Dec 27, 2021
Price Risk Management Case Study
Increasing Returns for Smallholder Farmers
Introduction
Agriculture is undoubtedly the largest livelihood provider in India, being more prevalent in rural areas. In the year 2020–21, the percentage share of agriculture and allied sectors to the total economy is 20.2%. Out of the total cultivable land in India, 85% is held by small (less than 2 hectares) and marginal farmers(less than 1 hectare). Small farmers’ livelihood is aggravated due to the fact that they suffer from production risks such as drought, flood, lack of adequate use of inputs, lack of assured and adequate irrigation, crop failure and so on. Furthermore, even if a farmer has produced efficiently there are market risks like absence of market, poor price realisation, high transaction cost, and poor bargaining power due to small market surplus. This leads to low and unstable farm incomes for these producers. Pre-production and post production aggregation is required to capture higher surplus.
Problem
In India, small and marginal farmers lack access to effective and stable post-harvest handling at different phases such as cleaning, sorting, transporting, storage. Each post-harvest stage results in some losses and has an effect on the value distribution. Farmers require capital to be able to afford post harvest services besides their own needs and capital for the next season. Beyond post-harvest losses, poor storage facilities compel smallholder farmers in India to sell their produce at low prices soon after the harvest. Eventually, this inability to store and sell after peak harvesting months results in loss of revenue and food loss.There is an urgent need to create solutions that increase the farmer’s ability to store.
Solution
A price risk mitigation product which insures the farmer against falling prices can significantly increase their risk appetite and improve access to finance. It will help FPOs/ smallholder farmers realize better prices by encouraging them to store their produce longer instead of immediate post-harvest sales. The farmer will be Insured of a minimum price in case prices don’t increase in the post harvest period.
The above graph displays how the prices of Wheat in a local market in India have risen after peak arrivals(March-May) around the months of October, November. This makes it clear that if the FPO stored and sold their produce in these months, they would have gained a better price.
Against this backdrop, Agtuall partnered with a leading financial institution and a leading warehouse service provider in India to provide a price risk mitigation product to farmers. This entity has already implemented an integrated warehousing receipt finance model which provides value-add services such as storage and warehouse receipt finance to smallholder producer organizations (FPOs). The concept revolves around providing farmers (through FPOs) with a minimum price guarantee. This acts as a safety net for the farmers and addresses the risk of prices falling after storage. It also acts as a catalyst for financial institutions to provide loans to farmers.
Agtuall used its understanding of the commodity markets data analytics capabilities to help both the institutions appropriate the risks accurately and calculate specifics such as the pricing for the product. It collected historical price data (both spot markets and futures markets) to model the price risk and used advanced analytics to forecast the performance of the product. All these insights were implemented into three basic modules.
Commodity Analysis: Analyze whether a crop and location is suitable for implementation.
RMS Management: Create and monitor the sales process.
Portfolio Management: Supports ideal portfolio composition and product pricing.
The results so far are very promising, the product is currently in its 1st season of piloting. Get in touch with us to learn more about how Agtuall can help you create similar products.
