Changing the face of farming
A truck loaded with 20 tonnes of castor seeds lumbers on to a weigh bridge in a warehouse, situated in the small town of Kadi in Gujarat’s Mehsana district. After the weighing is done, the truck moves on to the unloading dock, while another takes its place; drivers honk impatiently, awaiting their turn to unload bags of seeds from their trucks.
As soon as the truck is flush against the unloading dock, Mukesh, an employee of Sohanlal & Company, picks up a standard-size metal container to collect a random sample of the seeds. Sohanlal is sub-contracted by National Spot Exchange Limited (NSEL) to issue quality certificates for the castor, after a standard weighing and quality testing process. The commodity, packed in 75 kg bags, is then stacked away and Mukesh issues a receipt of weight and quality to Babubhai Poda, the farmer who has deposited the castor seeds.
Babubhai then briskly walks to the office of IFMR Trust’s Agricultural Terminal Markets Network Enterprises (ATMNE), where there is an NSEL terminal providing online data on prices of castor and other agricultural commodities for the day.
NSEL Terminal & Quality Certificate
Valkesh Prajapati, team member, ATMNE, scans Babubhai’s receipt. The price Babubhai can get is determined by the weight of the randomly selected sample, which reflects the commodity’s quality. Price adjustments have to be made according to deviations from set norms. Valkesh explains: “If the net weight of the sample is 2,230 grams, then there is no deduction in price. But in Babubhai’s case, we can see that the weight of the sample is 1,950 grams. As per procedure, we will deduct Rs 3 per 20 kg of the commodity.”
The net weight of Babubhai’s 36 landed bags of castor seeds is 2,383 kg. The market price for that day, shown on the NSEL terminal, is Rs 500 per 20 kg, which is higher than the price offered in the nearby wholesale market (mandi). With a price adjustment of Rs 3 per 20 kg, the amount payable to Babubhai works out to Rs 547 per 20 kg, or a total of Rs 67,175.
Valkesh places a ‘sell trade’ at the trading terminal and prepares a sale bill. Once the sale goes through, Babubhai is issued a receipt and a ‘self’ cheque drawn on a local bank. Within an hour of coming to Kadi with his produce, Babubhai is richer by Rs 65,175.
It’s just another day at ATMNE’s Kadi office, a pilot project aimed at changing the way business is done by small and medium farmers.
Addressing systemic challenges
Typically, small and medium farmers do not have access to fair market prices and finance at competitive rates due to their small volumes of production and non-availability of modern market infrastructure in distant locations. ATMNE, incubated by IFMR Ventures -- an SEBI-registered fund management company -- seeks to address this challenge.
ATMNE aims to provide small and marginal farmers with comprehensive access to transparently-run markets and risk management instruments, thereby eliminating the farmer’s exposure to systemic inefficiencies and risks.
A bouquet of services has been piloted in Kadi and Maliya (Junagadh), in Gujarat. The objectives are:
- Realisation of better prices for farmers, in a transparent manner.
- Provision of commodity-backed finance to increase the farmer’s holding capacity.
- Exploration of value-addition in all agricultural activities by offering farmers other financial products.
All these are expected to bring about greater efficiency in the local agricultural supply chain, enable farmers to realise higher prices for their produce, compared to what they would get at local mandis (thereby enhancing small-farm incomes), and give them access to finance at reasonable rates so that they can purchase agricultural inputs in a timely manner, and increase production.
Operations at Kadi began on February 16, 2009, through meetings and product briefings in the nearby villages. The response has been encouraging. Till March 2010, castor seeds worth Rs 72 million were traded by 925 farmers from 125 villages through the online NSEL trading platform at the Kadi centre. During peak harvest season, sales turnover per day hovers around half-a-million rupees. On an average, farmers have been able to get Rs 2-3 per 20 kg more than what they would have earned at the mandi.
IFMRT centre at Dharampur
The price realisation is transparent and fair; the farmer can see the day’s prices before he decides to sell, and price realisation is determined strictly by quality.
In February 2010, commodities worth Rs 10 million were traded through the NSEL trading platform at Kadi, compared to Rs 2 million in the same period in 2009. This clearly shows that farmers have perceived the benefits of the transparent system.
And that is only part of the story.
Warehouse receipt financing
Typically, after harvest there is a huge flow of commodities in the market depressing commodity prices. Small farmers would benefit from storing the commodity in a warehouse, getting a loan against the commodity to meet their immediate capital requirements, and being offered the opportunity to sell the commodity when prices rise.
With this in mind, a pilot warehouse receipt financing (WRF) product has been launched in Dharampur village, around 16 km from Kadi. Loans are being advanced against commodities as collateral to farmers in five villages around Dharampur.
To avail of the loans, farmers have to first register themselves. The process involves the standard bank KYC (Know Your Customer) process. Biometric identification and physical verification of address are also carried out. After charging appropriate margins to cover price fluctuations, loans are given against storage receipts for commodity stored by farmers in NSEL-managed warehouses.
Customer case
The drive to Harshadbhai’s sprawling farm in Vaghroda village, Kadi tehsil, takes you through huge tracts of land under castor, tomatoes and wheat. Harshadbhai Mani Lal Patel, 48, is busy supervising a group of labourers. “This is what I live for,” he says. “Farming is in my blood.” After working in a school in Ahmedabad until his retirement in 2006, he returned to the village to cultivate his 50 bighas (roughly 20 hectares) of land. He grows castor, wheat, tomatoes, jowar and pulses. Castor is the most profitable crop.
“On a scorching afternoon, Bhaveshbhai (of IFMR Trust) came to my farm on his motorcycle,” he recalls. “He politely introduced himself and wondered if I had a few minutes to spare to speak to him. I told him I had the whole afternoon!”
After hearing Bhavesh’s WRF proposition, Harshadbhai asked a dozen questions. Then, satisfied, he became the first customer for WRF.
Harshad Bhai in discussion with Bhavesh Nayak
“I took a loan of Rs 12,084 against 10 bags of castor seeds as I had no access to quick finance to pay for labour, seeds, fertiliser, diesel and tractor hiring expenses,” he says. The terms -- simple interest at 10% per annum for 70% of the value of the mortgaged product -- are “reasonable”, he believes. “Plus I get to keep the commodity and sell it when I am offered the best price!” The table below shows how he benefited.
How Harshadbhai benefited from a WRF loan
| Date of loan disbursement: |
5/13/2009 |
| Price of commodity on loan disbursement date: |
Rs 480 per 20 kg |
| Loan amount disbursed: |
Rs 12,844 |
| Interest charged: |
Rs 345 |
| Warehouse rent: |
Rs 165 |
| Total expense to borrower: |
Rs 510 |
| Date of loan closure: |
8/19/2009 |
| Price of commodity on loan closure date: |
527 per 20 kg |
| Weight (in kg): |
764.5 |
| Sale proceeds on closure of loan: |
Rs 19,601 |
| Difference in price: |
Rs 1,748 |
| Total expenditure: |
Rs 516 |
| Net benefit to borrower: |
Rs 1,238 |
| Loan tenure: |
98 days |
| Profit (in %) |
25.13% (annualised: 35.89%) |
Challenges
A dusty track leads to the village of Varkhariya. Bhopabhai Bhurabhai Bharwad, 42, sits under a canopy while a constant stream of people seeking his advice on castor and vegetable markets sidles up to him. Bhopabhai cultivates more than 150 bighas of land, of which 60 bighas are under castor, 50 bighas under cotton, 30 bighas under jowar and 5 bighas under tomatoes. On the remaining land, he grows fodder and vegetables.
Ever since he was introduced to the NSEL trading facility at Kadi, Bhopabhai has been selling 50% of his produce there. “From next season, I will sell 80% of my produce at the centre in Kadi,” he says, citing three main reasons. “The centre employs fair trade practices; the people there are competent; and we get our money without delays or unnecessary hassles.”
But he does have some concerns. “Too much money is deducted for the presence of dust and foreign matter in castor seed bags. In farming, this is unavoidable and the farmer should not be made to pay for it,” he says. Godown storage charges (Rs 4.50 per bag per month) are also on the high side, he feels, as castor seeds “do not have any special storage needs”.
IFMR Trust is working with NSEL and other service providers to find logical solutions to these problems.
Apart from addressing such issues, the team working in Kadi taluka has to deal with a number of basic challenges. Mita Solanki, who works out of a small but neat office in Dharampur village, narrates a point raised during commencement of operations. “People said: ‘The board outside your office has a Chennai address, so why should we believe you?’. They had had disappointing experiences with plantation and finance companies, and were thus sceptical about our offer.”
There were also questions like: “Why don’t you give loans against land?” or “Why don’t you give loans when the harvest is ready?”. A big plus for her, she says, was that she was a ‘local’. “I live and work in the community, and speak their language.” The Kadi taluka team built personal relationships, and offered customised products.
In the end, it’s the clear advantage offered and enjoyed by farmers that made the difference, Mita says, citing the example of Baldevbhai (see table below).
Profit for Baldevbhai Kamabhai Bhanwar
| Date of loan disbursement: |
5/25/2009 |
| Price of commodity on loan disbursement date: |
Rs 465 per 20 kg |
| Loan amount disbursed: |
Rs 19,3054 |
| Interest charged: |
Rs 9,996 |
| Warehouse rent: |
Rs 4,621 |
| Total expense to borrower: |
Rs 14,617 |
| Date of loan closure: |
11/30/2009 |
| Price of commodity on loan closure date: |
Rs 599 per 20 kg |
| Weight (in kg): |
11,862 |
| Sale proceeds on closure of loan: |
Rs 35,5267 |
| Difference in price: |
Rs 79,475 |
| Total expenditure: |
Rs 14,617 |
| Net benefit to borrower: |
Rs 64,858 |
| Loan tenure: |
189 days |
| Profit (in %) |
64.8% |
In the coming months, with the help of Self-Employed Women’s Association (SEWA) and the Aga Khan Rural Support Programme (AKRSP), ATMNE is planning to open commodity collection centres in Kadi and Maliya. The centres will enable small and marginal farmers to sell commodities in their own village at a good price, without worrying about transportation costs and having to find buyers.
Commodity collection centres
“As most small and marginal farmers in our country have very little saleable surplus, they end up selling to local aggregators who come and collect goods at their doorstep,” explains Valkesh. “They are thus able to sell quickly, without the transportation hassles. But they get a poor price.”
Village commodity collection centres, developed in a hub-and-spoke format, are aimed at creating better market access for such farmers. Collection centres set up in select villages will be equipped to sort, grade and transport goods to buyers’ locations. The centres will offer selling or storing facilities, as well as warehouse receipt loans. They will not be immediately connected to NSEL but will offer prices based on quotes in the exchange, with adjustments made towards transportation costs.
ATMNE, along with local partner(s), will buy commodities directly from the farmers and transport it to an NSEL-designated warehouse for sale through the NSEL terminal.
The first such commodity collection centre is expected to start working in Dharampur, in March 2010. Based on its success, it will be replicated with local partners who will be equipped to offer services with necessary back-end platforms, as well as training.
Online trading in castor will also be started soon at another location in Mehsana district.
All these closely monitored initiatives are expected to be replicated in other parts of the country in the years to come, by IFMR Trust and several other organisations.
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