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Capacity Building Toolkit (Module 7)

BUSINESS MODEL:
ORGANIC CHILLI
CULTIVATION
Published by
Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH

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July, 2019
 ABOUT THE
MODULE
National Bank for Agriculture and Rural Development (NABARD), Bankers
Institute of Rural Development (BIRD) and Deutsche Gesellschaft für
Internationale Zusammenarbeit (GIZ) GmbH has come up with a ‘Farmer
Producer Organisation (FPO) Capacity Building Toolkit’. The toolkit contains
the following modules:

1. FPO orientation material

2. FPO capacity assessment tool
3. Training for Trainers (ToT) manual for Board of Directors (BOD)
4. FPO Massive Open Online Course (MOOC)
5. Guidebook on FPO business planning
6. Guidebook on FPO legal compliances
7. Business models for FPOs
8. Schemes and policy initiatives for supporting FPO
9. Guidebook on common derivative market for FPOs
10. Guidebook on input business planning for FPOs
11. Guidebook on FPO financing for bankers

MODULE 7 ‘Business models for FPO’ presents a compilation of business

models of various commodities based on experience of Umbrella Programme
for Natural Resource Management (UPNRM) programme to help FPOs and
other stakeholders in development of business plan, as a reference material.

The module covers challenges with respect to the commodity, project idea,
impacts, sustainability and financial details including cost-economics.

This business model is on Organic Chilli.

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 CONTENTS
1. BACKGROUND 1

2. CHALLENGES IN CULTIVATION OF ORGANIC CHILLI 2

2.1 Lack of quality planting material  2
2.2 Integrated inputs management  2
2.3 Insect and pest management 2
2.4 Improving cultivation practices 2
2.5 Post-harvest management 2
2.6 Financial support 3
2.7 Market research 3
2.8 Need to popularise organic food 3
2.9 Difficulties in organic certification 3

3. PROJECT IDEA 4
3.1 Intervention strategies and convergence 4
3.2 Potential for upscaling 6
3.3 Comparison with conventional 6
3.4 UPNRM Case example 6
3.5 Business model with flow chart representation 7

4. IMPACTS AND SUSTAINABILITY 8

4.1 Impacts- Social, Economic and Environmental 8
4.2 Mainstreaming options 9
4.3 Climate resilience or adaptability of the model 9
4.4 Sustainability 9

5. FINANCIAL DETAILS 11
5.1 Scope of financing and subsidy 11
5.2 Cost Economics 12
5.2.1 Cost benefit for farmers 13
5.2.2 Cost benefit for FPO’s  15

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 01
BACKGROUND
The world production of red chilli is around 7 million tonnes, and the area under chilli cultivation
is close to 1.5 million hectares. India is the world’s largest producer, consumer and exporter of red
chillies in the world. In fact, chilli production is dominated by the Asian countries and apart from
India, China, Thailand and Pakistan there are other major producers of chilli in the world.

Figure 1: Area, production and yield of chillies in major producing countries

1376

1500

1200
792

900

600
300

156

150

129
131

300
2.31
6.82

2.23
70

0.98
1.74

65
44

0
India China Thailand Pakistan Myanmar

Source: Geetha, R and Selvarani, K.(2017). A study of chilli production and export from India. International Journal of Advance Research and
Innovative Ideas in Education (IJARIIE) Vol-3 Issue-2 2017.
Informatics Limited, Bangalore, India.1

As per the available statistics for the year 2013, nearly 8 lakh hectare area was
under chilli cultivation in India and total production was nearly 14 lakh tonnes. ORGANIC CHILLI
The production of other major chilli producing nations is much less than that of Despite lack of information of
India. the exact area and production
details on organic chilli India,
Indian chilli is considered to be world famous due to its colour and pungency cultivation of the same is
levels for which it has a high demand in the international markets. In terms of gaining popularity throughout
value, chilli exports from India constituted 24.21 per cent of total export of the nation. As per available
spices from the country in 2015-16. Chillies are exported as chilli powder, dried details, organic chilli is being
chillies, pickled chillies and chilli oleoresins. Malaysia, Sri Lanka, Indonesia, cultivated in parts of Orissa,
Bangladesh, United States and Mexico are the major importers of chilli. Uttarakhand, Tamil Nadu and
Maharashtra.
Although chilli is grown in across various states of the country, major chilli
growing states are Andhra Pradesh, Telangana, Tamil Nadu, Karnataka, Maharashtra, Tamil Nadu and West Bengal.
1 Source: Geetha, R. and Selvarani, K. (2017)

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 02
CHALLENGES IN
CULTIVATION OF
ORGANIC CHILLI
2.1 Lack of quality planting material

There is a lack of availability of certified seeds of chilli of that could be used by organic farmers. In fact, there is a
need to develop suitable varieties or hybrids for organic cultivation and making them easily available to the farmers.

2.2 Integrated inputs management

Integrated Nutrient Management (INM) and Integrated Water Management (IWM) are required in chilli cultivation
as it helps in the reduction of cost. There is a need for strengthening research and development for location-based
chilli production technologies.

2.3 Insect and pest management

In order to ensure the productivity of organic chilli farms it is essential to ensure insect and pest management.
However, organic farmers do not have sufficient capacities in Integrated Pest Management (IPM) and the use of bio-
pesticides. It is therefore essential to build capacities of farmers in IPM and also ensure large scale multiplication of
bio-fertilisers, vermicompost, bio-control agents and then distributing them to the farmers at reasonable rates.

2.4 Improving cultivation practices

Linked to the above factors is the fact that there is relatively a lack of awareness and capacities amongst farmers
related to organic farming. In regard to the above factors, farmers related to organic farming lack awareness and
capacities in the organic farming sector. Through the capacity building of farmers cultivation practices can be
improved.

2.5 Post-harvest management

Post-harvest management is critical for red chilli and proper drying of chilli ensures good quality of produce. Farmers
require support for post-harvest handling and value addition along with a need for training and education on post-
harvest handling.

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2.6 Financial support

The organic farmers have a lack of access to institutional financial banks regulated markets and co-operative
marketing society should adopt flexible lending policy for organic farmers to meet their credit requirements.

2.7 Market research

There is a lack of adequate marketing research on the export potential of organic produce. In fact, in order to
promote organic cultivation of crops such as chilli there is a need for proper research and for establishing market
linkages that would enable the farmers and their organisations to obtain a better price for organic products.

2.8 Need to popularise organic food

Organic foods are proved superior in terms of health and safety, but there is a limited scientific evidence to prove
their superiority in terms of taste and nutrition, as most of the studies are often inconclusive. Therefore, a strategy
should be made for proper evaluation of quality parameters and packaging of organic foods. The farmers will be able
to procure premium prices for organic produce through such a strategy.

2.9 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.

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 03
PROJECT IDEA
India is the largest producer of chilli in the world but at the same time the per ha yield of chilli in India (1.74 mt/ha)
is much lower than that of other leading chilli producers in the world such as China (6.82 mt/ha), Thailand (2.23
mt/ha) and Pakistan (2.31mt/ha).

Studies reveal that productivity depends on the structure and mineral composition of the soil, depth and drainage
facilities, organic matters, the intensity of earthworm, and microbial activities (Patra et. al. 20162). Productive
soils along with assured irrigation and optimum supply of nutrients can enhance the crop yields by 200 to 300 per
cent (Hegde 20003). However, it has also been observed that injudicious use of chemical fertilisers has made fertile
lands barren in many areas (Patra et. al. 2016). Scientists also argue that while application of fertilisers should be
according to the nutrient status of the soil but such practice is generally not followed by the farmers due to lack of
awareness. According to Maredia and Pingali (2001)4 soils in Punjab and Haryana has started showing the signs
of exhaustiveness. Moreover, an increase in the incidence of insect and pest attacks has also been reported under
inorganic farming practices.

It is in the above backdrop that promotion of organic cultivation of chilli is sought to be promoted through the
present business model with an aim to arrest the diminishing returns to farmers and also from the standpoint of
environmental conservation.

The project idea is to mobilise farmers and support them to cultivate organic chilli 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 chilli 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 Non-Governmental Organisation (NGO) would take the
lead in the collectivisation of farmer/producers at the village level while also facilitating the setting up of an FPO. 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:

2 Patra, S., Mishra, P., Mahapatra, S.C., and Mithu, S.K., (2016). Modelling impacts of chemical fertilizer on agricultural production: a case study of Hooghly district,
West Bengal, India. Model. Earth Syst. Environment. Springer International Publishing, Switzerland.
3 Hegde, N.G. (2000). Sustainable agriculture for food security. Indian Farming.
4 Maredia, M., Pingali, P., (2001). Environmental impacts of productivity– enhancing crop research: a critical review. CGIAR Technical Advisory Committee Secretariat,
FAO, Rome.

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For support to farmers groups

The support may be provided through a local competent NGO or an established FPO for the following
interventions.
a. Farmer mobilisation and sensitisation for the adoption of organic farming techniques.
b. Formation of farmer groups i.e. Farmer Interest Groups (FIGs)/Producer Groups (PGs) or Self Help Groups
(SHGs).
c. Training and extension services on a package of practices for organic chilli farming.
d. Compensation for certification cost (organic) maximum up to one ha of farmland.
e. Loan for meeting cultivation costs-working capital.
f. Facilitating farmers to access good quality seeds.
g. Facilitating farmers to get crop insurance.
h. Facilitating farmers to develop linkages with producer organisations for the sale of organic chilli.

A cluster approach would be followed and a minimum of 700 acres (280 ha) of the area is proposed to be taken
up under organic chilli in one cluster. This will help minimising the overhead costs including administrative,
monitoring, certification costs.

For support to FPOs to strengthen organic chilli supply chain:

a. Establishment of office and processing unit of FPO.
b. FPO to support farmer mobilisation and sensitisation for the adoption of organic farming.
c. FPO to support conducting training and extension services for the farmers on a Package of Practices (POPs) for
organic farming.
d. FPO to meet the organic certification cost of farmers maximum up to one ha of farmland.
e. Maintenance of a robust internal control system and system for traceability.
f. Procurement of quality seeds and supply to members.
g. Provision of credit to the farmers for cultivation costs-need based.
h. Promote crop insurance and ensure farmers to get crop insurance.
i. Procurement of chilli from farmers aggregation at the sub-cluster level.
j. Grading, drying and grinding of chilli.
k. Negotiate with different buyers for the sale of organic chilli.
l. Agreements with the buyers and obtaining pre-finance from the buyers.
m. 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 chilli

A loan could be provided to FPOs for the establishment of infrastructure (capital costs) and for procurement and
trade of chilli (working capital). The working capital would be utilised for purchasing organic produce of member
producers, and for transportation, temporary storage, drying, grading, processing and supplying to the buyers.

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 3.2 Potential for upscaling

Chilli has a high demand in domestic as well as international markets. This model has the potential for wide
applicability as chilli is widely grown in India. It can be replicated across Andhra Pradesh, Telangana, Karnataka,
West Bengal, Madhya Pradesh, Odisha, Gujarat, Maharashtra, Tamil Nadu, Punjab and even in the hill states of
Uttarakhand and the North East (provided sufficient land for cultivation is available in the hill regions).

Table 1: Chilli growing areas in India

State Major chilli growing area

Andhra Pradesh Guntur, Warangal, Khammam, Prakasam, Krishna, Hyderabad, Nizamabad, Cuddapah, Rajamundry
and Nellore
Karnataka Dharwad, Mysore, Hassan, Bangalore, Bellary, Ranibennur, Hubli, Gadag and Byadgi
Maharashtra Nagpur, Nasik, Ahmednagar, Solapur, Aurangabad, Nanded, Amravati
Punjab Amritsar, Nabha, Patiala
Uttar Pradesh Bareilly and Khurja
Tamil Nadu Coimbatore, Ramanathapuram, Tuticorin, Tirunelveli, Virudunagar, Kanayakumari, Madurai,
Salem, Tiruchi, Villupuram and Cuddalore districts
West Bengal Murshidabad, South & North 24 Parganas, Nadia, Coochbehar, Jalpaiguri, East & West Midnapore
districts

Source: http://agritech.tnau.ac.in/banking/PDF/Chilli.pdf

3.3 Comparison with conventional

Studies reveal that organic cultivation of chilli yields higher net returns for the farmers as compared to the
conventional cultivation. According to a study conducted by Naik et. al. (2012),5 “it is advisable for the farmers to
switch over to organic farming which minimises the environmental degradation and also brings higher net returns.”

This above study reveals that market prices of organic and inorganic chilli show wide disparities with market price of
organic chilli being more than 50 per cent higher than inorganic chilli. Similarly, net returns from organic chilli are
calculated to be 128 per cent higher than that from the conventional or inorganic cultivation of chilli currently being
practiced by the farmers.

Studies also reveal that in addition to economic benefits organic cultivation also has environmental and ecological
merits, as compared to the conventional cultivation systems.

3.4 UPNRM case example

This project idea is based upon the model established by Nilagiri Foundation, Andhra Pradesh under UPNRM.
This model promotes vermicomposting along with residue free cultivation of red chilli amongst farmers from the
Guntur district of Andhra Pradesh. It has been quite effective in increasing incomes of farmers through residue free
cultivation supported by an FPO/FPC that provide technical assistance to farmers along with aggregation, processing
and marketing of farm produce. The following are the highlights of this pilot:
• Over 1000 acre land is covered under the cultivation of residue free chilli cultivation and turmeric.
• A separate FPO/FPC is taking care of the chilli value chain along with some other crops such as dehydrated
vegetables and fruits.
• The FPO/ FPC has expanded the program from 250 farmers from approximately 22 villages to nearly 1000
farmers of 27 villages organised across 4 clusters of Guntur district, A.P.
5 Naik, V.R., Kunnal, L.B., Patil, S.S. and Guledgudda, S.S. (2012). Organic and inorganic cultivation of chilli and its marketing – An economic analysis. Karnataka J.
Agric. Science. 25 (2): (203-207) 2012

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• These farmers have been organised into groups and have been engaged in the cultivation of residue free crops
and vegetables. The main residue free crops are chilli, turmeric and vegetables. FPO/ FPC provides seed to seed
support and Package of Practices (POPs) to enhance production as well as productivity.
• The farmers have switched over to residue free farming in order to reduce the input cost in farming and to
reclaim the soil health which has been lost due to insidious usage of modern agriculture inputs.
• A wide marketing network for the brand building was developed by FPO/FPC and it has set up the required
infrastructure in chilli value chain-i.e.-processing, grading, value additions, packaging, branding, testing,
packaging and marketing. A strong supply chain is being maintained at this FPO level.
• The KHETINEXT app which is an Integrated Digital Platform has been introduced for enabling agricultural
transformation through smart farming.
• KHETINEXT also builds partnership with local NGOs and other agencies that work with farmers groups and
provide them with a variety of services including the real time expert advisory, connecting farmers with financial
institutions for availing of the credit facilities and insurance services as well.
• The FPO/ FPC has secured a loan of the order of INR 48 lakh for meeting the investment requirement of its
associated farmers.

3.5 Business model with flow chart representation

Under this model, it is proposed that an established NGO like the Nilagiri Foundation, can provide support in the
mobilisation of farmers into SHGs/PGs/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 for
establishing a processing centre, creating enabling infrastructure and establishment of systems for collection of
produce from farmers. For
Figure 2: Diagrammatic representation of the proposed business model
the purpose of meeting the
operational costs of processing
NGO
centre as well as for meeting
working capital requirements Start up and Government
for purchase of farmer produce Technical support programmes
the FPO could also take • Business planning
• Certification,
working capital loan. trademark and FPO Loan/
licensing subsidy
• Processing and
The NGO or the FPO can also grading
• Marketing
channelise loans for the farmers - Business planning
NABARD &
- Input Supply
(through banks) after keeping - Organic certification Financial
- Sale of produce - Bank linkages and loans Institutions
a fixed margin on interest rates - Capacity building
to meet its administrative cost. - Package of practices

The FPO is also required to - Farmer mobilisation

- SHG formation
build capacities of farmers in - Group management • Aggregation
organic cultivation and assist Farmer Groups • Account keeping
(between 10 to 20) • Business planning
them in organic certification.

The following flow chart • Organic cultivation

• Organic certification
represents the role of various Farmers
• Primary drying
institutions within the business
model and also depicts the flow
of inputs and outputs:

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 04
IMPACTS AND
SUSTAINABILITY
4.1 Impacts – Social, Economic and Environmental

Social impacts
a. Providing chemical residue free organic produce for consumption to the public thereby helping in food safety.
b. Building social capital and social cohesion through organisation of farmers.
c. Building capacity of individual farmers and also farmer groups.
d. Generating additional employment for a number of persons through the FPO and other business activities.
e. Generating additional employment for people involved in the value chain through the FPO.
f. Organic certification of the entire farmland helps farmers to produce other organic crops, which are either
consumed or sold in the market.

Economic impacts
a. Arrest the diminishing returns for chilli cultivators and enhancing per ha productivity of chilli for Indian
farmers.
b. Reduced cost of production of chilli as well as other crops in the long run (no purchase of chemical fertilisers,
pesticides, insecticides etc. with farm yard manure being prepared by farmers themselves. The reduced number of
spraying saves labour costs).
c. Farmers getting an extra premium for organic red chilli.
d. Proper grading and processing of red chilli by the farmers and by the FPO that ensure better market prices.
e. FPO ensures that farmers get higher prices for their produce and exploitation by middlemen is contained.

Environmental impacts
a. Reduction of soil, water and air pollution because of the use of organic manures, FYM and organic pesticides
and IPM.
b. Organic soils retain more water.
c. Increase in biodiversity, agri-biodiversity, micro-organisms etc.
d. Eco-balance between pests and beneficial insecticides.
e. Improved soil fertility.

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4.2 Mainstreaming Options

This model has a high potential to be replicated in key chilli growing belts of the country particularly in the states of
Andhra Pradesh, Telangana, Maharashtra, Tamil Nadu and West Bengal. NABARD/NABKISAN’s financial support
along with the technical and handholding support of development organisation can support the promotion of this
model.

4.3 Climate resilience or adaptability of the model

Agricultural crops are impacted by temperature and moisture regimes both of which are affected by the change in
climate. Chilli is not an exception and the growth and productivity of chilli is determined by the availability of soil
moisture and also the prevalent temperature.

According to Bhutia et. al. (2018), young Figure 3: Effect of climate change on chilli (Bhutia et. al. 2018)6
seedlings of chilli cannot withstand either
deficit or excess of soil moisture while
the distribution of rainfall throughout
the growing season of chilli also acts as
an important factor which influences the
growth and yield. Unequal distribution of
rainfall causes severe yield loss due to several
physiological and biochemical adversities
and infestations by insect pests and diseases.
Increase in temperature and moisture stress
(low moisture) causes early flowering in chilli
plants and many other phenotypic changes
that lead to poor growth and yield.

Soil acidity and salinity also have a profound

impact upon chilli crops and acidic and saline
soils are not suitable for chilli cultivation.
High soil salinity leads to poor germination, delays stand establishment and delays growth and yield (Ibid).6

Organic cultivation is expected to be climate resilient and has the potential to address some of the concerns for
farmers arising out of water and temperature stress. 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 chilli. 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 after farmers.
Preventing the use of chemical fertilisers is also expected to reduce the salinity of the soil.

4.4 Sustainability

This model is expected to become self-sustainable after support for an initial 3 to 4 years. This has been based upon
the understanding and experience from similar initiatives currently being taken up by Nilagiri Foundation, Andhra
Pradesh.

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. Farmer groups to be linked with banks and bank loans provided to farmers.
6 Bhutia KL, Khanna VK, Meetei TNG, Bhutia ND (2018) Effects of Climate Change on Growth and FDevelopment of Chilli. Agrotechnology 7:180

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 4. Convergence with ongoing government schemes to be achieved.
5. The economics of this model indicate good returns from the farmers and the FPO from the 2nd to 3rd year
onwards.
6. This model factors in 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 chilli 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.

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 05
FINANCIAL
DETAILS
5.1 Scope of financing and subsidy

In the case of chilli it is not sure whether the farmers might be requiring financial support in the form of loans,
grants or subsidies for meeting the cost of cultivation. However, in case farmers require working capital then their
requirements may be met partially through grant assistance from Paramparagat Krishi Vikas Yojana (PKVY) and
partially from bank 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 NABARD or other banks.

Figure 4: Flow of loan for FPO and farmers

Loan Loan

NABARD/Banks FPO Farmers

Repayment Repayment

It is envisaged that for this business model the FPO would require a loan of INR 52 lakh for meeting capital costs
and another loan as working capital of INR 250 lakh in the first two years and INR 300 lakh in the third year for
meeting the working capital requirements for procurement of chilli 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 grant assistance 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.

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 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:
a. 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.
b. 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 can be provided to such FPOs upto INR 50 lakh in the
form of loan based 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:
• Supply of silpauline sheets to chilli growers: These are provided at 50 per cent subsidy to tribal growers and at 33.33
per cent to other growers.
• Supply of PP equipment to chilli growers: The objective is to facilitate the growers to take up timely and effective
and need based spraying of pp chemicals and bio-agents to manage pest and diseases.
• 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: Individual growers are eligible for 50 per cent of the cost of certification subject to a
maximum of INR 30,000.
• 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.

In addition to the above there are a number of state schemes of horticulture departments of various states where upto
50 per cent subsidy is provided to farmers on planting material and other costs. They may also be explored by the
facilitating NGO or by the FPO.

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 chilli cultivation, processing and marketing.

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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 chilli cultivation on one-acre land.

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

A Particulars Unit Quantity Unit Cost (INR) Year 1 Year 2 Year 3 Year 4 Year 5
A.1 Sowing practices
1 Land Preparation Person days 10 250 2500 2625 2756 2894 3039
2 Seed procurement Per kg 0.1 5000 500 525 551 579 608
3 Nursery raising of seedling L/S 2000 2100 2205 2315 2431
4 Plantation of seedling Person days 10 250 2500 2625 2756 2894 3039
Total (A.1) 7500 7875 8269 8682 9116
A.2 Main Field cultivation
5 Irrigation Person days 6 250 1500 1575 1654 1736 1823
6 Inter-cultivation Person days 4 600 2400 2520 2646 2778 2917
7 Weeding Person days 8 250 2000 2100 2205 2315 2431
8 Vermicompost Tonnes 2 4500 9000 9450 9923 10419 10940
Plant protection cost (neem
9 power and castor cake) L/S 5000 5250 5513 5788 6078
10 Bio fertilizers Kg 50 50 2500 2625 2756 2894 3039
Bio dynamic applications
11 (Panchgavya) Ltrs 50 60 3000 3150 3308 3473 3647
Bio-pesticides and
12 botanical pesticides Kg 40 15 600 630 662 695 729
13 Spraying Person days 5 250 1250 1313 1378 1447 1519
14 Growth Promoters L/S 4000 4200 4410 4631 4862
15 Harvesting cost Person days 20 250 5000 5250 5513 5788 6078
Total (A.2) 36250 38063 39966 41963.9 44062.1
A.3 Post harvest expenses
Drying and grading (person
16 days) 10 250 2500 2625 2756 2894 3039
Total (A.3) 2500 2625 2756 2894 3039
A.4 Other expenses
17 Crop Insurance (Acre) 1 1700 1700 1785 1874 1968 2066
Total (A.4) 1700 1785 1874 1968 2066
Cost of Cultivation
(A.1+A.2+A.3+A.4) 47950 50348 52865 55508 58284
B Yield and revenue
Yield per Acre Qtl 8
Sale of chilli Per Qtl 8 9300 74400 78120 90229 94740 99477
Total B 74400 78120 90229 94740 99477
18 Net Returns (A-B) 26450 27773 37364 39232 41194

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 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
• If required the FPO could arrange bank loan for the farmers for meeting the cost of cultivation for one year.
• Inflation at the rate of 5 per cent per annum has been factored in while calculating all costs as well as revenues.
• From the third year onwards it is assumed that the farmers would be able to get organic certification and a
10 per cent premium in price of chilli has been taken.
• 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 10 to 20 per cent.
• The labour costs are included while calculating the above costs but in case farmer engages in performing various
agricultural operations then the cost of labour may be a saving for the farmer.
• This model is based on yield estimates from Guntur district of Andhra Pradesh. In case of other regions the yield
may show slight variations.

Economic analysis

Under the proposed model, farmers are able to get a return of around INR 2.86 lakh annualised over 5 years. While
the net annual returns are around INR 0.26 lakh (Year 1) to INR 0.41 lakh (Year 5). The benefit cost ratio for an
individual farmer is calculated to be 1.64 which is very good.

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

Amount in INR
Particulars
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Capital cost 0 0 0 0 0
Recurring cost 47950 50348 52865 55508 58284
Total cost 47950 50348 52865 55508 58284 264954
Total benefits 74400 78120 90229 94740 99477 436966
Net benefits 26450 27773 37364 39232 41194 172012

Net present worth of cost @15 per cent 175282

Net present worth of benefits @15 per cent 286789
Benefit Cost Ratio 1.64

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5.2.2 Cost-benefit for FPOs

Details of cost-benefit of FPO engaged in processing and marketing of organic chilli is provided under Table 4.

Table 4: Cost-benefits for FPO engaged in processing and marketing of chilli (700 acres)

S.No Particulars Unit Organic Cultivation INR Lakh

Quantity Cost (INR) Year 1 Year 2 Year 3 Year 4 Year 5

A.1 Capital Cost

1.1 Storage (transit storage) cum office Sq. ft. 1500 700 10.50 0.00 0.00 0.00 0.00
1.2 Office equipment (weight machines, Lumpsum 1 150000 1.50 0.00 0.00 0.00 0.00
chairs, table, shelf, desktop
computer, printer etc.)
1.3 Chilli processing unit- pulverizer, Nos 1 800000 8.00 0.00 0.00 0.00 0.00
2 dryers, grinders (including
installation and start-up costs)
1.4 Packaging unit and other equipment Nos 1 200000 2.00 0.00 0.00 0.00 0.00
1.5 Purchase of vehicle for Nos 2 1500000 30.00 0.00 0.00 0.00 0.00
transportation
Total capital cost (INR) 52.00 0.00 0.00 0.00 0.00
A.2 Recurring cost

2.1 Mobilisation of farmers, training Acre 150 1000 1.50 1.58 1.65 0.00 0.00
and technical guidance or organic
farming (per year for 3 years)
2.2 Capacity building of farmers in Acre 150 3500 5.25 5.51 5.79 0.00 0.00
POPs, primary processing etc
2.3 Certification cost (including Acre 150 1000 1.50 1.58 1.65 1.74 1.82
overheads)
2.4 Procurement of chilli from the Quintals 5600 9300 520.80 546.84 661.68 694.76 729.50
farmers @ 8 quintals from one acre
(700 acres)
2.6 Operational and maintenance Quintals 5600 250 14.00 14.70 15.44 16.21 17.02
expenses of processing unit
2.7 Packing and transportation Per 5600 175 9.80 10.29 10.80 11.34 11.91
expenses quintal
2.8 Staff, administration, travel, Month 12 150000 15.00 15.75 16.54 17.36 18.23
coordination, marketing etc.
2.9 Interest on loan for working capital Half 15.00 15.00 18.00 18.00 18.00
(12 per cent) yearly
2.1 Interest on loan for capital cost Per 6.24 5.79 5.28 4.72 4.08
(12 per cent) annum
Total recurring cost (INR) 589.09 611.24 731.55 759.41 796.48
Total cost - capital and recurring 641.09 611.24 731.55 759.41 796.48
A.3 Income/ Benefits
3.1 Sale of chilli Quintals 5320 11500 611.80 642.39 809.41 849.88 892.38
Total Income 611.80 642.39 809.41 849.88 892.38
Gross Profit 22.71 31.15 77.86 90.47 95.89

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 Assumptions

In the above analysis the following assumptions have been made:

• The above analysis assumes that the FPO is promoting cultivation of organic chilli with about 750 to 1000
farmers cultivating an aggregated area of 700 acres.
• The cost of cultivation/conversion to organic will be sourced from different schemes of the Government
including PKVY.
• The available subsidy from various sources has not been factored in this model which has been prepared on the
basis of maximum cost in order to assess economic viability.
• 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 2.50 crores during the first year as working capital for procurement of produce
from the farmers while from the third year a loan of INR 3 crores would be required. The working capital is
calculated as 50 per cent of the total cost of procurement of produce. The working capital loan would be taken
for about 6 months each harvesting season.
• A loan of INR 0.52 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 chilli (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 chilli 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 is expected to obtain a profit
of about INR 22 lakh in the first year (excluding capital costs) and from the 2nd year onwards FPO is projected to
obtain a net return of about INR 30 to 90 lakh per annum. The benefit cost ratio is calculated to be 1.06 which is
quite good and which indicates that this business model is viable.

Table 5: Economic analysis of operations of FPO

Amount in INR Lakh

Particulars
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Capital cost 52 0 0 0 0
Recurring cost 589 611 732 759 796
Total cost 641 611 732 759 796 3540
Total benefits 612 642 809 850 892 3806
Net benefits -29 31 78 90 96 266
Net present worth of cost @15 per cent 2331
Net present worth of benefits @15 per cent 2480
Benefit Cost Ratio 1.06

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LOANS

It is envisaged that for this business model the FPO would require a loan of INR 52 lakh for capital expenditure.
A loan of INR 250 lakh would also be required as working capital for procurement of chilli from farmers. The
working capital would be required for 6 months each year and has been calculated at 50 per cent of the total cost
of procurement of produce from the farmers. From the third year the value of procured commodities is expected to
increase with the result that the FPO would require working capital of INR 300 lakh.

Table 6: Working capital loan for FPO

Working Capital Loan INR in Lakh

Year 1 Year 2 Year 3 Year 4 Year 5
Yearly Working Capital Requirement 250 250 300 300 300
Repayment 250 250 300 300 300
Interest on net working capital Loan (Diminishing) @ 12 per cent per 15 15 18 18 18
annum

The repayment of loan of INR 52 lakh for capital expenditure would be initiated from second year onwards and it is
expected to be repaid over a period of 10 years.

Table 7: Capital expenditure loan for FPO

Capital expenditure loan INR in Lakh

Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y 10
Capital expenditure 52.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Repayment 0.00 10 10 10 10 10 10 10 10 6.44
Interest on capital loan 6.24 5.79 5.28 4.72 4.08 3.37 2.58 1.69 0.69 0
(Diminishing) @ 12 per cent per
annum
Total loan outstanding 58.24 54.03 49.31 44.03 38.11 31.49 24.07 15.75 6.44 0

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