This study paper takes India’s agriculture as a case in point for discussion and uses a simple to understand language without any reference to complex theories and jargons so that it connects to readers from a wider spectrum. However, though the case in point for discussion is with reference to India as geography and state, the readers are told that the base concept discussed in the paper can be applied to any densely populated, developing economy like Pakistan, Indonesia, Bangladesh, Philippines etc where Agriculture is a vital sector of the economy.
The very objective behind this study is undisputable reality that agriculture as a sector though is a vital life blood for any densely populated developing economy, very little penetration of good commercial practices have seeped into this sector for a variety of reasons like vastness of areas to be covered, resistance to good commercial practices from rural populace due to what can be called as fear of unknown, etc.
At the outset let us have a birds eye view of the agricultural structure in India (the geography taken for this study paper) in terms of available land on one hand and the awareness levels of rural populace of various tools and techniques, in short various commercial good practices / methods that are in place.
Of the total land available in the country, (though a tropical country with rich water resources) only approximately 67.6% of the land is made as agriculture fit and the area under irrigation is a mere 59 million hectares as at 1990. The country’s population is slated to touch approximately 1.68 billion mark by 2050 making it the most populous country on the planet. Connecting the dots here we can easily see the true picture. The picture is same for many of the developing economies in the region.
Now lets discuss the modus operandi and application of each one of the corporate good practices / techniques mentioned in the summary and title to this sector.
Risk Management in Agriculture
The risk that stares on the face of a farmer comes from multiple sources. However all these can be capsuled together and classified into broadly three major threats that account for bulk of all the risks faced, namely, weather, pests and poor (under) yeilds.
The risk of poor yields / under yields (this risk in many crops is so dangerous that it remains mostly invisible for the best duration of the crop, and exposes itself only towards the approach of harvest time) can be mitigated largely by resorting to time tested / proven high yield high resistant hybrid seed varieties. Pleasantly, in India the awareness of these seeds and their availability has of late penetrated into the ranks of the target audience namely the rural farmer. But the real challenge is ensuring the availability of these seeds to every single farmer who is willing to buy them for a price, and availability through the year for all harvest seasons. Here the supply chain (distribution chain) issue may arise in the minds of the readers, but the same can be resolved by using the post office branches that are spread through the entire landscape of the vast nation. It may be pointed out that though the business of a post office is completely different, the extensive distribution network of the postal department can be exploited for the distribution of these seeds, besides publishing the availability and non availability of different seeds at different intervals of time. This can also be embedded with checks and balances in the system, in such a way that farmers can register their grievances / complaints, if any, in the distribution process at immediate next higher level office (say district head office of the post office , regional head office etc).The status of the complaints can be found out at any time by invoking the RT I Act (Right To Information Act) or applicable laws in the relevant countries, if things go to such an extent, since the propesed checks will mitigate most of such requirements. Further the risk of poor yields (and the risk of pests) can also be mitigated to a good extent by a judicious use of right fertilizers. The supply chain (distribution) issue of the same can be resolved in exactly the same manner as that discussed for crop seeds.
The risk caused by uncertainty of realising the expected harvest due to adverse weather on one hand and / or pest attack / infection on the other hand can be mitigated by transferring the risk to a third party, that is, by taking crop insurance. Here is where a host of problems reside adding to woes, this risk constitutes the biggest of all risks faced by the farming community. Its a curse, this lethal risk which also comes with a very high probability of occurrence (and having its biggest and best mitigation bet in “insurance”) faces the problem of abysmally poor penetration of crop and allied insurance and this is a painful truth not just in India but in many parts of the world. Across the geographies, crop insurance schemes are subsidised by the respective governments but given the gaps in the schemes, it has been a failure. Lets discuss the case in India (again as mentioned earlier the same is observed in many countries in developing world with large populations to feed). As a mechanism to address the poor insurance penetration in agricuture sector, the central government came out with Comprehensive Crop Insurance Scheme (CCIS) in 1985 and the same was soon replaced by National Agriculture Insurance Scheme (NAIS). This NAIS did not deliver on expected lines as it suffered from the same flaws that scores of subsidised crop insurance schemes suffered from in many parts of the world such as adverse selection, area approach, arbitrary premiums (based on actuarial rates and administrative costs) to name a few, besides poor penetration. The flaws in product structure / design has to be addressed at the level of insurance provider by analysing each of the mentioned common flaws in its own merit and rectifying the same. Example, adverse selection can be mitigated by charging higher premia for high risk areas; by getting the schemes (that are financially subsidised by the Govt) to be administered by private companies, etc. The other perennial problem is that of absymally poor penetration of insurance in the farming community in most of the developing economies. Again as discussed in earlier paragraphs, the solution lies in creation of a viable, strong distribution network across the length and breadth of the rural hinterland and in a vast country like India that would mean creation of a network spread across more than 5,00,000 villages. Creating such a network from scratch is financially unviable, besides being time consuming in nature. Hence the solution lies in exploiting any existing network for firstly creating awareness about benefits of crop insurance to the target audience namely the farming community as a whole and secondly arranging for the cross selling of the insurance products to the farmers and this can happen only after a successful awareness campaign. The awareness campaign can be carried out (execution stage) by tying up with the scores of good NGO (Non Government Organisations) with a proven good track record and Micro Credit Institutions. Here the NGO’s involved can be encouraged financially by providing them with funds for the same on a piecemeal basis so that the results of their awareness campaign are also closely monitored (thus ensuring tax payers money not wasted) and a healthy checks and balances system also gets created. Further moral encouragement also needs to be given by giving them the tag of “Friends of Farmers” based on the results produced and deep lasting connections established by them with farming community. (Readers may kindly note that “deep, warm connections” in farming community (read: the rural hinterland) is of utmost importance since most deals in rural regions are driven by “trust” and this is particularly true for developing countries with vast rural populations like India, Pakistan, Bangladesh etc). Once the awareness of crop insurance, its associated benefits, etc are created and implanted successfully in the minds of the farmers (and this, given the vastness of the rural hinterland, will happen in stages, that is area by area and not across the country in one roll) the next stage involves ensuring that the insurance products (about which the farmers have been made aware in first stage) are available to the farmers (to begin with particularly in areas where successful awareness campaigns have been completed by the NGO s and micro credit institutions). The distribution network / chain for the same will be the post offices (given the fact they are spread all over the country’s vast landscape and manned by competent people who can well understand the nuances of the insurance products and can also easily connect to the local populace). Besides post offices, the network of petrol / gas stations spread across the country can also be exploited to increases the density of the insurance depot networks. Readers may note that given the fact most of these gas / petrol stations operate based on the permits given by Govt for distributing the fuel from oil marketing public sector companies, getting them to cross sell crop insurance to farmers in rural areas, can be easily possible.
It is time that these fundamental flaws in the insurance product and product structure / design, besides the issue of lack of awareness & poor penetration, are rectified to enable the farming community to effectively hedge their risks and on a different note, to enable the world at large to hedge its food security.
Better Price Discovery
Companies, be it manufacturing sector or the ones in services sector, price their offerings such that their bottom lines are well taken care of. They also enjoy the benefits of reaching the end consumer directly in some cases and in some cases through retail outlets like FMCG sector wherein the protection is there in the form of MRP (Maximum Retail Price). Now take the case of farmers, their produce reaches the end consumers after passing through a chain of middlemen and every time it changes hands from one middleman to another, it undergoes a price change obviously towards the upper side. Thus, by the time the agricultural produce reaches the end customer, the price is increased many fold. The notable pain point in this entire process is that the farmer gets only a miniscule value for his produce when compared to the price paid by end consumer. Readers may note that the agricultural produce does not undergo any value addition by the time it moves from farmers hands to the kitchens of the end consumer – hence there is no rational for the many fold multiplication of price). There are multiple effects of this pain point that we observed. One, the farmer does not get a good value for his produce (read: poor price discovery) and second, equally important effect is that the nation as such will face the problem of food inflation. (Mathematically extrapolating this to global stage – the same is found true for global economy as such due to what can be called as spill over effects).
One way of ensuring that this twin problem of poor price discovery for farmers and high food inflation of the economy can be addressed is by enabling the farmers direct access to the markets of the end consumer by establishing what is called as “farmers market” at different locations across the country (high density population areas are preferable) wherein the farmers get to take their produce to that market on designated days of a week and sell the same to the end consumer at a good price. This has been successfully attempted in many developed economies and to some extent even in parts of developing world. This will ensure that the farmers get a better price discovery for their produce (and that would mean increased rural income levels for the economy as such), consumers get a fair deal for their purchases and the twin effect of this is better control over food inflation.
Cost Savings & Improved Productivity – Higher Yield At Lower Costs
Again, companies, be it manufacturing sector or the ones in services sector, have multitude of ways (such as six sigma, TQM, Lean, Setting up of Shared Service Centres (SSC) etc) to improvise their productivity on a continuous basis and also to reduce their costs without impinging on the product quality and productivity. These offer farmers lots of good lessons as well. Due to the bottlenecks in the form of vastness of the rural hinterland, inadequate literacy levels in some places and therefore as a by product of this, inadequate awareness levels, etc. all these concepts cannot be taken to them as a whole. But instead the most essential ones can be taken forward and brought to the notice of the farming community. On an analysis of the current agricultural scene in India, the single biggest problem hindering productivity is “small land holdings” of the Indian farmer which is not conducive for mechanised farming and also which does not enable the farmers to exploit any kind of economies of scale in their other related activities like purchase of seeds, purchase of fertilizers, renovation to irrigation lines, etc.
As a solution to this the Shared Services Centres Model of the corporate world can be borrowed here effectively. Applying the fundamental base of the same, the farmers need to be incentivised to go for “co-operative farming”. The model for the same can be easily created and infact one tried and tested model is readily available, that is that of the successful white revolution.
Milk farmers in India (in the white revolution) formed cooperative societies and a number of cooperative societies of a particular region will have a parent cooperative society to which they will be affiliated members. In the same manner, the famers of a specific region (this will benefit all farmers- in particular the small farmers stand to gain the most) need to be incentivised to come together to form cooperative society and pool their land holdings together and perform cooperative (read: joint) farming. The benefits are countless and we will actually need a full book to comprehensively explain them. Here we try and compress the same into a nut shell by focussing on the prime advantages accruing to the farming community, in particular to the small farmers (that is farmers with small land holdings). When small land holdings are pooled together in a specific geography (say, as discussed earlier by formation of a cooperative society to give it a strong legal form) the resultant large single piece of land can be subjected tofull fledged mechanised farming but still retain the economic viability of doing so. (For readers who are unfamiliar to the operations aspects of agriculture, lets communicate that an economically viable, produce wise viable, full fledged mechanised farming is unthinkable for a small farmer). Besides this, a large single piece would also help in bettering the chances for exploring and implementing a multi-crop farming thereby leading multiple benefits in terms of productive yield per hectare of land. Further, the cost and earnings numbers in terms of cost incurred per hectare yield of land (and this can be further sub divided into inputs cost (ie. Cost of seeds, fertilizers and water) per hectare yield of land, labour cost per hectare yield of land, ploughing cost per hectare and other costs per hectare) and revenue earnings per hectare of land will also show a dramatic improvements under a successful, well planned multi-croping system. And besides these there always exists the un-doubtable, significant benefits from economies of scale with regards to the core operations aspect of a large pool under a system of joint farming.
Having discussed, in simple plain terms, without usage of any jargons and theories, the benefits of marrying some of the simple concepts in risk management, cost savings, productivity improvisations and price discovery mechanisms from the non agricultural sectors in the corporate to agricultural sector, it can be hoped that this will go a long way in bettering the lives of farmers in the developing economies on one hand and in controlling food inflation and improvising food security to the world as a whole on the other hand.
3. Research Internship Papers (2001), Centre for Civil Society (A paper by Jennifer Ifft)
Source by Karthik Krishnamani