The Adverse Agricultural Terms of Trade

 Globally and in India the big problem is that market prices for farm produce do not cover the costs. Consequently, governments have to subsidise farm production either by direct transfers to farmers or farm input producers or by providing support prices and insurance covers. However, these subsidies are not enough and so farmers are perpetually in the red and have to sell their produce immediately after harvest to pay off debts. This problem is more acute in India as the average landholding and the subsidy given is very low as compared to the high income countries, which are members of the Organisation for Economic Cooperation and Development.

Some amount of relief can be had if farmers can hold their produce for some time to get better prices rather than selling at the time of harvest but this requires both storage space and money which are not available to most farmers. Therefore, theoretically, if a company steps in and provides warehousing facilities to store the produce of farmers and provides cheap credit to them against this collateral, then the farmers can earn more at a later date by selling their produce when prices firm up and still carry on their operations in the interim. However, this is fraught with problems for the intermediary company as there is no guarantee that the prices will firm up enough later to cover the costs of warehousing, weight and pest attack loss and operational expenses. The traders who work in this space generally cheat the farmers by giving them even lower prices than the low ones which prevail in the market and they also provide the inputs to them at higher prices and usurious interest rates and so are able to make profits at the expense of the farmers. Therefore, it is unlikely that any intermediary company can make profits by giving farmers a fair deal.

There are a few agri startups in India which are trying to do this work. However, none of them are making any money because of the inherent constraints detailed above. One such company started off on a small scale by hiring warehouses and providing loans to farmers cheaply against the grains they stored in these warehouses. This boot strapped company worked at a small scale with a small turnover making small losses for a few years before it was funded by venture capital of a small amount of Rs 2 crores and then with a large amount of Rs 40 crores to scale up operations. The turnover shot up tremendously as a result but so did the losses as is evident from the graphics below!!

So, much higher government subsidies and investment are needed not only to shore up the economics of farming currently but also to gradually transition it away from chemical inputs towards natural farming. Unfortunately, the outlay in this year's budget, where it has been claimed that 1 crore farmers are to be transitioned to natural farming is only a paltry Rs 365.64 crores amounting to Rs 365 per farmer, which is less than the daily statutory minimum wage for skilled labour.