India is the largest producer of cotton globally. It makes up around 59% of the raw material consumption in the Indian textile industry. It plays a major role in sustaining the livelihoods of an estimated 6.5 million cotton farmers and engages about 60 million people in related activities.
With 11.7 million hectares, India has the world’s largest cotton cultivated area, constituting about 36% of the global cotton area. Cotton is produced in three main zones; the Northern zone, the Central zone and the Southern zone.
Headquartered in Bhopal, PAPL a private enterprise has been set up in 2020 to scale and support Farmer producer companies (FPCs) to strengthen the marketing, processing, brand building, and value chain, provide market linkage and direct access to markets and finance.
The idea of PAPL was conceptualized to bridge this gap by the Action for Social Advancement (ASA), a not-for-profit organization which pioneered the concept of FPCs and began the FPC development work in India in 2005.
The main objective of the company is “To enhance the income of small farmers so they can lead a better life”.
PAPL aims at least 70% of all commodities(all the FPC acreage under PAPL) produced under the organic / regenerative practices is market linked through farmers’ organizations. FPCs and producers are brought into the value chains with prominence; traceable and transparent systems established.
PAPL wants to work with over 100,000 farmers by 2026 from 60,000 farmer in 2022 eventually covering 150,000 acres in Kharif season and 90,000 acres in Rabi season.
Through this analysis, PAPL sought to answer the following key question: How can PAPL scale up its business model to extensively engage with smallholder farmers through FPCs for access to finance, access to market, promoting organic farming while ensuring PAPL business is grown profitably and ready to receive long-term investments?
Our analysis shows a positive business case for PAPL’s to reach its scale and profitability targets while ensuring sustainable FPC performance and positive impact on farm-income and resilience. The case report covers the following recommendations:
Commercial viability and investment readiness
- Increase the working capital turnover at the FPOs by evenly spreading the procurement volumes over the entire season
- Reduce cost of working capital finance by attracting equity capital, reduce loan cost by impact investors extending guarantees to financial institutions
- Incubate new opportunities such as on-lending arm, carbon in-setting unit and business to consumer(B2C) channel development conservatively which doesn’t need large upfront capital investments
- Ensure increase in EBIT margin of existing business to realize full benefits of scale
- Incubate new business units with dedicated capital allocation and further scale based on new business units meeting prior agreed KPIs
- FPC maturity can be assessed based on SCOPEinsight framework and tailor the capacity building to overcome identified gaps
- Consider consolidating loss making FPCs and explore income augmentation by other means to offset the loss
- Encourage farmers to take up agroforestry in fallow lands and explain the dual income (logs and carbon credits) potential from the same
- Monetize the lower carbon footprint of organic grown agri-commodities vs conventional agri-commodities by quantifying the carbon credits and trading them
- Sign carbon credit purchase agreements with potential buyers at a competitive price to offer stability from volatile market prices