Empowering Farmers through Value Chain Institutions:Operation Flood -The Example

RK Nagar worked with the National Dairy Development Board of India from 1969 to 1998 as a part of the senior management team in project planning, project management and operations of commodity business. He is currently a free lance Management Consultant, Value Chain Design and Development Specialist in Agribusiness and Rural Development. He is based in Toronto.

In a previous article, I mentioned “Operation Flood” as world’s largest development program that empowered millions of small and marginal milk producers in India. The program itself was based on a successful and time tested model, globally well known as AMUL.

When we talk of empowerment in the context of sustainable development in agriculture and allied sectors, we are essentially talking of, what the father of the “White Revolution” in India Dr. V Kurien echoed as “placing the instruments of development in the hands of the producers themselves”, and these instruments included not only the technologies but also the institutions through which the technologies were to be accessed by the farmers.

In other words, the farmers not only have the ownership of the produce, but also of the very infrastructure that adds value to their produce, so that the benefit of value addition accrues to them, rather than to some investor who has invested in the processing infrastructure that provides only a marketing outlet for the farm produce.

Value chain has often been used as a term to mean supply chain. In a normal supply chain, the farmer supplies the produce to a ‘collector’ or ‘procurer’, often an agent of the processor. The collector delivers the produce to the processor and earns a commission. The Famer does not have a direct contact/ relationship with the processor and therefore the benefit of value addition through processing never reaches him. Simply put, farmer is just a supplier of raw material to the processor.

Many improvements tried to bolster the relationship between the farmer and the processor include ‘contract farming’, which at best only provides an assured (not guaranteed) market so long as the supply does not exceed the processing capacity. In many cases, unsold inventory also causes the processor to refuse the farmer’s produce. Over supply therefore causes the farm gate prices to crash. Very often, over supply or inventory is used to manipulate farmers to beat down farm gate prices. Therefore from the farmer’s angle, even though contract farming is better than total uncertainty, it does not insulate him from price manipulations, leave alone any share in value addition.

All agricultural commodities suffer from these imperfections in the value chains that in fact are only ‘supply chains’. Price support mechanism only protects farmers to a limited extent by ensuring that they at least cover their cost of production, but again it ends up only as a ‘supply chain’, except that the players have changed.

The benefits of value addition in such models always invariably elude the farmers.

And here comes the importance of the “VALUE CHAIN THAT EMPOWERS”, as successfully implemented under “Operation Flood”. Dr. Kurien always maintained that “true development is development of men”. He demonstrated it by creating such institutions that made the farmers active participants in their own development process.

And this was done by putting into practice the underlying principles of democracy. I am inclined to quote here Abraham Lincoln who, when referring to democracy said, “Democracy is the government of the people, by the people, for the people”. Under ‘Operation Flood’, the institutions created are “Of the milk producers, by the milk producers, for the milk producers”.

Let me elucidate it further:

Here a basic brief of the pre Operation Flood dairy production scenario will help better understand the concept I am about to elaborate. In India, most milk producers were incidental milk producers. They were in fact trying to make the best use of crop residues and surplus family labor- both of whom had zero opportunity cost, by keeping 1-3 bovines- cows/buffaloes or a mix thereof, primarily to get in bargain some milk for family consumption and bullock power for farming.

This scenario has considerably changed over the last 50 years. Bullock power has been almost entirely replaced by mechanical power and farmers now have access to increased crop residues due to multiple increase in production of food crops. Better transportation facilities have made access to distant urban markets a lot easier and faster. Operation Flood therefore turned out to be a well-timed intervention to optimize on the limited resources of the individual small milk producers.

1.     Of the milk producers:

Small milk producers, over 85% of whom own 1-3 bovines individually cannot have access to a distant lucrative urban market since the quantity of milk to be sold is too small. Highly perishable nature of the produce adds to the problem. That leaves only one option with them, either consume all that they produce or sell it to a middlemen at distress prices.

A village dairy cooperative provides them an opportunity to bulk the milk and transfer it to a chilling center/dairy plant owned collectively by all the village dairy cooperatives in a given collection area referred to as “MILKSHED”. Every milk producer residing in the operational ambit of the cooperative has an equal opportunity to become a member. Since non milk producers and traders cannot become members of the coop, in real terms, it becomes an institution only of the milk producers.

2.     By the milk producers:

What makes the cooperatives an institution BY the milk producers? It is simply the pattern of shareholding and the way capital formation takes place to give them the ownership of the infrastructure.

At the level of village society, every member holds equal number of ordinary shares as decided by the members themselves. Shareholding therefore only denotes membership and not an individual’s investment in the venture.

At the next level, commonly referred to as the MILKSHED UNION (wherein all the village dairy cooperatives pool their resources to collectively own the infrastructure to collect, process and market the milk and products made from it; as well as infrastructure that provides inputs and services to increase milk production), the pattern of shareholding is identical, i.e. each society has the same number of shares in the union. The Union and the infrastructure is therefore build by the milk producers themselves for the benefit of all the members. The financial resources pooled under the union, enabled the farmers to obtain funding for investment in the infrastructure.

3.     For the milk producers:

The purpose of these institutions is three fold. One, to provide them access to a market and in the process give them the ownership of the entire value chain so that they retain the ownership of the finished product. This approach enables transfer of a larger share of consumers’ spending on milk and milk products reach back to the producer.

Second, larger share means higher returns than what they could ever get by selling raw milk to the collection agent. Higher returns in turn cause an attitudinal change and milk producers begin to see their bovine holding as a more powerful economic asset rather than just a means to use surplus crop residues and family labor. They then begin to demand inputs and services that help in increasing milk production at the farm level. The union’s ownership of the infrastructure to provide these services- nutritionally balanced feed, insemination and veterinary health care services, fodder seeds and cultivation package etc. comes in handy to provide this vital input.

Third and equally important is the democratic management of the institutions. The bye laws of the cooperatives are so designed that, through a democratic election process, the leadership of the institutions is vested in the hands of those who have genuine interest in furthering the business and economic benefit to its members. Eligibility criteria based on a system of internal checks and balances supported by timely audit of the business at each level ensures transparency.

Thus, the whole system is designed FOR the members benefit through sustainable growth. Since the cooperatives have to depend on the urban markets for their growth, they cannot indulge in exploitative pricing. Consumer prices are therefore moderated by the producers themselves and set an example of social responsibility. It also creates a win-win situation for both the milk producers and the consumers.

Milk producers’ cooperatives created under Operation Flood, thus present the finest example of “Democracy in action for the development of members”.

Role of facilitator:

The National Dairy Development Board of India (NDDB) that planned and implemented the entire project addressed an important livelihood issue by facilitating creation of democratically managed institutions and empowered them through judicious application of principles and practices to create a sustainable development model in dairy sector.

The milk producers’ cooperatives did not come overnight. The key aspect of project was meticulous planning, farmers education and training, funding and building of the infrastructure and above all the message given to milk producers that NDDB as the facilitator has full confidence in their ability to not only manage the business enterprises build for them but also service the funds loaned to them.

Replicability:

A question often asked is “Is the experience replicable in other agricultural commodities and other countries”? My un-wavered answer is YES, simply because it is based on very sound ‘principles and practices’. Whereas the practices will vary with the nature of the commodity, the guiding principle of giving the ownership of the entire value chain to the producers themselves remains unaltered. So long as this principle forms the fundamental basis of institution building, the model will be fully replicable for all agricultural commodities and all situations.

RKN: July 2018