This article attempts to decode a farmer’s balance sheet, cost of capital, P&L account, and the role of innovations in improving a farmer’s financial health. A disclaimer on the numbers presented in this article – the numbers are “directional” and not accurate to the tee because of lack of an adequate number of data points needed for constructing a farmer’s financial statements.
Constructing a farmer’s balance sheet
A farmer is an entrepreneur; farming is his enterprise. Like for any other business enterprise, return on capital employed (ROCE) in farming should be attractive enough for a farmer to remain invested in the business of farming. A holistic approach to improving a farmer’s financial situation requires dual focus – improving his income and ROCE. However, it is a paradox that there are not enough data points to construct a balance sheet for farming as a business activity.
In the absence of, data particularly on the value of fixed and long-term assets (such as land, cattle, agri machinery etc.), a representative balance sheet is attempted on the basis of current assets and current liabilities, not an ideal or financially correct approach, but good enough to assess the financial health.
Some of the data points are taken from Nabard’s All India Financial Inclusion Survey -2016-17 (NAFIS), which covered more than 40,000 rural households in 245 districts in 29 states. NAFIS is probably one of the most exhaustive surveys of rural households in recent times. We need more such surveys for obtaining data on the financial health of rural households on a continuous basis.
The survey has useful data points for constructing a farmer’s balance sheet and P&L account (with some interpretations and assumptions plugged in). The survey covers both – agricultural and non-agricultural households. For the purpose of constructing a farming balance sheet, the data for “agricultural household” is taken into consideration.
The balance sheet for a farmer with average ownership of about one hectare of land is represented below taking (only) current assets and current liabilities into consideration.
Table: Balance sheet for a farmer with ownership of one hectare of land
| % of Agricultural Households | Amount (INR) | Weighted Average INR) | Source / Assumption | |
| Liabilities | ||||
| Equity (retained earnings) | 55% | 9,657 | 5,311 | NAFIS (taken as savings for last one year) |
| Debt | 52.5% | 1,04,602 | 54,916 | NAFIS (most likely this represents debt is towards crop loan which is outstanding for the current and previous crop seasons) |
| Total | 60,227 | |||
| Assets | ||||
| Physical and financial assets | 10.5% | 62,734 | 6,524 | NAFIS (investment in physical and financial assets in last one year) |
| Current assets | 53,703 | Balancing figure (This is likely to be inventory of inputs, output for sale / self-consumption and value of the crop in the field) | ||
| Total | 60,227 |
The striking part of the balance sheet is high leverage (debt:-equity ratio in excess of 10). The high dependence of a farmer on debt along with low savings rate (driven by poor profitability) make the balance sheet fragile and, at times, unsustainable (which leads to a need for loan waivers or restructuring).
It is interesting that only 53 percent of households reported having taken a loan as per NAFIS survey. It means the balance 47 percent households either do not need debt or do not have access to debt. There is a high probability that it is more of an access issue, reflecting low levels of financial inclusion among a large section of the farming community.
Only about 10 percent of agricultural households reported investments in physical and financial assets, implying limited or negative surplus with farmers, leaving little money to invest in productive assets. A farmer’s limited ability to make investment builds a strong case for substantially increasing level of public and private investment in the sector. The current assets figure is derived to balance the balance sheet. Current assets are most likely to include an inventory of inputs, output, and the value of WIP crop in the field.
The balance sheet presented above is for a farmer with about one hectare of landholding. The balance sheet health is likely to be healthier for farmers with larger land holdings and worse for smaller hand holdings. There are about 70 percent farmers (approximately 6.5 crores) with farms smaller than one hectare and there are about 2 crores tenant farmers in India with no land ownership, so one can imagine the balance sheet health of about 8.5 crore farmers (with < 1 hectare land or no land). This calls for a surgical approach to improve the situation.
What is the cost of capital to a farmer?
Like for any other business, it is important to understand the cost of capital in the farming business and whether a farmer is making enough profit to beat the cost of capital. The weighted average cost of capital (WACC) in farming business comes out to be 18 percent with the following assumptions.
Table: Weighted average cost of capital
| Cost of Capital | Share | Cost | Assumption |
| Equity | |||
| Risk-free rate | 8% | Long-term savings rate | |
| Beta | 2.00 | High risk because of lack of market linkage and dependence on monsoons | |
| Market returns | 15% | Long-term market returns | |
| Cost of Equity | 22% | ||
| Debt | |||
| Institutional sources | 65% | 7% | Interest rate on Kisan Credit Card |
| Non-institutional sources | 35% | 36% | Interest rate on unsecured loans from non-institutional sources |
| Cost of Debt | 17% | ||
| Weighted average cost of capital | |||
| Share of Equity | 8% | 22% | D:E ratio as per the balance sheet above |
| Share of Debt | 92% | 17% | |
| Weighted average cost of capital (WACC) | 18% |
Its not a surprise that cost of capital for a farmer is higher because of higher cost of equity (due to inherent risk including lack of market access, monsoon dependence etc.) and high cost of debt (due to continued dependence on informal credit with steep interest rate – varying from 24 to 48 percent per year). To beat the WACC of 18 percent, a farmer should have ROCE in excess of this figure, let’s say at least 20 percent. However, this is not the case as we look at the P&L account in the following section.
Farmer’s P&L account: how much money does he make?
A farmer’s P&L account is constructed with data from NAFIS on income and household expenditure. Occupational expenditure is assumed on the conservative side.
It is interesting to note that only about one-third of a farmer’s income comes from cultivation; the rest is contributed by income from wage labour, livestock, other business, and jobs. With the assumptions tabulated below, for an average of 1 hectare land holding, the return on capital employed is about 11 percent, much less than the cost of capital which is about 18 percent.
EBIDTA (Earnings before interest, depreciation and tax) is positive, but is not good enough to serve the interest; that’s why there is always a concern of default on loan payment. Although non-institutional debt is unsecured, the lender (usually local money lender) has the first right on the sale of farm produce so he is able to recover principal and interest through the sale of produce. It is quite a contrast that unsecured loans in the farming business seem to be more secure than a secured loan from institutional sources.
Table: Farming P&L account for a farmer with a farm of about 1 hectare
| Income | Income/expenditure per month (INR) | Income/expenditure per year (INR) | Source |
| Cultivation | 3,140 | 37,680 | Income and household expenditure data points from NAFIS |
| Livestock rearing | 711 | 8,532 | |
| Other enterprise | 489 | 5,868 | |
| Wage labour | 3,025 | 36,300 | |
| Govt / private service | 1,444 | 17,328 | |
| Other sources | 122 | 1,464 | |
| Total | 8,931 | 1,07,172 | |
| Expenses | |||
| Household expenditure | 7,152 | 85,824 | |
| Occupational expenses | 15,000 | Expenses assumed for agricultural inputs per hectare of land excluding labour, irrigation | |
| EBIDTA | 6,348 | ||
| Depreciation | 0 | Assumed zero, as few farmers have fixed depreciable assets | |
| EBIT | 6,348 | ||
| Interest | 9,444 | Weighted average interest paid on credit from institutional and non-institutional sources | |
| PBT | -3096 | ||
| Tax | 0 | No income tax on agricultural income | |
| PAT | -3096 | ||
| ROCE (EBIT / Capital employed) | 11% |
It will be good to research further on the size of land holding at which ROCE becomes higher than the cost of capital. My guess is that inflection point may occur between 3 and 5 hectares. Even if inflection point is at 3 hectares, only about 10 percent of the farming population is likely to have ROCE higher than the cost of capital.
Improving balance sheet health for a small-holder farmer
The numbers shared in the financial statement, as I said earlier, are “directional”. They can be debated, challenged, and further refined with better availability of data, but the message is clear that a farmer’s balance sheet is in deep red and needs to turn green for agriculture to remain a sustainable occupation.
Farmers are not growing food just to feed the billion-plus population but to make money to sustain, survive, and grow like any other business enterprise. It is paradoxical that on one hand, food demand is growing steadily with consumers willing to pay price for good food and, on the other hand, the producers of food are bleeding with little motivation to continue farming.
How do we solve a problem of this magnitude? For me, the priority areas to improve farmer’s balance sheet health include the following, in the order mentioned below:
- Improve access to intuitional credit
- Enable access to market and diversification of income sources
- Optimisation in the cost of inputs
Innovations will play a key role in achieving these three goals. Let me summarise how innovations can catalyse the three interventions.
D.1 Access to institutional credit
As discussed above, a significant part of the farming community does not have access to credit. About one-third of credit (among those who borrowed) continues to be from non-institutional sources with steep interest rates. Such high-interest cost depresses the bottom line and has a negative indirect impact on the top line as well since the lenders do not allow farmers to sell farm produce at a time and place to maximise price.
Innovations can go a long way in improving the credit access in the following manner:
I) Building an Agristack: Agristack essentially means linking “farm id” to “farmer id”, and can be a game changer in improving banker’s access to farmers. Farm id is nothing but the location and size of the farm. Many startups, including CropIn, Satsure, Agnext, AgRisk, Farmguide, and Harvesting, have demonstrated success at scale in identifying and marking farm boundaries using satellite imagery, which is necessary to build farm id. However, the challenge lies in linking farm id to farmer’s id, and the government has a key role to play.
Another option to satellite imagery is the use of drones, which can capture a much higher resolution of farm images. In my estimate, the cost of flying drones with cameras to capture images over 200 million hectares of gross cropped area and processing them will cost about Rs 3,200 crore, which is a small investment in the context of potential usability of this data by government, bankers, insurers, and many other supply chain members.
The priority sector lending target for 2017-18 was about Rs 11.65 lakh crores (approximately $170 billion). Investment into building an Agristack in context of this target is worth pursuing. It can enable bankers to lend, monitor, and democratise the access of credit, particularly to smallholder farmers.
II) Linking credit to input sales: The agricultural inputs market (including seeds, fertilizers, agrochemicals and machinery) is worth approximately Rs 200,000 crore (approximately $30 billion). Farmer purchase of inputs is a good indicator of his income potential, which can be used in building algorithms and credit scoring models for farmers. The input sale data can be captured at the point of sale or with the assistance of local partners. There are a few startups, including Jai-Kisan, FarMart, and PayAgri, who are piloting such solutions.
In my estimate, access to institutional credit has the potential to reduce a farmer’s interest burden by Rs 4,000 to Rs 8,000 on a per hectare basis.
D.2 Access to markets and diversification of income sources
Farming in India is one of the few businesses where the product is being manufactured (as in growing crops) on faith and optimism, not on the basis of nature and pattern of market demand. Till we get to a stage of availability of accurate and real-time demand supply data (it may take another decade for this to happen at a pan-India level), the only other way we can solve demand-supply asymmetry is by having credible and reliable farm produce aggregators to link farmers with markets.
The likes of Ninjacart, Waycool, Kamatan, Crofarm, Loop, DeHaat, Gram Unnati, Agrowave, Farm Taaza, Our Foods, Jumbotail, Superzop, Shopkirana, Krishihub, Krishilok, Freshokartz, and Ergos are trying to solve this problem by building tech-enabled linkages between farmer and consumer to align supply with demand. Given the stage of development of these new-age supply chain organisers, the volumes are relatively small relative to conventional channels (all farm-to-fork startups put together aggregate less than 2,000 tonnes per day in a market which is estimated at 1.5 million tonnes per day at a pan-India level for fresh produce and staples).
However, even at the current rate, it is clear that farmers benefit in terms of better and more predictable prices in closed-loop models. Farmers have reported an increase in income by 20-50 percent while working with these startups, which means additional Rs 5,000-15,000 in the farmer’s pocket. Also, market inclusion can play a pivotal role in driving financial inclusion as bankers can draw comfort with buyback arrangements in place before lending. Samunnati Finance, one of the most successful NBFCs in the agricultural space, has built its book by enabling financial inclusion through establishing market linkages.
These startups are trying to organise fresh produce and staples supply chain, similar to what Amul and NDDB did in the last few decades in organising the milk supply chain. While milk cooperatives had government support, these startups lack that kind of support. One way the government can play a catalytic role in driving organisation of the supply chain is by accelerating the scaling of Farmer Produce Organisations (FPOs).
Theoretically, India needs about 200,000 FPOs (assuming membership of 700 farmers per FPO and 14 crores total number of farmers) to organise the entire farming community. We have only about 30,00 FPOs with few of them operational on the ground. Another big advantage of FPOs is they can also bring many tenant farmers into formal credit structure, which they are deprived of because of lack of land ownership.
Diversification of income source also needs to be targeted to boost and de-risk farmer’s revenue. Indian farmers have been able to survive in the last few decades on the back of three decisive movements – green, white, and horticultural revolution. Dairy and horticultural are the two biggest diversifications Indian agriculture has seen in the past few decades; they not only helped the farmer to earn more but also improved his working capital cycle (both milk and vegetables can be sold on a daily basis unlike field crops).
What next? There are plenty of diversification opportunities for farmers like beekeeping, sericulture, aquaculture, herbs, silage production etc, which are waiting to happen at scale. Each of these opportunities is worth billions of dollars. The growth of poultry (both broiler and layer) in the last decade or so has demonstrated that farmers are open to diversification into newer areas. My guess is that diversification into newer areas will be driven by market players willing to backwards integrate (as demonstrated in poultry by Suguna, Venky’s, Godrej). Diversification of income sources can help a farmer earn a few thousand rupees extra and further reduce his dependence on cultivation income.
D.3 Optimisation of farm input applications
The current input applications by farmers need to become more scientific. For example, flood irrigation is the norm in most areas because a majority of farmers do not measure soil moisture and end up feeding crops with more water than needed. Similarly, in many places, urea application is disproportionately higher and much more relative to other vital nutrients (urea continues to be out of nutrient-based subsidy so is relatively cheaper than other fertilisers on per unit basis). Measurement of soil nutrition is needed to correct sub-optimal applications of fertilisers, critical for improving soil health.
Many startups building factory-to-farm models for input sales such as Agrostar, BigHaat, Unnati, Gramophone, Behtar Zindagi, Agroy, and Salesbee are integrating advisory services for customised applications of inputs with the help of technology. Technology is evolving fast for real-time and affordable measurement of soil moisture, pH, nutrients, local weather parameters, early detection of pest attack etc. It is now possible to templatise the data collection and reporting formats so as to develop a customised input application plan for each farm. Scientific, data-driven customised application of inputs can reduce costs by 10 to 30 percent. This can result in savings of about Rs 2,000 to 5000 per hectare.
The objective of this article is not to be conclusive, but to build a discussion platform on possible ways to integrate innovations in Indian farming and improve a farmer’s balance sheet. The three interventions discussed in the article can potentially benefit farmers with a surplus in the range of Rs 15,000-30,000 per hectare, per year basis – a handsome amount to address financial distress.
In addition to the focus on improving farmer’s income, we also need to work towards improving ROCE to at least 20 percent and simultaneously bringing down the cost of capital to a single digit for farming business. The improvement in the health of a farmer’s balance sheet is critical to keep him motivated to pursue agriculture as a business enterprise.
Innovations in output, input, and data, anchored by digital tech, ae the way forward. Fortunately, we are blessed to have about 1,000-plus agritech startups in the country now and quite a few committed investors who can drive scaling of these innovations. Progressive and long-term policy framework from the government can further accelerate the integration of innovations in the supply chain to benefit farmers.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
member with many agritech start-ups in India. He works
as Venture Partner with Bharat Innovation Fund and is C…
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