Risk Mitigation Mechanisms in Agriculture

The risks in the Indian Agriculture sector are accentuated by a variety of factors including natural calamities, uncertain weather conditions, variability in yields and prices, weak rural infrastructure, imperfect markets and inadequate and sub-optimal financial services. All this warrants an urgent need to better understand and manage the risks in Indian Agriculture.

Rajesh Sinha

The need to enhance the overall food production to meet the growing population is only going to increase. With enhanced purchasing power, there is an added pressure to meet the requirement of diverse nutrition rich food rather than the current wheat-rice combination as part of food security initiatives.

As our farmers move towards nutrient responsive crops for meeting the ever increasing food demand, the risks to the food growers also go up. Farmer suicide is one of the many unwarranted outcomes of unmanaged risks in the sector. If not addressed, such factors endanger the livelihoods and incomes of smallholder farmers (SHF)  and decreases the viability of the agriculture sector and its potential to eliminate the endemic poverty cycle of smallholder farmers in India.

1.Managing Farmers’ Risk 

In order to manage the risk of farmers and encourage him o continue producing crops to feed the countrymen, agriculture risk management tools and policies have  been adopted by both the public and private sectors in India.

Farmers use different mechanisms including formal and informal techniques to manage and mitigate risk, ranging from the use of drought resistant crop varieties to reduced consumption and sale of assets. As part of its mandate to protect smallholder farmers (SHF) from adversities arising out of such risks, the government has been implementing various schemes

These may be broadly classified into

• Direct Risk Management Initiatives like agricultural credit, subsidies on inputs, and disaster/ calamity relief.

Government of India has been providing Kisan Credit Card for provision of direct input credit at concessional rates through financial institutions, indirect subsidies on fertilizer, smart irrigation solutions like drip irrigation and sprinklers, equipment rentals etc.

Indian political diaspora have widely used agriculture credit loan waivers with an aim to help smallholder farmers who are most affected in case of crop failures owing to risks arising out of varied reasons including inclement weather and pest attacks.

The government has created apex institution like National Agriculture and Rural Development Bank (NABARD) as part of its objective to provide support to institutions that helps in direct risk management initiatives using credit as a primary tool.

• Production Risk Mitigation measures through insurance including micro-insurance covering corps, weather and livestock. Globally, there are increasing evidences that weather and crop insurances have failed to provide any worthwhile relief to target farmers owing to limited resources available with Governments. Any private product in this field is yet to find a notable success.

Promoting crop diversification strategies are part of production risk mitigation mechanisms. The farmers diversify its cropping pattern to mitigate its risk arising out of crop concentration.

• Market -based approaches to mitigate price or income risks, which includes Price Support Schemes (PSS) like minimum support prices (MSP), farm income insurance, a price stabilization fund, commodity markets, contract farming, etc.

Government of India has successfully used market-based approach to achieve the twin objectives of food security and encouraging farmers to produce food-grains. New initiatives like Bhav Bahavantar Yojana (BBY), Buffer Stock Management (BSM) are part of new market based approaches that the government is taking to cover maximum number of farmers growing food-grains, pulses and oilseeds.

The government also established commodity exchanges to mitigate price risk of the farmers. There is increasing realization that the agricultural commodity exchanges like National Commodity and Derivative Exchange (NCDEX) are essential for mitigating price and market risk of farmers. If used well, the mechanism has a potential to hedge the price risk of farmers at the time of arrival season. On a similar note, e-market and services companies like NCDEX eMarkets Limited (NeML) which are evolved form of spot exchanges have proven to be useful to manage price and credit risk of farmers leveraging its unique e-market platforms.

2. Market based approach of NeML to Mitigate Farmer Risk

Institutions like NeML are new age efficient e-markets that  leverages technology and exchange principles for better managing price risk of farmers.

The company is committed “ to create solutions that empower Farmers get optimum prices, help Discerning Consumers get best value and help financial inclusion by facilitating credit provision to farmers and SME leveraging our e-market platform in an efficient and transparent manner.”

• Mitigating Risks in Primary Agricultural Markets

The company has taken the public private partnership (PPP) route to establish Rashtriya eMarkets and Services Limited (ReMS) with the state Government of Karnataka. ReMS under the inspiring leadership of Mr. Manoj Rajan has created a model State Agricultural market (SAM) that has led to establishment of e National Agriculture Market (eNAM) by the Government of India. As per a Niti Aayog report published in August 2017, the initiative has helped farmers earn 38% more by leveraging Unified Market Platform (UMP)- the platform used by ReMS. Currently this covers 157 APMC markets in Karnataka and is likely to cover all 162 markets by end of financial year 2017.

UMP has been used by the state government of AP and Telangana to initiate modernization of their Agriculture Markets. The initiative covers more than 42 lakhs farmers across the states and makes use of the mobile connectivity with Aadhar card to provide services to farmers.  It is inter-operable with other e-market platform.

• Mitigating Risks by supporting Price Support Schemes (PSS)

Since 2010 NeML has leveraged its market platform for facilitating  Government and Government enterprises procure efficiently  from farmers to support price support schemes to support minimum support prices (MSP) to smallholder farmers. The company was instrumental in rooting the farmer procurement strategy of Small Farmer Agribusiness Consortium in 2013-14 helping more than 28,000 farmers.

As on date, NeML is facilitating National Cooperative Marketing Federation (NAFED) to procure oilseeds and pulses from farmers across the country leveraging its unified procurement platform (UPP). The joint initiative is aptly called e-Samriddhi.

In three months ending Dec 31 2017, the platform benefitted more than 7.25 lakh farmers across six states including Gujarat, Rajasthan, Maharashtra, Karnataka, Andhra Pradesh, Telangana and Uttar Pradesh. It is likely to start its operations in other states where PSS is required. More than 1.2 million MT of oilseed and pulses valued at Rs  3,268 crore have been procured. It is expected that more than 1.5 million smallholder farmers would benefit from the initiative.

• Direct Risk Management Initiatives by NeML e-pledge

E-Pledge, is an initiative to provide finance to smallholder farmers (SHF) to avoid distress sales. Farmers store their commodities in NeML accredited and bank approved warehouses under special arrangement to allow small warehouse service provider act as a collateral manager.  Thus, a smallholder farmer can wait for a better price and is not forced to sell at lower prices during the glut season.

The company has developed a large ecosystem of over 10 banks (both PSU and private), 600+ warehouses and around 39 collateral managers across 10 states of India. Some of the leading banks such as SBI, IDBI Bank, PNB, Canara Bank, Corporation Bank, Central Bank of India, Union Bank of India and Vijaya Bank, have enabled a total of around 320 branches for the E-Pledge product across 200 plus districts in the country.

The year ending March 2017 saw a robust loan portfolio of over Rs10 bn for the E-Pledge product across our associate banks. The first half of the current year ending September 2017-18 has seen a 27% growth as compared to the previous year. NeML has facilitated farmers finance to the tune of Rs2.27 bn with the help of banks and NBFCs during first half of FY 17-18, against 139,705 tons stocks kept in accredited warehouses. NeML had extended farmers finance of Rs11.04 bn in 2016-17.

(The author is the Managing Director and CEO of NeML. Views expressed are personal.)