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 Development

Dehradun
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

2
3
 Executive Summary
This study focuses on the cultivation of organic basmati rice in the state of Uttarakhand,
1
situated in Northern India. 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.

4
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.

5
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.

6
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.

7
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)

8
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

9
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).

10
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

11
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.

12
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.

13
 Table 1

Costs of basmati rice per hectare (Organic and Conventional)

Cost Rs/hectare
ACTIVITY
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.

Table 2

Profitability

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 Average Yield Rate Amount Cost of Profits
(ton/Hectare) (Rs./ton) Received by Production (Rs./Hectare)
Farmers (Rs./Hectare)
(Rs./Hectare)
Organic Farming 2.25 15500 34875 19537 15338
Conventional 2.62 13000 34125 20693 13432
Farming

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 Initiation

As 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.

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

14 www.Sunstar overseas.com

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

15
(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.

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.

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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

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.

17
 • 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.

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

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
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.

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 O' Year Ist Year Certified Total No. of
Organic area area Organic Farmers village
area (ha.) (ha.) covered

18 Alam and Verma (2006)

19
 (ha.)

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.

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 Table 4
Production and sale of certified organic basmati rice (2005)

Certified Organic
Area Qty Rate Value
District (ha) (qtl) (Rs/qtl) (Rs)

Dehradun 102.51 732.73 2100 1538733

U.S.Nagar
32 365.14 2100 766794
134.5
Total 1 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

21
internal control system (ICS). As part of this system the internal inspection is carried out
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
4 10479.58
Total Cost of Cultivation
5 Cost of certification as percentage of cost 2.69 %
of cultivation

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.

22
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.

23
 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.

24
 Table 7
Cost of Production and Profitability (Rs./hectare)

AMOUNT
1 10479.58
Average cost of cultivation
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
farming methods.21 As this wheat is not sold at a premium, this affects the overall

20 Alam and Verma (2006)

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

25
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.

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.

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

.htm

26
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.

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.

27
 • 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

• 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

26 Alam and Verma (2006)

27 ibid.

28 ibid.

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

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

29
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
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.
30 http://www.nabard.org/introduction.asp

31 ibid.

30
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
35
make a significant contribution. 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.

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
32 Naik S D (2006)

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

34 ibid.

35 Naik S D (200)

31
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.
Timely harvesting, correct methods of drying, avoiding damage during mechanical
handling, avoiding contamination, grading, effective packaging for storage to maintain

32
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.

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

33
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.

34
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
organic methods of cultivation, pest and disease control, compost making techniques and

35
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
representing farmers’ interests they also play an important role in facilitating farmers’
training, coordinating procurement, supplying inputs to farmers and organizing payments.

36
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
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

37
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.

38
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