Transcript Methods of Risk Management in Agriculture Under Trade

Changing Agribusiness and
Agriculture Organization:
Implications for Reforms in
Karnataka
Gopal Naik
Professor
Indian Institute of Management
Bangalore
Changing Market Environment
• Globalization and integrated markets
• By 2050 the world food demand is expected
to double
– Asia is the major source of demand increase
• Population increase
• Income increase
Dynamics of Food Demand
• Upto $2 per day (Rs 3000/month) – demand for
staple food
– cereals and pulses
• Between $2 and $9 per day ( Rs 3000 to Rs
5000/month) people eat more
– animal protein, fruits, vegetables & edible oils, causing
rapid growth in raw ag commodity demand
• After $10 per day (Rs 5000/month) people buy more
– Processed and packaged food, variety
• ( Source: Thompson, 2005)
Huge Market Growth Potential
from Poverty Reduction
Country
China
India
Indonesia
Brazil
Pakistan
Russia
Bangladesh
Nigeria
Mexico
Pop’n (000) % < $1/day
1299
16.6
1065
34.7
239
7.5
184
8.2
159
13.4
144
6.1
141
36.0
126
70.2
105
9.9
Source: World Bank. World Development Indicators database
% < $2/day
46.7
79.9
52.4
22.4
65.6
23.8
82.8
90.8
26.3
Structure of Indian Agriculture
Sector
• Large number of small/marginal farmers
• Poor market orientation in agriculture
production
• Increasing risk in farming business
• Inadequate facility to address farm risk
• Need to evolve appropriate business models
Farm pyramids: Opposing Structures of
holdings and area (global)
Percentage of farm holdings
Percentage of farm area
100
6.2%
80
> 5 ha
8.9%
87.1%
60
2-5 ha
40
20
84.9%
<2 ha
Source: von Braun 2005 (FAO)
6.8%
6.1%
Source: Gulati,et.al. 2005 (FAO)
Implications of Globalization
• Gear up the sector to compete effectively in the market
– Market oriented production
• Quality of the produce
• Right quantity
– Improve quality to address SPS concerns and compete in the
international markets
• Production, Procurement, grading, transportation, storage and processing
– Increase productivity
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Research and Technology Development
Technology adoption
Infrastructure – production, marketing and services
Macro production management
– Alternative marketing formats
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Meet customer requirements
Reduce transaction cost
Enhance quality
Expand market – Domestic and International
Improve value addition
Improve realization
– Professional Management
• Plan, coordinate and execute market oriented
production
Common Marketing Channel for Commodities
Coops
Producers
CA
Processing
Exporters
Primary
Wholesalers
B Secondary
Wholesalers
B
E
X
P
O
R
T
Distributors
SemiWholesalers
B
Retailers
Consumers
Problems in the current value
chain
• High cost
• Quality loss is high
– Anonymity of buyers and seller
– Absence of grading
– Number of times packing, unpacking and handling
done is high
– Handled by unskilled people
– Quality orientation is low
• Time requirement is high
• Wastage is high
• Inadequate information
Overcoming constraints
• Reduce transaction cost
– Group financing (SHG mode)
• Joint liability group
• Farmers club
– Credit rating
• Incentive schemes – KCC
– Increase credit limit
– Reduce interest rate
– Encourage financing through contract farming
– Bundle services
• Form - input supplies/output marketing
• Time/space – loan melas
Reduce risk
• Institutional support - facilitating structured
commodity financing
– Legal/policy support
• Contract farming
– Grades and standards
• Appropriateness
• Institutional mechanism
– Infrastructural support
• Network of warehouses
• Grading system
– Warehouse receipt system
• Tradable warehousing system
– Futures contract
Risk and returns in Agriculture &
contract farming
Decision Variables
Conventional Agriculture
Market Price
Level and
Risk
Imperfect market for
output
-Availability
-Quality
-Price
Revenue
Yield Level
and Risk
Imperfect market for
Production Technology
-Information
Natural Factors
Net Returns
Contract Farming
-Market security Thro’
buyback arrangement
- Quality is pre -specified
- Pricing and payment
scheme known before
season
-R&D and Extension
departments take care of
the information needs of
the farmer
-Contingency contracts
takes care of natural factors
Levels of
Inputs
Cost
Price of
Inputs
Imperfect market for
Inputs
(Seeds, Production and
Protection inputs, Credit)
-Price
-Quality
-Availability
-Seeds supplied by
company
-Credit facilitation by
company
-Inputs supplied by
company
Key Requirements for facilitating
agribusiness
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Macro commodity sector management
Integrated but efficient services to farmers
Improve Agricultural marketing facilities
Opportunity to high value realization
Macro commodity sector
management
– Matching estimated supply and demand
• Track of production commitment within and outside
the state through a market intelligence service
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Input supply tracking
Computerize information
Weekly commodity meeting
Forecast prices and make it available to farmers
• Action: Start a pilot for tomato and sugarcane on a
PPP basis
Integrated Efficient Services to
farmers
• Production
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Technology
Inputs
Credit
Knowledge
• Marketing
• Market selection
• Prices
• Channel selection
Action: Allow contract farming
Set up Farm integrated services at APMC level
on a PPP basis
Modernizing APMC
• Modernize Regulated Markets (Safal)
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Electronic transaction
Grade based transaction
Infrastructure for grading and handling
Process simplification
Information on prices in different markets and different
forms of product
– Facilitate forward contracting and futures trading
– Facilitate value addition
– Facilitate market oriented production
Create Opportunity for high
value realization
• Grade based transaction
• Value added product transaction : baled cotton
– Packed product - mango
• Certification and certified product transaction:
organic product
•Partnering with
Farmers