Governance of agricultural value chains: Coordination, control and safeguarding

Pradeep Kumar Mishra

Kushankur Dey

(Pre-Print Version)
The final version of this paper has been through several revisions. Readers are requested to
consult the final version.

Final version published as:

Mishra, Pradeep Kumar and Kushankur Dey (2018) Governance of Agricultural Value Chains:
Coordination, Control and Safeguarding, Journal of Rural Studies, 64: 135-147. Elsevier; DOI:
https://doi.org/10.1016/j.jrurstud.2018.09.020

Author affiliation: Pradeep Kumar Mishra and Kushankur Dey are faculty members in the
Xavier School of Rural Management, Xavier University, Bhubaneswar.

Acknowledgement and notes:

• A previous version of this paper titled Governing agricultural value chains: A
conceptual framework (by the first Author - Mishra) was presented in the International
Conference on Business Paradigm in Emerging Markets ICBPEM) 12-13 December 2014
at the School of Management, NIT, Rourkela, India
• The authors thank Mr. Yateendra Joshi for copy editing of the paper.
• This research did not receive any specific grant from funding agencies in the public,
commercial, or not-for-profit sectors.

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 Abstract

The governance of agricultural value chains other than those that are export oriented has not been

well understood. A case in point is agricultural value chains in India, which are characterized by

the dominance of the unorganized sector, lack of standardization, and local policy dynamics. The

complex interactions among actors in such value chains are not explained in the existing literature,

which focuses on standardized, cross-border trades. The nature of coordination, control, and

interdependence in local agricultural value chains is distinct, varies with the commodity, and is

closer to the network system of governance. A study of six commodity-specific sub-sectors,

namely milk, rice, poultry meat, cotton, potato, and sugarcane, found that all consisted of relatively

unorganized markets and were trader-driven. The governance network is often riddled with

overlapping and contradictory roles of actors across the value chain. However, with the increasing

trend of markets being controlled by organized players, a shift towards a buyer-driven market is

expected in the future. The paper concludes that the existing system of governance may not ensure

the well-being of smallholder producers.

Keywords: Actors in value chains, Agriculture, Control in value chains, Governance, Value Chains

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1. Introduction

Most of the existing knowledge on the governance of value chains focuses on export-

oriented, standardized, and self-regulated global value chains (GVCs) and deals with various

aspects of strategic decisions related to the need for vertical integration, the controlling role of lead

firms in the value chain, and scope for smallholder participation (Dolan and Humphrey, 2000;

Gereffi, Humprey, and Sturgeon, 2005; Ponte, 2002). These aspects are relevant in the context of

specific value chains that are associated with international markets, established retail chains, and

supermarkets. However, these models of value chains are selective in that they focus primarily on

high-value markets and exclude most of the agricultural value chains (Trebbin and Franz, 2010).

The governance of a selective high-end value chain cannot be the same as that of a complete

set of value chains in a sub-sector, because the latter includes many more actors and complex

transactions. For example, retail chains are likely to have a formal contractual relationship with

the suppliers, whereas the relationship between local traders and their suppliers is often more

informal. Different value chains differ in the way they make pricing decisions, require regulatory

compliance, and meet quality standards, because non-export-oriented value chains are generally

dispersed and decentralized and are unlikely to conform to Gereffi’s (1994) classification, which

divides them into buyer-driven and producer-driven value chains. A large part of an agricultural

value chain is run by small-scale, decentralized producers participating in relatively unorganized

and dispersed retail markets. Further, lead firms in organized markets set quality benchmarks

(Gereffi et al., 2005) and, in an oligopolistic retail market, control the price (Gibbon, 2003). In a

decentralized and predominantly unorganized market, it is difficult for any single actor to set the

price or quality benchmarks, unless such push comes from the regulator.

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 A widely discussed issue related to the governance of value chains is the scope for

including smallholders: Tobin, Glenna, and Devaux (2016) suggest horizontal integration through

smallholders along the value chain, whereas Trebbin and Franz (2014) argue that to exercise tighter

control over the supply chain, big retailers often avoid small-scale producers. In the developing

countries, state procurement policies encourage procurement of goods from smallholders.

Information asymmetry in coordinating the actions of multiple actors in any decentralized

sub-sector can lead to market failures. How do the actors coordinate in the absence of an adequate

and appropriate information regime? The role of the state or the government in such a context does

not remain limited to regulation but extends to cover such aspects as food security, adaptation to

climate change, and the well-being of small and marginal farmers. How does this extended role

affect various actors and the market? Finally, as the transition from a localized value chain to a

GVC continues (Trebbin, 2014), how do such transitory value chains behave? What are the

implications of changes in technology and of the breaking of barriers in international trade?

There are no clear answers to the above questions, and the present paper is an attempt to

bridge this gap in literature. Based on a study of six commodity-specific agricultural sub-sectors

from India, the paper attempts to understand the mechanisms of control and coordination in these

decentralized value chains, examines how the value chain structures are changing, and considers

the implications of those changes on governance. The findings can enhance our understanding of

the governance of agricultural value chains in relatively decentralized markets consisting

predominantly of smallholder producers.

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2. Literature Review

2.1. Conceptualizing governance of agricultural value chains

Agricultural value chains include multiple actors associated with various functions and

technologies. A simple actor–function matrix suggested by Haggblade and Glammer (1991) can

be represented as shown in Table 1.

Table 1

Actor–function matrix in agricultural value chain.

Actor Supply of raw material Cultivation Harvesting Processing Selling

Input supplier

Producer

Wholesaler

Retailer

Consumer

Source: Haggblade and Glammer (1991)

However, the governance of a value chain extends beyond the functions listed in Table 1

to encompass such activities as financing, arbitration, regulation, and judicial intervention, and

participation in international market brings in quality certification and compliance with

international norms as well. The civil society also plays several roles including that of a pressure

group. A standard pattern of the governance of a value chain is represented schematically in Fig.

1.

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 Actors

Regulatory Civil-society
institutions organizations

• Legislative • Facilitators
• Judiciary • Pressure
• Executive groups

Function

Fig. 1. Governance of a value chain.

In agricultural value chains, the relations of the actors with one another are seldom dyadic

or confined to a single channel: for example, suppliers of inputs also act as moneylenders to

farmers, millers also act as traders, and the state does not merely regulate but also implements

programmes aimed at improving the income and well-being of smallholder producers (Singh,

2012). Civil society may also assume the role of an implementing agency while lobbying for

changes in policy. Thus, there are interactions at multiple points or nodes and sometimes such

interactions can be iterative—characteristics that are more of those of a network than of any other

form of relationships. The governance of such a structure fits into the definition of network

governance “characterized by informal social systems rather than by bureaucratic structures within

firms and contractual relationships between them” (Jones, Hesterly, and Borgatti, 1997, p. 911).

2.2. Conceptual problems in understanding governance of agricultural value chains

The governance of agricultural value chains has been either inadequate or faulty: the value

chains have not been clearly understood in some cases; in others, their governance has not been

6
clearly conceptualized. As mentioned earlier in the introduction, Gereffi (1994) explains the

difference between buyer-driven and producer-driven value chains while illustrating the structure

of various GVCs. However, in non-export-oriented value chains, Gereffi’s GVCs suffer from

contextual familiarity: for example, in India the classification proves inadequate in the context of

smallholder producers, and although the classification by Miller and Jones (2010) – adapted from

that by Vorley et al. (2008) – adds two more categories, namely facilitator-driven value chains and

integrated value chains, it does not cover decentralized markets.

To sum up, governance has not been conceptualized clearly in agricultural value chains.

As Dolan and Humphrey (2000, p. 151) observe

In situations where manufacturers are technically competent and have good market knowledge,

governance structure may not be required. For example, retailers might be able to purchase high

fashion Italian shoes through arm’s-length market relations. Similarly, complex supply chains for

products such as computers can be managed through arm’s-length relations. But governance is

required when the supplier lacks technical competence or market linkage.

Can we find a situation where business transactions are carried out on a massive scale and

yet governance is not required? Does an arm’s-length relationship need no governance at all?

Probably the authors equate governance with absolute control—as though only a vertically

integrated value chain is governed, and others are not. This does not fit with the way governance

is ordinarily understood in existing literature. Governance is not the same as the function of the

government. Kooiman (1993) states that decision-making is distributed between various actors

and institutions such as the state and civil society. Rhoades (1997) conceptualizes governance with

a broader idea of a networked form and interdependence. Whereas the neo-liberals advocated

minimal state intervention, Osborne and Gaebler (1992) emphasized efficiency improvements in

state functioning to make it comparable in efficiency to privately managed organizations; although

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the latter document dealt mainly with the role of the state, it indirectly tried to restructure power

relations among different actors in overall governance. From this emerged the new public

management and the new governance paradigm that looked forward to a pluralistic form of

governance involving interdependent roles of the market, the state, and civil society. Williamson

(1991, cited in Jones et al. 1997: 917) proposed that an effective governance system ‘must address

the problems of adapting, coordinating, and safeguarding more efficiently than other governance

forms’. Fukuyama (2013) describes governance as the ability to form and enforce rules and deliver

services. Thus governance is a much wider concept, and to say that governance is not required in

an arm’s-length relationship is inappropriate.

However, on some other occasions, scholars have used the wider conceptualisation of

governance. Ponte and Gibbon (2005) emphasize the importance of the conventions of

governance. Tallontire (2007:776) says that governance refers to how power is exercised in social

relations and that earlier the focus was on governance of vertically integrated chains and also

highlights the need for horizontal governance. But many researchers on value-chain governance

limit themselves to GVCs. This description is consistent with the original concept of value chains

(Porter, 1985), which, inter alia, helps in knowing whether a given operation can be integrated

vertically or outsourced profitably. Studies on agricultural value chains have also considered issues

related to such integration and outsourcing. Gibbon (2003) studied regulatory measures to cope

with ‘buyer power’ (that is, a market controlled by retail chains). Trebbin (2014) tried to position

producer organizations as an alternative to a vertically integrated chain. Tobin et al. (2016)

investigated the scope for farmer participation in a potato value chain and concluded that

participation in value chain development does not always lead to gains for small farmers.

Questions related to such integrations are associated with a single or a few firms and not relevant

8
to the entire value chain: in particular, when firms are dispersed, coordination and control will be

difficult for any firm; under such a situation, questions of integration may not be very useful, even

if integration is what the firms would like, and there may be some role for the state.

2.3. Conceptual framework

In the light of the above discussion, the traditional understanding of governing a value

chain proves inadequate if we try to understand the complex relationships in agricultural value

chains. When the producers are many but small, their bargaining power is very low. Unless the

value chain is both efficient and effective, some actors in it are likely to be exploited, which may

lead to market failure. In a democratic set-up, value chains cannot be effective if they do not benefit

many small farmers.

Bargawi (2015) defines the governance of agricultural value chains in terms of small-

holder farmers’ access to storage, transport, niche markets, closer linkages, elite producers, and

information. Gereffi et al. (2005), in proposing a framework for the governance of GVCs,

developed a typology of governance – market, modular, relational, captive, and hierarchical –

determined by three factors, namely the complexity of information and knowledge transfer, the

extent to which information can be codified, and the capabilities of actual and potential suppliers

in relation to the requirements of transactions. However, such approaches fall short of providing a

pragmatic model for governing network-like systems, and an alternative theoretical framework

therefore becomes necessary.

Jones et al. (1997) used a combination of transaction cost economics and social network

theories to explain network governance, which is appropriate when demand is uncertain, tasks are

complex, assets are specific, and exchanges are frequent. Such systems of governance are not

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purely contract- or agreement-based. The authors also maintain that in a network, the governance

system is embedded in social mechanisms such as restricted access to exchanges, the macro culture

of the network, collective sanctions, and reputations. Such a system of governance presents a

contrary view of the role of transaction costs in assessing the efficacy of an economic organization

(Williamson, 1988) but ensures the coordination and safeguarding of transactions.

Based on the above discussion, governance is conceptualized in the present paper to

encompass coordination, control, and safeguarding. In any sub-sector, the actors in a value chain

act in coordination. Further, the governance is likely to have one or more power centres

representing those actors that control major business and policy decisions. The end product of such

governance is safeguarding the interests of the value chain, although such a normative agenda may

differ from sub-sector to sub-sector. For example, from the viewpoint of consumers, the end

product is availability of quality products at competitive prices whereas for smallholders, the end

product is equitable distribution of value created in the process during the transactions. Fig. 2

presents this conceptual framework.

Actors Coordination

Safeguarding of
Actors’ interests

Control
Transactions /
Exchanges

Fig. 2. Conceptual framework for the governance of an agricultural value chain.

The framework is based on the following assumptions.

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 1) Multiple actors are involved in agricultural value chains in which the actors can be

either internal to the value chain (e.g. input suppliers, producers, traders, processers,

retailers, and consumers) or external to it (e.g. the state and civil society).

2) Each actor performs a specific function or functions (Table 1); the state plays the

regulator; and civil society acts as a pressure group. However, there may be some

overlap, and one actor can perform or execute multiple roles at various levels.

3) Coordination is generally not centralized.

4) There may be one or multiple centres of gravity that control business transactions and

policies.

5) The concerns of all actors are taken into account and inter-firm linkages are mutually

beneficial.

The following section with an analytical strand describes the situation of selected

agricultural value chains and identifies the gaps in the governance of these value chains.

3. Methodology

To understand the governance of the agricultural value chains, we used the multiple-case-study

method, which offered greater scope for investigation (Miles and Huberman, 1994). However, in

the present study, the cases referred not to different organizations but to different commodities:

we examined how different aspects of governance were dealt with in the value chains of six

commodities, namely milk, rice, poultry meat, cotton, potato, and sugarcane. These six were

chosen for the study using the principle of maximum variation between cases (Flyvbjerg, 2006),

the differences being in terms of physical properties, uses, and the scale of producers: smallholders

or the organized sector. Smallholders are defined as those holding not more than two hectares of

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land; these holdings account for as much as 85% of India’s total landholdings (Agriculture Census,

2011). Rice is a staple food whereas cotton and sugarcane are cash crops. Milk and poultry meat

are highly perishable; however, the extent of processing these two commodities require differs

significantly. These six sub-sectors are fairly representative of major agricultural value chains in

India. Commodities such as coffee and spices were not included in the study because they are

limited to specific regions and are generally part of integrated and standardized value chains.

Appendix I provides a comparative statement of the various commodities.

India was considered as the appropriate context for this study because agriculture and allied

sectors contributed 10.9% to the country’s GDP (Government of India, 2016) and accounted for

48.9% of its workforce (Government of India, 2015). Furthermore, markets for agricultural

products are dominated by the unorganized sector, are characterized by ‘dispersed populations and

inadequate infrastructure’ [in which] products ‘are often designed without any consideration for

the needs and capacities of rural households and agricultural producers’ (Chakravathy and

Poosapati, 2010, p. 138).

Characteristics of these six value chains were studied using the sub-sector analysis method

described in the Gemini Manual (Haggblade and Glamser, 1991), and observations were based on

a review of published information supplemented by interviewing 25 key informants selected using

the snowball method of sampling. The interviewees were chosen to represent different categories

of actors (progressive farmers, traders, managers, scientists, and processers). The observations are

summarized in Appendix II and discussed in the next section. The findings were compared across

the different subsectors and common pattern was identified for inference using pattern matching

process (Yin, 2003).

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4. Governance of value chains: Insights from selected sub-sectors

The six sub-sectors discussed in this paper were chosen to represent different sets of

commodity characteristics.

4.1. Interaction among actors

Interaction among actors in a value chain is primarily a function of the nature and use of

the commodity, which, in turn, determines the type of interdependence (Table 2).

Table 2

Determinants of interdependence among actors in six commodity-specific value chains.

Commodity Determinants of interdependence among actors

Degree of Frequency of Bulkiness of Complexity of Cost of

perishability production commodity processing processing
technology

Milk1 Very high Daily Low Simple Medium

Rice Low Seasonal High Medium to high2 Low to

Medium

Poultry Very high Daily subject Low Complex High

meat to planning

Cotton Low Seasonal Very high Complex High

Potato Medium Annual High Simple to Low

complex3

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 Sugarcane High Annual Very high complex High

1no production in dry period 2medium for unprocessed (‘raw’) rice and complex for parboiled rice
3generally used a vegetable without processing but complex processing required for potato chips
Source: interviews

Milk is perishable, produced at short intervals (usually twice a day), and must be taken to

the processing plant within four hours; otherwise, it is spoiled (personal communication 26 Aug.

2016). Processing can add value in terms of both shelf life and price but is costly and needs

advanced technology—features that compel producers to tie up with a processer. There are the

circumstances under which dairy cooperatives flourished in India. These are vertically integrated

primary cooperatives that collect milk; dairy unions then process the milk; and a dairy federation

is responsible for marketing. Poultry meat is also highly perishable but has no structure comparable

to that seen in the milk sub-sector. One reason for this can be the scale of production: in the milk

sector, most of the producers are smallholders (Patel, 2015) whereas in the poultry sector, 70% of

production comes from institutional players comprising commercial hatcheries (Indian Mirror,

n.d.). Further, seasonal variation in milk supply (low in summer and high in winter) is managed

by processers by converting surplus milk during the peak period into milk powder and blending it

with milk during the lean period—no such technology or mechanism is available for processing

poultry meat (personal communication, 16 Sept. 2017). Further, processing poultry meat is costly,

which discourages processers. Whereas 90% of poultry meat is sold in processed or dressed form

in the developed countries, the corresponding share in India is only 5%: live birds constitute 95%

of the market (Soundararajan, n. d.).

Sugarcane and potato too are perishable to some extent but not as much as milk and poultry

meat are. Sugarcane is perishable but rarely consumed unprocessed; it is converted into jaggery or

sugar, both of which have a longer shelf life. Similarly, potatoes can be stored for months in cold

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storage. The other two commodities (rice and cotton) are not perishable. Also, unlike milk and

poultry meat, the production frequency of rice, cotton, sugarcane, and potato is very low: each

crop takes months to produce (sugarcane takes a year or more). Thus, both production and sales

are in bulk. Potato needs no mechanical processing before it can be consumed, and farmers

generally sell it to traders. Sugarcane and rice farmers sell their produce either directly to traders

or through primary agricultural cooperative societies. Paddy (rice grains with husk) is typically

procured thorough cooperative societies; in some states in India, the procurement system is

electronic, for example, e-uparjan in Madhya Pradesh and Paddy Procurement and Automation

System (P-PAS) in Odisha (personal communication, 1 July 2017). At present, primary

cooperatives are required to procure paddy and sell the procured quantity to rice mills through

custom milling contract arrangements. The rice millers can sell rice in open market but they must

also sell a stipulated percentage to the Food Corporation of India (FCI): 55% in the case of

parboiled rice and 45% for normal or unprocessed (‘raw’) rice (personal communication, 26 May

2017).

The procurement of rice and sugarcane follows the minimum support price (MSP)

mechanism but farmers sometimes dispose of their produce below the MSP. Such sales are often

referred to as distress sales, undertaken because of other reasons such as paying off pressing debts,

a faulty procurement policy, lack of storage space, and immediate need for cash (Orissa Post,

Bhubaneswar, 10 May 2016; Times of India, Bhubaneswar, 22 May 2016). Jha (2014) reported

that in 2014, sugarcane farmers had to resort to distress sales because sugar mills were not able to

offer a fair and remunerative price (another term for MSP). Under such circumstances, the traders

(middlemen) generally benefit.

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 Cotton value chains are slightly different, primarily because of the involvement of

specialized suppliers (for transgenic Bt cotton seed), ginners, and spinning mills; the latter do not

belong to the food industry, unlike the other commodities discussed here. Cotton is generally

procured by the Cotton Corporation of India (CCI). Ginning results in seed and yarn, the volume

of yarn depending on how efficiently lint is removed from seed. Spinning mills spin the yarn for

weaving, with weavers giving final touches to the yarn (Grandhi and Crawford, 2007). Although

farmers often prefer seeds of genetically modified cotton (often referred to as ‘Bt cotton’, which

is resistant to the boll worm), several multinational companies such Monsanto and Pioneer sell

patented seeds and control the production (personal communication, 16 Oct. 2017). Whereas

cotton producers and weavers are unorganized or at best organized into clusters, the spinning sector

has evolved into a modern and organized form with a strong lobby. Because of the varied nature

of products, vertical integration in the cotton sub-sector seems impractical and unlikely.

Thus, agricultural value chains comprise a variety of actors: farmer-producers, processers,

and traders. In the global value chains mentioned in the literature, traders are generally referred to

as retailers whereas, as we have seen here, agricultural values chains include different types of

traders. First, there is the input supplier, who, as described above, plays a critical role in cotton

and sugar value chains (Appendix II). In other value chains too, the supplier plays an important

role. In the private sector (excluding the cooperatives), a trader links producers to processers or

consumers. A trader can act simply as a carrying and forwarding agent or as a retailer who has no

stake in the fate of a given commodity other than passing it on to the next actor (personal

communication, 4 July 2017). But a trader in the above commodities not only provides these

services but also stores the produce, determines the price, and can affect the demand–supply

equilibrium in the market. Traders also serve as informal financiers to smallholders, who are rarely

16
served by formal financial institutions. Traders can play the role of a financier or other related

roles along the value chain because they have interlocking arrangements with producers (Bardhan,

1980). In the milk sub-sector in India, despite the cooperatives, of the 65-billion-dollar market, the

organized sector claims only about 20% of the market share (Shashidhar, 2016). The unorganized

market in the milk subsector has a special kind of trader, referred to as a doodhiya (Hindi for

milkman), who collects milk from farmers and supplies it to consumers, sweet shops, etc. (personal

communication, 13 Aug. 2017). In the case of other commodities, the role of traders is equally

important, whether in potato, which is mostly sold unprocessed, or in rice, which is processed by

millers and then supplied to traders or to the state for supplying it to consumers through the public

distribution system (PDS).

In sugarcane, rice, and cotton, the state plays a critical role in determining the floor price

(which covers the cost of cultivation and other incidentals), or the MSP, which has been a bone of

contention for processers. The Indian Sugar Mills Association (ISMA) complains of the increasing

cost of procurement. The mechanism of the MSP also distorts the market, and the distortion

brought about by the state’s intervention is also visible at the output level: for example, the state

government (in Odisha and in many other states) supplies rice to the poor at one (Indian) rupee per

kilogram, whereas the market price of rice of similar quality is 20–25 times that (personal

communication, 9 Jan. 2017)

We started the discussion in this sub-section with the nature of commodities determining

the nature of interaction between actors. However, other factors, such as the cost of processing,

bulkiness of produce, perishability, state policy, technology, and frequency of production also

affect the interdependence between actors, and so do traders and the state. As interaction among

17
actors becomes complicated, the transactional relations also become complex, and the complexity

affects the mechanism of governance.

4.2. Control: centres of gravity

Relationships between actors are generally determined by two factors, namely coordination

(whether voluntary or enforced through the exchange process) and hierarchy. In a voluntary

exchange, no single actor has an upper hand, although it is possible that some of them gain at the

expense of others. In a hierarchy, however, one actor is subservient to the other; for example,

producers in captive or hierarchy value chains are transactionally dependent on much larger buyers

and in that codification of transactions become complex (Gereffi et al., 2005).

As summarized in Appendix II, the control of one actor by another is only one aspect: the

state determines the MSP and imposes it on processers; traders set the procurement price lower

than the MSP because of the informal contracts or interlocking arrangement they have with

producers (for example, traders supply critical inputs such as seeds, fertilizer, and credit to

producers); and so on. But is there any single actor who controls the entire sub-sector? Given the

kind of networked form of agricultural value chains, such control is probably rare. However, some

actors can be more powerful than others. Such ‘centres of gravity’ not only enjoy a degree of

influence over the entire value chain but also retain the largest proportion of profits in comparison

to their effort and investment.

In sugarcane, processers (millers) seem to be the most powerful. If mills are owned by a

cooperative, they have political links; if privately owned, they operate through an industry lobby

(such as ISMA). However, their influence is limited by the MSP set by the state. Farmers have

18
hardly any say once they receive their dues based on the MSP (personal communication, 28 July

2017).

In the case of milk and milk products, cooperatives, led by Amul, are the most powerful

actors. The Gujarat Cooperative Milk Marketing Federation (GCMMF) is not only is the lead firm

(holding about 40% of the market share in the organized dairy sector) but also sets the benchmarks

in terms of price, technology, products, and practices (personal communication, 18 Sept. 2017).

The regulatory control, however, lies with the National Dairy Development Board, which, given

its links with the Operation Flood, promoted milk cooperatives throughout India.

In the cotton sub-sector, the CCI procures the primary produce. In Maharashtra, the largest

cotton producing state, farmers lobby for a higher MSP, it being common for political parties to

promise a higher MSP (Mehta, 2016). Problems such as the increasing instances of farmers

committing suicides in the cotton belt (Katakam, 2015) also force the state to respond to such

demands; however, farmers remain dissatisfied with the current MSP (personal communication,

12 October 2017). The CCI, an organ of the state, also influences the MSP, which is arrived at

based on various factors such as the cost of production and international prices.

In the potato subsector, because of the nature of product – potato is mostly consumed as

vegetable (only 7% of the production is processed) – farmers cannot stockpile the produce because

they lack storage space or because their holding capacity is low, and traders control the value

chain. In rare cases, the state intervenes: for instance, in West Bengal in 2014/15, following a glut,

the traders wanted to sell potato also in the neighbouring state of Odisha, which was dependent on

West Bengal. However, the Government of West Bengal put an embargo, and the price of potato

in Odisha shot up from Rs 10 to Rs 20–40 per kilogram (personal communication, 15 Sept. 2017).

19
It is noteworthy, however, that producers did not benefit at all from the high price—all the

increased profit went to the traders.

In the poultry meat sub-sector, large-scale producers, who are vertically integrated, control

the market; smallholder producers often find the markets flooded with low-priced meat given the

economies of scale enjoyed by the large-scale producers (personal communication, 17 Sept. 2017).

Paddy is produced by many small-scale growers, but is processed and converted into rice

by a smaller number of rice millers. As mentioned earlier, the millers are obliged to sell a fixed

percentage of the quantity to the FCI for eventual sale to the public at subsidized prices through

the PDS. However, considering the investment and efforts of rice millers (processers), they fetch

a much larger share of benefits than that obtained by the farmers (producers), who are merely the

residual claimants of the majority of their produce (personal communication, 9 Jan. 2017). Further,

procurement by the FCI is generally limited to rice of average quality or even below that; premium

grades such as basmati and other aromatic or long-grained varieties of rice are not controlled by

the FCI.

The state has intervened in controlling the prices of cotton, sugarcane, and rice but not

those of milk, potato, and poultry meat, although other mechanisms, such as the embargo by the

West Bengal government on selling potato to Odisha, have been used. In rice and sugarcane sub-

sectors, millers form the centre of gravity within the state controls; poultry meat and milk sectors

are controlled by producers; and the potato sub-sector is controlled by traders. However, the

centres of gravity are not so well defined in the rice sub-sector, in which millers also assume the

role of traders. In the cotton sub-sector, although the CCI sets the price, large parts of the sector

are nevertheless controlled by traders and input suppliers.

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4.3. Safeguarding of interests

In the matter of safeguarding the interests of actors in a given sub-sector, the first question

is this: Whose interests are to be safeguarded? The answer, as mentioned in the conceptual

framework, depends on context. The process of governance should ensure equitable distribution

of profits (or value sharing) among all the actors. The second question then is this: In what

proportions are the profits to be distributed or shared? Obviously, the actors involved are those

internal to a given value chain. External actors (such as civil society and the state) can only

facilitate such equitable sharing. However, the issue is not merely sharing of values but extends to

a consideration of the larger goals of society or economy, that is whether the sharing is aligned

with the changing needs of the economy. These considerations are governed by three aspects,

namely (1) whether the value is shared equitably, (2) whether quality standards are met, and (3)

whether smallholders participate in the value chain and in other related activities. Table 3 lists

some approaches to safeguarding the interests of different actors in the six value chains studied in

the present paper.

21
Table 3

Mechanisms for safeguarding interests of various actors in six commodity-specific value chains.

Actors

Commodity Producers Processers Traders Consumers

Milk Cooperatives Integrated with Limited to retailing Reasonable margin

producers or distribution and by cooperatives
the margins in these
two activities

Rice Minimum Market control Interlocked market State-run public

support price by processers controlled by traders distribution system
for the poor

Poultry Large-scale, No mechanism; Control of the No mechanism

meat mechanized very little market except strict state
production processing regulations during
epidemics

Cotton Minimum Control within Retailers and No mechanism

support price set prices distributors’ margins

Potato No mechanism Very little Traders takes the No mechanism

Processing major gain

Sugarcane Minimum Political power Control of State-run public

support price interlocked market distribution system
by suppliers for the poor

Source: Interviews

The distribution of value in a value chain is ensured by two mechanisms, namely market

based and non-market-based (in the latter, through the MSP). In the milk sub-sector, the centre of

gravity is the vertically integrated producer-processers, who retain the larger part of the pie.
22
However, that does not mean that the interests of other actors are not safeguarded: for example,

dairy cooperatives, which normally follow the Amul pattern, generally fix prices prudently; not

being listed in the capital market, the cooperatives are not compelled to generate large profits and

are more concerned about transferring benefits to producers (Appendix II). As to traders, they are

not likely to participate in a transaction unless they are assured of a fair return on their investment

(personal communication, 15 Sept. 2017).

The rice sub-sector lacks a mechanism to safeguard the interests of all the actors and also

lacks an actor to enforce such a mechanism even if it exists. Rice millers are a dispersed group of

traders (note that rice millers also are traders) but form the centre of gravity of the sub-sector.

Despite price controls by the state, farmers sometimes undertake distress sales, and millers have

the upper hand in procurement, because the nature of the commodity (being both bulky and non-

perishable) does not allow producers to deal directly with retailers. Millers can also manipulate the

system to their advantage. As observed by one of the authors of this paper, during 2005 to 2007,

some millers from Odisha procured rice from the neighbouring state of Chhattisgarh and delivered

the commodity to the FCI after polishing but claimed that the produce had been procured and

milled locally. This unscrupulous tactic can save on milling costs and at the same time allows the

millers to claim that they have discharged at least part of their obligation to the FCI or to the Civil

Supplies Corporation (CSC), as part of levy, and also to claim the charges or fees for custom

milling.1 The state-stipulated MSP is not attractive to farmers given the increasing inflation,

because the MSP covers only the nominal cost of cultivation. Further, the rate of increase in the

MSP is at best marginal. Thus, to farmers, the MSP does not represent adequate compensation for

1
The obligation mentioned earlier to deliver a percentage of the quantities milled is also referred to as the levy. Custom
milling is a contract between the CSC or the FCI and the millers by which they miller supply rice over and above the
obligatory percentage. After 2013/14, such custom milling contracts replaced the levy rice supply.

23
their labour and for the amount of resources employed. The case of export-oriented value chain

for basmati rice is slightly different because the aromatic rice is a high-value product focused on

the high-end export market. However, only 10% of the total rice produced in India is exported: in

2015/16, such exports amount to 4.04 million tonnes of basmati rice and 6.36 million tonnes of

non-basmati rice (APEDA, n.d.).

In sugarcane, cotton, and paddy, producers are paid through the MSP or any equivalent

mechanism; as a policy measure, this mechanism needs adequate enforcement. As mentioned

earlier, under certain circumstances farmers are compelled to sell their produce at rates below the

MSP. Further, the MSP does not always represent a fair value, because it is only marginally higher

than the assumed average cost of production. Processers too are dissatisfied with the MSP;

however, being at the centre of gravity, they are able to ensure that they get their due returns. For

consumers, there is no mechanism to ensure a fair value other than the subsidized prices charged

in the PDS. In the potato sub-sector, price fluctuations are very high (from INR 10 per kilogram

to INR 25 per kilogram) and while consumers pay more, producers earn only INR 4–6 per

kilogram, the rest being pocketed by traders (personal communication, 15 Sept. 2017). In the

poultry meat sub-sector, producers’ gains or losses are subject to market fluctuations, whereas

retail prices are generally stable, being set by organized producers; the interests of the smallholders

are thus neglected, the major gainers being traders.

In cotton, the MSP forms a different case. Cotton farmers have been influential, particularly

in Maharashtra and Gujarat (the hubs of cotton production); in these two states, the MSP has gone

up significantly. However, this often goes against the market, in which prices have been below the

MSP. When there was a glut in China, which used to be a major destination for the export of

cotton, market prices crashed (Seth, 2016). Thus the sustainability of the higher MSP is uncertain.

24
In this case, the collusion between two actors – the state and the producer lobby – proved

deleterious to other actors. Similar is the case with sugarcane, a commercial crop involving more

influential farmers. Although the state sets the MSP, farmers do not always receive it in full and

face the downside arising from bumper production. However, by and large the MSP ensures that

farmers get their due. On the other hand, the millers’ lobby also protects their interests (personal

communication, 28 July 2017). However, sugar being relatively cheap in international markets,

this sub-sector has a long way to go before it can meet market expectations, namely low prices and

generous surplus (profits) to producers and processers.

In terms of setting of quality standards, because of the mechanised processing in the dairy

sector, the Amul cooperatives have been able to set the benchmarks (personal communication,

18 Sept. 2017). In other sub-sectors, where little processing is undertaken, the importance of

quality standards drawing upon benchmarking is minimal. In exceptional cases, as in the case of

epidemics such as the bird flu, the state enforces strict measures.

Overall, traders have their own mechanisms to safeguard their interests, whereas the

interests of producers and consumers are not always taken care of. Only the milk sub-sector,

controlled predominantly by cooperatives, displays a balanced pricing mechanism. In rice,

sugarcane, and cotton, the MSP offers some benefits to producers, but they hardly get anything of

the residual claim. In potato and poultry meat sub-sectors, producers (other than those who operate

on industrial scales) are usually at a disadvantage. As to consumers’ interests in the form of quality

standards, so far only the food standards prescribed by the state are the benchmarks.

25
5. The changing structure of value chains and challenges of governance

The structure of agricultural value chains has been changing significantly. CRISIL, a global

analytics company, estimated the organized sector in the dairy industry to grow 25% by 2018

(Mandavia, 2015). The Indian chips and wafers industry, of which potato wafers – in India, chips

or crisps are often referred to as wafers – is a major component, has been growing at about 15%

annually and the trend is likely to continue (Bali, 2017). Similarly, the demand for processed and

packaged food has been growing. Further, organized retail chains, which are at a nascent stage at

present (with a 9% market share in the sector)2, are expected to grow at 12%–14% annually

(CARE, 2017). The industry is already set to expand in a big way with liberal policies encouraging

the entry of multi-brand retail (Singh, 2011). In the future, the issues of certification, food labelling,

aggregation as done in the buyer-driven model, technology-based trading, market integration, and

infrastructure for processing and storage would be much larger and more complex than at present.

Is the institutional structure in India ready to deal with such kinds of value chains?

The value chains controlled by organized retail chains, referred to as the buyer-driven

model, are difficult to visualize in Indian context. In European countries, supermarkets may control

as much as 80% of the market (Gibbon, 2003), but such a figure is unlikely in a diverse country

like India. However, even then, organized retail chains would have a significant share in absolute

terms given the needs of more than 1.2 billion people.

Miller and Jones (2010) proposed several models for structured financial products for

agricultural value chains. It is possible that in the future such products would be integral to

agricultural value chains. As technological advances continue, and with a better information

regime, a new scenario is going to emerge. How will the actors in agricultural value chains behave

2
However, grocery and food account for only 11% market share of the organized retail industry in India, and food
services claim another 7% (ASA & Associates, 2015)

26
under these changed circumstances? Will such changes affect the structure and configuration of

the sub-sectors? Table 4 presents three scenarios for, or versions of, India’s agricultural value

chains, namely buyer driven, trader (middlemen) driven, and producer driven.

Table 4

Scenarios for agricultural value chains in India: Actors and probable outcomes.

Scenario Probable outcomes

Scenario 1 • Monopolistic or oligopolistic market

• Focus on high-value commodities, quality standards or

Buyer-driven (controlled by
private safety standards (as against state-imposed
food chains, modern retail
standards), traceability, and certification
chains, or multinational food
• Greater market orientation of producers, alienation or
corporations)
marginalization of smallholders (Gibbon, 2003)

• Control mechanisms and centres of gravity affected by

the exclusivity of private governance (Trebbin and

Franz, 2010)

Scenario 2 • Decreased bargaining power of producers and

diminished presence – but not total elimination – of

Organized-traders-driven
smallholders (Gibbon, 2003)
(controlled by seed, fertilizer,
• Streamlined mechanism for price discovery
and pesticide companies)—a
• Greater participation in electronic markets
different category of traders
• Orderly procurement
(generally referred to as

middlemen or intermediaries)

27
 • Withdrawal of the minimum support price (or at least

elimination of anomalies in the MSP

Scenario 3 • Producer organizations on the cusp of producer-driven

value chains (Shah, 2016)

Producer driven
• Decreased information asymmetry and agency conflicts

leading to fair practices and improved selection of

product–market mix

• Greater balance between demand and supply

• Better organized storage and distribution

• Standardized financing regime for differentiated or

high-value products (Miller and Jones, 2010)

• Adoption of new-age technologies

• Increased hold on the market by the elite because of

greater control and higher investments after the

institutionalization of small farmers

• Increased prevalence of opportunistic or side-selling

(Francesconi and Wouterse, 2015)

With increased focus on the control of processing exerted by organized buyers (retail

chains), the share of the unorganized market will decrease. In that event, what is the guarantee that

smallholders’ interests will be safeguarded? The literature suggests that in buyer-driven value

chains, firms tend to integrate vertically, and smallholders are kept out to maintain efficiency and

economy (Dolan and Humphrey, 2000; Gibbon, 2003). However, this view is also contested:

28
because of their efficiency and diversity, smallholders are held to be integral to the market and

prominent in the developing economies (Hazell and Rahman, 2014). The rationale behind the role

of small farmers was elaborated by Poulton, Dorward, and Kydd (2010). Mwambi et al. (2016)

found that contract farming was not sufficient for an assured household income. The centre of

gravity in the governance structure is likely to change in such cases. Capital infusion from

corporations to farms shifts the centre of gravity from small, individual producers to food value

chains dominated by corporations: for example, for example, Bayer Crop Science, crop protection

chemicals manufacturer and supplier, tied up with retail food chains, wholesalers, processors, and

exporters through a food chain partnership model (for more details, see Trebbin and Franz, 2010).

This contract buying arrangement from farmers and supply to corporates in agro-food business

shows the exclusivity of private governance in an agro-food system, which also minimizes price

fluctuations and supply uncertainty; thus, the consumer may gain in the long run, but how far the

producers can cope with the situation remains a question.

Producers are powerful in such sub-sectors as cotton and milk whereas processers are

powerful in sugarcane and rice; however, if the market becomes more organized, retails chains are

likely to wield more power.

Organized retail chains can destabilize existing successfully governed value chains such as

that for milk and milk products. In the wake of global integration, indigenous actors may find it

difficult to compete with highly subsidized products from the West. If such practices are

detrimental to the smallholder producers, especially when they comprise mostly small and

marginal farmers, such practices must be strongly resisted or lobbied against.

Financing and technology integration are instrumental in developing value chains and bring

structural changes. For example, the Drum-Net IT platform connects farmers to upstream actors

29
with the help of the Internet, mobile telephone networks, and other wireless devices. Rahman and

Smolak (2014) highlighted the networking role of the Internet by devising a framework for a value

chain based on efficient transactions and interactions. Such networks can be deployed in the value

chain of processed food because “market-based structures trading undifferentiated commodities

are deemed least conducive to value chain finance and value chain development” (Rahman and

Smolak, 2014, p. 228). To counter this drawback, warehouse receipts financing offers a more

viable option for commodity producers in the case of rice, cotton, and soybean, among others.

However, the degree of perishability of commodities governs the feasibility of warehouse receipts

or of structured financing. The emergence of warehousing and collateral management agencies in

India after 2004 has helped formal financial institutions and non-banking finance companies to

mitigate lending risks as well as post-harvest losses (Dey and Alur, 2016).

Johnston and Meyer (2008) argue that the structure of governance within a value chain (in

a sub-sector) affects the effectiveness and sustainability of value-chain finance (VCF) by

facilitating monitoring and enforcement of contracts. In other words, directed governance

structures are the most conducive for direct value-chain finance for those commodities or products

(in a monopolistic market) whenever lead firms have greater control over the quality and quantity

of output. Rahman and Smolak (2014) are in favour of governance structures to formalize value

chain finance, which

leverages the business relationships within a value chain in order to improve the availability of finance

to the various actors. But it is sustainable in situations where governance structures and production

characteristics permit. The onus is on the chain actors to ensure the sustainability of VCF, whether the

financing flows directly from actors within the chain or is accessed from outside sources (Rahman and

Smolak, 2014, p. 230).

30
 However, market-based conditions favouring the integration for value-chain finance and

technology may not be suitable for developing value chains that involve smallholders in large

numbers, as was the case with many of the sub-sectors considered in the present study. Therefore,

a broad range of sustainability goals – including the safeguarding of interests of smallholders and

expanding livelihood opportunities – need to be kept in mind while assessing coordination and

control in a governance structure (Nelson and Tallontire, 2014). Because social regulations can

ensure that the impacts of value chains on small producers are positive, integrating the

smallholders with retail formats or a few lead firms or multinational suppliers is questionable: in

the developing counties including India, exclusively private governance of the agro-food sector

may not be advisable (Blanc and Kledal, 2012). If such integration is considered worthwhile

nonetheless, state support may prove essential to lower the costs incurred by producers to enter

such undifferentiated product or commodity value chains (Escobal and Cavero, 2012).

5. Conclusions

• The type of interaction among actors in a value chain depends on the use and the nature of the

commodity (degree of perishability, frequency of production, type of use) and the technology

used for processing (including its cost and sophistication). Poultry meat and milk are highly

perishable, but because of the difference in the frequency of production and the cost of

processing, the interdependence between producers and processers in the two sub-sectors

varies. Interdependence among actors in rice is facilitated by state interventions, whereas only

a small fraction of the total potato production is processed, mainly because potato is used as a

vegetable. Cotton, being a non-food commercial crop, goes to unrelated (ginning and spinning)

31
 industries for processing, and hence the farmers have to be content with the MSP; and in

sugarcane, cooperatives and millers wield greater power over the value chain.

• Making a value chain more organized allows it to adopt better technology and hygiene and

lowers the extent of fluctuation in prices.

• The centre of gravity in a relatively unorganized value chain lies with non-retailer or traders.

• Market distortion (due to state intervention) in staple-food sectors has undermined farmers’

interest whereas in commercial crops, farmers have benefited, although the sustainability of

such a mechanism remains uncertain. For example, 80% of farmers have not been covered

under the price support scheme in the form of MSP reported by the Chand (2017), while the

crop diversification from staple food crops to high value agricultural commodities has reduced

smallholders’ poverty level in general (Birthal, Roy and Negi, 2015).

Thus, the way standardized global agricultural value chains are governed differs

significantly from the way the relatively unorganized and decentralized local value chains in India

are governed. Control over pricing and over standards is more widely distributed and, in different

value chains, is held by different categories of actors. As discussed earlier, such a feature differs

from that found in standardized value chains, in which the control generally rests with retail chains.

Further, the diversity of controlling actors also ensures that the interests of different actors are

safeguarded. In the milk sub-sector, producers’ interest remains paramount whereas in potato,

traders have a greater say. The sugarcane value chain is dominated by processers, who dictate the

terms of trade. Thus, all these value chains are far from ideal, which safeguard the interests of

every actor.

The emerging globalized trade can be a game changer and can have far-reaching

consequences for the decentralized value chains in the developing countries. Such upstream actors

32
as retail chains can resort to vertical integration and become more influential actors, which changes

the whole dynamics of interaction and may lead to an exploitative regime. In such sub-sectors as

milk and cotton, which feature heavy subsidies to farmers by the state in the developed countries

under such regimes as the Agreement on Agriculture and that of the World Trade Organization,

things can be very different from what they are now. Although change is inevitable, mechanisms

should be in place to safeguard the interests of all the actors, and policies must be tailored to ensure

a non-exploitative regime in agricultural value chains.

33
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 Appendix I: Agricultural value chains: A comparative analysis

Attributes Dairy Paddy Poultry Cotton Potato Sugarcane

Nature of • Harvested • Harvested • Broiler • Harvested once • Harvested • Sugarcane is

Commodity daily once seasonally harvested 4- a year once a year harvested

or twice (1/2/3 times 5 times a • Perishable once a year

• Highly a year) year • High water

perishable • Staple food • Layer – requirement

• No crop about 3-4 • Sugarcane

landholding cycles a more

required year perishable

• Meat highly than sugar

perishable

Type of • Generally • Small and • Industrial • Generally large • All types of • Generally rich

producers small and marginal producers and resource farmers farmers; in

marginal significantly rich farmers some places

41
 • Backyard small farmers

poultry also grow

farmers

Technology • Medium • Adoption of • freshly • Decreasing • Short • Crushing and

scale HYV done dressed productivity duration sugar

adoption of extensively chicken sold • Bt cotton is variety recovery

production • Drought and • Live birds more popular getting technology

technology flood sold by than local adopted increasing

• Productivity resistant wholesalers varieties • Cold efficiency

still low varieties • Hygiene • Adoption of storage and

• Organized • SRI slowly problem drip irrigation processing

players gaining • Limited • Processing technology

processing popularity processing technology advanced

properly • Harvesting getting high

and milling automated

technology

adopted

42
Institutions • Cooperative • Commission • Institutional • Cotton • Contract • Cooperatives

s have had for players Commission of farming • Private Sugar

played an Agricultural • Civil India done mills

important Costs and societies are • Collectives extensively • State Trading

role Prices supporting • Contract • Central Corporation

• After • ICAR- backyard farming Potato

liberalizatio National poultry Research

n, private Rice Institute

players are Research • Industries

coming up Institute

• State

government

Agriculture

dept.

Industry • GCMMF/N • Rice Miller • NECC • CCI/Cotton • No such • Indian Sugar

associations DDB Association/ Association of association Mill

STC Association

43
 International

Repute

Economy • India is self- • Consistent • Most • Increasing • Growing • Production

sufficient in growth in promising production production increasing –

dairy production growth • Employment • Fluctuating but erratic

• Growth • Landholding high in prices • Export

potential s limited processing subsidy

very high

Trade • Export • Basmati rice • Limited • Export quality • Trade • Limited

barriers – is the major export lacking among international

due to SPS export • Bird flu is • Import of long different trade

• Export an export and extra-long states of

barrier – barrier staple cotton India

aroma and

LB ratio

Source: Compiled by authors from several published and unpublished materials

44
 Appendix II: Findings from Interviews

Coordination Control Safeguarding

Dairy Farmers are dispersed. Cooperatives The value adding entities like marketing Because of cooperative-dominated nature,

aggregate the produce and then it is federations and private dairies have the farmers’ interests are safeguarded.

processed by milk unions. Federations control. GCMMF and Mother dairies Consumer’s interest is safeguarded too

market the produce. Private dairies have provide the price benchmarks. because of reasonable margin by

integrated systems – they depend on dairy cooperatives.

farms sometimes.

Paddy Dispersed producers, interlocked market, Government determines MSP Government helps farmers get a basic

processers-trader mix, frequency of Miller-trader combination is the most minimum return. Rice distributed through

interaction between processer and powerful PDS to help consumers.

producer is once or twice.

Poultry The industry mainly is composed of Private hatcheries are the most powerful Government takes action during bird flu to

industrial hatcheries with small proportion entities. NECC helps in private discovery. protect consumers. But farmers do not

of produce provided by backyard farming. Price of live birds fluctuates seasonally have any mechanism, unless the form

Hatcheries depend on chick providers. although price is stable at the processer cooperative or similar entities.

level.

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Cotton CCI procures from farmers. Farmers get Government fixes the MSP, it also has The MSP is a major point of safeguarding

inputs from traders. Input supplier is also access to privilege information on of farmers interest.

the provider of information in the input- production, processing, and other aspects.

heavy crop. Ginners and spinners are the Ginners and spinning mills have the

basic processers. Next level of value control over trade.

addition becomes highly specialized.

Potato Farmers get inputs from local market. Traders control the price and supply. Farm No safeguarding mechanism established.

Input seller often acts as knowledge hub. gate prices are fixed at very low level, any Farmers are vulnerable to price variability

No price discovery of mechanism. Trader upper movement is cashed upon by and market volatility.

is the centre of payment settlement. traders.

Sugarcan Input supplier, farmer and sugar mills are Sugar mills and the association of sugar MSP helps farmers, but payments often

e the major players. Processing is costly. mills are the major players. Government get delayed. Sugar is one of the PDS

Input suppliers provide inputs on credit in fixes the procurement price. commodities from which poor consumers

this high cost farming. get benefit.

46