Why FPCs Need to Understand Their Position in the Value Chain

One of the biggest reasons why most Farmer Producer Companies (FPCs) fail is because they try to become something they are not.

Across India, more than 40,000 FPCs have been promoted in additions of lakhs of cooperatives and thousands of producer groups with the objective of improving farmer incomes through aggregation, value addition, and market linkages. Yet despite significant investments in infrastructure, capacity building, and grant support, only a small percentage have emerged as commercially sustainable businesses. Most continue to struggle with low turnover, weak member participation, insufficient working capital, and under-utilised assets. The common response has been to blame governance, management capacity, or lack of finance. While these are certainly important factors, they often distract attention from a more fundamental issue. Many FPCs do not clearly understand the role they should play within the value chain.

There is a widespread belief that every successful FPC must eventually become a processor, brand owner, exporter, or retailer. As a result, many organisations move quickly into processing units, packaging facilities, and branded products without first asking a more important question: where do we actually create value? This question lies at the heart of long-term business sustainability.

Every agricultural value chain consists of multiple actors performing specialised functions. Farmers produce. Aggregators collect. Warehouses store. Processors transform. Traders distribute. Retailers sell. Each actor survives because they perform a particular function efficiently. The purpose of an FPC is not to replace every actor in this chain. Its purpose is to identify the activities where it can create value more efficiently than others and build a business around those strengths. This idea is closely aligned with the Core Competency Framework developed by management scholars C.K. Prahalad and Gary Hamel. Their argument was simple: successful organisations focus on what they do best and avoid spreading resources across activities where they possess no competitive advantage. For FPCs, this means understanding their position within the value chain before making investments in new businesses.

Unfortunately, many producer organisations attempt to move into higher-value activities before mastering the fundamentals. Processing is a common example. Across India, hundreds of flour mills, dal mills, oil expellers, spice grinding units, and packaging facilities have been established with grant support. Yet a large proportion operate far below capacity.The reason is simple. Processing is not merely a technical activity. It is a business model.

A flour mill does not succeed because it can convert wheat into flour. It succeeds because somebody can procure sufficient wheat, operate the machine efficiently, build distribution channels, manage inventory, collect payments, and continuously generate demand. When any one of these elements is missing, the economics of the business begin to collapse. The experience of many FPC-owned flour mills demonstrates this challenge. Machines often operate only when orders are available. Capacity utilisation remains low. Fixed costs continue regardless of production volumes. What initially appeared to be value addition gradually becomes a financial burden.

The mustard value chain interventions by Navchetna FPC in Mirzapur provides another useful example. Many FPCs assume that producing mustard oil will automatically generate better returns than selling mustard seed. In reality, the answer depends on where the organisation's strengths lie. If the FPC is able to aggregate large volumes, maintain quality standards, provide moisture-tested produce, and negotiate effectively with processors, aggregation itself may generate more sustainable returns than operating a small oil mill. In such cases, procurement and supply chain management become the business rather than merely a stepping stone towards processing.

The success of Sahyadri Farms is often cited as evidence that all FPCs should pursue exports and branded products. However, this interpretation overlooks an important lesson. Sahyadri did not begin with exports. It first mastered farmer mobilisation, quality assurance, aggregation, logistics, traceability, and buyer relationships. The export business emerged after these systems were already functioning at scale. Its success was built on supply chain excellence long before it became known for processing and branding.

A similar lesson can be observed in organisations such as Navi Umed, where Soybean and Tur procurement have emerged as core business functions. Large processors and institutional buyers are not necessarily looking for another consumer brand. They are looking for reliable suppliers. An FPC that can consistently aggregate thousands of tonnes, maintain quality standards, honour delivery schedules, and manage working capital effectively occupies a highly valuable position within the value chain. In such situations, sourcing and procurement are not secondary activities. They are the source of competitive advantage.

Perhaps nowhere is the misunderstanding of value chains more visible than in the rush towards branding. Many newly formed FPCs aspire to launch branded products within the first few years of operation. Development programmes often reinforce this aspiration because branding is seen as the highest form of value addition. However, branding is fundamentally different from aggregation. Aggregation generates cash flow. Branding consumes cash.

A procurement business can often rotate inventory within days or weeks. A branded food business may require months before investments are recovered. Packaging, distribution, retailer margins, marketing, inventory financing, and customer acquisition all require capital. For an FPC with limited reserves and weak access to finance, branding can quickly become a drain on scarce resources.

More importantly, branding does not solve the primary problem that farmers expect their producer organisation to address. Farmers join FPCs because they need reliable procurement, transparent transactions, better price realisation, market access, and protection from market volatility. The first responsibility of an FPC is to build trust among its own members.

This is where the Core Competency Framework becomes a powerful management tool for producer organisations. Instead of asking, "Should we start a brand?" or "Should we install a processing unit?", an FPC should ask four simpler questions.

·       What do we currently do better than others?

·       Where do we create the greatest value for farmers?

·       Which activity generates the most stable margins?

·       What capability must we build before moving to the next stage of the value chain?

The answers often reveal that different FPCs should pursue very different business models. Some may succeed as aggregation and procurement enterprises. Others may specialise in quality management, storage, warehousing, or logistics. A smaller number may develop the scale and systems necessary for processing, exports, or branded products.

There is no single model of success.

The mistake occurs when FPCs attempt to imitate successful organisations without understanding the capabilities that made those organisations successful in the first place. Viewed through this lens, the objective of an FPC is not to climb every rung of the value chain. The objective is to identify the rung where it possesses a genuine competitive advantage and then build depth, efficiency, and scale around that position. Financial success follows when strategy is aligned with capability. Organisations that understand their role in the value chain allocate capital more efficiently, avoid premature diversification, build stronger buyer relationships, and create businesses that can survive market fluctuations. Those that do not often find themselves owning infrastructure without possessing a viable business model.

The future of successful farmer-owned enterprises will therefore depend less on how many activities they undertake and more on how clearly, they understand where they create value. An FPC does not become successful by doing everything. It becomes successful by doing a few things exceptionally well and building a business around those strengths.

Ravi Chandra is the Founder of EcoKargha Consulting Private Limited and a development professional with over two decades of experience in agriculture value chains, FPO development, rural livelihoods, and market systems.