January 2007

Appraisal of financing mechanisms, marketing strategies

and value-adding opportunities in the organic sector

as tools for enhancing farmers’ income-generation:

a Study of Organic basmati Rice in Uttarakhand, India

Ghayur Alam

Centre For Sustainable DevelopmentDehradun

India

Contents

Page Number

Executive Summary 3

1. Introduction 7

2. Organic Farming in Uttarakhand 9

3. Basmati Rice 10

4. Sunstar Overseas Organic Marketing Strategies

4.1 Organization of Supply Chain, and Role and Responsibilities 11

4.2 Market Initiation 15

4.3 Logistic and Infrastructure 16

4.4 Factors effecting success and failure 17

4.5 Good Practice 18

4.6 Future Development and Challenges 18

5. Uttarakhand Organic Commodity Board’s Organic Marketing Strategies

5.1 Organization of Supply Chain, and Role and Responsibilities 19

5.2 Market Initiation 26

5.3 Logistics and Infrastructure 27

5.4 Dispute Resolution and Arbitration 27

5.5 Factors effecting Success and Failure 28

5.6 Good Practices 29

5.7 Future Development and Challenges 29

6. Sources of Financing for Organic Farming 29

7. Post Harvest Management 33

8. Conclusions and Recommendations 35

9. References 39

1

2

Executive Summary

This study focuses on the cultivation of organic basmati rice in the state of Uttarakhand,

situated in Northern India. 1 The main objectives of the study are to examine a) the

functioning of organic production chains; b) the factors which influence the success and

failures (or limitations) of the chain; c) the availability of finance for setting up and

maintaining the chain; and d) the efficiency of post-harvesting techniques. The study is

based on two main sources: a) a review of three case studies of organic basmati rice in

Uttarakhand; b) data collected through discussions with various actors in the chain, and

c} published sources.

Organic farming has large potential for Uttarakhand. A part of the state consists of plains

and foothills, where most farmers practise chemically intensive farming. Conversion to

organic farming would have both financial and environmental benefits for these areas.

The rest of the state consists of mountains, where the use of chemicals in agriculture is

small. Conversion to organic farming in these areas will pose relatively little difficulty

and provide farmers with a comparative advantage. The foothills of Uttarakhand are well

known for their organic basmati rice. Therefore, cultivation of organic basmati rice

provides an important opportunity for farmers in these areas.

The organic production chains reviewed by the study are both located in the foothills of

the Himalayas. One of them is initiated by a private company called Sunstar Overseas

(referred to as Sunstar in the following paragraphs). It is among the largest traders of

basmati rice in India. The other chain was developed by a public sector agency

Uttaranchal Organic Commodity Board (referred to as UOCB in the following

paragraphs) which was set up by the Uttarakhand government to promote organic

farming in the state. Both chains involve a large number of farmers: while the chain

initiated by Sunstar has about 500 farmers, the UOCB chain involves more than 1200

farmers. Most of these farmers are small and medium size landholders.

1 Uttarakhand was called Uttaranchal until recently.

3

The chain set up by Sunstar was aimed at meeting its business objectives. As one of

India’s largest traders of basmati rice, it needed to develop a secure source of certified

organic basmati rice. It spent about Rs. 13.99 million (Rs. 11195/hectare) from its own

resources during the four years it took to set up the chain. The number of farmers and the

area under organic cultivation has grown considerably since its inception. Sunstar

provides the farmers with a number of services which include training and the supply of

farm inputs (certified seed, biofertilizers and biopesticides) on credit. It has facilitated the

organic certification of farmers by setting up an internal control system (ICS), which has

led to a large reduction in the cost of certification. The company is also responsible for

the marketing of the produce at a pre-agreed price under a five years contract.

The chain set up by UOCB was motivated by the state government’s policy to promote

organic farming. UOCB has made a large investment from public funds in initiating and

supporting the chain for a number of years. The chain has also received support from a

private foundation (The Ratan Tata Trust) set up by a large corporate house.

As in the case of Sunstar, UOCB has set up an ICS system to facilitate the certification

process. As a result, the cost of certification is small: it accounts for only 3% of the total

production cost. UOCB also provides training to farmers in cultivation technology, pest

and disease control and documentation. Not being a business company, UOCB is not

involved in the marketing of organic basmati. It is purchased and marketed by a private

company called Satnam Overseas (referred to as Satnam in the following paragraphs),

which is another large exporter of basmati rice. The company also provides the farmers

with farm inputs on credit.

The case studies show that the cost of setting up an organic production chain is high.

They also show that chains can be financed either through the internal resources of a

company (Sunstar) or through a public-private sector partnership (Uttarakhand state

government and The Ratan Tata Trust). Both modes of finance have been very effective

in promoting successful chains.

4

Most farmers involved in the chains are smallholders and need financial support.

Unfortunately, India does not have special credit facilities or subsidies to support organic

farming. However, the support the farmers receive from the buyers in the form of farm

inputs on credit provides them with much needed support.

In short, both the chains are found to be very successful in motivating a large number of

farmers to adopt organic farming. Some of the factors contributing to their success

include:

Sunstar and UOCB have committed large financial and managerial resources to

support the chains until they become sustainable;

Sunstar and Satnam, being large traders of basmati rice, are able to provide the

farmers with a premium market;

The internal control systems have lowered the cost of organic certification

considerably.

The case studies also show that the chains suffer from a number of limitations. These

include:

Many farmers are illiterate and find it difficult to join the chain as they have

difficulty in maintaining records.

Many farmers grow wheat in addition to basmati rice. The farmers do not receive

a premium price for wheat. This results in a considerable lowering of their profits.

The extent of training is considered by most farmers to be inadequate. A large

majority had received training for only three or fewer days. The two areas where

most farmers would like more training are: preparation of compost, control of

disease and pests, documentation and grading of rice.

The post harvesting techniques used by farmers are inefficient and affect the

quality of rice;

The techniques used for the control of pests and diseases are not very effective.

Especial credit facilities for organic farmers are not available.

5

Based on the case studies, the following recommendations are being made to strengthen

organic basmati chains. These are:

1. The cost of setting up and maintaining a certified organic chain is high. Financial

support to companies and farmers may be necessary to promote these chains.

2. Public-Private collaborations to finance and set up organic production chains need

to be promoted.

3. The quality of training provided to farmers is poor and needs to be improved.

4. Improved techniques to control pests and disease using environmentally friendly

methods need to be developed and diffused.

5. The post-harvesting techniques employed by the farmers need to be improved.

6. Premium markets need to be found for all the crops being produced organically,

to increase the overall profitability of organic cultivation.

6

1. Introduction

Organic farming is ideal for Indian agriculture.2 It is estimated that around 30% of the

total cultivable area in India, where irrigation facilities are available, is covered by green

revolution technology. Farmers in these areas have become heavily dependent on

chemical inputs such as fertilizers and pesticides. This has resulted in environmental

degradation, pest resistance and health hazards.3 Organic farming can reduce the ill

effects of intensive farming in these areas.4

The remaining 70% (approximately) of agricultural land lacks irrigation facilities.

Farmers in these areas practise rainfed or dry farming and, generally, do not use agro-

chemicals. For example, according to an estimate made by the Institute of Integrated

Rural Development in 2001, only one fifth of India’s dryland farmers use chemical

inputs, the rest relying upon manure and green compost for the maintenance of soil

fertility. These farmers can convert to organic farming with comparatively little

difficulty. Organic farming provides an attractive possibility for them to increase their

incomes for a number of reasons. These include: a) lower costs, as the requirement for

commercial inputs (such as chemical fertilizers) is small in organic farming. This is very

important for small and marginal farmers, many of whom purchase inputs on credit, and

pay high interest; b) the high premium for organic products. This, along with low cost of

inputs, provides an opportunity to obtain higher profits; c) higher labour intensity. This

provides family members with an opportunity to be employed in farming activities. 5

Recent years have seen an increasing interest in organic farming in India, and the Central

and State Governments have taken a number of steps to promote it among farmers and

consumers. A number of programmes and institutions including a National Programme

on Organic Farming (NPOF) and a National Centre for Organic Farming (NCOF) have

been set up by the Central Government. Some state governments have also initiated

programmes to encourage farmers to convert to organic farming. Steps have also been

2 GOI (2003)

3 Alam (2004)

4 CII (2004)

5 Das Kasturi (2004)

7

taken to facilitate the organic certification process, which is necessary for obtaining

premium price in the market.

As a result of these initiatives, organic farming has seen a rise in popularity, and the area

under organic cultivation has increased. By the year 2004-05, the area under organic

cultivation was estimated to be about 2.5 million hectares.6 A large proportion of certified

organic production from India is directed at export markets, with the majority being

exported to Europe, USA, Australia, New Zealand, Israel and Middle-Eastern countries.

The exports consist of about 35 commodities, including cotton, spices, tea and basmati

rice.

The domestic market for organic produce is small; it is estimated to be about Rs. 5

million per year.

Although interest in organic farming has increased, supply chains involving organic

farming have not been studied adequately. This study is an attempt to fill this gap. The

study focuses on the cultivation of organic basmati rice in the Indian state of

Uttarakhand. It is based largely on empirical information collected from farmers engaged

in the cultivation of organic basmati and the private and public sector actors engaged in

setting up the organic supply chain. The main objective of the study is to examine the

following:

Organization of the supply chain, including: marketing strategies, the roles of

various actors in the chain, infrastructure requirements, factors affecting the success

and limitations of the chain, and future developments and challenges;

Sources of financing used in organic production chains;

Post-harvest practices and their role in improving quality and value addition;

Conclusions and recommendations.

6 http://www.ifad.org/media/press/2005/35.htm

8

2. Organic Farming in Uttarakhand

Organic farming is highly relevant for Uttarakhand. Farmers in two of its districts

(Dehradun and Udhamsingh Nagar) largely practise chemical intensive farming,

characterized by high use of fertilizers and pesticides. This has caused serious damage to

the soil, ground water and health. Organic farming provides a sustainable option which

can reduce the farmers’ dependence on chemical inputs without affecting their income.

The rest of Uttarakhand is characterized by hilly and mountainous terrain. This area has

very limited irrigation facilities. In some districts only about 5% of the cultivated area is

under irrigation.7 Most farmers in these areas practise traditional farming methods; the

adoption of High Yield Varieties (HYVs) and use of chemical fertilizers is small. 8

According to some estimates, less than 10% of the cultivated area is under improved seed

and fertilizer respectively.9 Even in areas with a higher incidence of fertilizer use, the

quantity of fertilizer used is very low. The average productivity of the region is low, and

most farmers practise subsistence farming.10 Organic farming provides these farmers with

an opportunity to increase both yields and incomes.

Realizing its importance, the Government of Uttarakhand has taken several steps to

promote organic farming. The most important of these are the formation of the

Uttarakhand Organic Commodity Board and the Centre for Organic Farming (COF)

which provides technical capabilities and logistic support to the Board. The Board and

COF provide technical and marketing support to farmers and assist them in obtaining

organic certification. They have set up an Internal Control System to reduce the cost of

certification by international certification agencies.

In addition to setting up the Board, the State government has taken the following steps to

promote organic farming:

7 Teli (1992)

8 The average yearly consumption of fertilizers in the hilly areas of Uttarakhand was only 4.12 kg/hectare during 2002-02.

Calculated from data given by the Uttarakhand government at http://www.geocities.com/agriculturedeptt_ua/fert_con.htm

9 Dobhal (1987).

10 Kumar and Tripathi (1989).

9

1. The Uttarakhand State Seed Certification Agency has been reconstituted as the

Uttarakhand State Seed and Organic Production Certification Agency.

2. State owned farms are being converted to organic production and developed as

centres of excellence for different organic commodities.

3. Research institutions in the state have been directed to carry out research on various

aspects of organic farming.

4. The staffs of agriculture and horticulture departments are being trained in Organic

Farming methods.

5. The agriculture department of the state has been directed not to promote chemical

practices in hill regions.11

3. Basmati Rice

Basmati accounts for a large proportion of rice export from India; about Rs 3,0303

million worth was exported during 2004-05.12 Most of this is exported to the Middle East,

constituting a 65% share of the total basmati rice exported. The UK and US account for

20% of the exports. A large proportion of the export is unbranded, and buyers sell

basmati rice under local brands. However, major players are now shifting focus to selling

under their own brands.

Branded basmati is becoming important even in the domestic market where it accounts

for about a 30% share. The domestic market for branded basmati rice is estimated to be

about Rs. 4500 million.13

Traditionally basmati has been grown in the foothills of the Central Himalayas, an area

largely within the newly created state of Uttarakhand. In the past, farmers grew

traditional varieties of basmati and did not use chemical inputs. With the advent of the

green revolution, this situation changed considerably as many basmati farmers began

cultivating high yielding varieties of basmati, using chemical inputs. Recent years,

however, have seen a reversal of this trend. As a result of public and private sector

11 See the web site of the Uttarakhand Organic Commodity Board at http://www.organicuttaranchal.org/policy.asp

12 http://www.thehindubusinessline.com/2006/11/03/stories/2006110302181300.htm

13 http://www.satnamoverseas.com/kohinoor1.htm

10

initiatives, a large number of farmers in the foothills of Uttarakhand are reverting to the

organic cultivation of basmati rice.

As the domestic market for organic basmati is small, most is exported. The countries of

the European Union account for much of these exports.

The two organic basmati production chains are described in the following paragraphs.

4. Sunstar Overseas Organic Marketing Strategies

4.1 Organization of Supply Chain, and Role and Responsibilities

Sunstar Overseas Ltd. initiated an organic basmati rice project in the foothills of the

Himalayan lowlands, called the Tarai region, in 2001. The area was considered suitable

for organic farming for three main reasons: a) the farmers were already growing

traditional basmati varieties, which are suitable for organic farming; b) the farmers were

used to cultivation without the use of chemical inputs, including fertilizers, pesticides and

fungicides; and c) the cropping pattern practiced by the farmers was also found to be

suitable for organic farming. These farmers are used to cultivating a single crop, which

makes possible the cultivation of green manure crops to provide the land with additional

nutrients.

Sunstar provides the farmers with technical and certification support and is responsible

for the marketing of the produce. It has entered into a five year contract with farmers,

which covers a number of aspects, including the type of crop to be cultivated, price,

purchasing policy, terms of payment, the responsibilities of both parties, conditions of

non-compliance and termination of contract.

11

The programme began in 2001 with 100 farmers who cultivated organic basmati rice on

600 hectares. The number of farmers working with the programme has increased and

more than 500 are now cultivating organic basmati for Sunstar. These farmers have

formed a federation, called Federation of Small Farmers of Khaddar Area, and the

organic basmati they produce has been certified as fair trade since 2004. The Farmers’

Federation supplies organic basmati rice to Sunstar which markets it in

the domestic and export markets, including fair trade markets in

Switzerland and France. The additional earnings from fair trade are used to

support educational programmes for women and children, pre-financing the farmers

during harvest periods and facilitating organic certification.

The farmers working with the company include both small and large holders. The

average landholding varies from 0.24 hectare to 16 hectares. Most farmers lack formal

education though some can read and write. This has been found to be an impediment in

the way of building technical and organizational capabilities among farmers.

4.1.1 Cost of setting up the project

As Table 1 shows, Sunstar has incurred significant cost in setting up the project.

According to company data, it spent Rs. 13.99 million (Rs. 11195/hectare) during the

four years period 2001-04 to set up the project. A large proportion of the cost was

accounted for by the salary of its staff and the premium paid to farmers during the

conversion period.

4.1.2 Profitability of Organic and Conventional Basmati Rice

Organic farming is found to be more profitable for basmati rice growers than growing

using conventional methods. Although the yield of conventional basmati is slightly

higher than that of organic basmati, the low cost of cultivation and a significant premium

in the market enables farmers to receive higher profits from organic farming. Compared

to a profit of Rs. 13432 per hectare from conventional farming, the profit from organic

farming was found to be Rs. 15338 per hectare. See Tables 1 and 2.

12

Table 1

Costs of basmati rice per hectare (Organic and Conventional)

ACTIVITY

Cost Rs/hectare

Organic Conventional

Biofertilizers and manure/

Chemical Fertilizers 2727 3338

Pesticides/fungicides/weedicides 0 1675

Seed 510 480

Farm Preparation (Tilling) 4200 4200

Puddling 1500 1500

Transplanting 2000 2000

Weeding 3200 1600

Irrigation 1800 1800

Harvesting (cutting, threshing &

Loading) 3200 3200

Cost of Finance 400 900

Total 19537 20693

Source: Prepared from Katyal Ajay, “Appraise of Certification Costs for Farmers and Farmer’s Organizations under Different Certification Schemes-Sunstar Overseas Limited, India”, Prepared for Food and Agricultural Organization, 2006.

13

Table 2

Profitability

Average Yield

(ton/Hectare)

Rate

(Rs./ton)

Amount

Received by

Farmers

(Rs./Hectare)

Cost of

Production

(Rs./Hectare)

Profits

(Rs./Hectare)

Organic Farming 2.25 15500 34875 19537 15338

Conventional

Farming

2.62 13000 34125 20693 13432

Source: Prepared from Katyal Ajay, “Appraise of Certification Costs for Farmers and Farmer’s Organizations under Different Certification Schemes-Sunstar Overseas Limited, India”, Prepared for Food and Agricultural Organization, 2006.

4.2 Market InitiationAs mentioned above, Sunstar is responsible for the marketing of the organic basmati rice

produced by the farmers working with their project. With a total sale of Rs. 16,000 metric

tons rice (including exports) and a turnover of more than Rs. 3200 million during 2005-

06, Sunstar is one of India’s leading basmati rice trading companies.14 As other major

basmati rice companies, it depends heavily on exports, which account for 85% of its total

sale.15 It exports rice to more than 20 countries, including major global brands in Europe,

USA, Saudi Arabia and UAE. Its important European customers include wholesalers

such as: Masterfoods, Soufflet Almenteire, Euricorn and Herba Group. They, in turn,

supply to Sainsbury’s and Tesco.

Sunstar is also an important player in the domestic market and sells basmati rice under

the brand names Hello Basmati, Gateway of India and Neelkamal. Hello Basmati is

exclusively used for the marketing of organic rice. Sunstar sold 51,000 metric tons of

basmati rice in the domestic market during 2005-06.

14 www.Sunstar overseas.com

15 http://sify.com/finance/fullstory.php?id=14022384

14

4.3 Logistics and Infrastructure

Sunstar has a number of large and modern rice processing mills and an extensive

infrastructure to provide services to farmers. These services include the supply of seeds

and other inputs (biofertilizers and biopesticides), training in cultivation practices

(especially pest control) and certification support. Furthermore, the company is

responsible for the procurement, processing and marketing of the organic basmati

produced. In order to provide these services the infrastructure that has been set up is

large. It includes:

4.3.1 Technical support and supply of inputs

a) Cultivation Practices. Although the farmers had been cultivating traditional basmati rice

for a long time, their cultivation practices were not very efficient. The company has set

up an agricultural extension service to train farmers in improved cultivation practices.

Support provided by Sunstar has led to an improvement in the quality and yield of crops.

b) Preparation and use of compost, biofertilizers and green manure. In the past farmers used cow

dung as manure without turning it into compost, which was not very efficient. The

company has provided farmers with information and training on the preparation and use

of compost. It also encourages farmers to use biofertilizers, such as phosphate bacteria,

Azobacter, primary EM. Furthermore, some farmers plant green manure crops called

barseem ( Egyptian clover) and Susbania (Dancha) to improve land productivity.

c) Pest control: In the past, the farmers did not use any pest and disease control methods.

The company has trained them to use biopesticides, which are recommended by the

certifying agencies. It also provides the farmers with these inputs on credit.

15

4.3.2. Facilitation of Certification

Sunstar has facilitated organic certification for its farmers. The certification is provided

by SGS and ECOCERT. Earlier, until 2004, only SGS provided certification. Since 2004

ECOCERT has also been providing additional certification under DEMETER standards

of BIO-DYNAMIC farming.

In order to reduce the cost of certification, Sunstar has set up an internal control system

(ICS). Its personnel assist the farmers in keeping the records needed for ICS. The

documentation is carried out by farmers in their own language.

4.4 Factors effecting success and failure

Success

Selection of farmers who were already following near-organic cultivation

practices

Ability and willingness of Sunstar to commit large (and long term) financial and

managerial resources.

Company’s position as an important player in global and domestic basmati rice

market. This has enabled it to provide the farmers with a secure and profitable

market.

The setting up of an internal control system, which has lowered the cost of

organic certification.

Failures (limitations)

Many farmers are illiterate and find it difficult to join the project as they have

difficulty in maintaining records.

Lack of special credit facilities for organic farmers.

The cost of seeds, biofertilizers, biopesticides and composts is high. Techniques

to reduce these costs need to be developed. The use of locally available inputs

needs to be promoted to reduce cultivation cost.

4.5 Good Practices

16

This is an example of a successful chain developed by a private company to meet the

demands of its export market. The main reasons for the success of the project are: a) the

choice of an area where chemical inputs were not being used; b) the ability and

willingness of the company (Sunstar) to invest large financial and managerial resources

to provide farmers with support for all major stages, including production, certification,

procurement, storage, processing and marketing. Other good practices responsible for the

success of the project include:

The farmers are organized into a Federation. They are certified as Fair Trade

producers, which enables them to receive a higher price for their produce.

The company has complete control over the various stages of the chain. This

ensures high quality of production.

The company has a strong agri-input distribution network.

The company buys back all the production, so the farmers are assured of a

premium market.

The technology being transferred by the company is easy to adopt.

The project has been successful in providing farmers with an opportunity to acquire

organic certification and earn higher profits. In addition to economic benefits, the farmers

have received a number of other benefits. These include training in more efficient

cultivation practices, pest and disease control methods and compost making techniques.

A number of long term benefits such as improved soil condition have also occurred.

4.6 Future Development and Challenges

As the project has been successful, there are good opportunities for the expansion

of the project to include many more farmers and cover a larger area.

As the farmers’ confidence has grown, it is now possible to get farmers interested

in “biodynamic” farming.

17

5. Uttarakhand Organic Commodity Board’s Organic Marketing Strategies 16

The following paragraphs describe the case of organic basmati being promoted by the

Uttarakhand Organic Commodity Board (UOCB). The section is largely based on two

recently prepared studies. The first study, which focuses on one block (Kashipur) of

Udhamsingh Nagar was carried out by the UOCB for FAO. It covers 46 farmers in 11

villages. This study is hereafter referred to as the UOCB study.17

The other study is based on data collected from 140 farmers, belonging to seven blocks in

Udhamsingh Nagar and Dehradun districts of Uttarakhand. The data was collected in

2005 and pertains to 2004. This study is hereafter referred to as Alam and Verma.18

5.1 Organization of Supply Chain, and Role and Responsibilities

UOCB supports a large programme to promote the cultivation of organic basmati in three

districts of Uttarakhand. The programme was initially set up in 2002 by a World Bank

supported project called Diversified Agriculture Support Project (DASP), whose

objective was to promote the diversification of agriculture and increase farmers’ income

through higher yields and value addition. On the completion of DASP in 2004, the

organic basmati programme was taken over by UOCB, and renamed Organic Basmati

Export Program (OBEP).

UOCB primarily performs a facilitating role by a) motivating farmers to become organic

growers; b) provide training and technical inputs; c) arrange for organic certification; c)

help in the marketing of organic rice at a premium. The Board has appointed a number of

field officers who carry out these functions. Furthermore, the Board has encouraged the

formation of Farmers’ federations. These federations act as links between farmers, the

Board, and the buyers. The Board does not market the rice directly.

16 The Uttarakhand Organic Commodity Board was set up by the Uttarakhand government in 2003 to promote organic

farming in the State.

17 Srivastva (2006)

18 Alam and Verma (2006)

18

Initially, the programme was confined to Dehradun district and included only 12 farmers,

covering 19.8 hectare. Encouraged by the positive response of farmers, the program was

expanded to include farmers in Udham Singh Nagar district. It was further expanded in

2006 to cover another district, Haridwar.

Table 3

Status of Organic Basmati Cultivation (2006)

District

Total

Organic

area

(ha.)

O' Year

area

(ha.)

Ist Year

area

(ha.)

Certified

Organic Total

Farmers

No. of

village

covered

Dehradun 385.3 219.38 20.14 145.78 581 86

Udhamsingh

Nagar 392.5 261.9 57.3 73.3 457 83

Haridwar 191.58 191.58 0 0 181 30

Total 969.38 672.86 77.44 219.08 1219 199

Source: Alam Ghayur and Deepti Verma, “Cost Benefit Analysis of Organically Produced Crops Grown

in Dehradun and Udhamsingh Nagar”, Prepared for Centre for Organic Farming, Dehradun, October 2006

Currently, a total of 1219 farmers belonging to 199 villages are involved with the project.

The area under organic basmati is about 970 hectares, 219 hectares of which is certified.

Of the rest, most (672 hectares) is in year 0. For details, please see Table 3.

19

Table 4

Production and sale of certified organic basmati rice (2005)

District

Certified Organic

Area

(ha)

Qty

(qtl)

Rate

(Rs/qtl)

Value

(Rs)

Dehradun 102.51 732.73 2100 1538733

U.S.Nagar 32 365.14 2100 766794

Total  134.51 1097.87  2100  2305527

Source: Alam Ghayur and Deepti Verma, “Cost Benefit Analysis of Organically Produced Crops Grown

in Dehradun and Udhamsingh Nagar”, Prepared for Centre for Organic Farming, Dehradun, October 2006

The production of certified organic basmati rice in 2005 was 109.8 tons. It received a

premium price of Rs. 21000/ton. The total value of the organically certified basmati rice

sold by farmers working with the project was about Rs. 2.3 million in 2005. See Table 4.

Each block has two Farmers’ Federations and all the farmers working with the Board are

members. Farmers can join the Federation on payment of Rs. 50. Furthermore, the

farmers pay 2% of their sale to the Federations, which provide the farmers with storage,

processing and transport facilities. With increased experience the Federations have

become competent to negotiate terms and conditions for the sale of their produce. To

some extent they are also involved with the training of farmers and supply of farm inputs.

The farmers working with the Board receive organic certification from internationally

renowned certification agencies including IMO Control, ECOCERT and USOCS. The

process of certification is facilitated by UOCB. As most of the farmers involved with the

organic basmati programme are smallholders, they can not afford to pay the cost of

certification individually. In order to reduce the cost of certification UOCB has set up an

internal control system (ICS). As part of this system the internal inspection is carried out

20

by UOCB inspectors. Only a small number of farms are inspected by the external

inspectors, which considerably reduces both the time spent and cost. As a result of ICS,

the cost of a visit by the staff of the external certifying agency is reported to have come

down from an average of Rs. 3000/ man day to Rs. 350 / man day. As shown in Table 5,

the cost of certification accounts for less than 3% of the total cost of production.

Table 5

Cost of Certification by IMO

S.N. Activity Amount

(Rs./hectare)

1 External Inspection by IMO 194.50

2. Internal Inspection 79.73

3 Certification charges 274.23

4Total Cost of Cultivation

10479.58

5 Cost of certification as percentage of cost

of cultivation

2.69 %

Note: The certification and production cost figures relate to Kashipur block in

Udhamsingh Nagar district. However, they are representative of the rest of the area.

The lower cost of certification makes it possible for small farmers of the state to

participate in the organic programme and receive premium prices for their products.19 The

cost of certification is expected to be reduced further as Uttarakhand State Seed and

Organic Production Certification Agency is expected to be recognized soon as an organic

certification agency.

19 The ICS system is being used for other crops also. A total of 1792 farmers with 693.08 hectares land in 162 villages had been

certified as organic by 2003-04.

21

In addition to facilitating the certification of farmers, UOCB has also arranged for the

certification of a rice-processing mill for export. Prior to this, Uttarakhand did not have

an organic certified mill. The Board has also facilitated the certification of more than 10

warehouses.

5.1.1 Production Cost

The average cost of production of basmati rice in Udhamsingh Nagar is found to be Rs.

10205.35 per hectare. A very large proportion of this is accounted for by the cost of

labour employed in various operations, especially ploughing, transplantation, irrigation

and harvesting. The other important component of production cost is the expense of pest

control. The profitability of organic basmati cultivation was found to be Rs. 19371 per

hectare. See Tables 6 and 7.

22

Table 6

Production Cost of Organic basmati Rice

Activity Average Cost Rs. Per

Hectare

Ploughing 616.05

Seed 188.10

Nursery Preparation 363.10

Transplantation 1806.55

Irrigation 535.73

Manuring 270.25

Pest Control 1339.27

Spraying 604.18

Transportation 940.47

Weeding 1086.30

Harvesting 2455.35

Certification 274.23

TOTAL 10479.58

Source: Srivastva Ashish (2006), “Appraisal Of Certification Cost for Farmers and Farmers Organisations under Government Scheme in Uttaranchal”, Prepared for the Food and Agricultural Organization.

23

Table 7

Cost of Production and Profitability (Rs./hectare)

AMOUNT

1Average cost of cultivation

10479.58

2 Production (kilograms) 1837

3 Sale value @ Rs. 16.25 per Kg 29851.25

4 Net Profit 19371.67

Source: Srivastva Ashish (2006), “Appraisal of Certification Cost for Farmers and Farmers Organisation under Government Scheme in Uttaranchal”, Prepared for the Food and Agricultural Organization.

The study carried out by Alam and Verma has compared the profitability of organic

basmati rice with the non-basmati rice using conventional (based on chemical inputs)

farming methods. The study finds that the average yield of the non-basmati varieties is

about three times higher than that of organic basmati. However, because of the low price

fetched by these varieties, their profitability is lower than organically grown basmati rice.

The study found that the difference in the profit was Rs. 3442 per hectare. 20

It must, however, be stressed that these figures relate only to rice; they do not indicate

overall profitability of the whole year. In addition to organic basmati, most farmers grow

another crop, which is wheat in most cases. The overall cost-benefit of organic farming

depends on the profitability of both rice and wheat. We find that the average yields of

organically grown wheat are considerably lower than the wheat grown by conventional

20 Alam and Verma (2006)

24

farming methods.21 As this wheat is not sold at a premium, this affects the overall

profitability of organic farming. Most farmers feel that the economics of organic farming

will improve only when all the crops grown on the farm are sold at a premium.

5.2 Market Initiation

As mentioned above, UOCB is not directly involved with the marketing of organic

basmati rice. However, it does play an important role by helping the farmers to select a

suitable buyer. During the first two years of the programme (when the farmers’

federations were weak) UOCB played an active role in choosing a marketing strategy. It

focused on the export market and chose Rapunzel of Germany as the buyer. In 2004-05,

85 tons of Organic Basmati rice was exported to Rapunzel .

In 2005 the farmers Federations felt that the prices they obtained were too low, and they

approached UOCB requesting them to look for a new buyer. This time the Federations

were closely involved in negotiations with a number of companies. As a result of these

negotiations, a three years contract has been signed with Satnam, a large exporter of

basmati rice. 175 tons of organic basmati was sold to Satnam at a price of Rs. 21000 per

ton.22

With about a 10% share, Satnam is among the major exporters of basmati rice from

India.23 Its Kohinoor brand is sold in 57 countries through two wholly-owned subsidiaries

in the US and the UK and a network of 45 distributors.24 Its rice is sold by leading global

retail chains such as TESCO, Harrods, Costco, Coles, B.J.’s, Somerfield, Whole Food,

Tiger Brands International etc.

21 In Dehradun district they were found to be 35% lower. See: Alam and Verma (2006)

22 http://www.organicuttaracnchal.org/products_marketing.asp

23 http://www.thehindubusinessline.com/bline/iw/2005/09/04/stories/2005090400200900

.htm

24 http://www.thehindubusinessline.com/2004/06/02/stories/2004060200611200.htm

25

In addition to exports, Satnam also has a strong presence in the domestic market where its

premium Kohinoor brand has a 35 per cent share.25 Satnam’s total turnover during the

financial year 2005 was Rs. 5030 million, with net profit of Rs. 179 million.

The company hopes to increase its market in the EU. It has set up a processing

mill in the UK, which started functioning in the middle of 2005. This is expected to help

the company to supply processed basmati to EU markets.

5.3 Logistics and Infrastructure

As UOCB is not involved in the marketing of basmati it does not have a marketing

infrastructure. However, it has set up an extensive infrastructutre to train farmers in

various aspects of the organic cultivation of basmati. Broadly speaking, the training

covers documentation, cultivation practices, pest and disease control, compost

preparation and post-harvest management. Furthermore, UOCB has set up an internal

control system (ICS) and its personnel help farmers to maintain records and carry out

internal inspections. Until recently, UOCB was also engaged in the procurement and

processing of the paddy. However, this role has now being taken over by Satnam, which

already has a large infrastructute to procure, store, transport, process and market organic

basmati.

5.4 Dispute Resolution and Arbitration

According to the contract between the Federations and Satnam, disputes between the two

are to be settled directly. UOCB has no role in the resolution of disputes between farmers

and buyers. However, as UOCB is a public agency, it may provide advice to farmers

involved in a dispute.

25 http://www.thehindubusinessline.com/bline/iw/2005/09/04/stories/2005090400200900

.htm

26

5.5 Factors Effecting Success or Failure

Success

UOCB (and DASS before it) had access to large public and private funds to set up

an organic project. As it is a public agency, it has strong governmental support.

UOCB has been able to set up efficient ICS, facilitating organic certification.

Farmers are happy with organic farming because of reduced exposure to chemical

pesticides and improvement in soil condition.

Ensured Premium market

Failure (Limitations)

Farmers have converted only a small proportion of their land to organic basmati.

Although the area under organic basmati rice has increased considerably, this is

largely because the number of farmers has increased. The intensity of organic

cultivation is low; farmers participating in the project had converted only 16% of

their land to organic farming in 2004. This situation has not changed much since

then.26

While the price of organic basmati is high, it does not compensate for the loss of

yield (and profits) in organic wheat. Farmers were reluctant to increase area under

organic farming, as they were not prepared to bear the losses resulting from the

expected decline in wheat yields.

The extent of training is considered inadequate by most farmers. A large majority

had received training for only three or fewer days. The two areas where most

farmers would like more training are: preparation of compost, control of disease

and pests, documentation and grading of rice.

The domestic market for organic basmati is small.

Lodging of traditional basmati varieties. 63% of the farmers were unhappy with

the varieties of basmati included in the organic programme because of the lodging

problem, which results in a loss of yield. 27

26 Alam and Verma (2006)

27 ibid.

27

Difficulty in pest and disease control. 55% of the farmers reported pests and

diseases to be an important problem. Their ability to meet this challenge is limited

by a number of factors. These include: 28

Inadequate training in biocontrol methods.

Unavailability of effective biocontrol agents.

Ineffectiveness of biocontrol methods

5.6 Good Practices

Dedicated team of field workers

Good relations with farmers

Government support

Efficient ICS

5.7 Future Development and Challenges

Increasing the intensity of organic basmati cultivation by expanding the area

under organic basmati.

Finding a premium market for wheat and other organically grown crops.

Building a premium domestic market for organic products to reduce dependence

on exports.

Train farmers in efficient pest and disease contiol techniques.

6. Sources of Financing for Organic Farming

Credit is vitally important for small farmers if they are to adopt new technology and

cultivation practices. It is particularly important for organic farmers as they may suffer

loss of income because of the loss of yields during the conversion period.

In India, agricultural credit is facilitated by the National Bank for Agriculture and Rural

Development (NABARD), which was set up as an apex development bank for this

purpose. Based on the rules and schemes devised by NABRAD, credit is made available

by commercial banks (50%), cooperative banks (43%), regional rural banks (7%).29

28 ibid.

29 http://agmarknet.nic.in/rice-paddy-profile_copy.pdf

28

According to NABARD, Rs 1,25,3090 million were provided as credit to agriculture

during 2004-2005.30 The Indian government plans to double this amount during the three

years’ period between 2004-05 and 2007-2008.

Institutional agricultural credit is available for short, medium and long terms. The main

schemes under which short and medium term loans are available include:

1. Crop Loan. The loan is available to all farmers for cultivation purposes. Its

repayment period is 18 months or less.

2. Produce Marketing Loan. This is given to help farmers to store produce so as to

avoid distress sale. The loan is available for a maximum period of six months.

3. Kisan Credit Card Scheme (KCCS). This provides farmers with running account

facilities to meet their credit needs when necessary. The credit limit is based on

the size of land-holding and cropping pattern. It is available to farmers with good

track records for the last two years. Almost 60 million credit cards have been

issued. 31

4. National Agricultural Insurance Scheme (NAIS). This provides insurance and

financial assistance to farmers in case of crop failure due to natural causes, pest

and disease attack. Its other objective is to provide assistance to encourage

farmers to adopt efficient cultivation practices and introduce high in-puts.

5. Agricultural Term Loan. This is a long term loan given by commercial banks to

create assets to increase agricultural income. The activities covered by the loan

include: minor irrigation facilities, mechanization of farming activities,

introducing horticultural crops, dairy, poultry, sericulture, dry/waste land

development etc. The loan is offered as direct finance to farmers with a repayment

period between 3 and 15 years.

In addition to the above mentioned schemes, Self Help Groups (SHGs) are also an

important source of small credit (micro-credit) to small farmers. The programme is linked

with commercial banks, regional rural banks and cooperative banks which permit village

30 http://www.nabard.org/introduction.asp

31 ibid.

29

level SHGs and micro-finance institutions to borrow with relaxed security requirements.

The agencies involved in the schemes are NABARD, banks, NGOs and SHGs members.

India’s SHG programme is now the biggest in the world. More than 2 million SHGs, with

a total bank credit of Rs 11,3980 million, were reported to be functioning in 2005-06. 32

Another 3,85,000 SHGs were expected to avail themselves of credit facilities during

2006-07.

Although the extent of credit provided to agriculture has increased, it is believed to be

still too small to meet farmers’ needs. Firstly, only a very small number of farmers have

access to institutional credit. In fact, in some states such as Andhra Pradesh and Uttar

Pradesh up to 70% of the farmers do not have access to institutional credit and depend on

private money lenders to meet their credit needs.33 Even worse, the resources available to

finance the credit needs of SHGs are enough to meet only 5% of the requirement. 34 The

average loan amount per beneficiary works out to just about Rs 2,000. It is too small to

make a significant contribution. 35 Unless the credit resources available are increased

substantially, the government policy objective to meet farmers’ need for credit will be

only partially fulfilled.

The case studies reviewed here show that setting up an organic production chain requires

substantial financial resources. In Sunstar’s case the cost of setting up the organic

production chain has been born by the company from its internal resources. As the

company is a large trader, it has adequate resources to initiate and sustain the chain until

it becomes profitable. In addition to the expense of initiating the project, the company has

also born heavy expenditure in setting up separate storage, transportation, processing and

marketing facilities. It has also paid the farmers a premium during the period of

conversion.

32 Naik S D (2006)

33 http://agmarknet.nic.in/rice-paddy-profile_copy.pdf

34 ibid.

35 Naik S D (200)

30

Most of the farmers in the organic chains are small, and their access to credit is limited.

By and large, they have to depend on their own resources to finance farming operations.

Although most farmers working with Sunstar are found to use agricultural credit from

various commercial banks, the volume of the loans is small: the average loan taken by

farmers for the organic cultivation of paddy is about Rs. 4000 per hectare. Loans from

banks are available at interest rates varying between 9.5% to 12% per year. The local

money lenders give credit at much higher rates, between 24% and 36%.

In addition to credit from banks the farmers also receive inputs (seeds, biopesticides etc.)

on interest free credit from Sunstar. This amount is deducted at the time of harvest.

In the case of UOCB, a public-private sectors partnership has provided the resources to

set up the chain. While the Uttarakhand government supports the activities of the UOCB,

The Ratan Tata Trust provides financial support to the Centre of Organic Farming which

looks after the training of farmers and ICS. The buyer of organic basmati (Satnam)

finances post-harvest operations. The farmers do not receive direct financial support or

subsidies. As with other small farmers, they have only limited access to institutional

credit. Although they have formed SHGs, the loans available through micro credit

schemes are insufficient for their credit needs. However, these farmers receive seed and

other inputs (biopesticides and biofertilizers) from Satnam (the buyer) on credit. This

amount is deducted at the time of harvest. The inputs are supplied to farmers through the

Federations.

7. Post Harvest Management

About 9% of paddy is reported as lost in India due to inefficient post harvest

management, including inappropriate methods of harvesting, storage, transportation and

processing. Furthermore, poor post-harvest management has a serious effect on the

quality of rice. Efficient post-harvest management is particularly important for organic

basmati as it is mostly sold in the export market, which is highly quality conscious.

31

Timely harvesting, correct methods of drying, avoiding damage during mechanical

handling, avoiding contamination, grading, effective packaging for storage to maintain

optimum moisture, protection from pests and rodents are some of the measures necessary

to limit post-harvest losses.

According to Sunstar’s agreement with the farmers, Sunstar alone is responsible for the

post-harvest management of organic paddy. The company has three large, fully

mechanized modern processing plants. The processing technology and machines have

been obtained through a technical collaboration with Cimbria, Buhler (Germany) and

Satake (Japan). This enables the company to produce rice of a quality which is acceptable

globally.

The company maintains separate facilities for the storing, packaging, and delivering of

organic basmati rice to market. Following its procurement from farmers’ stores, paddy is

brought in clean sacks and stored in a separate area. This is taken to the factory where the

samples are tested for microbiological contamination and foreign material. The processed

rice is delivered without delay so that the chances of infestation are minimized. However,

in spite of these precautions, between 5-7% of the rice is lost due to infestation.

As especial care is required in the storage, processing, transport and marketing of organic

rice, the handling costs are considerably higher than the costs associated with

conventionally grown rice. For example, according to Sunstar, the labour cost involved in

the processing, packaging and marketing of organic rice is 40% higher than conventional

produce. Similarly, marketing costs are higher; the volume of organic produce sold is

smaller than conventional produce, but the cost of marketing is the same.

The cost of transportation (freight for export) of organic basmati is between 20-25%

higher than conventional basmati. This is because special care has to be taken to prevent

the rice being contaminated during shipment. The cost is also higher as the shortest and

most direct routes are taken to reduce the risk of infestation.

32

In the case of the UOCB project, during the first two years when rice was exported to

Rapunzel the former was responsible for post-harvest management. It procured paddy

from farmers and stored and transported it to a certified organic processing mill. As

UOCB does not have the necessary infrastructure and experience in post-harvest

management, the quality of rice suffered. For example, there were delays in lifting the

crop from the farmers’ stores, resulting in infestation by rodents and pests. Furthermore,

the processing technology used by the mill was old and inefficient, leading to poor

quality of rice and large losses in processing. This situation has now changed. The new

buyer (Satnam) is among the leading players in the global market and uses world class

post-management techniques. It has long experience and extensive facilities to procure,

store and transport paddy efficiently. It also has world class processing facilities

consisting of a number of modern processing mills, including a new plant set up recently

in the UK. In short, with the entry of a large and experienced player, the post-harvest

management of the rice produced by farmers working with UOCB has vastly improved.

However, there are still some problems at the farmers’ level. According to the agreement

with Satnam, the farmers are responsible for preliminary cleaning and removing stones

and dirt. This is done manually and is not very effective. The harvesting is also done

manually, resulting in the mixing of stones etc. with paddy. After harvesting the paddy is

stored by farmers for about a week. These stores are not very secure and considerable

damage is caused by rodents and pests. The stores do not have humidity control facilities

and this can lead to either too little or too much moisture in the paddy.

The very basic techniques used by the farmers result in many problems, including

contamination with stones and other extraneous material and loss to pests and rodents.

These techniques can be improved in the following ways:

Use of threshers to harvest paddy. This will reduce the contamination with stones

and dirt at the time of harvesting.

Improved storage facilities

Better moisture control by the use of moisture meters.

33

Both Satnam and UOCB are working on the improvement of post-harvest management

techniques. For example, Satnam has initiated improvements to the quality of the gunny

bags in which the paddy is transported. Earlier farmers used their own gunny bags, many

of which were of poor quality and were unsuitable for handling and transporting. To

improve the quality, Satnam first gave money to the Federations to buy gunny bags to

distribute to farmers, but the quality of bags was still poor. Now Satnam gives bags to

farmers so that quality can be maintained.

UOCB is planning to set up a Common Facility Centre for each block to improve the

post-harvest management of the paddy. These facilities will include a thresher and a

moisture meter. The facilities will be run by the Federations. The cost of setting up these

Centres is estimated to be about Rs. 0.5 million, which will be born by UOCB.

8. Conclusions and Recommendations

The study examines the experience of two organic basmati production chains in

Uttarakhand. While one of these was initiated by a large rice trading company (Sunstar),

the other was set up by a government agency (UOCB) responsible for the promotion of

organic farming in the state. In both cases, a large proportion of the organic basmati is

exported.

Both the chains have been very successful in motivating a large number of farmers to

adopt the organic cultivation of basmati rice. The number of farmers and the area under

cultivation has increased steadily since the inception of the chains. The studies reviewed

here show that while the farmers have benefited from the conversion to organic farming,

they also face a number of difficulties.

Farmers in both the chains require considerable support in converting from conventional

to organic farming. Outside agencies (for example, Sunstar and UOCB) play a crucial

role in motivating farmers and initiating and supporting organic production chains, before

they become sustainable. The important areas where support is needed include training in

34

organic methods of cultivation, pest and disease control, compost making techniques and

organic certification. Most importantly, farmers need marketing support to sell their

organic produce at a premium. While Sunstar market the organic basmati rice produced

by its associated farmers, UOCB is not involved in the marketing. In both cases, the

farmers are ensured premium markets as they have long term marketing contracts with

buyers.

Large financial and technical resources are required to set up an organic production

chain. This is shown by the expenditure incurred by Sunstar. Although data for UOCB is

not available, it also employs a large number of personnel to work with the organic

farmers. There are important differences in the sources of finance used for setting up the

chains. While in the case of Sunstar the financial resources were generated internally by

the company, resources for UOCB were provided by the state government and a

foundation set up by a large corporate house. The heavy investment requirement may act

as an impediment to the expansion of organic farming to other areas. Public-private

sector collaboration, as seen in the case of the chain developed by UOCB, offers a

possible strategy for the financing of organic production chains.

As most Indian farmers are smallholders with limited financial resources, they need low

cost credit. While the government has taken a number of steps to increase farmers’ access

to credit, most farmers still suffer from a lack of financial resources. Furthermore, the

farmers who have adopted organic farming are not given special credit facilities and do

not receive any subsidies for practising organic farming. However, in both the chains

studied here farmers receive seed and other inputs on credit from the buyers. The

experience of these chains shows that while farmers would like greater access to low cost

credit and subsidies, the lack of these incentives does not affect the decision to (or not to)

convert to organic farming.

The success of both the chains is, at least partly, due to the formation of farmers’

organizations, which carry out a number of important functions. In addition to

35

representing farmers’ interests they also play an important role in facilitating farmers’

training, coordinating procurement, supplying inputs to farmers and organizing payments.

As exports provide the main market for organic basmati, it is important that the

production is certified organic by internationally recognized certifying agencies. In both

examples, the production is being certified by such agencies. As the cost of organic

certification can be high, both Sunstar and UOCB are conscious of the need to minimize

its cost. They have achieved this by setting up internal control systems (ICS), which have

led to a sizeable reduction in the cost. In fact, the cost of certification is found to be a

small proportion of the total cost of production and is not found to be an important

impediment.

The studies show that the profitability of organic basmati is higher than that of

conventionally grown basmati rice. While the average yield of organic cultivation is

lower in both the chains, it is more than compensated by low cost of production and

higher price because of the premium available to organic produce in the market.

However, most farmers in the UOCB chain grow wheat as a second crop. As they are

unable to market their organic wheat at a premium, their overall profitability is lower

than that of conventional farmers. It is, therefore, important that efforts are made to find

premium markets for all the crops grown by organic farmers.

The studies show that the buyers in both chains use state-of-the-art post harvest

management techniques. In particular they have modern and fully automated processing

mills, which can produce high quality rice. However, the practices employed by the

farmers are inefficient and need improvement. Their harvesting and storing methods are

particularly inefficient and result in loss of both quality and quantity. Efforts are being

made both by the buyers and UOCB to help farmers to improve post-harvest techniques.

In addition to inefficient post-harvest techniques, the farmers face a number of other

difficulties. These include poor training in pest and disease control, and compost making,

high costs of inputs and inability to market all their crops of at a premium. Faced with

36

these difficulties, many farmers have converted only a small proportion of their land to

organic farming. It is important that these impediments are removed so that the farmers

will feel motivated to convert a greater part of their land to organic cultivation. This will

also help in building new organic production chains by attracting more farmers to organic

farming.

Recommendations

Based on the case studies reviewed here, the following recommendations can improve the

efficiency of organic basmati production chains and encourage industry and farmers to

set up new chains:

1. The cost of setting up and maintaining a certified organic chain is high.

Financial support to companies and farmers may be necessary to promote

these chains.

2. Public-Private collaborations to finance and set up organic production chains

need to be promoted.

3. The quality of training provided to farmers is poor and needs to be improved.

4. Improved techniques to control pests and disease using environmentally

friendly methods need to be developed and diffused.

5. The post-harvesting techniques employed by the farmers are inefficient and

need to be improved.

6. Premium markets for all the crops being produced organically need to be

found to increase the overall profitability of organic cultivation.

37

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39