Dynamics of Crop Diversification

One routinely hears recommendations for crop diversification, saying that B crop is more profitable than A crop. The dynamics of crop diversification are more complex than that. In my experience, every farmer evaluates the B vs A trade-off, using a five-dimensional model, often intuitively. And, each of the dimensions have further nuances too.

1. For sure, net profit from one crop vs the other, is the most important variable. But, such profit will be seen from a twelve-month cycle perspective. At times, the chosen crop, depending on its duration from land preparation to harvest, limits the choice of next crop (or prior crop) that can be planted. Hence the twelve month cycle. I am keeping the cases of even longer term options like trees, out of the argument when I said twelve months. Profitability trade-off, often, also involves assigning value to the crop byproducts consumed off-farm for livestock or at home.

2. Another important factor is the effort involved in growing one crop vs the other. Some require more tender care or frequent monitoring vs the other. Or more physical drudgery. One crop may need more farm labour for an operation. Trade-off decisions then involve whether sufficient number of people are available within the family or one needs to hire. Then there are nuances, like labour barter – “I work on your farm and you work on mine”, if the window of that activity has flexibility of time.

3. Going beyond labour, the next factor involves access to resources, such as farm inputs, or credit to buy the inputs. Some of the resources place constraints on which crop can be grown; water for example, be it ground water, or canal water with the attendant restrictions, if any, on the release quantum and timings. Soil and climatic conditions, of course, are the more fundamental factors that limit choices of crops.

4. The fourth dimension is knowledge required to grow different crops. At a basic level, certain generic good practices on growing a crop like land preparation, planting density, irrigation and fertigation cycles, crop protection should the need arise, post-harvest activities etc. Then, every farmer requires certain contextualized knowledge on managing the crop as the growing conditions evolve, in terms of temperatures and humidity, besides any implications of the crop planted in the previous season, or limitations on the resources required etc.

5. Finally, probably most importantly, the risks involved in growing one crop vs the other. There are risks first in the production stage and then in marketing the crop produced. Some crops are more vulnerable to weather variations than the others. This is more important today, when the extreme variations have become the order of the day. Market risks include the extent of price volatility and liquidity of demand for a crop.

The market conditions will throw up a natural bias for one or the other crop in a given region for a profile of the farmer each season. If the Government or any other agency (say, a food processing company) would like to promote a particular crop or variety, first step is to make an assessment if the wind is hitting the tail or the head along all these dimensions and take advantage or neutralize respectively, so that the proposed crop is in the best all-round interest of the farmer.

e-NAM: Opportunities as an Integrated Market Platform for Agricultural Produce

On the occasion of the third anniversary of e-NAM, I post this blog, envisioning the opportunities for the platform beyond merely linking mandies.

There are four sources of arbitrage that offer an opportunity to capture value and raise farmer incomes:
1. Price difference between the producing and the consuming regions
2. Price rise between the harvesting season and a few months later
3. Gap between the price a consumer pays and the price a farmer receives
4. Price a consumer is willing to pay for superior value, such as safety through traceability

e-NAM is primarily built to capture the value from the first of these opportunities, i.e. the price difference between the producing and the consuming regions. e-NAM can also play a key role as an integrated market platform and capture the value from the other three opportunities by working in conjunction with other initiatives of the Government and / or Private Sector.

1. The basic logic of capturing value from the price difference between the producing and consuming regions is to extend the participation of buyers from across the country, going beyond the physical mandies (APMC Market Yards). In order to that, the e-NAM ecosystem has to integrate a few critical activities like quality assaying, payment mechanism, and logistics to actually enable long distance buyers to participate. I am glad, e-NAM has added or in the process of adding these features in different locations. It is important to keep the costs of these services competitive vs the post-mandi physical chain’s so that they do not eat away the arbitrage between regions and leave nothing for the farmer. One must recognize that our traditional intermediary system is very efficient in this regard.

2. For capturing value from the price rise between the harvest season and a few months later, e-NAM has to integrate with the Commodity Derivative Markets and enable its participants to determine prices linked to Futures and Options. Any farmer would love to sell his output at the time of planting using an Options embedded forward contract, which works exactly like a Minimum Support Price mechanism.

3. To capture value from the huge gap that typically exists between a consumer and farmer price, e-NAM has to plug into initiatives like ITC e-Choupal. The roles of each of these platforms are different. While e-NAM enables competitive discovery of quality-factored spot prices for physical goods, Derivative Markets enable discovery of future prices by standardizing product quality, ITC e-Choupal enables discovery of different consumer segments for different varieties and qualities of the produce

4. By integrating e-NAM with GrAM, the latest Government initiative to create more spokes in the form of Gramin Agricultural Markets that are in proximity to production clusters. This enables improved traceability and identity preserved supply chains in the public domain, much like ITC e-Choupal has been able to do in a private network.

As e-NAM evolves into an integrated market platform, APMC Markets can transform themselves into Post-harvest Service Organisations to work with the farmers to improve quality and lower costs.