Producer Company

The Companies Act of 1956 recognized three types of companies viz., public limited, private limited and trusteeship and nidhis. It was amended in 2002 to accommodate a fourth type of company called Producer Company. Cooperative organizations it was felt would not be able to respond to rapid changes taking place globally in trade, technology etc. Therefore, a producer company was contemplated to protect the interests of the farmers. Producer organization was expected to respond with much alacrity to market conditions than cooperatives which are slow to react to market signals due to regulations.

Cooperative organizations/institutions are “user owned and user controlled”. They help the members realize better prices for their output or lower prices for inputs by leveraging on scale and bargain collectively. In case of farming especially small size of holding such as in India the cooperatives are the best forms of organization to protect the interest of the farmers from the vagaries of the market forces. However, the success stories of cooperatives in India are few. There are various reasons attributed for their poor showing one of them is said to be the excessive interference of the government in their functioning.

Cooperative governance structure consists of the general body consisting of all members, a board elected from the members and executives who are paid to look after the day today affairs of their functioning. The checks and balances among these three constituents ensure a fair and transparent administration of cooperatives. However, in India a fourth component is added to the governance structure that is the cooperative registrar of the government. Though the registrar is not a stakeholder in the true sense he was vested with lot of powers ostensibly to guide the cooperatives but more often than not he/she comes in the way of its effective functioning. Crucial decisions are delayed and the initiatives of the cooperatives stifled as everything needs the registrar’s approval.

Therefore, there was a felt need for a new type of organization which would retain the cooperative spirit and at the same time lot more flexible and nimble to market signals. The Companies (Amendment) Act 2002 inserted Part IXA in the Companies Act of 1956 to enable formation of producer companies.

Under the Act, any ten or more individual producers or two or more producers institutions can come together to form a producer company. The voting pattern is based on single vote for every member irrespective of his shareholding or patronage of the producer company. Members’ equity cannot be publicly traded but can be transferred to other members. The producer company shall become a body corporate as if it is a private limited company and under no circumstances become a public limited company under this Act. The members of the producer company necessarily have to be primary producer that is persons engaged in activity connected with or related to primary produce.

Primary produce is defined as produce of farming arising from agriculture including animal husbandry, horticulture, floriculture, forest produce, apiculture or from any other primary activity or service which promotes the interest of the farmer or consumers or produce of persons engaged in handlooms, handicrafts and other cottage industries. The activities of the producer companies will relate to one or more of the activities such as production, harvesting, procurement, grading, pooling, processing, pricing, marketing including export of primary produce of the members or import of goods and services for the benefit of the members.

Benefits to the Members

Every member will initially receive only such value for the produce or products pooled and supplied as determined by the board.   The withheld price which is defined as part of the price due and payable for goods supplied by any Member to the Producer Company; and as withheld by the Producer Company for payment on a subsequent date. The withheld amount will be distributed later (usually at the end of the year) in the form of cash or kind or by allotment of equity shares.

The members will receive only a limited return (the maximum decided by the articles of association) on the share capital.

The surplus if any, remaining after making provision for payment on limited return and reserves will be disbursed as patronage refund in proportion to the participation of the members in the business of the producer company.

Management

Producer Company can have at least 5 but not more than 15 directors. Each director will hold the position for one year but not more than five years. There is a provision to co-opt expert directors. They should not exceed one fifth of the board strength. These expert directors will not have voting rights. The board can also constitute committees to assist in its functioning. The board will appoint a full time Chief Executive and shall entrust substantial powers to look at the efficient administration of the company. The Chief Executive will be an ex-officio director of the board. Producer Company having an average turnover of five crores for three consecutive financial years shall have a full time secretary

There are several producer companies being set up in various parts of the country. Vanilla India Producer Company in Kerala was the first to be set up in 2004 under the act. There are several producer companies in Madhya Pradesh promoted by NGOs such as Pradan. Other parts of country such as Gujarat, Maharashtra, Rajasthan Assam, Uttaranchal etc are also giving importance to producer companies. NABARD has created a “Producers Organization Development Fund” to support Producer Organizations across the country.

Though Producer Company is an innovation and free of certain limitations of cooperatives there are certain elements which are similar to cooperatives that may hinder growth. True, that the registrar as in the cooperative cannot interfere in the functioning of the producer company. This in turn precludes the company in seeking any funds from the government. Farmers in India being too poor to raise the necessary capital and market borrowings being costly most of the producer companies are handheld by the promoting NGOs. The grant and donations from the NGOs are not sustainable. Non producers cannot invest in the equity of the company therefore capital mobilization from the producers who themselves are short of capital put the organizations ability to manage funds on a sustainable basis extremely difficult.

The shares of the company cannot be traded but can be transferred to other members. If the transfer has to take place at the face value it is not fair to the original investors at the time of the formation of the company because the share prices should be different as the company had become fully functional. As in cooperatives it is difficult to come up with a realistic valuation of the company in the absence of the secondary market for the shares.

Agrarian Crisis: Are We Barking Up the Wrong Tree?

The suicide by Gajendra Singh Kalyavat in an Aam Admi Party rally on April 22 in the national capital had sharply brought into focus the plight of the farmers in the country. Sadly, instead of discussing what made farmers to commit suicide the media and the politicians debating who was to blame for the death of Gajendra Singh. What was his financial status? Was the suicide note really written by him? Why the AAP leaders did not call off the rally? etc were the polemics to score brownie points.

Occasional loan waiver, better prices, structural changes in marketing, credit at cheaper rates etc are policy prescriptions bandied about by the pundits. These prescriptions may have some placebo effect and will not solve the farmers’ problems in a sustainable manner because the very base with which the farmers operate is so tiny that even in the best of the conditions they cannot eke out a decent living. Any natural disaster such as the unseasonal rains in North India would push them over the cliff. Instead the focus should be how to supplement the farm income from other activities.

I am reproducing an article written by me in the Hindu Businessline newspaper on November 25, 1999 titled Wanted, a new deal for rural India.  I believe the issues highlighted then are relevant even today.

Wanted, a new deal for rural India

S.R. Asokan

Published in The Hindu Businessline on  Nov 25, 1999

In the ninth year post- liberalization, market is the new mantra, re­placing the discredited· socialistic pattern of planning, growth and distribution. However, the vast majority re­main outside the market mechanism ­mostly in rural India eking out a living on meager resources. Naturally, the benefits of liberalization have largely by­passed them.

Successive governments have not ac­corded due importance to agriculture. Except for making the right noises noth­ing much has been done- to raise rural incomes. The present BJP-Ied coalition Government promises to unleash a sec­ond generation of reforms targeting agriculture and allied sectors, but is yet to find a Cabinet minister for the Agricul­ture Ministry. The attention agriculture is getting can be gauged from the clamour for ministries such as finance, Indus­try, commerce, and so on, by the National .Democratic Alliance (NDA) constituents, there were no takers for the agriculture portfolio. Yet, the challenges faced by the Agriculture Ministry are no less daunting than those in 'high­ profile' ministries.

The average size of agricultural hold­ings in India is 1.55 hectares. Nearly 60 per cent of the farmers, constituting 63 million farm families, own less than one hectare - that is, 315 million people de­pend on such small holdings for their livelihood.

The average size of a marginal farm is 0.39 hectare. Assuming that the farmers can grow, two crops a. year and can choose the crops to' be grown, such as paddy, wheat, bajra, sugarcane and cotton the income from the best· possible combination of these crops does not ex­ceed Rs 4,000 per annum (see Table). If the rental value of land is deducted from the cost the income level rises to Rs. 8,000.

These marginal farmers 'supplement their income by doubling as agricultural laborers, rearing milch animals, and so on. Thus, they strive to make a living with some dignity rather than slip into destitution. In addition to the millions of marginal farmers, there are an estimat­ed 70 million landless agricultural laborers in the country.

It has to be conceded that there are variations across the States with regard to development; resource endowments and so on. For example, a marginal farmer in Punjab may be better off than a small farmer in Maharashtra or Guj­arat. The average size of a marginal farm is 0.17 hectare in Kerala - with the high level of literacy, one does 'not presume that they eke out a living from this small patch of land alone; but the same cannot hold true in Orissa and Bi­har. Whichever way one looks at it, there are more than 370 million rural Indians barely able to make ends meet.

There is no way the benefits of liberalization would reach them unless some urgent and drastic measures are adopt­ed. An export-Ied growth strategy for agriculture as advocated by some has no relevance to the marginal farmers as they consume most of whatever they produce. Therefore, the emphasis should be to improve the skill levels of these multitudes and reduce their dependence on agriculture and allied activities.

Cost and returns from various crops for 1995-96 for 0.39 hectares

	Sugarcane	Cotton	Paddy	Wheat	Bajra
Value of the main and by product	16,369	6,022	7,399	6,998	2,252
Cost of cultivation	12,315	3,831	5,947	5,398	2,247
Net returns	4,054	2,191	1,452	1,600	5
Rental value of land	2,711	1,003	1,990	1,939	665
returns	6,765	3,194	3,442	3,536	670

Source: Report of Commission on Agriculture Costs and Prices, 1997-98. Ministry of Agriculture

Though there are several Central schemes that aim to provide gainful employment to such people, the efforts de not match the enormity, of the problem The Training of Rural Youth in Self Employment (TRYSEM) scheme in operation for the past two decades; aims at training rural youth in the 18-35 age group in some trade, to help them get wage employment or start their own small businesses. Though the scheme was well-formulated, the implementation has been tardy. Evaluation studies of the scheme have found that the train­ing was for too short a period, not enough to improve the skills of the trai­nees.

Further, Identifying the youth and finding suitable trades matching their aptitudes was often difficult. The few trained youths also found· it difficult to get Small loans from commercial banks to start their business.

Another important scheme is the Ja­wahar Rozgar Yojana (JRY). It aims to provide employment to marginal farm­ers and agricultural laborers during the lean season. The supplementary in­come generated is crucial for the surviv­al of many poor families. According to the latest Economic Survey, the wages earned under the JRY were but a small proportion of the amount required helping the beneficiaries cross the poverty line.

Thus, the whole approach to poverty alleviation needs to be reviewed. Instead of introducing new schemes, the existing ones should be reformulated and strengthened, and their implementation properly monitored and evaluated. The approach should address both short and long-term issues. In the short run the JRY should be continued to put the vital extra income in the hands of the underprivileged.

The TRYSEM should be expanded, say up to the age of 45.  Those in the upper end may be trained for the skills required locally.  The younger members of the group, depending on their educational qualification, should be given longer periods of training to enable them to move out of agriculture. The kind of skills and the quality of manpower needed in a district should be studied and the training provided accordingly.  Wherever possible the corporate sector could be co-opted in this vital task. Its technical and managerial skills could be used for training. The big and medium industries located in a district could be approached for such services. Special and intensive efforts have to be made in the backward districts.

Apart from improving the traditional skills, new skills - with the help of modern technology, - must be introduced. For example, the Bangladesh Grameen Bank, apart from helping small businesses (mostly run by women), provide a cell-phone network throughout the country. In India, photocopying centres and STD booths have generated a lot self-employment for the youth in several small towns. Therefore, the key is identifying the needs and catering to them.

Rural youth themselves could be consulted on the kind of skills they wish acquire. The youths trained in self employment must form self-help groups to generate their own credit with minimum assistance from commercial banks.

The approach to poverty alleviation should be both short and long-term. In the short term, employment guaranteed schemes, such as the JRY, should be continued. In the long term say the three-five years, the overall skill level of the youth should be improved. The strategy must be to raise the income of the vast multitude so that they can economic mainstream and the benefit of market-dependent growth percolate down to them.

As Noam Chomsky put it, “Freedom without opportunity is a devil’s gift and the refusal to provide such opportunity is criminal. The fate of the more vulnerable offers a sharper measure of the distance from here to something that might be called civilization”.

Published in The Hindu Businessline on  Nov 25, 1999

Cooperative and Agricultural Marketing

A Cooperative venture is a “user owned and user controlled” business for the benefit of the users. Unlike an investor owned firm where the shareholder need not use its services to benefit from the investment, in a cooperative the benefits accrue only when the member investor use its services.

A shareholder, for example, in a Ford Motor Co or Maruti Suzuki need not purchase these cars to get dividend or realize the appreciated value of the share of these companies. However, for a cooperative share there is no secondary market nor there any mechanism to estimate its true value due to the nature of the institution as user owned and user controlled. The members benefit when they use the services of the cooperative. In case a farmer is a member of a marketing cooperative he would be getting a better price for his produce compared to the non member. Similarly, if he is a member of a cooperative supplying input such as seeds, fertilizer, pesticides etc he would be getting them at a lower price compared to the market. He can be also confident about the quality of the input supplied as well as its timely availability.  Cooperatives can be reliable suppliers especially during the times of shortages.

Whatever profit the cooperative may make is returned to the members based on their patronage that is proportion in which the members used the services of the cooperative. Therefore, the relationship between the members and the cooperative is transactional rather than financial as in the case of investor owned firms. The principle of any enterprise is pursuing owner interests. In case of a firm it is the shareholder value whereas in a cooperative it is user value.

The user of the services of the cooperative is a patron. The patrons are members of the cooperative and are eligible to vote in running its affairs. Each member has only one vote regardless of the number of shares he held or the volume of business he did with the cooperative. Thus control of cooperative is truly democratic.

Cooperatives and Market Failure

Cooperatives emerge because the existing businesses were not able to provide the goods and services as expected. For example, as the farmers are scattered there may be few who would be involved in aggregating the surplus output. These few may again face a limited business opportunity in an area or a region and hence a given area is serviced by a single buyer to achieve some scale. Thus with no competition they offer lower price to the farmers and extract a larger profit from their ventures. This is more so in case of perishables like milk, vegetables, fruits etc. Similarly, there would be few input suppliers who would charge higher price for the inputs in the absence of competition. Many time quality brands may not be available as the suppliers may be getting higher margin from other brands and hence little incentive to stock them. Therefore, it makes sense for the farmers to come together to form cooperatives to reap the economies of scale. They can pool their resources to make market arrangements for their output or buy the inputs in bulk thus lowering the cost and price which as individual farmers they cannot realize. Cooperatives improve the bargaining power of the farmers when dealing with other business to get a better deal for their output. Purchase in large volumes of inputs reduces the cost of transaction as well as in getting the discount. Cooperatives can also broaden the market opportunities for farmers by getting into value added processing. However, the nature of the organization itself is a constraint in raising enough capital.

Value Addition

If the farmers are able to raise enough capital they can also invest in value added processing. However, as the incentive is in the use of the services and the voting rights have no relation to number of shares held it is always difficult for cooperatives to raise enough capital to invest and operate at a higher level in the value chain. Further if the cooperative aims to go up the value chain into processing and marketing it would be a challenge to coordinate the customer demand with that of member farmers’ activities. For example, if the quality expectations of the consumers and the input supplied are to be matched. In case it was difficult or not possible to measure objectively the quality of the input supplied to the processing units, to monitor and enforce compliance among the member farmers would be daunting.

Governance

Cooperatives are governed by an elected board and day to today business done by paid techno managerial cadre. Therefore, apart from the general body which consists of all members who own the cooperative the governing mechanism include a board and paid employees of management. Participation of the members, governance by the board keeping the interest of the farmers and the efficiency in day to day operations brought about by the management are three critical pillars for the cooperative. However, in India, a fourth dimension is added in the form of government through the registrar of cooperatives. Registrar is supposed to act as friend, philosopher and guide to the cooperatives and ensures that cooperatives function in accordance with the Cooperative Act. Since the registrar has no stake in the cooperative many feel registrar is a hindrance to efficient functioning of the cooperatives rather than facilitate their smooth and efficient functioning. 

Agribusiness and Agribusiness Management

It is a fascinating journey for a seed of wheat or corn to end up as bread or cornflakes in a dining table. It changes several hands undergoes several mutations during which time it was turned into crop, then processed at the primary level later at secondary and tertiary level to be turned into value added products. By the time it reaches the table the metamorphosis is complete.

The wheat in your slice of bread might have originated from Punjab or Haryana, the corn in the cornflakes from the fields of Karnataka or Tamilnadu, the butter or cheese from the villages of Gujarat, the tea from the estates in Assam, the juice from the oranges of Nagpur. The coffee or chocolate you drink might have come from Brazil or Ghana and Ivory Coast, the edible oil from Malaysia or Indonesia, the toor dal from Myanmar, mattar (green peas) from Australia. The food on the table whether it is a ready to eat type or cooked at home is the result of the efforts and coordination of a complex network of people and organizations. You might have visualized by now the several people or organizations involved in the whole process. The input suppliers, farmers, traders, millers, value added processors, bakers and at every stage the transporters, warehouse owners, wholesalers, retailers etc are involved in the chain from the farm to the fork.

Davies and Goldberg of Harvard Business School defined agribusiness way back in 1957 as “the sum total of all operations involved in the manufacture and distribution of farm supplies; production activities on the farm; and the storage, processing and distribution of farm commodities and the items made from them”. 

The complex network of organizations involved in food production and marketing consists of thousands of organizations of varied size and formats. Small and marginal farmers, primary processors or millers at the block or taluka town, village and cottage industries manufacturing papad, pickles, ketch up, giant corporations both domestic and transnational sourcing raw materials from different parts of the world using sophisticated technology, big corporations supplying seed, fertilizer, pesticide, farm machineries, retailers from modern organized format to small kirana (mom and pop)stores etc. All these organizations at one level are collaborating and another level competing with one another to deliver the product of value to the consumer. The value could be in terms of lower price or better and unique product.

Agribusiness and Rural Enterprises

The term “agribusiness” is often misconstrued especially by policy makers especially in developing countries such as India and equated with small agro processors located in rural areas using locally available resources. Further, the use of low cost technology and labour intensive process of manufacturing mostly by unskilled and semiskilled labourers completes that “understanding”. The policy pronouncements follow this understanding to boost agro processing with the hope to increase rural income and employment. One can very well imagine the competition between say a small ketchup manufacturer operating out of a shed in one of the small industrial estates and Heinz and Hindustan Unilever’s Kissan or a flour miller operating in a neighbourhood with that of Pillsbury (General Mills) or Aashirvaad (ITC).

These small units mostly produced/processed and marketed locally. The products are undifferentiated they are essentially commodities. These rural based processing units add only time dimension to the crop or commodity. That is agricultural commodities are produced in certain seasons but demand is throughout the year. As the products are mostly perishable they need to be processed thus making it available for consumption throughout the year. When space dimension is added, that is, to cater to the demand for urban and overseas market these units are inadequate or inefficient for the purpose.

In order to cater to urban and overseas market the scale of agro processing units need to be expanded or some sort of institutional innovation is needed to achieve economies of scale to build brands and market their products nationally or internationally.  AMUL and Lijjat Pappad are examples of institutional innovations which helped to scale up operations to serve the markets far from production centres. The aggregation of decentralized production of small producers and centralized processing and marketing enabled them to build brands.

Today, the consumer tastes and preferences are changing rapidly and are becoming increasingly complex. Commodity processing motivated at first by the need to preserve food has evolved into system to fulfill consumers’ desires for quality, variety, convenience etc. The quality attributes of a product demanded by the consumers is increasing in complexity. From storability and prolongation of shelf life to nutritional standards to flavour to convenience and to health providing nature the quality attributes demanded in the market place are constantly evolving. This has necessitated the processing firm to source raw materials far and wide.

Apart from the intrinsic qualities such as flavour, texture, appearance, shelf life and nutritional value, extrinsic factors that is the production system adopted such as pesticide used, genetically modified organism, processing methods, packing etc contribute to the quality demands of the consumer.  As the ingredients originate from different parts of the country or the world to make a product to cater to a particular set of consumers ensuring food safety becomes paramount importance. Technological advances have provided the food industry with methods required to meet the complex needs of the consumer.

As the scale and nature of agro processing changed it has opened up the possibility of using modern management tools and techniques. Tuning up the supply chain for procurement, efficiency in processing, segmenting the market and cater to them all increases the scope to use management tools.

Agribusiness, as mentioned earlier, is not just agro processing It involves several actors from input suppliers, farmers, processors, wholesalers, retailers, logistic providers etc. Thus agribusiness sector is a 'chain' of industries directly and indirectly involved in the production, transformation and provision of food, fibre, chemicals and pharmaceutical sub-strata.

As agribusiness encompasses all activities that are relevant to the eventual production, transformation / value addition, differentiation, distribution and retailing of food, fibre and associated products the question is what to manage in the various sub sectors? Are the managerial skills needed to run the various activities of agribusiness firms different from the conventional management techniques?

Is the job of a finance manager in a large fertilizer firm different from the one in an engineering firm? Is the job of a marketing executive in a processed food industry say in HLL (Kissan Jam, Squash, Annapoorna Atta etc) different than the one at a toy manufacturer or white goods manufacturer such as TV, refrigerator, washing machines etc? Is the role of the HRD manager in a pesticide unit different than his counterpart in a computer manufacturing firm? The answers to the above questions tend to be negative. 

Agribusiness Firms and Governance

Till a century or so ago farming was basically a subsistence activity and was self contained. Farmers basically produced their own inputs such as seed, manure etc farm tools were supplied by local artisans and the production was largely consumed on the farm or in the village. The small surplus that might remain was collected by itinerant traders.

Technology especially after World War II had revolutionized agriculture in many ways. Inputs such as seed and fertilizer which the farmer himself was producing had become specialized activities. The modern inputs and improved farming practices increased production manifold. The huge surplus began to be shipped to distant markets. This has spawned a range of activities away from farms such as processing, storage, transportation and marketing giving rise to functional specialization and segmented organizational handling. For each of these activities there are supporting activities such as finance, research and development and others such as government policies. For example, processing needs finance for both investment and operations (working capital), manpower is needed to run the plant and machinery, and research and development can contribute to efficiency or innovations. If the government policies are favourable the enterprise may flourish. So, each activity is impacted by various forces from outside.  Further, the actions of one activity in the chain affect other activities. If the consumers’ preferences are not incorporated in processing it not only affects the processor but also the wholesaler and retailer of the products.  However, these activities had no center for control and the firms separately perform the various functions and make their decisions. Price is the coordinating mechanism across the structure and that influences the behaviour of various components. In order to be efficient the decision makers must be fully aware of what is happening and what is likely to happen in the subsector of the system if not, the decisions they take might adversely affect other players. However, price and market mechanism alone is not sufficient to coordinate the various activities when a firm is dealing with non commodity product that is, offering a differentiated product to the consumers. So, there is a need for other governance structure apart from price and market mechanisms in order for the various players in the agribusiness sector to perform effectively.

Firm Strategy and Governance Structure

The various components of the agribusiness sector can be demarcated into production and processing sub sector. Firms involved in activities which impact the commodity prior to processing are in the production sub sector e.g seeds, input supplies etc. Firms involved after commodity processing are in the processing sub sector.

The quality attributes demanded by the consumers as was seen earlier is expanding. Apart from storability consumers are looking for nutrition, food safety, convenience etc. As for quality it is not only about texture, flavor, appearance etc but also about pesticide residues, genetic modification etc. This had given rise to two types of firms – firms that focus on the commodity and the firms that focus on the consumer. The competitiveness of the firm is defined as the ability of the firm to profitably create and deliver differentiation. This implies that competitiveness is directly related to the factors that influence a firm’s cost and structure. Commodity firms are likely to utilize the strategy of cost leadership to compete and survive in the field.

The firms which are differentiating their product and competing in the market focus on the consumer. They constantly look for opportunities in the consumer behaviour and try to seize it by acting accordingly. For example, consumer expectation on convenience and food safety cannot be delivered unless all stages of the food system work together to deliver them. In such circumstances, the boundaries between the input suppliers, commodity producers, merchandisers are broken and there is interrelationship in the channel. Prices and markets once the primary coordinating mechanism for open market is replaced by various forms of managed coordination such as contracting, strategic alliances, vertical integration wherein there is single ownership of multiple market stages. The reliability of various actions and the cost determines what sort of governance structure is needed for a product.

Invisible coordination allows individual economic actors to follow their self interest and pursue exchange relationships that are short term, opportunistic, limited as to information sharing, flexible, preserving independence of the actors. Managed coordination, however, is built on mutual trust, benefit sharing, open to information flow, stable and inter dependent. The intensity of control determines the kind of arrangement.

If the different actors in the chain of a product carry out their activity efficiently and the firm is getting the needed materials at the time it wanted the firm can rely on the spot market to get the materials to cater to its consumers. In case, there is uncertainty may be with regard to price or timely delivery or quality specification dependency on the spot market would be detrimental to the firm. The firm then has to look for alternative arrangements to get the supply may be through contracts or strategic alliances with the suppliers or taking over the activity itself that is involving in the activity.  A firm involved in value added processing needs different ingredients apart from the main raw materials such as flavours, preservatives, nutrients for fortification etc besides packing materials. Depending on the reliability of the suppliers to the firm’s specification the governance structure need to be determined. In case the supplier of packing material is completely unreliable the firm may start or acquire the packaging unit. If the raw materials available in the spot market are not upto their quality standards the company may enter into contract with farmers. It may take stake in a firm supplying critical flavor in order to reduce uncertainty. Thus, depending on the situation for different inputs that goes to make a product the firm has to follow its procurement strategy. The market conditions largely determine the power of the players which in turn dictates the governance structure. For example if the market is perfectly competitive spot market is ideal but in case for some supplies the market is monopolistic or oligopolistic in nature the suppliers tend to extract “rent” by constantly haggling during each transaction thus disrupting whole planning of the firm. In such cases the firm may be forced to look for other governance mechanisms.

Many large corporations have multiple governance structure in order to achieve cost leadership or differentiation. For example,  Cargill Inc, one of the largest grain traders in the world also have presence in flour milling, animal feed manufacturing, seed and chemical companies

Organization’s   Dependence	High	Partner Relatively Powerful Compared to the Organization	High Degree of Interdependence Smooth Relationship
	Low	Low Level of dependence on each other (ideal for market based transactions)	Organization Powerful compared to the partners
		Low                                   High Partners’ Dependence

Fig 1 Interdependence in the Supply chain under various Situations

 Source: Chopra (2007

The challenge for agribusiness managers is when to buy, where to buy, how to buy and from whom to buy. Depending upon the organizations dependence on its partners the decision may change to when to make, how to make. The knowledge about the agricultural markets and its functionaries, market conditions etc are important for managing agribusiness