing agricultural output as depicted by the literature is multi-faceted. The economies of scale and scope that the FPOs can avail upon procuring agri-produces from multiple sources would help them to reduce costs and thereby explore more marketing opportunities. The backward and forward linkages created by the FPOs do help the farmers to diversify and market their agri-products. Sustainable farming involves enhancing agricultural productivity, sustainable livelihood as well as product diversification. Thus, the performance of FPOs depends crucially on how integrated the FPO is and how widespread its upstream and downstream linkages are. The effective coordination of an FPO across vertical and horizontal dimensions can yield significant benefits for buying a diverse range of products. Vertical coordination refers to the integration of multiple contract forms, while horizontal coordination involves collaboration with various farmer organization types, both of which are favored by potential purchasers. This coordinated approach has been found to effectively minimize transaction costs, as highlighted by Vroegindewey and Hodbod (2018). Also, literature shows FPOs well-connected vertically or horizontally can provide better market access, and have more impact on the smallholder vegetable farmer’s income (Aku et al., 2018).

The literature explores the Farmer Producers Company as a New Generation Cooperative, focusing on strategic problems and emerging potential (King et al., 2021). A comparative analysis in Karnataka examined market facilities received by members and non-members. Networking connections between FPOs and supporting agencies, particularly non-governmental organizations, have facilitated backward and forward linkages and essential market services, including high-quality inputs and timely information (Darshan et al., 2019).

FPO versus noncontract small and medium-sized enterprises (SMEs)

The midstream components of commerce, processing, and logistics involve a heterogeneous array of actors along the value chain who provide a varied range of supplementary services to agricultural producers. These services are rendered beyond the scope of formal contractual arrangements for resource provision but are not limited exclusively to major organizations; instead, it is widespread among SMEs (Liverpool et al., 2020). The classification of focal actors is based on their involvement in transactions, specifically as suppliers of agricultural inputs (e.g., chemical fertilizer: IS1) or providers of services (e.g., warehouse rental: L1) (Liverpool et al., 2020).

However, the literature suggests a bottom-up approach for small and marginalized farmers to enhance agricultural productivity and achieve sustainable livelihoods through member ownership and democratic operation (Panda and Singh, 2016). Nevertheless, it is worth noting that while value addition has the potential to enhance profitability for FPOs, a significant number of these organizations encounter obstacles that hinder their ability to engage in such activities. These constraints mostly stem from limited access to financial resources, a dearth of qualified labor, and other technical complexities (Thomas and George, 2018).

Establishment of farmers’ markets

Within the realm of agricultural markets, a multitude of sequential stages and diverse participants are engaged, commencing from the provision of inputs, and culminating in the activities of retail vendors at the forefront of the market. The comprehensive range of stakeholders in this context encompasses many individuals and groups, including in-loaders operating at the farm, transporters, off-loaders situated at the market, in-market stall agents, market security agents, market license officers, wholesalers, and retailers (Mburu, 2020). The author observed that the implementation of farmers’ markets, which enable direct delivery from farmers to retailers, serves to reduce the length of the value chain connecting farmers and consumers. This reduction in intermediaries is projected to result in a significant boost of approximately 60% in farmers’ income. The interaction between farmers and retailers not only contributes to the enhancement of farmers’ profits but also facilitates the identification of market demands, thereby ensuring that farmers cultivate marketable crops. According to the research conducted by Bernard and Spielman (2009), rural producer organizations, specifically cooperatives, play a crucial role in facilitating the commercialization of smallholder farmers. The study examines the correlation between the implementation of inclusive and bottom-up principles and the marketing performance of these organizations.

Intermediary and role of FPO

Indian agriculture faces significant challenges due to the presence of intermediaries at various levels, layers, and capacities. This has led to malfunctioning institutions, cost escalation, and below-potential value addition. The role of intermediaries should be kept within bounds to prevent price distortion and lack of competitiveness. Factors such as farmers’ ignorance of large procurers, transportation costs, and long-term relationships with intermediaries contribute to these issues. FPOs have reduced middlemen’s power, allowing farmers to benefit directly from the money shared with them. However, concerns remain, such as recruiting qualified managers and maintaining salaries due to financial limitations.

Concerns and discussions in regulation and policy domains surround the effectiveness of FPOs in facilitating improved market access for farmers. Insufficient or unattainable transportation infrastructure and a dearth of communication networks impede the farmers’ ability to access profitable markets and create chances for local traders and intermediaries to engage in rent-seeking behavior (Negi et al., 2018).

FPOs toward inclusive farming

What are the dynamics of farmers’ membership and participation in the decision-making process? Which type of PO is inclusive-bargaining PO? Producing POs are discussed in the literature as specific cases (Mwambi et al., 2020). While the UN set the goals for Sustainable Development Goals (SDGs) which involves sustainable farming (SDG 2) inter alia, India started preparing for institutional and structural reforms toward that endeavor. On one hand, sustainable farming achieves the target of food security, and on the other hand, this will mitigate poverty and hunger-related developmental concerns.

A strand of agro-economic literature explores the concept of institutional reforms and rearrangements, specifically focusing on Contract Farming (CF). This literature posits that CF has the potential to generate a triple-win scenario, benefiting companies (sponsors), smallholders, and the environment (Vamuloh et al., 2020; Vamuloh et al., 2019). These studies demonstrate that the success of CF can have substantial beneficial consequences for SDGs pertaining to food security, poverty alleviation, climate change mitigation, and other relevant areas.

FPO and bargaining power

Farmer Producer Companies (FPCs) aim to mobilize small-scale farmers in India for collective bargaining power, empowering them and eliminating middlemen, but have not achieved success (Tandon, 2019). Smallholder farmers face limited access to big markets due to insufficient local markets and expensive transport, resulting in low-priced produce sales to traders (Hegde, 2010). The FPOs by its design can help farmers get higher earnings by directly selling their produce to the companies or traders. Thus, FPOs can help manage to get the right or fair price for their produce. Moreover, individual farmers when bargaining with intermediaries mostly cannot exercise their bargaining strength, which is feasible when specialized organizations with better managerial expertise do the bargaining on their behalf (Tandon, 2019; Trebbin and Hassler, 2012). In regions or states where marginal and smallholders and tillers with no ownership rights are highly skewed, FPOs can play a pivotal role in improving smallholders’ welfare (Mojo et al., 2017). Most studies consider FPOs to be homogeneous; however, it is extremely crucial while drawing any inference about the role of FPOs in improving small holders’ welfare or bargaining power to consider types of FPOs. Authors argue that POs have significant organizational structures and functionality differences, and studies should focus on these differences for better performance (Bijman et al., 2016; Michalek et al., 2018; Mwambi et al., 2020; Zhong et al., 2018). Also, differences do exist between types of POs such as Bargaining PO or Processing PO. Moreover, the potential for profit growth in FPOs lies in their ability to enhance value and improve management practices. Many FPOs face obstacles in achieving these objectives, including limited access to financial resources, a shortage of trained labor, and technical obstacles (Thomas and George, 2018).

Sustainable livelihood and regulatory mechanism of FPO

In the realm of agricultural production, a notable disparity exists between large-scale farmers and their smaller, more marginalized counterparts. This discrepancy stems from the differential access to networks and markets that these farmers possess, ultimately influencing their ability to effectively manage their income. Large farmers often have well-developed networks and markets and exhibit a large capacity to navigate the intricacies of income management to high levels. On the other hand, small and marginal farmers lack bargaining strength and encounter significant challenges in securing their rightful share of income within the agricultural sector. However, the cooperative business model like FPOs can enhance the principles of self-help, democracy, equality, and solidarity, and serve as an inclusive framework to facilitate the provision of goods, services, and livelihood opportunities to low-income communities in economically sustainable manners (Bijman and Wijers, 2019).