Risk Mitigation in Agriculture

Risk Mitigation in Agriculture

April 7, 2017

Blogs and Articles

Agriculture & Food Processing

Every now and then, we hear about crop failure due to drought or floods, crop damage due to heavy or unseasonal rain/thunderstorms, deterioration of stored food grains due to poor warehousing infrastructure, and crash in prices in the event of a bumper crop. In all these cases, we are essentially referring to pre-harvest and post-harvest risks in agriculture. Over the years, a number of risk mitigation measures have evolved to provide some relief to the farmer community. While much more needs to be done to put a lasting smile on the face of the farmer, this article attempts to put together some of the measures initiated by different agencies, including NCML, to address the risks faced by the producer community.

Pre-harvest Risk and its Mitigation
The pre-harvest risk faced by the farmers is crop failure or damage to crops, largely owing to excess or deficient rainfall or variations in temperatures effecting crop growth. GoI / State Govt.s have introduced crop insurance schemes, a yield-based scheme (NAIS and Modified NAIS) and a weather index based scheme (WBCIS) in a large way to mitigate the risks. Experience has proved that farmers benefit immediately after their loss, under the WBCIS schemes than under other schemes, as the weather data can be made available from weather stations installed for every 10 to 15 KM, to get very accurate localized weather data, on a real-time basis, immediately after the expiry of the season to settle the crop loss claims. Yield or production of a farm varies from farm to farm depending on the practices followed by individual farmers, whereas, weather is not a variable parameter within a captive area of a weather station, and as such resultant risk is uniform across the captive area. Hence a weather based insurance scheme is more suitable for the Indian conditions. NCML has been in the forefront in this area, providing accurate weather data to a number of insurance companies. Towards this end, NCML has set up a network of 3200 Automatic Weather Stations (AWSs) across 14 states where WBCIS has been implemented.

Post-harvest Risk and its Mitigation
The major post-harvest risk for a farmer is a fall in the prices of harvested crops. It is a well known fact that farmers are always hard-pressed to sell immediately on harvest, resulting in distress sale and thereby poor or sub-optimal realization. Further, given the large number of small and marginal farmers, the average size of individual farm plots is very low, resulting in low production efficiency. Thus, for a majority of farmers, the twin problems of low production and low realization pose major challenges. Although, the government has been attempting to address some of the problems through the MSP mechanism, the fact remains that a large number of farmers do not get MSP for their produce, for various reasons. Also, the optimum benefit of price increase over a 3-4 month period post harvest, which is normally observed, does not accrue to the farmers. Thus, while a roaring debate on food inflation continues in the corridors of the Parliament and RBI, the farmer remains a mute spectator – with rising food prices having no positive impact on his fortunes. In other words, the farmer has little incentive to produce more particularly given the fact that in a year of bumper harvest, the price of produce suffers a steep fall; also, any increase in price at the consumer level even during the harvesting season does not automatically get transmitted to the farmer level. In the circumstances, to change the rules of the game in favour of the farmer, it is imperative to showcase to the farmer community, the benefits of warehousing both in terms of quality preservation as also by way of better realization. Further, any immediate liquidity requirement of the farmer can be easily taken care of through finance against the warehouse receipt by banks. It would be pertinent to mention that banks are more than eager to finance farmers as such loans are classified as Direct Agri Finance, under Priority Sector Lending (PSL).
To put things in context, warehouse receipt finance to the tune of 70 -75% of the value of the farmer’s produce assumes paramount importance. Once the financial requirement is satisfied, the farmer would be a willing participant in the warehouse market system. Over time, as the farmer actually experiences higher realization thanks to a well preserved stock and deferred sale, he would stay with the warehouse receipt system. The crucial issue is therefore to educate the farmers about the virtues of scientific warehousing, about the availability of ready finance against the warehouse receipt, from banks, at a reasonable rate of interest, and finally, about the potential for a far higher realization for their produce through deferred sale. The warehousing and financial eco-system has enabling regulations in place to help the farmer participate more gainfully in the agri supply chain. NCML is proud to have spread awareness about warehousing and warehouse receipt finance among lakhs of farmers across the length and breadth of the country, and to have taken this initiative to its logical conclusion by actually facilitating warehouse receipt finance to over 2 lakh farmers. The resulting higher realization arising out of deferred sale of harvested crops, preserved in NCML’s high quality warehouses, has been a boon to these farmers. NCML has also helped some large farmers hedge their price risk through commodity exchanges.

Summing up
The farmer community will need to be educated about insurance schemes to mitigate the pre-harvest risk, and about storage of produce in quality warehouses & related finance against stock to mitigate the post-harvest risk. Groups of farmers at village and block levels will have to be advised on the virtues of weather based insurance, of quality preservation in warehouses, on the availability of ready finance from banks against warehouse receipts at a reasonable rate of interest, and on the potential for better price realization for their produce at the end of a 3 – 4 month storage period. A number of agencies will have to work together to achieve this objective: these agencies include warehousing companies, banks, spot & futures commodity exchanges, entities specialized in agriculture & rural development such as NABARD, local NGOs, village level aggregators, and agri extension officers. The awareness programmes will have to be conducted in a structured and time bound manner to have the desired impact. These programmes will then have to be followed up with sustained action on the ground to enable meaningful and lasting risk mitigation in the agriculture sector.

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Sanjay Kaul

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