Evolving Corporate Procurement Models - FPOs as the Centrepiece

In 2018, Arya undertook a project ‘Study of market players and identification of FPO clusters for value chain and market integration’ for Tata Trusts. The project team organized the FPOs into clusters, developed profiles of FPO clusters and studied the key Agri-produce value chains in which the FPOs were present as part of this study for which field information was collected three years before. 

Amravati and Nagpur were two clusters which were part of this study where Orange was a key produce. Based on their market research the team identified existing gaps in effecting market linkages for FPOs and possible interventions to bridge the major gaps. 

Ann Thomas speaks with Akshay Jambhulkar, Procurement Lead from Citrus Processing India Pvt Ltd., a key processor in Nanded to understand how the produce landscape has shifted since Arya’s research and recommendations. 

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Akshay, tell our readers a little about Citrus Processing India Pvt. Ltd and your role. 

A: Citrus Processing India Pvt Ltd. is a food processing company which produces citrus concentrates and citrus by-products such as aroma oils. We work with citrus family fruits like orange, sweet orange, lime...however, now we are largely focussed on oranges for the past three years as Mausambi has not been in demand. We procure from the geography of Maharashtra since our plant is located in Nanded. Our daily requirement for the plant is around 250MT of fruit. 

We largely procure oranges from Maharashtra especially Aurangabad and Jalna as procurement outside Maharashtra is expensive. From Nanded, Andhra and Telangana are closer and the quality of Andhra’s Mosambi is known to be better. 

I lead procurement for bulk quantities. 

Daily we require around 250 MT of fruit to run the plant. 

Tell us more about your procurement process. Do you buy directly from farmers? And how has the FPO linkages changed since our report in 2018?

We do not procure directly from farmers. We have tried this in the past however this procurement model has had logistical and regulatory hurdles. There are a lot of payment related issues as well with direct procurement. 

In 2016 when I joined the company, the procurement from FPOs was nil - 0%. It was not an easy switch and in the first years, we struggled with FPOs procurement as well. Moreover, FPOs too were not strong in this geography. Govt interventions and local administrative bodies efforts gradually strengthened the FPPOs. And annually our procurement had only grown, we were at 10 % the first year, last year we moved to 20% and this year it is at 30% of total procurement. Our objective this year is to increase FPO procurement to 50% of the total purchase. 

What are the changes you have seen with FPOs over the years? 

Over the last few years, they have understood how the processing industry works and how grading works. Lower grades mixed with the product brings down the overall pricing of the commodity and grading and segregation helps with the pricing of the product. 

There are two big Farmer Producer companies in the orange belt and they have procured their own set of grading and waxing machines. This makes it convenient for them to grade products. 50% of their business for the FPOs also comes from other small traders. The local traders who don’t have their own machines, approach the FPOs for these facilities at an acceptable charge.

FPOs are more willing to work with processors as it brings stability. We offer fixed rates compared to open markets and there is better assurance of sales for lower grade commodities compared to auction markets. Market linkages are a crucial challenge for smaller traders just as much as for farmers and they are happy to supply to these FPOs. 

Earlier our procurement needs were smaller (4000-5000 MT) and largely done through traders and auction markets. Now we procure 17-20,000 MT annually. This has built in confidence as well. 

In your view, what are the challenges faced by FPOs?

One, FPOs struggle with working capital! In any fruit Industry, it is common practice that farmers do not undertake segregation and direct selling of produce. Farmer sells the whole orchard as it is to the local trader and the trader takes the responsibility to harvest, segregate and sell to distant markets. Individual farmer find it difficult to undertake these activities . FPOs struggle with the working capital required to book the entire orchard. Moreover, price volatility adds to their challenges. It is challenging to forecast prices and if there is a price drop FPOs end up in loss. The second limitation is their limited risk taking capacity hindering large volume transactions. 

The other challenges are organisation and capability challenges. These will surely improve but will take time. 

As a company did you need to make any system level changes to include Farmer Producer Companies in the value chain?

No it was a smooth shift as Farmer Producer Companies are bound to transact online with banks. Also, we do not follow a credit system and within five days of procurement, the payment is released. So there is transparency and accountability on both ends. 

How can the system support the growth of FPOs?

FPOs need working capital, price assurance mechanisms and market linkages. Price fluctuations can be hard. Previous season (Sept - Dec), oranges were easily available at Rs. 15 per kg. Pandemic impacted production and between Jan-March oranges were priced at Rs 90-100 per kg. However since storage of fruits happens closer to the consumption markets, the price increase did not translate into earnings for FPOs. 

The many engagements with the experts from Arya and the Tata Trust did help us in improving our understanding of the FPO ecosystem and did influence in making FPOs a centrepiece of our procurement strategy.