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Friday, June 30, 2017

Farmer suicides and loan waivers - can we solve it?

Farmer suicides have brought the problems facing the farmers to the fore. Indebtedness has been highlighted as one of the dominant problems for suicides. As a corollary, governments have taken populist turn towards loan waivers. This is not the first time the farm loans have been waived. But can we do something to make it the last?

I reviewed the research on this topic and summarised them in my paper. I found there are a lot of problems facing agriculture. To put it succinctly, Indian agriculture suffers from: i) poor productivity, ii) falling water levels, iii) expensive credit, iv) a distorted market, v) many intermediaries who increase cost but do not add much value, vi) laws that stifle private investment, vii) controlled prices, viii) poor infrastructure, and ix) inappropriate research. 

These are basically symptoms of two fundamental issues with agriculture. First, farm risk management has gone wrong. Second, there is lack of coordination between various parts of agricultural value-chain. Thus, farmers do not respond to changing prices and market dynamics pro-actively. They also bear higher costs for post-harvest coordination in the value-chain like transportation, packaging, etc. 

Farmers needed to become better at risk management. They should use futures prices at the crop planning stage itself. At harvest stage a mix of contracted sales, and spot sales to can maximise realisations. They also needed more reliable availability of inputs, of credit etc. All this meant we need information – different types and large quantum of information like futures prices, weather forecasts, demand estimations, pesticide usage guidance, seed knowledge, planting knowledge, etc. AND, this information had to be available to farmer when he/she needs it.

But information is only ONE part of the problem. Farmer also needs physical inputs to reach at his remote farm. So, fertilizers should be delivered on time. Farm insurance should approved. Seeds, pesticides should reach the farmer on time. It means the value-chain partners must be available and acting reliably consistently. It meant the value-chain participants need the farming process to be visible.

There is universal agreement about risk associated with dealing with commodities. It means despite much effort many times farmers will fail. The question is then – can they fail safely? 

The corporate world has solved this issue through use of limited liability vehicles. So can we apply that to the farmers? I believe, a limited agricultural bankruptcy mechanism should act like a safety net for farmers. However, we don’t want farmers to hide personal failures within agricultural risks. Hence, we want farmers to separate personal and agricultural assets for this purpose of limiting liability.

I think we can fix these using an information system –an ERP-like solution for agriculture to help assist the farmers. Such system will reduce the coordination costs, improve information availability and increase the scale of operation allowing formal economy to step in and help farmers. With ring-fencing of risks, low cost collaboration, timely information, we can help farmers into a positive spiral of profits-investment-productivity. I sketch out the schematic of such a system called Smart Agriculture Management System (SAMS) in my paper.

This issue is important. Please read the paper, I tried to keep it as short as possible. Please make suggestions for improvement. If you think SAMS will work then do spread the word.

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms".