AEM-202 Agri-Business and Entrepreneurship Development

Post Graduate Diploma in Agricultural ExtensionManagement (PGDAEM)

AEM-202

Agri-Business and Entrepreneurship Development

(3 Credits)

National Institute of Agricultural Extension Management(An Organization of the Ministry of Agriculture, Govt. of India)

Rajendranagar, Hyderabad – 500 030, Andhra Pradesh, Indiawww.manage.gov.in

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Agri-Business and Entrepreneurship Development Course -202

Published by

National Institute of Agricultural Extension Management,Rajendranagar, Hyderabad – 500 030, Andhra Pradesh, India

First Published: 2008Revised 2013© MANAGE, 2008

All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means

without permission in writing from the MANAGE.

Shri. B. Srinivas, IASDirector GeneralNational Institute of Agricultural Extension Management (MANAGE),Rajendranagar, Hyderabad – 500 030, Andhra Pradesh, India

Programme Coordinators

Dr.Senthil Vinayagam, Director (Agri. Extn.) & Principal Coordinator (PGDAEM)Dr.K.Uma Rani, Deputy Director (Extn)Dr.M.A.Kareem, Deputy Director (Agri. Extn)

Contributors (2008)

This material was originally prepared for YASHADA, Pune. The intellectual copy right of this material belongs

to YASHADA, Pune

Contributors (2013)

Dr. Sendil Kumar, Associate Professor (Agril. Ext.), KAU, ThrissurDr. Seema, Professor, School of Agri-Business Management, ANGRAU, HYD.

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Post Graduate Diploma in Agricultural Extension Management (PGDAEM)

AEM 202: Agri-Business and Entrepreneurship Development (3 credits)

Block I : Entrepreneurship

Unit – 1 Enterpreneurship Development and Agri-Business Plan 5 - 44

Unit – 2 Cash Management 45 - 53

BlockII : Agri Business

Unit – 1 Marketing Management in Agri Business 55 - 72

Unit – 2 Rural Marketing 73 - 89

Unit – 3 Procurement 90 -109

Block III : Commodity and Future Marketing

Unit – 1 Commodity Markets 111 - 129

Unit – 2 Introduction to Commodity Exchanges 130 - 147

Unit – 3 Futures Exchange and Risk Management 148 - 154

Unit – 4 Ware house Receipts and Collateral Management 155 - 165

Block IV : Business Laws and Ethics

Unit – 1 Business Laws and Ethics 167 - 172

Unit – 2 Indian Contract Act, 1872 173 - 182

Unit – 3 Sale of Goods Act, 1930 183 - 189

Unit – 4 Companies Act, 1956 190 - 198

Unit – 5 Negotiable Instrument Act, 1881 199 - 205

Unit – 6 The Essential Commodities Act, 1955 206 - 218

Course-202 Agri-Business and Entrepreneurship Development

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AEM 202


(3 Credits)

Block I

Entrepreneurship

Unit – 1 : Enterpreneurship Development for Agri-preneurs 5 - 44

Unit – 2 : Cash Management 45 - 53

Enterpreneurship Development for Agripreneurs

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Unit- 1


Structure

1.0 Objectives

1.1 Introduction

1.2 Enterpreneurship

1.3 Phases of Entrepreneurial Development Programme

1.4 Institutional support to business entrepreneurs

1.5 Institutional Interventions and Capacity building for Agri Business Entrepreneurship

1.6 Guidelines for starting Farm Enterprises

1.7 Why a business plan

1.8 The business plan

1.9 Types of business firms

1.10 Updating your business plan: a checklist

1.11 Types of plans

1.12 Writing the Agri-business plan

1.13 Success stories of Agripreneurs

1.14 Let us sum up

1.0 Objectives

On completing this unit you will be able to understand

• The concept of enterpreneur and enterpreneurship

• Phases of Entrepreneurial Development Programme


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• Institutional support to business entrepreneurs

• Institutional Intervention and Capacity building for Agri BusinessEntrepreneurship

• Guidelines for starting Farm Enterprises

• The need and importance of a Business Plan

• The building blocks of a Business Plan

• The intricacies in preparing an effective Agri-business Plans

Inspiring Agribusiness enterprises

1.1 Introduction

Future outcomes are a function of today’s decisions. Although there is a high degreeof randomness and uncertainty associated with the future, you can increase the probabilityof a successful outcome by planning ahead. This is true in nearly every aspect of our lives,both personal and professional.For those who operate their own businesses, planningbecomes increasingly important because the personal and professional aspects becomemore difficult to untangle. In agricultural businesses,planning may be even more vitalbecause of the inherent uncertainty associated with agriculturalproduction. Some importantsources of uncertainty include production risk, price risk, financial (or interest rate) risk,and changes in government programs.In this module we will discuss the importance ofentrepreneurship development in agriculturalsector and business planning for agriculturalfirms-from input suppliers to producers to processors and describe the steps required toprepare a thorough business plan. The general process ofbusinessplanning is the same foreach type of firm. However, each may have differing individual aspects that affect its plan’scontent.

1.2 Entrepreneurship

After economic liberalization, entrepreneurial activity is playing a major role in socio-economic evelopment of the country in India. In developing countries like India for raisingthe living standard of he vast majority of the backward regions, planning andimplementation for development of entrepreneurial programmes are essential because oftheir over-dependence on agriculture for employment. Thus entrepreneurship


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development in rural industries appears to be the best possible alternative to findemployment avenues for the rural population. The issue of educated unemployment inrural India and increase in farm income needs much concentration by the extensionfunctionaries working in the field of agriculture and allied sectors. Extension functionariesshould encourage unemployed rural youth to attempt towards entrepreneurshipdevelopment. A serious attempt was made in India towards massive creation of self-mployment opportunities through entrepreneurship development programmes. Recenttrends in agri-business sector and emerging ICT has substantially improved Indianagriculture system. In the modern era agriculture is not only restricted to farm but it hasexpanded to the global market system. And hence, the farmer now is not only restricted tofarm and domestic market, but also has opportunity to reach global markets as an agri-business entrepreneur.

Definition and concept of entrepreneurship

Entrepreneurship means to create some thing new, organizing and coordinating andbearing risk with economic uncertainty. Entrepreneurial activities are substantially differentdepending on the type of organization that is being started. It is the name given to thefactor of production which performs the function of “Enterprise”. Out of the five factors ofproduction i.e. land, labour, capital, organization and enterprise, organization does thework of coordination between different factors and makes the production possible by takingupon itself the risk or more appropriately the uncertainty of production.

That is why the entrepreneur is termed as “Uncertainty Bearer” and his function asthat of Uncertainty bearing. Haggen defines entrepreneurship as “the function of seeinginvestment and production opportunity, organizing and enterprise to undertake a newproduction process, raising capital, hiring labour, arranging the supply of raw materialsand selecting top managers for day-to-day operation of the enterprise.”

The major factor for entrepreneurship is the achievement motivation. A societyconstituting individuals with a high level of need for achievement would come up asentrepreneurs. Entrepreneurship involves task accomplishment that embodies a reasonablechallenge to the individuals, competence. Entrepreneurs have to work hard at tasks thatinvolve a real challenge which imply only a moderate risk. Entrepreneur have many of thesame traits as leaders.


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Entrepreneur

According to McClelland entrepreneur is “some one who exercises some control overthe means of production and produces more than what he can consume in order to sell itfor profit. He executes the functions of coordination, organization and supervision.Entrepreneur is basically an innovator who introduces new combinations. An entrepreneuris one who creates a new business in the face of risk and uncertainty for the purpose ofachieving profit and growth by identifying opportunities and assembling the necessaryresources to capitalize on them. He conceives an industrial enterprise for the purpose,displays considerable initiative, grit and determination in bringing his project into fruition.During the process entrepreneur exhibits some of the following characteristics.

Desire for responsibility: Entrepreneur feel a deep sense of personal responsibilityfor the outcome of ventures he start. He prefer to be in control of his resources and usethose resources to achieve self- determined goals.

Preference for moderate risk: Entrepreneurs are not mere risk takers but are insteadcalculating risk takers. Their goals may appear to be high even impossible. But they seethe situation from a different perspective and believe that their goals are realistic andattainable. They usually select only those areas for opportunity where those areas reflecttheir knowledge, backgrounds, and experiences, which increase their probability of success.

Confidence to succeed: Entrepreneurs typically will take the challenges withconfidence in their ability to succeed. They tend to be optimistic about their chances forsuccess, and their optimism is based in reality.

Desire for immediate feedback: Entrepreneurs enjoy the challenge of running abusiness avoiding risks, and they like to know how they are running their business throughconstant feedback from the customers.

High level of energy: Entrepreneurs are more energetic than the average person.That energy may be a critical factor given the incredible effort required to launch a start-upcompany. Long hours and hard work are the rule rather than the exception.

Future orientation: Entrepreneurs have a well defined sense of searching foropportunities. They look ahead and are less concerned with what was done yesterdaythan with what might be done tomorrow. Entrepreneurs see potential where most peoplesee only problems or nothing at all. In contrast to traditional managers who are concernedwith managing available resources, entrepreneurs are more interested in spotting and


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capitalizing on opportunities.

Skill at organizing: Building a company “from scratch” is much difficult task.Entrepreneurs know how to put the right people together to accomplish a task.

Value of achievement over money: It is a common misconception that entrepreneurstarts his business to make money. But it is difficult to say what is the force behind anentrepreneurs motivaton. Some times money may be only a secondary force.

An Entrepreneur puts his innovative ideas into effect in the process of economicdevelopment. The important factor of entrepreneurship is the ability to create new anduseful ideas that solve the problems and challenges people face every day. Entrepreneursachieve success by creating value in the marketplace by utilizing the resources in aninnovative way to sustain the product competitively in the market. Which inturn satisfiesthe customer’s needs. Creative thinking is a core business skill which every entrepreneurneeds to acquire. Entrepreneurship is the result of a disciplined, systematic process ofapplying creativity and innovation to needs and opportunities in the market place.Entrepreneurship is a commitment to expand and grow the major determinants of industrialdevelopment which leads to economic growth of the country. It has been identified as anessential factor for economic development of the country.

The basic objective of an entrepreneurship development should be to develop theman and competencies required to initiate, manage, and expand the entrepreneurialactivity. Hence it is very much important to pay attention towards conceptualization,planning, implementation and management of a business idea. It involves applying focusedstrategies to mould new ideas to create a product or services that satisfies customers needsor solves their problems. Thus, business plan is a pre-requisite which helps an entrepreneurto execute his creative ideas into course of action.

1.2.1 Types of entrepreneurs:

According to Clarence Danhof entrepreneurs are classified in to four types

1. Innovating entrepreneurs: In this category entrepreneur introduces new goods/service, invent new method of production, discovers new market and reorganizesthe enterprises. This kind of entrepreneur can be comfortable with certain level ofdevelopment is already achieved and people look forward to change andimprovement


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2. Imitative entrepreneurs: These people are characterized by readiness to adoptsuccessful innovation, but do not innovate.

3. Fabian entrepreneurs: This particular entrepreneurs, are characterized by greatcaution and skepticism in experimenting any change in their enterprises.

4. Drone entrepreneurs: Entrepreneurs of this category exhibited the characteristicsof refusal to adopt opportunities to make changes in production method, despiteof reduced returns compared to similar producers. Even they may suffer from theloss, but they do not ready to make changes in their existing production methods.

Apart from this classification, some more categories of entrepreneurs are listedby behavioural scientists. They are

Solo operators: Essentially work alone and if needed only take few employees

Agripreneurs: Here people of these kinds venture in to agriculture and allied sectors

Women entrepreneurs: Those women who think of business enterprise, initiate it,organize and combine the factors of production, operate the enterprise and undertakerisks and handle economic uncertainty involved in running a business enterprise.

Inventors: Characterized by competence and inventiveness to invent new productand show interest in research and innovative activities. Eg. Scientist ,who contributedfor innovation.

Challengers: Entrepreneurs who plunge into industry because of the challenges itpresents. Even after met the challenge, they look for the new one.

Lifetimers: These Entrepreneurs take business as an integral part to their life. Usuallythe family enterprises and business run with their personal skill belongs to this category.

Social entrepreneurs: These Entrepreneurs involved in social activities. People whoengaged their service in NGOs, voluntary organizations etc are noted in this category.Even if they run business, certain portion of the profit will be utilized for the socialactivities. Mostly shows high social responsibility.

Intrapreneurs:

• New breed of Entrepreneurs: Operate from within the organization itself.

• Emerge from within the confines of existing enterprise


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• Dependent on the entrepreneur for some activities (Eg. Fund raising)

• Not fully bear the risks involved in the enterprise.

1.2.2 Entrepreneurial traits of agri-preneurs

What makes the entrepreneurs successful? Whether have they anything commonin their personal characteristics? The scanning of their personal characteristicsshows that there are certain characteristics or traits which are found usuallyprominent in them. Few of them are discussed here.

Achievement motivation, risk taking ability, leadership ability, decision makingability, innovativeness, management orientation, and self confidence, attitudetowards self employment and income generation and information seeking aresome of the important entrepreneurial traits for any entrepreneur reported byvarious researchers.

Achievement motivation: The achievement motivation is one of the traits requiredby the agripreneurs . It is the basic urge for the entrepreneur to becomeenterprising.

Risk taking ability: Any enterprise or venture normally circumvents with all kindsof risks. Especially in agribusiness enterprises, it is unpredictable. Hence,agripreneurs should assumes more of risks than any other business venture.Randhawa (1987) and Goleman (1995) reported that agripreneurs should have thewillingness to take risk, while facing tough situations. Agribusiness is complexand risky prone ventures in all spheres, agripreneurs necessarily exhibit the traitsof risk taking ability

Leadership ability: Agriventures as an enterprise is a group activity whichdemands team work and leadership abilities.

Decision making ability: The decision making ability is generally depends oneducation, better communication behaviour, large scale awareness about thedevelopmental practices in that particular enterprise. Such factors will supportthe decision making ability of entrepreneurs. Taking right decision, at right time,at right place (Production and Post production activities) will be the most essentialtraits of successful entrepreneurs. Any failure will attributes for unsuccessfulperformance.

Innovativeness: innovativeness towards the developmental activities and newtechnologies in the Agri-enterprise innovativeness significantly affect the


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leadership qualities of entrepreneurship in the process of development.

Management orientation: Management orientation included orientation towardsplanning, production practices, marketing information and awareness about thenew technologies and developmental practices to improve the productivity ofagri-enterprises.

Self confidence: Literacy level and good exposure will certain extend to supportsself confidence.

Information seeking: The people who have adequate education, innovativeness,enthusiastic will exhibits good information seeking behaviour. Any businessenterprise requires wide variety of information related to production and postproduction. Hence an entrepreneur should possess adequate information seekingbehaviour.

Some of the researchers identified the traits required for the entrepreneurs whodo venture in agribusiness are listed below:

1.2.3 Entrepreneur vs Entrepreneurship

Though ,we use the term entrepreneur often interchangeably with entrepreneurship,yet they are conceptually different. The relationship between entrepreneur andentrepreneurship is given in the table.

1.2.4 What factors motivate entrepreneurs to start enterprises?

It is important to know what factors motivating the entrepreneurs to start enterprises.Various researchers have tried to identify the factors that motivate people to start businessenterprises. Such factors will be immense useful, whenever we design entrepreneurial


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development programme for the targeted people. The factors identified are:

• Entrepreneur possessed technical knowledge or manufacturing experience in thesame/ related line

• There might be a heavy demand for the particular product

• Availability of Governmental and institutional assistance

• Achievement motivation to do something

1.3 PHASES OF ENTREPRENEURSHIP DEVELOPMENT PROGRAMME

The extension programme either in the Department of Agriculture or Krishi vigyanKendra may have to conduct EDP programme suited for different clientele. Hence it isimportant to know the different phases of EDP. Such knowledge will be useful when wedesign and organize similar programme.

EDP consists of three phases

1. Pre- training phase 2. Training phase 3. Post- training phase

1. Pre- training phase :

It is a phase undertaken before the conduct of actual training. This includes activitiesand preparedness required to launch the training programme.

• Selection of entrepreneurs

• Arrangement of infrastructure

• Fixing appropriate resource persons

• Arrangement for the event programme( inauguration etc.,)

• Selection of necessary tools, techniques to select the suitable entrepreneurs

• Formation of selection committee

• Arrangement for the publicity

• Application form for the registration

• Finalizing the training syllabus


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• Pre-potential survey of opportunities

2. Training phase: It deals with actual training period

• Tuning of attitude of trainee to match with the proposed project

• Motivation of trainee towards the entrepreneurial career

• Checking for perceptible change in the behaviour

• Behavioural monitoring for entrepreneurial activities

• Knowledge building of trainee on the technical knowledge, resource management

• Skill up gradation (Preparing viable project, fund mobilization etc.,)

3. Post- training phase

• How far the trainee utilized the training( Post evaluation session)

• Feed back

• Follow-up

• Linking with the supporting institutions

1.4 Institutional support to business entrepreneurs

Central Government and various State Government Institutions have the mandate tohelp the entrepreneurs by providing various kinds of support and facilities. Availabilityof the Institutional support will motivate the new entrepreneurs to get in to the venture.Here we can see the existing support structure available to entrepreneurs.

1.4.1 Specialized Training Institutions for Agricultural human resource management

1. State Agricultural Universities: Recently, almost all SAUs in India focusingAgribusiness Education. While doing so it also simultaneously fosters theagripreneurship development among the future generations available foragribusiness and agriventures. To strengthen the agribusiness education andentrepreneurship development new degree courses (in Undergraduate and Postgraduate level), training programmes have been introduced considering thegrowing demand.

Eg. TNAU- has established separate Directorate of Agribusiness, Dept of PH Courses:


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B.S.(ABM), MBA,(ABM) , BSc.(Ag)-: RAWE- EDP module

2 . KRISHI VIGYAN KENDRA: ICAR sponsored KVK are available throughout thecountry, conducting various vocational training programme with broad objectiveof promoting agripreneurship among farm youth. Eg. Some of the novel Trainingprogramme like Production of organic products and organic inputs, Specialpackaged foods for Sugar patient, Heart patient, packaged flower for specialoccasion and season promotes business entrepreneurship

3. AGRICULTURAL TECHNOLOGY MANAGEMENT AGENCY; The existingstructure of ATMA a district level agency provide wider scope and support topromotes group specific agribusiness entrepreneurship.. Eg. Group farming ,Group marketing using the provision of ATMA.

4. NATIONAL INSTITUTES OF ICAR AND GOVT OF INDIA: Various Nationalinstitutes of ICAR AND GOI also started agribusiness programme with broadfocus to promote agribusiness entrepreneurship among farm graduates especiallyin the first line and second line managers Eg. NIAM, MANAGE, NAARMconducting PG Diploma in Agribusiness.

5. Entrepreneurship Development Cell (EDC): SAUs and even traditional Universitiesstarted functioning entrepreneurship Development cell to promoteentrepreneurship among students.

Eg. EDC of Bharathiar University, Coimbatore and Coimbatore Institute OfManagement and Technology(CIMAT) are functioning well.

6. National Institute of Entrepreneurship and small business development (NISEBUD): This institute in functioning at New Delhi. It imparts specialized training to variouscategories of entrepreneurs. It establishes a forum between various agenciesinvolved in ED activities.

7. National Institute of small Industries Extension Training (NISIET): It is functioningat Hyderabad. It gives training to entrepreneurs of small-scale industries. Apartfrom this it also supports the research on development of SSI. It also extends itsconsultancy services to SSI.

8. RUDSETI (Rural development for self-employment and training Institute): Thisorganization is being promoted by Syndicate Bank. It operates the traininginstitutes at Mangalore and Kannur. It conducts a residential entrepreneurialdevelopment programme for rural unemployed youths.


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1.4.2 Infrastructure support to business entrepreneur

1 Special Economic Zone: (SEZ)

• 237 SEZ in 16 states and UT

• 166 approved in Principle and 41 SEZ formally notified supporting entrepreneur

2. Agri- Export Zone (AEZ)

• To cater the needs of agri- exporter

• Provision of cold chains to supply chain and logistics

3. APEDA ( Agrl. & Processed Food Products Export Development Authority)

• Maximize foreign exchange through agro- products

• Create employment opportunity through value added products

Eg; Grapes, Mango-Maharastra, Karnataka

4 . KINFRA (Kerala Infra structure Authority)

• Development of Industries

• Balancing social, cultural, regional and ecological

• Industrial Parks/Township/Zones

1.4.3 Institutional Finance to Business entrepreneurs

The following institutions providing finance to entrepreneurs.

• Commercial Banks

• National Agricultural Bank for Rural Development

• Industrial development banks of India (IDBI)

• Industrial Finance Corporation of India (IFCI)

• Industrial Credit and Investment Corporation of India (ICICI)

• State financial corporations


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• State Industrial Development Corporations (SIDC)

• Small Industries Development Bank of India (SIDBI)

• Export- Import Bank Of India (EXIM Bank)

• YES Bank (Agri business)

NABARD promotes rural entrepreneurs by means of establishing rural go-downsand storage structure. Submission of bankable projects in the recommended format withtechnical, economic, socially and environmentally viable indicators attracts finance to theentrepreneurs without much of difficulty. The entrepreneurs also some time have theprivilege to avail subsidy component being the part of promotion announced by theGovernment.

1.5 Institutional Intervention and Capacity building for Agri BusinessEntrepreneurship

Some of ongoing Program were conceptualized with different purposes and meetingspecific target too. . At the time of conceptualization it may not be adequately thought ofinclusion of agri business entrepreneurship perspective. Considering the growing demandfor the agri-business entrepreneurship, an attempt has been made to explore the possibilityits inclusion in the ongoing programme without much additional cost. The PossibleProgrammes to include agribusiness entrepreneurship in principle are discussed below:

1.5.1 Agri clinic and Agri business Centre

It is a Joint venture of MANAGE & SAU with support of NABARD

Why agri-clinic and agribusiness centre?

India trains over12000 graduates/year from agriculture and allied sectors, while only2000 are able to find employment. Thus, skilled manpower of agricultural graduates(about10,000, circumvent to become educated unemployed and even under employed in a singleyear. Thus, an urgent need was felt by policy makers to tackle this serious issue throughproper educational planning and a scheme for training, skill up gradation andentrepreneurial development.


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EVOLUTION OF AGRICLINIC AND AGRIBUSINESS CENTRE

• The committee, under chairmanship of Prof. M.S. Swaminathan suggested creationof agriclinics and agribusiness centers managed by agri-graduates.

• During February 2001 NABARD has formulated a model scheme in consultationwith MOA and selected banks for financing agriclinics and agribusiness centresand being implemented with the help of SFAC

• While MANAGE identified training institutes throughout the country for impartingtraining to agri-graduates.

• The Parliamentary consultative committee of Ministry of Agriculture approvedthis scheme on August 22, 2001.

The scheme has the following objectives.

1 To supplement the efforts of government extension system.

2 To make available supplementary sources of input supply and services to needy

farmers.

3 To provide gainful employment to agricultural graduates in new emerging areas

of agricultural sectors.

Agri-Clinic (AC)

• It is envisaged to provide expert services and advice to farmers on croppingpractices

• Technology dissemination, crop protection from pest and diseases, market trendsand prices of various crops in the markets and also clinical services for animalhealth etc., which would enhance productivity of crops and animals.

Agribusiness centers

• Envisaged to provide input supply farm equipments on hire and other services.

• In order to enhance viability of ventures, agricultural graduates may also take upactivities in agriculture and allied areas along with agriclinics and agribusinesscenters.


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Dawn of Agri-clinic and agribusiness centers (AC&ABC)

In order to assess demand for and acceptability of private extension through agriculturegraduates, from farmers (as clients) and agriculture graduates (as service providers),Government organized surveys with the help of ICAR, NCAP and NAARM in 2000 andthe outcome received support of all the members of the Consultative Committee.

At the backdrop of an extension gap and availability of a vast reservoir of untappedresource of unemployed agriculture graduates, a need was felt by the Government of Indiato design a programme which can take care of both, gave birth to the centrally sponsoredscheme of “Agri-clinics and agribusiness centers”,

• NABARD in consultation with the Ministry of Agriculture, and selected bankformulated a scheme for financing agriculture graduates under this scheme andannounced the same on 23 July 2001.

• Government of India made a provision of Rs. 10.50 crores

• In this regard MANAGE identified 67 training institutes all over India for impartingtraining.

• With all expectation launched the ambitious “agriclinic and agribusiness centersscheme (AC & ABCs) on 9April, 2002 at Jaipur.

Agri-clinic and agribusiness centers

Evolved with a view

(a) To gainfully utilize services and skills of agricultural

graduates for supporting agriculture and allied activities,

(b) To complement government efforts, and

(c) To bring up SPS standards of Indian agriculture

(d)To create gainful employment for unemployed

Agrigraduates

Who will become trainee?

• The scheme is open to agricultural graduates in the subjects allied to agriculturelike horticulture, animal husbandry, forestry, dairy, veterinary, poultry farming,


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fish culture, rural home science and other allied activities. As per the latestprovision in the scheme even the Diploma holders (Agriculture), any graduatewith science background , retired employees are enrolled as a trainee

• In case of group activity, one group members may be a management graduate ora person experienced in business development and management.

Selection of trainee for the AC&ABC scheme

The candidate who have the willingness to undergo the training ,has to send his/herapplication to the concerned Nodal Officer of the State . The application will be subject toscrutiny based on the qualifications and aptitude prescribed .The committee involves NodalOfficer of the concern State and the nominee from MANAGE and the NABARDrepresentative to select the candidate. A batch of trainees limited to strength of 20.

Training to incumbents

After the successful selection of the incumbent, two months free residential trainingprogramme will given by the Nodal Officer of the concern State with a team of trainerscovering different modules enable the trainee to become entrepreneur.

Follow- up

Once the training is completed, an adequate follow-up will be taken for the subsequentactivities like institutional financing . After the appraisal of enterprise plan with necessaryrequirements, the loan will be sanction by NABARD through any of the commercial bank.The scheme is provided with back ended subsidy support.

1.5.2 .Small Farmers Agri -business Consortium(SFAC)

The Kerala chapter of SFAC ,venturing into the following agri enterprises.

• Organic farming

• Hydroponics

• Herbal products

• Food & beverage

• Agri shade nets


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This may further activated by means of introduction of agri business entrepreneurshiptraining with institutional and functional linkages mode with Kerala Agrl. University andallied departments.

1.5.3 .Farmers Market-

• The Novel initiatives from some of the State Govt, Popularly known by Uzhavarsanthai ( Tamil nadu), Rythu Bazaars( Andhra Pradesh), Apna mandi ( Punjab)

This kind of organization explores immense scope for agribusiness entrepreneurshiptraining especially to inculcate Business skills. It could be imparted through KVK. Theknowledge on value addition (Small Packet of fresh vegetables, “Daily a green “concepts,ready to cook foods, ready to eat foods ,door delivery to apartments) sand witched withbusiness leadership concept could be an added feature to attract youth towardsagribusiness.

1.5.4. Domestic and Export Market Intelligence Cell (DEMIC), CARDS, TNAU

• Forecasting of Prices of Commodities

• Hastens the business skills

• Indirectly promote business entrepreneurship skills and decision making skillsof agripreneurs

1.5.5. Agro biotechnology agency for rural employment and development (ABARD)

• It is an initiative of KAU

• Training on technologies, entrepreneurship, marketing, leadership, Operatingskills

• SAIU (Small Agro Industrial Units)

• Establishes Coco confectionary unit eg. Eg.Local competitor to Cadbaries chocolate

1.5.6. Market linked Agricultural Intensification (MALAI)

• Experiences on contract farming lead to MALAI

• Facilitated by ADA at the block level


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• Block level Maize Growers Association

• Facilitates direct purchase

• Provision for business leadership through direct marketing, bargaining skills

• Getting premium price, and serve as road map for group marketing and farmersinterest group

1.5.7. Pasumai Padai

• Initiative of Pondicherry Govt

• Farmers Interest group

• Structured organization

• Hiring Agrl. Equipments & machinery

• Supplementary & Complimentary to Uzhavar Udhaviyagam

• Provision for promoting agribusiness entrepreneurship ( Group promotedentrepreneurship) through venturing into agri- enterprise

1.5.8. Grape wine growers Association, Maharastra

• 150 co-operative societies

• 500 farmers

• Entered to international market and international supplier for quality grapesupplier

• MAHAGRAPES is a trade name

• Sales 1200 tonnes achieved, because of spark in agri-business entrepreneurship

1.5.9. ITC- e-choupal

• Empower farmers with Weather & Price information

• Improves Selling and Purchasing

• Direct linkage between business objectives and societal goals


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• Empowerment on business skills and entrepreneurship skills.

1.5.10. Agribusiness Incubators

The Agri-Business Incubation (ABI) Program launched in 2003, is an initiative of theInternational Crops Research Institute for the Semi-Arid Tropics (ICRISAT) in partnershipwith India’s Department of Science and Technology (DST).

• It pro¬motes agricultural technologies developed by ICRISAT, other R&D centersof excellence, universities, and other institutions, separately and jointly.

• Its approach features a dual service and outreach strategy. The outreach strategyinvolves collaborative business incubation to bring a wider range of expertiseand resources to bear on business development to foster agricul¬tural developmentin other regions.

ABI ADMINISTRATION:

ABI is governed by a board of advisors headed by the Director General of ICRISATand by a standing advisory committee that counsels the board on strategy and client intakeand exit.

OBJECTIVES OF ABI

• ABI represents a new resource to promote enterprise development in agricultureand facilitate business among entrepreneurs

• ABI is the only incubator with an inclusive, market-oriented development planthat seeks to improve farmers’ livelihoods through business incubation.

ABI model

ABI has been provided with initial startup as recurring grant provided by NationalScience and Technology Entrepreneurship Development Board (NST¬EDB) and managedby close linkages and coordination with world-class committed Professionals. It works ontwo financial models:

• Capital gain model: ABI takes an equity share in companies it incubates. Thismodel is useful for startup companies with highly proprietary technologies andstrong entrepreneurship capabilities. It requires less management support, butthe new technology must be very strong.


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• The revenue-generation model: It is a franchisee model in which revenue for ABIis generated through service fees, royalties, rental fees, and one-time fees. It isuseful for small-scale entrepreneurs who need significant manage¬ment supportbut do not require strong technology inputs; their business is based on incrementaltechnolo¬gies or pure services.

1.6 GUIDELINES FOR STARTING FARM ENTERPRISES

A broad guideline is given here to start farm enterprises. The frame work prescribedhere will serve as a blue print to any entrepreneur. An intensive effort to answer the itemswill give clarity to entrepreneur as well to financial institutions.

1. 6.1 SELF ASSESSMENT:

Self assessment is very imperative to start an enterprise. A separate SWOC analysisis required to evaluate oneself to know how far we have to deal the favourable andunfavourable items.

Personal interests and resources

• Whether you have adequate and full fledged interest on the enterprises going tostart?

• Whether your interest and attitude match with the nature of enterprise?

• Do you have required skill and competencies to hold the enterprise?

• Do you need to attend any capacity building training to upgrade the skillsrequired?

• What kind of resources do you have? Human resources, financial resources etc.,

• How much financial resources you are propose to invest? - Whether it is adequate?

• Is there a need to approach any financial investors for the project

1.6. 2. WHAT SHOULD I PRODUCE OR SELL?

What should I Produce?

• Assess land capabilities- soil type, topography, irrigation, drainage, environmentall constraints


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• Match the land capabilities with production requirements

• Regulatory measures available

• Production information: technology related to production and post production,equipments and machinery availability, consultancy services etc.,

• Source of production information: Book, e-sources, journals

• Alternative/ competitive products available

• What should I sell?

• Kind of product to sell?

• Quantity to sell?

• Type of marketing the produce

• Market channels to be used

• Competitive advantage of the product

• Where to sell?

• Who are al the target market segment?

• How to sell your product?

• On what price,you propose to sell the product?

Buying or leasing farm land

Buying farm land

• Whether soil is suitable?

• Irrigation/ drainage facility

• Proximity to the market centre

• Other infrastructure availability: Road, electricity, communication, supportinginstitutions

Leasing farm land

• Lease arrangements

• Lease amount


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• Lease periods and terms & conditions

1.6. 3. DEVELOPING FARM ENTERPRISING PLAN

Enterprise plan: The enterprise plan generally includes the enterprise goal, vision,production plan, market plan , financial plan and follow-up plan. In short, all the saidplans are needed for any business plan of an enterprise .

• Production Plan

• Production information

• Cost information

• Labour component

• Major production inputs

• Production led- informations

• Production schedule -month wise/ product wise

• Operating costs

Market Plan

• How do you promote your product?

• How do you estimate potential sales? And sales forecast

• How can you maintain the competitive advantage of the product?

• Product descriptions

• Promotions

Financial Plan

• Sources of fund

• Projected income statement/balance sheet

• Cash flow analysis

• Farm revenue and tax

1.6. 4. INSIITUTIONAL SUPPORT


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• Technological: training, consultancy

• Financial, Loan, interest, repayment schedule, subsidy,

• Marketing(Domestic and export),MSP

• Legal and political

• Policy frame work

About the Business Plan

One of the most important documents for any business is their business plan. It is acommon practice for consultants, lenders, potential business partners, and other business-associated individuals to request a business plan to make a more informed decisionconcerning their relationship with a business.

However, business plans have many more direct benefits for the business owner.The planning process forces owners to systematically consider all facets of the business. Inso doing, they become more knowledgeable of the business, the industry, and the marketenvironment in which their business operates. The process also helps to define businessgoals and to assess the impact that uncertainty may have on future business outcomes.Perhaps most importantly, the written plan provides a well-defined direction for thebusiness. Therefore, it can be used to keep all employees moving toward the commongoals established within it. Completing a business plan can be a time-consuming activity,but well worth the effort. Because businesses operate in an ever-changing environment,the plan should be revisited periodically to be sure that the business is headed in theproper direction or to formally alter the firm’s course if circumstances dictate that this isnecessary. Again, the systematic review of the business plan forces the owner, andpotentially others, to look at the business as a whole and make better-informed decisions.

In a business plan there are several issues that should be addressed, correspondingto the four functional areas of management: marketing, production, finance, and humanresources.

1.7 Why a Business Plan?

Not everyone who starts and runs a business begins with a business plan, but itcertainly helps to have one. If you are seeking funds from a venture capitalist, you willcertainly need a comprehensive business plan that is well thought out and contains sound


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business reasoning.

The best way to show bankers, venture capitalists, and angel investors that you areworthy of financial support is to show them a great business plan. Make sure that yourplan is clear, focused and realistic. Then show them that you have the tools, talent andteam to make it happen. Your business plan is like your calling card, it will get you in thedoor where you’ll have to convince investors and loan officers that you can put your planinto action.

Once you have raised the money to start or expand your business, your plan willserve as a road map for your business. It is not a static document that you write once andput away. You will refer it often, making sure you stay focused and on track, and meetmilestones. It will change and develop as your business evolves.

Reasons for writing a business plan include

• Support a loan application

• Raise equity funding

• Define and fix objectives and programs to achieve those objectives

• Create regular business review and course correction

• Define a new business

• Define agreements between partners

• Set a value on a business for sale or legal purposes

• Evaluate a new product line, promotion, or expansion

What makes a successful business plan?

• A well thought out idea

• Clear and concise writing

• A clear and logical structure

• Illustrates management’s ability to make the business a success

• Shows profitability


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1.8 The Business Plan

A Business Plan is a written description of your business’s future. That’s all there isto it—a document that describes what you plan to do and how you plan to do it. If you jotdown a paragraph on the back of an envelope describing your business strategy, you’vewritten a plan, or at least the germ of a plan.

Business plans can help perform a number of tasks for those who write and readthem. They’reused by investment-seeking entrepreneurs to convey their vision to potentialinvestors. They may also be used by firms that are trying to attract key employees, prospectsfor new business, deal with suppliers or simply to understand how to manage theircompanies better.

So what’s included in a business plan, and how do you put one together? Simplystated, a business plan conveys your business goals, the strategies you’ll use to meet them,potential problems that may confront your business and ways to solve them, theorganizational structure of your business (including titles and responsibilities), and finally,the amount of capital required to finance your venture and keep it going until it breakseven.

Enterpreneurship Developmant and Agri-Business Plan

If put together properly a good business plan follows generally accepted guidelinesfor both form and content. There are three primary parts to a business plan:

• The first is the business concept, where you discuss the industry, your businessstructure, your particular product or service, and how you plan to make yourbusiness a success.

• The second is the marketplace section, in which you describe and analyze potentialcustomers: who and where they are, what makes them buy and so on. Here, youalso describe the competition and how you’ll position yourself to beat it.

• Finally, the financial section contains your income and cash flow statement, balancesheet and other financial ratios, such as break-even analyses. This part may requirehelp from your accountant and a good spreadsheet software program.

Breaking these three major sections down even further, a business plan consists ofSEVEN key components:


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1. Executive summary

2. Business description

3. Market strategies

4. Competitive analysis

5. Design and development plan

6. Operations and management plan

7. Financial factors

In addition to these sections, a business plan should also have a cover, title page andtable of contents.

Length of the business plan

Depending on what you’re using it for, a useful business plan can be any length,from a few pages to, in the case of an especially detailed plan describing a complexenterprise, more than 100 pages. A typical business plan runs 15 to 20 pages, but there’sroom for wide variation from that norm.

Much will depend on the nature of your business. If you have a simple concept, youmay be able to express it in very few words. On the other hand, if you’re proposing a newkind of business or even a new industry, it may require quite a bit of explanation to get themessage across.

The purpose of your plan also determines its length. If you want to use your plan toseek millions in seed capital to start a risky venture, you may have to do a lot of explainingand convincing. If you’re just going to use your plan or internal purposes to manage anongoing business, a much more abbreviated version should be fine.


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1.9 Types of Business Firms

Startups. The classic business plan writer is an entrepreneur seeking funds to helpstart a new venture. Many great companies had their starts on paper, in the form of a planthat was used to convince investors to put up the capital necessary to get them under way.

Most books on business planning seem to be aimed at these startup business owners.There’s one good reason for that: As the least experienced of the potential plan writers,they’re probably most appreciative of the guidance. However, it’s a mistake to think thatonly cash-starved startups need business plans. Business owners find plans useful at allstages of their companies’ existence, whether they’re seeking financing or trying to figureout how to invest a surplus.

Established firms seeking help. Not all business plans are written by starry-eyedentrepreneurs. Many are written by and for companies that are long past the startup stage.Before beginning the arduous and costly task of taking over Corus, TATA Sons used abusiness plan complete with sales forecasts to convince their stake holders which includedshare holders, financiers and customers. It helped make the new venture a winner longbefore the big day arrived. These middle-stage enterprises may draft plans to help themfind funding for growth just as the startups do, although the amounts they seek may belarger and the investors more willing. They may feel the need for a written plan to helpmanage an already rapidly growing business. Or a plan may be seen as a valuable tool tobe used to convey the mission and prospects of the business to customers, suppliers.

1.10 Updating your Business Plan: a checklist

Here are seven reasons to think about updating your business plan. If even just oneapplies to you, it’s time for an update.

1. A new financial period is about to begin. You may update your plan annually,quarterly or even monthly if your industry is a fast changing one.

2. You need financing, or additional financing. Lenders and other financiers need anupdated plan to help them make financing decisions.

3. There’s been a significant market change. Shifting client tastes, consolidation trendsamong customers and altered regulatory climates can trigger a need for planupdates.


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4. Your firm develops or is about to develop a new product, technology, service orskill. If your business has changed a lot since you wrote your plan the first timearound, it’s time for an update.

5. You have had a change in management, new managers should get fresh informationabout your business and your goals.

6. Your company has crossed a threshold, such as moving out of your home office,crossing the Rs 1 million sales mark or increasing the manpower.

7. Your old plan doesn’t seem to reflect reality any more. May be you did a poor joblast time; may be things have just changed faster than you expected. But if yourplan seems irrelevant, redo it.

Business plans tend to have a lot of elements in common, like cash flow projectionsand marketing plans. And many of them share certain objectives as well, such as raisingmoney or persuading a partnerto join the firm. But business plans are not all the same anymore than all businesses are.

Depending on your business and what you intend to use your plan for, you mayneed a very different type of business plan from another entrepreneur. Plans differ widelyin their length, their appearance, the detail of their contents, and the varying emphasisthey place on different aspects of the business.

The reason that plan selection is so important is that it has a powerful effect on theoverall impact of your plan. You want your plan to present you and your business in thebest, most accurate light. That’s true no matter what you intend to use your plan for, whetherit’s destined for presentation at a venture capital conference, or will never leave your ownoffice or be seen outside internal strategy sessions.

1.11 Types of Plans

Business plans can be divided roughly into FOUR separate types.

Miniplan. A miniplan may consist of one to 10 pages and should include at leastcursory attention to such key matters as business concept, financing needs, marketing planand financial statements, especially cash flow, income projection and balance sheet. It’s agreat way to quickly test a business concept or measure the interest of a potential partneror minor investor. It can also serve as a valuable prelude to a full-length plan later on.

Miniplan is not intended to substitute for a full-length plan. Do not send a miniplan


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to an investor who’s looking for a comprehensive one.

The Working Plan: A working plan is a tool to be used to operate your business. Ithas to be long on detail but may be short on presentation. As with a miniplan, you canprobably afford a somewhat higher degree of candor and informality when preparing aworking plan.A plan intended strictly for internal use may also omit some elements thatwould be important in one aimed at someone outside the firm. You probably don’t needto include an appendix with resumes of key executives, for example. Nor would a workingplan especially benefit from, say, product photos.

Internal consistency of facts and figures is just as crucial with a working plan as withone aimed at outsiders. You don’t have to be as careful, however, about such things astypos in the text, perfectly conforming to business style, being consistent with date formatsand so on.

Presentation Plan: If you take a working plan, with its low stress on cosmetics andimpression, and twist the knob to boost the amount of attention paid to its looks, you’llwind up with a presentation plan. This plan is suitable for showing to bankers, investorsand others outside the company.

Essentials

• Almost all the information in a presentation plan is going to be the same as that ofa working plan, although it may be styled somewhat differently. For instance, oneshould use standard business vocabulary, omitting the informal jargon, slang andshorthand that’s so useful in the workplace and is appropriate in a working plan.Remember, these readers won’t be familiar with your operation. Unlike theworking plan, this plan isn’t being used as a reminder but as an introduction.

• Among investors’ requirements for due diligence is information on all competitivethreats and risks. Even if you mention some of only peripheral significance, youneed to address these concerns by providing the information.

• The big difference between presentation and working plans is in the details ofappearance and polish. A working plan may be run off on the office printer andstapled together at one corner. A presentation plan should be printed by a high-quality printer, probably using color. It must be bound expertly into a bookletthat is durable and easy to read. It should include graphics such as charts, graphs,tables and illustrations.


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• It’s essential that a presentation plan be accurate and internally consistent. Amistake here could be construed as a misrepresentation by an unsympatheticoutsider.

1.12 Writing the Agri-business Plan

Farm / Business Name

(Try to insert the colour photograph of your firm at this part of the plan)

(FARM / Business Name)

Month / Year

Owners

Address

Phone

Business Plan Copy Number 1

This document is confidential. It is not for re-distribution.

Prepared by ————-

Table of Contents

Executive Summary 1

Mission / Goals 3

Mission Statement 3-1

Short Term Goals 3-2

Long Term Goals 3-3

Farm Overview 4

The Property

Improvements

Current Operations

Business Product / Services


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(The product)———

Provisions for ———

Herd Plan

Business Organization

The Market

——————- Sales

Marketing Plan

Promotion Advertising

Trade shows

Customer Profile

Strategic Alliances

Competition

Risk/Opportunity

Risks

Opportunities

The Owners

—————

Conclusion

Financials

Capital Requirements

Cash Flow and Break Even Analysis

Cash Flow Projections Spreadsheet

Income Statement

Net Worth Statement


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Exhibits

Articles of Organization

Operating Agreement

Sample Purchase Contract

———— Brochure

Executive Summary

Mission

The mission of ————— is ————.

Farm

Owners —— purchased ——— in ———. The ——— acre property is located in ———.

Business Product / Service

Our farm intends to ———————.

The Market

We intend to sell ——————— to ———————.

Marketing Plan

The objective of all our promotions is to ————————. Once our ————— are

established, we will ——————.

Competition

—————— will be competitive in the —————— sector and the ——————, due in

part to —————. Although others in the market provide similar services, we will be able

to differentiate ourselves through ———————.

Risk/Opportunity

The risk associated with ——————. The greatest risk we will face in our business is

establishing ourselves in the market. We are confident we can overcome these risks through the


37

establishment of —————.

The opportunities before us are significant; we are looking for a sustainable use for our

small farm that actually provides a good investment return and ——————. ———— are

very well suited for our acreage, location and preference for. We have the opportunity to establish

ourselves in the marketplace with .

The Owners

————is owned and operated by ————.

———has a degree? in ———— from ——————, and is employed by? ———.

——— has a degree in ——— from and is employed as ————.


We seek ——— of financing, which will enable us to —————.

Financial Snapshot

There is combined household income of approximately ————annually, and an estimated

combined

net worth of ———

Projected Gross Farm Income

2005 2001 (year 2) 2002 (year 3)

xxxx xxxx xxxx

Balance Sheet Summary

———: Assets: Rs. xxxxx

Liabilities: Rs. xxxxx

Net Worth:

Rs. xxxxx


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———: Assets: Rs. xxxxx

Liabilities: Rs. xxxxx

The initial business focus will be on ————————. During the first two to threeyears, we will strive to ——————. During this time, we will also be —————. Tocomplement this objective, ——————.

Long Term Goals

It is the intent of the owners of ——————— to —————.

To achieve our goals ————— needs seed capitol to begin establishing ————.

Farm Over-View

The Property

Discribe your farm our property.

Improvements

The current livestock capacity is —————————, with interior hay storagecapacity of ————— . The existing facilities, with routine care and maintenance, will ————.

Current Operations

Discribe any farm operation you are curently involved in.

Business Product / Services

(The Product or Service)

Explain what you will be raising or selling.

Uses

Explain its uses.


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Provisions for ———

Feed:: —————

Pasture: The pasture requirements for ——— are ———.

Shelter:

Fencing / Predator Security::

Health care::

Manure management:

Insurance: Describe plans for insuring your livestock if any….———— Provide names of

potential companies———— ie: There are several established nationwide insurance companies

in the business of insuring ———including:

•————

•———— (see exhibits for brochure)

Labor:: —————will carry out ——— farm labor and care of the animals. The exception

being professional veterinary care.

Herd Plan ———————plan to purchase ————————in ————, with birthsexpected in ——. This will be our founding herd of ——, with ——— additional birthsexpected in ——. After the 2001 births, the herd size will have grown to ————. At whichpoint, the ———original females and now the females born in ——— will be bred. Weexpect we can realize —— pregnancies at this time, which will bring the herd to ——. Themales produced by the previous year’s birth will be ———.

2000 end 2001 2002 2003 2004 2005

Females

Total herd

Off spring available to sell

Assumed Birth Rate: 80%

Chance of Female Birth: 50%


40

Business Organization ————————— is organized under ———— as a ——————. As declared in article —— of the Articles of Organization, management of the ———— is vested in the ———————, ———— and ———. The ——— have alsoestablished an operating agreement to augment the articles of organization. See Exhibits.——— professional accounting software will be used to administer the accounts of thebusiness. —— — – CPA, will provide additional professional accounting services on an asneeded basis.

The Market

Sales

Explain who buys your product and why. Show the bank that you have done yourresearch. ——According to all indications and current market research, ——— prices are————. Future supplies in the US will ——————:

The —— Registry

To further the value of US bloodstock, the ——— industry has established ———registry. Newborns — —— are registered by —————. Their value is maintained throughthis verifiable pedigree.

Marketing Plan

The objective of all our promotions will be —————.

Promotion

Our promotion plan will initially be focused on ———.

Advertising

Initially we plan to —————, with the longer term goal of ————.

Trade shows

We plan to become involved in ——.

Customer Profile

Explain who you customers are and why they buy the product.

Strategic Alliances ———— is a member of (i.e., livestock organizations, show


41

associations, etc.)—————— which has numerous exclusive membership rights andprivileges, including ————. We also belong to ———. In addition, we intend to join ————— We have also developed strategic alliances with (mentors for example)—.Competition

Why should people buy from you? —— Although others in the market providesimilar ——— and services, we will be able to differentiate ourselves through ——.

Risk/Opportunity

Risks

Explore the risks now, and explain how you are prepared for them. No one expectsyou to be able to foresee everything, but researching this section can prepare you for bumpsin the road, and help you avoid mistakes in the future.

Opportunities

Let them have it – Here is where you sell your dream!

The Owners

Explain your background(s) and experiences.

Conclusion

This is your last chance to impress upon them, but be brief. Summarize why youwant to do this.


We seek ———— of financing to fund ————. A positive cash flow is projected inapproximately — ———. This funding will be used to ————. Here is a breakdown ofhow the funds will be spent;

————— Rs.—

————— Rs.—

————— Rs.—

————— Rs.—

Rs.—


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We can provide an exit for this loan within ——— by ———.

Cash Flow and Break Even Analysis

We have assumed that our expenses for the first two years can be provided for through———. We project that we will reach a positive cash flow by ———. Sales are expected tobe ———— until the projected herd size of ——— is achieved.

1.13 Success stories of Agripreneurs

Some of the selected successful agripreneurs and their ventures are presented herefor the readers insights to appreciate the opportunities available for agripreneurs.

• Agro input promoter and Agro output marketers

Sri. C. Matheswaran and Sri. Jaisankar were trained at Kodaikanal and Coimbatorerespectively during April-June, 2002. They have taken up an “Agro input promoter andAgro output marketers” project in Mettur Dam area. The project aims at providing allinputs to farmers on credit to raise vegetable crops and offers technical advice and supportthrough weekly follow-up field visits. The vegetables produced will be marketed by themin major vegetable markets located at Thalaivasal, Salem, Erode and Coimbatore. The outputsale proceeds will be paid back to the farmers the very next day after deducting 10% onsales as service charge and the actual transport cost. Input cost provided to the farmerswill be deducted daily from commencement of marketing @ 5% per day. Thus all theoutstandings get zeroed in 20 days from the day of commencement of marketing. Theyhave started the project on 15th July 2002. A further aim is to create 8-10 centres within aradius of 30 km of Mettur Dam.

• Rakshak Agri-Business Center

Sri. Bhavesh Sodha was working as a Gardener in United Phosphorus Ltd. And wasearning Rs. 5000/-per month prior to his training. He started the Rakshak Agri-BusinessCenter at Vapi and inducted Kisan Bharat Kendra, an innovative service where informationon production technologies of crops, weather and market information services are providedto registered farmers through Agrinet services charging Rs. 5/-per page of print out.Implements are also being provided on hire. He has registered 60 farmers for a fee of Rs.300/-per annum. He plans to increase the number of registered farmers to 500 to earn anannual income of Rs. 1.50 lakhs. He has 60 workers and maintains a nursery. He has also


43

taken up pest control work in the city of Vapi for which he is charging the Corporation andGujarat District Industries Centre. He is accessible to the farmers through mobile phone.

• Biodynamic farming and gardening

Greencross Society, an NGO with its members trained under agriclinic andagribusiness center scheme, established to develop biodynamic farming and gardening inrural and urban areas. The focus areas are farming technologies and advisory servicesabout organic and biodynamic agriculture, training and development of bio-dynamic andorganic farming, designing and development of agrofarms, greenery development systemsand earth sciences, marketing network of organically grown agri produce. The society hasestablished its own biodynamic training center at Aruka Valley in Andhra Pradesh andalso conducted training programmes for about 200 farmers in organic and biodynamicfarming with the help of biodynamic association of India and New Zealand.

• Vermiculture production:

Ms. G.K. Satyavathi has started an Agri-Clinic and Agri-Business center at Yarngudem,West Godavari Dist. The concept to guide farmers on Technical lines purely on voluntarybasis and promote seed production, vermiculture etc. During Rabi season 2002-03 she hasstarted paddy seed production in 100 acres with G. Samba Murthy. They have also starteda vermiculture unit with an investment of Rs. 1 lakh. His capacity of the unit is 5 tonnes permonth, banks have been approached for financial support.

• Biopesticide industries

Dr. Suresh Choudhary an agricultural consultant who has established “IndraprasthaAgriclinic center” at Faridabad has extended its services to pesticides and biopesticidesindustries services for setting up new pesticide and biopesticide industries. Source ofavailability of new/old machinery, manpower chemist, production-manager, qualitycontroller and also plant protection consultancy.

• Project report & feasibility report consultancy

Dr. Santosh Agarwal has started agro consultancy in Agribusiness management andagro-industries for agripreneurs to prepare feasibility report and project report for startingenterprises and availing financial help.


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1.14 Let us Sum Up

We have discussed the meaning, importance and concept of entrepreneur,entrepreneurship and scope of entrepreneurship in promotion of agribusiness and creatingemployment in the agricultural sector. Thereafter ,we have studied the entreprenurialcharacteristics,Phases of Entrepreneurial Development Programme, Institutional supportto business entrepreneurs, Institutional Intervention and Capacity building for AgriBusiness Entrepreneurship and Guidelines for starting Farm Enterprises. We have alsolearnt that, business plan is a prerequesite for putting innovative ideas of an entrepreneurinto action.

As noted above, the preparation of an agribusiness plan is not something to takelightly. The long-term future of your business may well depend on its ability to attract theinterest of lenders and/or investors. Such a comprehensive plan involves both dedicationand competency. Management should be deeply involved in every aspect of its preparation.Each segment of the business plan fulfills an important role and cannot be overlooked. Ifyour agribusiness firm has not already prepared such a comprehensive plan, it is verylikely that it will have to do so in the near future. I hope this discussion will provide youwith some help in determining the contents of such a plan.

Cash Management

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Unit- 2

Cash Management

Structure

2.0 Objectives

2.1 Introduction

2.2 Entrepreneurial skills and Cash Management

2.3 Problems of cash management

2.4 Cash planning

2.5 Cash budget

2.6 Let us Sum Up

2.0 Objectives


• The role and importance of cash management

• Entrepreneurial skills and Cash Management

• The cash planning process

• Various tools for cash control

• Functions or importance of cash budget

2.1 Introduction

Cash is one of the current assets of the business. It is needed at all times to keep thebusiness going. A business concern should always keep sufficient cash for meeting itsobligations. Any shortage of cash will hamper the operations of a concern and any excess


46

of it will be unproductive. Cash is the most unproductive of all the assets. While fixedassets like machinery, plant etc., and current assets such as inventory will help the businessin increasing its earning capacity, cash in hand will not add anything to the concern. It is inthis context that cash management has assumed much importance.

What is cash management? Every undertaking is desirous of utilizing the availablecash most effectively so as to accomplish the goals of the undertaking i.e., maximization ofprofits or wealth of the owners of capacity with the minimum of efforts. But managementof cash is not as simple as it appears. In case, the undertaking does not keep sufficient cashin hand, it may not be in a position to meet the unexpected challenges that may bringdown its credit in the market. On the other hand, if the undertaking maintains excessivecash revenue to meet the challenges the excessive cash will remain idle in the business,contributing nothing towards the wealth of the firm. If heavy amounts are blocked forunforeseen contingencies, the company will not be in a position to carry on its day-to-dayworking efficiently. It is where the real problem of cash management comes, i.e. how muchcash should be set aside for unexpected challenges and how much for regular day-to-dayworking. Therefore, the aim of cash management is to maintain a sound cash position tokeep the firm sufficiently liquid and to use the excessive cash, if any, in some profitableway.

2.2 Entrepreneurial skills and Cash Management

Managerial skills involve entrepreneurial skills too. For any business, the cashmanagement is so vital for the successful running of the enterprises. It involves a seriousof composite activities like searching and arranging financial sources, cash planning, cashbudgeting, optimum of utilization of fund, credit management, cash transaction etc.,. Eachlisted activities require some basic skills and specialized entrepreneurial skills to bringout good performance. Different task basically requires certain competency to perform.Since, cash management is a specialized activity, it also require intended skills to performin efficient way. The relationship between cash management and associated broadentrepreneurial skills are presented below for better understanding. Each listed activitiesmay require one or more entrepreneurial skills to perform the activities.

Cash Management

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Activities related to Cash management Associated Entrepreneurial skillsMobilizing fund sources Interpersonal relations skill, Information seeking skill,Communicationcash planning Planning skill, visionarycash budgeting Decision-making skill, Accounting skillcredit management Credit orientation, Management orientationcash transaction Technical and operating skill( e-transfer,e-payment)Cash handling Risk-seeking , risk taking abilityPayment settlement Interpersonal relations skill, Negotiation skillControl of inflow of fund Fund management skill, technical skillControl of outflow of fund Fund management skill, technical skill

2.3 Problems of Cash Management

Cash management has problems attached to it. We can examine these problems underthe following four heads.

1. Controlling level of cash

2. Control inflow of cash

3. Controlling outflow of cash, and

4. Optimal investment of surplus cash.

Now we shall discuss each of the above problems one by one.

1. Controlling level of cash

Every undertaking desires to keep minimum balance of cash for its unforeseenobligations. What that minimum amount of cash should be is really a problem for financialmanagement to solve. In deciding the level of cash the following considerations should betaken into account:

i. Predictable discrepancies: The basic tool for management to forecast the predictablediscrepancies between cash inflow and outflow is cash budget. Cash budget revealsthe timing and the size of net cash flow as well as the period during which surpluscash may be available for temporary investment. In small concerns, preparation ofcash budget is a very minor job while in large companies, the job is assigned to thecontroller of finance and is a full time job. Cash budget may be short range cash budgetand long range cash budget. Short range cash budget is usually of a duration of 6-12


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months. It is generally regarded as a basic financial working tool to determine operatingcash requirements, to anticipate the need for short term financing and to manageinvestments. The short term forecasts may be of great help in optimizing bankrelationship by indicating the highest and lowest of the cash and the timing of its flowin and out of the company. It also helps in planning education of long term bets, guidingdividend policy, co- coordinating divisional financial needs, taking advantage of cashdiscourse planning forward purchasing etc. In addition, revision and review is a regularfeature. Informal reviews are carried on between formal reviews. Some big companieshave developed their own standard forms to maintain uniformity information.

ii. Unpredictable discrepancies: In addition to the predictable discrepancies, there arecertain unpredictable discrepancies like strike, lock out, recession, rise in the cost ofmaterial etc. It is desirable to reserve an adequate balance of cash to meet suchcontingencies. These events either may interrupt the inflow of cash or cause a suddenoutflow of cash which the undertaking did not expect. The amount kept in reserve forsuch eventualities is in the nature of insurance. The amount should be very carefullyearmarked because if no such eventuality arises, the company will lose its profits,which should have been earned, had the amount been earned, had the amount beeninvested in business.

iii. Sources of funds: Cash level depends very much on the sources of funds from which acompany can obtain funds at short notice. Creditability of the company counts muchin this regard. The better the credit standing the smaller the amount of cash to bemaintained by the company. The company is required to maintain less cash, if it hasinternal sources of funds to meet unpredictable expenses. It may sell its redundantmachinery and equipment, assign its receivable or other assets convertible into cash.

iv. Relations with banks: The level of cash balance is determined, to a great extent byrelationship of a company with banks. Relationship with banks very much dependsupon the creditability of the concern. If the company has cordial relations with banks,banks will come forward to assist the undertaking as and when it needs cash. Companywill have to maintain less cash to meet its unexpected challenges. On the other hand, itdepends much on their services which the company will like to have from banks i.e.cash credit arrangement, discounting and collecting the bills, control of balances. Inthis connection, points of major importance are financial condition of the bank, itslocation, the services it offers and the managerial ability of its chief officers.

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2. Controlling Inflow of Cash

Adequate control of cash inflow is an important problem before every businessexecutive with a view not only to prevent fraudulent diversion of cash receipts but also tocollect cash speedily. Fraudulent diversion of cash can be checked easily by installing aninternal check system by breaking the job of cash receipts into several stages, each handledby a different employee. But collections of cash speedily i.e. inflow of cash can be controlledby a) Adopting lock box system or b) Collecting funds through regional officers.

a) Lock-box system: This system is quite popular in U.S.A. It is a technique for speedycollection of cash from debtors. Under this system, deposit accounts are opened withnow or more banks, geographically so located that remittances from customers do nottake more than one day in transit. Customers mail their remittances to the lock-box inthe post office that serves the company’s regional bank. The bank collects chequesfrom the lock-box several times a day, clears them and deposits the amount in theaccount of the customers, bank emits the excess funds to the company in accordancewith the arrangement after maintaining the minimum balances to cover the costs ormay be drawn by the company treasurer at his discretion. This system speeds upcollections of cheques. The company comes to know of dishonored cheques and weakcredit situations sooner. It also reduces the chances of fraud in the collection process ofcash as it controls the cash incoming better.

b) Collections through regional branch officers: It is another method for collecting cashspeedily. Under this system the company’s regional branch officers are authorized tocollect the payments from the customers and deposit them in the local office of thebanks. The local officers in turn transfer the amount to the company’s head office bank,telegraphically or by telexes. Regional officers maintain an account of cost of remittancespaid by them. The Head office either collects the amount or may instruct the regionalofficers to make the payments to suppliers. The system is good when business of thecompany is spread over throughout the country and the amounts to be colleted are ofsmall value.

3. Controlling Outflow of Cash

Controlling outflow of cash is as important as controlling inflow in the interest of thecustomers as well. Every company knows by experiences the peak timings of cash inflows


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and outflows. The problem is that of adjustments of timings between inflows and outflowswhich must be planned properly, in the absence of any proper planning there shall eitherbe overflow of cash or unnecessary drain on un-liquid cash. In order to control the outflowof cash, most of the companies flow the system of centralizedcash payments. Under thissystem, all receipts are transferred from subsidiaries to the central office and central officein turn accepts and pays the creditor’s bills direct to the parties. Bills for local expensesare, however, paid by the local office of the company.

4. Optimal Investment of Surplus Cash

After controlling inflows and outflows of cash, the next problem is that of investmentof surplus cash available with the company, for a short period. The finance executive willhave to use its discretion as far as the decision for investment of surplus cash is concerned.Cash surplus can be temporary or permanent. Temporary cash surplus is composed offunds available for investment on short term basis as they are required to meet the regularobligations such as taxes, dividends etc.

2.4 Cash Planning

Planning and control of cash is the central point of all finance functions. It is one ofthe primary responsibilities of financial management to maintain an adequate supply ofcash. Ample cash funds are the index of liquidity of financial resources and the profitabilityof the firm. Inadequacy of funds or non- availability of cash when it is needed may haveserious setback to an undertaking, but this does not imply that there must be ample fundsto remain unutilized in the business., In order to maintain the flow of cash, cash planningis necessary.

What is Cash Planning and Control?

Cash planning is nothing but simply to forecast the cash needs well in advance for agiven period with a view to maintain adequate cash balance in hand, sufficient to meet thepayments and obligations as and when they mature. Thus it includes forecasting of cashinflows and cash outflows. Cash planning includes cash control as well. Cash planning isa technique to plan for and control the use of cash. It involves formation and sound cashmanagement policies, procedures and practices. Sound cash planning does not only coverthe amount of cash required for day-to-day operations but it must make allowance for

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abnormal situations also which are likely to occur in the business. Cash for normaloperations is easy to predict but it is not so easy to forecast the requirements of cash forcontingencies. Cash control involves proper implementation of policies and proceduresregarding inflow and outflow of cash. It includes short-term investment plans when cashis surplus and borrowing programmes during the days of cash deficit.

Tools for Cash Control

Proper cash control is possible only when there is a person responsible for planningand controlling the cash. Business exigencies and government policies should also be takeninto account while planning the control of cash. We can control the cash position with thefollowing tools.

a) Cash Budget report: Cash Budget is also a good tool for cash control. For this purpose,a cash budget report is prepared as a supplement to cash budget.

b) Inflow and outflow of cash: In order to check the diminution in cash position, a cashflow statement is prepared. It helps controlling inflows and outflows of cash.

c) Ratio analysis: Cash ratios are also important tools of cash control. Various cash ratiosare used which explain the efficiency of cash management.

Tools of Cash Planning

i) Net cash forecast: Forecast of net cash means forecast of cash inflows and cash outflowsfor a given period.

ii) Cash Budget: Cash Budget is the second tool of cash planning. It is a systematic forecastof cash requirement i.e. forecast of cash inflows and outflows and thus shows theprobable surplus or deficiency of cash flow, policies regarding other functions suchsales, production, Marketing etc.

iii) Forecasting an overall working capital position: Forecast of the overall working capitalposition is also an important tool of cash planning. Working capital analysis forecaststhe value of current assets and current liabilities to know the cash position of thebusiness.


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2.5 Cash Budget

What is Cash Budget?

One of the major responsibilities of financial management is to maintain an adequatecash balance to ensure the business to make available sufficient cash to meet its needs asand when they arise.

• Cash budget is an analytical device to estimate the flow of cash in any businessover a future period of time.

• It presents an estimate of cash inflows and outflows. It involves a projection offuture cash receipts and cash disbursement of the firm over various intervals oftime.

• It reveals to the financial manager the timing and amount of expected cash inflowsand outflows over the period studied.

Functions or Importance of Cash Budget

The importance of cash budget may be summarized as follows:

• Evaluation of performance: Cash budget acts as a standard for evaluating thefinancial performance by comparing the actual performance with the budgetfigures. If deviations are positive, the performance may be regarded as good.

• Sound dividend policy: Cash budget plans for cash dividend to shareholders,consistent with the liquid position of the firm. It helps in following a soundconsistent dividend policy.

• Helpful in planning: Cash budget helps planning for most efficient use of cash. Itpoints out cash surplus or deficiency at selected points of time and enables themanagement to arrange for the deficiency before time or to plan for investing thesurplus money as profitably as possible withoutany threat to the liquidity.

• Controlling cash expenditure: Cash budget acts as a controlling device. Theexpenses of various departments in the firm combustible?? controlled so as not toexceed the budgeted limit.

• Testing the influence of proposed expansion programmed: Cash budget forecaststhe inflows from a proposed expansion or investment programmed and testifiesits impact on cash position.

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• Forecasting the future needs of funds: Cash budget forecasts the future needs offunds, its time and the amount well in advance. It, thus, helps planning for raisingthe funds through the most profitable source at reasonable terms and costs.

• Maintenance of ample cash balance: Cash is the basis of liquidity of the enterprise.Cash budget helps in maintaining the liquidity. It suggests adequate cash balancesfor retiring the obligations and their?? to the liquidity.

• Basis of long-term planning and co-ordination: Cash budget helps in co-coordinating the various finance functions, such as sales, credit, investment,working capital etc.

2.6 Let us Sum Up

Cash is the most important assets of the business. Cash itself doesn’t produce anygoods or services. Certain essential entrepreneurial skills also required for effective cashmanagement A business has to keep required cash o meet business needs. A financialmanager synchronizes the cash inflows and outflows.


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AEM- 202Agri-Business and Entrepreneurship Development

(3 Credits)

Block-IIAgri Business

Unit – 1 :Marketing Management in Agri Business 55 - 72

Unit – 2 :Rural Marketing 73 - 89

Unit – 3 :Procurement 90 - 109

Marketing Management for Agri Business

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Unit- 1


‘Marketing is a social and managerial process by which individuals and groups obtainwhat they want and need through creating, offering and exchanging products of valuewith others’

- Philip Kotler

Structure

1.0 Objectives

1.1 Introduction

1.2 Agricultural marketing

1.3 Definition

1.4 Marketing concept vs. selling concept

1.5 Marketing mix (The 4 P’s of marketing) and SAVE model approach

1.6 Market promotion techniques:

1.7 FARMER’S MARKET

1.8 Let us sum up

1.0 Objectives


• The meaning and the objectives of Marketing & Marketing Management,

• Marketing Concepts,

• Market Segmentation

• Marketing Mix(SAVE model)


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• Market Promotional techniques

• Farmers’ Market

1.1 Introduction

An efficient marketing management system provides an incentive to farmers toproduce more; conveys changing needs of the economy to enable production planning;and fosters competition among traders, and eliminates exploitation, particularly amongthe small and marginal farmers.

The Agricultural market in India today is dominated by rural primary markets thatmeet local demand, secondary markets that service distant demands and wholesale marketsthat gather large amounts of produce from different sources for the retailers in the country.

1.2 Agricultural Marketing

Agricultural marketing includes the movement of agricultural produce from farmswhere it is produced to the consumers or manufacturers. This covers physical handlingand transport, initial processing and packing to simplify handling and reduce wastage,grading and quality control to simplify sales transactions and meet different consumers’requirements, and holding over time to match concentrated harvest seasons with thecontinuing demands of consumers throughout the year. For the farmer, the strategic functionof the marketing system is to offer him a convenient outlet for his produce at a remunerativeprice. To the consumers and the manufacturers of agricultural raw materials, assurance ofa steady supply at a reasonable price is the vital service. Prices are determined throughfree market process by negotiations at rural purchase, wholesale and retail stages, andrepresent a balance between the consumers’ ability to pay and the farmers’ need for incentiveto produce An effective marketing system will be geared towards expanding the rangeand types of consumer service, and thus offer procurement outlets.

Agricultural marketing also includes the marketing of production inputs and servicesto the farmers. Some of these include fertilizers, pesticides and other agricultural chemicals;livestock feed; farm machinery, tools and equipment. As the mass of small farmers in thedeveloping world becomes aware of the value of these supplies, the organization ofdistribution systems adapted to their needs becomes vital. Through all the stages ofmarketing, financing and easy access to credit is vital if goods are to move freely and


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bargains be concluded without constraint In this unit we primarily focus on the study ofprinciples of marketing which are applicable to all kinds of products and services.

1.3 Definition

The American Marketing Association (AMA) uses the following: “The process ofplanning and executing the conception, pricing, promotion, and distribution of ideas, goods,and services to create exchanges that satisfy individual and organizational objectives.”From this definition, we understand that: Marketing is an ongoing process. Theenvironment is “dynamic”—what customers want today is not necessarily what they wanttomorrow.

• Marketing involves both planning and implementing (executing) the plan.

1.4 Marketing Concept vs. Selling Concept

Two approaches to marketing exist. The traditional selling concept emphasizes sellingexisting products. The philosophy here is that if a product is not selling, more aggressivemeasures must be taken to sell it e.g., cutting price, advertising more, or hiring moreaggressive sales-persons. Manufacturers of typewriters were too slow to realize thatconsumers wanted the ability to process documents and not typewriters per se. Themarketing concept, in contrast, focuses on getting consumers what they seek, regardless ofwhether this entails coming up with entirely new products.


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1.5. The Marketing Mix (The 4 P’s of Marketing) and SAVE Model

The major marketing management decisions can be classified in one of the followingfour categories:

• Product• Price• Place (distribution)• PromotionThese variables are known as the marketing mix or the 4 P’s of marketing. They are

the variables that marketing managers can control in order to best satisfy customers in thetarget market.

The marketing mix is portrayed in the following diagram:


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The firm attempts to generate a positive response in the target market by blendingthese fourmarketing mix variables in an optimal manner. The 4Ps marketing mix can bereorient in terms of contemporary model popularly known as SAVE model experimentedby Richard Ettenson and Jonathan Knowles (2013) consists of contents SAVE, (S- Solution,A- Access,V- Value, E- Education). It has got significant role in extension services. Hencethe readers are request to study this portion keeping SAVE model as focus centric.

Product=Solution

The product is the physical product or service offered to the consumer. In the case ofphysical products, it also refers to any services or conveniences that are part of the offering.Product decisions include aspects such as function, appearance, packaging, service,warranty, etc. Here the extension professional while advocating any product/ service tooffset the farmers problems should yield a solution . It clearly states the importance ofsolution based approach to solve the farmers problem. To that extend the product/ service,should give a credible results to the farmers problem. By this approach, tranfer of technologyprocess could be reenergised and assume highest social responsibility.

Place= Access

Place (or placement) decisions are those associated with channels of distributionthat serve as the means for getting the product to the target customers. The distributionsystem performs transactional, logistical, and facilitating functions.Distribution decisionsinclude market coverage, channel member selection, logistics, and levels of service. Thisaspects is so important for an extension functionaries in the sense that the product/serviceadvised to the farmers to find solution should available in the nearby place. He has toprovide details like where it is available? From Whom ? and the quantity available? Timeframe needed to arrange etc.,

Price=Value

Pricing decisions should take into account profit margins and the probable pricingresponse of competitors. Pricing includes not only the list price, but also discounts,financing, and other options such as leasing. As an extension professionals when we giveadvisory services, it is very important to look for the price of products either fertilizer/pesticide. According to the clientele paying capacity, it is better to recommend suchitems.Further while doing so it is important to ascertain that whehter the farmer could


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afford to buy the recommended items/not. In case no,alternative could be suggest tothem and make them to felt that they paid for value of the product/service renderedrather than mere Price.

Promotion= Education

Promotion decisions are those related to communicating and selling to potentialconsumers. Since these costs can be large in proportion to the product price, a break-evenanalysis should be performed when making promotion decisions. It is useful to know thevalue of a customer in order to determine whether additional customers are worth the costof acquiring them.Promotion decisions involve advertising, public relations, media types,etc. As a one step ahead the extension functionaries instead of limit only to promotionpoint of view, he shoud educate the clientele interms of value based education involvingall the three kinds of knowledge(awarness, how-to-do and principle knowledge). By doingso it is believed that.it gives comparatively good sustainable results. Eg. Educating thefarmers on insurance( Crop insurance, Animal insurance, Property insurance), future tradingetc.,

Product

Products come in several forms. Consumer products can be categorized as conveniencegoods, for which consumers are willing to invest very limited shopping efforts. Thus, it isessential to have these products readily available and have the brand name well known.

Shopping goods are goods in which the consumer is willing to invest a great deal oftime and effort. For example, consumers will spend a great deal of time looking for a newcar or a medical procedure.

Specialty goods are those that are of interest only to a narrow segment of thepopulation— e.g., drilling machines. Industrial goods can also be broken down intosubgroups, depending on their uses. It should also be noted that, within the context ofmarketing decisions, the term product refers to more than tangible goods—a service canbe a product, too.

There are 3 levels of products 1) Core P Marketers must first define what the coreBENEFITS the product will provide the customer. Eg. Oil Engine is the core product ofKirlosker 2) Actual Prod Marketer must then build the actual product around the coreproduct. May have as many as five characteristics: Eg. Agricultural pumps fitted with


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Oil engine-Kirlosker

• Quality level

• Features

• Brand name

• Packaging

all combined to carefully deliver the core benefit(s).

• Augmented product -offer additional consumer benefits and services.

• Warranty- Eg. 6 months warranty for Kirolsker oil engine

• Customer training

Marketers must first identify the core consumer needs (develop core product), thendesign the actual product and find ways to augment it in order to create the bundle ofbenefits that will best satisfy the customer.

A firm’s product line or lines refers to the assortment of similar things that the firmholds. Boeing, for example, has both a commercial aircraft and a defense line of productsthat each take advantage of some of the same core competencies and technologies of thefirm.

Price

To a manufacturer Price represents the quantity of money received by the firm orsellers for its products. To a customer it represents a monetary sacrifice.

Pricing Objectives

• Maximize current profits and return on investments

• Exploit competitive position

• Survival in a competitive market

• Balance price over product line

There are many ways to price a product considering quality and price as two aspectsof strategy. Let’s have a look at some of them and try to understand the best policy/strategyin various situations.


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Premium Pricing

Use a high price where there is uniqueness about the product or service. This approachis used where a substantial competitive advantage exists. Such high prices are charge forluxuries such as Five Star Hotels. Luxury Cars. Eg First grade quality Cashew, Price/Service charge prevailing in recognisedhospital with high grading.

Penetration Pricing

The price charged for products and services is set artificially low in order to gainmarket share. Once this is achieved, the price is increased. This approach was used byFrance Telecom in order to get entry in to the market.

Economy Pricing

This is a no frills low price. The cost of marketing and manufacture are kept at aminimum. Supermarkets often have economy brands for soups, spaghetti, etc.

Price Skimming

Charge a high price because you have a substantial competitive advantage. However,the advantage is not sustainable. The high price tends to attract new competitors into themarket, and the price inevitably falls due to increased supply. Manufacturers of digitalwatches used a skimming approach in the 1970s. Once other manufacturers were temptedinto the market and the watches were produced at a lower unit cost, other marketingstrategies and pricing approaches are implemented. Eg. Price for organic products follows


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skimming pricing Premium pricing, penetration pricing, economy pricing, and priceskimming are the four main pricing policies/strategies. They form the bases for the exercise.However there are other important approaches to pricing.

Psychological Pricing

This approach is used when the marketer wants the consumer to respond on anemotional, rather than rational basis. For example a product is priced at Rs 99 not Rs 100.

Product Line Pricing

Where there is a range of product or services the pricing reflect the benefits of parts ofthe range.

For example car washes. Basic wash could be Rs 200, wash and wax Rs 150, and thewhole package Rs 350.

Optional Product Pricing

Companies will attempt to increase the amount customer spend once they start tobuy. Optional ‘extras’ increase the overall price of the product or service. For exampleairlines will charge for optional extras such as guaranteeing a window seat or reserving arow of seats next to each other.

Captive Product Pricing

Where products have complements, companies will charge a premium price wherethe consumer is captured. For example a razor manufacturer will charge a low price andrecoup its margin (and more) from the sale of the only design of blades which fit the razor.

Product Bundle Pricing

Here sellers combine several products in the same package. This also serves to moveold stock. Videos and CDs are often sold using the bundle approach.

Promotional Pricing

Pricing to promote a product is a very common application. There are many examplesof promotional pricing including approaches such as BOGOF (Buy One Get One Free)


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Geographical Pricing

Geographical pricing is evident where there are variations in price in different partsof the world.

For example rarity value, or where shipping costs increase price.

Value Pricing

This approach is used where external factors such as recession or increasedcompetition force companies to provide ‘value’ products and services to retain sales e.g.value meals at McDonalds.

Place (Distribution)

A channel of distribution comprises a set of institutions which perform all of theactivities utilised to move a product and its title from production to consumption place isalso known as channel, distribution, or intermediary. It is the mechanism through whichgoods and/or services are moved from the manufacturer/ service provider to the user orconsumer.

There are six basic ‘channel’ decisions:

1. Do we use direct or indirect channels? (e.g. ‘direct’ to a consumer, ‘indirect’ via awholesaler).

Eg. Wholesaler/Retailers vegetable market to consumer, Farmer market to consumer.

2. Single or multiple channels.

3. Cumulative length of the multiple channels.

4. Types of intermediary.

5. Number of intermediaries at each level (e.g. how many retailers in South India).

6. Which companies as intermediaries to avoid ‘intra-channel conflict’ (i.e. infightingbetween local distributors).

Selection Consideration

• Market segment - the distributor must be familiar with your target consumer andsegment.

• Changes during the product life cycle - different channels can be exploited at differentpointsi in the distribution.


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• Producer - distributor fit - Is there a match between their polices, strategies, image, andyours?

Look for ‘synergy’.

• Qualification assessment - establish the experience and track record of yourintermediary.

• How much training and support will your distributor require?

Types of Channel Intermediaries

There are many types of intermediaries such as wholesalers, agents, retailers, theInternet, overseas distributors, direct marketing (from manufacturer to user without anintermediary), and many others. The main modes of distribution will be looked at in moredetail.

1. Wholesalers

They break down ‘bulk’ into smaller packages for resale by a retailer. They buy fromproducers and resell to retailers. They take ownership or ‘title’ to goods whereas agentsdo not . They provide storage facilities. For example, cheese manufacturers seldom waitfor their product to mature. They sell on to a wholesaler that will store it and eventuallyresell to a retailer. Wholesalers offer reduce the physical contact cost between the producerand consumer e.g. customer service costs, or sales force costs. A wholesaler will often takeon the some of the marketing responsibilities. Many produce their own brochures and usetheir own telesales operations.

2. Agents

Agents are mainly used in all big markets. An agent will typically secure an orderfor a producer and will take a commission. They do not tend to take title to the goods. Thismeans that capital is not tied up in goods. However, a ‘stockist agent’ will hold consignmentstock (i.e. will store the stock, but the title will remain with the producer. This approach isused where goods need to get into a market soon after the order is placed e.g. foodstuffs).Agents can be very expensive to train. They are difficult to keep control of due to thephysical distances involved. They are difficult to motivate. Eg. Commission agents foragricultural commodities


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3. Retailers

Retailers will have a much stronger personal relationship with the consumer. Theretailer will hold several other brands and products. A consumer will expect to be exposedto many products.

Retailers will often offer credit to the customer e.g. Local kirana stores.

Products and services are promoted and merchandised by the retailer. The retailerwill give the final selling price to the product. Retailers often have a strong ‘brand’themselves e.g. Spencer, Reliance Fresh.

4. Internet

The Internet has a geographically disperse market. The main benefit of the Internet isthat niche products reach a wider audience. There are low barriers to entry as set up costsare low. Use e-commerce technology (for payment, shopping software, etc). There is aparadigm shift in commerce and consumption which benefits distribution via the Internet

Promotion

Another one of the 4P’s is ‘promotion’. This includes all of the tools available to themarketer for ‘marketing communication’. As with Neil H.Borden’s marketing mix, marketingcommunications has its own ‘promotions mix.’ Think of it like a cake mix, the basicingredients are always the same. However if you vary the amounts of one of the ingredients,the final outcome is different. It is the same with promotions. You can ‘integrate’ differentaspects of the promotions mix to deliver a unique campaign. The elements of thepromotions mix are

• Personal Selling

• Sales Promotion

• Public Relations

• Direct Mail

• Trade Fairs and Exhibitions

• Advertising

• Sponsorship

The elements of the promotions mix are integrated to form a coherent campaign. Aswith all forms of communication the message from the marketer follows the


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‘communications process’ as illustrated above. For example, a TV advertisment made forpopularising the Kissan Call Center(KCC).

The KCC(sender) pays for a specific advert which contains a message specific to atarget audience ie Farmers (encoding).It is transmitted during a set of commercials from aTVstation (Message / media). The message is decoded by TV (decoding) and the targetconsumer(Farmers) interprets the message (receiver). He/she might call toll free call toenquire his doubts(Response). The farmers may mind set to adopt/not adopt (feedback).This information will reinforced during integrated promotional campaign conducted bythe concern department would push the farmer to the point of decision. The disturbancein the form of noise will delay the process.

The Promotions Mix

Let us look at the individual components of the promotions mix in more detail.Remember all of the elements are ‘integrated’ to form a specific communications campaign.

1. Personal Selling

Personal selling is an effective way to manage personal customer relationships. Thesales person acts on behalf of the organization. They tend to be well trained in theapproaches and techniques of personal selling. However sales people are very expensiveand should only be used where there is a genuine return on investment. Eg. The farm andhome visit made by extension personnel would comparativlely convinincing the farmersto go for high tech farming.

2. Sales Promotion

Sales promotion tend to be thought of as being all promotions apart from advertising,personal selling, and public relations. For example Buy One Get One Free(BOGOF)promotion, Others include couponing, money-off promotions, competitions, freeaccessories , introductory offers and so on. Each sales promotion should be carefully pricedand compared with the next best alternative. Similar promotional methods can adoptedby agripreneurs who venturing in to the agriclinic and agribusiness centre. He can suitablymix the diagnostice service of his centre with sale of their products to match intendedpurpose.


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3. Public Relations

Public Relations is defined as ‘the deliberate, planned and sustained effort to establishand maintain mutual understanding between an organization and its publics’. It is relativelycheap, but certainly not cheap. Successful strategies tend to be long-term and plan for alleventualities.

4. Direct Mail

Direct mail is very highly focused upon targeting consumers based upon a database.In marketing, the potential consumer is ‘defined’ based upon a series of attributes andsimilarities. Creative agencies work with marketers to design a highly focusedcommunication in the form of a mailing. The mail is sent out to the potential consumersand responses are carefully monitored. For example, if you are marketing organic products,you would use a database of organic growers in the state and well wishers who haveliking towards consumption of organic products trhough social networking and contactingthem through mail/facebook

5. Trade Fairs and Exhibitions

Such approaches are very good for making new contacts and renewing old ones.Companies will seldom sell much at such events. The purpose is to increase awarenessand to encourage trial. They offer the opportunity for companies to meet with both thetrade and the consumer. Eg. Use of AgriExpo trade fair and exhibitionswould bring all thestakeholders in a singleplateform.

6. Advertising

Advertising is a ‘paid form of ‘communication. It is used to develop attitudes, createawareness, and transmit information in order to gain a response from the target market.There are many advertising ‘media’ such as newspapers (local, national, free, trade),magazines and journals, television (local, national, terrestrial, satellite) cinema, outdooradvertising (such as posters, bus sides, flex and mobile announcement).

7. Sponsorship

Sponsorship is where an organization pays to be associated with a particular event,cause or image. Companies will sponsor events . The attributesof the event are then


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associated with the sponsoring organization. The elements of the promotionalmix are thenintegrated to form a unique, but coherent campaign.Eg.CODDISIA Agri- Intex Expo ofevery year is an joint venture of CODDISIA, TNAU AND NABARD. Here the organistionwill sponsore the events and bears the entire expenses.

1.6 Market promotion techniques:

There are 3 levels of market promotional techniques

1. Consumer level promotion 2. Dealer level promotion 3. Business level promotion

1. Consumer level promotion: All activities which are intended to educate andstimulate consumers are known as consumer promotional tools. Here the goal is to increasethe volume of sales by creating a demand among the public. Samples: Samples are offersof a free trail of a product conducted for consumers and distributed for introducing a newproduct. Here the ultimate goal is to create customer awareness and brand preference.

Coupons: It is a certificate which entitles a customer to purchase at the reduced prices.It is distributed along with the purchase of every item. Some it is circulated along with thenewspaper, magazines. Premiums: An offer of a certain amount of a product at no cost toconsumers who buy a specified amount of the product Eg. Gift is packed along withpurchased materials. Price off: It is a technique of offering goods at a reduced price andmostly followed to clearance of sale other ways in reduction sale.

Contests: It is an indirect way of introducing a new product. Here an opportunity isgiven to consumers to contest with chances of winning attractive prizes. While purchasingthe product the consumers has to fill up the entry form and has to perform the task given.Eg. Complete the slogan writing.

Trading stamps: Here seller will given certain stamps proportionate to the value ofthe purchase made. Later these stamps can be exchanged for goods at stamp redemptioncounters.

Demonstrations: It is actual public performance of a product for convincing itsreliability. It may be arranged in stores, exhibition/fairs, temple festivals and some timedoor to door. Eg. New hand tools and equipments for different artisans


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2. Dealer level promotion

Allowance: It is an amount offered in return for the retailers agreement to sell themanufacturers product. It may be extended to buying advertising and display.

Free goods: It is offered to dealers for taking up extra goods or for carrying newproducts. It may be in the form of cash gifts or free complimentary items.

Price –offs: It is method under which the product is offered to dealers ara price lowerthan the normal price. This is to encourages dealers to buy a standard quantity pack or tocarry a newly launched product.

3. Business level promotion

Bonus to sales force: Here the sales person assigned with stipulated quoto /targetover specific period of time. In excess of the target achieved bonus will be issued. Salesforce contest: It is designed to redouble the interest of the sales force It will motivate thesales force to use full or maximum capacity. Sales meetings/conventions/conferences: Itis arranged by the manufacturing company with a view to educate, inspire and some timerewarding the sales force. In such an occasion new products, new schemes, new sellingtechniques will be introduced.

The above discussed promotional techniques can be used according to the nature ofproducts/service, market segments, and occasion with an element of creativity andinnovation to yield indented impact.

Case of Reliance fresh- Fruits and vegetables

A study was conducted in the two outlets of Reliance fresh in Kerala (Chalakudy andIrijalkuda) with a sample of 100 customers. The firm used Master Card, Free Goods, PriceOff, Coupon and Mark Down as their promotional techniques to attract the customers.However, Market card and price off were the main promotional strategies used by the firmthrough Store communication, displays, announcements and advertisements. Majority ofthe customers exhibited their satisfaction on the promotional methods used by the firm.

1.7 FARMERS MARKET

Most of the farmers in India sell their produce through village level markets, fairs,Mandies, Co-operative Societies, and directly through intermediaries like agents etc. Inthe above process of agricultural marketing, there may be possibility of middlemen exploit


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farmers as well as consumers. Consequently farmers has not get fair price and even notable to meet the cost of cultivation results in indebt ness. In order to eliminate themiddlemen between farmers and consumers, government level intervention worked outby the policy makers in different state introduces the farmer market concept as an alternateto agricultural marketing. It is being known by different names like Uhavar santhai(TamilNadu), Rythou bazar(Andhra), Apna mandis(Punjab), Hazli Bazzar( Maharastra).

1.7.1 RYTHOU BAZZAR (FARMERS MARKET) – A CONCEPT OF MARKET

DRIVEN AGRICULTURE DEVELOPMENT

Based on the lesson learned in Andhra pradesh and Pujab, MANAGE has evolvedmodern concept of farmers market named as Rythou bazar/ Apni mandis Model.

The philosophy behind the model is to help the farmers not only to control hisproduction of commodities but also to take the role of seller of his produce in the market,subsequently lead to build up farmer's prosperity and consumer satisfaction and avoidingmiddlemen in the process and ensure farm fresh.

Objectives

• To create a venue for farmers to sell their own produce directly to consumers asfarm fresh at comparatively lower prices

• To act as a hub for various activities related to farming, farm families etc andprovide platform for understanding of consumer needs to the farmers

• To help in stabilizing prices in other related markets.

• To help producers of specific products come from distant places and sell theirproducts

• To help the local administration streamline all operations relating to marketing atone place

Commodities to be marketed

It would include vegetables, flowers, fruits, cereals, eggs, milk, meat, honey ,seeds,saplings etc.

Besides that farmers needed inputs and other materials also provided in the bazaarSpecial features


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• Farmers are oriented towards market driven produce

• Farmer owned and farmer managed with government felicitation in the initialyears.

• Farmer will be permitted to market their produce by issue of Identity cards

• The government will provide a one time of the capital for infrastructure and overthe years, model envisages self-sufficiency in its operation and management

• Various services required for both the consumers and sellers will be provided oncost basis at the Bazaar such as Bank, STD Booth, internet facilities to know themarket price across various market

1.8 Let us Sum Up

An efficient marketing system provides an incentive to farmers to produce more;coveys changing needs of the economy to enable production planning; and fosterscompetition among traders, and eliminates exploitation, particularly among the small andmarginal farmers. The Agriculture market in India today is dominated by rural primarymarkets that meet local demand, secondary markets that service distant demands andwholesale markets that gather large amounts of produce from different sources for theretailers in the country.

Agricultural marketing has assumed increased importance after launching of the neweconomic policy and consequent opening up of India’s markets to foreign suppliers andbuyers and access by Indians to world markets. Efficient marketing practices enable Indianfarmers derive the full benefits from the new liberalized world trade regime. A betterunderstanding of Marketing principles in general and Agri-Marketing Practices in particularwill remove various constraints and deficiencies in the existing domestic markets andmarketing practices.

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Unit- 2

Rural Marketing

“The future lies with those companies who see the poor as their customers”.

-C.K.Prahalad

Structure

2.0 Objectives

2.1 Introduction

2.2 Rural marketing

2.3 Profile of Indian rural market

2.4 Features of Indian rural markets

2.5 Marketing strategies

2.6 Rural market needs

2.7 ICT initiatives in agricultural marketing

2.8 Let us Sum Up

2.0 Objectives


• The meaning and the objectives of rural marketing

• Characteristics of rural markets

• Rural marketing strategies

• Rural vs urban consumer


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• Rural market needs

ICT initiatives in agricultural marketing

2.1 Introduction

Of late, rural markets have acquired significance as a result of substantial increase inthe purchasing power of the rural communities. On account of the green revolution, therural areas are consuming a large quantity of industrial and urban manufactured products.In this context, a special marketing strategy, namely, Rural Marketing has emerged. RuralMarketing means delivering manufactured or processed inputs or services to ruralproducers or consumers.

2.2 Rural Marketing

Rural marketing facilitates flow of goods and services from rural producers to urbanconsumers at a possible time at reasonable prices, and agriculture inputs/ consumer goodsfrom urban to rural. Marketing is an exchange function; it started much earlier whencivilization began, but was not recognized as marketing. All economic goods are marketedin terms of goods and services (Barter system). Now money is used as a good exchangemedium. The surplus produce is brought to sophisticated places where both buyers andsellers meet and exchange goods, services and ideas in terms of money. The market maybe a street, or a small town/ metropolitan city. Developments in infrastructure, transport,and communication facilities increased the scope of the Rural Market. The advent of PURA(Providing Urban amenties in Rural areas) has further widened the scope and importanceof Rural marketing.

2.3 Profile of Indian Rural Market

The difference between rural and urban markets is on the basis of various socio –economic factors viz, the source of income, the frequency of receipt of income, the seasonalnature of income and consumption. Rural markets are small, non- contiguous settlementunits of village relatively low infrastructure facilitates, low density of population, theirlife style is different. Rural consumers are mostly farmers whose income receipts aredependent on the vagaries of monsoon and nature Following are the facts related to IndianRural Market (According to the Estimates of 2000)

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• 742 million people

• Estimated annual size of the rural market

• FMCG Rs 65,000 Crore

• Durables Rs 5,000 Crore

• Agri-inputs (incl. tractors) Rs 45,000 Crore

• 2 / 4 wheelers Rs 8,000 Crore

• In 2001-02, LIC sold 55 % of its policies in rural India.

Of two million BSNL mobile connections, 50% in small towns/villages.

• Of the six lakh villages, 5.22 lakh have a Village Public Telephone (VPT)

• 41 million Kisan Credit Cards issued (against 22 million credit-plus-debit cards inurban) with cumulative credit of Rs 977 billion resulting in tremendous liquidity.

• 42 million rural House Holds availing banking services in comparison to 27 millionurban

House Holds.

• Investment in formal savings instruments: 6.6 million HHs in rural and 6.7 million inurban

2.4 Features of Indian Rural Markets

• Heterogeneity: Rural markets comprise of heterogeneous population. Varioustiers are present depending on the incomes like Big Landlords; Traders, smallfarmers, Marginal farmers, Labors, Artisans. State wise variations exist in ruraldemographics like Literacy (Kerala 90%, Bihar 44%), Population below povertyline (Orissa 48%, Punjab 6%) etc.,

• Annual Income: Number of middle class House Holds (annual income Rs 45,000-2, 15,000) for rural sector is 27.4 million as compared to the figure of 29.5 millionfor urban sector. Rural incomes CAGR was 10.95% compared to 10.74% in urbanbetween 1970-71 and 1993-94.

• Collective Decision Making: In rural markets decision making process is collective.Purchase process- influencer, decider, buyer, one who pays can all be different.So marketers must address brand message at several levels. Rural youth bringsbrand knowledge to Households.


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2.5 Marketing Strategies

It is very important to note by the marketers that the rural markets are not dumpinggrounds for low-end products basically designed for an urban audience.

Product

The winning strategy of organisations in rural markets is to focus on their corecompetency such as technological expertise to design specific products for the ruraleconomy. Launch of sachets is the most remarkable example in this context which hastransformed the rural market considerably as packaging in smaller units and lesser-pricedpacks increases the product’s affordability. Along with the cultural dynamics, the needsand latent feelings of the rural people have to be well understood by the marketers beforelaunching products in rural segments. Marketers would do well to first understand thisand then designing products accordingly. Another very important factor is the proliferationof spurious products. Majority of rural masses are illiterate people and they identify aproduct by its packaging (color, visuals, size etc.). So it becomes very easy for counterfeitproducts to eat into the market share of established reputed brands. The retailer also getsa larger profit on selling the counterfeits rather than the genuine products and hence isbiased towards the fakes.

Pricing

The rural market remains quite price-sensitive and thus squeezing costs at everystage is of vital importance. Some marketers like HLL are in process of enhancing theircontrol on the rural supply chain through a network of rural sub-stockists, who are basedin the villages only.

Sales

Marketers need to understand the psyche of the rural consumers and then actaccordingly. Rural marketing involves more intensive personal selling efforts comparedto urban marketing. Firms should refrain from designing goods for the urban markets andsubsequently pushing them in the rural areas. Marketers should reach the customers byutilizing the various rural folk media like celebrations, festivals, melas and other activitieswhere they assemble.

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Distribution

Companies would also do well to have a proper sales and distribution network. Interms of sheer reach the companies can gain significant competitive advantages as therural market is highly fragmented and a brand needs to be on the shop shelf before it canbe sold. Companies should also make sure that the prices of their products are not pushedup because of a channel of middlemen who are neither required nor add any value to theproduct. One of the ways could be using company delivery vans which can serve twopurposes- it can take the products to the customers in every nook and corner of the marketand it also enables the firm to establish direct contact with them and thereby facilitate salespromotion.

Annual “melas” organized are quite popular and provide a very good platform fordistribution because people visit them to make several purchases. Rural markets have thepractice of fixing specific days in a week as Market Days (often called “Haats’) whenexchange of goods and services are carried out. This is another potential low costdistribution channel available to the marketers. Also, every region consisting of severalvillages is generally served by one satellite town (termed as “Mandis” or Agri-markets)where people prefer to go to buy their durable commodities. If marketing managers usethese feeder towns they will easily be able to cover a large section of the rural population.

Promotion

The use of traditional media for creating awareness about their products in the ruralmarkets will be an effective promotional strategy. The need for unconventional mediaarises as mass media is too glamorous, interpersonal and unreliable for a rural consumer.The traditional media on the other hand with its effective reach, powerful input andpersonalized communication system will help in realizing the goal. Besides this when theadvertisement is couched in entertainment it goes down easily with the villager. Theadvantages of traditional media which make it a powerful marketing communicationchannel are:

• Accessibility is high

• It involves more than one sense

• Interest arousal capability is high and

• Cost is minimum


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There are few companies which have used traditional media effectively and reapedrich dividends. Brooke Bond Lipton India Ltd (BBLIL) markets its rural brandsthrough magic shows and skits.

Firms must be very careful in choosing the mode of communication. Access to avernacular newspaper is very low. Hence, audio visuals must be planned to conveya right message to the rural folk. The rich, traditional media forms like folk dances,puppet shows, etc with which the rural consumers are familiar and comfortable,can be used for high impact product campaigns.

Eg. Media mix strategy

2.6 Rural Market Needs

Following are the major areas to be addressed by organizations poised to take amajor share of rural markets. Though the list is not exhaustive, it enables “The RuralPlayers” to frame up strategies to cater to the customers in these markets.

1. Small unit packing

2. Simple and easily understandable literature in local language

3. New product designs

4. Sturdy products

5. Proper selection of colours

6. Utility oriented products

7. Mnemonics and brand name(It should be easy to recognize)

8. Usage of Logos

9. Basic packaging

10. Reusable packaging

11. Innovative distribution strategies

12. Developmental marketing

13. Extensive distribution

14. Appointing opinion leaders

15. Relevant promotional strategies with blend of appropriate media mix

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16. Taking care of price sensitivity

In agricultural marketing, use of marketing information system is indispensable,because it is essential for all the stakeholders (the farmers, traders and consumers) inagriculture value chain for the improvement. Especially, the farmers and traders are helpedby providing the market information of agricultural commodities by way of publishing inthe Newspapers, Magazines and Government Bulletins, transmitting/broadcasting on theRadio, T.V. etc. The ICT applications in areas such as supply chain management, logistics,transactions, market creation, information on pricing etc., makes a remarkable utility inthe agriculture value chain. Different agencies from Government, private and NGos hasmade a significant initiative in the form of research models , projects in providinginformation to the online with agricultural market information. Some of the novel attemptsviz, e-procurement (MCX),e-auction for cardomum(Spice Board of India), e-marketing(ITC-e-choupal) and e-governance (Kerala) are worth mentioning. The lesson learned from theexperiments helps the policy makers to think of scaling up of the successive model whereverapplicable. The comprehensive details of ICT initiatives in agricultural marketing arepresented in table 1 would help the extension professionals to understand better


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2.7 ICT Initiatives in Agricultural Marketing Information Network

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Uttar Pradesh, Haryana and Punjab

Tata Kisan Kendra (TKK) is developed by Tata Chemicals Limited (TCL)

Email:corporate_ communication @tatachemicas.com

Played a pivotal role in giving the rural farmers access to the latest ICT tools, knowledge about modern farming technologies and information for enhanced income.

Andhra Pradesh

India Rural World

CoOptions Technologies Limited, Hyderabad

Creation of a multilingual, multi portal that will enable easy access to information. The project started in 1999 for farmers to buy and sell their harvest to the highest bidder.

Tamil Nadu Muruggappa Groups’ EID Parry

The project has been designed in 2002

http://www.eidparry.com/aboutus.asp

To catalyze e-commerce in agricultural and non-farm products. Sugar Cane procurement and other knowledge sharing initiatives have been launched from EID Parry's Kiosks.

TamilNadu (Vellore)

TamilNadu (Krishnagiri )

Pochampalli

The Safal National Exchange of India Limited (SNX), Bangalore,

Promotes online trading in banana and mango (Tothapuri) through ATMA, traded 9,000 tonnes of mangoes grown in Krishnagiri district in Tamil Nadu, Chittoor district in Andhra Pradesh and in Bangalore. Also launched additional delivery centers in the district for banana, onion, potato and coconut.

Tamilnadu (Perundurai Taluk)

One-stop shop for farmers’ needs

Kongu Engineering College Department of Information Technology http;//wserver1.nic.in/ apic/apic

It has set up a portal on agriculture-based marketing activities


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Source: Adapted and edited from http://www.nistads.res.in/indiasnt2008/t6rural/t6rur21.htm

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2.8 Let us Sum Up

Rural Marketing is a different ball game. Rural markets are playing major role indeciding the future of many big business houses. In many product/service areas ruralmarkets have not been completely tapped for its buying power. Rural market comprisesof 700+ million people. Estimated market potential in rural markets are quite huge andimpressive. Rural markets need non-conventional and market specific marketing practicesfor any business firm to be successful. Structure of the rural markets are different from theurban markets. Firms face many challenges in marketing their products/services to ruralmarkets. Communication practices in rural markets are quite different from those of urbanmarkets and are to be effectively implemented to convince the potential customers.According to Dr C.K.Prahlad, the future of any business lies at the Bottom of the Pyramidviz., selling goods/services to rural markets. With the advent of ICT and its variousapplication in agricultural marketing will bring the value chain actors in a commonplatfform.


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Unit- 3

ProcurementStructure

3.0 Objectives

3.1 Importance of procurement

3.2 Nature of Agricultural Commodities

3.3 Scope of agriculture

3.4 Procurement management environment

3.5 Types of purchasing

3.6 Procurement objective

3.7 What is the right quality?

3.8 What is the right source of supply?

3.9 What is the right price?

3.10 What is the right time?

3.11 What is the right quantity?

3.12 Let us Sum Up

3.0 Objectives

On Completing this unit you will be able to understand

• The importance of procurement,

• The difference between industrial raw materials and agricultural raw materials,

• Agricultural environment affecting procurement of commodities by processors, largeorganized retailers, and exporters.

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• Meaning of the right quality, the right source of supply, the right price, the right timeand the right quantity.

• Procurement associated activities such as transportation, receiving and storage,planning techniques used in procurement and general procedures followed for a typicalpurchase.

3.1 Importance of Procurement

Purchase (procurement) is as important a function as production and marketing incontributing to profit and other objectives of an organization. It deserves all the skills andknowledge of modern professional management. The importance of procurement functionin agro-business is even more since (1) cost of raw material constitutes a very highpercentage of the total cost of processed products; (2) it involves operations under highlyfluctuating markets, and (3) it affects the economy of large number of producers (farmers)often inviting government intervention. The importance of agro-processing is increasingin view of the expected large growth of demand for processed products for internalconsumption and exports, Entry of a number of large national and multinationalcorporations in organized retailing of processed agro-based products, fresh fruits andvegetables and other agricultural commodities has further created demand for professionalprocurement managers. On socio-economic front agri-business has a high potential forgeneration of non-farm employment. Hence, procurement of agricultural raw materials isexpected to provide more challenging opportunities in years to come.

3.2 Nature of Agricultural commodities

Procurement is an integral part of materials management (see Exhibit 1). The literatureavailable exclusively to deal with procurement of agricultural raw material for directmarketing and/or processing are relatively limited. However, an attempt has been madeto give good resource materials to the perspective learners.

Exhibit 1: Purchasing – Procurement – Materials Management

Exihibit 1 : Procurement Management -Agricultural Commodities


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PURCHASING IS AN INTEGRAL,IMPORTANT AND PROFIT MAKING PART OF

BUSINESS MANAGEMENT

Agricultural commodities procurement is affected due to their perishable nature,seasonality of production, production density, degree of freedom in quality control, etc.All these individually and interactively, influence organizational pattern and managementstructure of procurement system as well as processing units, and organized retailing.

Perishable : Some of the agricultural commodities such as milk, green leafy vegetables,some fruits are highly perishable. These have to be procured as soon as produced,marketed/processed immediately so that quality is not lost and wastage is minimizedbefore these reach the consumer. Season specific: Some of the agricultural raw materialsare produced during specific season. For example wheat is produced in winter (Rabi

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season), harvested in March-April and arrives in mandis, April onwards. Paddy is cultivatedin rainy season (Kharif) and generally harvested in November (though in some regions ofthe country it is cultivated all the year round). Hence, procurement period for these cropsis different. Similarly, there are fruits and vegetables that are available only in certainseasons. Thus, the seasonality of production determines the timing of procurement.

Region and agro-climatic specific: There are certain crops which grow only in certainlocations having the needed agro-climatic conditions e.g. apples in Kashmir and HimachalPradesh, grapes in and around Nasik and Hyderabad, onions, while cultivated all overIndia, are primarily available in and around Nasik. Tea is grown in North Bengal andOoty Hills. Coffee and spices in South India’s coastal belt.

Essential commodities:

There are certain commodities which are considered as essential commodities sincethese form a major part of the food and consumption of these is essential for survival andhealth of the people. These are cereals, pulses, oilseeds, oil, milk, sugar, salt etc. Centraland State governments keep a constant watch on production, movement, availability andprices of such commodities. It keeps large buffer stock of cereals and controls the prices ofmany essential commodities. A procurement manager has to be aware of government policyand regulations while dealing with such commodities.

Price variations: Because of these said reasons agricultural commodities are subjectedto high price variations.The price variations greately affects the purchasing decision intermsof quantity purchased for production of finished products, fixation of price for theconsumable products, difficult in competiting with alternate products etc., Thus, you as aprocurement manager has to be aware of (i) the characteristics/nature of commodities, (ii)the place of production (iii) the location of mandis where a particular raw material can bepurchased, and (iv) government policy and regulations related to marketing of agriclturalcommodities especially, essential commodities and (v) Price variations

3.3 Scope of Agriculture

The scope of “Agriculture” is very vast as it encompasses entire bio-mass produceby plants, livestock and other animals (both land and aquatic) insects and micro-organismseach covering numerous species and subspecies.


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Every primary agricultural commodity and organic residue, animal by-products andwaste, fishery and forest by-products has potential for developing a series of industries,and thus it urges proper planning for procurement in order to ensure timelyproduction.Thebiomass providesnumerous opportunities for commercial and industrial exploitation,which contribute to economic growth.The biomass processing chain provides a variety ofproducts even from common food crops. For example, the below table portrays the rangeof major products and bye-products from the paddy explores the scope and possibility ofvarious commercial products

Major Products

from Paddy

Subsequent Processed products from the major

products

Rice rice products (puffed rice, poha, noodles, etc.), starch, wi

ne from rice

Bran rice bran oil, de-oiled cake, cattle feed, wax, tar

Husk cement, coal briquettes, husk board, furfural oil, Silica,

etc.

Straw straw board, paper, handicraft products

Similarly, various products can beproduced from other commodities like sugarcane,groundnut, coconut, cassava, maize, cotton, castor,horticultural crops, forest produce,animal and fish, and insects like silkworm and honeybee. Commercialenterprises couldalso be developed from cultivation / procurement of wild plants (especiallymedicinalcrops) and rearing of wild animals like rabbit, crocodile, snake, butterflies. Infact, there are number ofbig companies having vertically integrated plants processingprimary products, associated products,and by-products. Common among these are paddy,sugarcane, cotton, maize, castor, etc. While the basic concepts and principles of materialmanagement are applicable to procurement of agricultural raw materials, while applyingthese concepts you should be aware of the above mentioned differences between theindustrial raw materials and agricultural raw materials. Hence the agricultural commoditiesshould be handled with due care by considering its perishability, seasonality, producvitiy,quality of agrl. Commodities.

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3.4 Procurement Management Environment

Indian agriculture is an economic activity with mainly a small unit of management asare fishery and livestock raising (Annexure 1). The small size causes two problems. Onone hand, providing knowledge of modern agricultural practices (extension services),credit, inputs, irrigation, power and other services (including infrastructure) to each farmerand other primary producers becomes increasingly difficult and costly. On the other hand,small units produce small quantities; two units may produce the same commodity but ofsomewhat different qualities. From this small produce he keeps some for his consumptionand some for seed for next season. This marketable surplus is even smaller. This smallsurplus somehow gets pooled and then reaches the market. Procurement managers ofcompanies involved in buying commodities for marketing / processing / organizedretailing and exports often list the problems that they face in getting the material of rightquality, in the right quantity, at the right time and at the right price, caused by small andvaried offerings of individual producers. Agricultural export business has been particularlyaffected by this, since exporters have to function in markets which are competitive in termsof quality, quantity, time and price. To have better knowledge and understanding ,aprocurement manager may aware of the constraints discussed below.

Constraints of Procurement- Agricultural commodities

Here, problems encountered in procurment of agricultural commodities needed forproceseing units and exporters aregiven below.

• Strengthening the backward and forward linkages of agro-processing with farmingoperations and better price and higher share in value addition to reach the farmerson account of agro- processing activities” should be key areas needing policyintervention…

• Poor yields and quality, cost-ineffective processing, expensive and unsuitablepacking material, are the reasons for dismal Indian performance in fruit andvegetable exports.

• Foremost problem is supply of good quality of raw material in sufficient quantityto ensure high quality of finished products.

• Since Black pepper is grown as a garden crop in Kerala, it is very difficult toimprove the yield…..Export oriented corporate and co-operative farms could playa very important role.


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• Absence of high-yielding and disease resistant varieties (of pepper and cardamom)and inadequate extension were the main problems.

• Importance of medicinal plants as export commodity is still not fullyappreciated….Inhabitants of the forest area should be trained in scientific methodsof herb collection.

• India lost Middle-East meat market due to some inherent drawbacks, such asunhygienic breeding, slaughter at an unproductive age which produced poorermeat and a traditional butcher style which increased the risk of infection.

• Production of high quality sericulture raw material needs to be planned byinducing farmers to accept advanced silkworm rearing technology.

In leather industry, defective technologies, inadequate storage facilities, poor marketintelligence, indifferent grading of hides and excessive retention by trade intermediariescoupled with the diminished bargaining capacity of primary producers were themain problem Farmers suffer avoidable losses in handling and transport due to poorpackaging, especially in case of horticultural and floricultural crops, medicinal plants.

• The Indian trade (as distinct from multinationals) in agricultural products is yetto understand the significance of packaging in market penetration, sustenanceand expansion.

• The crux of the problem lies in the absence of effective backward linkages of foodprocessing industry with small farmers……even contract farming arrangementshave failed to ensure that farmers kept their end of the contract……..this mechanism(contract farming) could be effectively strengthened if the tripartite arrangementbetween farmers, industry and State/ Central Government could be worked out.

• Low yields combined with the excessive number of intermediaries in theprocurement chain, the waste, and loss of value, lock India’s food chain into avicious cycle of low investment, low skill, low yield, low efficiency, and low addedvalue…..Their solution comprises both backward integration for reducing costsand forward integration for adding value.

From the above, we can find that the processing units and exporters of agriculturalcommodity or product face identical problems.

Source: National workshop on “Strategies for Accelerating Agro-processing andExports”1988

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3.5 Types of Purchasing

There are two types of purchasing: (i) purchasing for resale and (ii) purchasing forconversion or consumption. (i) Purchasing for resale : In this type buyer purchases thematerial for resale. This is done by traders, merchants, speculators and trading firms. Forexample, small traders/merchants buy wheat, paddy, oilseed, etc from the farmers invillages and/or mandis (regulated markets) and resale these to bigger merchants/commission agents, retail shops, processing companies etc. Speculators and trading firmsbuy such commodities and take physical delivery, stock these for sometime and sell thesewhen the prices are high, and make profit. For resale, the buyer knows in advance andcertain extendthe market price and what his customer wants and sells the commodity at aprice which includes his cost of buying (i.e. price he paid for the commodity plus his costof travel,weighing, packaging, transport, octroi, and losses in trading the material), andprofit.

The buyers purchases from the farmer at a price which permits resale at a profit.Further, he is quite aware of the price he is likely to get in the mandis as well as the costslikely to be incurred on weighing, packaging, handling and transport. It is because of thisknowledge of market price and various costs, he makes a profit.

Eg. A vegetable hawker buys fruitsand vegetables from the mandi early morning,load these on his/her four wheel cart, or carries it onher head, goes round the housingcolonies or parks his cart at roadsides, and sell these to consumers.

Eg. Even large companies buy fruits and vegetables from farmers and mandis andafter cleaning & grading sell these in retail chains, and supermarket outlets. For example,we have Reliance Fresh, Subhiksha, Tata’s Star Bazaar supermarket, Big Bazaar’s FoodBazaar, ITC’s e-choupal system for purchasing & reselling of farm produce. This kind ofsystem of purchasing activities can be encouraged among the members of SHGS/FIGs/CIGs to involve in group marketing.


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(ii) Purchasing for conversation or consumption

In the second type of purchasing ,the buyer purchases the material for ownconsumption or conversion i.e., for converting the material in different finished or semi-finished products by processing. The folowing table indicates with the examples ofpurchasing for consumption and conversion.

Sources of Purchase and agricultural commodities

Organisation Product Bye-products

Tomato growers- Tomato Companies Tomato katup, chase,soup etc.,

Sugarcane growers- sugarcane Sugar Mill companies

Sugar Bagass( ra w materials forFuel, and Paper mills)

Fruitgrowers( Mango/Guava/litch/organges/Pineapples

Fruit processing companies

Pulp, juices, jams, jelly

Finished products as canned juices and soft drinks

Some companies purchase fruits for conversion into semi-finished products. Forexample, a company may specialize in processing mangoes only up to mango pulp stage.This pulp is purchased by other companies to produce finished products like bottled orcanned juices and soft drinks. We thus see that company purchasing agriculturalcommodities faces different kind of problems. It has to determine:

(i) What finished products it should make.

(ii) What commodity / raw material, in what quantity it should be purchased from openmandi market?

Company’s purchasing department has to decide from where to buy the needed material.

(i) Through contract farmers

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(ii) Open mandi markets

(iii) Direct from farmers

(iv) Direct from farmers’ cooperative, groups, associations.

(v) Semi-finished products from other companies.

Illustrations of companies buying semi-finished products are many. For example,

• Buying mango pulp from other companies specializing in mango pulp, instead ofbuying mangoes and converting it into mango pulp and then into juices & soft drinks.

• Buying mint extracts from farmers who do the first stage of conversion at village level.

• Vanaspati manufacturing company buying oil from oil mills.

• Solvent extraction plants buying rice-bran from rice mills.

All these types of factories are operating in case of oil seeds, timber, leather, chocolate

manufacturing, biscuits etc.

3.6 Procurement Objective

The classical definition of procurement objective is to buy materials and services

• of the right quality

• of the right quantity

• at the right price

• from the right source

• at the right time

3.7 What is the Right Quality?

People are generally attracted towards high quality. But this does not mean theyalways buy high quality products. Many a time budget available is also one of the factorconsiderd for purchase decision. In purchasing high quality is not something that has alwaysto be insisted upon. It is also accepte fact that best quality raw materials gives bestproduction.

Eg. A company purchasing mangoes for producing mango pulp for fruit juices and soft


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drinks. It needs to consider the following questions and subquestions before goingfor procurement of mango pulp

1. Which mango variety it should purchase? Alphanso(High quality but costly ) orKeshar or still cheaper Badam and Totapuri

2. Fact for consideration I - Quality of Alphanso pulp will be high, but so costly

3. Facts for consideration II :Market demand for high cost product is limited

4. Facts for consideration III: Large segment of market wants a low price product

Wise purchase decision: It has to purchase Kesar and/or Totapuri Hence dependingon quality attributes (taste, colour, thichness, flavour etc.,) the consumer wants it has topurchase different varieties of mangoes and blend them to produce the preferred quality.Therefore quality has altogether different meaning.(suitability, satisfaction of theneed,function and cost etc.) The best quality is one that satisfies the intended need at thelowest cost.

3.7.1 How is quality determined?

While determining the quality of raw materials to be purchased ,following threemajor considerations has to be keep in mind

Major considerations for quality Determinants The technical consideration of suitability

• Whether machines are designed to suit a parti-cular quality and made of standard raw material.

• Minimisation of wastage, less chance of break-down of plant, match with plant capacity, suited for agro processing

The economic consideration of price • Availability of appropriate costeffective substitutes,

• Cost involved in Price, weighing, packaging, handling, transportation,insurance,receiving, inventory cost

The physical consideration of availability of materials

• Season, distance, means of transport(logistic services) ,suitability for transport

Taking into consideration all these factors, a manager strives to get the required qualityof materials at right time and place and at least cost. “Value analysis is an organized

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procedure for efficient identification of unnecessary cost”. Value Analysis is a major cost-saving technique used in industry. It looks into the cost side ofquality problem. By valueanalysis one can achieve a balance among price, cost and value received and reduces costby better integration of technical and economic factors of quality.

3.8 What is the Right Source of Supply?

The procurement manager has to locate right source of supplyof raw materials.

Based on the requirments of quality and quantity one has choose right type of sources.

3.8.1 How to build good Buyer – Seller Relationship?

Right source is a very critical factor in procurement management. In procurement ofmaterial the company must develop “supplier good will”. The system should developand sustain good buyer and seller relationship. Some practical tips to build good buyerand seller relationship are

• A good procurement manager motivates the suppliers and builds up such buyer-seller relationship which is mutually profitable and advantageous with continuingrelationship.

• The procurement staff has to learn respect sellers’ culture and behave accordingly.

• A capable supplier, if motivated,can provide the other four requirements, namely,right price, right quality, right quantity at right time.

• Dealings should be fair to all vendors, irrespective of heir caste, creed, language,dress etc.

• Not favor any one vendor over the other just because he is friend or relative

The procurement manager has to see that in his dealings he is fair to all vendors,irrespective of their caste, creed, language, dress etc. and not favor one vendor over theother just because he is friend of a friend or a relative of some friend or relative. Thereputation of fairness to all vendors is a valuable asset and goes a long way in developinga mutually profitable, continuing relationship.


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3.8.2 Factors to be considered for the selection of vendor

The following discussed factors have to be considered for the selection of vendorReliability of seller: If a seller regularly supplies the agreed quality and quantity at righttime and place, then he is Considered to be reliable. From own experience , track recordand from market reputation of the seller, the manager will know, how reliable the seller is.

Continuous supply of goods under all conditions

A good supplier will continue to deliver materials even under adverse conditionssuch as due to market, increasecost of transportation, strikes,weather conditions; cropfailure in the region from where the supplier procures the material etc. In all suchconditions ,the reliable seller finds out ways and means and ,continues, to deliver thematerial as agreed upon.

Accessibility of seller

A good seller is accessible to the company at all time. To cope up with some of theoccasion like uncertainities, sudden rush order for finished product needs, sudden revisionof supply schedule due to temporary breakdown of plant , warranted quick decisions.While taking such key decisions accessibility of seller is very imperative to support thecontingency measures.

Low prices

Price is another important factor while selecting one vendor over another. Vendorwho regularly offers lower price and interested to establish long term relationship withthe company would obviously preferredto get the bulk order on regular basis. On theother hand there are vendors who are opportunists and believe in one-shot, high profit intheir deals and move from company to company taking advantage of short-term demandand supply conditions in the market.

Quick and reliable delivery

Many agricultural commodities especially fruit and vegetables are highly perishable.and delivered quickly to keep their freshness. Systematic planned delivery reduced thecost of inventory cost and some times quick deliveries are alsoimportant when there is asudden spurt of demand for finished product in the market. Thus a procurement manager

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has to keep in mind all the above factors while evaluating vendors and while selecting oneover the other.

3.8.3 Sources of Information on Suppliers

The information about the suppliers can be get from the enlisted sources

Suppliers’ Catalogs Purchasing department’s vendor file

Trade registers and directories File on mailing pieces (mail advertisement

Trade Journals Salesmen

The “Yellow Pages” Trade Exhibits

Company personnel (having past experience of purchasing)

3.8.4 Evaluating a New Supplier

When a company made decision to purchases semi-finished products from otherprocessors, it should take following steps for evaluating a new supplier. The ProcurementManager should personally visit the plant of the new supplier, and check the followinglisted observations.

• Plant location and capacity

• Technology used and process followed

• Hygienic conditions at all stages of handling, processing, and storage and transport

• Technology and process for quality control

• Variety of commodities processed

• Financial condition

• Overall reputation in the market

• Management system of the new supplier

• Services the supplier can provide

• Whether vendor is allso a supplier to the nearest competitors


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3.9 What is the Right Price?

Different vendors offer to supply material at different prices. What is right price toone vendor is not necessarily the right price for other vendors.

What is a right price today may not be the right price tomorrow, it varies with timeand place There are constantly changing variables, such as demand and supply at aparticular place and at a particular time. These have to be evaluated to arrive at the rightprice for a specific purchase. For this we have to understand: (i) Condition of competitionand (ii) What constitutes a fair profit.

3.9.1 Condition of Competition

The condition of competition depends upon market structure prevailing. Tounderstand and determine, what would be the right price, it is essential to know on thedifferent market structure. Traditionally the markets are determined as indicated in thefollowing table

Market

Structure

What it means? What is the right price?

Perfect competition

large number of buyers and sellers , homogeneous product, complete knowledge about the market

Supply and demand determine the price and this can be considered as the right price.

Monopolistic competition

large number of buyers and sellers , heterogeneous product

Supply and demand ,additionaly quality of the product also determines the right price

Oligopoly competition

Few sellers in the market, Each one has significant portion of of total market supply, Entry restricted to new suppliers Product may be homogeneous /heterogeneous

price is dictated by the single seller .Eg. National Egg Coordination committee of Poultary farmers association decide the price of egg.

3.9.2 Fair Profit

A company may procure the material through contract farming. It may buy semi-finished product from small food processors. While deciding the price it often has to seethat the farmer/producer gets a fair profit so that he is motivated to have a continuingmutually profitable relationship with the company. The buyer company should see thatthe price is high enough to keep the vendor in business. In agriculture, profit to farmerproducer may be calculated on percentage of cost basis. Treating farming as business, cost

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should be calculated taking into account all cost factors including all operating expenses(on inputs, labor, power etc.), market value of land, all other fixed costs (on machinery,equipment etc.) and managerial cost.

On this total cost farmer should get fair profit. This should be between the currentinterest rate charged by banks for medium term loan, and the interest rate for mediumterm deposits. The cost plus fair profit should be price of the produce purchased at farmgate by a company. Many large companies buy semi-finished products from smallprocessors. They also ensure with fair price Whatever may be the categoryof supplier,purchasing company has to see that the processor makes a fair profit to keep him in business.The profit may be calculated on percentage of cost basis. The other method for calculatingthe profit is to first calculate the capital investments made by the processors and then workout a fixed return on investment.

3.9.3 Obtain the Right Price- How and Where?

Information about prevailing prices of agricultural commodities in the market isobtained from published websites of market boards, Department of Agricultural marketing,market intelligence cell, pricelists, competitive bidding, negotiation and price investigation.

• Many suppliers publish periodically pricelist of commodities handled by them.Generally listed prices are for orders placed during a specific period.

• Auction or competitive bidding or tender helps in knowing the range of pricewithin which buyer can take decision.

• A procurement manager has to investigate price from various sources to get anidea about the range of price before taking a decision.

• Negotiation with suppliers is a common feature in purchasing. During negotiation,in addition to agreement on price,details regarding supply schedule, transportand other services should also be agreed upon.

3.9.4. Contracts

Written contract between buyer and seller is a significant part of purchasing. Thereare short- term and long-term contracts. The period of contract mainly depends on:

1. Amount of competition in the market.


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2. Accuracy in judgment about the availability of material and price.

3. Extent of business risk.

Parties to contract generally start with the assumption that during the period of contractmarket conditions (demand and supply, prices, availability, transport and other servicesetc.) do not significantly change. However, as there is no guarantee that changes may besignificant, the parties often incorporate in the contract such items as:

(i) Fixed price with escalation,

(ii) Fixed price with predetermination of (a) maximum price, and (b)flexible price, and

(iii) Fixed price with incentives. In case of semi-processed products the parties maynegotiate the price on the basis of (a) Cost to supplies plus percentage of cost; (b)

Cost plus fixed fees;

(c) Cost sharing between parties.

3.10 What is the Right Time?

3.10.1 Kinds of Market

In procurement of agricultural commodities timing of purchase is determined bytwo factors: (i) availability and (ii) price.

Markets of agricultural are unstable. Here supply and price fluctuate substantiallyproducing a highly unstable short-run situation. For example, in vegetable markets, whichgenerally start operations early morning, prices may change hour-on-hour. Certainvegetables are available in certain seasons. Early arrivals of crops such as cauliflower mayfetch higher price which goes down during the season. Highly perishable crops like greenleafy vegetables loose their value if not sold early in the day. Same is the case with manysoft skin fruits. Grains (wheat and rice), oilseeds, cotton, onion, potato are seasonal crops.These are not perishable in short period as vegetables or fruits.

These can be stored.

Thus, markets for agricultural commodities are unstable. Only the markets forindustrial products and hardware are stable. Here, factors of supply and price are reasonablystable in the short run.

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3.10.2 Timings of Purchase

The timings of purchase depends on

(i) Policies for Purchasing: These should be in relation to quality, source, price and quantity.

(ii) Speculative Buying: It means buying at one price and selling it at higher price laterwith profit motive

(iii) Forward Buying: Here company purchases quantity which is more than its currentRequirement and surplus quantity is stored for its future use.

(iv) Hand-to-mouth Buying: There are companies which do not keep any inventory ofmaterial.

But buy the quantity needed according to their daily or weekly capacity and/or demandfor the processed product.

Eg. Medium companies engaged in producing fruit pulp, pickles, rice and wheat flour,cooking oil etc.

Eg. Companies of solvent extraction plant for processing rice bran or oil cake

Eg. Big companies involved in organized retailing of fruits and vegetables

3.11 What is the Right Quantity?

This could be analyzed in relation to (i) Total quantity needed by the buyer(ii) Time,price and source

3.11.1 Total Quantity Needed is depend upon

• In processing industry, plant capacity (installed or rated capacity) determines the totalquantity of raw material needed by the company.

Eg.soybean processing plant with installedcapacity of 300 MT/day operatingcontinuously for 365 days in a year will require 300*365 =10,9500 MT of soybean.

• The actual requirement will depend on sale forecast and production schedule. Forexample, say60% capacity utilization is needed to satisfy the demand, then quantityneeded will be (109500/ 100)*60 = 65,100 MT.

• Depending upon company policy and delivery schedule for the finished products,and corresponding production schedule


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• Inventory and storage issues related to raw material, as well as finished goods.

• Since quantity is related to time of buying and price. The price-volume-time factorstaken together decide the right quantity at a specific transaction.

• Close relation between Quality and Quantity of raw materials in deciding the rightquantity

Eg. Agricultural commodities are biological produce. As such, these are affected duringtransport and storage. There could be weight loss due to loss of moisture (as oftenhappens in case of paddy), losses due to poor packaging and handling during transportand storage, spoilage due to unscientific storage, pest attack and fungus etc. Oftenexternal matter such as small stones, sticks, mud, unripe or over ripe seeds affect thequantity and quality of the material. All these have to be taken into account whiledetermining the right quantity.

• On the basis of expected demand of the outlets

Eg. In organized retail business, in fruits and vegetables quantity is determined on thebasis of expected demand from the company single outlets and multiple outlets.

• Availability of quality , quantity and logistics also some determine the right quantity

3.12 Let us Sum Up

The procurement is an integral, important and profit making function of anyorganization. Procurement decides the price, quality, quantity and availability of rawmaterials which will go in to the process of production. As Kotler and Levy stressed that“Buying is a marketing tool too” as both of them like two sides of the same coin.Procurement is an integral part of materials management. Agricultural commodities areorganic in nature and their procurement is affected by their perishability, seasonality,productions density and quality etc., Procurement manager should be well versed withthe characteristics of the commodities, place of their production, location of mandis andrelated Government policies. There are two types of purchasing viz., Purchasing for resaleand Purchasing for consumption. Purchasing plans differ depending on the reasons topurchase. Known sources of purchase are Contract farmers, Open Mandis, Direct fromfarmers, Farmer cooperatives and Semi finished products from other companies. Purchasemanager has o decide on either few or many sources of supply depending on the need ofthe organisation. Thus source selection is one of the most important decisions which decides

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the profitability of the organization. Once selected and accepted as a source of supplyvendors are to be rated periodically to ensure the desired standards with respect to variousfactors the organization considers as the most important ones. Written contract betweenbuyer and seller is a significant part of purchase. Though transportation, packaging andstorage are mainly the subjects of materials management, a well defined purchase order/contract ensures that these vital aspects are properly taken care of.


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AEM-202


(3 Credits)

Block-III

Commodity and Future Marketing

Unit – 1 : Commodity Markets 111- 129

Unit – 2 : Introduction to Commodity Exchanges 130 - 147

Unit – 3 : Futures Exchange and Risk Management 148 - 154

Unit – 4 : Ware house Receipts and Collateral Management 155 - 165

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Unit - 1

Commodity Markets

Structure

1.0 Objectives

1.1 Commodity markets

1.2 Classification of markets

1.3 Market players and motives

1.4 Motives of market participants

1.5 Forward and backward linkages in markets

1.6 Regulation of commodity markets

1.7 Recent innovation in commodities markets

1.8 Let us sum up

1.0 Objectives

Agriculture occupies a very important place in the economic life of our country. It isthe backbone of our economic system. India is primarily an agricultural country. Thefortunes of the economy are, even now, dependent on the course of agricultural production.Commodity markets have been serving the livelihood in the Indian economy. There weredifferent kinds of markets based on products, nature of competition, time etc. This Unitwill help you to understand the following concepts viz:

• Commodity Markets

• Classification of markets,


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• Market motives,

• Market participants and

• Forward and backward linkages.

1.1. Commodity Markets

1. What are commodities?

A commodity is anything for which there is demand, but which is supplied withoutqualitative differentiation across a given market. It refers to any good that possesses aphysical attribute.

2. Characteristics of Commodities

• They are essential things that are produced and consumed in large quantities.

• Physical goods that have a value attached to them and hence can be called assetclasses.

• They are often used as inputs in the production of other goods or services.

• The prices are determined as a function of their market as a whole.

• There is little differentiation between commodity coming from one producer andthe same commodity from another producer.

• Generally they do not have brands.

• Include physical substances, such as food, grains, and metals, which areinterchangeable with another product of the same type, and which investors buyor sell.

3. How are commodities different from other assets?

• Commodities are bulky in nature

• They are perishable – especially agro products

• Commodities are physical assets - involves storage costs

• They are goods, associated with logistics problem - as they are bulky and as theirproduction and consumption centers are far apart

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• They have wide variations in quality and hence certain grades are taken asstandards

4. Commodity Markets

The term market means not a particular place in which things are bought and soldbut the whole of any region in which buyers and sellers are in such a free intercourse withone another that the prices of the same goods tend to equality, easily and quickly.

1.2 Classification of Markets

There are different kinds of markets, which have been classified, based on the followingaspects.

The description of different kinds of markets is given below

1. Based on Functioning

Based on the functioning, markets are placed in two categories

a. Regulated Markets: These are markets in which business is done in accordancewith the rules and regulations framed by the statuary market organizationrepresenting different sections involved in markets. The marketing costs in suchmarkets are standardized and marketing practices are regulated. Eg. Regulatedmarket for cotton, Coimbatore Important features of regulated markets


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i) Method of sale: in regulated markets, the sale of agricultural produce is undertakeneither by open auction or by the close tender method.

ii) Weighment of produce: Weighment of the produce is done by a licensed standardweights and platform scale.

iii) Grading: the produce in the regulated markets is expected to be sold only aftergrading.

iv) Licensing of market functionaries: all the market functionaries , from the hamals(loaders) to traders, working in the regulated markets have to obtain license frommarket committee.

b. Unregulated Markets: these are the markets in which business is conducted withoutany set rules and regulations. Traders frame the rules for the conduct of the businessand run the market. These markets suffer from many ills, ranging from non-uniformcharges for marketing functions to imperfections in the determination of prices.

2. Based on the Stage of Marketing

Based on the marketing, the markets are divided into three categories

a. Primary Markets

They are markets where most of the raw materials / materials are sold without muchprocessing. They lie near the origin of commodities. In primary markets, the producers ofgoods sell their farm products to the wholesalers and their agents. Eg. Mostely farmerssell their produce in the farmgate, characterised by large volume of proudction of singlemost commodity attracts the wholesaler/agents to procure from that place for furtheractivities in the chain.

b. Secondary Markets

These markets are mostly far away from the primary centers of production and locatedat the consumption centers. This is the market where the wholesalers sell their goods tothe retailers for onward selling to the consumer. The middlemen buy goods from producersand manufacturers and sell to the retailers. Eg. Ottanchatiram whole sale market of TamilNadu. Here vegetables are bring to the market and distributed to various whole salemarkets and some time to large scale retail markets.

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c. Terminal Market

This is the market where goods are purchased for final use or consumption. Theretailers sell their goods to consumers. This market is one where the produce is eitherfinally disposed of to the consumers or processors, or assembled for exports. In thesemarkets, merchants are well organized and use modern methods of marketing.Eg.Organised retail shops like Reliance Fresh, More, Big bazzar, Kannan Deparmental Storesof coimbatore etc.,Recently ,in this particular type of market the direct participation offarmers are much encouraged with evolution Of “Farmers market “ an innnovativeagricultural market concept ,where in farmers they themselves bring the produce to marketand engaged in direct selling experience through the established market set up like UzhavarUdhaviyagam (TN), Rithu baza(AP), Apna mandi(Punjab)

The main objectives of setting up Terminal Markets are

i) To link the farmers to the markets by shortening the supply chain of perishablesand enhance their efficiency and thus increase farmers income,

ii) Provide professionally managed competitive alternative marketing structures thatprovide multiple choices to farmers for sale of their agricultural produce,

iii) To drive reforms in the agricultural marketing sector resulting in accelerateddevelopment of marketing and post harvest infrastructure including cool chaininfrastructure in the country through private sector investment.

iv) To bring transparency in the market transactions and price fixation for agriculturalproduce and through provision of backward linkages to enable the farmers torealise higher price and thus higher income to the farmers.

3. Based on scale/volume of business

a. Retail Markets

These markets cater to the needs of the general public who are consumers of theproducts. Largely small-scale transactions take place at retail level. Retailers are scatteredall over – mostly in residential areas. In short retail refers to a market where goods are soldin small quantity directly to the consumer. Eg. Retail shops at junction place, traditionalkirana stores


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b. Wholesale Market

This market sells primarily to traders such as caterers and small shopkeepers.Members of the public however, are not necessarily excluded. Large-scale transactionstake place. Whole sale shops are mostly concentrated in a particular location in a town/city. It is the market where the middlemen buy the goods in bulk from the producers andmanufacturers. Wholesaling is normally characterized by a system of delivery by thewholesaler to the customer and the extension of credit facilities against bulk purchases.

Eg. Whole sale market of vegetables Ottanchatiram(Tamil Nadu).

4. Based on Time

a. Futures Market

This is an auction market in which participants buy and sell commodity/futurecontracts for delivery on a specified future date. Futures exchanges act as a platformfacilitating and regulating trade. A futures contract is an agreement between two parties tobuy or sell a specified and standardized quantity and quality of an asset at a certain timein the future at a price agreed upon. It is a market in which the buyers and sellers makeagreement for delivery of goods in future. The contract is made on a certain date but thegoods will be delivered in future. Eg: MCX

b. Forward Market

Forward contract is an agreement between two parties to buy or sell an asset at afuture date for a price agreed upon by both. Contracts are booked in advance, to mitigaterisk. Contracts are signed by the buyers and sellers and they have their own set of norms.Forward trade may not involve the activity of an Exchange.

c. Spot Market

Commodities are physically bought and sold here so these are called physicalmarkets. In this market, delivery is taken immediately. Cash settlement is done within amaximum of 11 days. The spot market is a ready market where the sellers on the spotphysically hand over goods to the buyers. There is an exchange of goods for money at thesame time.

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5. Based on Place

a. Electronic Market

These are markets wherein the buyers and sellers do not meet. They are also calledas virtual markets / online market place – eg e-bay. In Futures exchanges also, now tradingis taking place electronically

b. Physical Markets

A market in which commodities, such as grain, gold, crude oil etc. are bought andsold for cash and delivered immediately. This is also called cash market or spot market.

6. Based on Products sold

a. Industrial Markets

This involves the sale of goods between businesses. They are not aimed directly atthe consumer.

Eg: primary market where the raw materials and inputs are obtained – eg: cement.

b. Consumer Market

Here, the products and services are bought by individuals for their own or familyuse. This can be broadly classified into:

1. Fast-Moving Consumer Goods (FMCG) - high volume, low unit value

2. Consumer durables - low volume but high unit value

3. Soft goods – eg: clothes, shoes

4. Services - e.g. hairdressing, dentistry

7. Based on Competition

Based on competition the markets are classified into perfect and imperfect markets

a. Perfect Markets: A perfect market is one in which the following condition willhold good

• There is a large number of buyers and sellers


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• All the buyers and sellers in the market have perfect knowledge

• Prices at any one time are uniform over a geographical area plus or minus the costof supplies.

b. Imperfect Markets: The markets in which the conditions of perfect completion arelacking are characterized as imperfect markets. The following are the situationsbased on the imperfections:

i. Monopoly: It is a persistent situation where there is only one provider of a productor service in a particular market. Monopolies are characterized by a lack ofeconomic competition for the good or service that they provide and a lack ofviable substitute goods.

ii. Oligopoly: It is a market form in which a market or industry is dominated by asmall number of sellers (oligopolists).

i. Duopoly: This is a specific type of oligopoly where only two producers exist inone market

1.3 Market Players and Motives

There are different kinds of participants in the markets, which are listed below. Theiractivities vary slightly according to the markets they operate and they also carry differentnames according to the place of operation. – eg. speculators, hedgers & arbitragers in futuresmarket.

1. Buyer

• A person who buys commodities or products

• Buyers are classified as consumer / industrial buyer

• The buying behaviour varies with time, place etc.,

2. Seller

A person who has goods to offer for willing buyers to buy.

3. Stockist

• A trader who buys goods at lower levels and stores it for some time and sellswhen prices improve.

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• They take advantage of the price variation

4. Brokers

• Intermediaries who operate between buyers and sellers

• They facilitate trade and take some part of the price margin Eg. Stoke brokers,share brokers

1.4 Motives of Market Participants

The market participants have different kinds of motives to meet physical requirement.The different kinds of motives are listed below

• Investment motive

• Speculative motive

• Arbitrage motive

1. Investment motive

A trader who is neither a producer nor a consumer of a produce, but operates in themarkets for profit motive is an investor. He works in the market by buying goods andselling it at a later period or in a different market and gains from the price differences.Investment may be subdivided into – a) speculative and b) arbitrage motive

2. Speculative motive

A speculator buys, holds and sells commodities in the market to get profit from thefluctuations arises in the Market and associated with more of risk factors.

3. Arbitrage motive

Arbitrage is the practice of taking advantage of a price differential between two ormore markets, time periods etc Eg. a person buying in the spot market and selling in thefutures market or vice-versa


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1.5 Forward and Backward Linkages in Markets

The markets are linked with two types of linkages namely backward and forwardlinkages

1. Backward linkage

The backward linkage consists of a)contract farming and b) corporate farming models

1.5.1 Contract Farming

Contract farming has been prevalent in various parts of the country for commercialcrops like sugarcane, cotton, tea, coffee, etc. The concept has, however, gained importancein recent times in the wake of economic liberalization. The main feature of contract farmingis that farmers grow selected crops under a buy back agreement with an agency engagedin trading or processing. There are many success stories on contract farming such as potato,tomato, groundnut and chilli in Punjab, Safflower in Madhya Pradesh, oil palm in AndhraPradesh, seed production contracts for hybrids seed companies in Karnataka, cotton inTamil Nadu and Maharashtra etc. which helped the growers in realization of better returnsfor their produce. In our country contract farming has considerable potential where smalland marginal farmers can no longer be competitive without access to modern technologiesand support. The contractual agreement with the farmer provides access to productionservices and credit as well as knowledge of new technology. Pricing arrangements cansignificantly reduce the risk and uncertainty of the market place.

Small-scale farmers are frequently reluctant to adopt new technologies because ofthe possible risks and costs involved. In contract farming, private agribusiness firmsnormally offer improved methods and technologies because they have a direct economicinterest in improving farmers’ production to meet their needs. In many instances, the largercompanies provide their own extension support to contracting farmers to ensure thatproduction is according to the specification. The farmer learns many skills through contractfarming like record keeping, improved methods of applying chemicals, fertilizers andknowledge of the importance of quality and of the demands of export markets. In view ofthe above, contract-farming arrangements need to be encouraged widely. This wouldrequire arrangement for registration of sponsoring companies and recording of contractfarming agreements, in order to check unreliable and spurious companies. A dispute

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resolution mechanism needs to be set up near to farmers which can quickly settle issues, ifany, arising between the farmers and the company under a quasi-judicial manner. Thefarmers while raising the contracted crops, run the risk of incurring debt and consequentdisplacement from land in the event of crop failure.

Farmers need to be indemnified from such displacement by law.

Eg: PepsiCo has emerged as one of the biggest providers of high quality seeds(especially tomatoes, chillies and potatoes) for which farmers have to pay up front. Thecompany recently imported 15,000 citrus plants from California, which are being distributedin Punjab with an idea to develop Punjab as a major citrus exporter.

1.5.2 Corporate Farming

Corporate farming refers to direct ownership or leasing in of farmland by businessorganizations in order to produce for their captive processing requirements or for the openmarket.

Eg:, Jamnagar Farms Pvt. Ltd.- a subsidiary of Reliance Industries (Mukesh Ambani group)with 7500 acres of farm land which has mango occupying 450 acres that makes it thelargest mango orchard in Asia with highest social responsibilityto ensureenvironmental protection and functioning as profitable venture .

2. Forward linkage

Forward linkage means the dealings with retail chains and processors. The mostessential things in forward linkages are

• Quantity and consistency in supply,

• Competitive pricing of the produce,

• Market knowledge, and

• Farmers’ ability to build their associations, which are very much required.

Retailer’s buying process

Retail buying is the recent procurement strategy adopted by major retailers, i.e. theywill not agree with any pre-agreed price with farmer, however they give the prevailingmarket rate through their collection centers in villages/taluk place. They directly buy the


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produce on cash and cheque payments, some retail companies buy directly from existingopen markets.

Eg: Relaince Retail buying of vegetables through their collection centers for their outlets.

1.5.3.Challenges for Commodities Markets

• Encourage the retail companies to evolve sourcing models and meanwhileproactively prepare farmer group to establish linkage with retailers.

• Necessary infrastructure in order to provide, Multi commodity service, preservingquality, enhancing agri produce shelf life etc

• Improved market access for farmers both in the national and overseas markets

• Increase bargaining power of farmers by building their own associations

• Introduce de-intermediation process into the current marketing system

• Forward linkage of farmers and backward linkage of retail chain etc.

1.6 Regulation of Commodity Markets

Commodity markets are regulated at national and international level by the followingorganizations.

1. India

a. APMC

b. State Marketing Board

c. Forward Markets Commission (FMC)

2. International

a) WTO

b) United Nations Conference on Trade and Development (UNCTAD)

2.a United Nations Conference on Trade and Development (UNCTAD)

The United Nations Conference on Trade and Development (UNCTAD) wasestablished in 1964 as a permanent intergovernmental body, UNCTAD is the principalorgan of the United Nations General Assembly dealing with trade, investment anddevelopment issues.

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• To maximizing the trade and development prospects of developing countries andeconomies in transition,

• Assisting them in their beneficial integration into the globalizing and liberalizingworld economy and the international trading system, and

• Aims to strengthen human, institutional and policy-making capacities byformulating and implementing national trade policy frameworks conducive toeconomic, human and social development and poverty alleviation, as well as inparticipating effectively in multilateral, regional and sub regional tradenegotiations.

• To develop Comprehensive computer-based information system on trade controlmeasures that uses UNCTAD’s database.

2.b World Trade Organization (WTO)

WTO is the only international body dealing with the rules of trade between nations.

The main functions of WTO are

• To oversee implementation and administering of WTO agreements

• To provide a forum for negotiations

• To provide a dispute settlement mechanism and

• Expand the production and trade in goods and services.

1.7 Recent Innovations in Commodities Markets

1.7.1.Safal Market

This was the initiative by NDDB, which came into existence in April 2003 with settingup of a full- fledged trading platform for Fruits and Vegetables at Bangalore. It has beenformed to establish an alternative market set-up that operates parallel to mandis to stimulateproduction, raise quality standards, reduce losses etc

Reasons for NDDB’s debut into the F&V sector could be

• Dominated by small farmers, who were unable to effectively bargain in the Mandisand get remunerative prices

• APMC Act emphasises on regulation and restrictions on marketing activity which createa situation which is disadvantageous to growers


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• Mandi operations were poorly designed - inefficient & lack transparency

1.7. 2. E-Choupal

E-Choupal is an initiative of ITC Limited (a large diversified group in India) to linkdirectly with rural farmers for the procurement of agricultural/aquaculture produce likesoya, coffee, and prawns. E-Choupal was conceived to tackle the challenges posed by theunique features of Indian agriculture, characterized by fragmented farms, weakinfrastructure and the involvement of numerous intermediaries. Traditionally, thesecommodities are being procured in ‘mandis’ (major agricultural marketing centres in ruralareas of India), where the middleman used to make most of the profit. These middlemenused unscientific means to judge the quality of the product, the price difference in thepayout for good quality and inferior quality was less and hence there was no incentive forthe farmers to produce good quality yield. With e-choupal, role of the middleman wasrestricted.

ITC Limited has now established computers and Internet access in key rural areaswhere the farmers can directly negotiate the sale of their produce with ITC Limited. ThePCs and Internet access at these centers enable the farmers to obtain information on mandiprices, good farming practices and place orders for agricultural inputs like seeds andfertilizers. This helps farmers in improving the quality of produce, and also helps inrealizing a better price. Each ITC Limited kiosk having an access to Internet is run by asanchalak—a trained farmer. The computer housed in a farmer’s house is linked to theInternet via phone lines or by a VSAT connection and serves an average of 600 farmers in10 surrounding villages within about a 5 km radius. The sanchalak bears some operatingcost but in return gets commissions for the e-transactions done through his eChoupal. Thewarehouse hub is managed by middle-men called samyojaks. The samyojak acts as a localcommission agent for ITC Limited.

The system saves procurement costs for ITC Limited. The E-Choupal model is quitedifferent from the other models, as the farmers do not pay for the information andknowledge they get from E-Choupals.

ITC Limited has extracted value in four steps through E-Choupal

(a) Elimination of non-value adding activities

(b) Differentiating product through identity preservation

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(c) Value added products traceable to farm practices

(d) E-market place and support services to future exchange.

1.7.3.Metro Cash & Carry

Cash and Carry is a new initiative in wholesaling in which services of credit anddelivery are replaced with discounts. Metro’s Cash & Carry’s business model bringstogether small, medium and large-sized producers, farmers, agricultural cooperatives andmanufacturers, with the dispersed community of hotels, restaurants, caterers, traders,retailers and small to medium business enterprises, under one roof. They buy directlyfrom producers and manufacturers and sell to business customers at wholesale centers.This way, they shorten the supply chain and thereby eliminate the high costs associatedwith a fragmented supply chain. They also cut costs and wastage by building moderntrade infrastructure and implementing modern IT-based systems, which improve efficiency.By aggregating the demand of small and medium businesses, they are able to buy in bulkquantities at lower costs, a part of which is passed on to the customers.

1.7.4. GROUP MARKETING – Case of Vegetable and Fruit Promotion CouncilKeralam (VFPCK) Kerala Horticulture Development Programme (KHDP) is the precursorto the farmer led company known as Vegetable and Fruit Promotion council of Kerala. Ithas explored the feasibility of introducing SHG in agricultural sector with empowermentintervention model Vegetable and Fruit Promotion Council Keralam (VFPCK) is an ISO9001-2000 certified company registered under section 25 of Indian Companies Act 1956and has been established to bring about overall development of fruit and vegetable sectorin Kerala and established in 2001. At present 260 VFPCK Swasraya Karshaka Samithis arefunctioning in across Kerala. About 98460 MT of produce worth Rs.157.54 crores weretraded by these SKS during the financial year 2010-11

Organizational setup:The Director Board with 11 members is chaired by the Ministerfor Agriculture, Government of Kerala ,and acts as the governing body of the Council. Theboard members include senior Government officials like Agricultural ProductionCommissioner, Secretary (Finance), Chief Executive Officer of VFPCK, four personsincluding a woman to be elected from the SHGs and one representative each fromparticipating banks, national agency in horticulture and European Union.


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Objectives

• To improve the livelihood of vegetable and fruit farmers by empowering them inproduction, value addition and marketing as a profitable venture in a sustainable way.

Innovative concepts developed and implemented by VFPCK

1. Master farmers: Farmers empowered to disseminate information related to production,credit and marketing to fellow farmers of their designated group

2. Office-less extension: It has periodical planned fixed schedule of farm and home visitby the Extension professional, supplemented with mass awareness programmes likecampaigns and demonstrations

3. Group Marketing

A group of 7 to 15 neighbouring SHGs will constitute a Field Centre (FC), whereinthe SHG farmers bring their produce to a common place for marketing and traders willprocure the produce directly from the farmers.

4. ParticipatoryCredit

VFPCK signed an MOU with 11 banks in the State for disbursement of credit basedparticipatory credit planning session to farmers ,facilitates members for easy and timelyaccess of credit.

5.Participatory Technology Development

The experimental capacities of the farmers are enhanced through PTD approach andempower to solve their problems by themselves.

Farmer Markets (Swasraya Karshaka Samithi)

Concept of group marketing

The concept of group marketing was developed with focus on empowering andfacilitating the farmers to take more effective decisions for marketing of their produce. Itprovides SHG farmers better access to markets and therefore a greater share in theconsumer’s rupee.

Clustering of SHG – Market centric approach

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Under group marketing, 10-15 Self Help Groups (SHGs), numbering about 250-300farmers, come together under the banner of Swasarya Karshaka Samithi (SKS) and tradetheir produce collectively.

How the group marketing concept is being worked in VFPCK?

• A group of 7 to 15 neighbouring SHGs will constitute a Field Centre (FC), whereinthe SHG farmers bring their produce to a common place for marketing.

• Traders are coming to the Field Centers and this will increase the bargaining powerof the member farmers.

• The Market Information Centre (MIC) associated with VFPCK provides the dailymarket prices of banana and all other vegetables collected from different marketsin Kerala and even outside,

• It also provides account books and platform weighing scale to Field Centers

• After evaluating the performance at different stages periodically FCs are elevatedto Swasraya Karshaka Samithis (SKS)

• Each SKS provided with stage by stage various other supports like additionalplatform weighing scale, furniture, telephone, major expense reimbursement fora year, land and building.

Advantages of Group marketing

1. Helps them to reduce transportation expenses and save time

2. Since Weighing is done by farmers it ensures transparency and accuracy.

3. The loading/unloading of produce is done by the farmers themselves ensuringcareful handling of the produce.


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4. Guaranteed Prompt payment within the prescribed period due to collective effortin recovery from among debtor traders

5. Assures the fair profit and eliminate the traders lobby and improve the bargainingpower for farmers

6. helps the farmers to have a good volume of transaction of produce and negotiatewith the wholesalers in order to 'optimize their returns'

7. Large volumes of produce, induces traders to buy from the Swasarya KarshakaSamithis.

Infrastructural Supports from VFPCK

Adequate and timely training is ensured for the Marketing Master Farmer committeemembers. The VFPCK extends the stage by stage support as indicated below.

Stage of Farmer

Market

Supports from VFPCK Time of support

Phase I

(Bulking phase)

One Platform balance,

One set of account books.

Date of initiating

bulking point

Phase II

(After up

gradation)

Telephone,Furniture1 table, 1

Almirah, 10plasticchairs,Reimbursement

ofAudit fees,Rent,Secretary’s salary (for

1year)

After the first audit

Phase III.

(Minimum sales

turnover of Rs.15

lakhs/ annum and

other eligibility

Land and building for markets. After one year.

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1.8 Let us Sum Up

The fortunes of the economy are, even now, dependent on the course of agriculturalproduction. Commodity markets have been serving the livelihood in the Indian economy.A commodity is anything for which there is demand, but which is supplied withoutqualitative differentiation across a given market. The markets in which the commoditiesare trading are called as commodities markets. There are different kinds of commoditiesmarkets, which have been classified based on functioning, stage, scale of business, timeand nature of business transaction, place and area, products sold and competition. In themarkets, largely there are four kinds of participants, namely buyers, sellers, stockists andtrade facilitators. The market participants have investment, speculative and arbitragemotives.

The markets are bound with forward and backward linkages. The backward linkagesconsist of contract farming and corporate farming models. In contract farming the farmersgrow selected crops under a buy back agreement with an agency engaged in trading orprocessing. Corporate farming involves the direct ownership or leasing in of farmland bybusiness organizations to produce for their captive processing requirements or for theopen market. Dealing with retail chains and processing units are termed as forwardlinkages. Under the changing scenario, commodity markets arefacing many challengessuch as increased infrastructure requirement, market access to farmer, improving thebargaining power of farmers, introduction of de-intermediation process. To pace up thechallenges, market functionaries have been introducing innovations in marketing such asE-Choupal, Cash and Carry markets and Safal market, Group marketing.


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Unit - 2

Introduction to Commodity Exchanges

Structure

2.0 Objectives

2.1. Introduction to derivatives

2.2. Instruments available for trading

2.3 Commodity exchanges and futures trading

2.4 Evolution of futures trading

2.5 Commodity exchanges at global and national level

2.6 Exchange transactions

2.7 Future trading and Agricultural marketing

2.8 Let us sum up

2.0 Objectives

On completing this unit you will be able to

• Understand the meaning of derivatives

• Futures contract and exchanges

• Evolution of futures trading

• Commodity exchanges in India

• Structure and members of commodity exchanges and

• How to trade in the commodity exchanges


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2.1. Introduction to Derivatives

In the world of liberalization it is most indispensable to predict the future. It becomesmore requisite for agriculture, which faces more flux than other sectors. So the Governmentof India introduced commodity futures trading in India through commodity exchanges.Derivative is a product whose value is derived from the value of one or more underlyingvariables or assets in a contractual manner. The underlying asset can be equity, forex,commodity or any other asset. It is a derivative is a generic term for a variety of financialinstruments. Unlike financial instruments such as stocks and bonds, a derivative is acontract rather than an asset. It is essentialy a promise to convey ownership of the asset,rather than the asset itself. Derivative markets can broadly be classified as commodityderivative market and financial derivatives markets. As the name suggests, commodityderivatives markets trade contracts for which the underlying asset is a commodity. It canbe an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metalslike gold, silver, etc. Financial derivatives markets trade contracts that have a financialasset or variable as the underlying. The main types of derivatives are futures, forwards,options, and swaps. Futures: A futures contract is an agreement between two parties tobuy or sell the underlying asset at a future date at a future price. Futures contracts differfrom forward contracts in the sense that they are standardized and exchange traded.

Options: There are two types of options - calls and puts. Calls give the buyer theright but not the obligation to buy a given quantity of the underlying asset, at a given priceon or before a given future date. Puts give the buyer the right, but not the obligation to sella given quantity of the underlying asset at a given price on or before a given date.

Warrants: Options generally have lives of up to one year, the majority of optionstraded on options exchanges having a maximum maturity of nine months. Longer datedoptions are called warrants and are generally traded over the counter.

Swaps: Swaps are private agreements between two parties to exchange cash flows inthe future according to a prearranged formula. They can be regarded as portfolios of forwardcontracts.


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2.2. Instruments available for Trading

In recent years, derivatives have become increasingly popular due to their applicationsfor hedging, speculation and arbitrage. Before we study about the applications ofcommodity derivatives, we will have a look at some basic derivative products. There arethree derivative contracts namely forward, futures and options trading.

a. Forward contracts

A forward contract is an agreement to buy or sell an asset on a specified date for aspecified price. One of the parties to the contract assumes a long position and agrees tobuy the underlying asset on a certain specified future date for a certain specified price.The other party assumes a short position and agrees to sell the asset on the same date forthe same price. Other contract details like delivery date, price and quantity are negotiatedbilaterally by the parties to the contract. The forward contracts are normally traded outsidethe exchanges. The salient features of forward contracts are

• They are bilateral contracts and hence exposed to counter party risk.

• Each contract is custom designed, and hence is unique in terms of contract size,expiration date and the asset type and quality

• The contract price is generally not available in public domain

• On the expiration date, the contract has to be settled by delivery of the asset

• If the party wishes to reverse the contract, it has to compulsorily go to the samecounter party, which often results in high prices being charged.

b. Futures contract

A futures contract is an agreement between two parties to buy or sell an asset at acertain time in the future at a certain price. But unlike forward contracts, the futures contractsare standardized and exchange traded. To facilitate liquidity in the futures contracts, theexchange specifies certain standard features of the contract. It is a standardized contractwith standard underlying instrument, a standard quantity and quality of the underlyinginstrument that can be delivered, (or which can be used for reference purposes in settlement)and a standard timing of such settlement. A futures contract may be offset prior to maturityby entering into an equal and opposite transaction. Majority of the futures transactions areoffset this way.


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The standardized items in a futures contract are:

• Quantity of the underlying

• Quality of the underlying

• The date and the month of delivery

• The units of price quotation and minimum price change

• Location of settlement

2.2.1 Distinction between forward contracts and futures contracts [Chatnani.N.N(2010)]

Forward contracts Futures contracts

Not traded on an exchange Traded on an exchange Private, and are negotiated between parties Use a clearing house which provides

protection for both parties Involve no margin payments as mutual good will is the basis for contracting

Require a margin to be paid as good-faith money

Used for hedging and physical delivery Used for hedging and speculating Terms of the contract are dependent on the negotiated contract

Terms of the contract are standardized and published by the exchange

Not transparent as they are private deals Transparent and are reported by the exchange

Contracts are settled by physical delivery Most contracts ( almost 98%) are cash settled : only 2% settled by actual delivery

Futures Terminology

Spot price: The price at which an asset trades in the spot market.

Futures price: The price at which the futures contract trades in the futures market.

Contract cycle: The period over which a contract trades. The commodity futures contractson the exchanges have one-month, two-months and three-months expiry cycles.

Expiry date: It is the date specified in the futures contract. This is the last day on whichthe contract will be traded, at the end of which it will cease to exist.

Delivery unit: The amount of asset that has to be delivered under one contract. Forinstance, the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales.The delivery unit for the Gold futures in MCX contract is 1 kg.


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Basis: Basis can be defined as the futures price minus the spot price. There will be adifferent basis foreach delivery month for each contract. In a normal market, basis is positive.This reflects that futures prices normally exceed spot prices.

Cost of carry: The relationship between futures prices and spot prices can besummarized in terms of what is known as the cost of carry. This measures the storage costplus the interest that is paid to finance the asset less the income earned on the asset.

Initial margin: The amount that must be deposited in the margin account at the timea futures contract is first entered into is known as initial margin. Marking-to-to-market(MTM): In the futures market, at the end of each trading day, the margin account is adjustedto reflect the investor’s gain or loss depending upon the futures closing price. This is calledmarking to market.

Maintenance margin: This is somewhat lower than the initial margin. This is set toensure that the balance in the margin account never becomes negative. If the balance in themargin account falls below the maintenance margin, the investor receives a margin calland is expected to top up the margin account to the initial margin level before tradingcommences on the next day.

Short position: The sale of a security or commodities futures not owned by the sellerat the time of the trade. Short sales are usually made in anticipation of a decline in theprice.

Long Position: Owning a commodity with an anticipation of increase in prices.

c. Options trading

An option gives the holder of the option the right to do something but the holderdoes not have the obligation to exercise this right. In contrast, in a forward orfutures contract, the two parties have committed themselves to the act of buyingand selling. Whereas it costs nothing (except margin requirements) to enter into afutures contract, the purchase of an option requires an up front payment.

2.3 Commodity Exchanges and Futures Trading

A commodity exchange is an association or a company or any other body corporatethat is organizing futures trading in commodities. A commodity futures contract is acontractual agreement between two parties to buy or sell a specified quantity and qualityof commodity at a certain time in future at a certain price agreed at the time of entering intothe contract on the commodity futures exchange.


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1. Structure of Commodities exchange

A Commodities Exchange is formed with the following objectives

• To create a platform for the market participants

• To bring professionalism and transparency into commodity trading

• To inculcate best international practices like de-modularization, technologyplatforms, low cost solutions and information dissemination without noise etc.into the trade

• To provide nation wide reach and consistent offering

• To bring together the entities that the market can trust

2. Exchange membership

Membership of exchanges is open to any person, association of persons, partnerships,cooperativesocieties, companies etc. that fulfills the eligibility criteria set by the exchange.All the members of the exchange have to register themselves with the competent authoritybefore commencing their operations. The members of Exchanges fall into two categories,Trading cum Clearing Members (TCM) and Professional Clearing Members (PCM).

Trading cum Clearing Member - An individual or corporate can be admitted by theCommodity Exchange as a Trading-Cum-Clearing Member (TCM) conferring upon them aright to trade and clear through the clearing house of the Commodity Exchange. Moreover,the member may be allowed to make deals for themselves (proprietary positions) besidestrading on behalf of registered approved / authorized users and to clear/ settle them.Professional Clearing Member (PCM) - Any Financial Institution or Bank, which is registeredas PCM is conferred the right only to clear and settle trades through the clearing-house ofthe exchange. They may clear and settle trades of such members of the exchange whochoose to do so through that PCM.

3. Participants in the futures trading

There are three types of participants in futures trading namely hedgers, speculators,and arbitragers.

Hedgers: a person who makes investment in order to reduce the risk of adverse pricemovements in a commodity, by taking an offsetting position in a related commodity, such


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as long and short position is called as hedger. Hedgers could be government institutions,private corporations like financial institutions, trading companies and even otherparticipants in the value chain, for instance farmers, extractors, ginners, processors etc.,who are influenced by the commodity prices.

Speculators: Speculators are participants who wish to bet on future movements inthe price of an asset. Futures and options contracts can give them leverage; that is, byputting in small amounts of money upfront, they can take large positions on the market.As a result of this leveraged speculative position, they increase the potential for largegains as well as large losses.

Arbitragers: Arbitragers work at making profits by taking advantage of discrepancybetween prices of the same product across different markets. If, for example, they see thefutures price of an asset getting out of line with the cash price, they would take offsettingpositions in the two markets to lock in the profit.

2.4 Evolution of Futures Trading

Forward Market Commission (FMC) is a regulatory authority for all CommodityDerivatives Exchanges in India, which is overseen by the Ministry of Consumer Affairsand Public Distribution, Government of India. It is a statutory body set up in 1953 underthe Forward Contracts (Regulation) Act, 1952.

The functions of the Forward Markets Commission are as follows:

(a) To advise the Central Government in respect of the recognition or the withdrawalof recognition from any association or in respect of any other matter arising out ofthe administration of the Forward Contracts (Regulation) Act 1952.

(b) To keep forward markets under observation and to take such action in relation tothem, as it may consider necessary, in exercise of the powers assigned to it by orunder the Act.

(c) To collect whenever the Commission thinks it necessary, to publish informationregarding the trading conditions in respect of goods to which any of the provisionsof the act is made applicable, including information regarding supply, demandand prices, and to submit to the Central Government, periodical reports on theworking of forward markets relating to such goods;


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(d) To make recommendations generally with a view to improving the organizationand working of forward markets;

(e) To undertake the inspection of the accounts and other documents of any recognizedassociation or registered association or any member of such association wheneverit considerers it necessary.

2.5 Commodity Exchanges at Global and National level

1. Commodity Exchanges at National level

The Government, in order to make the commodities market more transparent andefficient, accorded approval for setting up of national level multi commodity exchanges.Accordingly three national level exchanges are there which deal in a wide variety ofcommodities and which allow nation-wide trading. They are

a. National Commodities Derivatives Exchange (NCDEX)

b. Multi Commodity Exchange (MCX)

c. National Multi Commodity Exchange (NMCE)

Today commodity exchanges are offering spectacular growth opportunities andadvantages to a large cross section of the participants including Producers / Processors,Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives andAssociations.

a. National Commodities Derivatives Exchange (NCDEX)

NCDEX is a nation-level, technology driven de-mutualized on-line commodityexchange with an independent Board of Directors and professionals. It is a professionallymanaged by ICICI Bank, LIC, NABARD and (NSE). NCDEX is a public limited companyincorporated on April 23, 2003 under the Companies Act, 1956.


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Important Commodities traded at NCDEX

Commodity Unit of price

quotation

Unit of trading Yield/Re.

Movement

Precious metals

Gold 10gm 100gm 10.00

Kilo gold 10gm 1000gm 100.00

Silver 1kg 5KG 5.00

Agricultural products

Soya oil 10KG 1000kg 100.00

Cotton-l 1T 11 bales 18.70

Mustard 20KG 1000kg 50.00

Mustard oil 10KG 1000kg 100.00

Palmolein oil RBD 10KG 1000kg 100.00

Pepper 1T 1000kg 10.00

Chana 1T 10000kg 100.00

Guar seeds 1T 10000kg 100.00

Rubber 1T 1000kg 10.00

b. Multi Commodity Exchange (MCX)

MCX an independent and de-mutulised multi commodity exchange established onNovember 2003. It has permanent recognition from Government of India for facilitatingonline trading, clearing and settlement operations for commodity futures markets acrossthe country. Key shareholders of MCX include Financial Technologies (I) Ltd., State Bankof India & associates, Fidelity International, National Stock Exchange of India Ltd. (NSE)and National Bank for Agriculture and Rural Development (NABARD).


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Important Commodities traded at MCX

Commodity Unit of price

quotation

Unit of trading Yield/Re.

Movement Precious metals Gold-m 10gm 100gm 10.00 Gold 10gm 1000gm 100.00 Silver-m 1kg 5kg 5.00 Silver 1kg 30kg 30.00 Agricultural products Soya 1t 10 t 10.00 Soya oil 10kg 1000kg 100.00 Crude palm oil 10kg 1000kg 100.00 Rbd palmolein 10kg 1000kg 100.00 Castor seed 100kg 1t 10.00 Castor oil 10kg 1t 100.00 Ground nut oil 10kg 1t 100.00 Gaur seed 100kg 5t 50.00 Black pepper 100kg 1t 10.00 Rubber 100kg 25 t 250.00 Kapas 20kg 4t 200.00 Industrial metals Steel long 1t 25 t 25.00 Steel flat 1t 25 t 25.00 Copper 1kg 1t 1000.00 Nickel 1kg 250kg 250.00 Tin 1kg 500kg 500.00

c. National Multi Commodity Exchange of India Limited

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it wasgranted approval by the Government to organize trading in the edible oil complex. It hasoperationalized from November 26, 2002. It is being supported by Central WarehousingCorporation Ltd., Gujarat State Agricultural Marketing Board and Neptune OverseasLimited. It got its recognition in October 2002. Apart from these national exchanges thereare other regional commodities exchanges in India.


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2.6 Exchange Transactions

There are three components in exchanges transaction viz: trading, clearing andsettlement.

1. Trading

The trading system on the electronic exchanges provide a fully automated screenbased trading for futures on commodities on a nationwide basis as well as an onlinemonitoring and surveillance mechanism, which is called as terminal. It supports an orderdriven market and provides complete transparency of trading operations. The systemsupports an order driven market, where orders match automatically. Order matching isessentially on the basis of commodity, its price, time and quantity. All quantity fields arein specified units and price in rupees. The exchange specifies the unit of trading and thedelivery unit for futures contracts on various commodities. The exchange notifies the regularlot size and tick size for each of the contracts traded from time to time. When any orderenters the trading system, it is an active order. It tries to find a match on the other side ofthe book. If it finds a match, a trade is generated. If it does not find a match, the orderbecomes passive and gets queued in the respective outstanding order book in the system.Electronic recording is done for each trade and this provides the possibility for a completeaudit trail if required. How to invest/trade in commodities exchange

The following diagram should give an investor/trader clear understanding of howto go about investing/trading in commodities market. The prerequisite for trading incommodities markets are

a.1 Client code: The client who is interested to trade in commodity exchanges has toopen a trading account with a commodity broker by signing the client agreement form.The broker in turn submits the details to the TCM and PCM of the exchanges. The validityof client agreement will be verified in the exchanges and specific client code is allotted totrade in the exchanges.

a.2. Depositing initial margin

An initial amount has to be deposited by a customer at the time of entering into acontract, which is termed as initial margin. The initial margin will differs based on thecommodities. The exchanges fix the margin for each commodity and it is a small percentage


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(5-6%) of the value of the lot. Procedure for opening client-trading account

a.3 Trading process

The next step is trading in the exchange terminal. The client has to place his tradewith broker through NCDEX/MCX terminals. The trade placed at brokers terminal issubmitted to the exchange terminal. When any order enters the trading system, it is anactive order. It tries to find a match on the other side of the book. If it finds a match, a tradeis generated. From the exchange terminal the trade confirmation is sent to the broker andbroker in turn gives the trade confirmation to the client.


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Daily exchanges calculate the difference of the entry value and closing price of theparticular date. If the difference is positive the exchanges credit that particular amountinto the client account. In case the difference is negative, the exchanges deduct that particularamount from the credit account. If the account does not have balance then pay in request issent to the clients.

2. Clearing

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing oftrades executed on the exchanges. The settlement guarantee fund is maintained andmanaged by exchanges. Only clearing members including Professional Clearing Members


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(PCMs) are entitled to clear and settle contracts through the clearinghouse. At exchanges,after the trading hours on the expiry date, based on the available information, the matchingfor deliveries takes place firstly, on the basis of locations and then randomly, keeping inview the factors such as available capacity of the vault/ warehouse, commodities alreadydeposited and dematerialized and offered for delivery etc. Matching done by this processis binding on the clearing members. After completion of the matching process, clearingmembers are informed of the deliverable/ receivable positions and the unmatchedpositions. Unmatched positions have to be settled in cash. The cash settlement is only forthe incremental gain/ loss as determined on the basis of final settlement price.


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3. Settlement

Futures contracts have two types of settlements, the MTM settlement, which happenson a continuous basis at the end of each day, and the final settlement, which happens onthe last trading day of the futures contract. On the Exchanges, daily MTM settlement andfinal MTM settlement in respect of admitted deals in futures contracts are cash settled bydebiting/ crediting the clearing accounts of CM (Clearing Member) with the respectiveclearing bank. All positions of a CM, either brought forward created during the day orclosed out during the day, are marked to market at the daily settlement price or the finalsettlement price at the close of trading hours on a day. On the date of expiry, the finalsettlement price is the spot price on the expiry day. The responsibility of settlement is ona trading cum clearing member for all trades done on his own account and his client’strades. A professional clearing member is responsible for settling all the participants’ trades,which he has confirmed to the exchange. On the expiry date of a futures contract, memberssubmit delivery information through delivery request window on the trader workstationsprovided by the exchanges for all open positions for a commodity for all constituentsindividually. Exchanges on receipt of such information match the information and arriveat a delivery position for a member for a commodity. The seller intending to make deliverytakes the commodities to the designated warehouse. These commodities have to be assayedby the exchange specified assayer. The commodities have to meet the contract specificationswith allowed variances. If the commodities meet the specifications, the warehouse acceptsthem. Warehouse then ensures that the receipts get updated in the depository system givinga credit in the depositor’s electronic account. The seller then gives the invoice to his clearingmember, who would courier the same to the buyer’s clearing member. On an appointeddate, the buyer goes to the warehouse and takes physical possession of the commodities.

2.7 FUTURES TRADING AND AGRICULTURAL MARKETING

The futures market has emerged as one of the pivotal determinant of agriculturalcommodity production system and serving as a platform for discovering market prices inthe recent past. Here farmers selling a future contract and committed to deliver their produceat future date (may be after harvest of the produce eg. Wheat, Corn, Groundnut, Soya etc.,)not to any buyer, directly, but to the clearing house of futures exchange. In this type oftrading the future prices are viewed as bench mark for farmers as well as to traders. Theysupport the farmer’s choice of raising crops and decision making of marketing produce –


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• Which crop to grow?

• When to market?

• When to switch from one crop to another?

• coup with agro climatic conditions,

• Input availability management.

Above all it facilitates the farmers, to decide on the

• Most appropriate time to sell their produce and enable to get better pricerealization.

At what circumstances the future trading will be advantageous?

Some of the occasion the futures will advantageous to the stake holders of thesystem. They are described below.

• There are agricultural commodities, whose production is seasonal, location/region specific, but consumption is throughout the year and even seen nationwide.In such cases traders and stockiest invariably carry risk of price changes in suchcommodities. This kind of issues greately supported by futures trading, byhelping even out prices of seasonal commodities through the year.

• This trading system also helps in deciding the level of farm diversification. Beingmarket driven, futures trading help growers in their diversification decision.Commodities that have a good market value are traded on the futures market andfarmers with fair knowledge on this perspective can decide on diversifying theirfarm as per the market demand.

• The price of a certain crop fluctuates; it is a win-win situation for a farmer as hecan hedge his risk in futures platform.

• The organized and unorganized retailers at the delivery end would use thisplatform for the procurement purposes and can think of effective logistic services.

What is required from the extension side?

Extension functionaries in this regard have a great deal to provide adequate knowledgeand empowerment on futures trading to farmers will help them to get better prices for theproduce. The periodical monitoring of market intelligence reports and advisory from thecredible sources like DEMIC etc would help the extension system to provide useful market-


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led agriculture.


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2.8 Let us Sum Up

The agricultural sector in India is facing more flux in prices than other sector. So thegovernment of India introduced commodity futures trading in India through commodityexchanges. A commodity exchange is an association or a company or any other bodycorporate that is organizing futures trading in commodities. The members of Exchangesare Trading cum Clearing Members (TCM) and Professional Clearing Members (PCM).While the participants of futures trading are hedgers, speculators, and arbitragers.Organized futures market evolved in India by the setting up of “Bombay Cotton TradeAssociation Ltd.” in 1875. The consequent gradual trade and industry liberalization inboth the domestic and external sectors emphasized the need for futures trading and on1.4.2003 the Government permitted futures trading in the commodities. The nationalcommodity exchanges in India are National Commodities Derivatives Exchange (NCDEX),Multi Commodity Exchange (MCX) and National Multi Commodity Exchange (NMCE)Globally, the major commodity exchanges are New York Mercantile Exchange, ChicagoBoard of Trade, New York Board of Trade, Chicago Mercantile Exchange and LondonMetal Exchange. Exchange transactions involve trading, clearing and settlement. To starttrading the participant has to create trading account in exchange and has to place the tradesat broker terminals. The exchanges undertake the pay in and pay out of trades executed.National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of tradesexecuted on the exchanges. At last the contracts are settled. Finally an orientation of futurestrading and its role in agricultural marketing also discussed.


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Unit- 3

Futures Exchange and Risk Management

Structure

3.0 Objectives

3.1. Price risk

3.2 Causes of price risk

3.3. Methods of tackling price risks

3.4. Advantages and limitations of risk management strategy

3.5. Hedging

3.6. Advantages of hedging

3.7 Limitation of hedging

3.8 Let us sum up

3.0 Objectives

This unit has been designed to help you to understand

• Price risk, causes of price risks

• Methods of handling price risk

• Hedging, advantages and limitations of hedging

• Types of hedging-long hedge

• Short hedge and cross hedge and hedge ratio


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3.1 Price Risk

Risk has always been a part of agriculture. The rate of price volatility in agriculturalproduce would create uncertainty and risks, which could hamper the performance of theagricultural sector and negatively impact the income and welfare of the farmers. Besides,it will have a negative impact on overall economic growth, income distribution and povertyalleviation. Therefore understanding agricultural risks and the ways for managing itbecomes important. Price volatility is perhaps the most pressing issue facing the producersof primary commodities. Agricultural production implies an expected outcome or yieldto achieve the expected returns. Variability in outcomes from those, which are expected,poses risks to the ability to achieve financial goals. In this context ‘Price risk’ is basicallythe risk that returns from the investment in physical agricultural goods or commoditieswill be reduced or lost due to a fall in the future market price of the commodity owned.Here it is important to understand the difference between risk and variability. It is wellknown that agricultural prices vary from month to month and year to year. However, if thevariation were predictable, farmers would face no price risk. There are many numbers ofrisks that are associated with the agricultural commodities, especially at the production,storage, transport, marketing and processing stages. Hence it becomes important to identifythe cause for price risks and manage them.

3.2 Causes of Price Risks

a. Production Risks

As the demand for agricultural products is inelastic, supply shocks caused due toproduction variations are magnified in price variations. Agricultural production risks maybe due to those arising out of weather related factors, pests or diseases, farm andmanagement practices, genetics, machinery efficiency, quality of inputs and also due torisks from variable prices.

b. Financial or Credit Risk

Farm credit has always been an important factor in improving agriculturalproductivity and strengthening the rural economy. However, complicated operationalmechanism of farm credit services, high transaction costs, uncomfortable repaymentschedules, higher interest rates, lower access to credit, heavy reliance on money lenders,insolvency problems etc have increased the associated price risks of the commodities.


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c. Institutional Risks

If Government policy framework may come unwarranted that would create a profoundimpact on the prices. The government intervention sometimes instead of protecting mayresult in distortion of trade, as it does not let the natural market forces of supply anddemand in identifying the prices.

Eg. Reform measures like restriction on storage and movement of produces, directprice support measures, subsidies etc.

d. Market linked Risks

In a developing economy like India, wild swings in market prices due to supply anddemand factors arise due to nascent nature of such markets. Lack of participation, non-availability or low dissemination of market information, infrastructure bottlenecks, marketstructure etc tend to increase the price risks.

3.3 Methods of Tackling Price Risks

Price risks may be handled in any one of the following ways. They may be

1) Retained – holding the risk, that is taking no protection for the downside risk

2) Avoided –Risks can be avoided fully by going for a totally new venture

3) Reduced –risks can be reduced or mitigated by different possible ways in order to getsome assured income.

a. Self-insurance

Here the farmer’s use the previous period’s accumulated savings to protect themselves

against uncertainties that they cannot control.

b. Crop storage – It is a means of avoiding seasonally low prices when there is expectationof price fall in the season and adequate price rise later. However financial resourcesand storage space are required which may limit the scope of this kind of riskmanagement.

c. Diversification – It is the combining of different production processes so that low incomein one will be compensate by higher income from other enterprises. It can includegrowing of different crops or different types of the same crop, mixed farming withcombining crops and livestock etc. Eg. Farm diversification and Non farm diversification


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d. Taking credit – The farmers may lean on to credit given by government banks, co-operative societies, commercial banks, micro financial insitutions etc as well as moneylenders. If collateral is insisted on advancing of the loan then this measure may not befeasible for poor farmers.

e. Contract farming – Contract farming is normally associated with vertical integration,where an agribusiness firm coordinates all aspects of a producer from production toobtaining the end produce. Here a stable market or price is guaranteedfor the produce.Eg. Contractfarming promoted by Appachi cotton

f. Crop Insurance – Insuring a crop against the risks basically gives protection againstthe natural perils. Eg. Insuring the Paddy crops under modified NAIS as loanee farmeras well as non loanee farmers

g. Hedging in futures

Here the risk averse producers can buy protection from the risk taking speculatorslooking for profit.It involves establishing a position in the futures market that is equaland opposite of a position in the physical or spot market,

3.4. Advantages and limitations of risk management strategy


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3.5 HedgingHedging is defined as, “the establishing of a position in the futures market that is

equal and opposite the position, or intended position, in the cash market with an objectiveof transferring cash price risk.

What it means?

• Taking a position in the futures market that is opposite to a position in the physicalmarket (i.e. buying in futures markets the quantity soldi n spot markets andvice versa, thus offsetting any loss attained in one market by a gain in the othermarket)

• Reduces or limits risks associated with unpredictable changes in price

• The objective behind this mechanism is to offset a loss in one market with a gainin another

• A temporary substitution of futures market transaction for a planned cash markettransaction Goals of Hedging

1. Reducing the underlying volatility of your cash flows.

2. Minimizing the probability of large losses.

Hedging based one two assumptions

1. The future and cash commodity prices move up and down together ie the basis ofprice changes remains unchanged

2. The mechanics of hedging includes the making of simultaneous transaction, but ofopposite Nature, in the futures and cash markets.

Who could be the Hedgers?

Hedgers could be Government institutions, private corporations like financialinstitutions, trading companies and even other participants in the value chain, for instancefarmers, extractors, ginners, processors etc., who are influenced by the commodity prices.

3.6 Advantages of Hedging

a. It protect the hedger from sustaining loss and enables him to earn to normal tradeprofit


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b. Hedging enables him to keeep the trade margins at a lower level to casue there isno risk

c. It facilitates the financing of inventories of stored commodities to the maximumpossible extent.

3.7 Limitations of Hedging

• In reality, hedging is not quite simple and straightforward and are not perfect.

• Hedging can only minimize therisk but cannot fully eliminate it.

• The asset whose price is to be hedged may not be exactly the same as the assetunderlying the futures contract.

• Often the hedgemay require the futures contract to be closed out well before itsexpiration date. This could result in an imperfect hedge.

• The expiration date of the hedge may be later than the delivery date of the futurescontract. When this happens, the hedger would be required to close out the futurescontracts entered into andtake the same position in futures contracts with a laterdelivery date. This is called a rollover.

• Hedgescan be rolled forward many times. However, multiple rollovers could leadto short term cash owned problems.

3.8 Let us Sum Up

Risk has always been a part of agriculture. Price volatility is perhaps the most pressingissue facing the producers of primary commodities. The different causes of price risks areproduction risks, financial risks, institutional risks, and market-linked risks. There aredifferent methods for handling price risks. One among them is hedging in futures. Hedgingis defined as, “the establishing of a position in the futures market that is equal and oppositethe position, or intended position, in the cash market with an objective of transferring cashprice risk.” The advantages of hedging are Hedging stretches the marketing period,Hedging protects inventory values, Hedging permits forward pricing of products.

There are two types of hedging short and long hedge. A short hedge is a hedge thatrequires a short position in futures contracts. It is appropriate when the hedger alreadyowns the asset, or is likely to own the asset and expects to sell it at some time in the future.Hedges that involve taking a long position in a futures contract are known as long hedges.


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Long hedge strategy is used by dealers, consumers, fabricators, traders and processorsetc, who have taken or will be taking an exposure in the physical market. Cross hedging isthe process of hedging a cash commodity in the futures market of a different, but related,commodity. Among the various risk management tools available in India, except cropinsurance(14%) all other have got very negligible out reach. Hence , there is great challengesare rest on the extension machinery to diffuse these tools with an element of educating thepros and cons. Since these tools are to be handled with expert guidance only, our role willbe more important. Therefore great care should be taken before advocating this knowledgeto the farmers.

Ware house Receipts and Collateral Management

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Unit - 4

Warehouse Receipts and Collateral Management

Structure

4.0 Objectives

4.1 Introduction to warehouses and warehousing

4.2 Functions of warehouses

4.3 Classification of warehouses

4.4 Warehouse receipt

4.5 Collateral management and its functions

4.6 Dematerialization of warehouse receipts and linkage of warehousing with futurestrading

4.7 Let us sum up

4.0 Objectives

In this unit you will learn about the following related concepts

• Introduction to warehouses, warehousing and warehouse receipts

• Functions of Warehouses

• Classification of Warehouses

• Warehouse Receipt and its uses

• Collateral Management and its functions


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• Issues related to Warehouse Receipts: Negotiability

• Key features of the Warehousing (Development and Regulation) Bill, 2005

• Dematerialization of Warehouse Receipts and linkage of warehousing with futurestrading

4.1 Introduction to Warehouses and Warehousing

The production of most of the agricultural goods is seasonal, though theirconsumption takes place throughout the year. This phenomenon has led to the growth ofwarehousing concept where goods are physically stored till the time of consumption orsales. The warehousing concept has assumed immense importance after the recentdevelopments in the market like increase in futures trading at the exchanges, increasedrole of banks and other institutions in agricultural trading in the context of liberalization ofthe Indian markets in the WTO regime.

A warehouse is a location with adequate facilities where volume shipment are receivedfrom a production center, broken down, reassembled into combinations representing aparticular order or orders, and shipped to the customer’s location or locations. In otherwords a warehouse is a scientifically designed storage structure technically designed toprotect the quality and quantity of the stored produce.

Warehousing may be defined as a function, which involves assuming theresponsibility for quality and quantity of the stored goods in the warehouses. Thuswarehousing involves the technical aspects related to designing safe and sound structuresas per the type of goods to be stored and the prevailing conditions around the storagestructures. Warehousing also involves having the knowledge of safekeeping of grains whilethey are inside the warehouses through techniques like fumigation and record keepingrelated to transfer of goods inside and outside the warehouses.

4.2 Functions of Warehouses

The functions of warehouse are as follows

Receive the Material

Store the Material properly: Provide the right and adequate storage and preserve thematerial properly. Ensure that the materials do not suffer from damage, pilferage or


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deterioration.

Mixing/Repacking of material

Deliver the material to right place

Keep the records perfectly in discipline

Arranging transport

Arranging Finance: The material stored in the warehouses are recognized as safecollaterals by various banks and about 75% of the value of the produce may be financed.We would discuss in detail about this function in later sections.

Price Stabilization and Market Intelligence: Warehouses provide an opportunity tothe farmers and the traders to store the produce when the prices are too low. They alsosometimes become information suppliers on the price trends through the data on offloading.Thus they help the prices to stabilize through controlling excessive supplies in the market.

4.3 Classification of Warehouses

1. On the basis of Type of Commodities Stored

General Warehouses: These are ordinary warehouses used for storage of most foodgrains, fertilizers, etc. Special Commodity Warehouses: These are warehouses, which arespecially constructed forthe storage of specific commodities like cotton, tobacco, wool andpetroleum products.

1. Refrigerated Warehouses/Cold Storages: These are warehouses in which lowtemperature is

Private warehouses: These are owned by individuals, large business houses orwholesalers for the storage of their own stocks. They also store the products of others for arent.

Public warehouses: These are the warehouses, which are owned by the governmentand are meant for the storage of goods. In India, Central Warehousing Corporation (CWC)and State Warehousing Corporations (SWC) are the government organizations, which havethe mandate of building and operating warehouses all across the country. The CWC was


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established as a statutory body in New Delhi on 2nd March 1957. CWC provides safe andreliable storage facilities for about 120 agricultural and industrial commodities.

Separate warehousing corporations have been also set up in different States of theIndian Union. The areas of operation of the State Warehousing Corporations are centers ofdistrict importance. The total share capital of the State Warehousing Corporations iscontributed equally by the concerned State Govt. and the Central Warehousing Corporation.

Apart from CWC and SWCs, the Food Corporation of India has also created storagefacilities. The Food Corporation of India is the single largest agency which as a capacity of25.2 million tons. maintained as per requirements and are meant for such perishablecommodities as vegetables,

2. fruits, fish, eggs and meat.

3. On the basis of Ownership

Bonded warehouses: These warehouses are specially constructed at a seaport or anairport and accept imported goods for storage till the payment of customs by the importerof goods. These warehouses are licensed by the government for this purpose. The goodsstored in this warehouse are bonded goods.

Capacity of Different Types of Warehouses in India

Capacity of Different Types of Warehouses in India

Sl No Type of Warehouse Capacity in Million Metric Tons

1 CWC 10.27

2 SWC 25

3 FCI 25.2

4 Private Warehouses available for hire (Estimated) 10

5 Private Warehouses used for self use(Estimated) 20

The extent of warehouse facilities available are very less in India as argued by expertsin commodity trading and there is a need to create further investment in the sector. The 11th plan says that a further capacity of 35 million tons should be created in the Warehousingsector.


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4.4 Warehouse Receipt

A warehouse receipt is simply a document stating the ownership of a commodity. Itis a warrant issued by the warehouse to the person depositing the goods/produce in thewarehouse stating the following:

a) Specified quantity, quality and grade of produce stored

b) Warehouse location, storage fee etc.

c) Date of Issue

d) Approximate value of the produce indicating the present price

Warehouse receipts are issued by all approved warehouses after quality certificationof the stored goods. The warehouse receipt can perform various functions. It convertsagricultural produce or other inventory to a tradable warrant, which can be sold or used toraise a loan and even used for delivery against a derivative instrument like futures contract.

Different banks have different guidelines for providing loans against the storedproduce. The amount of loan advanced depends on the market price, minimum supportprice and the guidelines issued by the bank. The interest charged also depends on thenorms of the bank for that type of commodity. The other charges may involve collateralmanagement charges and other fixed charges as stipulated by the banks. By and largethere are two systems prevalent:

1. Hypothecation/Pledge of stocks

This system is prevalent mostly for the small private warehouses where the entirewarehouse is occupied with material belonging to a single entity. The material depositedin the warehouse is pledged /Hypothecated as security. Once the loan is repaid afternegotiations with the buyer, the borrower is free to express his control over the stocks.This scheme is also popular as ‘Produce Marketing Loan’ Storage receipts

It is a term closely associated with pledge financing, which is most common for Privategowdons/ private licensed warehouses. These receipts are issued by collateral managersof an agency known to the bank who will have control over the commodity by lock-keymethod. In this way, the bank finances the depositor only if the collateral manager approvesthe stock through the storage receipt.


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2. Warehouse receipt system

This is the most popular system where the financing is done based on warehousereceipt issued by the warehouse. The warehouse receipt duly endorsed in favor of theBank is to be deposited at the bank and the material is released once the bank receives thepayment from the buyer. It is felt by various industry analysts that warehouse receipt-based funding has tremendous growth potential in India. With the priority sector lendingnorms making it mandatory for banks to advance 18% of loans to agriculture, warehouse-based receipt financing is being considered as the next big opportunity in catering for theagricultural sector. The Planning Commission has also recently reinforced its commitmentto double the farm sector’s growth from a low 2% per annum to 4% a year during the 11thFive Year Plan. The government is now keen to break the logjam of low production andproductivity of the farming sector by beefing up infrastructure and irrigation sectorssimultaneously. Therefore, in the near future agricultural commodities will flow moresteadily from farms. The management of these commodities will prove to be both a challengeand an opportunity for banks and warehousing companies.

4.5 Collateral Management and its Functions

The word collateral is synonymous with ‘security’ or goods pledged against the loanadvanced. It may be defined as a third-party commitment accepted by the collateral takerto secure an obligation of the collateral provider. In the context of warehouse basedfinancing, the obligation is the amount lent and the collateral is the goods stored. The needof collateral is intended to protect against performance risk of counter party i.e. the risk ofnon-repayment of loan. Collateral Management involves managing the collateral on behalfof the collateral taker. The collateral is the only security, which provides protection againstthe financing done by the financial institution in case of warehouse financing; collateralmanagement has developed into a highly specialized technique. Collateral managementbasically involves management of risk associated with maintaining the value of thecollateral. It therefore is associated not only with physically maintaining the quality andquantity of the stored products in the warehouses but also mitigating risks associatedwith fluctuations in prices of various commodities.


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Thus collateral management deals with the following

1. Storage and Preservation

Scientific storage and preservation is the first step towards keeping the quality andquantity of the collateral.

2. Testing and Certification

Timely testing helps to mitigate the quality risks that are ever-present in thecommodities.

3. Market Intelligence for Price Risk Management

Development of price prediction models based on information on spot and futuresprices, market arrivals and market trends to enable decisions on the timing of the sale.

4. Price Risk Hedging

Minimization of the price risk exposure of the collateral through futures and optionstrading at the national and international commodity exchanges.

5. Developing Market Linkages

Prefixed buying and selling arrangements between buyers and sellers is also a veryuseful technique to protect the collateral from any un-expected fall in the prices.

6. Insurance

7. Stock Documentation and Information repository

Collateral management is also very important when the warehouses are linked tocommodity exchanges. Collateral management ensures efficient and risk-free physicaldelivery systems. In the recent past we have seen increased integration of collateralmanagement and commodity exchanges.

Companies like National Bulk Handling Corporation (NBHC) and National CollateralManagement Services Limited (NCMSL) have developed as specialized agencies, whichprovide complete solutions related to Collateral Management.


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4.6 Dematerialization of Warehouse Receipts and Linkage of

Warehousing With Futures Trading

The concept of dematerialization has been developed with a view to increasing theefficiency ofsettlement of trades on stock exchanges and improving settlement efficiency.The concept involves holding shares in electronic form with a depository and transactingthe same on-line without any signatures. With the increase in activity in the commoditiesfutures market and establishment of national level screen-based multi-commoditiesexchanges, need for an efficient settlement system in that market is felt. Broadly, acommodity futures contract may be settled either by cash or by delivery of the commoditydepending upon the terms of the trade, demand of the buyer and rules of the exchange.

If the trade is expected to be settled by way of delivery of the commodity, the clearinghouse of the commodity exchange will receive warehouse receipts from the seller insteadof actual commodities and pass such warehouse receipts over to the buyer. In case ofnational commodity exchanges, buyers and sellers could operate from different parts ofthe country and if warehouse receipts are in physical form, the warehouse receipts have tobe delivered across the country from the seller to the buyer, which could lead to systemicinefficiencies. Either the original depositor or the holder in due course (transferee) canclaim the commodities from the warehouse for negotiable warehouse receipts. Warehousereceipts in physical form suffer all the disadvantages of the paper form of title documents.Some of these limitations are as follows:

• Need for splitting the warehouse receipt in case the depositor has an obligation totransfer only a part of the commodities

• Need to move the warehouse receipt from one place to another with risk of theft/mutilation, etc. if the transferor and transferee are at two different locations

• Risk of forgery

Drawing lessons from the depository system for securities, depositories such as NSDLand CDSL exchanges have worked out a scheme to extend depository services for settlingtrades in commodity futures. Investors trading in commodity futures may avail depositoryservices for receiving and delivering warehouse receipts. A demat account for commoditieshas to be opened with empanelled DPs (Depository Participants).


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Warehouses, that have entered into an agreement with depositories and commodityexchanges, can issue depository eligible warehouse receipts. For example, NSDL hasagreements with two multi-commodity exchanges viz., National Commodity & DerivativesExchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX) andfew warehouses that hold designated commodities in their custody. The warehouse receiptsin demat form can be used to give delivery and also physical delivery of goods can beobtained against warehouse receipts credited in the demat account, through prescribedprocedures. In fact the smooth functioning of commodity exchanges is enabled throughelectronic warehouse receipts increasing the association between the warehousing andfutures trading. This is enabled through the following:

a) Ease in settlement of the contract through physical delivery

b) With a good networking of warehouses, delivery can be taken at any location.This would encourage hedge participation in the exchanges

c) Better integration of spot and futures market increasing the efficiency of futuresmarket

d) Better information on crop fundamentals like stock positions helps to reduce riskof excess volatility in prices

Extension Professional: How to use this Knowledge?

Having studied the Warehouse and warehouse receipts advantages, as extensionpersonnel, we can inculcate the farmers on;

• Where the farmers can store their surplus produce?

• Procedure for how to store the products,

• What are all organization available for store the products?,

• How this NWR can be effectively used to tackle the price risks etc.,?

• Additional advantages of NWR etc.,

4.7 Let us Sum Up

A warehouse is a location with adequate facilities where volume shipment are receivedfrom a production center, broken down, reassembled into combinations representing aparticular order or orders, and shipped to the customer’s location or locations. Warehousing


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involves the technical aspects related to designing safe and sound structures as per thetype of goods to be stored and the prevailing. conditions around the storage structures aswell as knowledge of safekeeping of grains while they are inside the warehouses throughtechniques like fumigation and record keeping. Warehouses are classified according totype of commodities stored as General Warehouses, Special purpose Warehouses andCold storages. On the basis of ownership they could be Private or Public or BondedWarehouses.

A warehouse receipt is a document stating the ownership of commodity. It specifiesthe quantity, quality and grade of produce stored, warehouse location, storage fee andother details.

The warehouse receipt can perform various functions. As it converts agriculturalproduce or other inventory to a tradable warrant, which can be sold or used to raise a loanand even used for delivery against a derivative instrument like futures contract.

The Term Collateral Management refers to a third-party commitment accepted bythe collateral taker to secure an obligation of the collateral provider. Thus, collateral is thesecurity, which provides protection against the financing done by the financial institution.Collateral management basically involves management of risk associated with maintainingthe value of the collateral and deals with aspects like Storage and Preservation,, Testingand Certification and other aspects related to price risk management of commodities servingas collateral. Negotiable warehouse receipts can be traded, sold, swapped, used as collateralto support borrowing, or accepted for delivery against a derivative instrument such as afutures contract. The Warehousing (Development and Regulation) Bill, 2005, which hasbeen passed in the Parliament in early 2007 has features that would create a regulatoryframework for making the warehouse receipts fully negotiable.

Negotiable warehouse receipts have many advantages such as low risk for the bankerand high credibility apart from efficient usage in delivery against a futures contract. Recentadvancements in dematerialization of Warehouse Receipts i.e. Holding Warehouse Receiptsin Electronic Form has solved problems of splitting the warehouse receipt, high risk oflosing the document and the risk of forgery. This has brought greater integration betweenwarehousing and futures trading. Later we have also seen the relevance and importaanceof WRDA in agriculture.


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Business Laws and Ethics Course -202

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AEM- 202


(3 Credits)

Block-IV

Business Laws and Ethics

Unit – 1 : Business Laws and Ethics 167 - 172

Unit – 2 : Indian Contract Act, 1872 173 - 182

Unit – 3 : Sale of Goods Act, 1930 183 - 189

Unit – 4 : Companies Act, 1956 190 - 198

Unit – 5 : Negotiable Instrument Act, 1881 199 - 205

Unit – 6 : The Essential Commodities Act, 1955 206 - 218


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Unit- 1


Structure

1.0 Objectives

1.1 Introduction

1.2 Business laws in India

1.3 Basic ethics and values

1.4. Ethical practices in organisation

1.5 Code of conduct for business executives

1.6 Let us sum up

1.0 Objectives

On completing this Unit you will be able to

• To distinguish between business and ethics and to take note of a growingdivergence bettween the two

• To review business opportunities and laws governing them in India

• To survey the prevailing notions about the mutual exclusiveness of ethics andbusiness

• To review the thoughts of Indian Gurus and Western Scholars about ethics andbusiness

• To highlight important elements of business ethicso know about the codes ofconduct for business executives and theiresponsibilities ofmanagement boardsin upholding ethical values.


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There are seven sins in the world: Wealth without work

Pleasure without conscience, knowledge without characters

Commerce without morality, science without humanity

Worship without sacrifice and politics without Principle

Mahathma Gandhiji

The wordings of Father of Nation c learly spelt out the importance of moral andethics. It has to be followed even in our life as well as in the business. The socialresponsibility of individual of any profession has to observe a minimum code of conductand moral and ethics. In the absence of such moral and ethics the role of law and legislationhas take its course of action. Any entrepreneur who engaged in agribusiness also followmoral and ethics in every activities of business venture. He has the social responsibility toaugument good inputs to produce quality outputs with a reasonable margin.

1.1 Introduction

• Ethics encompasses the larger domain of human behavior. There are three mainWestern Perspectives on human behavior while doing a business activityare:

• Extols the virtues ofjustice, charity and generosity to act in a way that benefitsboth the person possessing thosedispositions and the society he relates to.

• Makes the concept of duty central tomorality, encoding the principle of mutualrespect in all relationships and dealings.

• All conduct should be guided by the principle of greatest happiness or the benefittothe greatest number.

• According to Milton Friedman ‘it is socially irresponsible and economicallydamaging for business to be concerned with anything but business results

• While the objective of a business is to maximize profits and returns to shareholdersmoney, ethics are perceived to be benevolence, charity and social responsibility.

• However, the holistic meaning of ethics is much wider and covers the entire gamutof business operations carried out in a transparent manner following someprinciples. Ethical practices are deeply embedded in business plans and form thecore of the business strategy for many good companies.


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1.2 Business laws in India

India has become one of the top foreign investment destinations and there are goodreasons for the same. Some of the major facts about India, which may seem amazing tosome are nevertheless true, are as follows:

The major bodies of law in India affecting investment include the following:

• The Foreign Trade (Development and Regulation) Act, 1992

• The Industries Act, 1951

• The Indian Contract Act, 1872

• The Sales of Goods Act, 1930

• The Partnership Act, 1932

• The Negotiable Instruments Act, 1881

• The Consumer Protection Act, 1986

• The Monopolies and Restrictive Trade Practices Act, 1969

• The Copyright Act, 1957

• The Trade and Merchandise Mark Act, 1958

• The Trade Marks Act, 1999

• The Information Technology Act, 2000

• The Company Act, 1956

• The Income Tax Act, 1961

• The Customs Act, 1962

• The SEBI Act, 1992

• Air (Prevention and Control of Pollution) Act,1981

• The Industrial Disputes Act, 1947

• The Factories Act, 1948

• The Benami Transactions (Prohibitions) Act, 1988


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Despite several laws governing business in India, there are still several instances ofdishonesty in business in India. Breach in ethics is not just limited to the company’s day-to-day practices. Evenadvertisements and promotional campaigns are known to cross theethical line quite often.

1.3 Basic Ethics and Values

Discretionary Vs non-discretionary

Understand what actions fall into discretionary and not-discretionary realms.‘Compromise’ is a dirty and unacceptable word in non-discretionary decisions.

E.g.: Operating the plant even after reporting of leakage of some dangerous liquidor gas, to save his profits, Standard norms: These are widely accepted and adopted withoutviolation. Suchas

• Criminal offences and illegal trade

• Land laws and regulations

• Physical and verbal abuse of employees to be shunned

• Public and employee safety

• Transparency and truthfulness of records and statemets

• Human slavery and capitivity in any form

Specific Norms: These are very pertinent to the organisation. Some time known forsuch specific morms. Unlearn to accept unethical practices: Learn to say ‘NO’, even if it isthe command of higher Ups

Eg. Adulteration in the food products

1.4 Ethical practices in Organizations

Peter F.Drucker said, “The leaders in an organization need to impose on themselvescongruence between deeds and words, between behavior and professed beliefs and values,that we call ‘Personal integrity’. Rank does not confer privileges; it entails responsibility.

To determine whether one’s actions are ethical, a list of seven parameters has beenevolved.


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1. Legal framework: Laws are created to help society function. One has to considerwhether the action he is contemplating is legal.

2. Rules and Procedures: Companies create specific policies and procedures to helpthe business function appropriately to run successful ly and avoid problems.

3. Principles: These social doctrines help create society’s laws and a company’spolicies and procedures. In turn, laws and policies reinforce values.

4. Sense of Right and Wrong: This internal sense of right and wrong develops froman early age. Your conscience recognizes certain principles that lead to feelings ofguilt if you violate the principles.

5. Trust and Commitment: Business is based upon trust. It is believed that what isstated will be delivered. Will your action ensure the commitment (Customer,Client, Supplier, Employees) to continue the business relationship?

6. Role Model: Every person has at least one individual who is, in some way, a rolemodel. A role model may be a parent, teacher, coach, mentor or friend.

7. Check before you act: As a business person, you are ultimately responsible foryour actions.

You are the person who decides if you should act ethically?

1.5. Code of Conduct for Business Executives

Some of the code of conduct forBusiness executives are listed below

• Avoid use of office resources for personal purposes

• It is unethical to tease some of your colleagues for their personal shortcomings,physique or religion and avoid critising your subordinates in common place

• Give due regards to woman employee and establish ethical code against sexualharassment.

• Do not show favor itism towards an employee and ensure transparency

• Keep and maintan the company ‘s confidential information

• Trust the coworkers and donot encourage the spying activities rather feel themwith responsibillity.


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• It is unethical to give false information to the employer or other governmentagencies.

• Senior executives should not take advantage of juniors for doing their personalwork.

1.6 Let us Sum Up

This module highlights the growing divergence between business and ethics in theintroductory part. Modern day business and young managers are guided by the principleof maximizing efficiency and profits with very little concern for ethical values. In Indiabusiness is regulated by a large number of legislations. But despite so manylaws, instancesof scams and dishonest practices hit the press every day, making one wonderwhatishappening to business ethics. The three pillars of business ethics arethen summarized inthe form of three R’s: Respect, Responsibility, and Results, and some of the importantbasicethics and values are listed. Then, Seven Parameters of ethical conduct are discussed. Thecodes ofconduct that should be followed by the business executives are enumerated. Thisunit also prescribes a moral code of conduct for the manager of today’s business followedby Stephen Covey’s Seven Steps to be an effective manager are listed.

Indian Contract Act, 1872

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Unit- 2


Structure

2.0 Objectives

2.1 Introduction

2.2 Definitions

2.3 Essentials of a valid contract

2.4 Offer and acceptance

2.5 Capacity of parties to contract

2.6 Consent of the parties to contract

2.7 Consideration to contract

2.8 Quasi contract

2.9 Discharge of the contract

2.10 Breach of the contract

2.11 Bailment & pledge

2.12 Let us sum up

2.0 Objectives

On completing this Unit you will be able to understand

• What is a contract and how they impact our day-to-day life.

• The difference between a contract and an agreement; when an agreement becomesa contract and the essentials of valid contract.


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• Characteristics of a valid contract

• About special contracts like the quasi contracts, Bailment, Pledge, and Rules ofthe agency.

2.1 Introduction

In the present commercial world we find commercial transactions taking place everysecond. These include trading in goods, supply of material, service contracts etc. On accountof volume of contract being done daily, it was proposed to make an enactment which shallbind parties to the agreement and to necessitate a smooth flow of commercial transactions.Contract Act was enacted in the year 1872. Contract Act is the mother of all the other acts,which have been enacted based on the Contract Act. Hereinafter “The Contract Act, 1872“is referred to as Act. Contract means any agreement between two persons, which isenforceable under the Law. Law of the contracts regulates the actions of parties to thecontract. Contract Act is not exhaustive as it only regulates the freedom of contractingparties for the smooth functioning of commercial transactions. In the module we shall finddefinitions to the various terms as per the Indian Contract Act, 1872. Along with thedefinitions the module also covers the different doctrines, which explain the rights betweenparties to the contract. Some of the topics are supported by examples.

2.2 Definitions

Contract:As per section 2(h) of the Act, contract is any agreement between parties,which is enforceable under law.

Agreement: Every promise or set of the promises forming considerations to each other isan agreement.

Void Agreement: Any agreement, which is not enforceable under court of law, is a voidagreement. From the above definition of the contract and the agreement, we can very wellpresume that all contracts are agreements but all agreements are not contracts.

Valid Contract: An agreement becomes a contract when it fulfills all the essentials of avalid contract

Void Agreement: Any agreement not enforceable by law is called void agreement

Void Contract: Any contract, which ceases to be enforceable by law is called voidcontract.


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Voidable Contract: When any agreement is enforceable upon the option of one or moreparties thereto but not at the option of other or others then such contract is called voidablecontract.

2.3 Essentials of a Valid Contract

In order to form a valid contract, the following conditions need to be fulfilled:

1. There must be a valid offer and a valid acceptance to the offer made

2. There must be a consensus between the parties to the contract. This is a basicrequirement, as by arriving at the contract, both the parties must achieve a commonobjective.

3. There must be intention between the parties to the contract to create a legalrelationship out of the contract

4. Parties to the contract must be competent to enter into the contract

5. Agreement between the parties to the contract must be achieved through freeconsent of all the parties to the agreement.

6. There must be a lawful consideration for a contract

7. Object for which an agreement is proposed to be entered must be lawful andmust not be illegal or opposed to public policy

8. An agreement, which is proposed to be entered between parties, must not beexpressly declared as void under any provisions of the Act or any other law, whichis presently under existence.

9. In case of certain contracts, if the law requires them to be in writing or for enteringany contract if registration is mandatory, then such contracts are enforceable onlyupon compiling of such conditions.

2.4 Offer and Acceptance

There must be a valid offer from one party, and the same needs to be accepted by theother party to the agreement, in order to form a valid contract.


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Offer

As per section 2(a) of the Act, Offer is

• Expression of willingness to do something or refrain from doing something byone person

• Made to the other person with a view to seek his positive response to do or abstainfrom doing any act

• In the above cases, person can be a natural person or an artificial person such ascompany etc.

• Offer can be a specific offer made to a particular person or persons or it can be ageneral offer made to a larger community.

• Offer can be an express offer by use of words or written offer or implied by theconduct of the parties to the contract.

• Offer needs to be communicated to the intended party to be contracted with.

• Offer can be a plain offer or with conditions. Conditions of the offer can be in astandard form.

• An offer needs to be distinguished from the mere invitation to offer.

Ex: In case a company invites the public to participate in a proposed auction sale ofTea ,then it amounts to invitation to offer and not the offer by the company. It is onlyexpression of desire of the company to conduct auction sale. In case the person participatesin the auction sale of the company and bids for a product then it amounts to offer from theside of the person to the company.

Acceptance

As per section 2(b) of the Act, when the person to whom the offer is made, signifieshis assent to the offer, then the proposal is said to be accepted. A proposal when acceptedshall become a promise.

Following are the pre-requisites to a valid acceptance

a) Acceptance to be given by the person to whom the offer is made.

b) Offer needs to be accepted within a reasonable period.


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c) Acceptance to the offer needs to be obsolute and un-qualified.

d) Acceptance needs to be communicated to the person who has made the offer.

e) Acceptance to the offer must be in a proper mode and should be as mentioned inthe offer or as per the custom

f) Two identical and cross offers by two persons shall not tantamount to acceptance.

g) Offer once rejected can never be accepted.

2.5 Capacity of Parties to Contract

All the persons to the agreement must be competent enough to enter into the contractin order to form a valid contract.

As per section 11 of the Act, every person is competent to contract provided:

• He is not a person with an unsound mind

• He is not disqualified from entering into contract by any law which is in force andto which he is subject.

Persons of Unsound Mind

Any agreements, which are made with persons of unsound mind are void ab-initio.

Other disqualified persons

a) Alien Enemy: Alien is a citizen of a foreign country, which is at war with India.Such agreements are enforceable with the permission of the government.

b) Agreement made with foreign diplomats is void

c) Agreement made with persons under conviction in the court of law is void.

d) An agreement with insolvent person during the pendency of insolvencyproceedings is void.

However his estate is liable incase of contracts for the necessaries for his sustenance.

e) Any agreement, which is entered with corporate bodies for doing or abstain fromdoing any acts, which such corporates are not entitled to enter, is void.


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2.6 Consent of the Parties to Contract

Free Consent

Two or more persons are said to be in consent when they agree upon the same thingand in the same sense.

Under section 14 of the Act, consent is said to be free, if the same is not caused by:

Coercion as defined u/s 15 of the Act

a) Undue influence as defined u/s 16 of the Act

b) Fraud u/s 17 of the Act

c) Mis-representation u/s 18 of the Act

d) Mistake u/s 20,21,22 of the Act

2.7 Consideration to Contract (Section 2 (d))

Consideration means, when at the desire of any promisor, the promisee (or) any otherperson has done or abstained from doing any act, or does or abstains from doing any act,or promises to do or abstains to do any act, and then such act or abstinence or promise iscalled consideration to the contract.

Essentials of valid consideration

• Consideration shall be materialized upon fulfillment of the desire of the promisor

• Such desire shall be fulfilled either by the promisee or any other person

• Consideration can be on account of past, present or future act on the part of thepromisee

Doctrine of privity of contract

As per this doctrine only parties who are in agreement to the contract have the rightto sue other parties to the contract.


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2.8 Quasi Contract

It is a relationship between two parties not by virtue of mutual agreement betweenthem, which gives advantage to one party over the other and creates obligation on the firstparty to transfer such benefits to the other. Justification of the law: Fundamental justificationof the quasi contract is that one person cannot have unjust enrichment at the cost of theother. If one party gets such unfair advantage over the other then the law does not allow toenrich at the cost of the other.

Example: If A purchases goods from B and B on account of a mistake delivers suchgoods to C instead of A and C accepts such goods from B then there exists Quasi contractbetween B and the C. C is responsible to B to account for the sale consideration of goodsreceived.

2.9 Discharge of the Contract

A contract can be discharged by any of the following ways:

• By performance of the contract

• By mutual agreement a contract could be put to an end

• By lapse of time provided in the agreement and if agreement is silent then lapseof reasonable time. On account of occurrence of any event which makesperformance of the contract impossible

• By breach of terms of the contract by one party to the contract. Such breach can bethe actual breach or anticipatory breach

2.10 Breach of the Contract

Consequences of breach of duty under a contract:

• Suit for the cancellation of the contract

• Suit for damages on account of breach of contract by the other party

• Suit for money to the extent of work completed in the agreement

• Suit for the specific performance of the contract

• Suit for injunction from restraining the other person to do or abstain from doing


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any act Contract of Guarantee & Indemnity (Section 124) Indemnity

A contract by which one party promises to save the other party from the loss causedto him by the conduct of promisor or any other person, is called indemnity.

Guarantee

• A contract of guarantee is a contract to perform the promise or discharge the liabilityof the third person in case of default.

• In case of contract of guarantee there shall be three parties, a debtor, a creditor anda guarantor.

Contingent Contract

A contingent contract is a contract to do or not to do something in event ofoccurrence of some uncertain future event.

Examples: a) Insurance Contracts where insurance company insures the insuredto safeguard him and his family from the occurrence of some uncertain futureevent.

2.11 Bailment & Pledge

Bailment: Bailment is delivery of goods by one person to another for some purpose,upon a contract that they shall, when the purpose is accomplished be returned or otherwisedisposed of according to the direction of the person delivering them.

Person who delivers goods is called bailor and the person to whom the goods aredelivered are called bailee and the contract is called Bailment.

Example: A businessman/Farmer( P )has handed over his stock to a warehouse owner( J)/SWC or CWC to keep the same for 10 days for certain charges as rent, then in this case,(P) is the bailor and (J )is the bailee. Where (P) Farmer or Busineess man is a bailor: (J)SWC/CWCor some time Private warehous is a bailee

Duties of the Bailee

• To take judicious care of the goods

• Not to make un-authorized use of the goods


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• Not to mix goods with his own

• To return back the goods to the bailor after accomplishing the purpose

• To return back any accretion that is caused to the goods under his control

Duties of the Bailor

• To reveal all the facts pertaining to the goods

• To pay necessary charges and expenses to the bailee

• To pay any extraordinary expenses incurred by the bailee on account of the specialnature of his goods.

• To indemnify the bailee for the loss occurred to him on account of his goods or onaccount of any act of the bailor

• To receive back the goods

• To pay damages on account of pre-matured termination of the contract

Pledge

The bailment of goods for payment of any debt or for the performance of anycontract is called pledge. In this case, bailor is called pawnor and bailee is calledpawnee.

2.12 Let us Sum Up

• In the above module we have started with the need for a separate legislation andthen we have understood what is a contract. We defined some topics in the Actand then we went on to understand the difference between a contract and anagreement.

• We have understood the essentials of the valid contract and we have discussedeach topic in detail.

• First we have understood principles underlying in the Offer and Acceptance inthe contract.

• We have also discussed on competent persons of the contract and we have studiedcontracts with the Minor and Persons of Unsound mind and special protection,which the law is providing for safeguarding minors and persons of unsound mind.


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• We then went into how the consent to the contract was obtained and understoodrules regarding the contracts obtained through use Coercion, Undue- influence,mis-representation and fraud.

• We then went to the legality of object and consideration to the contract anddiscussed about contracts, which are expressly declared to be void.

• We have understood about the breach of the contract and remedies for the breachof the contract.

• We then came to special contracts such as, Quasi Contracts, Bailment, Pledge, andrules governing the agency

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Unit - 3


Structure

3.0 Objectives

3.1 Introduction to sale of goods

3.2 Definitions

3.3 Conditions and warranties in the contract of sale of goods

3.4 Doctrine of caveat emptor and its exceptions

3.5 Doctrine of “ Nemo dat quad non habet”

3.6 Breach of Warranty by the seller

3.7 Auction sale

3.8 Let us sum up

3.0 Objectives

On completing this Unit you will be able to learn about

• One more special contract called Sale of goods Act; why a separate legislationwas sought in this regard and about the applicability of the Sale of Goods Act.

• The rights and liabilities of the parties to the contract of sale and when the saleintends to take place and when the property in goods passes from the seller tobuyer.

• The rights of the aggrieved part on the breach of contract of sale by any personand remedies available to him

• And discuss a special type of sale i.e. Auction Sale.


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3.1 Introduction

Sale of goods is also a special contract involving goods. In Sale of Goods Act, goodsshall form the subject matter of the contract. However, under this Act, only transactionspertaining to movable properties are covered. Transactions pertaining to immovableproperties are outside the scope of the Act. On account of numerous day-to-day commercialtransactions involving goods it was sought to have a separate legislation on suchtransactions and therefore Sale of Goods Act was enacted in the year1930.

Hereinafter for all purposes, Sale of Goods Act, 1930 is referred to as the Act.

3.2 Definitions

Contract: A contract for sale of goods is a contract whereby the seller transfers oragrees to transfer property in goods to a buyer for a price.

Features

• There must be two parties to contract

• There must be transfer of ownership

• Goods must be the subject matter of the contract

Goods: Section 2(7): Goods means every kind of movable property other thanmoney and actionable claims, including shares, stock, growing crops and thingsattached to or forming part of land which are agreed to be severed before sale orunder the contract of sale.

Agreement to Sell: An agreement wherein the seller intends to transfer ownershipof goods for a consideration is called agreement to sell and when the seller actuallytransfers the ownership then it is called a sale. Under sale, ownership of goodspasses from a seller to a buyer and in agreement to sell there is no such transfer ofownership.

Hire-Purchase Contract: Hire purchase contract is a contract wherein one persontransfers goods to another for hire charges. There is no transfer of ownership ingoods.

Eg. Hiring of Tractor and other machinery for Paddy culltivation from the serviceprovider Price at which, goods are transferred by one person to another is calledconsideration to the contract


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Subject matter of the contract: As contract of sale is transfer of ownership in goods,goods form the subject matter of the contract. Such goods can be:

a) Existing Goods: Existing goods are the goods, which form the subject matter ofthe contract, which are in physical possession of the person at the time of enteringof the contract.

Existing goods can be specific goods or un-ascertained goods. Specific goods arethe goods, which are identified at the time of sale and in case goods are not identifiedat the time of sale then they are called un-ascertained goods. Eg. Harvestedproduce say ADT 43

b) Future Goods: Future goods are the goods

• Which are not acquired or manufactured by the seller

• Which are not in the possession or ownership of the seller

• And which, are intended to be acquired by the seller for the contract of sale

Eg. Paddy variety ADT -43 is expected to be harvestd at the end of February

c) Contingent Goods: Goods whose acquisition depends upon happening oroccurrence of contingency are called contingent goods.

Destruction of Goods

If goods forming the subject matter of the contract are destroyed after the transfer ofownership of goods, then the buyer of goods shall be responsible for the loss of the goods,otherwise seller is responsible for the loss of the goods.

3.3 Conditions and Warranties in the contract of the sale of Goods

Condition: A condition is a stipulation to the main purpose of the contract, the breachof which gives the other party to repudiate the contract.

Example: Papain Processing Company (A) enters a contract with group of Papayagrowers ( B )for supply of goods suitable for any specified manufacturing activity. If thegoods supplied by papayin growers (B) are not suitable for such activity then A canrepudiate the contract with

(B) Warranty: A warranty is a stipulation collateral to the main purpose of the contract,the breach of which gives the other party the right to claim for damages but is not entitled


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to claim for repudiation of contract.

Example: When A enters agreement with B to purchase a car. B promises to A todeliver the car after making necessary repairs. If B delivers the car without making suchrepairs and A is liable to incur after the said car is purchased then B is liable to make goodthe repair charges incurred by A. Conditions and warranties can be expressed in thecontract or can be implied.Express conditions and warranties are those conditions havinga degree of significance in them. Implied conditions and warranties are those conditionswhich are required to be complied in respect of goods, depending upon the nature of thegoods unless any contrary in this regard is mentioned in the contract. The following arethe implied conditions pertaining to the goods:

Conditions as to the title – Title of the goods needs to be clear

Conditions in case of goods sold by description – In case of goods sold by descriptionthen there implies the condition that such goods shall correspond to such description.Conditions in case of sale of goods sold by sample – In case goods are sold after samplesare distributed in respect of such goods, then the goods must correspond to the goodsissued by samples. Conditions in case of sale of goods by description and also by sample– In this case, goods must correspond to both description and also the sample. Conditionas to the fitness of goods for a certain purpose. This is applicable in case of:

Buyer expressly or impliedly mentions the end use for which goods are subjected

b) Buyer purchases goods in good faith based on judgment

c) Seller regularly deals in the business of such goods and is considered to be knowingabout the same.

If the above conditions are satisfied then goods supplied by the seller are supposedto be fit forthe purpose of the buyer’s use.

Conditions as to merchantability – There arises implied condition on the seller thatgoods produced by him must posses the basic qualities for which they are known.

3.4 Doctrine of Caveat Emptor and its exceptions


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The basic principal behind this doctrine is that, let the buyer be aware. This meansthat the buyer is responsible for his fault in identifying damages in the goods if suchdamages can be found easily or are apparent from such goods when the buyer has beengiven reasonable opportunity to examine goods before its purchase.

Exceptions: The Rule is not applicable in the following cases –

Conditions as to the title – Title of the goods needs to be clear

Conditions in case of goods sold by description – In case of goods sold by descriptionthen there implies the condition that such goods shall correspond to such description.Conditions in case of sale of goods sold by sample – In case goods are sold after samplesare distributed in respect of such goods then the goods must correspond to the goodsissued by samples. Conditions in case of sale of goods by description and also by sample– In this case, goods must correspond to both description and also sample.

Condition as to the fitness of goods for a certain purpose. This is applicable in case:

a. Buyer expressly or impliedly mentions the end use for which goods are subjected

b. Buyer purchases goods in good faith based on judgment

c. Seller regularly deals in the business of such goods and is considered to be knowingabout the same.

If the above conditions are satisfied then goods supplied by the seller are supposedto be fit for the purpose of the buyer’s use.Conditions as to merchantability – There arisesimplied condition on the seller that goods produced by him must posses the basic qualitiesfor which they are known.

• Where seller is guilty of fraud or misrepresentation then this doctrine shall notapply.

• In case of express condition pertaining to quality and content made by the sellerthen doctrine of caveat shall not be applicable upon such breach.

3.5 Doctrine of “ Nemo dat quad non habet”

Principle behind this doctrine is that no one can have better title to goods other thanthe owner himself. If any person who does not own ownership in particular goods sellsthem, then buyer shall not get better title to such goods.


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3.6 Breach of Warranty by Seller

Buyers right against the seller-

a) Suit for damages for non-delivery of goods

b) Suit for specific performance of the contract

c) Suit for damages for the breach of the contract

d) Suit for recession of contract

e) Suit to recover money already paid by the buyer

f) Suit to recover interest on the amount paid either determined by the terms of thecontract or by the court.

3.7 Auction Sale

An auction sale is a public sale of goods through the process of open bidding by theprospective buyers of the goods. An advanced method of auction ie e-auction is beingcarried out for cardomum, facilitated by the Spice board, Kochi Following are the rulesfor the auction sale:

• Where goods are put in different lots then each lot is a separate contract for sale.

• Contract is said to have taken place once the auctioneer announces by the fall of thehammer (or) in any customary manner. Bidder has the right to call off the bid beforethe fall of the hammer

• Auctioneer has the right to announce the bid subject to condition

• Sale in an auction does not happen below the reserve or the upset price

• Bidders are allowed to have knocked out agreement among them in order to safeguardthemselves from raising bid.

• Auctioneer before the acceptance of the bid can announce cancellation of auction.However the same cannot be done to defeat the highest bidder without any justification.


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3.8 Let us Sum Up

We have started the module with an introduction to sale of goods and requirementof separate legislation for the act. We have also discussed the scope of the legislation. Wehave then discussed when the transfer of property in goods is deemed to be transferred.We then went on to definitions under the Act and understood the difference between asale and the agreement to sell under the provisions of the Act.We have also discussed theexpress and implied conditions and warranties pertaining to goods under the sale of goods.We have also discussed when the risks associated with the goods are transferred from aseller to a buyer under this Act We have then discussed about the doctrine of Caveat Emptorand its exceptions and further we have also discussed Nemo dat quad non habet andexceptions to the same. We have discussed on sale on approval basis and when the sale isdeemed to have concluded in such cases. We have discussed performance of contract bythe parties and discussed about the remedies available to the unpaid seller and his right oflien on goods. We also discussed about the case breach of duties by the seller and remediesavailable to the buyer in this regard. We have concluded the topic with the auction saleand discussed the features of an auction sale.


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Unit- 4

Companies Act, 1956

Structure

4.0 Objectives

4.1 Meaning and definition of the company

4.2 Special features of the company

4.3 Kinds of companies

4.4 Memorandum of the company

4.5 Different kinds of capital

4.6 Corporate governance

4.7 Let us sum up

4.0 Objectives

On completing this unit you will be able to

• Understand the meaning and the definition of the company and special featuresof the company; the different types and categories of companies and their nature.

• Understand how the company is incorporated, the powers and the limitations ofthe company and the liability of its members and its directors on account of theacts of the company.

• Understand how the capital of the company is raised and about the ownershipand control of the company

• Understand how decisions are taken on behalf of the company and how meetingsof the company are held.

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4.1 Meaning and Definition of the Company

Company means a group of people with a common goal. With the growing needs incommrcial transactions, formation of companies has become mandatory and company lawwas established to govern the acts of the companies. Now in India, Companies Act, 1956,governs all companies. Unlike partnership, company shall come into existence onregistration. We shall conclude this module with the corporate governance and duty, whichit imposes on the directors of the company.

Eg. Farmers Producers Company

We shall have only basic understanding over the companies Act in this module.

Definition

Section 3(1)(i) Company means any company, which is formed and registered underthe provisions of this act. Existing company means any company, which was formed beforethe enactment of Companies Act, 1956. A company is an association of many persons whocontribute money or money’s worth to a common stock and is employed in some trade orbusiness and who share profits and losses among themselves. Common stock is denotedas money or capital for the company.

4.2 Special features of the company

(a) Incorporated entity: A company comes into existence with its registration.

(b) A Company is an artificial person and all the powers of the company areexecutedby its board of directors as its agents.

(c) Separate legal entity: A company has a separate legal entity separate from itsmembers. It has the power to own a particular property and has power to be liableor borrow money from others. Company has legal entity separate from itspromoter.

Example: Separate legal entity of the company can be well understood from a famouscase Salmon vs. Salmon & co ltd. Salmon is a shoe merchant having his own business. Heconverted his business into a company and the company purchased shoe business for£30000 . Out of the £30000, the company issued for £20000 pounds and the balance £10000was issued in the form of debentures (registered and secured). After one year of formation,company went into liquidation and only £6000 was collected out of the sale of assets of the


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company. As Salmon was having £10000 of secured debentures Salmon claimed that heshould have the first right on the money received out of the sale of assets. Creditors of thecompany claimed that both Salmon and Salmon & co ltd are one and the same and thatSalmon was carrying on the business with a new name.

Under the following circumstances, liability of shareholders shall become unlimited:

(a) When the number of members in a private limited company falls below two andin public limited company falls below 7 and business is carried on for six months.Then the liability shall become unlimited of all the persons who carry on businessbeyond six months.

(b) When upon liquidation of the company if the court finds that any director, manger,officer is responsible for gross misconduct of the affairs of the company then it canmake his liability unlimited.

4.3 Kinds of companies

Classification of companies is done on the following basis

(a) Based on formation of the company.

(b) Number of members of the company.

(c) Liability of the members of the company.

(d) Control of management.

a. Based on formation of companies

Statutory companies: Corporations created under special laws of legislature are calledstatutory companies.

Ex: Life insurance Corporation of India & Food Corporation of India, AgriculturalInsurance company Registered companies: Companies, which are registered underCompany’s Act 1956, or any law pertaining to companies are called registered companies.Eg Producers Company-VFPCK

b. On the basis of the permitted number of members

A) As per 3CD(iii) Private limited company: A private limited company havingsubscribed capital of more than one lakh is a company which by virtue of its articles

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(i) Restricts the number of members to 50, not including the employees of the companyor the past employees of the company who subscribe for company’s shares whilethey are in employment of the company

(ii) Prohibits any invitation to subscribe for shares or debentures of the company.

(iii)Prohibits any invitation for acceptance of deposits from persons other thanmembers, directors and their relatives.

B) Public limited company: Sec (i) (iv)

A Private company or public limited company means a company which

(i) Is not a private company.

(ii) Has minimum paid up capital of 5 lakhs and above as may be prescribed.

C. On the basis of liabilities of members of the company

(i) Limited company

Liability limited by share

Liability limited by guarantee.

(ii) Unlimited company

Limited liability

Liability limited by shares

In case of company having limited liability of shares, liability of each shareholder ofthe company shall be restricted to the unpaid value of shares held by them.

Liability limited by guarantee

Guarantee Company is a company which does not have any share capital and shallrun with the guarantee given by members of the company. It shall call for such sums uponthe liquidation of the company and liability of such members shall be limited to guaranteegiven for assets of the company.

Ex: Clubs, societies etc

Unlimited liability


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Liability of the member of the company is said to be unlimited if their liability ismore than the unpaid value of shares, if any, held by them. Unless the company’s articlesexpressly contain this provision, liability of the company’s shareholder is limited.

d. On the basis of ownership of the company

Holding company

A company is said to be holding if such a company possesses control over the other.

Subsidiary company As per section 4(1), a company shall be deemed to be a subsidiarycompany of the other if:

(i) The other company controls the composition of board of directors.

(ii) Where the other company holds the majority of shareholder rights.

(iii) Where the first mentioned company is subsidiary of a company and such acompany is subsidiary of such other company.

Nature of companies

1. Nonprofit companies (or) Section 25 companies

It is a company, which is not formed to derive profit out of its operations but is formedfor promotion of sports or one of an art or of commerce. Such a company does not distributeexcess of income generated over expenditure but applies the same for furtherance of itsobjective. It can be with or without capital. Eg. NGOs led company

2. Government Company

Government company is a company wherein not less than 51% of its paid up sharecapital is owned by the central government or state government or any other companyowned by the central or state government. (Sec. 617)

3. Foreign companies

Foreign companies means any company incorporated outside India according to thelaws of such other country and

(i) Having place of business in India after the commencement of the act.

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(ii) Having place of business in India before the commencement of the act andcontinues to exist even after the commencement of this act.

4.4 Memorandum of the company

Doctrine of ultra-virus

As per this doctrine if any act is done by the company which is outside its powersthen the company shall not be liable for such a transaction. It is the duty of the supplier,financier or customer to verify whether the company has the right to undertake such businessby virtue of memorandum of the company. If the company does not have the power to dosuch transaction then they cannot proceed against the company for any loss they haveincurred on account of such a transaction.

Articles of the company

Articles of association of the company frame the internal rules of conduct within thecompany. They are drafted keeping in mind the memorandum and the provisions of thecompany’s act, 1956. For a private limited company articles of association is compulsoryand must have the restrictions as to the maximum number of members, transfer of sharesetc. Public limited company may adopt articles which are contained in table A of scheduleI to this Act.

Section 28 to 30 of the companies act, governs the provisions with regard to form andcontracts of articles of the company.

Following are the brief contents of articles of the company

1. Various classes of shares and their voting rights

2. Procedure for issue of shares & their allotment

3. Procedure for issue of share certificates and warrants

4. Forefeiture of shares and its re-issue

5. Calls on shares

6. Winding up of company

7. Alteration of shares


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8. Payment of dividend on capital

9. General meetings and policies

10. Quorum in meetings

11. Board meeting and Quorum in Board.

12. Voting rights of members.

13. Appointment and qualification of directors.

14. Powers, duties of directors and their remuneration.

15. Rules as to resolution etc

4.5 Different kinds of Capital

Allotment of shares

Allotment of shares subscribed shall be done by the board of the company inaccordance with the listing agreement with any of stock exchanges where the shares of thecompany are proposed to be listed.

Shares of the company

Share capital of the company consists of

(i) Authorized share capital

This is registered share capital of the company issued.

(ii) Subscribed share capital

It is the share capital issued by the company and subscribed by the general public.

(iii) Paid up capital

It is the amount of capital paid up by the members of the company.

(iv) Reserve capital

It is the amount of uncalled capital reserved for liquidation of the company. This isreserved for storage of funds in the hands of the company to pay off its liabilities incase ofliquidation of the company.

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Kinds of shares

(i) Equity shares

Equity shares are shares, which carry voting power with them and equity shareholdersare entitled to have dividend only after satisfying claims of creditors, financiers andpreference shareholders. At the time of liquidation, equity shareholders shall be paid lastafter satisfying the claims of creditors, financiers and also preference shareholders.

Equity shareholders with differential voting rights

These shares have been issued after 2000 in order to safe guard promoters from hostiletakeovers.

They can be issued up to 25% of total share capital of the company.

(ii) Preference shares

Preference shares are the shares, which enjoy preference both in payment of dividendsand also in capital pay back during liquidation over equity shareholders of the company.They do not enjoy the voting rights of the company.

4.6 Corporate Governance

It denotes the right direction in managing and controlling the affairs of the company.The objective of corporate governance is to ensure that directors of the company performtheir duties, obligations and responsibilities diligently and act in the best interests of thecompany. They must be made accountable to the shareholders and other beneficiaries ofthe company.

Corporate governance is concerned with establishing a system whereby directors areentrusted with responsibilities and duties in relation to the direction of company’s affairs.It is directed to the main objective of maximization of wealth of the shareholders of thecompany. Effective corporate governance shall provide mechanism for regulating dutiesof the directors and restraining them from abuse of the powers and act in the best interestsof the company. Corporate governance is also concerned with the ethics, values and moralsof the company and its directors. Corporate governance is mandatory for all listedcompanies. It discusses about


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• Composition of the board, independent directors in the board and non-executivedirectors in the board

Constitution of audit committee and manner in which it meetings are held and itsreports to be discussed. It also defines the powers, rights of the audit committeeetc.

• Disclosure of compensation structure of the management

• Disclosure of contingent liabilities of the company

• Requires Management discussion and analysis report about the performance andthe operations of the company to be annexed with annual report to the shareholders.

• Details of new management personnel appointments with their qualification andtheir remuneration package

• Requirement of the period wherein annual report to be prepared and tabled tothe shareholders

• Disclosure of related party transactions

• Disclosure of risks which the company is subjected to

4.7 Let us Sum Up

In this module we have understood the meaning of the company and the types ofcompanies and their nature. We have learnt about the separate legal entity status to thecompany, which enables a company to own properties on its own and incur liabilities forcarrying out its operations. Ownership in the company rests in the shareholders but controlof management of the company is vested on the board of the company. We have understoodhow the memorandum defines the scope of powers of the company and how its articlesregulate the internal management of the company. We have also understood as to how thecapital of the company is raised and different kinds of capital of the company. Decisions ofthe company are taken in either board or in shareholders meeting and based on requisitemajority, resolution is passed. We have concluded the module by understanding corporategovernance and the duty of the directors to act in good faith in exercise of functions in theconduct of management of the company.

Negotiable Instrument Act, 1881

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Unit- 5


Structure

5.0 Objectives

5.1 Introduction

5.2 Definitions

5.3 Kinds of negotiable instruments

5.4 Essentials of valid bills of exchange

5.5 Dishonor of negotiable instrument

5.6 Crossing of cheque

5.7 Bouncing of cheque and remedies

5.8 Let us sum up

5.0 Objectives

On completing this Unit, you would learn

• About negotiable instruments, their types, how they are enforceable by law, whatare the requirements of negotiable instruments; and also understand the specialfeatures of negotiable instruments.

• Necessity of the negotiable instrument in the modern day world; parties tonegotiable instrument and rights and liabilities of the parties of the instrumentand remedies available to the aggrieved parties on dishonor of the instrument.

• Cheques and crossing of cheques.


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5.1 Introduction

With the growth in commercial and economic transactions, new medium of exchangeapart from money have been evaluated such as bills of exchange, hundi, cheques, bankdrafts etc. These documents are substituting money as a medium of exchange. On accountof these changes, a law to govern these transactions was proposed and the NegotiableInstrument Act, 1881 was enacted. Hereinafter for this module the Negotiable InstrumentAct, 1881 is referred to as Act. The module is supported by examples in order to explainthe provisions of the act and to make the subject more interesting.

5.2 Definition

Negotiable instrument means a promissory note, bills of exchange or cheque eitherto the order or to the bearer.

Following are the characteristics

1) A negotiable instrument must be in writing and it is to be signed by the maker

2) It is an unconditional order (or) promise to pay some money

3) It is for a fixed sum of money

4) Negotiable instrument is freely transferable from one person to other.

5) If the transferee of negotiable instrument receives the same in good faith and valuethen even if the transferor of the same has defect in it shall be entitled to enforce incourt of law – Holder in Due Course.

5.3 Kinds of Negotiable Instruments

a) Promissory Note

b) Bills of Exchange (including Hundi)

c) Cheque.

Promissory Note

Promissory note is a negotiable instrument in writing containing an unconditionalpromise, signed by the maker to pay a certain sum of money to, or to the order of a certainperson or to the bearer of the instrument.


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Ex: I promise to pay B or to his order Rs.500/-

Essential Characteristics

• It must be in writing

• It must show an express promise

• It must be an unconditional promise

• It must be signed by the maker

• It has to be for a certain sum of money

• Such promise is to pay in legal tender only

• All parties to promissory note must be certain

• Other formalities like stamping, place of preparation etc needs to be taken care of.

Specimen of Promissory Note Rs 20,000 Hyderabad, 25th May’2008 Two months afterdate, I promise to pay P or order a sum of rupees twenty thousand only, for value received.

Stamp

Sd/-

(Sign of R)

Bills of Exchange

A bill of exchange is an unconditional order, signed by the maker directing a certainsum of money to pay a certain sum of money only to or to the order of a certain person orto the bearer of the instrument.

Creditor draws a bill of exchange on debtor to recover his money.

In Bills of Exchange there exist three parties

a) Drawer: One who draws the bill

b) Drawee: The person against whom the bill is drawn and person who accepts thebill.

c) Payee: The person who is responsible for the receipt of money under the bill


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5.4 Essentials of valid Bills of Exchange

a) It must be signed by maker and must be in writing.

b) It must be an express and an unconditional order to pay certain money

c) Parties to the contract need to be certain

d) It must direct a certain person to pay a certain sum of money

a) It must satisfy the other formalities as to the stamping, sign of the maker,acceptance of the drawee and signature of the drawee.

Following is the draft specimen of bill of exchange:

Rs 20,000 25th May’07

Three months after date, pay to G or his order a sum of twenty thousand rupees onlyfor the value received.

Signature of the Drawee Signature of the Drawer

(Mr T) With Revenue stamp

(M.P)

To Mr T

Plot No.10,

Banjara Hills, Hyderabad.

Essentials of a valid cheque

It must satisfy all the essentials of valid Bills of Exchange.

a) It must be drawn on a specified bank

b) It must be payable on demand

5.5 Dishonor (or) discharge of Negotiable Instrument

Dishonor of negotiable instrument: A negotiable instrument can be dishonored by:

a) Non-acceptance b) Non-payment


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Only the Bill can be dishonored by non-acceptance.

Dishonor by Non-payment: A promissory note or bill of exchange is said to bedishonored when the maker of the note and acceptor of the bill defaults in making paymentto the holder of the bill. Effect of the Dishonor: When a negotiable instrument getsdishonored, then the holder in due course has the right to sue the maker of the note and thecheque, acceptor of the bill, maker of the bill, all prior indorses to the instrument. All suchparties are jointly and severally liable to the same.

Rules regarding the dishonor

a) Notice needs to be given by means of formal communication by the holder withregard to dishonor of the instrument to the person liable on account of dishonorof the instrument. It acts as a warning to the other person and also prepares theother person to take action against the other previous parties.

b) Notice of dishonor needs to be given by the holder to the other party who remainsliable and the other party shall, further in reasonable time, communicate to allprior parties.

c) Notice must be in writing or by word of mouth. If the notice is in writing than itmust be through post.

When notice is not required: (Section 98)

a) When the party dispenses it entitled for notice.

b) When the drawer of the cheque has himself made the payment

c) When the party has not suffered damage on account of dishonor.

Ex: Accommodation Bill.

d) When drawer and drawee are the same persons

e) When the party entitled to have notice by due means cannot be found

f) In case of promissory note which is not negotiable

g) When the party entitled for notice has made or promises to pay unconditionallythe full amount due on the instrument.

Consequences of not serving dishonor notice


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If the holder has not served notice to the party entitled to such notice then they aredischarged from being liable under the Act unless the notice is not required to beserved as discussed above u/s 98 of the Act.

5.6 Crossing of Cheque

Cheques can be open cheques or crossed cheques. Open cheques are cheques, whichcan be en-cashed at the counter. In case of crossed cheques, the holder has to deposit chequesin his bank account and the bank shall collect money in his account. Crossing of chequessafeguards the holder against the cheque being mis-utilized by any other person A chequeis said to be crossed when two parallel lines are drawn across with or without the mentionof words.

Types of crossing

a) General Crossing: This is a normal crossing with or without mentioning any wordsthereon.

b) Special Crossing: Under special crossing between the lines the name of thecollecting bank is mentioned, only such bank has the power to collect such money.

c) Not negotiable crossing: When between the words it is mentioned that is notnegotiable then the holder of cheque shall not have better title against the personfrom whom the cheque is taken.

d) Account Payee: If in between the lines, it is mentioned as “Account Payee only”then that amount needs to be deposited into the account of the particular payeeonly or to the particular person only and to nobody else.

5.7 Bouncing of Cheque and remedies

Cheque is said to be bounced or dishonored for non-payment when the banker of thecheque refuses to make the payment. The banker shall refuse to make payment either onaccount of insufficient funds in the account of the drawer or for any technical reasons Thedrawer of the cheque whose bank has rightfully dishonored the cheque for insufficientfunds shall be guilty of an offence for issuing such a cheque and is liable to face punishment.This is to ensure that people do not issue cheques carelessly and to default others.According to section 138 of the Act, a drawer of the dishonored cheque shall be liable to:

a) Imprisonment for a term which may extend to two years


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b) A fine which might exceed to twice the amount of the cheque

c) Both of these

However penal action can be taken against the drawer of dishonored cheque, if within30 days from the date of dishonor, the holder of the cheque has sent a notice to him inwriting and the drawer has failed to make payment within 15 days from receipt of suchnotice.

5.8 Let us Sum Up

We started this topic with an introduction to negotiable instruments and requirementof having separate enactment for the same. We then defined the various terms. We haveunderstood the types of negotiable instruments and their essential features. We have thenstudied the parties to the instrument and their rights and liabilities individually towardsthe other parties to the instrument. We have studied about the Holder-in due course andhis rights against the other parties to the negotiable instrument. We studied as to how theinstrument needs to be presented and the circumstances when the instrument getsdishonored and remedies of aggrieved parties on dishonor of the instrument; notingand protest and the manner in which they are done. We then have studied about thedischarge of the instrument and modes of discharge of the instrument; cheques, crossingof cheques and concluded with the bouncing of cheques and remedies on the same.


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Unit- 6

The Essential Commodities Act, 1955 andAgribusiness Legislations

Structure

6.0 Objectives

6.1 Introduction

6.2 Definitions

6.3 Powers of the central government

6.4 Power of government to procure essential commodity

6.5 Manner of fixation of prices on compulsory acquisition by government

6.6 Control on manufacturing activity by government

6.7 Confiscation of the commodity

6.8 Relevance of the Legislative Acts and its application to agribusiness andEntrepreneurship

6.9 Market Legislations

6.10 Agricultural legislation

6.11 Let us sum up

6.0 Objectives

On completing this unit you will learn about

• An act, which shall have an economic significance and shall deal with commoditiesof daily usage i.e. Essential Commodities Act.

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• Significance of the legislation to regulate the production, supply, sale, distributionetc. of essential commodities.

• How the government regulates the production, distribution and black marketingin essential commodities.

• The powers of the Central Government to implement the preamble of the Act.

• Penalties levied and also the prosecution of persons involved in the contraventionof the act and

• The relief available to the aggrieved persons against the orders of the CentralGovernment or any officer authorized by the government

6.1 Introduction

The Essential Commodities Act, 1955 is an important legislation in the interest of thegeneral public for the control and regulation of production, sale, supply, distribution ofand trade and commerce in certain commodities, increase supply of those commodities inthe market and ensure than those commodities are available at reasonable prices. Theobject of the enactment is to secure fair and equitable distribution of essential commoditiesat fair prices to the public and punish hoarding and black marketing in essentialcommodities. For all purposes Essential Commodities Act is hereinafter referred to as Actin this Unit.

6.2 Definitions

Collector: Collector includes an additional collector and such other person not belowthe rank of sub- divisional officer as may be authorized by the collector to perform functionsand exercise the powers of the collector under the Act.

Essential Commodity: Sec (2 (a)) – Essential commodity means any of the following:

• Cattle fodder including oil cakes and other concentrates

• Coal including coke and other derivatives

• Component parts and accessories of automobiles

• Cotton and woolen textiles

• Drugs as defined under section 3(b) of Drugs and Cosmetics Act 1940


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• Food stuff including edible oil and oil seeds

• Iron and steel including manufactured products of Iron and steel

• Paper including newsprint, paper board and straw board

• Petroleum and petroleum products

• Raw cotton, whether ginned or unginned and cotton seeds

• Raw jute

• Any other class of commodity, which the Central Government by notified orderdeclares to be an essential commodity Ex: Sugar etc.

Section 2 (e): Sugar means –

a) Any form of sugar containing more than 90% of sucrose including sugar candy

b) Khandsari sugar or bura sugar or crushed sugar or any sugar in crystalline orpowder form

c) Sugar in the process of vaccum pan sugar factory or raw sugar produced.

6.3 Powers of the Central Government

Power to control production, supply, and distribution etc. of essential commodities(Section 3) The Central Government, in order to maintain or increase supplies of essentialcommodities or for securing equitable distribution of goods or to secure availability ofgoods for defense of India or for any other military purposes, may by order regulate orprohibit the production, sale, supply, distribution, of any essential commodity.

Central Government shall: (Section 2)

a) Regulate the permits, licenses for the production or manufacture of any essentialcommodity

b) Bring under cultivation waste or arable land for growing food crops and therebyincrease the supply of food crops

c) Control the price at which any essential commodity is purchased and sold

d) Regulate by licenses or permit the storage, transport, supply, distribution, use,consumption of any essential commodity.


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e) Prohibit withholding of sale of any essential commodity

f) Require any person holding stock of essential commodity or is engaged in thebusiness of production, trading of essential commodity:

• To sell whole or specified part of the quantity held, produced or traded by him

• In case such quantity is likely to be held or produced by him to sell whole or anyspecified part of quantity likely to be held or produced,

To central government or state government or any officer or agent of suchgovernment or to any corporation owned or controlled by such government or tosuch class or classes of person as specified by such Government.

g) Regulate or prohibit any class of commercial or financial transaction relating tofood stuffs Or cotton textiles, which are in the opinion of government detrimentalto public interest.

h) Collect any information or statistics in order to regulate or prohibit any activity,Government may:

• Require people engaged in production, supply, sale, distribution etc., of suchcommodity to maintain such books of accounts and produce the same forinspection and shall pro-vide such information

• Levy such sum as may be prescribed as fee for licenses, permits etc and shall askto deposit such sum as may be prescribed to the people engaged with essentialcommodity.

j) For any other incidental or supplementary matters. Government has the power toinitiate Search, examination and inspection of premises of any person and shallauthorize an Officer to conduct search, examination and inspection of andsubsequent seizure of:

• Articles or the commodities in respect of which authorized person has reason tobelieve that contravention with respect to provisions of the act has taken place

• Vessels, aircraft, vehicles etc or any other conveyance used to carry commoditiesin respect of which contravention has taken place.

• Of any books of accounts and documents which give sufficient proof of suchcontravention and is authorized to take copies of such books of accounts anddocuments.


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6.4 Power of the Government to procure Essential Commodity

(Section 3 A) When central government is of the opinion that in order to preventraising of prices, or to prevent hoarding and black marketing of goods it shall by notificationin official gazette order that such goods shall be sold to the government.

6.5 Manner of fixation of prices on compulsory acquisition bygovernment

Where any person is required by virtue of order to sell any goods to the centralgovernment, then he shall be paid the price:

• Where agreement can be reached then such agreed price

• Where agreement cannot be reached then the price calculated with reference tocontrolled price.

• When both the above conditions are not satisfied then at the market price prevailingwith respect to such goods as determined by authorized officer.

(Section 3 B) Where any person is required to sell to the government or any officer oragent appointed by the government or corporation owned or controlled by the governmentany variety or grade of food grains, edible oilseeds or edible oil by virtue of order undersection 2 and not by virtue of section 3A then he shall be paid the price as determined bythe state government with the previous approval of the central government and the sameshall be determined considering:

a) Controlled price if any fixed for such variety or grade of food grains, edible oilsand oil seeds

b) General crop prospects

c) Need for making such goods or edible oils or oil seeds available at reasonableprices to all sections of the society

d) Recommendations if any of Agriculture Price Commission in respect of such foodgrains and edible oils.

Where any producer is required to sell sugar to government or any officer or agentappointed by the government or corporation owned or controlled by the government thenprice of sugar shall be calculated by the central government keeping in mind: (section 3 C)


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• Minimum price fixed by the government for sugarcane

• Duty or tax payable thereon

• Manufacturing cost of sugar

• Reasonable amount of profit on capital employed

Central government may direct any person, producer, importer, exporter not todeliver, remove sugar even if the same are in bonded godowns of the factory. Further, thecentral government shall give such directions to any producer, importer, and exporterwith regard to production, sale, supply, and export pertaining to sugar. (Section 3 D)

6.6 Control on the Manufacturing activity by Government (Section4)

If the central government is of the opinion that to maintain adequate supply of essentialgoods or the commodity or to maintain price of any essential commodity it may authorizesuch person or the class of persons to exercise control over the whole or any part ofundertaking where such commodity is manufactured. Upon such order:

• Authorized person shall exercise such functions in accordance with the provisionsof the Act or any order made in this behalf by the central government

• Such whole or any part of the undertaking shall run according to directions issuedby the central government (Section 5) – Any order made by central government,ifif:

• It is of general nature pertaining to any class of persons then the same shall benotified in the official gazette.

• If it is of special nature, specific to any person or class of the person:

a) Needs to be given to the individual

b) If the same cannot be tendered or delivered then the same needs to be affixed inthe premises of the undertaking or any office of the person.

Every order made in this regard by the central government or any officer orauthority of the central government needs to be tabled in both the houses ofparliament (section 6)


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6.7 Confiscation of the Commodity (section 6 A)

Where any essential commodity is seized in accordance with the provisions of theAct such commodity shall be brought before the collector of the district or the presidencytown and shall be produced for inspection before him and if the collector is satisfied thatcontravention has taken place may order for confiscation of:

a) Essential good or the commodity

b) Any package wherein essential commodity is found

c) Any animal, vehicle, vessel, aircraft carrying such essential commodityIf the owner of the animal, vehicle, vessel, aircraft carrying such essential commodity

pays penalty not exceeding the price of the essential commodity as on the date of seizurethen the collector may relieve such animal, vehicle, vessel, and aircraft etc.

When the collector is of the opinion that the essential commodity which was confiscatedis subject to speedy decay or if it is necessary in the public interest to do so:

a) Sell the confiscated commodity at the controlled price if any applicable to suchcommodity

b) If no such controlled price exists for such commodity then auction such commodityOtherwise collector may for equitable distribution of goods order the sale ofessential commodities through fair price shops.

When goods are sold then such sale proceeds after deducting the expenses incurredfor making such sale shall be paid to the owner of such goods from whom goods areseized, provided that:

• The order of confiscation is not made after the seizure of goods by collector

• In an appeal made against the order, court has ordered to do so

• When the person concerned has been acquitted in this regard from contraventionof any of the provisions of the Act

Issue of show cause notice before confiscation of goods: (Section 6 B)

No order of confiscation to confiscate any essential commodity, vehicle or vesselcarrying such commodity can be passed without:


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a) Giving a reasonable notice in writing mentioning the grounds under which goodsneed to be confiscated

b) Giving an opportunity of making a representation against the grounds ofconfiscation in reasonable time

c) Giving an opportunity of being heard No such vehicle, vessel, animal, aircraft orany other conveyance, etc. be confiscated if the owner of such conveyance provesthat he was not aware that such carrying of essential commodity and he has takenall the precautions under the Act.

6.8 Relevance of the Legislative Acts and its application toagribusiness and Entrepreneurship

Here an attempt has been made to give a contextual relevance of the legislative Actsto agribusiness and marketing in capsule form for the easy understanding andcomprehension of the readers.


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Besides the above Acts we discussed, an entrepreneur should have adequateknowledge and understanding of following legislative Acts which are very pertinent forthe agribusiness unit. Some legislation related market perspective and agricultureperspective are comprehended and given below:


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Sl.No Name of the Act Contextual relevance 1 The standard of weights

and measurements Act 1976

To ensure the right weights of the produce by the producers/traders/ consumers.

Eg. Insisted in the farmers market Uhavar sandhai (TamilNadu), VFPCK(Kerala), Rythou Bazar.

All regulated markets and Ware house corporations. Even in the procurement process of Civil supply corporation and Public Distribution system

2 The prevention of food

adulteration Act 1954, 5th Amendment Rules 2006

More relevance to the food processing industries, Milk industries, food supplementary items, Food preservatives Eg. Baby food manufactures by the SHG and supplied to the anganwady and Balwady

3 The Bureau of Indian standards Act 1986

Certification of commodities notified under the provision of the Act is carried out on voluntary basis.

Grading is carried out in accordance with the standards notified , following meticulous procedure of sampling, testing , packaging, marking and sealing as per the instructions issued under the Act and Rules

4 The Agricultural Produce(Grading and Marketing Act 1937(amended in 1986)

It provides for the grading and marking of the agriculture and allied commodities.

Agricultural produce has been defined to include all produce of agriculture or horticulture and all articles, food or drink, wholly or partly manufacture from any such produce and fleeces and the skins of animals.

Standards prescribed under the provision of the Act are known as “Agmark” standards

5 Food Safety and standards

Act ,2006 and amendment in 2008

Food Safety and standards Authority of India (FSSAI) established this act.

It lays down science base standards for articles of food and regulating manufacturing , processing, distribution, sale and import of food so as to ensure safe and wholesome food for human consumption

6 The environment Protection Act 1986

This Act envisages appropriate steps for the protection and improvement of human environment.

It relates to the protection and improvement of environment and prevention of hazards of human beings, other living creature, plant and properties

6.9 Market Legislations


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7 Biodiversity Act 2002 It aims at safeguarding the nation’s sovereign rights on its genetic resources

8 The Geographical Indications of Goods(Regulation and Protection Act) 1999

Any name which is not the name of the country , region or locality of that country shall also be considered as the GI, if it relates to a specific geographical area and is used upon or in relation to particular goods originating from that country, region or locality.

Goods may be any agricultural , natural, or manufacturing goods, or any goods of handicraft or industry and include food stuff.

Eg. Navara Rice of Palakad Kerala, Hydrabad briyani

9 The patents (Amendment)Act 2005 and Patents(Amendment) Rules 2006

The Patent law fabricated in line with requirements of TRIPS section of the agreement of WTO.

It has also brought out Trademarks(Amendment)Act 2007 and The Geographical Indications of Goods

10 Warehousecorporations

(Amendment ) Act 2005 Producers and traders can stock various

commodities such as food grain, pulses, sugar, metals and oil in ware houses.

This bill seeks to make Warehouse receipts negotiable and established a structure to enable trading.

The latest provision of the act permits this instrument for on line trading through MCX, NCDX (Demat account mode)


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Sl.No Name of the Act Contextual relevance 1 Fertilizer control order

1857/1985 To protect the interest of the farmers as well as that genuine traders/manufactures form the exploitation by unscrupulous elements. It needs to ensure the availability of right quality and adequate quantity of fertilizers, at right time and fair price to the farmers in all parts of country. The serial number of the first schedule includes Fertilizers –inorganic and organic and mixed.

2 Fertilizer(Movement control) order 2001

To ensure the equitable distribution of fertilizer in different states. The enforcement of this order has been entrusted to the state government

3 Seed s Act 1966 To ensure the farmers get quality seeds. Seed legislations provides notification of varieties/ kinds of crops certification, labeling of seeds, seed testing and the seeds (control) order provides licensing of dealers, display of stock etc.,

4 Seeds ( control) order 1983 It deals with central government power to control and regulate production, supply distribution of essential commodities

5 Seed bill 2004 It deals with compulsory registration of varieties based on performance that ensures that quality of seeds, accreditation of ICAR, SAUs and private organizations to conduct the performance trails, maintenance of national register of varieties , provision of self certification, accreditation of private seed testing laboratories, regulation of export and import of seeds, regulation of horticultural nurseries, exemption for farmer to sav, use, exchange share or sell their seeds without registration and brand names provision of compensation, regulate the Genetically modified (GM) crops and ban on terminator seeds

6 Protection of Plant varieties and Farmer ’s r ight Act 2001

It establishes provision for an authority for protection of plant varieties and farmer’s rights at national level Chapter II (sec.3-11) and also a provision for a registry. It shall have a broad based composition comprising scientists, state representatives, farmers/tribal’s, women’s organization etc. This legislation extends to all categories of plants except micro-organisms. Farmers will continue to enjoy their traditional rights to save, use, exchange, share and sell their produce of the protected variety with only restriction that the farmers will not be able to sell branded seed of the protected variety for commercial purposes

7 Insecticide (Amendment) Act, 2000

It deals with the provision for registration of pesticides at the central Government level and

6.10 AGRICULTURAL LEGISLATIONS


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The knowledge gained so far with the above discussed subjects on legislations willbe greatly helpful to the people who are engaged in extension services though StateDepartment of Agriculture, Krishi vigyan Kendra(ICAR), Private Extension serviceorganizations(Private Company/ NGos/Cooperatives/ Farmer led organization).Herebefore, we have compelled to give production led information to the farmers and not muchof market led information or post production information. Now there is a policy level shiftto focus both on production and market centric information to suit the farmers felt need.Thus, discussion we had in this chapter explores immense scope in the secondaryagriculture where the value chain become one of the potential component will effectivelyattempted to links all the stakeholders.

6.11 Let us Sum Up

In the present module we have understood the basic need for the legislation andeconomic importance of the legislation. Essential commodities are defined under the act,though the definition is an inclusive one giving power to government to include moregoods under the definition of essentialcommodities.

Then the Act mentions the powers of the Central Government to ensure free movementof essential commodities in the market and enable them to be available in good quantitiesat reasonable prices. Powers of the central government range from the issue of licenses,compulsory acquisition, taking control of undertaking manufacturing essentialcommodities, confiscation of essential commodities and sale of essential commodities toensure that there exists smooth flow of essential commodities in the market.

We have also discussed the penalties under the act for the contravention of provisionsof the act and have also studied the penalties on the offences by the companies. We havealso studied the appeals available under the act to aggrieved persons.

Lastly we have also seen the relavance of the various business law and its applicationto agribusiness entrepreneurship . Additionally we do also discussed the market andagriculture legislative laws for our better extension service in the field.

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AEM-202 Agri-Business and Entrepreneurship Development

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Transcript of AEM-202 Agri-Business and Entrepreneurship Development