Making agriculture economical
Basic Premise
Agriculture as a domain domestically is efficient beast that satisfices each stakeholder’s needs without fulfilling majority of them economically.
The concept of economics is alien to the startup world, especially in agriculture. We tend to plug a gap by building a solution. In other cases, bring some form of efficiency to an existing system. For example market linkages.
But without understanding economics of how things play out in agriculture, we are operating in the visible problem area without being cognisant of the invisible ones which form systemic problems.
Building businesses is equal parts art and science. Economic lens provides us a guiding tool to balance between the two and build a self sufficient business.
In this post with the help of a paper written in 1918. I try to unpack , What do we mean by agriculture economics?
The current state of Farm Lands
The recent economic chronicle of NABARD postulated the numbers of operation holdings. These are farm lands that are being operated independently, i.e owner of the land is different.
The thing to be highlighted over here is that farm lands are getting even smaller when it comes to small and marginal farmers whereas the landholding of medium and large farmers are decreasing.
Excerpt from the report(emphasis is mine).
The number of operational holdings (OH) has more than doubled over the last ten AC period, from 704.9 lakh in 1970-71 to 1464.54 lakh in 2015-16 (Figure 1). This general trend could not have been the case across all size groups as these changes in the number of OH represent the redistribution of holdings from larger size groups to smaller size groups through the effects of fragmentation. Thus, the number of OH went up by 2.8 times from 356.8 lakh in 1970-71 to 1002.51 lakh in 2015-16 in marginal size group, 1.9 times from 134.3 lakh to 258.09 lakh in small size group, and 1.3 times from 106.8 lakh to 139.93 lakh in semi-medium size group. In sharp contrast, the number of OH has steadily gone down from 79.3 lakh in 1970-71 to 55.61 lakh in 2015-16 in medium size group and from 27.7 lakh in 1970-71 to 8.38 lakh in 2015-16 in large size group. Thus, the sharp rise in the total number of OHs is an outcome of the vast increase in the numbers of marginal and small holdings; this, in turn, reflects increased fragmentation of land holdings. Link to the report
If you are an agri-startup working for the benefit (not help) of farmers than your addressable market is not number of farmers but number of operational holdings(farms).
Large and medium farmers are continuing to grow their crops and run their farms economically. In my conversations with few such farmers, they have actually bought land in the last few years.
Additionally, the current market is too favourable to larger yield farms. More the yield, higher the chances of being economical.
The issue begins at small and marginal farmers. They are the fragmented majority without a collective way to aggregate. FPOs have become the silver bullet to solve all these issues championed by government. And if you are startup then they become your messiah. Forget farmer or farms, target FPOs.
For my take on FPOs I will have to come back with an another post. In short, without proper consideration proliferation of FPOs will lead to same moral hazard that co-operatives stumbled into in a previous era.
Fragmented Farms
The issue of small land holding has been omnipresent in the agriculture sector since the days of independence. When the lion share of people and economy was around agriculture. It seems eventual outcome that through the cycle of succession and distress brought upon small and marginal farmers that this land holding sub-divided became even smaller.
There was also a luminary who addressed this issue way before our time. India’s prominent polymath, BR Ambedkar. I stumbled across his agriculture work in a podcast episode of Chandra Bhan Prasad on “The seen and unseen” podcast hosted by Amit Varma.
For his dessirtation, Ambedkar wrote about the issue of Small Land Holdings . And like all good papers I read. He spends a considerable time defining the word “agriculture economics” and context surrounding it.
Addressing Land Holding
Case in point. This was written in 1918. If you are working in the agri-sector in any capacity. It will do you a ton of good if you just read the paper in entirety.
Moving on to my commentary and excerpts from the post.
The scope of the paper revolved around the literature review of consolidation of land that was being evaluated by the British government by the Baroda Committee, 1917.
But first, he sets the principle problems of agricultural economy.
The problems of agricultural economy dealing directly with agricultural production are what to produce, the proper proportion of the factors of production, the size of holdings, the tenures of land etc. In this paper it is attempted to deal only with the problem of the size of holdings as it affects the productivity of agriculture.
At that time, the scattered land holding was viewed as a real concern due to the prominence of agriculture to the overall economy. The first statement can be debated in this day and age if you see it in terms of GDP. But, it becomes prominent issue when it comes to number of people employed.
These small and scattered holdings have given a real cause for anxiety regarding our great national industry. Comparative Statistics go to swell this feeling by laying bare two very noteworthy but equally sad facts regarding economic life in India; (1) that it is largely an agricultural country ;* and (2) that its agricultural productivity is the lowest†—
Ambedkar takes a shot at the report published which address consolidation without outlining the enlargement of land holding.
A more serious criticism against these projects of consolidation consists in the fact they have failed to recognize that a consolidated holding must be an enlarged holding as well. If it is said that Indian agriculture suffers from small and scattered holdings we must not only consolidate, but also enlarge them. It must be borne in mind that consolidation may obviate the evils of scattered holdings, but it will not obviate the evils of small holdings unless the consolidated holding is an economic, i.e. an enlarged holding.
The other issue was how the common opinion was that of feeding oneself and family as the prerogative of farmers.
According to the Hon. Mr. Keatinge an economic holding is :— “a holding which allows a man chance of producing sufficient to support himself and his family in reasonable comfort, after paying his necessary expenses.”
Defining Economic Holding
Ambedkar spends considerable time unpacking how this is the wrong way to see farmers productivity and agricultural economics. He explains how the law of proportions factor in making a farm economical. He concludes with a definition:
An economic holding, therefore, if it is not to be a hollow concept, consists in a combination of land, capital and labour, etc., in a proportion such that the pro rata contribution of each in conjunction with the rest is the highest. In other words to create an economic holding it will not do for a farmer solely to manipulate his piece of land. He must also have the other instruments of production required for the efficient cultivation of his holding and must maintain a due proportion of all the factors for, without it, there can be no efficient production. If his equipment shrinks, his holding must also shrink. If his equipment augments, his holding must also augment. The point is that his equipment and his holding must not be out of proportion to each other. They must be in proportion and must vary, if need be, in proportion.
Conclusion: My takeaway
This paper helped me ground my thinking in a framework. The one that I made during my time at subjimandi.app, agriculture is a canvas.
It is a complex beast that if you want to address, you need to play at the intersection of 3 aspect within bounded region.
Today, the distress prevails because the price regime signals quantity (yield) and the many farms are non economical due to this nature.
We have transitioned from food security to food surplus nation. Yet, the majority of small and marginal farmer are still ill prepared to tackle the onslaught of climate change added with land, labour and capital problems.
Jeff Bezos has this famous quote about business strategy.
It helps to base your strategy on things that won’t change. When I’m talking with people outside the company, there’s a question that comes up very commonly: “What’s going to change in the next five to ten years?” But I very rarely get asked “What’s not going to change in the next five to ten years?”
At Amazon we’re always trying to figure that out, because you can really spin up flywheels around those things. All the energy you invest in them today will still be paying you dividends ten years from now.
If you are operating in the agriculture space. The landholding pattern of farms will not change for the next 10 years.
Then comes the fun and challenging part of making these farm lands economical without having the possibility of addressing the land issue. We have to start with this constraint and derive a strategy within it.
So, you are left with either making capital cheaper or increasing the labour productivity or making farming climate resilient.
The cards you are dealt as an agriculture startup are not similar to building a SaaS business on the internet. It is best we derive our own understanding of value creation, scale and eventual success.
We won’t revolutionise farming but let’s start with making agriculture economical.
Signing off till the next time,
Vivek V.S, optimistic in hindsight
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