2. Challenges in cultivation of Organic Pepper

2.1 Low Productivity

One of the biggest challenges in black pepper cultivation is low productivity. Experts believe that intensive use of chemical fertilisers degrades the soil nutrients and microbes which is leading to low productivity of pepper. However, organic farming can lead to an improvement in soil fertility and enhancement in yields in the long term.

2.2 Lack of quality planting material

Lack of availability of quality planting material for the farmers is another issue that affects the productivity of black pepper farms

2.3 Improving cultivation practices

The farmers who are currently engaged into cultivation of organic black pepper lack adequate capacities and knowledge about organic farming. There is a need to improve cultivation practices by introducing a regulated system of planting, integrated pest and disease management practices and use of organic inputs/bio agents.

2.4 Post-harvest management

Black pepper cultivators lack proper awareness relating to post-harvest management techniques. By introducing a regulated system of planting, integrated pest and disease management practices along with the usage of organic inputs/bio agents, the cultivation practices can be improved.

2.5 Difficulties in organic certification

Farmers need handholding support in establishing Internal Control Systems (ICS) and in completing other necessary formalities for obtaining certification. Moreover, the cost of certification of organic spices is high and beyond the capacity of an average Indian farmer. This has to be brought down to a reasonable and affordable level.

3. Project Idea

India is the second largest producer of black pepper in the world and more than INR 1.3 lakh ha area is under pepper cultivation in the country. However, conventional cultivation of pepper is becoming increasingly difficult for farmers due to declining crop yield, lack of availability of quality planting material, increase in insect and pest attacks and erratic rainfall. Moreover, poor cultivation techniques for pepper cultivation as an intercrop have also resulted in limited yields for farmers.

In this backdrop, it is felt that cultivation of organic black pepper could be a much more viable and economically rewarding option for the farmers. Organic cultivation, it is felt, has the potential to introduce sustainable practices into pepper farming that have lower input costs, has sustained crop yield and also has the potential to improve soil fertility.

The project idea is to mobilise farmers and support them to cultivate organic pepper by providing them financial and technical support. The project would strive to build capacities of farmers in organic cultivation while also ensuring that improved cultivation and post-harvest techniques are used.

The farmer groups at the village level would be federated in the form of cluster level organisation or FPOs of smallholders to promote the cultivation of organic pepper and also to establish a strong supply chain.

3.1 Intervention strategies and convergence

This project is based on the surmise that a local competent NGO or an established FPO would take the lead in initiating this project. The proposed project seeks to intervene at two levels i.e. at the farmer group level and at the FPO level. The following is the nature of intervention/support envisaged under this project idea:

For support to farmers groups

The support may be provided through a local competent NGO or an established FPO for the following interventions.

1. Farmer mobilisation and sensitisation for the adoption of organic farming techniques.
2. Training and extension services on a package of practices for organic black pepper farming.
3. Compensation for certification cost (organic) maximum up to one ha of farmland.
4. Loan for meeting cultivation costs - working capital.
5. Facilitating farmers to access good quality seeds.
6. Facilitating farmers to get crop insurance.
7. Facilitating farmers to develop linkages with producer organisations for the sale of organic black pepper.

A cluster development approach will be adopted to have a minimum of 1000 acres (400 ha) of the area under organic pepper in a cluster. This will help to minimise the overhead costs including administrative, monitoring, certification costs.

For support to FPOs to strengthen organic black pepper supply chain:

1. Establishment of office and processing unit of FPO.
2. Support for farmer mobilisation and sensitisation for the adoption of organic farming.
3. Support for conducting training and extension services for the farmers on a Package of Practices (POPs) for organic farming.
4. Compensation for organic certification cost of farmers maximum up to one ha of farmland.
5. Maintenance of a robust internal control system and system for traceability.
6. Procurement of quality seeds and supply to members.
7. Provision of credit to the farmer members for cultivation costs – need based.
8. Promote crop insurance and ensure farmers to get crop insurance.
9. Procurement of black pepper from farmers, aggregation at the sub-cluster level.
10. Grading, drying and grinding of pepper.
11. Negotiate with different buyers for the sale of organic pepper.
12. Agreements with the buyers and obtaining pre-finance from the buyers.
13. Convergence with various enabling schemes.

The funds can either flow directly to the FPO or through an NGO which will have the overall responsibility of achieving the project objectives.

For support to producer organisation for procurement and trade of organic pepper

A loan could be provided to FPOs for procurement and trade of black pepper. The loan will be utilised as working capital to purchase organic produce of member producers, and for transportation, temporary storage, drying, grading, processing and supplying to the buyers.

3.2 Potential for upscaling

Black pepper is a high-value spice with high demand in national and international markets. India has a significant area under black pepper cultivation and there is sufficient scope for converting part of it for organic pepper cultivation.

This model can be replicated across Kerala, Tamil Nadu, Karnataka as well as part of Maharashtra and Goa (with suitable modifications based on local requirements).

3.3 Comparison with conventional approach

Studies reveal that in addition to its environmental and ecological merits, organic farming of black pepper also has several other merits as compared to the conventional cultivation systems.

Amidst reports that yield of black pepper per ha is declining under conventional farming practices (inorganic) studies reveal that organic cultivation of black pepper could have significant merits for farmers. According to a study conducted by Parvathi and Waibel (2015) amongst the smallholder black pepper farms in Kerala it was found that organic farms were most productive and that conventional black pepper farmers could enhance their yields by 113 per cent if they adopted organic black pepper farming.

In addition to this, cultivation costs in organic farms are believed to be lower as the input costs of farmers (chemical fertilisers and pesticides) are reduced due to replacement of chemical inputs by bio-manures and bio-pesticides and also due to less incidence of insect and pest attacks in the long term.

The market price of organic black pepper is also significantly higher than conventionally grown black pepper. Online market survey revealed that wholesale prices of organic black pepper were listed to be 20 per cent to 30 per cent higher than conventionally grown black pepper (although rates would differ based on the quality of produce).

3.4 UPNRM case example

This project idea is based upon the model established by Wayanad Social Service Society (WSSS), Kerala under UPNRM. This model promotes organic cultivation of black pepper amongst farmers from Kerala. It has been quite effective in increasing incomes of farmers through a FPO based model that promotes aggregation, processing and marketing of farm produce. The following are the highlights of this pilot:

• More than 6000 ha land across 40 villages brought under black pepper and coffee cultivation.
• More than 10000 farmers were involved and organised under under 1216 Self Help Groups (SHGs) and 490 farmer clubs.
• Farmers have improved capacities and POPs for organic black pepper and coffee cultivation.
• Cost saving, productivity enhancement and higher revenues for farmers.
• Farmers are also cultivating other crops like cardamom, ginger, turmeric, cinnamon, clove, vanilla, lemongrass, vegetables and fruits which supplement their incomes.
• Processing facilities developed for increasing efficiency across the value chains that includes cleaning, grading, sorting, cracking, grinding and packaging.
• Marketing by FPO and better prices for farmers.
• Environment and biodiversity conservation owing to the use of organic inputs/bio-agents and bio-fertilisers.
• Project able to generate fair trade premium amounting of INR 8 crores.

3.5 Business model with flow chart representation

Under this model, it is proposed that an established NGO can provide support in mobilisation of farmers into SHGs/Producer Groups (PGs)/Farmer Interest Groups (FIGs) and later collectivise them in the form of an FPO.

The FPO could obtain loan (along with grant/subsidy if applicable) from NABARD or commercial banks. The loan taken by the FPO would be for establishing a processing centre, establishment of systems for collection of produce from farmers, operational costs of processing centre as well as for meeting working capital requirements for purchase of farmer produce.

If required the FPO can also channelise loans for the farmers (through banks) after keeping a fixed margin on interest rates to meet its administrative cost.

The FPO is also required to build capacities of farmers in organic cultivation and also assist them in organic certification. For this purpose, it could channelise funds from various government schemes otherwise it would have to utilise part of the loan funds.

The following flow chart represents the role of various institutions within the business model and also depicts the flow of inputs and outputs.

4. Impacts and Sustainability

4.1 Impacts – Social, Economic and Environmental

Social impacts

1. Providing chemical residue free organic black pepper for consumption to the public, thereby helping in food safety.
2. Building social capital and social cohesion through the organisation of farmers.
3. Building capacity of individual farmers and also farmer groups.
4. Generating additional employment for a number of persons through a FPO and other business activities.

Economic impacts

1. Reduced cost of production of black pepper as well as other crops (no purchase of chemical fertilisers, pesticides, insecticides etc. with farm yard manure being prepared by farmers themselves. Reduced number of spraying saves labour costs)
2. Increased yield of black pepper as well as other crops (after a few years) contributing to increased income of the family.
3. Increased access to organic and Fairtrade (if certified under Fairtrade) market; hence a price premium on the harvests sold and later access to Fairtrade premium for community development activities.
4. Increased access to other economic activities supported by various companies.
5. Organic farming is taken up in a combination of several food crops that leads to increased benefits and enhanced food security for farmers.

Environmental impacts

1. Reduction of soil, water and air pollution because of use of organic manures, FYM and organic pesticides and IPM.
2. Reduction of health hazards because of no use of chemical fertilisers, pesticides, insecticides etc.
3. No pesticides residues in fibre, hence no carcinogenic threats to the users.
4. Increase in biodiversity – agri-biodiversity, micro-organisms etc.
5. Eco-balance between pests and beneficial insecticides.
6. Improved soil fertility and crop productivity.

4.2 Mainstreaming Options

This model has a high potential to be replicated in the Malabar region as well as in the pepper growing regions of Tamil Nadu. Banks may look into the prospects of providing financial support for this model.

4.3 Climate resilience or adaptability of the model

Climate change and climate variability manifesting in the form of low rainfall and higher temperatures are a major concern for black pepper farmers. Lack of rainfall for prolonged periods affect black pepper productivity while high temperature causes spike shedding in black pepper. Salinity is another major issue as salinity, caused due to the use of large quantities of chemical fertilisers and overexploitation of aquifers is believed to have an adverse impact on the production of black pepper. Similarly, it is also a well-documented fact that insect and pest attacks have been on the increase due to conventional agriculture and also due to variations in climate.

Organic cultivation is expected to address some of the concerns for farmers over a period of time. Organic practices are expected to enhance resilience in farming systems by ensuring better soil health and increasing organic soil matter which results in higher water retention in the soil which is expected to enhance the yield of black pepper. In the medium-term organic cultivation is also expected to build the resilience of crops against insect and pest attacks, thereby reducing the plant protection costs for farmers. Stopping the use of chemical fertilisers is also expected to reduce the salinity of the soil which is quite favourable for black pepper cultivation.

4.4 Sustainability

This model is expected to become self-sustainable after support for the initial 3 to 4 years. This has been based upon the understanding and experience from similar initiatives currently being taken up by Wayanad Social Service Society (WSSS) in Wayanad, Kerala.

In fact, this model has been designed in a manner that it would be comparatively easy to achieve sustainability in the short term. The major factors that are expected to contribute towards sustaining this model are:

1. Facilitating agency to provide initial facilitation, startup and handholding support.
2. Capacity building of farmer groups and FPOs in governance, business planning and financial management.
3. Farmers groups to be linked with banks for loan.
4. Convergence with ongoing government schemes to be achieved.
5. The economics of this model indicate moderate to high returns from the farmers and the FPO.
6. This model factors the cultivation of one crop only, however, farmers would be able to cultivate at least one more organic crop and hence this would result in even higher economic gains for the farmers.
7. Adoption of organic practices is expected to lead to improved soil condition and hence improved crop productivity in the medium-term. This is expected to result in higher financial returns for the farmers.
8. The economic analysis of FPO has been done based on the processing of black pepper only. However, it is expected that the FPO would also engage in collection/processing of other organic farm produce and this would enhance its turnover and revenues.

5. Financial Details

5.1 Scope of financing and subsidy

At the FIG level, farmers would be requiring financial support in the form of loans for meeting the cost of cultivation for the first three years (till the time the first harvest of black pepper is done).

It is proposed that this requirement may be met partially through grant assistance from Paramparagat Krishi Vikas Yojana (PKVY) and partially from banks loans. In case culturable wastelands are to be brought under cultivation then Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) also provides financial assistance which may be utilised. Convergence with spice board may be also done to avail their existing subsidies for farmers. The facilitating agency and/or the FPO would assist the farmers in convergence.

FPO may also facilitate the farmers to obtain loans for meeting their cultivation costs. These loans would be sourced from NABKISAN or other banks.

It is envisaged that for this business model the FPO would require a loan of INR 72 lakh for meeting capital costs and another loan as working capital of INR 600 lakh for meeting the working capital requirements for procurement of black pepper from farmers. The working capital requirement would be primarily met through loans from NABKISAN and other banks while capital costs would be met partially through loans and partially through grants from NABARD, Spice Board and Ministry of Food Processing industries.

PKVY:  Under PKVY farmers taking up organic farming (minimum group size of 50 farmers) are provided grant assistance of INR 20000 per acre spread over a three-year period. Farmers could utilise these funds for purchasing seed, crop harvesting and transportation of produce.

Small Farmers’ Agribusiness Consortium (SFAC) Scheme: SFAC supports the FPOs by extending the loan guarantee and equity capital support schemes: The following two schemes of SFAC would be helpful for the FPOs to leverage the loan from banks:

1. Loan/equity guarantee cover scheme: Loans to POs/FPOs/FPCs under credit guarantee cover. Under this scheme FPOs can get term loan, working capital loan and or both. However, to be eligible to get the loan, the FPO must be 1 to 2 years old having audited balance sheet for at least one year and a minimum share capital of INR 3 lakh. The rate of interest is charged as per the NABARD refinancing rate. The loan is given up to 6 times of the net worth of FPOs or INR 1 Cr whichever is less.
2. Equity Grant Fund Support to FPCs: The Equity Grant Fund enables eligible FPCs to receive a grant equivalent in amount to the equity contribution of their shareholder in the FPC, thus enhancing the overall capital base of the FPC. The Scheme shall address nascent and emerging FPCs, which have paid up capital not exceeding INR 30 lakh as on the date of application.

NABKISAN’s support to newly formed FPOs: There is provision for the loans to emerging/nascent POs which are not in a position to provide collaterals. However, funding support to such FPOs can be provided in the form of loan of upto INR 50 lakh which depends purely on the merits and prospects of their business plan.

MGNREGA: In case unculturable wastelands, erstwhile fallow lands are proposed to be used for spice cultivation then under ‘land development works’ component of MGNREGA labour cost for bunding and land levelling are provided under this scheme.

Spice Board of India: The Spice Board of India is also offering various schemes for farmers, NGOs and for farmer organisations. Major components of assistance by Spice Board include:

• Pepper thresher: Subsidy is offered @ 50 per cent of the cost of the equipment subject to a maximum of INR 15000 per thresher.

• Bamboo mats: Spices Board India provides bamboo mats at 90 per cent subsidy to tribal growers and 50 per cent subsidy to others.

• Supply of polythene/silpauline sheets: These are provided at 50 per cent subsidy to tribal growers and at 33.33 per cent to other growers.

• Pepper/clove ladders: Spices board distributes ladders for harvesting pepper and clove with 50 per cent of cost of the ladder, subject to a maximum of INR 5000 is provided as subsidy.

• Spice cleaners/graders for pepper: Board provides pepper cleaning/grading machines at 50 per cent assistance, subject to a maximum of INR 35000.

• Organic cultivation: The assistance to spice growers is available to the extent of 12.5 per cent cost of production; subject to maximum of INR 12500 per ha.

• Assistance for ICS groups: 50 per cent cost of maintenance of ICS subject to a maximum of INR 75000, as subsidy.

• Organic certification: Individuals growers are eligible for 50 per cent of the cost of certification subject to a maximum of INR 30000.

• Bio-agent production unit: For setting up bio-agents production units i.e. training cum demonstration centres NGOs/SHGs/Spices Producer Societies/Farmers Group etc. are eligible to avail benefit under this scheme; the Board provides 50 per cent of the cost of equipment, accessories and mother culture unit subject to a maximum of INR 1.50 lakh as subsidy.

• Organic value addition: For setting up primary processing/value addition units Growers Societies/NGOs/Women groups/SHGs etc. having valid scope certificate for C1/C2/C3/Organic are eligible to avail 50 per cent of cost of the equipment/machineries subject to a maximum of INR 5.00 lakh as subsidy.

5.2 Cost Economics

The proposed business model provides estimates of cost-benefits at two levels i.e. at the level of individual farmer and at the level of the FPO for organic black pepper cultivation, processing and marketing.

5.2.1 Cost-benefit for farmers

The following table provides details of the expected cost of cultivation and the expected net revenue for individual farmers engaged in organic black pepper cultivation on one-acre land.

Table 2: Cost-benefits for individual farmers engaged in organic black pepper cultivation (1 acre landholding)

Assumptions

• The cost of cultivation may be sourced from the ongoing schemes of the Government primarily PKVY wherein a subsidy for an individual farmer is provided for upto 3 years.
• Since the farmers would get the first harvest at the end of the third year, therefore, they would require loans to meet the cultivation costs during the first three years. The FPO could arrange loan from the bank for thefarmers.
• From the third year onwards it is assumed that the farmers would be able to get organic certification and hence a premium price of black pepper has been taken and subsequently 5 per cent inflation has been factored in.
• Each year price inflation of 5 per cent in production costs has been factored in.
• The above assumption does not factor in drip irrigation system. In case drip irrigation is factored in then the yields are expected to increase by about 15 to 20 per cent.

Economic analysis

It is evident from the table below that under the proposed business model the farmers are able to get a return of around INR 25000 annualised over 5 years. While the net annual returns are around INR 60000 to INR 85000 from the 3rd year onwards. The benefit cost ratio for an individual farmer is calculated to be 1.29.

Table 3: Economic analysis of organic black pepper cultivation in one-acre landholding

LOANS

It is envisaged that the black pepper cultivators would require loan to meet their cultivation costs during the first three years. However, at the end of 3rd year the farmers would be able to sell their first crop and earn revenues and subsequently they would not require loans to meet the cultivation costs. The repayment of loan is projected from the 4th year onwards.

Table 4: Working capital loan for farmers

5.2.2 Cost-benefit for FPOs

Details of cost-benefit of FPO engaged in processing and marketing of organic black pepper is provided under Table 6.

Table 5: Cost-benefits for FPO engaged in processing and marketing of black pepper (1000 acres)

Assumptions

In the above analysis the following assumptions have been made:

• The above analysis assumes that the FPO is promoting cultivation of organic black pepper with about 500 to 750 farmers cultivating an aggregated area of 1000 acres.
• The cost of cultivation/conversion to organic black pepper farming for the farmers will be sourced from different schemes of the Government including PKVY.
• The FPO would assist the farmers in obtaining organic certification.
• The storage infrastructure will be made of low-cost materials.
• Loan will be obtained for INR 5.00 crores during the first as working capital for procurement of black pepper from the farmers while in the subsequent years a loan of INR 6.00 crores would be required. This amount for procurement will be taken on loan for about 6 months each harvesting season.
• A loan of INR 0.72 crores would be obtained for meeting the capital costs.
• An increment of 5 per cent each year for price escalation in the market value of black pepper (selling price) as well as a premium of 15 per cent (after organic certification) has been factored in from the 3rd year.
• An increment of 5 per cent each year for price escalation and that of 10 per cent (for organic certification) in the purchase price of black pepper from the farmers has been factored in from the 3rd year.
• An increase of 5 per cent each year in the cost of processing has been factored.
• An increase of 5 per cent each year in the administrative costs has been factored.
• The staff of FPO will coordinate the entire business operation including monitoring of conversion of conventional to organic farming.

ECONOMIC ANALYSIS

It is evident from the table below that under the proposed business model the FPO would incur a deficit of about INR 33 lakh in the first year (including capital costs of INR 72 lakh) but from the 2nd year onwards the FPO is expected to break even and from the 4th year FPO is projected to obtain a net return of about INR 53 to 62 lakh per annum. The benefit cost ratio is calculated to be 1.01 which is quite good and which indicates that this business model is viable.

Table 6: Economic analysis of operations of FPO

LOANS

It is envisaged that for this business model the FPO would require a loan of INR 72 lakh for capital expenditure and in the first year of operation a loan of INR 500 lakh for meeting the working capital requirements for procurement of black pepper from farmers. The working capital is roughly around 50 per cent of the total procurement cost and would be required for 6 months each year. From the second year onwards the value of procured commodities is expected to increase with the result that the FPO would require working capital of INR 600 lakh.

Table 7: Working capital loan for FPO

As far as loan for capital expenditure is concerned, its repayment would be initiated from second year onwards and it is expected to be repaid over a period of 10 years.

Table 8: Capital expenditure loan for FPO