Smallholder farmers market integration through Producer Organizations - An analysis of the Producer Company model in the context of India’s emerging modern food retail sector

Since the official start of economic liberalization in 1991, transformations in India’s agro-food system were relatively slow. Only the more recent steps towards a further deregulation and liberalization, not only of the retail sector, but also of other sectors relevant to the trade with and the processing of food, and agriculture, have accelerated these transformations and here, the food retail sector plays an important role. Starting in the early 2000s, modern food retailers increasingly gained foothold in the Indian market and are since then expanding their share in the country’s food retail sales. The core question of this thesis is what the emergence of modern retail in India means for India’s farmers and how they can be able to profit from the developments in the retail sector through an integration into modern retailers’ supply chains. The focus of research on such market integration of smallholder farmers is on so-called Producer Companies which are a hybrid form between a traditional cooperative and a private company. Against this backdrop, this thesis analyses the success of the Producer Company model in integrating smallholder farmers into markets. The analysis is theoretically embedded into the collective action debate. The concrete analysis of Producer Companies as economic actors in emerging trade relations with modern retailers is conducted using the Global Value Chain framework. Within the frame of this analysis, Producer Companies are conceptualized as potential suppliers to the modern retail sector in India. The thesis consists of three manuscripts. The first article uses a case study to show that Producer Companies can help smallholder farmers and underprivileged rural communities to position themselves in a more demanding market environment and to establish trading relations to modern retail companies by conducting value adding processes and generate economies of scale in output marketing. The article also shows that, for Producer Companies, reducing the risk of marketing is sometimes more important than realizing the best possible price available in the market. Analyzing a very successful case study, the article stresses that Producer Companies carry out a series of functions for their members besides providing agricultural inputs, extension services and taking care of the marketing process, which lead to an increase of farmer capabilities. Additionally, Producer Companies can facilitate access to credit for their members, and to consulting services in the fields of health, education, hygiene and others. It is this sum of functions the Producer Company provides for its members that enhances the farmer families’ livelihoods. The second article shows that Producer Companies can be a tool for farmers to reduce their dependence on private companies in the area of input supplies, improve their market and bargaining position, and fill the gap left by the public sector’s withdrawal from agricultural extension services. Taking the cotton sector and a specific case study from the southern state of Karnataka as an example, this article focuses on the functions of a Producer Company as a farmer owned company in the areas of production and marketing. It also emphasizes and analyzes the challenges and problems that currently hamper a greater success of the Producer Company model in India. The third article brings together all major findings from the research and compares the Indian scenario to experiences from other countries, where cooperation between supermarket chains and farmer organizations already exists. The article’s main message is that the integration of farmer organizations, such as Producer Companies, into modern retailers’ supply chains brings advantages for both sides through a reduction of transaction and coordination costs as well as marketing risks. However, a relatively low demand from the modern retailers’ side is currently hampering the quantitative and qualitative expansion of such cooperation. Generally, modern retailers in India welcome the idea of working with a Producer Company as a supplier. However, due to a relative lack of positive examples of such cooperation, and due to the problems Producer Companies are still facing, well functioning trading relations between modern retailers and Producer Companies in India are still rare. To develop more Producer Companies into vibrant and smoothly running companies government support is required. In the future, economically stable Producer Companies might evolve into Business Hubs in rural areas from which modern retailers can source large quantities of quality produce and through which member farmers can get access to production inputs end technology.