Description
In this such a brief data pertaining to agri business and entrepreneurship development.
Post Graduate Diploma in Agricultural Extension
Management (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, India
www.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: 2008
Revised 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, IAS
Director General
National 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, Thrissur
Dr. 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
Agri-Business and Entrepreneurship Development
(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
Enterpreneurship Development for Agripreneurs
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
Course-202 Agri-Business and Entrepreneurship Development
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• Institutional support to business entrepreneurs
• Institutional Intervention and Capacity building for Agri Business
Entrepreneurship
• 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 degree
of randomness and uncertainty associated with the future, you can increase the probability
of 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, planning
becomes increasingly important because the personal and professional aspects become
more difficult to untangle. In agricultural businesses,planning may be even more vital
because of the inherent uncertainty associated with agriculturalproduction. Some important
sources 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 of
entrepreneurship development in agriculturalsector and business planning for agricultural
firms-from input suppliers to producers to processors and describe the steps required to
prepare a thorough business plan. The general process ofbusinessplanning is the same for
each type of firm. However, each may have differing individual aspects that affect its plan’s
content.
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 raising
the living standard of he vast majority of the backward regions, planning and
implementation for development of entrepreneurial programmes are essential because of
their over-dependence on agriculture for employment. Thus entrepreneurship
Enterpreneurship Development for Agripreneurs
7
development in rural industries appears to be the best possible alternative to find
employment avenues for the rural population. The issue of educated unemployment in
rural India and increase in farm income needs much concentration by the extension
functionaries working in the field of agriculture and allied sectors. Extension functionaries
should encourage unemployed rural youth to attempt towards entrepreneurship
development. A serious attempt was made in India towards massive creation of self-
mployment opportunities through entrepreneurship development programmes. Recent
trends in agri-business sector and emerging ICT has substantially improved Indian
agriculture system. In the modern era agriculture is not only restricted to farm but it has
expanded to the global market system. And hence, the farmer now is not only restricted to
farm 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 and
bearing risk with economic uncertainty. Entrepreneurial activities are substantially different
depending on the type of organization that is being started. It is the name given to the
factor of production which performs the function of “Enterprise”. Out of the five factors of
production i.e. land, labour, capital, organization and enterprise, organization does the
work of coordination between different factors and makes the production possible by taking
upon itself the risk or more appropriately the uncertainty of production.
That is why the entrepreneur is termed as “Uncertainty Bearer” and his function as
that of Uncertainty bearing. Haggen defines entrepreneurship as “the function of seeing
investment and production opportunity, organizing and enterprise to undertake a new
production process, raising capital, hiring labour, arranging the supply of raw materials
and selecting top managers for day-to-day operation of the enterprise.”
The major factor for entrepreneurship is the achievement motivation. A society
constituting individuals with a high level of need for achievement would come up as
entrepreneurs. Entrepreneurship involves task accomplishment that embodies a reasonable
challenge to the individuals, competence. Entrepreneurs have to work hard at tasks that
involve a real challenge which imply only a moderate risk. Entrepreneur have many of the
same traits as leaders.
Course-202 Agri-Business and Entrepreneurship Development
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Entrepreneur
According to McClelland entrepreneur is “some one who exercises some control over
the means of production and produces more than what he can consume in order to sell it
for profit. He executes the functions of coordination, organization and supervision.
Entrepreneur is basically an innovator who introduces new combinations. An entrepreneur
is one who creates a new business in the face of risk and uncertainty for the purpose of
achieving profit and growth by identifying opportunities and assembling the necessary
resources 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 responsibility
for the outcome of ventures he start. He prefer to be in control of his resources and use
those resources to achieve self- determined goals.
Preference for moderate risk: Entrepreneurs are not mere risk takers but are instead
calculating risk takers. Their goals may appear to be high even impossible. But they see
the situation from a different perspective and believe that their goals are realistic and
attainable. They usually select only those areas for opportunity where those areas reflect
their knowledge, backgrounds, and experiences, which increase their probability of success.
Confidence to succeed: Entrepreneurs typically will take the challenges with
confidence in their ability to succeed. They tend to be optimistic about their chances for
success, and their optimism is based in reality.
Desire for immediate feedback: Entrepreneurs enjoy the challenge of running a
business avoiding risks, and they like to know how they are running their business through
constant 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-up
company. Long hours and hard work are the rule rather than the exception.
Future orientation: Entrepreneurs have a well defined sense of searching for
opportunities. They look ahead and are less concerned with what was done yesterday
than with what might be done tomorrow. Entrepreneurs see potential where most people
see only problems or nothing at all. In contrast to traditional managers who are concerned
with managing available resources, entrepreneurs are more interested in spotting and
Enterpreneurship Development for Agripreneurs
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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 entrepreneur
starts his business to make money. But it is difficult to say what is the force behind an
entrepreneurs motivaton. Some times money may be only a secondary force.
An Entrepreneur puts his innovative ideas into effect in the process of economic
development. The important factor of entrepreneurship is the ability to create new and
useful ideas that solve the problems and challenges people face every day. Entrepreneurs
achieve success by creating value in the marketplace by utilizing the resources in an
innovative way to sustain the product competitively in the market. Which inturn satisfies
the customer’s needs. Creative thinking is a core business skill which every entrepreneur
needs to acquire. Entrepreneurship is the result of a disciplined, systematic process of
applying creativity and innovation to needs and opportunities in the market place.
Entrepreneurship is a commitment to expand and grow the major determinants of industrial
development which leads to economic growth of the country. It has been identified as an
essential factor for economic development of the country.
The basic objective of an entrepreneurship development should be to develop the
man and competencies required to initiate, manage, and expand the entrepreneurial
activity. Hence it is very much important to pay attention towards conceptualization,
planning, implementation and management of a business idea. It involves applying focused
strategies to mould new ideas to create a product or services that satisfies customers needs
or solves their problems. Thus, business plan is a pre-requisite which helps an entrepreneur
to 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 reorganizes
the enterprises. This kind of entrepreneur can be comfortable with certain level of
development is already achieved and people look forward to change and
improvement
Course-202 Agri-Business and Entrepreneurship Development
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2. Imitative entrepreneurs: These people are characterized by readiness to adopt
successful innovation, but do not innovate.
3. Fabian entrepreneurs: This particular entrepreneurs, are characterized by great
caution and skepticism in experimenting any change in their enterprises.
4. Drone entrepreneurs: Entrepreneurs of this category exhibited the characteristics
of refusal to adopt opportunities to make changes in production method, despite
of reduced returns compared to similar producers. Even they may suffer from the
loss, but they do not ready to make changes in their existing production methods.
Apart from this classification, some more categories of entrepreneurs are listed
by 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 undertake
risks and handle economic uncertainty involved in running a business enterprise.
Inventors: Characterized by competence and inventiveness to invent new product
and show interest in research and innovative activities. Eg. Scientist ,who contributed
for innovation.
Challengers: Entrepreneurs who plunge into industry because of the challenges it
presents. Even after met the challenge, they look for the new one.
Lifetimers: These Entrepreneurs take business as an integral part to their life. Usually
the family enterprises and business run with their personal skill belongs to this category.
Social entrepreneurs: These Entrepreneurs involved in social activities. People who
engaged 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 social
activities. Mostly shows high social responsibility.
Intrapreneurs:
• New breed of Entrepreneurs: Operate from within the organization itself.
• Emerge from within the confines of existing enterprise
Enterpreneurship Development for Agripreneurs
11
• 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 common
in their personal characteristics? The scanning of their personal characteristics
shows that there are certain characteristics or traits which are found usually
prominent in them. Few of them are discussed here.
Achievement motivation, risk taking ability, leadership ability, decision making
ability, innovativeness, management orientation, and self confidence, attitude
towards self employment and income generation and information seeking are
some of the important entrepreneurial traits for any entrepreneur reported by
various researchers.
Achievement motivation: The achievement motivation is one of the traits required
by the agripreneurs . It is the basic urge for the entrepreneur to become
enterprising.
Risk taking ability: Any enterprise or venture normally circumvents with all kinds
of 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 the
willingness to take risk, while facing tough situations. Agribusiness is complex
and risky prone ventures in all spheres, agripreneurs necessarily exhibit the traits
of risk taking ability
Leadership ability: Agriventures as an enterprise is a group activity which
demands team work and leadership abilities.
Decision making ability: The decision making ability is generally depends on
education, better communication behaviour, large scale awareness about the
developmental practices in that particular enterprise. Such factors will support
the decision making ability of entrepreneurs. Taking right decision, at right time,
at right place (Production and Post production activities) will be the most essential
traits of successful entrepreneurs. Any failure will attributes for unsuccessful
performance.
Innovativeness: innovativeness towards the developmental activities and new
technologies 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 towards
planning, production practices, marketing information and awareness about the
new technologies and developmental practices to improve the productivity of
agri-enterprises.
Self confidence: Literacy level and good exposure will certain extend to supports
self confidence.
Information seeking: The people who have adequate education, innovativeness,
enthusiastic will exhibits good information seeking behaviour. Any business
enterprise requires wide variety of information related to production and post
production. Hence an entrepreneur should possess adequate information seeking
behaviour.
Some of the researchers identified the traits required for the entrepreneurs who
do 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 and
entrepreneurship 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 business
enterprises. Such factors will be immense useful, whenever we design entrepreneurial
Enterpreneurship Development for Agripreneurs
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development programme for the targeted people. The factors identified are:
• Entrepreneur possessed technical knowledge or manufacturing experience in the
same/ 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 vigyan
Kendra may have to conduct EDP programme suited for different clientele. Hence it is
important to know the different phases of EDP. Such knowledge will be useful when we
design 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 activities
and 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
Course-202 Agri-Business and Entrepreneurship Development
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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 to
help the entrepreneurs by providing various kinds of support and facilities. Availability
of 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 focusing
Agribusiness Education. While doing so it also simultaneously fosters the
agripreneurship development among the future generations available for
agribusiness and agri- ventures. To strengthen the agribusiness education and
entrepreneurship development new degree courses (in Undergraduate and Post
graduate level), training programmes have been introduced considering the
growing demand.
Eg. TNAU- has established separate Directorate of Agribusiness, Dept of PH Courses:
Enterpreneurship Development for Agripreneurs
15
B.S.(ABM), MBA,(ABM) , BSc.(Ag)-: RAWE- EDP module
2 . KRISHI VIGYAN KENDRA: ICAR sponsored KVK are available throughout the
country, conducting various vocational training programme with broad objective
of promoting agripreneurship among farm youth. Eg. Some of the novel Training
programme like Production of organic products and organic inputs, Special
packaged foods for Sugar patient, Heart patient, packaged flower for special
occasion and season promotes business entrepreneurship
3. AGRICULTURAL TECHNOLOGY MANAGEMENT AGENCY; The existing
structure of ATMA a district level agency provide wider scope and support to
promotes group specific agribusiness entrepreneurship.. Eg. Group farming ,
Group marketing using the provision of ATMA.
4. NATIONAL INSTITUTES OF ICAR AND GOVT OF INDIA: Various National
institutes of ICAR AND GOI also started agribusiness programme with broad
focus to promote agribusiness entrepreneurship among farm graduates especially
in the first line and second line managers Eg. NIAM, MANAGE, NAARM
conducting PG Diploma in Agribusiness.
5. Entrepreneurship Development Cell (EDC): SAUs and even traditional Universities
started functioning entrepreneurship Development cell to promote
entrepreneurship among students.
Eg. EDC of Bharathiar University, Coimbatore and Coimbatore Institute Of
Management 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 various
categories of entrepreneurs. It establishes a forum between various agencies
involved in ED activities.
7. National Institute of small Industries Extension Training (NISIET): It is functioning
at Hyderabad. It gives training to entrepreneurs of small-scale industries. Apart
from this it also supports the research on development of SSI. It also extends its
consultancy services to SSI.
8. RUDSETI (Rural development for self-employment and training Institute): This
organization is being promoted by Syndicate Bank. It operates the training
institutes at Mangalore and Kannur. It conducts a residential entrepreneurial
development 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
Enterpreneurship Development for Agripreneurs
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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-downs
and storage structure. Submission of bankable projects in the recommended format with
technical, economic, socially and environmentally viable indicators attracts finance to the
entrepreneurs without much of difficulty. The entrepreneurs also some time have the
privilege to avail subsidy component being the part of promotion announced by the
Government.
1.5 Institutional Intervention and Capacity building for Agri Business
Entrepreneurship
Some of ongoing Program were conceptualized with different purposes and meeting
specific target too. . At the time of conceptualization it may not be adequately thought of
inclusion of agri business entrepreneurship perspective. Considering the growing demand
for the agri-business entrepreneurship, an attempt has been made to explore the possibility
its inclusion in the ongoing programme without much additional cost. The Possible
Programmes 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 agri- business centre?
India trains over12000 graduates/year from agriculture and allied sectors, while only
2000 are able to find employment. Thus, skilled manpower of agricultural graduates(about
10,000, circumvent to become educated unemployed and even under employed in a single
year. Thus, an urgent need was felt by policy makers to tackle this serious issue through
proper educational planning and a scheme for training, skill up gradation and
entrepreneurial development.
Course-202 Agri-Business and Entrepreneurship Development
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EVOLUTION OF AGRICLINIC AND AGRIBUSINESS CENTRE
• The committee, under chairmanship of Prof. M.S. Swaminathan suggested creation
of agriclinics and agribusiness centers managed by agri-graduates.
• During February 2001 NABARD has formulated a model scheme in consultation
with MOA and selected banks for financing agriclinics and agribusiness centres
and being implemented with the help of SFAC
• While MANAGE identified training institutes throughout the country for imparting
training to agri-graduates.
• The Parliamentary consultative committee of Ministry of Agriculture approved
this 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 cropping
practices
• Technology dissemination, crop protection from pest and diseases, market trends
and prices of various crops in the markets and also clinical services for animal
health 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 up
activities in agriculture and allied areas along with agriclinics and agribusiness
centers.
Enterpreneurship Development for Agripreneurs
19
Dawn of Agri-clinic and agribusiness centers (AC&ABC)
In order to assess demand for and acceptability of private extension through agriculture
graduates, from farmers (as clients) and agriculture graduates (as service providers),
Government organized surveys with the help of ICAR, NCAP and NAARM in 2000 and
the 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 untapped
resource of unemployed agriculture graduates, a need was felt by the Government of India
to design a programme which can take care of both, gave birth to the centrally sponsored
scheme of “Agri-clinics and agribusiness centers”,
• NABARD in consultation with the Ministry of Agriculture, and selected bank
formulated a scheme for financing agriculture graduates under this scheme and
announced 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 imparting
training.
• With all expectation launched the ambitious “agriclinic and agribusiness centers
scheme (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 agriculture
like horticulture, animal husbandry, forestry, dairy, veterinary, poultry farming,
Course-202 Agri-Business and Entrepreneurship Development
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fish culture, rural home science and other allied activities. As per the latest
provision in the scheme even the Diploma holders (Agriculture), any graduate
with science background , retired employees are enrolled as a trainee
• In case of group activity, one group members may be a management graduate or
a 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/her
application to the concerned Nodal Officer of the State . The application will be subject to
scrutiny based on the qualifications and aptitude prescribed .The committee involves Nodal
Officer of the concern State and the nominee from MANAGE and the NABARD
representative 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 training
programme will given by the Nodal Officer of the concern State with a team of trainers
covering different modules enable the trainee to become entrepreneur.
Follow- up
Once the training is completed, an adequate follow-up will be taken for the subsequent
activities like institutional financing . After the appraisal of enterprise plan with necessary
requirements, 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
Enterpreneurship Development for Agripreneurs
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This may further activated by means of introduction of agri business entrepreneurship
training with institutional and functional linkages mode with Kerala Agrl. University and
allied departments.
1.5.3 .Farmers Market-
• The Novel initiatives from some of the State Govt, Popularly known by Uzhavar
santhai ( Tamil nadu), Rythu Bazaars( Andhra Pradesh), Apna mandi ( Punjab)
This kind of organization explores immense scope for agribusiness entrepreneurship
training especially to inculcate Business skills. It could be imparted through KVK. The
knowledge 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 with
business leadership concept could be an added feature to attract youth towards
agribusiness.
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 skills
of 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, Operating
skills
• 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 farmers
interest 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 promoted
entrepreneurship) 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 grape
supplier
• 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 the
International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) in partnership
with India’s Department of Science and Technology (DST).
• It pro¬motes agricultural technologies developed by ICRISAT, other R&D centers
of excellence, universities, and other institutions, separately and jointly.
• Its approach features a dual service and outreach strategy. The outreach strategy
involves collaborative business incubation to bring a wider range of expertise
and resources to bear on business development to foster agricul¬tural development
in other regions.
ABI ADMINISTRATION:
ABI is governed by a board of advisors headed by the Director General of ICRISAT
and by a standing advisory committee that counsels the board on strategy and client intake
and exit.
OBJECTIVES OF ABI
• ABI represents a new resource to promote enterprise development in agriculture
and facilitate business among entrepreneurs
• ABI is the only incubator with an inclusive, market-oriented development plan
that seeks to improve farmers’ livelihoods through business incubation.
ABI model
ABI has been provided with initial startup as recurring grant provided by National
Science and Technology Entrepreneurship Development Board (NST¬EDB) and managed
by close linkages and coordination with world-class committed Professionals. It works on
two financial models:
• Capital gain model: ABI takes an equity share in companies it incubates. This
model is useful for startup companies with highly proprietary technologies and
strong entrepreneurship capabilities. It requires less management support, but
the new technology must be very strong.
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• The revenue-generation model: It is a franchisee model in which revenue for ABI
is generated through service fees, royalties, rental fees, and one-time fees. It is
useful for small-scale entrepreneurs who need significant manage¬ment support
but do not require strong technology inputs; their business is based on incremental
technolo¬gies or pure services.
1.6 GUIDELINES FOR STARTING FARM ENTERPRISES
A broad guideline is given here to start farm enterprises. The frame work prescribed
here will serve as a blue print to any entrepreneur. An intensive effort to answer the items
will 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 analysis
is required to evaluate oneself to know how far we have to deal the favourable and
unfavourable items.
Personal interests and resources
• Whether you have adequate and full fledged interest on the enterprises going to
start?
• 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 skills
required?
• 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, environmental
l 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, supporting
institutions
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 said
plans 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 a
common practice for consultants, lenders, potential business partners, and other business-
associated individuals to request a business plan to make a more informed decision
concerning 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. In
so doing, they become more knowledgeable of the business, the industry, and the market
environment in which their business operates. The process also helps to define business
goals 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 the
business. Therefore, it can be used to keep all employees moving toward the common
goals 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 the
proper direction or to formally alter the firm’s course if circumstances dictate that this is
necessary. Again, the systematic review of the business plan forces the owner, and
potentially 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, corresponding
to the four functional areas of management: marketing, production, finance, and human
resources.
1.7 Why a Business Plan?
Not everyone who starts and runs a business begins with a business plan, but it
certainly helps to have one. If you are seeking funds from a venture capitalist, you will
certainly 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 are
worthy of financial support is to show them a great business plan. Make sure that your
plan is clear, focused and realistic. Then show them that you have the tools, talent and
team to make it happen. Your business plan is like your calling card, it will get you in the
door where you’ll have to convince investors and loan officers that you can put your plan
into action.
Once you have raised the money to start or expand your business, your plan will
serve as a road map for your business. It is not a static document that you write once and
put away. You will refer it often, making sure you stay focused and on track, and meet
milestones. 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 is
to it—a document that describes what you plan to do and how you plan to do it. If you jot
down a paragraph on the back of an envelope describing your business strategy, you’ve
written a plan, or at least the germ of a plan.
Business plans can help perform a number of tasks for those who write and read
them. They’reused by investment-seeking entrepreneurs to convey their vision to potential
investors. They may also be used by firms that are trying to attract key employees, prospects
for new business, deal with suppliers or simply to understand how to manage their
companies better.
So what’s included in a business plan, and how do you put one together? Simply
stated, 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, the
organizational 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 breaks
even.
Enterpreneurship Developmant and Agri-Business Plan
If put together properly a good business plan follows generally accepted guidelines
for 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 business
structure, your particular product or service, and how you plan to make your
business a success.
• The second is the marketplace section, in which you describe and analyze potential
customers: who and where they are, what makes them buy and so on. Here, you
also describe the competition and how you’ll position yourself to beat it.
• Finally, the financial section contains your income and cash flow statement, balance
sheet and other financial ratios, such as break-even analyses. This part may require
help from your accountant and a good spreadsheet software program.
Breaking these three major sections down even further, a business plan consists of
SEVEN 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 and
table 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 complex
enterprise, more than 100 pages. A typical business plan runs 15 to 20 pages, but there’s
room for wide variation from that norm.
Much will depend on the nature of your business. If you have a simple concept, you
may be able to express it in very few words. On the other hand, if you’re proposing a new
kind of business or even a new industry, it may require quite a bit of explanation to get the
message across.
The purpose of your plan also determines its length. If you want to use your plan to
seek millions in seed capital to start a risky venture, you may have to do a lot of explaining
and convincing. If you’re just going to use your plan or internal purposes to manage an
ongoing 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 help
start a new venture. Many great companies had their starts on paper, in the form of a plan
that 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 that
only cash-starved startups need business plans. Business owners find plans useful at all
stages of their companies’ existence, whether they’re seeking financing or trying to figure
out how to invest a surplus.
Established firms seeking help. Not all business plans are written by starry-eyed
entrepreneurs. 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 a
business plan complete with sales forecasts to convince their stake holders which included
share holders, financiers and customers. It helped make the new venture a winner long
before the big day arrived. These middle-stage enterprises may draft plans to help them
find funding for growth just as the startups do, although the amounts they seek may be
larger and the investors more willing. They may feel the need for a written plan to help
manage an already rapidly growing business. Or a plan may be seen as a valuable tool to
be 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 one
applies 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 an
updated plan to help them make financing decisions.
3. There’s been a significant market change. Shifting client tastes, consolidation trends
among customers and altered regulatory climates can trigger a need for plan
updates.
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4. Your firm develops or is about to develop a new product, technology, service or
skill. If your business has changed a lot since you wrote your plan the first time
around, it’s time for an update.
5. You have had a change in management, new managers should get fresh information
about 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 job
last time; may be things have just changed faster than you expected. But if your
plan seems irrelevant, redo it.
Business plans tend to have a lot of elements in common, like cash flow projections
and marketing plans. And many of them share certain objectives as well, such as raising
money or persuading a partnerto join the firm. But business plans are not all the same any
more than all businesses are.
Depending on your business and what you intend to use your plan for, you may
need a very different type of business plan from another entrepreneur. Plans differ widely
in their length, their appearance, the detail of their contents, and the varying emphasis
they place on different aspects of the business.
The reason that plan selection is so important is that it has a powerful effect on the
overall impact of your plan. You want your plan to present you and your business in the
best, most accurate light. That’s true no matter what you intend to use your plan for, whether
it’s destined for presentation at a venture capital conference, or will never leave your own
office or be seen outside internal strategy sessions.
1.11Types 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 least
cursory attention to such key matters as business concept, financing needs, marketing plan
and financial statements, especially cash flow, income projection and balance sheet. It’s a
great way to quickly test a business concept or measure the interest of a potential partner
or 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. It
has to be long on detail but may be short on presentation. As with a miniplan, you can
probably afford a somewhat higher degree of candor and informality when preparing a
working plan.A plan intended strictly for internal use may also omit some elements that
would be important in one aimed at someone outside the firm. You probably don’t need
to include an appendix with resumes of key executives, for example. Nor would a working
plan especially benefit from, say, product photos.
Internal consistency of facts and figures is just as crucial with a working plan as with
one aimed at outsiders. You don’t have to be as careful, however, about such things as
typos in the text, perfectly conforming to business style, being consistent with date formats
and so on.
Presentation Plan: If you take a working plan, with its low stress on cosmetics and
impression, and twist the knob to boost the amount of attention paid to its looks, you’ll
wind up with a presentation plan. This plan is suitable for showing to bankers, investors
and others outside the company.
Essentials
• Almost all the information in a presentation plan is going to be the same as that of
a working plan, although it may be styled somewhat differently. For instance, one
should use standard business vocabulary, omitting the informal jargon, slang and
shorthand 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 the
working plan, this plan isn’t being used as a reminder but as an introduction.
• Among investors’ requirements for due diligence is information on all competitive
threats and risks. Even if you mention some of only peripheral significance, you
need to address these concerns by providing the information.
• The big difference between presentation and working plans is in the details of
appearance and polish. A working plan may be run off on the office printer and
stapled 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 booklet
that 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. A
mistake here could be construed as a misrepresentation by an unsympathetic
outsider.
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
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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 ————.
Capital Requirements
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 three
years, we will strive to ——————. During this time, we will also be —————. To
complement 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 storage
capacity 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 births
expected in ——. This will be our founding herd of ——, with ——— additional births
expected in ——. After the 2001 births, the herd size will have grown to ————. At which
point, the ———original females and now the females born in ——— will be bred. We
expect we can realize —— pregnancies at this time, which will bring the herd to ——. The
males 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%
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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 also
established an operating agreement to augment the articles of organization. See Exhibits.—
—— professional accounting software will be used to administer the accounts of the
business. —— — – CPA, will provide additional professional accounting services on an as
needed basis.
The Market
Sales
Explain who buys your product and why. Show the bank that you have done your
research. ——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 through
this 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
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associations, etc.)—————— which has numerous exclusive membership rights and
privileges, 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 provide
similar ——— 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 expects
you to be able to foresee everything, but researching this section can prepare you for bumps
in 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 you
want to do this.
Capital Requirements
We seek ———— of financing to fund ————. A positive cash flow is projected in
approximately — ———. This funding will be used to ————. Here is a breakdown of
how 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 to
be ———— 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 here
for 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 Coimbatore
respectively during April-June, 2002. They have taken up an “Agro input promoter and
Agro output marketers” project in Mettur Dam area. The project aims at providing all
inputs to farmers on credit to raise vegetable crops and offers technical advice and support
through weekly follow-up field visits. The vegetables produced will be marketed by them
in major vegetable markets located at Thalaivasal, Salem, Erode and Coimbatore. The output
sale proceeds will be paid back to the farmers the very next day after deducting 10% on
sales as service charge and the actual transport cost. Input cost provided to the farmers
will be deducted daily from commencement of marketing @ 5% per day. Thus all the
outstandings get zeroed in 20 days from the day of commencement of marketing. They
have started the project on 15th July 2002. A further aim is to create 8-10 centres within a
radius of 30 km of Mettur Dam.
• Rakshak Agri-Business Center
Sri. Bhavesh Sodha was working as a Gardener in United Phosphorus Ltd. And was
earning Rs. 5000/-per month prior to his training. He started the Rakshak Agri-Business
Center at Vapi and inducted Kisan Bharat Kendra, an innovative service where information
on production technologies of crops, weather and market information services are provided
to 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 an
annual income of Rs. 1.50 lakhs. He has 60 workers and maintains a nursery. He has also
Enterpreneurship Development for Agripreneurs
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taken up pest control work in the city of Vapi for which he is charging the Corporation and
Gujarat 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 and
agribusiness center scheme, established to develop biodynamic farming and gardening in
rural and urban areas. The focus areas are farming technologies and advisory services
about organic and biodynamic agriculture, training and development of bio-dynamic and
organic farming, designing and development of agrofarms, greenery development systems
and earth sciences, marketing network of organically grown agri produce. The society has
established its own biodynamic training center at Aruka Valley in Andhra Pradesh and
also conducted training programmes for about 200 farmers in organic and biodynamic
farming 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 voluntary
basis and promote seed production, vermiculture etc. During Rabi season 2002-03 she has
started paddy seed production in 100 acres with G. Samba Murthy. They have also started
a vermiculture unit with an investment of Rs. 1 lakh. His capacity of the unit is 5 tonnes per
month, banks have been approached for financial support.
• Biopesticide industries
Dr. Suresh Choudhary an agricultural consultant who has established “Indraprastha
Agriclinic center” at Faridabad has extended its services to pesticides and biopesticides
industries services for setting up new pesticide and biopesticide industries. Source of
availability of new/old machinery, manpower chemist, production-manager, quality
controller and also plant protection consultancy.
• Project report & feasibility report consultancy
Dr. Santosh Agarwal has started agro consultancy in Agribusiness management and
agro-industries for agripreneurs to prepare feasibility report and project report for starting
enterprises and availing financial help.
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1.14Let us Sum Up
We have discussed the meaning, importance and concept of entrepreneur,
entrepreneurship and scope of entrepreneurship in promotion of agribusiness and creating
employment in the agricultural sector. Thereafter ,we have studied the entreprenurial
characteristics,Phases of Entrepreneurial Development Programme, Institutional support
to business entrepreneurs, Institutional Intervention and Capacity building for Agri
Business Entrepreneurship and Guidelines for starting Farm Enterprises. We have also
learnt that, business plan is a prerequesite for putting innovative ideas of an entrepreneur
into action.
As noted above, the preparation of an agribusiness plan is not something to take
lightly. The long-term future of your business may well depend on its ability to attract the
interest of lenders and/or investors. Such a comprehensive plan involves both dedication
and 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. If
your agribusiness firm has not already prepared such a comprehensive plan, it is very
likely that it will have to do so in the near future. I hope this discussion will provide you
with some help in determining the contents of such a plan.
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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
On completing this unit you will be able to understand
• 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 the
business going. A business concern should always keep sufficient cash for meeting its
obligations. Any shortage of cash will hamper the operations of a concern and any excess
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of it will be unproductive. Cash is the most unproductive of all the assets. While fixed
assets like machinery, plant etc., and current assets such as inventory will help the business
in increasing its earning capacity, cash in hand will not add anything to the concern. It is in
this context that cash management has assumed much importance.
What is cash management? Every undertaking is desirous of utilizing the available
cash most effectively so as to accomplish the goals of the undertaking i.e., maximization of
profits or wealth of the owners of capacity with the minimum of efforts. But management
of cash is not as simple as it appears. In case, the undertaking does not keep sufficient cash
in hand, it may not be in a position to meet the unexpected challenges that may bring
down its credit in the market. On the other hand, if the undertaking maintains excessive
cash 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 for
unforeseen contingencies, the company will not be in a position to carry on its day-to-day
working efficiently. It is where the real problem of cash management comes, i.e. how much
cash should be set aside for unexpected challenges and how much for regular day-to-day
working. Therefore, the aim of cash management is to maintain a sound cash position to
keep the firm sufficiently liquid and to use the excessive cash, if any, in some profitable
way.
2.2 Entrepreneurial skills and Cash Management
Managerial skills involve entrepreneurial skills too. For any business, the cash
management is so vital for the successful running of the enterprises. It involves a serious
of composite activities like searching and arranging financial sources, cash planning, cash
budgeting, optimum of utilization of fund, credit management, cash transaction etc.,. Each
listed activities require some basic skills and specialized entrepreneurial skills to bring
out good performance. Different task basically requires certain competency to perform.
Since, cash management is a specialized activity, it also require intended skills to perform
in efficient way. The relationship between cash management and associated broad
entrepreneurial skills are presented below for better understanding. Each listed activities
may require one or more entrepreneurial skills to perform the activities.
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Activities related to Cash management
Associated Entrepreneurial skills
Mobilizing fund sources Interpersonal relations skill, Information seeking skill,
Communication
cash planning Planning skill, visionary
cash budgeting Decision-making skill, Accounting skill
credit management Credit orientation, Management orientation
cash transaction Technical and operating skill( e-transfer,e-payment)
Cash handling Risk-seeking , risk taking ability
Payment settlement Interpersonal relations skill, Negotiation skill
Control of inflow of fund Fund management skill, technical skill
Control 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 under
the 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 unforeseen
obligations. What that minimum amount of cash should be is really a problem for financial
management to solve. In deciding the level of cash the following considerations should be
taken into account:
i. Predictable discrepancies: The basic tool for management to forecast the predictable
discrepancies between cash inflow and outflow is cash budget. Cash budget reveals
the timing and the size of net cash flow as well as the period during which surplus
cash may be available for temporary investment. In small concerns, preparation of
cash budget is a very minor job while in large companies, the job is assigned to the
controller of finance and is a full time job. Cash budget may be short range cash budget
and 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 operating
cash requirements, to anticipate the need for short term financing and to manage
investments. The short term forecasts may be of great help in optimizing bank
relationship by indicating the highest and lowest of the cash and the timing of its flow
in and out of the company. It also helps in planning education of long term bets, guiding
dividend policy, co- coordinating divisional financial needs, taking advantage of cash
discourse planning forward purchasing etc. In addition, revision and review is a regular
feature. Informal reviews are carried on between formal reviews. Some big companies
have developed their own standard forms to maintain uniformity information.
ii. Unpredictable discrepancies: In addition to the predictable discrepancies, there are
certain unpredictable discrepancies like strike, lock out, recession, rise in the cost of
material etc. It is desirable to reserve an adequate balance of cash to meet such
contingencies. These events either may interrupt the inflow of cash or cause a sudden
outflow of cash which the undertaking did not expect. The amount kept in reserve for
such eventualities is in the nature of insurance. The amount should be very carefully
earmarked 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 been
invested in business.
iii. Sources of funds: Cash level depends very much on the sources of funds from which a
company can obtain funds at short notice. Creditability of the company counts much
in this regard. The better the credit standing the smaller the amount of cash to be
maintained by the company. The company is required to maintain less cash, if it has
internal sources of funds to meet unpredictable expenses. It may sell its redundant
machinery 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 by
relationship of a company with banks. Relationship with banks very much depends
upon 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. Company
will have to maintain less cash to meet its unexpected challenges. On the other hand, it
depends 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. In
this connection, points of major importance are financial condition of the bank, its
location, 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 business
executive with a view not only to prevent fraudulent diversion of cash receipts but also to
collect cash speedily. Fraudulent diversion of cash can be checked easily by installing an
internal check system by breaking the job of cash receipts into several stages, each handled
by a different employee. But collections of cash speedily i.e. inflow of cash can be controlled
by 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 speedy
collection of cash from debtors. Under this system, deposit accounts are opened with
now or more banks, geographically so located that remittances from customers do not
take more than one day in transit. Customers mail their remittances to the lock-box in
the post office that serves the company’s regional bank. The bank collects cheques
from the lock-box several times a day, clears them and deposits the amount in the
account of the customers, bank emits the excess funds to the company in accordance
with the arrangement after maintaining the minimum balances to cover the costs or
may be drawn by the company treasurer at his discretion. This system speeds up
collections of cheques. The company comes to know of dishonored cheques and weak
credit situations sooner. It also reduces the chances of fraud in the collection process of
cash as it controls the cash incoming better.
b) Collections through regional branch officers: It is another method for collecting cash
speedily. Under this system the company’s regional branch officers are authorized to
collect the payments from the customers and deposit them in the local office of the
banks. 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 remittances
paid by them. The Head office either collects the amount or may instruct the regional
officers to make the payments to suppliers. The system is good when business of the
company is spread over throughout the country and the amounts to be colleted are of
small value.
3. Controlling Outflow of Cash
Controlling outflow of cash is as important as controlling inflow in the interest of the
customers 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 outflows
which must be planned properly, in the absence of any proper planning there shall either
be overflow of cash or unnecessary drain on un-liquid cash. In order to control the outflow
of cash, most of the companies flow the system of centralizedcash payments. Under this
system, all receipts are transferred from subsidiaries to the central office and central office
in turn accepts and pays the creditor’s bills direct to the parties. Bills for local expenses
are, 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 investment
of surplus cash available with the company, for a short period. The finance executive will
have 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 of
funds available for investment on short term basis as they are required to meet the regular
obligations 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 of
the primary responsibilities of financial management to maintain an adequate supply of
cash. Ample cash funds are the index of liquidity of financial resources and the profitability
of the firm. Inadequacy of funds or non- availability of cash when it is needed may have
serious setback to an undertaking, but this does not imply that there must be ample funds
to remain unutilized in the business., In order to maintain the flow of cash, cash planning
is necessary.
What is Cash Planning and Control?
Cash planning is nothing but simply to forecast the cash needs well in advance for a
given period with a view to maintain adequate cash balance in hand, sufficient to meet the
payments and obligations as and when they mature. Thus it includes forecasting of cash
inflows and cash outflows. Cash planning includes cash control as well. Cash planning is
a technique to plan for and control the use of cash. It involves formation and sound cash
management policies, procedures and practices. Sound cash planning does not only cover
the amount of cash required for day-to-day operations but it must make allowance for
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51
abnormal situations also which are likely to occur in the business. Cash for normal
operations is easy to predict but it is not so easy to forecast the requirements of cash for
contingencies. Cash control involves proper implementation of policies and procedures
regarding inflow and outflow of cash. It includes short-term investment plans when cash
is 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 planning
and controlling the cash. Business exigencies and government policies should also be taken
into account while planning the control of cash. We can control the cash position with the
following 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 cash
flow 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 ratios
are 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 outflows
for a given period.
ii) Cash Budget: Cash Budget is the second tool of cash planning. It is a systematic forecast
of cash requirement i.e. forecast of cash inflows and outflows and thus shows the
probable surplus or deficiency of cash flow, policies regarding other functions such
sales, production, Marketing etc.
iii) Forecasting an overall working capital position: Forecast of the overall working capital
position is also an important tool of cash planning. Working capital analysis forecasts
the value of current assets and current liabilities to know the cash position of the
business.
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2.5 Cash Budget
What is Cash Budget?
One of the major responsibilities of financial management is to maintain an adequate
cash balance to ensure the business to make available sufficient cash to meet its needs as
and when they arise.
• Cash budget is an analytical device to estimate the flow of cash in any business
over a future period of time.
• It presents an estimate of cash inflows and outflows. It involves a projection of
future cash receipts and cash disbursement of the firm over various intervals of
time.
• It reveals to the financial manager the timing and amount of expected cash inflows
and 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 the
financial performance by comparing the actual performance with the budget
figures. 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 sound
consistent dividend policy.
• Helpful in planning: Cash budget helps planning for most efficient use of cash. It
points out cash surplus or deficiency at selected points of time and enables the
management to arrange for the deficiency before time or to plan for investing the
surplus money as profitably as possible withoutany threat to the liquidity.
• Controlling cash expenditure: Cash budget acts as a controlling device. The
expenses of various departments in the firm combustible?? controlled so as not to
exceed the budgeted limit.
• Testing the influence of proposed expansion programmed: Cash budget forecasts
the inflows from a proposed expansion or investment programmed and testifies
its impact on cash position.
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• Forecasting the future needs of funds: Cash budget forecasts the future needs of
funds, its time and the amount well in advance. It, thus, helps planning for raising
the 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 balances
for 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 any
goods or services. Certain essential entrepreneurial skills also required for effective cash
management A business has to keep required cash o meet business needs. A financial
manager synchronizes the cash inflows and outflows.
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AEM- 202
Agri-Business and Entrepreneurship Development
(3 Credits)
Block-II
Agri Business
Unit – 1 : Marketing Management in Agri Business 55 - 72
Unit – 2 : Rural Marketing 73 - 89
Unit – 3 : Procurement 90 - 109
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Unit- 1
Marketing Management for Agri Business
‘Marketing is a social and managerial process by which individuals and groups obtain
what they want and need through creating, offering and exchanging products of value
with 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
On completing this unit you will be able to understand
• 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 to
produce more; conveys changing needs of the economy to enable production planning;
and fosters competition among traders, and eliminates exploitation, particularly among
the small and marginal farmers.
The Agricultural market in India today is dominated by rural primary markets that
meet local demand, secondary markets that service distant demands and wholesale markets
that 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 farms
where it is produced to the consumers or manufacturers. This covers physical handling
and 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 the
continuing demands of consumers throughout the year. For the farmer, the strategic function
of the marketing system is to offer him a convenient outlet for his produce at a remunerative
price. To the consumers and the manufacturers of agricultural raw materials, assurance of
a steady supply at a reasonable price is the vital service. Prices are determined through
free market process by negotiations at rural purchase, wholesale and retail stages, and
represent a balance between the consumers’ ability to pay and the farmers’ need for incentive
to produce An effective marketing system will be geared towards expanding the range
and types of consumer service, and thus offer procurement outlets.
Agricultural marketing also includes the marketing of production inputs and services
to 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 the
developing world becomes aware of the value of these supplies, the organization of
distribution systems adapted to their needs becomes vital. Through all the stages of
marketing, 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 of
principles 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 of
planning 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. The
environment is “dynamic”—what customers want today is not necessarily what they want
tomorrow.
• 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 selling
existing products. The philosophy here is that if a product is not selling, more aggressive
measures must be taken to sell it e.g., cutting price, advertising more, or hiring more
aggressive sales-persons. Manufacturers of typewriters were too slow to realize that
consumers wanted the ability to process documents and not typewriters per se. The
marketing concept, in contrast, focuses on getting consumers what they seek, regardless of
whether 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 following
four categories:
• Product
• Price
• Place (distribution)
• Promotion
These 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 the
target 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 blending
these fourmarketing mix variables in an optimal manner. The 4Ps marketing mix can be
reorient in terms of contemporary model popularly known as SAVE model experimented
by 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. Hence
the 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 of
physical 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 to
offset the farmers problems should yield a solution . It clearly states the importance of
solution 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 technology
process could be reenergised and assume highest social responsibility.
Place= Access
Place (or placement) decisions are those associated with channels of distribution
that serve as the means for getting the product to the target customers. The distribution
system performs transactional, logistical, and facilitating functions.Distribution decisions
include market coverage, channel member selection, logistics, and levels of service. This
aspects is so important for an extension functionaries in the sense that the product/service
advised to the farmers to find solution should available in the nearby place. He has to
provide details like where it is available? From Whom ? and the quantity available? Time
frame needed to arrange etc.,
Price=Value
Pricing decisions should take into account profit margins and the probable pricing
response 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 give
advisory 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 such
items.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 to
them and make them to felt that they paid for value of the product/service rendered
rather than mere Price.
Promotion= Education
Promotion decisions are those related to communicating and selling to potential
consumers. Since these costs can be large in proportion to the product price, a break-even
analysis should be performed when making promotion decisions. It is useful to know the
value of a customer in order to determine whether additional customers are worth the cost
of acquiring them.Promotion decisions involve advertising, public relations, media types,
etc. As a one step ahead the extension functionaries instead of limit only to promotion
point of view, he shoud educate the clientele interms of value based education involving
all the three kinds of knowledge(awarness, how-to-do and principle knowledge). By doing
so it is believed that.it gives comparatively good sustainable results. Eg. Educating the
farmers on insurance( Crop insurance, Animal insurance, Property insurance), future trading
etc.,
Product
Products come in several forms. Consumer products can be categorized as convenience
goods, for which consumers are willing to invest very limited shopping efforts. Thus, it is
essential 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 of
time and effort. For example, consumers will spend a great deal of time looking for a new
car or a medical procedure.
Specialty goods are those that are of interest only to a narrow segment of the
population— e.g., drilling machines. Industrial goods can also be broken down into
subgroups, depending on their uses. It should also be noted that, within the context of
marketing decisions, the term product refers to more than tangible goods—a service can
be a product, too.
There are 3 levels of products 1) Core P Marketers must first define what the core
BENEFITS the product will provide the customer. Eg. Oil Engine is the core product of
Kirlosker 2) Actual Prod Marketer must then build the actual product around the core
product. May have as many as five characteristics: Eg. Agricultural pumps fitted with
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61
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), then
design the actual product and find ways to augment it in order to create the bundle of
benefits that will best satisfy the customer.
A firm’s product line or lines refers to the assortment of similar things that the firm
holds. Boeing, for example, has both a commercial aircraft and a defense line of products
that each take advantage of some of the same core competencies and technologies of the
firm.
Price
To a manufacturer Price represents the quantity of money received by the firm or
sellers 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 aspects
of strategy. Let’s have a look at some of them and try to understand the best policy/strategy
in various situations.
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Premium Pricing
Use a high price where there is uniqueness about the product or service. This approach
is used where a substantial competitive advantage exists. Such high prices are charge for
luxuries 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 gain
market share. Once this is achieved, the price is increased. This approach was used by
France 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 a
minimum. 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 the
market, and the price inevitably falls due to increased supply. Manufacturers of digital
watches used a skimming approach in the 1970s. Once other manufacturers were tempted
into the market and the watches were produced at a lower unit cost, other marketing
strategies and pricing approaches are implemented. Eg. Price for organic products follows
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skimming pricing Premium pricing, penetration pricing, economy pricing, and price
skimming 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 an
emotional, 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 of
the range.
For example car washes. Basic wash could be Rs 200, wash and wax Rs 150, and the
whole package Rs 350.
Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to
buy. Optional ‘extras’ increase the overall price of the product or service. For example
airlines will charge for optional extras such as guaranteeing a window seat or reserving a
row of seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where
the consumer is captured. For example a razor manufacturer will charge a low price and
recoup 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 move
old 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 examples
of 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 parts
of 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 increased
competition 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 the
activities utilised to move a product and its title from production to consumption place is
also known as channel, distribution, or intermediary. It is the mechanism through which
goods and/or services are moved from the manufacturer/ service provider to the user or
consumer.
There are six basic ‘channel’ decisions:
1. Do we use direct or indirect channels? (e.g. ‘direct’ to a consumer, ‘indirect’ via a
wholesaler).
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. infighting
between local distributors).
Selection Consideration
• Market segment - the distributor must be familiar with your target consumer and
segment.
• Changes during the product life cycle - different channels can be exploited at different
pointsi in the distribution.
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• Producer - distributor fit - Is there a match between their polices, strategies, image, and
yours?
Look for ‘synergy’.
• Qualification assessment - establish the experience and track record of your
intermediary.
• How much training and support will your distributor require?
Types of Channel Intermediaries
There are many types of intermediaries such as wholesalers, agents, retailers, the
Internet, overseas distributors, direct marketing (from manufacturer to user without an
intermediary), and many others. The main modes of distribution will be looked at in more
detail.
1. Wholesalers
They break down ‘bulk’ into smaller packages for resale by a retailer. They buy from
producers and resell to retailers. They take ownership or ‘title’ to goods whereas agents
do not . They provide storage facilities. For example, cheese manufacturers seldom wait
for their product to mature. They sell on to a wholesaler that will store it and eventually
resell to a retailer. Wholesalers offer reduce the physical contact cost between the producer
and consumer e.g. customer service costs, or sales force costs. A wholesaler will often take
on the some of the marketing responsibilities. Many produce their own brochures and use
their own telesales operations.
2. Agents
Agents are mainly used in all big markets. An agent will typically secure an order
for a producer and will take a commission. They do not tend to take title to the goods. This
means that capital is not tied up in goods. However, a ‘stockist agent’ will hold consignment
stock (i.e. will store the stock, but the title will remain with the producer. This approach is
used 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 the
physical distances involved. They are difficult to motivate. Eg. Commission agents for
agricultural commodities
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3. Retailers
Retailers will have a much stronger personal relationship with the consumer. The
retailer will hold several other brands and products. A consumer will expect to be exposed
to 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 retailer
will 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 is
that niche products reach a wider audience. There are low barriers to entry as set up costs
are low. Use e-commerce technology (for payment, shopping software, etc). There is a
paradigm 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 the
marketer for ‘marketing communication’. As with Neil H.Borden’s marketing mix, marketing
communications has its own ‘promotions mix.’ Think of it like a cake mix, the basic
ingredients 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’ different
aspects of the promotions mix to deliver a unique campaign. The elements of the
promotions 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. As
with all forms of communication the message from the marketer follows the
Marketing Management for Agri Business
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‘communications process’ as illustrated above. For example, a TV advertisment made for
popularising the Kissan Call Center(KCC).
The KCC(sender) pays for a specific advert which contains a message specific to a
target audience ie Farmers (encoding).It is transmitted during a set of commercials from a
TVstation (Message / media). The message is decoded by TV (decoding) and the target
consumer(Farmers) interprets the message (receiver). He/she might call toll free call to
enquire his doubts(Response). The farmers may mind set to adopt/not adopt (feedback).
This information will reinforced during integrated promotional campaign conducted by
the concern department would push the farmer to the point of decision. The disturbance
in 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. The
sales person acts on behalf of the organization. They tend to be well trained in the
approaches and techniques of personal selling. However sales people are very expensive
and should only be used where there is a genuine return on investment. Eg. The farm and
home visit made by extension personnel would comparativlely convinincing the farmers
to 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, free
accessories , introductory offers and so on. Each sales promotion should be carefully priced
and compared with the next best alternative. Similar promotional methods can adopted
by agripreneurs who venturing in to the agriclinic and agribusiness centre. He can suitably
mix the diagnostice service of his centre with sale of their products to match intended
purpose.
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3. Public Relations
Public Relations is defined as ‘the deliberate, planned and sustained effort to establish
and maintain mutual understanding between an organization and its publics’. It is relatively
cheap, but certainly not cheap. Successful strategies tend to be long-term and plan for all
eventualities.
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 and
similarities. Creative agencies work with marketers to design a highly focused
communication in the form of a mailing. The mail is sent out to the potential consumers
and 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 have
liking towards consumption of organic products trhough social networking and contacting
them 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 awareness
and to encourage trial. They offer the opportunity for companies to meet with both the
trade and the consumer. Eg. Use of AgriExpo trade fair and exhibitionswould bring all the
stakeholders in a singleplateform.
6. Advertising
Advertising is a ‘paid form of ‘communication. It is used to develop attitudes, create
awareness, 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, outdoor
advertising (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
Marketing Management for Agri Business
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associated with the sponsoring organization. The elements of the promotionalmix are then
integrated to form a unique, but coherent campaign.Eg.CODDISIA Agri- Intex Expo of
every year is an joint venture of CODDISIA, TNAU AND NABARD. Here the organistion
will 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 and
stimulate consumers are known as consumer promotional tools. Here the goal is to increase
the volume of sales by creating a demand among the public. Samples: Samples are offers
of a free trail of a product conducted for consumers and distributed for introducing a new
product. 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 the
newspaper, magazines. Premiums: An offer of a certain amount of a product at no cost to
consumers who buy a specified amount of the product Eg. Gift is packed along with
purchased materials. Price off: It is a technique of offering goods at a reduced price and
mostly followed to clearance of sale other ways in reduction sale.
Contests: It is an indirect way of introducing a new product. Here an opportunity is
given to consumers to contest with chances of winning attractive prizes. While purchasing
the 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 of
the purchase made. Later these stamps can be exchanged for goods at stamp redemption
counters.
Demonstrations: It is actual public performance of a product for convincing its
reliability. It may be arranged in stores, exhibition/fairs, temple festivals and some time
door 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 the
manufacturers 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 new
products. 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 lower
than the normal price. This is to encourages dealers to buy a standard quantity pack or to
carry a newly launched product.
3. Business level promotion
Bonus to sales force: Here the sales person assigned with stipulated quoto /target
over specific period of time. In excess of the target achieved bonus will be issued. Sales
force contest: It is designed to redouble the interest of the sales force It will motivate the
sales force to use full or maximum capacity. Sales meetings/conventions/conferences: It
is arranged by the manufacturing company with a view to educate, inspire and some time
rewarding the sales force. In such an occasion new products, new schemes, new selling
techniques will be introduced.
The above discussed promotional techniques can be used according to the nature of
products/service, market segments, and occasion with an element of creativity and
innovation 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 and
Irijalkuda) with a sample of 100 customers. The firm used Master Card, Free Goods, Price
Off, 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 firm
through Store communication, displays, announcements and advertisements. Majority of
the 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. In
the above process of agricultural marketing, there may be possibility of middlemen exploit
Marketing Management for Agri Business
71
farmers as well as consumers. Consequently farmers has not get fair price and even not
able to meet the cost of cultivation results in indebt ness. In order to eliminate the
middlemen between farmers and consumers, government level intervention worked out
by the policy makers in different state introduces the farmer market concept as an alternate
to agricultural marketing. It is being known by different names like Uhavar santhai(Tamil
Nadu), 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 evolved
modern 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 his
production 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 avoiding
middlemen in the process and ensure farm fresh.
Objectives
• To create a venue for farmers to sell their own produce directly to consumers as
farm fresh at comparatively lower prices
• To act as a hub for various activities related to farming, farm families etc and
provide 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 their
products
• To help the local administration streamline all operations relating to marketing at
one 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 bazaar
Special features
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• Farmers are oriented towards market driven produce
• Farmer owned and farmer managed with government felicitation in the initial
years.
• 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 over
the years, model envisages self-sufficiency in its operation and management
• Various services required for both the consumers and sellers will be provided on
cost basis at the Bazaar such as Bank, STD Booth, internet facilities to know the
market 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 fosters
competition among traders, and eliminates exploitation, particularly among the small and
marginal farmers. The Agriculture market in India today is dominated by rural primary
markets that meet local demand, secondary markets that service distant demands and
wholesale markets that gather large amounts of produce from different sources for the
retailers in the country.
Agricultural marketing has assumed increased importance after launching of the new
economic policy and consequent opening up of India’s markets to foreign suppliers and
buyers and access by Indians to world markets. Efficient marketing practices enable Indian
farmers derive the full benefits from the new liberalized world trade regime. A better
understanding of Marketing principles in general and Agri-Marketing Practices in particular
will remove various constraints and deficiencies in the existing domestic markets and
marketing 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
On completing this unit you will be able to understand
• 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 in
the purchasing power of the rural communities. On account of the green revolution, the
rural areas are consuming a large quantity of industrial and urban manufactured products.
In this context, a special marketing strategy, namely, Rural Marketing has emerged. Rural
Marketing means delivering manufactured or processed inputs or services to rural
producers or consumers.
2.2 Rural Marketing
Rural marketing facilitates flow of goods and services from rural producers to urban
consumers at a possible time at reasonable prices, and agriculture inputs/ consumer goods
from urban to rural. Marketing is an exchange function; it started much earlier when
civilization began, but was not recognized as marketing. All economic goods are marketed
in terms of goods and services (Barter system). Now money is used as a good exchange
medium. The surplus produce is brought to sophisticated places where both buyers and
sellers meet and exchange goods, services and ideas in terms of money. The market may
be 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 importance
of 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 seasonal
nature of income and consumption. Rural markets are small, non- contiguous settlement
units of village relatively low infrastructure facilitates, low density of population, their
life style is different. Rural consumers are mostly farmers whose income receipts are
dependent on the vagaries of monsoon and nature Following are the facts related to Indian
Rural Market (According to the Estimates of 2000)
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75
• 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 in
urban) with cumulative credit of Rs 977 billion resulting in tremendous liquidity.
• 42 million rural House Holds availing banking services in comparison to 27 million
urban
House Holds.
• Investment in formal savings instruments: 6.6 million HHs in rural and 6.7 million in
urban
2.4 Features of Indian Rural Markets
• Heterogeneity: Rural markets comprise of heterogeneous population. Various
tiers are present depending on the incomes like Big Landlords; Traders, small
farmers, Marginal farmers, Labors, Artisans. State wise variations exist in rural
demographics like Literacy (Kerala 90%, Bihar 44%), Population below poverty
line (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 million
for urban sector. Rural incomes CAGR was 10.95% compared to 10.74% in urban
between 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 brings
brand 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 dumping
grounds for low-end products basically designed for an urban audience.
Product
The winning strategy of organisations in rural markets is to focus on their core
competency such as technological expertise to design specific products for the rural
economy. Launch of sachets is the most remarkable example in this context which has
transformed the rural market considerably as packaging in smaller units and lesser-priced
packs increases the product’s affordability. Along with the cultural dynamics, the needs
and latent feelings of the rural people have to be well understood by the marketers before
launching products in rural segments. Marketers would do well to first understand this
and then designing products accordingly. Another very important factor is the proliferation
of spurious products. Majority of rural masses are illiterate people and they identify a
product by its packaging (color, visuals, size etc.). So it becomes very easy for counterfeit
products to eat into the market share of established reputed brands. The retailer also gets
a larger profit on selling the counterfeits rather than the genuine products and hence is
biased towards the fakes.
Pricing
The rural market remains quite price-sensitive and thus squeezing costs at every
stage is of vital importance. Some marketers like HLL are in process of enhancing their
control on the rural supply chain through a network of rural sub-stockists, who are based
in the villages only.
Sales
Marketers need to understand the psyche of the rural consumers and then act
accordingly. Rural marketing involves more intensive personal selling efforts compared
to urban marketing. Firms should refrain from designing goods for the urban markets and
subsequently pushing them in the rural areas. Marketers should reach the customers by
utilizing the various rural folk media like celebrations, festivals, melas and other activities
where they assemble.
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Distribution
Companies would also do well to have a proper sales and distribution network. In
terms of sheer reach the companies can gain significant competitive advantages as the
rural market is highly fragmented and a brand needs to be on the shop shelf before it can
be sold. Companies should also make sure that the prices of their products are not pushed
up because of a channel of middlemen who are neither required nor add any value to the
product. One of the ways could be using company delivery vans which can serve two
purposes- it can take the products to the customers in every nook and corner of the market
and it also enables the firm to establish direct contact with them and thereby facilitate sales
promotion.
Annual “melas” organized are quite popular and provide a very good platform for
distribution because people visit them to make several purchases. Rural markets have the
practice of fixing specific days in a week as Market Days (often called “Haats’) when
exchange of goods and services are carried out. This is another potential low cost
distribution channel available to the marketers. Also, every region consisting of several
villages 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 use
these 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 rural
markets will be an effective promotional strategy. The need for unconventional media
arises 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 and
personalized communication system will help in realizing the goal. Besides this when the
advertisement is couched in entertainment it goes down easily with the villager. The
advantages of traditional media which make it a powerful marketing communication
channel 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 reaped
rich dividends. Brooke Bond Lipton India Ltd (BBLIL) markets its rural brands
through magic shows and skits.
Firms must be very careful in choosing the mode of communication. Access to a
vernacular newspaper is very low. Hence, audio visuals must be planned to convey
a 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 a
major share of rural markets. Though the list is not exhaustive, it enables “The Rural
Players” 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) in
agriculture value chain for the improvement. Especially, the farmers and traders are helped
by providing the market information of agricultural commodities by way of publishing in
the Newspapers, Magazines and Government Bulletins, transmitting/broadcasting on the
Radio, 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 in
the agriculture value chain. Different agencies from Government, private and NGos has
made a significant initiative in the form of research models , projects in providing
information to the online with agricultural market information. Some of the novel attempts
viz, 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 the
experiments helps the policy makers to think of scaling up of the successive model wherever
applicable. The comprehensive details of ICT initiatives in agricultural marketing are
presented 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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81
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82
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83
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
2002http://www.eidparry.com/about
us.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 fromhttp://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 in
deciding the future of many big business houses. In many product/service areas rural
markets have not been completely tapped for its buying power. Rural market comprises
of 700+ million people. Estimated market potential in rural markets are quite huge and
impressive. Rural markets need non-conventional and market specific marketing practices
for any business firm to be successful. Structure of the rural markets are different from the
urban markets. Firms face many challenges in marketing their products/services to rural
markets. Communication practices in rural markets are quite different from those of urban
markets 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 Pyramid
viz., selling goods/services to rural markets. With the advent of ICT and its various
application in agricultural marketing will bring the value chain actors in a common
platfform.
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Unit- 3
Procurement
Structure
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, large
organized retailers, and exporters.
Procurement
91
• Meaning of the right quality, the right source of supply, the right price, the right time
and the right quantity.
• Procurement associated activities such as transportation, receiving and storage,
planning techniques used in procurement and general procedures followed for a typical
purchase.
3.1 Importance of Procurement
Purchase (procurement) is as important a function as production and marketing in
contributing to profit and other objectives of an organization. It deserves all the skills and
knowledge of modern professional management. The importance of procurement function
in agro-business is even more since (1) cost of raw material constitutes a very high
percentage of the total cost of processed products; (2) it involves operations under highly
fluctuating markets, and (3) it affects the economy of large number of producers (farmers)
often inviting government intervention. The importance of agro-processing is increasing
in view of the expected large growth of demand for processed products for internal
consumption and exports, Entry of a number of large national and multinational
corporations in organized retailing of processed agro-based products, fresh fruits and
vegetables and other agricultural commodities has further created demand for professional
procurement managers. On socio-economic front agri-business has a high potential for
generation of non-farm employment. Hence, procurement of agricultural raw materials is
expected 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 literature
available exclusively to deal with procurement of agricultural raw material for direct
marketing and/or processing are relatively limited. However, an attempt has been made
to 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 management
structure 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 minimized
before these reach the consumer. Season specific: Some of the agricultural raw materials
are produced during specific season. For example wheat is produced in winter (Rabi
Procurement
93
season), harvested in March-April and arrives in mandis, April onwards. Paddy is cultivated
in rainy season (Kharif) and generally harvested in November (though in some regions of
the country it is cultivated all the year round). Hence, procurement period for these crops
is different. Similarly, there are fruits and vegetables that are available only in certain
seasons. Thus, the seasonality of production determines the timing of procurement.
Region and agro-climatic specific: There are certain crops which grow only in certain
locations having the needed agro-climatic conditions e.g. apples in Kashmir and Himachal
Pradesh, grapes in and around Nasik and Hyderabad, onions, while cultivated all over
India, are primarily available in and around Nasik. Tea is grown in North Bengal and
Ooty Hills. Coffee and spices in South India’s coastal belt.
Essential commodities:
There are certain commodities which are considered as essential commodities since
these form a major part of the food and consumption of these is essential for survival and
health of the people. These are cereals, pulses, oilseeds, oil, milk, sugar, salt etc. Central
and State governments keep a constant watch on production, movement, availability and
prices of such commodities. It keeps large buffer stock of cereals and controls the prices of
many essential commodities. A procurement manager has to be aware of government policy
and regulations while dealing with such commodities.
Price variations: Because of these said reasons agricultural commodities are subjected
to high price variations.The price variations greately affects the purchasing decision interms
of quantity purchased for production of finished products, fixation of price for the
consumable products, difficult in competiting with alternate products etc., Thus, you as a
procurement 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 be
purchased, and (iv) government policy and regulations related to marketing of agricltural
commodities 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 produce
by plants, livestock and other animals (both land and aquatic) insects and micro-organisms
each covering numerous species and subspecies.
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Every primary agricultural commodity and organic residue, animal by-products and
waste, 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.The
biomass providesnumerous opportunities for commercial and industrial exploitation,
which contribute to economic growth.The biomass processing chain provides a variety of
products even from common food crops. For example, the below table portrays the range
of major products and bye-products from the paddy explores the scope and possibility of
various 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 could
also be developed from cultivation / procurement of wild plants (especially
medicinalcrops) and rearing of wild animals like rabbit, crocodile, snake, butterflies. In
fact, there are number ofbig companies having vertically integrated plants processing
primary products, associated products,and by-products. Common among these are paddy,
sugarcane, cotton, maize, castor, etc. While the basic concepts and principles of material
management are applicable to procurement of agricultural raw materials, while applying
these concepts you should be aware of the above mentioned differences between the
industrial raw materials and agricultural raw materials. Hence the agricultural commodities
should 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 as
are fishery and livestock raising (Annexure 1). The small size causes two problems. On
one hand, providing knowledge of modern agricultural practices (extension services),
credit, inputs, irrigation, power and other services (including infrastructure) to each farmer
and 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 of
somewhat different qualities. From this small produce he keeps some for his consumption
and some for seed for next season. This marketable surplus is even smaller. This small
surplus somehow gets pooled and then reaches the market. Procurement managers of
companies involved in buying commodities for marketing / processing / organized
retailing and exports often list the problems that they face in getting the material of right
quality, in the right quantity, at the right time and at the right price, caused by small and
varied offerings of individual producers. Agricultural export business has been particularly
affected by this, since exporters have to function in markets which are competitive in terms
of quality, quantity, time and price. To have better knowledge and understanding ,a
procurement manager may aware of the constraints discussed below.
Constraints of Procurement- Agricultural commodities
Here, problems encountered in procurment of agricultural commodities needed for
proceseing units and exporters aregiven below.
• Strengthening the backward and forward linkages of agro-processing with farming
operations and better price and higher share in value addition to reach the farmers
on account of agro- processing activities” should be key areas needing policy
intervention…
• Poor yields and quality, cost-ineffective processing, expensive and unsuitable
packing material, are the reasons for dismal Indian performance in fruit and
vegetable exports.
• Foremost problem is supply of good quality of raw material in sufficient quantity
to ensure high quality of finished products.
• Since Black pepper is grown as a garden crop in Kerala, it is very difficult to
improve the yield…..Export oriented corporate and co-operative farms could play
a 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 fully
appreciated….Inhabitants of the forest area should be trained in scientific methods
of herb collection.
• India lost Middle-East meat market due to some inherent drawbacks, such as
unhygienic breeding, slaughter at an unproductive age which produced poorer
meat and a traditional butcher style which increased the risk of infection.
• Production of high quality sericulture raw material needs to be planned by
inducing farmers to accept advanced silkworm rearing technology.
In leather industry, defective technologies, inadequate storage facilities, poor market
intelligence, indifferent grading of hides and excessive retention by trade intermediaries
coupled with the diminished bargaining capacity of primary producers were the
main problem Farmers suffer avoidable losses in handling and transport due to poor
packaging, especially in case of horticultural and floricultural crops, medicinal plants.
• The Indian trade (as distinct from multinationals) in agricultural products is yet
to understand the significance of packaging in market penetration, sustenance
and expansion.
• The crux of the problem lies in the absence of effective backward linkages of food
processing industry with small farmers……even contract farming arrangements
have failed to ensure that farmers kept their end of the contract……..this mechanism
(contract farming) could be effectively strengthened if the tripartite arrangement
between farmers, industry and State/ Central Government could be worked out.
• Low yields combined with the excessive number of intermediaries in the
procurement chain, the waste, and loss of value, lock India’s food chain into a
vicious cycle of low investment, low skill, low yield, low efficiency, and low added
value…..Their solution comprises both backward integration for reducing costs
and forward integration for adding value.
From the above, we can find that the processing units and exporters of agricultural
commodity or product face identical problems.
Source: National workshop on “Strategies for Accelerating Agro-processing and
Exports”1988
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3.5 Types of Purchasing
There are two types of purchasing: (i) purchasing for resale and (ii) purchasing for
conversion or consumption. (i) Purchasing for resale : In this type buyer purchases the
material for resale. This is done by traders, merchants, speculators and trading firms. For
example, small traders/merchants buy wheat, paddy, oilseed, etc from the farmers in
villages and/or mandis (regulated markets) and resale these to bigger merchants/
commission agents, retail shops, processing companies etc. Speculators and trading firms
buy such commodities and take physical delivery, stock these for sometime and sell these
when the prices are high, and make profit. For resale, the buyer knows in advance and
certain extendthe market price and what his customer wants and sells the commodity at a
price which includes his cost of buying (i.e. price he paid for the commodity plus his cost
of travel,weighing, packaging, transport, octroi, and losses in trading the material), and
profit.
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 costs
likely to be incurred on weighing, packaging, handling and transport. It is because of this
knowledge 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 housing
colonies or parks his cart at roadsides, and sell these to consumers.
Eg. Even large companies buy fruits and vegetables from farmers and mandis and
after 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 Food
Bazaar, ITC’s e-choupal system for purchasing & reselling of farm produce. This kind of
system 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 own
consumption or conversion i.e., for converting the material in different finished or semi-
finished products by processing. The folowing table indicates with the examples of
purchasing 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/Pi
neapples
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. For
example, 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 or
canned juices and soft drinks. We thus see that company purchasing agricultural
commodities 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 open
mandi 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 of
buying 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 they
always buy high quality products. Many a time budget available is also one of the factor
considerd for purchase decision. In purchasing high quality is not something that has always
to be insisted upon. It is also accepte fact that best quality raw materials gives best
production.
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 going
for procurement of mango pulp
1. Which mango variety it should purchase? Alphanso(High quality but costly ) or
Keshar 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 depending
on quality attributes (taste, colour, thichness, flavour etc.,) the consumer wants it has to
purchase different varieties of mangoes and blend them to produce the preferred quality.
Therefore quality has altogether different meaning.(suitability, satisfaction of the
need,function and cost etc.) The best quality is one that satisfies the intended need at the
lowest cost.
3.7.1 How is quality determined?
While determining the quality of raw materials to be purchased ,following three
major considerations has to be keep in mind
Major considerations for quality Determinants
The technical consideration of suitability
• Whether machines are designed to suit a pa
rti-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 quality
of 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 value
analysis one can achieve a balance among price, cost and value received and reduces cost
by 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 of
material the company must develop “supplier good will”. The system should develop
and sustain good buyer and seller relationship. Some practical tips to build good buyer
and seller relationship are
• A good procurement manager motivates the suppliers and builds up such buyer-
seller relationship which is mutually profitable and advantageous with continuing
relationship.
• 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 the
other just because he is friend of a friend or a relative of some friend or relative. The
reputation of fairness to all vendors is a valuable asset and goes a long way in developing
a 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 vendor
Reliability of seller: If a seller regularly supplies the agreed quality and quantity at right
time and place, then he is Considered to be reliable. From own experience , track record
and 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 conditions
such as due to market, increasecost of transportation, strikes,weather conditions; crop
failure in the region from where the supplier procures the material etc. In all such
conditions ,the reliable seller finds out ways and means and ,continues, to deliver the
material as agreed upon.
Accessibility of seller
A good seller is accessible to the company at all time. To cope up with some of the
occasion like uncertainities, sudden rush order for finished product needs, sudden revision
of supply schedule due to temporary breakdown of plant , warranted quick decisions.
While taking such key decisions accessibility of seller is very imperative to support the
contingency measures.
Low prices
Price is another important factor while selecting one vendor over another. Vendor
who regularly offers lower price and interested to establish long term relationship with
the company would obviously preferredto get the bulk order on regular basis. On the
other hand there are vendors who are opportunists and believe in one-shot, high profit in
their deals and move from company to company taking advantage of short-term demand
and 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 the
cost of inventory cost and some times quick deliveries are alsoimportant when there is a
sudden 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 one
over 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 other
processors, it should take following steps for evaluating a new supplier. The Procurement
Manager should personally visit the plant of the new supplier, and check the following
listed 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 to
one 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 time
and place There are constantly changing variables, such as demand and supply at a
particular place and at a particular time. These have to be evaluated to arrive at the right
price for a specific purchase. For this we have to understand: (i) Condition of competition
and (ii) What constitutes a fair profit.
3.9.1 Condition of Competition
The condition of competition depends upon market structure prevailing. To
understand and determine, what would be the right price, it is essential to know on the
different market structure. Traditionally the markets are determined as indicated in the
following 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 see
that the farmer/producer gets a fair profit so that he is motivated to have a continuing
mutually profitable relationship with the company. The buyer company should see that
the price is high enough to keep the vendor in business. In agriculture, profit to farmer
producer 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 current
interest rate charged by banks for medium term loan, and the interest rate for medium
term deposits. The cost plus fair profit should be price of the produce purchased at farm
gate by a company. Many large companies buy semi-finished products from small
processors. 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 calculating
the profit is to first calculate the capital investments made by the processors and then work
out 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 is
obtained 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 price
within which buyer can take decision.
• A procurement manager has to investigate price from various sources to get an
idea 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, transport
and other services should also be agreed upon.
3.9.4. Contracts
Written contract between buyer and seller is a significant part of purchasing. There
are 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 contract
market conditions (demand and supply, prices, availability, transport and other services
etc.) do not significantly change. However, as there is no guarantee that changes may be
significant, 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 may
negotiate 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 by
two factors: (i) availability and (ii) price.
Markets of agricultural are unstable. Here supply and price fluctuate substantially
producing a highly unstable short-run situation. For example, in vegetable markets, which
generally start operations early morning, prices may change hour-on-hour. Certain
vegetables are available in certain seasons. Early arrivals of crops such as cauliflower may
fetch higher price which goes down during the season. Highly perishable crops like green
leafy vegetables loose their value if not sold early in the day. Same is the case with many
soft 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 for
industrial products and hardware are stable. Here, factors of supply and price are reasonably
stable 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 later
with profit motive
(iii) Forward Buying: Here company purchases quantity which is more than its current
Requirement and surplus quantity is stored for its future use.
(iv) Hand-to-mouth Buying: There are companies which do not keep any inventory of
material.
But buy the quantity needed according to their daily or weekly capacity and/or demand
for 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 total
quantity of raw material needed by the company.
Eg.soybean processing plant with installedcapacity of 300 MT/day operating
continuously 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. For
example, say60% capacity utilization is needed to satisfy the demand, then quantity
needed 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 factors
taken together decide the right quantity at a specific transaction.
• Close relation between Quality and Quantity of raw materials in deciding the right
quantity
Eg. Agricultural commodities are biological produce. As such, these are affected during
transport and storage. There could be weight loss due to loss of moisture (as often
happens in case of paddy), losses due to poor packaging and handling during transport
and storage, spoilage due to unscientific storage, pest attack and fungus etc. Often
external matter such as small stones, sticks, mud, unripe or over ripe seeds affect the
quantity and quality of the material. All these have to be taken into account while
determining 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 the
basis 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 any
organization. Procurement decides the price, quality, quantity and availability of raw
materials 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 are
organic in nature and their procurement is affected by their perishability, seasonality,
productions density and quality etc., Procurement manager should be well versed with
the characteristics of the commodities, place of their production, location of mandis and
related Government policies. There are two types of purchasing viz., Purchasing for resale
and Purchasing for consumption. Purchasing plans differ depending on the reasons to
purchase. Known sources of purchase are Contract farmers, Open Mandis, Direct from
farmers, Farmer cooperatives and Semi finished products from other companies. Purchase
manager has o decide on either few or many sources of supply depending on the need of
the 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 supply
vendors are to be rated periodically to ensure the desired standards with respect to various
factors the organization considers as the most important ones. Written contract between
buyer and seller is a significant part of purchase. Though transportation, packaging and
storage 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
Agri-Business and Entrepreneurship Development
(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
Commodity Markets
111
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 is
the backbone of our economic system. India is primarily an agricultural country. The
fortunes 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 were
different kinds of markets based on products, nature of competition, time etc. This Unit
will 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 without
qualitative differentiation across a given market. It refers to any good that possesses a
physical 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 asset
classes.
• 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 and
the same commodity from another producer.
• Generally they do not have brands.
• Include physical substances, such as food, grains, and metals, which are
interchangeable with another product of the same type, and which investors buy
or 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 their
production and consumption centers are far apart
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113
• They have wide variations in quality and hence certain grades are taken as
standards
4. Commodity Markets
The term market means not a particular place in which things are bought and sold
but the whole of any region in which buyers and sellers are in such a free intercourse with
one 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 following
aspects.
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 accordance
with the rules and regulations framed by the statuary market organization
representing different sections involved in markets. The marketing costs in such
markets are standardized and marketing practices are regulated. Eg. Regulated
market 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 undertaken
either by open auction or by the close tender method.
ii) Weighment of produce: Weighment of the produce is done by a licensed standard
weights and platform scale.
iii) Grading: the produce in the regulated markets is expected to be sold only after
grading.
iv) Licensing of market functionaries: all the market functionaries , from the hamals
(loaders) to traders, working in the regulated markets have to obtain license from
market committee.
b. Unregulated Markets: these are the markets in which business is conducted without
any set rules and regulations. Traders frame the rules for the conduct of the business
and run the market. These markets suffer from many ills, ranging from non-uniform
charges 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 much
processing. They lie near the origin of commodities. In primary markets, the producers of
goods sell their farm products to the wholesalers and their agents. Eg. Mostely farmers
sell their produce in the farmgate, characterised by large volume of proudction of single
most commodity attracts the wholesaler/agents to procure from that place for further
activities in the chain.
b. Secondary Markets
These markets are mostly far away from the primary centers of production and located
at the consumption centers. This is the market where the wholesalers sell their goods to
the retailers for onward selling to the consumer. The middlemen buy goods from producers
and manufacturers and sell to the retailers. Eg. Ottanchatiram whole sale market of Tamil
Nadu. Here vegetables are bring to the market and distributed to various whole sale
markets 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. The
retailers sell their goods to consumers. This market is one where the produce is either
finally disposed of to the consumers or processors, or assembled for exports. In these
markets, merchants are well organized and use modern methods of marketing.Eg.
Organised retail shops like Reliance Fresh, More, Big bazzar, Kannan Deparmental Stores
of coimbatore etc.,Recently ,in this particular type of market the direct participation of
farmers are much encouraged with evolution Of “Farmers market “ an innnovative
agricultural market concept ,where in farmers they themselves bring the produce to market
and engaged in direct selling experience through the established market set up like Uzhavar
Udhaviyagam (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 perishables
and enhance their efficiency and thus increase farmers income,
ii) Provide professionally managed competitive alternative marketing structures that
provide multiple choices to farmers for sale of their agricultural produce,
iii) To drive reforms in the agricultural marketing sector resulting in accelerated
development of marketing and post harvest infrastructure including cool chain
infrastructure in the country through private sector investment.
iv) To bring transparency in the market transactions and price fixation for agricultural
produce and through provision of backward linkages to enable the farmers to
realise 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 the
products. Largely small-scale transactions take place at retail level. Retailers are scattered
all over – mostly in residential areas. In short retail refers to a market where goods are sold
in small quantity directly to the consumer. Eg. Retail shops at junction place, traditional
kirana 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 transactions
take 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 and
manufacturers. Wholesaling is normally characterized by a system of delivery by the
wholesaler 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/future
contracts for delivery on a specified future date. Futures exchanges act as a platform
facilitating and regulating trade. A futures contract is an agreement between two parties to
buy or sell a specified and standardized quantity and quality of an asset at a certain time
in the future at a price agreed upon. It is a market in which the buyers and sellers make
agreement for delivery of goods in future. The contract is made on a certain date but the
goods 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 a
future date for a price agreed upon by both. Contracts are booked in advance, to mitigate
risk. 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 physical
markets. In this market, delivery is taken immediately. Cash settlement is done within a
maximum of 11 days. The spot market is a ready market where the sellers on the spot
physically hand over goods to the buyers. There is an exchange of goods for money at the
same 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 called
as virtual markets / online market place – eg e-bay. In Futures exchanges also, now trading
is taking place electronically
b. Physical Markets
A market in which commodities, such as grain, gold, crude oil etc. are bought and
sold 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 at
the 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 family
use. 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 will
hold 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 cost
of supplies.
b. Imperfect Markets: The markets in which the conditions of perfect completion are
lacking are characterized as imperfect markets. The following are the situations
based on the imperfections:
i. Monopoly: It is a persistent situation where there is only one provider of a product
or service in a particular market. Monopolies are characterized by a lack of
economic com- petition for the good or service that they provide and a lack of
viable substitute goods.
ii. Oligopoly: It is a market form in which a market or industry is dominated by a
small number of sellers (oligopolists).
i. Duopoly: This is a specific type of oligopoly where only two producers exist in
one market
1.3 Market Players and Motives
There are different kinds of participants in the markets, which are listed below. Their
activities vary slightly according to the markets they operate and they also carry different
names according to the place of operation. – eg. speculators, hedgers & arbitragers in futures
market.
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 sells
when 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 the
markets for profit motive is an investor. He works in the market by buying goods and
selling 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 the
fluctuations 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 or
more markets, time periods etc Eg. a person buying in the spot market and selling in the
futures 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 forward
linkages
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 commercial
crops like sugarcane, cotton, tea, coffee, etc. The concept has, however, gained importance
in recent times in the wake of economic liberalization. The main feature of contract farming
is that farmers grow selected crops under a buy back agreement with an agency engaged
in 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 Andhra
Pradesh, seed production contracts for hybrids seed companies in Karnataka, cotton in
Tamil Nadu and Maharashtra etc. which helped the growers in realization of better returns
for their produce. In our country contract farming has considerable potential where small
and marginal farmers can no longer be competitive without access to modern technologies
and support. The contractual agreement with the farmer provides access to production
services and credit as well as knowledge of new technology. Pricing arrangements can
significantly reduce the risk and uncertainty of the market place.
Small-scale farmers are frequently reluctant to adopt new technologies because of
the possible risks and costs involved. In contract farming, private agribusiness firms
normally offer improved methods and technologies because they have a direct economic
interest in improving farmers’ production to meet their needs. In many instances, the larger
companies provide their own extension support to contracting farmers to ensure that
production is according to the specification. The farmer learns many skills through contract
farming like record keeping, improved methods of applying chemicals, fertilizers and
knowledge of the importance of quality and of the demands of export markets. In view of
the above, contract-farming arrangements need to be encouraged widely. This would
require arrangement for registration of sponsoring companies and recording of contract
farming 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, if
any, arising between the farmers and the company under a quasi-judicial manner. The
farmers while raising the contracted crops, run the risk of incurring debt and consequent
displacement 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. The
company recently imported 15,000 citrus plants from California, which are being distributed
in 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 business
organizations in order to produce for their captive processing requirements or for the open
market.
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 the
largest mango orchard in Asia with highest social responsibilityto ensure
environmental protection and functioning as profitable venture .
2. Forward linkage
Forward linkage means the dealings with retail chains and processors. The most
essential 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. they
will not agree with any pre-agreed price with farmer, however they give the prevailing
market 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 existing
open 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 meanwhile
proactively prepare farmer group to establish linkage with retailers.
• Necessary infrastructure in order to provide, Multi commodity service, preserving
quality, 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 following
organizations.
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) was
established in 1964 as a permanent intergovernmental body, UNCTAD is the principal
organ of the United Nations General Assembly dealing with trade, investment and
development issues.
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• To maximizing the trade and development prospects of developing countries and
economies in transition,
• Assisting them in their beneficial integration into the globalizing and liberalizing
world economy and the international trading system, and
• Aims to strengthen human, institutional and policy-making capacities by
formulating and implementing national trade policy frameworks conducive to
economic, human and social development and poverty alleviation, as well as in
participating effectively in multilateral, regional and sub regional trade
negotiations.
• To develop Comprehensive computer-based information system on trade control
measures 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 setting
up of a full- fledged trading platform for Fruits and Vegetables at Bangalore. It has been
formed to establish an alternative market set-up that operates parallel to mandis to stimulate
production, 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 Mandis
and get remunerative prices
• APMC Act emphasises on regulation and restrictions on marketing activity which create
a 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 link
directly with rural farmers for the procurement of agricultural/aquaculture produce like
soya, coffee, and prawns. E-Choupal was conceived to tackle the challenges posed by the
unique features of Indian agriculture, characterized by fragmented farms, weak
infrastructure and the involvement of numerous intermediaries. Traditionally, these
commodities are being procured in ‘mandis’ (major agricultural marketing centres in rural
areas of India), where the middleman used to make most of the profit. These middlemen
used unscientific means to judge the quality of the product, the price difference in the
payout for good quality and inferior quality was less and hence there was no incentive for
the farmers to produce good quality yield. With e-choupal, role of the middleman was
restricted.
ITC Limited has now established computers and Internet access in key rural areas
where the farmers can directly negotiate the sale of their produce with ITC Limited. The
PCs and Internet access at these centers enable the farmers to obtain information on mandi
prices, good farming practices and place orders for agricultural inputs like seeds and
fertilizers. This helps farmers in improving the quality of produce, and also helps in
realizing a better price. Each ITC Limited kiosk having an access to Internet is run by a
sanchalak—a trained farmer. The computer housed in a farmer’s house is linked to the
Internet via phone lines or by a VSAT connection and serves an average of 600 farmers in
10 surrounding villages within about a 5 km radius. The sanchalak bears some operating
cost but in return gets commissions for the e-transactions done through his eChoupal. The
warehouse hub is managed by middle-men called samyojaks. The samyojak acts as a local
commission agent for ITC Limited.
The system saves procurement costs for ITC Limited. The E-Choupal model is quite
different from the other models, as the farmers do not pay for the information and
knowledge 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 and
delivery are replaced with discounts. Metro’s Cash & Carry’s business model brings
together small, medium and large-sized producers, farmers, agricultural cooperatives and
manufacturers, with the dispersed community of hotels, restaurants, caterers, traders,
retailers and small to medium business enterprises, under one roof. They buy directly
from producers and manufacturers and sell to business customers at wholesale centers.
This way, they shorten the supply chain and thereby eliminate the high costs associated
with a fragmented supply chain. They also cut costs and wastage by building modern
trade 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 bulk
quantities at lower costs, a part of which is passed on to the customers.
1.7.4. GROUP MARKETING – Case of Vegetable and Fruit Promotion Council
Keralam (VFPCK) Kerala Horticulture Development Programme (KHDP) is the precursor
to the farmer led company known as Vegetable and Fruit Promotion council of Kerala. It
has explored the feasibility of introducing SHG in agricultural sector with empowerment
intervention model Vegetable and Fruit Promotion Council Keralam (VFPCK) is an ISO
9001-2000 certified company registered under section 25 of Indian Companies Act 1956
and has been established to bring about overall development of fruit and vegetable sector
in Kerala and established in 2001. At present 260 VFPCK Swasraya Karshaka Samithis are
functioning in across Kerala. About 98460 MT of produce worth Rs.157.54 crores were
traded by these SKS during the financial year 2010-11
Organizational setup:The Director Board with 11 members is chaired by the Minister
for Agriculture, Government of Kerala ,and acts as the governing body of the Council. The
board members include senior Government officials like Agricultural Production
Commissioner, Secretary (Finance), Chief Executive Officer of VFPCK, four persons
including a woman to be elected from the SHGs and one representative each from
participating 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 in
production, 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 visit
by the Extension professional, supplemented with mass awareness programmes like
campaigns and demonstrations
3. Group Marketing
A group of 7 to 15 neighbouring SHGs will constitute a Field Centre (FC), wherein
the SHG farmers bring their produce to a common place for marketing and traders will
procure the produce directly from the farmers.
4. ParticipatoryCredit
VFPCK signed an MOU with 11 banks in the State for disbursement of credit based
participatory credit planning session to farmers ,facilitates members for easy and timely
access of credit.
5.Participatory Technology Development
The experimental capacities of the farmers are enhanced through PTD approach and
empower 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 and
facilitating the farmers to take more effective decisions for marketing of their produce. It
provides SHG farmers better access to markets and therefore a greater share in the
consumer’s rupee.
Clustering of SHG – Market centric approach
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Under group marketing, 10-15 Self Help Groups (SHGs), numbering about 250-300
farmers, come together under the banner of Swasarya Karshaka Samithi (SKS) and trade
their 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), wherein
the SHG farmers bring their produce to a common place for marketing.
• Traders are coming to the Field Centers and this will increase the bargaining power
of the member farmers.
• The Market Information Centre (MIC) associated with VFPCK provides the daily
market prices of banana and all other vegetables collected from different markets
in 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 elevated
to Swasraya Karshaka Samithis (SKS)
• Each SKS provided with stage by stage various other supports like additional
platform weighing scale, furniture, telephone, major expense reimbursement for
a 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 ensuring
careful handling of the produce.
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4. Guaranteed Prompt payment within the prescribed period due to collective effort
in recovery from among debtor traders
5. Assures the fair profit and eliminate the traders lobby and improve the bargaining
power for farmers
6. helps the farmers to have a good volume of transaction of produce and negotiate
with the wholesalers in order to 'optimize their returns'
7. Large volumes of produce, induces traders to buy from the Swasarya Karshaka
Samithis.
Infrastructural Supports from VFPCK
Adequate and timely training is ensured for the Marketing Master Farmer committee
members. 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 agricultural
production. Commodity markets have been serving the livelihood in the Indian economy.
A commodity is anything for which there is demand, but which is supplied without
qualitative differentiation across a given market. The markets in which the commodities
are trading are called as commodities markets. There are different kinds of commodities
markets, which have been classified based on functioning, stage, scale of business, time
and nature of business transaction, place and area, products sold and competition. In the
markets, largely there are four kinds of participants, namely buyers, sellers, stockists and
trade facilitators. The market participants have investment, speculative and arbitrage
motives.
The markets are bound with forward and backward linkages. The backward linkages
consist of contract farming and corporate farming models. In contract farming the farmers
grow selected crops under a buy back agreement with an agency engaged in trading or
processing. Corporate farming involves the direct ownership or leasing in of farmland by
business organizations to produce for their captive processing requirements or for the
open market. Dealing with retail chains and processing units are termed as forward
linkages. Under the changing scenario, commodity markets arefacing many challenges
such as increased infrastructure requirement, market access to farmer, improving the
bargaining power of farmers, introduction of de-intermediation process. To pace up the
challenges, market functionaries have been introducing innovations in marketing such as
E-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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131
2.1. Introduction to Derivatives
In the world of liberalization it is most indispensable to predict the future. It becomes
more requisite for agriculture, which faces more flux than other sectors. So the Government
of 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 underlying
variables 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 financial
instruments. Unlike financial instruments such as stocks and bonds, a derivative is a
contract 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 commodity
derivative market and financial derivatives markets. As the name suggests, commodity
derivatives markets trade contracts for which the underlying asset is a commodity. It can
be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals
like gold, silver, etc. Financial derivatives markets trade contracts that have a financial
asset 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 to
buy or sell the underlying asset at a future date at a future price. Futures contracts differ
from 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 the
right but not the obligation to buy a given quantity of the underlying asset, at a given price
on or before a given future date. Puts give the buyer the right, but not the obligation to sell
a 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 options
traded on options exchanges having a maximum maturity of nine months. Longer dated
options are called warrants and are generally traded over the counter.
Swaps: Swaps are private agreements between two parties to exchange cash flows in
the future according to a prearranged formula. They can be regarded as portfolios of forward
contracts.
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2.2. Instruments available for Trading
In recent years, derivatives have become increasingly popular due to their applications
for hedging, speculation and arbitrage. Before we study about the applications of
commodity derivatives, we will have a look at some basic derivative products. There are
three 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 a
specified price. One of the parties to the contract assumes a long position and agrees to
buy 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 for
the same price. Other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded outside
the 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 same
counter 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 a
certain time in the future at a certain price. But unlike forward contracts, the futures contracts
are standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. It is a standardized contract
with standard underlying instrument, a standard quantity and quality of the underlying
instrument 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 maturity
by entering into an equal and opposite transaction. Majority of the futures transactions are
offset 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 contracts
on 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 which
the 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. For
instance, 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 a
different 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 be
summarized in terms of what is known as the cost of carry. This measures the storage cost
plus 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 time
a 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 adjusted
to reflect the investor’s gain or loss depending upon the futures closing price. This is called
marking to market.
Maintenance margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the balance in the
margin account falls below the maintenance margin, the investor receives a margin call
and is expected to top up the margin account to the initial margin level before trading
commences on the next day.
Short position: The sale of a security or commodities futures not owned by the seller
at the time of the trade. Short sales are usually made in anticipation of a decline in the
price.
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 holder
does not have the obligation to exercise this right. In contrast, in a forward or
futures contract, the two parties have committed themselves to the act of buying
and selling. Whereas it costs nothing (except margin requirements) to enter into a
futures 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 corporate
that is organizing futures trading in commodities. A commodity futures contract is a
contractual agreement between two parties to buy or sell a specified quantity and quality
of commodity at a certain time in future at a certain price agreed at the time of entering into
the 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, technology
platforms, 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 authority
before 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 the
Commodity Exchange as a Trading-Cum-Clearing Member (TCM) conferring upon them a
right 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) besides
trading on behalf of registered approved / authorized users and to clear/ settle them.
Professional Clearing Member (PCM) - Any Financial Institution or Bank, which is registered
as PCM is conferred the right only to clear and settle trades through the clearing-house of
the exchange. They may clear and settle trades of such members of the exchange who
choose 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 price
movements 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 other
participants 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 in
the price of an asset. Futures and options contracts can give them leverage; that is, by
putting 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 large
gains as well as large losses.
Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy
between prices of the same product across different markets. If, for example, they see the
futures price of an asset getting out of line with the cash price, they would take offsetting
positions 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 Commodity
Derivatives Exchanges in India, which is overseen by the Ministry of Consumer Affairs
and Public Distribution, Government of India. It is a statutory body set up in 1953 under
the 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 withdrawal
of recognition from any association or in respect of any other matter arising out of
the administration of the Forward Contracts (Regulation) Act 1952.
(b) To keep forward markets under observation and to take such action in relation to
them, as it may consider necessary, in exercise of the powers assigned to it by or
under the Act.
(c) To collect whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions
of the act is made applicable, including information regarding supply, demand
and prices, and to submit to the Central Government, periodical reports on the
working of forward markets relating to such goods;
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(d) To make recommendations generally with a view to improving the organization
and working of forward markets;
(e) To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever
it 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 and
efficient, accorded approval for setting up of national level multi commodity exchanges.
Accordingly three national level exchanges are there which deal in a wide variety of
commodities 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 and
advantages to a large cross section of the participants including Producers / Processors,
Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives and
Associations.
a. National Commodities Derivatives Exchange (NCDEX)
NCDEX is a nation-level, technology driven de-mutualized on-line commodity
exchange with an independent Board of Directors and professionals. It is a professionally
managed by ICICI Bank, LIC, NABARD and (NSE). NCDEX is a public limited company
incorporated 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 on
November 2003. It has permanent recognition from Government of India for facilitating
online trading, clearing and settlement operations for commodity futures markets across
the country. Key shareholders of MCX include Financial Technologies (I) Ltd., State Bank
of 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 was
granted approval by the Government to organize trading in the edible oil complex. It has
operationalized from November 26, 2002. It is being supported by Central Warehousing
Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas
Limited. It got its recognition in October 2002. Apart from these national exchanges there
are other regional commodities exchanges in India.
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2.6 Exchange Transactions
There are three components in exchanges transaction viz: trading, clearing and
settlement.
1. Trading
The trading system on the electronic exchanges provide a fully automated screen
based trading for futures on commodities on a nationwide basis as well as an online
monitoring and surveillance mechanism, which is called as terminal. It supports an order
driven market and provides complete transparency of trading operations. The system
supports an order driven market, where orders match automatically. Order matching is
essentially on the basis of commodity, its price, time and quantity. All quantity fields are
in specified units and price in rupees. The exchange specifies the unit of trading and the
delivery unit for futures contracts on various commodities. The exchange notifies the regular
lot size and tick size for each of the contracts traded from time to time. When any order
enters the trading system, it is an active order. It tries to find a match on the other side of
the book. If it finds a match, a trade is generated. If it does not find a match, the order
becomes 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 complete
audit trail if required. How to invest/trade in commodities exchange
The following diagram should give an investor/trader clear understanding of how
to go about investing/trading in commodities market. The prerequisite for trading in
commodities markets are
a.1 Client code: The client who is interested to trade in commodity exchanges has to
open 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 validity
of client agreement will be verified in the exchanges and specific client code is allotted to
trade in the exchanges.
a.2. Depositing initial margin
An initial amount has to be deposited by a customer at the time of entering into a
contract, which is termed as initial margin. The initial margin will differs based on the
commodities. The exchanges fix the margin for each commodity and it is a small percentage
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141
(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 trade
with broker through NCDEX/MCX terminals. The trade placed at brokers terminal is
submitted to the exchange terminal. When any order enters the trading system, it is an
active order. It tries to find a match on the other side of the book. If it finds a match, a trade
is generated. From the exchange terminal the trade confirmation is sent to the broker and
broker 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 the
particular date. If the difference is positive the exchanges credit that particular amount
into the client account. In case the difference is negative, the exchanges deduct that particular
amount from the credit account. If the account does not have balance then pay in request is
sent to the clients.
2. Clearing
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of
trades executed on the exchanges. The settlement guarantee fund is maintained and
managed 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 matching
for deliveries takes place firstly, on the basis of locations and then randomly, keeping in
view the factors such as available capacity of the vault/ warehouse, commodities already
deposited and dematerialized and offered for delivery etc. Matching done by this process
is binding on the clearing members. After completion of the matching process, clearing
members are informed of the deliverable/ receivable positions and the unmatched
positions. Unmatched positions have to be settled in cash. The cash settlement is only for
the 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 happens
on a continuous basis at the end of each day, and the final settlement, which happens on
the last trading day of the futures contract. On the Exchanges, daily MTM settlement and
final MTM settlement in respect of admitted deals in futures contracts are cash settled by
debiting/ crediting the clearing accounts of CM (Clearing Member) with the respective
clearing bank. All positions of a CM, either brought forward created during the day or
closed out during the day, are marked to market at the daily settlement price or the final
settlement price at the close of trading hours on a day. On the date of expiry, the final
settlement price is the spot price on the expiry day. The responsibility of settlement is on
a trading cum clearing member for all trades done on his own account and his client’s
trades. 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, members
submit delivery information through delivery request window on the trader workstations
provided by the exchanges for all open positions for a commodity for all constituents
individually. Exchanges on receipt of such information match the information and arrive
at a delivery position for a member for a commodity. The seller intending to make delivery
takes the commodities to the designated warehouse. These commodities have to be assayed
by the exchange specified assayer. The commodities have to meet the contract specifications
with allowed variances. If the commodities meet the specifications, the warehouse accepts
them. Warehouse then ensures that the receipts get updated in the depository system giving
a credit in the depositor’s electronic account. The seller then gives the invoice to his clearing
member, who would courier the same to the buyer’s clearing member. On an appointed
date, 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 agricultural
commodity production system and serving as a platform for discovering market prices in
the recent past. Here farmers selling a future contract and committed to deliver their produce
at 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 of
trading the future prices are viewed as bench mark for farmers as well as to traders. They
support 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 price
realization.
At what circumstances the future trading will be advantageous?
Some of the occasion the futures will advantageous to the stake holders of the
system. 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 such
commodities. This kind of issues greately supported by futures trading, by
helping even out prices of seasonal commodities through the year.
• This trading system also helps in deciding the level of farm diversification. Being
market driven, futures trading help growers in their diversification decision.
Commodities that have a good market value are traded on the futures market and
farmers with fair knowledge on this perspective can decide on diversifying their
farm as per the market demand.
• The price of a certain crop fluctuates; it is a win-win situation for a farmer as he
can hedge his risk in futures platform.
• The organized and unorganized retailers at the delivery end would use this
platform 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 knowledge
and empowerment on futures trading to farmers will help them to get better prices for the
produce. The periodical monitoring of market intelligence reports and advisory from the
credible 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 the
government of India introduced commodity futures trading in India through commodity
exchanges. A commodity exchange is an association or a company or any other body
corporate that is organizing futures trading in commodities. The members of Exchanges
are 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 Trade
Association Ltd.” in 1875. The consequent gradual trade and industry liberalization in
both the domestic and external sectors emphasized the need for futures trading and on
1.4.2003 the Government permitted futures trading in the commodities. The national
commodity 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, Chicago
Board of Trade, New York Board of Trade, Chicago Mercantile Exchange and London
Metal Exchange. Exchange transactions involve trading, clearing and settlement. To start
trading the participant has to create trading account in exchange and has to place the trades
at broker terminals. The exchanges undertake the pay in and pay out of trades executed.
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades
executed on the exchanges. At last the contracts are settled. Finally an orientation of futures
trading 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 agricultural
produce would create uncertainty and risks, which could hamper the performance of the
agricultural 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 poverty
alleviation. Therefore understanding agricultural risks and the ways for managing it
becomes important. Price volatility is perhaps the most pressing issue facing the producers
of primary commodities. Agricultural production implies an expected outcome or yield
to 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 basically
the risk that returns from the investment in physical agricultural goods or commodities
will 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 well
known that agricultural prices vary from month to month and year to year. However, if the
variation were predictable, farmers would face no price risk. There are many numbers of
risks that are associated with the agricultural commodities, especially at the production,
storage, transport, marketing and processing stages. Hence it becomes important to identify
the 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 to
production variations are magnified in price variations. Agricultural production risks may
be due to those arising out of weather related factors, pests or diseases, farm and
management practices, genetics, machinery efficiency, quality of inputs and also due to
risks from variable prices.
b. Financial or Credit Risk
Farm credit has always been an important factor in improving agricultural
productivity and strengthening the rural economy. However, complicated operational
mechanism of farm credit services, high transaction costs, uncomfortable repayment
schedules, 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 profound
impact on the prices. The government intervention sometimes instead of protecting may
result in distortion of trade, as it does not let the natural market forces of supply and
demand in identifying the prices.
Eg. Reform measures like restriction on storage and movement of produces, direct
price support measures, subsidies etc.
d. Market linked Risks
In a developing economy like India, wild swings in market prices due to supply and
demand factors arise due to nascent nature of such markets. Lack of participation, non-
availability or low dissemination of market information, infrastructure bottlenecks, market
structure 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 get
some 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 expectation
of price fall in the season and adequate price rise later. However financial resources
and storage space are required which may limit the scope of this kind of risk
management.
c. Diversification – It is the combining of different production processes so that low income
in one will be compensate by higher income from other enterprises. It can include
growing of different crops or different types of the same crop, mixed farming with
combining 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 money
lenders. If collateral is insisted on advancing of the loan then this measure may not be
feasible 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 to
obtaining 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 against
the natural perils. Eg. Insuring the Paddy crops under modified NAIS as loanee farmer
as well as non loanee farmers
g. Hedging in futures
Here the risk averse producers can buy protection from the risk taking speculators
looking for profit.It involves establishing a position in the futures market that is equal
and 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 Hedging
Hedging 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 objective
of transferring cash price risk.
What it means?
• Taking a position in the futures market that is opposite to a position in the physical
market (i.e. buying in futures markets the quantity soldi n spot markets and
vice versa, thus offsetting any loss attained in one market by a gain in the other
market)
• 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 gain
in another
• A temporary substitution of futures market transaction for a planned cash market
transaction 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 of
price changes remains unchanged
2. The mechanics of hedging includes the making of simultaneous transaction, but of
opposite Nature, in the futures and cash markets.
Who could be the Hedgers?
Hedgers could be Government institutions, private corporations like financial
institutions, trading companies and even other participants in the value chain, for instance
farmers, 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 trade
profit
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b. Hedging enables him to keeep the trade margins at a lower level to casue there is
no risk
c. It facilitates the financing of inventories of stored commodities to the maximum
possible 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 asset
underlying the futures contract.
• Often the hedgemay require the futures contract to be closed out well before its
expiration date. This could result in an imperfect hedge.
• The expiration date of the hedge may be later than the delivery date of the futures
contract. When this happens, the hedger would be required to close out the futures
contracts entered into andtake the same position in futures contracts with a later
delivery date. This is called a rollover.
• Hedgescan be rolled forward many times. However, multiple rollovers could lead
to 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 pressing
issue facing the producers of primary commodities. The different causes of price risks are
production risks, financial risks, institutional risks, and market-linked risks. There are
different methods for handling price risks. One among them is hedging in futures. Hedging
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 objective of transferring cash
price 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 that
requires a short position in futures contracts. It is appropriate when the hedger already
owns 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 processors
etc, who have taken or will be taking an exposure in the physical market. Cross hedging is
the 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 crop
insurance(14%) all other have got very negligible out reach. Hence , there is great challenges
are rest on the extension machinery to diffuse these tools with an element of educating the
pros and cons. Since these tools are to be handled with expert guidance only, our role will
be more important. Therefore great care should be taken before advocating this knowledge
to the farmers.
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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 futures
trading
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 futures
trading
4.1 Introduction to Warehouses and Warehousing
The production of most of the agricultural goods is seasonal, though their
consumption takes place throughout the year. This phenomenon has led to the growth of
warehousing concept where goods are physically stored till the time of consumption or
sales. The warehousing concept has assumed immense importance after the recent
developments in the market like increase in futures trading at the exchanges, increased
role of banks and other institutions in agricultural trading in the context of liberalization of
the Indian markets in the WTO regime.
A warehouse is a location with adequate facilities where volume shipment are received
from a production center, broken down, reassembled into combinations representing a
particular order or orders, and shipped to the customer’s location or locations. In other
words a warehouse is a scientifically designed storage structure technically designed to
protect the quality and quantity of the stored produce.
Warehousing may be defined as a function, which involves assuming the
responsibility for quality and quantity of the stored goods in the warehouses. Thus
warehousing involves the technical aspects related to designing safe and sound structures
as per the type of goods to be stored and the prevailing conditions around the storage
structures. Warehousing also involves having the knowledge of safekeeping of grains while
they are inside the warehouses through techniques like fumigation and record keeping
related 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 the
material 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 safe
collaterals 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 to
the farmers and the traders to store the produce when the prices are too low. They also
sometimes 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 food
grains, fertilizers, etc. Special Commodity Warehouses: These are warehouses, which are
specially constructed forthe storage of specific commodities like cotton, tobacco, wool and
petroleum products.
1. Refrigerated Warehouses/Cold Storages: These are warehouses in which low
temperature is
Private warehouses: These are owned by individuals, large business houses or
wholesalers for the storage of their own stocks. They also store the products of others for a
rent.
Public warehouses: These are the warehouses, which are owned by the government
and are meant for the storage of goods. In India, Central Warehousing Corporation (CWC)
and State Warehousing Corporations (SWC) are the government organizations, which have
the 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 and
reliable storage facilities for about 120 agricultural and industrial commodities.
Separate warehousing corporations have been also set up in different States of the
Indian Union. The areas of operation of the State Warehousing Corporations are centers of
district importance. The total share capital of the State Warehousing Corporations is
contributed equally by the concerned State Govt. and the Central Warehousing Corporation.
Apart from CWC and SWCs, the Food Corporation of India has also created storage
facilities. The Food Corporation of India is the single largest agency which as a capacity of
25.2 million tons. maintained as per requirements and are meant for such perishable
commodities 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 an
airport and accept imported goods for storage till the payment of customs by the importer
of goods. These warehouses are licensed by the government for this purpose. The goods
stored 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 experts
in commodity trading and there is a need to create further investment in the sector. The 11
th plan says that a further capacity of 35 million tons should be created in the Warehousing
sector.
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4.4 Warehouse Receipt
A warehouse receipt is simply a document stating the ownership of a commodity. It
is a warrant issued by the warehouse to the person depositing the goods/produce in the
warehouse 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 certification
of the stored goods. The warehouse receipt can perform various functions. It converts
agricultural produce or other inventory to a tradable warrant, which can be sold or used to
raise a loan and even used for delivery against a derivative instrument like futures contract.
Different banks have different guidelines for providing loans against the stored
produce. The amount of loan advanced depends on the market price, minimum support
price and the guidelines issued by the bank. The interest charged also depends on the
norms of the bank for that type of commodity. The other charges may involve collateral
management charges and other fixed charges as stipulated by the banks. By and large
there are two systems prevalent:
1. Hypothecation/Pledge of stocks
This system is prevalent mostly for the small private warehouses where the entire
warehouse is occupied with material belonging to a single entity. The material deposited
in the warehouse is pledged /Hypothecated as security. Once the loan is repaid after
negotiations 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 Private
gowdons/ private licensed warehouses. These receipts are issued by collateral managers
of an agency known to the bank who will have control over the commodity by lock-key
method. In this way, the bank finances the depositor only if the collateral manager approves
the 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 warehouse
receipt issued by the warehouse. The warehouse receipt duly endorsed in favor of the
Bank is to be deposited at the bank and the material is released once the bank receives the
payment 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 lending
norms 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 the
agricultural sector. The Planning Commission has also recently reinforced its commitment
to double the farm sector’s growth from a low 2% per annum to 4% a year during the 11th
Five Year Plan. The government is now keen to break the logjam of low production and
productivity of the farming sector by beefing up infrastructure and irrigation sectors
simultaneously. Therefore, in the near future agricultural commodities will flow more
steadily from farms. The management of these commodities will prove to be both a challenge
and 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 loan
advanced. It may be defined as a third-party commitment accepted by the collateral taker
to secure an obligation of the collateral provider. In the context of warehouse based
financing, the obligation is the amount lent and the collateral is the goods stored. The need
of collateral is intended to protect against performance risk of counter party i.e. the risk of
non-repayment of loan. Collateral Management involves managing the collateral on behalf
of the collateral taker. The collateral is the only security, which provides protection against
the financing done by the financial institution in case of warehouse financing; collateral
management has developed into a highly specialized technique. Collateral management
basically involves management of risk associated with maintaining the value of the
collateral. It therefore is associated not only with physically maintaining the quality and
quantity of the stored products in the warehouses but also mitigating risks associated
with 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 and
quantity of the collateral.
2. Testing and Certification
Timely testing helps to mitigate the quality risks that are ever-present in the
commodities.
3. Market Intelligence for Price Risk Management
Development of price prediction models based on information on spot and futures
prices, 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 options
trading at the national and international commodity exchanges.
5. Developing Market Linkages
Prefixed buying and selling arrangements between buyers and sellers is also a very
useful 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 to
commodity exchanges. Collateral management ensures efficient and risk-free physical
delivery systems. In the recent past we have seen increased integration of collateral
management and commodity exchanges.
Companies like National Bulk Handling Corporation (NBHC) and National Collateral
Management Services Limited (NCMSL) have developed as specialized agencies, which
provide 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 the
efficiency ofsettlement of trades on stock exchanges and improving settlement efficiency.
The concept involves holding shares in electronic form with a depository and transacting
the same on-line without any signatures. With the increase in activity in the commodities
futures market and establishment of national level screen-based multi-commodities
exchanges, need for an efficient settlement system in that market is felt. Broadly, a
commodity futures contract may be settled either by cash or by delivery of the commodity
depending 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 clearing
house of the commodity exchange will receive warehouse receipts from the seller instead
of actual commodities and pass such warehouse receipts over to the buyer. In case of
national commodity exchanges, buyers and sellers could operate from different parts of
the country and if warehouse receipts are in physical form, the warehouse receipts have to
be delivered across the country from the seller to the buyer, which could lead to systemic
inefficiencies. Either the original depositor or the holder in due course (transferee) can
claim the commodities from the warehouse for negotiable warehouse receipts. Warehouse
receipts 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 to
transfer 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 NSDL
and CDSL exchanges have worked out a scheme to extend depository services for settling
trades in commodity futures. Investors trading in commodity futures may avail depository
services for receiving and delivering warehouse receipts. A demat account for commodities
has to be opened with empanelled DPs (Depository Participants).
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Warehouses, that have entered into an agreement with depositories and commodity
exchanges, can issue depository eligible warehouse receipts. For example, NSDL has
agreements with two multi-commodity exchanges viz., National Commodity & Derivatives
Exchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX) and
few warehouses that hold designated commodities in their custody. The warehouse receipts
in demat form can be used to give delivery and also physical delivery of goods can be
obtained against warehouse receipts credited in the demat account, through prescribed
procedures. In fact the smooth functioning of commodity exchanges is enabled through
electronic warehouse receipts increasing the association between the warehousing and
futures 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 futures
market
d) Better information on crop fundamentals like stock positions helps to reduce risk
of excess volatility in prices
Extension Professional: How to use this Knowledge?
Having studied the Warehouse and warehouse receipts advantages, as extension
personnel, 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 received
from a production center, broken down, reassembled into combinations representing a
particular 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 the
type of goods to be stored and the prevailing. conditions around the storage structures as
well as knowledge of safekeeping of grains while they are inside the warehouses through
techniques like fumigation and record keeping. Warehouses are classified according to
type of commodities stored as General Warehouses, Special purpose Warehouses and
Cold storages. On the basis of ownership they could be Private or Public or Bonded
Warehouses.
A warehouse receipt is a document stating the ownership of commodity. It specifies
the quantity, quality and grade of produce stored, warehouse location, storage fee and
other details.
The warehouse receipt can perform various functions. As it converts agricultural
produce or other inventory to a tradable warrant, which can be sold or used to raise a loan
and even used for delivery against a derivative instrument like futures contract.
The Term Collateral Management refers to a third-party commitment accepted by
the collateral taker to secure an obligation of the collateral provider. Thus, collateral is the
security, which provides protection against the financing done by the financial institution.
Collateral management basically involves management of risk associated with maintaining
the value of the collateral and deals with aspects like Storage and Preservation,, Testing
and Certification and other aspects related to price risk management of commodities serving
as collateral. Negotiable warehouse receipts can be traded, sold, swapped, used as collateral
to support borrowing, or accepted for delivery against a derivative instrument such as a
futures contract. The Warehousing (Development and Regulation) Bill, 2005, which has
been passed in the Parliament in early 2007 has features that would create a regulatory
framework for making the warehouse receipts fully negotiable.
Negotiable warehouse receipts have many advantages such as low risk for the banker
and high credibility apart from efficient usage in delivery against a futures contract. Recent
advancements in dematerialization of Warehouse Receipts i.e. Holding Warehouse Receipts
in Electronic Form has solved problems of splitting the warehouse receipt, high risk of
losing the document and the risk of forgery. This has brought greater integration between
warehousing and futures trading. Later we have also seen the relevance and importaance
of WRDA in agriculture.
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Business Laws and Ethics Course -202
166
AEM- 202
Agri-Business and Entrepreneurship Development
(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
Business Laws and Ethics
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Unit- 1
Business Laws and Ethics
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 growing
divergence bettween the two
• To review business opportunities and laws governing them in India
• To survey the prevailing notions about the mutual exclusiveness of ethics and
business
• To review the thoughts of Indian Gurus and Western Scholars about ethics and
business
• To highlight important elements of business ethicso know about the codes of
conduct for business executives and theiresponsibilities ofmanagement boards
in 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 and
ethics. It has to be followed even in our life as well as in the business. The social
responsibility of individual of any profession has to observe a minimum code of conduct
and moral and ethics. In the absence of such moral and ethics the role of law and legislation
has take its course of action. Any entrepreneur who engaged in agribusiness also follow
moral and ethics in every activities of business venture. He has the social responsibility to
augument good inputs to produce quality outputs with a reasonable margin.
1.1 Introduction
• Ethics encompasses the larger domain of human behavior. There are three main
Western Perspectives on human behavior while doing a business activityare:
• Extols the virtues ofjustice, charity and generosity to act in a way that benefits
both the person possessing thosedispositions and the society he relates to.
• Makes the concept of duty central tomorality, encoding the principle of mutual
respect in all relationships and dealings.
• All conduct should be guided by the principle of greatest happiness or the benefitto
the greatest number.
• According to Milton Friedman ‘it is socially irresponsible and economically
damaging for business to be concerned with anything but business results
• While the objective of a business is to maximize profits and returns to shareholders
money, ethics are perceived to be benevolence, charity and social responsibility.
• However, the holistic meaning of ethics is much wider and covers the entire gamut
of business operations carried out in a transparent manner following some
principles. Ethical practices are deeply embedded in business plans and form the
core 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 good
reasons for the same. Some of the major facts about India, which may seem amazing to
some 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 of
dishonesty 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 the
ethical 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 liquid
or gas, to save his profits, Standard norms: These are widely accepted and adopted without
violation. 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 for
such specific morms. Unlearn to accept unethical practices: Learn to say ‘NO’, even if it is
the 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 themselves
congruence 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 been
evolved.
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1. Legal framework: Laws are created to help society function. One has to consider
whether the action he is contemplating is legal.
2. Rules and Procedures: Companies create specific policies and procedures to help
the business function appropriately to run successful ly and avoid problems.
3. Principles: These social doctrines help create society’s laws and a company’s
policies and procedures. In turn, laws and policies reinforce values.
4. Sense of Right and Wrong: This internal sense of right and wrong develops from
an early age. Your conscience recognizes certain principles that lead to feelings of
guilt if you violate the principles.
5. Trust and Commitment: Business is based upon trust. It is believed that what is
stated 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 role
model. 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 for
your 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 sexual
harassment.
• 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 them
with responsibillity.
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• It is unethical to give false information to the employer or other government
agencies.
• Senior executives should not take advantage of juniors for doing their personal
work.
1.6 Let us Sum Up
This module highlights the growing divergence between business and ethics in the
introductory part. Modern day business and young managers are guided by the principle
of maximizing efficiency and profits with very little concern for ethical values. In India
business is regulated by a large number of legislations. But despite so manylaws, instances
of scams and dishonest practices hit the press every day, making one wonderwhat
ishappening to business ethics. The three pillars of business ethics arethen summarized in
the form of three R’s: Respect, Responsibility, and Results, and some of the importantbasic
ethics and values are listed. Then, Seven Parameters of ethical conduct are discussed. The
codes ofconduct that should be followed by the business executives are enumerated. This
unit also prescribes a moral code of conduct for the manager of today’s business followed
by Stephen Covey’s Seven Steps to be an effective manager are listed.
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173
Unit- 2
Indian Contract Act, 1872
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 becomes
a 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 of
the agency.
2.1 Introduction
In the present commercial world we find commercial transactions taking place every
second. These include trading in goods, supply of material, service contracts etc. On account
of volume of contract being done daily, it was proposed to make an enactment which shall
bind 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 is
enforceable under the Law. Law of the contracts regulates the actions of parties to the
contract. Contract Act is not exhaustive as it only regulates the freedom of contracting
parties for the smooth functioning of commercial transactions. In the module we shall find
definitions to the various terms as per the Indian Contract Act, 1872. Along with the
definitions the module also covers the different doctrines, which explain the rights between
parties 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 is
an agreement.
Void Agreement: Any agreement, which is not enforceable under court of law, is a void
agreement. From the above definition of the contract and the agreement, we can very well
presume 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 a
valid 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 void
contract.
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Voidable Contract: When any agreement is enforceable upon the option of one or more
parties thereto but not at the option of other or others then such contract is called voidable
contract.
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 basic
requirement, as by arriving at the contract, both the parties must achieve a common
objective.
3. There must be intention between the parties to the contract to create a legal
relationship 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 free
consent 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 and
must not be illegal or opposed to public policy
8. An agreement, which is proposed to be entered between parties, must not be
expressly declared as void under any provisions of the Act or any other law, which
is presently under existence.
9. In case of certain contracts, if the law requires them to be in writing or for entering
any contract if registration is mandatory, then such contracts are enforceable only
upon 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 the
other 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 by
one person
• Made to the other person with a view to seek his positive response to do or abstain
from doing any act
• In the above cases, person can be a natural person or an artificial person such as
company etc.
• Offer can be a specific offer made to a particular person or persons or it can be a
general offer made to a larger community.
• Offer can be an express offer by use of words or written offer or implied by the
conduct 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 a
standard 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 of
Tea ,then it amounts to invitation to offer and not the offer by the company. It is only
expression of desire of the company to conduct auction sale. In case the person participates
in the auction sale of the company and bids for a product then it amounts to offer from the
side of the person to the company.
Acceptance
As per section 2(b) of the Act, when the person to whom the offer is made, signifies
his assent to the offer, then the proposal is said to be accepted. A proposal when accepted
shall 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 in
the 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 contract
in 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 and
to 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 insolvency
proceedings 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 from
doing 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 thing
and 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 other
person 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 is
called 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 the
promisee
Doctrine of privity of contract
As per this doctrine only parties who are in agreement to the contract have the right
to 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 between
them, which gives advantage to one party over the other and creates obligation on the first
party to transfer such benefits to the other. Justification of the law: Fundamental justification
of the quasi contract is that one person cannot have unjust enrichment at the cost of the
other. If one party gets such unfair advantage over the other then the law does not allow to
enrich at the cost of the other.
Example: If A purchases goods from B and B on account of a mistake delivers such
goods to C instead of A and C accepts such goods from B then there exists Quasi contract
between B and the C. C is responsible to B to account for the sale consideration of goods
received.
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 lapse
of reasonable time. On account of occurrence of any event which makes
performance of the contract impossible
• By breach of terms of the contract by one party to the contract. Such breach can be
the 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 caused
to 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 liability
of the third person in case of default.
• In case of contract of guarantee there shall be three parties, a debtor, a creditor and
a guarantor.
Contingent Contract
A contingent contract is a contract to do or not to do something in event of
occurrence of some uncertain future event.
Examples: a) Insurance Contracts where insurance company insures the insured
to safeguard him and his family from the occurrence of some uncertain future
event.
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 otherwise
disposed of according to the direction of the person delivering them.
Person who delivers goods is called bailor and the person to whom the goods are
delivered 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 special
nature of his goods.
• To indemnify the bailee for the loss occurred to him on account of his goods or on
account 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 any
contract is called pledge. In this case, bailor is called pawnor and bailee is called
pawnee.
2.12 Let us Sum Up
• In the above module we have started with the need for a separate legislation and
then we have understood what is a contract. We defined some topics in the Act
and then we went on to understand the difference between a contract and an
agreement.
• We have understood the essentials of the valid contract and we have discussed
each topic in detail.
• First we have understood principles underlying in the Offer and Acceptance in
the contract.
• We have also discussed on competent persons of the contract and we have studied
contracts 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 understood
rules 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 and
discussed about contracts, which are expressly declared to be void.
• We have understood about the breach of the contract and remedies for the breach
of the contract.
• We then came to special contracts such as, Quasi Contracts, Bailment, Pledge, and
rules governing the agency
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Unit - 3
Sale of Goods Act, 1930
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 legislation
was 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 sale
intends to take place and when the property in goods passes from the seller to
buyer.
• The rights of the aggrieved part on the breach of contract of sale by any person
and 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, goods
shall form the subject matter of the contract. However, under this Act, only transactions
pertaining to movable properties are covered. Transactions pertaining to immovable
properties are outside the scope of the Act. On account of numerous day-to-day commercial
transactions involving goods it was sought to have a separate legislation on such
transactions 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 or
agrees 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 than
money and actionable claims, including shares, stock, growing crops and things
attached to or forming part of land which are agreed to be severed before sale or
under the contract of sale.
Agreement to Sell: An agreement wherein the seller intends to transfer ownership
of goods for a consideration is called agreement to sell and when the seller actually
transfers the ownership then it is called a sale. Under sale, ownership of goods
passes from a seller to a buyer and in agreement to sell there is no such transfer of
ownership.
Hire-Purchase Contract: Hire purchase contract is a contract wherein one person
transfers goods to another for hire charges. There is no transfer of ownership in
goods.
Eg. Hiring of Tractor and other machinery for Paddy culltivation from the service
provider Price at which, goods are transferred by one person to another is called
consideration 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 of
the contract, which are in physical possession of the person at the time of entering
of the contract.
Existing goods can be specific goods or un-ascertained goods. Specific goods are
the goods, which are identified at the time of sale and in case goods are not identified
at the time of sale then they are called un-ascertained goods. Eg. Harvested
produce 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 or
occurrence of contingency are called contingent goods.
Destruction of Goods
If goods forming the subject matter of the contract are destroyed after the transfer of
ownership 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 breach
of which gives the other party to repudiate the contract.
Example: Papain Processing Company (A) enters a contract with group of Papaya
growers ( B )for supply of goods suitable for any specified manufacturing activity. If the
goods supplied by papayin growers (B) are not suitable for such activity then A can
repudiate 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 to
deliver the car after making necessary repairs. If B delivers the car without making such
repairs and A is liable to incur after the said car is purchased then B is liable to make good
the repair charges incurred by A. Conditions and warranties can be expressed in the
contract or can be implied.Express conditions and warranties are those conditions having
a degree of significance in them. Implied conditions and warranties are those conditions
which are required to be complied in respect of goods, depending upon the nature of the
goods unless any contrary in this regard is mentioned in the contract. The following are
the 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 description
then 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 samples
are distributed in respect of such goods, then the goods must correspond to the goods
issued 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. Condition
as 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 knowing
about the same.
If the above conditions are satisfied then goods supplied by the seller are supposed
to be fit forthe purpose of the buyer’s use.
Conditions as to merchantability – There arises implied condition on the seller that
goods 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 means
that the buyer is responsible for his fault in identifying damages in the goods if such
damages can be found easily or are apparent from such goods when the buyer has been
given 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 description
then 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 samples
are distributed in respect of such goods then the goods must correspond to the goods
issued 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 knowing
about the same.
If the above conditions are satisfied then goods supplied by the seller are supposed
to be fit for the purpose of the buyer’s use.Conditions as to merchantability – There arises
implied condition on the seller that goods produced by him must posses the basic qualities
for which they are known.
• Where seller is guilty of fraud or misrepresentation then this doctrine shall not
apply.
• In case of express condition pertaining to quality and content made by the seller
then 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 than
the owner himself. If any person who does not own ownership in particular goods sells
them, 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 the
contract or by the court.
3.7 Auction Sale
An auction sale is a public sale of goods through the process of open bidding by the
prospective buyers of the goods. An advanced method of auction ie e-auction is being
carried out for cardomum, facilitated by the Spice board, Kochi Following are the rules
for 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 the
hammer (or) in any customary manner. Bidder has the right to call off the bid before
the 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 safeguard
themselves 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 requirement
of separate legislation for the act. We have also discussed the scope of the legislation. We
have 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 a
sale and the agreement to sell under the provisions of the Act.We have also discussed the
express 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 a
seller to a buyer under this Act We have then discussed about the doctrine of Caveat Emptor
and its exceptions and further we have also discussed Nemo dat quad non habet and
exceptions to the same. We have discussed on sale on approval basis and when the sale is
deemed to have concluded in such cases. We have discussed performance of contract by
the parties and discussed about the remedies available to the unpaid seller and his right of
lien on goods. We also discussed about the case breach of duties by the seller and remedies
available to the buyer in this regard. We have concluded the topic with the auction sale
and 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 features
of the company; the different types and categories of companies and their nature.
• Understand how the company is incorporated, the powers and the limitations of
the company and the liability of its members and its directors on account of the
acts of the company.
• Understand how the capital of the company is raised and about the ownership
and control of the company
• Understand how decisions are taken on behalf of the company and how meetings
of 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 in
commrcial transactions, formation of companies has become mandatory and company law
was established to govern the acts of the companies. Now in India, Companies Act, 1956,
governs all companies. Unlike partnership, company shall come into existence on
registration. We shall conclude this module with the corporate governance and duty, which
it 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 under
the provisions of this act. Existing company means any company, which was formed before
the enactment of Companies Act, 1956. A company is an association of many persons who
contribute money or money’s worth to a common stock and is employed in some trade or
business and who share profits and losses among themselves. Common stock is denoted
as 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 are
executedby its board of directors as its agents.
(c) Separate legal entity: A company has a separate legal entity separate from its
members. It has the power to own a particular property and has power to be liable
or borrow money from others. Company has legal entity separate from its
promoter.
Example: Separate legal entity of the company can be well understood from a famous
case Salmon vs. Salmon & co ltd. Salmon is a shoe merchant having his own business. He
converted 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 £10000
was 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 he
should have the first right on the money received out of the sale of assets. Creditors of the
company claimed that both Salmon and Salmon & co ltd are one and the same and that
Salmon 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 and
in 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 business
beyond 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 can
make 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 called
statutory companies.
Ex: Life insurance Corporation of India & Food Corporation of India, Agricultural
Insurance company Registered companies: Companies, which are registered under
Company’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 having
subscribed 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 company
or the past employees of the company who subscribe for company’s shares while
they 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 than
members, 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 of
the 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 shall
run with the guarantee given by members of the company. It shall call for such sums upon
the liquidation of the company and liability of such members shall be limited to guarantee
given 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 is
more than the unpaid value of shares, if any, held by them. Unless the company’s articles
expressly 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 subsidiary
company 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 a
company 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 formed
for promotion of sports or one of an art or of commerce. Such a company does not distribute
excess of income generated over expenditure but applies the same for furtherance of its
objective. 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 share
capital is owned by the central government or state government or any other company
owned by the central or state government. (Sec. 617)
3. Foreign companies
Foreign companies means any company incorporated outside India according to the
laws 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 and
continues 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 powers
then 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 business
by virtue of memorandum of the company. If the company does not have the power to do
such transaction then they cannot proceed against the company for any loss they have
incurred on account of such a transaction.
Articles of the company
Articles of association of the company frame the internal rules of conduct within the
company. They are drafted keeping in mind the memorandum and the provisions of the
company’s act, 1956. For a private limited company articles of association is compulsory
and must have the restrictions as to the maximum number of members, transfer of shares
etc. Public limited company may adopt articles which are contained in table A of schedule
I to this Act.
Section 28 to 30 of the companies act, governs the provisions with regard to form and
contracts 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 in
accordance with the listing agreement with any of stock exchanges where the shares of the
company 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 is
reserved for storage of funds in the hands of the company to pay off its liabilities incase of
liquidation 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 shareholders
are entitled to have dividend only after satisfying claims of creditors, financiers and
preference shareholders. At the time of liquidation, equity shareholders shall be paid last
after 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 hostile
takeovers.
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 dividends
and 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 perform
their duties, obligations and responsibilities diligently and act in the best interests of the
company. They must be made accountable to the shareholders and other beneficiaries of
the company.
Corporate governance is concerned with establishing a system whereby directors are
entrusted 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 the
company. Effective corporate governance shall provide mechanism for regulating duties
of the directors and restraining them from abuse of the powers and act in the best interests
of the company. Corporate governance is also concerned with the ethics, values and morals
of the company and its directors. Corporate governance is mandatory for all listed
companies. It discusses about
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• Composition of the board, independent directors in the board and non-executive
directors in the board
Constitution of audit committee and manner in which it meetings are held and its
reports to be discussed. It also defines the powers, rights of the audit committee
etc.
• Disclosure of compensation structure of the management
• Disclosure of contingent liabilities of the company
• Requires Management discussion and analysis report about the performance and
the operations of the company to be annexed with annual report to the shareholders.
• Details of new management personnel appointments with their qualification and
their remuneration package
• Requirement of the period wherein annual report to be prepared and tabled to
the 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 of
companies and their nature. We have learnt about the separate legal entity status to the
company, which enables a company to own properties on its own and incur liabilities for
carrying out its operations. Ownership in the company rests in the shareholders but control
of management of the company is vested on the board of the company. We have understood
how the memorandum defines the scope of powers of the company and how its articles
regulate the internal management of the company. We have also understood as to how the
capital of the company is raised and different kinds of capital of the company. Decisions of
the company are taken in either board or in shareholders meeting and based on requisite
majority, resolution is passed. We have concluded the module by understanding corporate
governance and the duty of the directors to act in good faith in exercise of functions in the
conduct of management of the company.
Negotiable Instrument Act, 1881
199
Unit- 5
Negotiable Instrument Act, 1881
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, what
are the requirements of negotiable instruments; and also understand the special
features of negotiable instruments.
• Necessity of the negotiable instrument in the modern day world; parties to
negotiable instrument and rights and liabilities of the parties of the instrument
and 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 exchange
apart from money have been evaluated such as bills of exchange, hundi, cheques, bank
drafts etc. These documents are substituting money as a medium of exchange. On account
of these changes, a law to govern these transactions was proposed and the Negotiable
Instrument Act, 1881 was enacted. Hereinafter for this module the Negotiable Instrument
Act, 1881 is referred to as Act. The module is supported by examples in order to explain
the 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 either
to 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 value
then even if the transferor of the same has defect in it shall be entitled to enforce in
court 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 unconditional
promise, signed by the maker to pay a certain sum of money to, or to the order of a certain
person or to the bearer of the instrument.
Negotiable Instrument Act, 1881
201
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 after
date, 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 certain
sum of money to pay a certain sum of money only to or to the order of a certain person or
to 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 the
bill.
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 only
for 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
Negotiable Instrument Act, 1881
203
Only the Bill can be dishonored by non-acceptance.
Dishonor by Non-payment: A promissory note or bill of exchange is said to be
dishonored when the maker of the note and acceptor of the bill defaults in making payment
to the holder of the bill. Effect of the Dishonor: When a negotiable instrument gets
dishonored, then the holder in due course has the right to sue the maker of the note and the
cheque, acceptor of the bill, maker of the bill, all prior indorses to the instrument. All such
parties 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 with
regard to dishonor of the instrument to the person liable on account of dishonor
of the instrument. It acts as a warning to the other person and also prepares the
other 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 remains
liable and the other party shall, further in reasonable time, communicate to all
prior parties.
c) Notice must be in writing or by word of mouth. If the notice is in writing than it
must 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 unconditionally
the 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 are
discharged from being liable under the Act unless the notice is not required to be
served 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, which
can be en-cashed at the counter. In case of crossed cheques, the holder has to deposit cheques
in his bank account and the bank shall collect money in his account. Crossing of cheques
safeguards the holder against the cheque being mis-utilized by any other person A cheque
is said to be crossed when two parallel lines are drawn across with or without the mention
of words.
Types of crossing
a) General Crossing: This is a normal crossing with or without mentioning any words
thereon.
b) Special Crossing: Under special crossing between the lines the name of the
collecting 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 not
negotiable then the holder of cheque shall not have better title against the person
from 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 payee
only 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 the
cheque refuses to make the payment. The banker shall refuse to make payment either on
account of insufficient funds in the account of the drawer or for any technical reasons The
drawer of the cheque whose bank has rightfully dishonored the cheque for insufficient
funds 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
Negotiable Instrument Act, 1881
205
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 within
30 days from the date of dishonor, the holder of the cheque has sent a notice to him in
writing and the drawer has failed to make payment within 15 days from receipt of such
notice.
5.8 Let us Sum Up
We started this topic with an introduction to negotiable instruments and requirement
of having separate enactment for the same. We then defined the various terms. We have
understood the types of negotiable instruments and their essential features. We have then
studied the parties to the instrument and their rights and liabilities individually towards
the other parties to the instrument. We have studied about the Holder-in due course and
his rights against the other parties to the negotiable instrument. We studied as to how the
instrument needs to be presented and the circumstances when the instrument gets
dishonored and remedies of aggrieved parties on dishonor of the instrument; noting
and protest and the manner in which they are done. We then have studied about the
discharge of the instrument and modes of discharge of the instrument; cheques, crossing
of cheques and concluded with the bouncing of cheques and remedies on the same.
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Unit- 6
The Essential Commodities Act, 1955 and
Agribusiness 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 and
Entrepreneurship
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 commodities
of daily usage i.e. Essential Commodities Act.
The Essential Commodities Act, 1955
207
• Significance of the legislation to regulate the production, supply, sale, distribution
etc. of essential commodities.
• How the government regulates the production, distribution and black marketing
in 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 contravention
of the act and
• The relief available to the aggrieved persons against the orders of the Central
Government or any officer authorized by the government
6.1 Introduction
The Essential Commodities Act, 1955 is an important legislation in the interest of the
general public for the control and regulation of production, sale, supply, distribution of
and trade and commerce in certain commodities, increase supply of those commodities in
the market and ensure than those commodities are available at reasonable prices. The
object of the enactment is to secure fair and equitable distribution of essential commodities
at fair prices to the public and punish hoarding and black marketing in essential
commodities. For all purposes Essential Commodities Act is hereinafter referred to as Act
in this Unit.
6.2 Definitions
Collector: Collector includes an additional collector and such other person not below
the rank of sub- divisional officer as may be authorized by the collector to perform functions
and 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 order
declares 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 or
powder 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 essential
commodities or for securing equitable distribution of goods or to secure availability of
goods for defense of India or for any other military purposes, may by order regulate or
prohibit 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 essential
commodity
b) Bring under cultivation waste or arable land for growing food crops and thereby
increase 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.
The Essential Commodities Act, 1955
209
e) Prohibit withholding of sale of any essential commodity
f) Require any person holding stock of essential commodity or is engaged in the
business 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 any
specified part of quantity likely to be held or produced,
To central government or state government or any officer or agent of such
government or to any corporation owned or controlled by such government or to
such class or classes of person as specified by such Government.
g) Regulate or prohibit any class of commercial or financial transaction relating to
food stuffs Or cotton textiles, which are in the opinion of government detrimental
to 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 such
commodity to maintain such books of accounts and produce the same for
inspection and shall pro-vide such information
• Levy such sum as may be prescribed as fee for licenses, permits etc and shall ask
to deposit such sum as may be prescribed to the people engaged with essential
commodity.
j) For any other incidental or supplementary matters. Government has the power to
initiate Search, examination and inspection of premises of any person and shall
authorize an Officer to conduct search, examination and inspection of and
subsequent seizure of:
• Articles or the commodities in respect of which authorized person has reason to
believe that contravention with respect to provisions of the act has taken place
• Vessels, aircraft, vehicles etc or any other conveyance used to carry commodities
in respect of which contravention has taken place.
• Of any books of accounts and documents which give sufficient proof of such
contravention and is authorized to take copies of such books of accounts and
documents.
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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 prevent
raising of prices, or to prevent hoarding and black marketing of goods it shall by notification
in official gazette order that such goods shall be sold to the government.
6.5 Manner of fixation of prices on compulsory acquisition by
government
Where any person is required by virtue of order to sell any goods to the central
government, 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 to
controlled price.
• When both the above conditions are not satisfied then at the market price prevailing
with 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 or
agent appointed by the government or corporation owned or controlled by the government
any variety or grade of food grains, edible oilseeds or edible oil by virtue of order under
section 2 and not by virtue of section 3A then he shall be paid the price as determined by
the state government with the previous approval of the central government and the same
shall be determined considering:
a) Controlled price if any fixed for such variety or grade of food grains, edible oils
and oil seeds
b) General crop prospects
c) Need for making such goods or edible oils or oil seeds available at reasonable
prices to all sections of the society
d) Recommendations if any of Agriculture Price Commission in respect of such food
grains and edible oils.
Where any producer is required to sell sugar to government or any officer or agent
appointed by the government or corporation owned or controlled by the government then
price of sugar shall be calculated by the central government keeping in mind: (section 3 C)
The Essential Commodities Act, 1955
211
• 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 to
deliver, remove sugar even if the same are in bonded godowns of the factory. Further, the
central government shall give such directions to any producer, importer, and exporter
with 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 essential
goods or the commodity or to maintain price of any essential commodity it may authorize
such person or the class of persons to exercise control over the whole or any part of
undertaking where such commodity is manufactured. Upon such order:
• Authorized person shall exercise such functions in accordance with the provisions
of 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 issued
by 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 be
notified 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 in
the premises of the undertaking or any office of the person.
Every order made in this regard by the central government or any officer or
authority of the central government needs to be tabled in both the houses of
parliament (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 the
Act such commodity shall be brought before the collector of the district or the presidency
town and shall be produced for inspection before him and if the collector is satisfied that
contravention 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 commodity
If 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 seizure
then the collector may relieve such animal, vehicle, vessel, and aircraft etc.
When the collector is of the opinion that the essential commodity which was confiscated
is 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 such
commodity
b) If no such controlled price exists for such commodity then auction such commodity
Otherwise collector may for equitable distribution of goods order the sale of
essential commodities through fair price shops.
When goods are sold then such sale proceeds after deducting the expenses incurred
for making such sale shall be paid to the owner of such goods from whom goods are
seized, 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 contravention
of 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 vessel
carrying such commodity can be passed without:
The Essential Commodities Act, 1955
213
a) Giving a reasonable notice in writing mentioning the grounds under which goods
need to be confiscated
b) Giving an opportunity of making a representation against the grounds of
confiscation in reasonable time
c) Giving an opportunity of being heard No such vehicle, vessel, animal, aircraft or
any other conveyance, etc. be confiscated if the owner of such conveyance proves
that he was not aware that such carrying of essential commodity and he has taken
all the precautions under the Act.
6.8 Relevance of the Legislative Acts and its application to
agribusiness and Entrepreneurship
Here an attempt has been made to give a contextual relevance of the legislative Acts
to agribusiness and marketing in capsule form for the easy understanding and
comprehension of the readers.
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Besides the above Acts we discussed, an entrepreneur should have adequate
knowledge and understanding of following legislative Acts which are very pertinent for
the agribusiness unit. Some legislation related market perspective and agriculture
perspective are comprehended and given below:
The Essential Commodities Act, 1955
215
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, 5
th
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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216
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)
The Essential Commodities Act, 1955
217
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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218
The knowledge gained so far with the above discussed subjects on legislations will
be greatly helpful to the people who are engaged in extension services though State
Department of Agriculture, Krishi vigyan Kendra(ICAR), Private Extension service
organizations(Private Company/ NGos/ Cooperatives/ Farmer led organization).Here
before, we have compelled to give production led information to the farmers and not much
of market led information or post production information. Now there is a policy level shift
to 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 secondary
agriculture where the value chain become one of the potential component will effectively
attempted to links all the stakeholders.
6.11 Let us Sum Up
In the present module we have understood the basic need for the legislation and
economic importance of the legislation. Essential commodities are defined under the act,
though the definition is an inclusive one giving power to government to include more
goods under the definition of essentialcommodities.
Then the Act mentions the powers of the Central Government to ensure free movement
of essential commodities in the market and enable them to be available in good quantities
at reasonable prices. Powers of the central government range from the issue of licenses,
compulsory acquisition, taking control of undertaking manufacturing essential
commodities, confiscation of essential commodities and sale of essential commodities to
ensure that there exists smooth flow of essential commodities in the market.
We have also discussed the penalties under the act for the contravention of provisions
of the act and have also studied the penalties on the offences by the companies. We have
also studied the appeals available under the act to aggrieved persons.
Lastly we have also seen the relavance of the various business law and its application
to agribusiness entrepreneurship . Additionally we do also discussed the market and
agriculture legislative laws for our better extension service in the field.
* * *
doc_367091223.pdf
In this such a brief data pertaining to agri business and entrepreneurship development.
Post Graduate Diploma in Agricultural Extension
Management (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, India
www.manage.gov.in
2
Agri-Business and Entrepreneurship Development Course -202
Published by
National Institute of Agricultural Extension Management,
Rajendranagar, Hyderabad – 500 030, Andhra Pradesh, India
First Published: 2008
Revised 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, IAS
Director General
National 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, Thrissur
Dr. Seema, Professor, School of Agri-Business Management, ANGRAU, HYD.
3
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
4
AEM 202
Agri-Business and Entrepreneurship Development
(3 Credits)
Block I
Entrepreneurship
Unit – 1: Enterpreneurship Development for Agri-preneurs 5 - 44
Unit – 2: Cash Management 45 - 53
Enterpreneurship Development for Agripreneurs
5
Unit- 1
Enterpreneurship Development for Agripreneurs
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
Course-202 Agri-Business and Entrepreneurship Development
6
• Institutional support to business entrepreneurs
• Institutional Intervention and Capacity building for Agri Business
Entrepreneurship
• 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 degree
of randomness and uncertainty associated with the future, you can increase the probability
of 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, planning
becomes increasingly important because the personal and professional aspects become
more difficult to untangle. In agricultural businesses,planning may be even more vital
because of the inherent uncertainty associated with agriculturalproduction. Some important
sources 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 of
entrepreneurship development in agriculturalsector and business planning for agricultural
firms-from input suppliers to producers to processors and describe the steps required to
prepare a thorough business plan. The general process ofbusinessplanning is the same for
each type of firm. However, each may have differing individual aspects that affect its plan’s
content.
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 raising
the living standard of he vast majority of the backward regions, planning and
implementation for development of entrepreneurial programmes are essential because of
their over-dependence on agriculture for employment. Thus entrepreneurship
Enterpreneurship Development for Agripreneurs
7
development in rural industries appears to be the best possible alternative to find
employment avenues for the rural population. The issue of educated unemployment in
rural India and increase in farm income needs much concentration by the extension
functionaries working in the field of agriculture and allied sectors. Extension functionaries
should encourage unemployed rural youth to attempt towards entrepreneurship
development. A serious attempt was made in India towards massive creation of self-
mployment opportunities through entrepreneurship development programmes. Recent
trends in agri-business sector and emerging ICT has substantially improved Indian
agriculture system. In the modern era agriculture is not only restricted to farm but it has
expanded to the global market system. And hence, the farmer now is not only restricted to
farm 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 and
bearing risk with economic uncertainty. Entrepreneurial activities are substantially different
depending on the type of organization that is being started. It is the name given to the
factor of production which performs the function of “Enterprise”. Out of the five factors of
production i.e. land, labour, capital, organization and enterprise, organization does the
work of coordination between different factors and makes the production possible by taking
upon itself the risk or more appropriately the uncertainty of production.
That is why the entrepreneur is termed as “Uncertainty Bearer” and his function as
that of Uncertainty bearing. Haggen defines entrepreneurship as “the function of seeing
investment and production opportunity, organizing and enterprise to undertake a new
production process, raising capital, hiring labour, arranging the supply of raw materials
and selecting top managers for day-to-day operation of the enterprise.”
The major factor for entrepreneurship is the achievement motivation. A society
constituting individuals with a high level of need for achievement would come up as
entrepreneurs. Entrepreneurship involves task accomplishment that embodies a reasonable
challenge to the individuals, competence. Entrepreneurs have to work hard at tasks that
involve a real challenge which imply only a moderate risk. Entrepreneur have many of the
same traits as leaders.
Course-202 Agri-Business and Entrepreneurship Development
8
Entrepreneur
According to McClelland entrepreneur is “some one who exercises some control over
the means of production and produces more than what he can consume in order to sell it
for profit. He executes the functions of coordination, organization and supervision.
Entrepreneur is basically an innovator who introduces new combinations. An entrepreneur
is one who creates a new business in the face of risk and uncertainty for the purpose of
achieving profit and growth by identifying opportunities and assembling the necessary
resources 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 responsibility
for the outcome of ventures he start. He prefer to be in control of his resources and use
those resources to achieve self- determined goals.
Preference for moderate risk: Entrepreneurs are not mere risk takers but are instead
calculating risk takers. Their goals may appear to be high even impossible. But they see
the situation from a different perspective and believe that their goals are realistic and
attainable. They usually select only those areas for opportunity where those areas reflect
their knowledge, backgrounds, and experiences, which increase their probability of success.
Confidence to succeed: Entrepreneurs typically will take the challenges with
confidence in their ability to succeed. They tend to be optimistic about their chances for
success, and their optimism is based in reality.
Desire for immediate feedback: Entrepreneurs enjoy the challenge of running a
business avoiding risks, and they like to know how they are running their business through
constant 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-up
company. Long hours and hard work are the rule rather than the exception.
Future orientation: Entrepreneurs have a well defined sense of searching for
opportunities. They look ahead and are less concerned with what was done yesterday
than with what might be done tomorrow. Entrepreneurs see potential where most people
see only problems or nothing at all. In contrast to traditional managers who are concerned
with managing available resources, entrepreneurs are more interested in spotting and
Enterpreneurship Development for Agripreneurs
9
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 entrepreneur
starts his business to make money. But it is difficult to say what is the force behind an
entrepreneurs motivaton. Some times money may be only a secondary force.
An Entrepreneur puts his innovative ideas into effect in the process of economic
development. The important factor of entrepreneurship is the ability to create new and
useful ideas that solve the problems and challenges people face every day. Entrepreneurs
achieve success by creating value in the marketplace by utilizing the resources in an
innovative way to sustain the product competitively in the market. Which inturn satisfies
the customer’s needs. Creative thinking is a core business skill which every entrepreneur
needs to acquire. Entrepreneurship is the result of a disciplined, systematic process of
applying creativity and innovation to needs and opportunities in the market place.
Entrepreneurship is a commitment to expand and grow the major determinants of industrial
development which leads to economic growth of the country. It has been identified as an
essential factor for economic development of the country.
The basic objective of an entrepreneurship development should be to develop the
man and competencies required to initiate, manage, and expand the entrepreneurial
activity. Hence it is very much important to pay attention towards conceptualization,
planning, implementation and management of a business idea. It involves applying focused
strategies to mould new ideas to create a product or services that satisfies customers needs
or solves their problems. Thus, business plan is a pre-requisite which helps an entrepreneur
to 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 reorganizes
the enterprises. This kind of entrepreneur can be comfortable with certain level of
development is already achieved and people look forward to change and
improvement
Course-202 Agri-Business and Entrepreneurship Development
10
2. Imitative entrepreneurs: These people are characterized by readiness to adopt
successful innovation, but do not innovate.
3. Fabian entrepreneurs: This particular entrepreneurs, are characterized by great
caution and skepticism in experimenting any change in their enterprises.
4. Drone entrepreneurs: Entrepreneurs of this category exhibited the characteristics
of refusal to adopt opportunities to make changes in production method, despite
of reduced returns compared to similar producers. Even they may suffer from the
loss, but they do not ready to make changes in their existing production methods.
Apart from this classification, some more categories of entrepreneurs are listed
by 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 undertake
risks and handle economic uncertainty involved in running a business enterprise.
Inventors: Characterized by competence and inventiveness to invent new product
and show interest in research and innovative activities. Eg. Scientist ,who contributed
for innovation.
Challengers: Entrepreneurs who plunge into industry because of the challenges it
presents. Even after met the challenge, they look for the new one.
Lifetimers: These Entrepreneurs take business as an integral part to their life. Usually
the family enterprises and business run with their personal skill belongs to this category.
Social entrepreneurs: These Entrepreneurs involved in social activities. People who
engaged 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 social
activities. Mostly shows high social responsibility.
Intrapreneurs:
• New breed of Entrepreneurs: Operate from within the organization itself.
• Emerge from within the confines of existing enterprise
Enterpreneurship Development for Agripreneurs
11
• 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 common
in their personal characteristics? The scanning of their personal characteristics
shows that there are certain characteristics or traits which are found usually
prominent in them. Few of them are discussed here.
Achievement motivation, risk taking ability, leadership ability, decision making
ability, innovativeness, management orientation, and self confidence, attitude
towards self employment and income generation and information seeking are
some of the important entrepreneurial traits for any entrepreneur reported by
various researchers.
Achievement motivation: The achievement motivation is one of the traits required
by the agripreneurs . It is the basic urge for the entrepreneur to become
enterprising.
Risk taking ability: Any enterprise or venture normally circumvents with all kinds
of 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 the
willingness to take risk, while facing tough situations. Agribusiness is complex
and risky prone ventures in all spheres, agripreneurs necessarily exhibit the traits
of risk taking ability
Leadership ability: Agriventures as an enterprise is a group activity which
demands team work and leadership abilities.
Decision making ability: The decision making ability is generally depends on
education, better communication behaviour, large scale awareness about the
developmental practices in that particular enterprise. Such factors will support
the decision making ability of entrepreneurs. Taking right decision, at right time,
at right place (Production and Post production activities) will be the most essential
traits of successful entrepreneurs. Any failure will attributes for unsuccessful
performance.
Innovativeness: innovativeness towards the developmental activities and new
technologies in the Agri-enterprise innovativeness significantly affect the
Course-202 Agri-Business and Entrepreneurship Development
12
leadership qualities of entrepreneurship in the process of development.
Management orientation: Management orientation included orientation towards
planning, production practices, marketing information and awareness about the
new technologies and developmental practices to improve the productivity of
agri-enterprises.
Self confidence: Literacy level and good exposure will certain extend to supports
self confidence.
Information seeking: The people who have adequate education, innovativeness,
enthusiastic will exhibits good information seeking behaviour. Any business
enterprise requires wide variety of information related to production and post
production. Hence an entrepreneur should possess adequate information seeking
behaviour.
Some of the researchers identified the traits required for the entrepreneurs who
do 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 and
entrepreneurship 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 business
enterprises. Such factors will be immense useful, whenever we design entrepreneurial
Enterpreneurship Development for Agripreneurs
13
development programme for the targeted people. The factors identified are:
• Entrepreneur possessed technical knowledge or manufacturing experience in the
same/ 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 vigyan
Kendra may have to conduct EDP programme suited for different clientele. Hence it is
important to know the different phases of EDP. Such knowledge will be useful when we
design 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 activities
and 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
Course-202 Agri-Business and Entrepreneurship Development
14
• 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 to
help the entrepreneurs by providing various kinds of support and facilities. Availability
of 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 focusing
Agribusiness Education. While doing so it also simultaneously fosters the
agripreneurship development among the future generations available for
agribusiness and agri- ventures. To strengthen the agribusiness education and
entrepreneurship development new degree courses (in Undergraduate and Post
graduate level), training programmes have been introduced considering the
growing demand.
Eg. TNAU- has established separate Directorate of Agribusiness, Dept of PH Courses:
Enterpreneurship Development for Agripreneurs
15
B.S.(ABM), MBA,(ABM) , BSc.(Ag)-: RAWE- EDP module
2 . KRISHI VIGYAN KENDRA: ICAR sponsored KVK are available throughout the
country, conducting various vocational training programme with broad objective
of promoting agripreneurship among farm youth. Eg. Some of the novel Training
programme like Production of organic products and organic inputs, Special
packaged foods for Sugar patient, Heart patient, packaged flower for special
occasion and season promotes business entrepreneurship
3. AGRICULTURAL TECHNOLOGY MANAGEMENT AGENCY; The existing
structure of ATMA a district level agency provide wider scope and support to
promotes group specific agribusiness entrepreneurship.. Eg. Group farming ,
Group marketing using the provision of ATMA.
4. NATIONAL INSTITUTES OF ICAR AND GOVT OF INDIA: Various National
institutes of ICAR AND GOI also started agribusiness programme with broad
focus to promote agribusiness entrepreneurship among farm graduates especially
in the first line and second line managers Eg. NIAM, MANAGE, NAARM
conducting PG Diploma in Agribusiness.
5. Entrepreneurship Development Cell (EDC): SAUs and even traditional Universities
started functioning entrepreneurship Development cell to promote
entrepreneurship among students.
Eg. EDC of Bharathiar University, Coimbatore and Coimbatore Institute Of
Management 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 various
categories of entrepreneurs. It establishes a forum between various agencies
involved in ED activities.
7. National Institute of small Industries Extension Training (NISIET): It is functioning
at Hyderabad. It gives training to entrepreneurs of small-scale industries. Apart
from this it also supports the research on development of SSI. It also extends its
consultancy services to SSI.
8. RUDSETI (Rural development for self-employment and training Institute): This
organization is being promoted by Syndicate Bank. It operates the training
institutes at Mangalore and Kannur. It conducts a residential entrepreneurial
development programme for rural unemployed youths.
Course-202 Agri-Business and Entrepreneurship Development
16
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
Enterpreneurship Development for Agripreneurs
17
• 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-downs
and storage structure. Submission of bankable projects in the recommended format with
technical, economic, socially and environmentally viable indicators attracts finance to the
entrepreneurs without much of difficulty. The entrepreneurs also some time have the
privilege to avail subsidy component being the part of promotion announced by the
Government.
1.5 Institutional Intervention and Capacity building for Agri Business
Entrepreneurship
Some of ongoing Program were conceptualized with different purposes and meeting
specific target too. . At the time of conceptualization it may not be adequately thought of
inclusion of agri business entrepreneurship perspective. Considering the growing demand
for the agri-business entrepreneurship, an attempt has been made to explore the possibility
its inclusion in the ongoing programme without much additional cost. The Possible
Programmes 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 agri- business centre?
India trains over12000 graduates/year from agriculture and allied sectors, while only
2000 are able to find employment. Thus, skilled manpower of agricultural graduates(about
10,000, circumvent to become educated unemployed and even under employed in a single
year. Thus, an urgent need was felt by policy makers to tackle this serious issue through
proper educational planning and a scheme for training, skill up gradation and
entrepreneurial development.
Course-202 Agri-Business and Entrepreneurship Development
18
EVOLUTION OF AGRICLINIC AND AGRIBUSINESS CENTRE
• The committee, under chairmanship of Prof. M.S. Swaminathan suggested creation
of agriclinics and agribusiness centers managed by agri-graduates.
• During February 2001 NABARD has formulated a model scheme in consultation
with MOA and selected banks for financing agriclinics and agribusiness centres
and being implemented with the help of SFAC
• While MANAGE identified training institutes throughout the country for imparting
training to agri-graduates.
• The Parliamentary consultative committee of Ministry of Agriculture approved
this 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 cropping
practices
• Technology dissemination, crop protection from pest and diseases, market trends
and prices of various crops in the markets and also clinical services for animal
health 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 up
activities in agriculture and allied areas along with agriclinics and agribusiness
centers.
Enterpreneurship Development for Agripreneurs
19
Dawn of Agri-clinic and agribusiness centers (AC&ABC)
In order to assess demand for and acceptability of private extension through agriculture
graduates, from farmers (as clients) and agriculture graduates (as service providers),
Government organized surveys with the help of ICAR, NCAP and NAARM in 2000 and
the 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 untapped
resource of unemployed agriculture graduates, a need was felt by the Government of India
to design a programme which can take care of both, gave birth to the centrally sponsored
scheme of “Agri-clinics and agribusiness centers”,
• NABARD in consultation with the Ministry of Agriculture, and selected bank
formulated a scheme for financing agriculture graduates under this scheme and
announced 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 imparting
training.
• With all expectation launched the ambitious “agriclinic and agribusiness centers
scheme (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 agriculture
like horticulture, animal husbandry, forestry, dairy, veterinary, poultry farming,
Course-202 Agri-Business and Entrepreneurship Development
20
fish culture, rural home science and other allied activities. As per the latest
provision in the scheme even the Diploma holders (Agriculture), any graduate
with science background , retired employees are enrolled as a trainee
• In case of group activity, one group members may be a management graduate or
a 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/her
application to the concerned Nodal Officer of the State . The application will be subject to
scrutiny based on the qualifications and aptitude prescribed .The committee involves Nodal
Officer of the concern State and the nominee from MANAGE and the NABARD
representative 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 training
programme will given by the Nodal Officer of the concern State with a team of trainers
covering different modules enable the trainee to become entrepreneur.
Follow- up
Once the training is completed, an adequate follow-up will be taken for the subsequent
activities like institutional financing . After the appraisal of enterprise plan with necessary
requirements, 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
Enterpreneurship Development for Agripreneurs
21
This may further activated by means of introduction of agri business entrepreneurship
training with institutional and functional linkages mode with Kerala Agrl. University and
allied departments.
1.5.3 .Farmers Market-
• The Novel initiatives from some of the State Govt, Popularly known by Uzhavar
santhai ( Tamil nadu), Rythu Bazaars( Andhra Pradesh), Apna mandi ( Punjab)
This kind of organization explores immense scope for agribusiness entrepreneurship
training especially to inculcate Business skills. It could be imparted through KVK. The
knowledge 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 with
business leadership concept could be an added feature to attract youth towards
agribusiness.
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 skills
of 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, Operating
skills
• 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
Course-202 Agri-Business and Entrepreneurship Development
22
• 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 farmers
interest 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 promoted
entrepreneurship) 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 grape
supplier
• 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
Enterpreneurship Development for Agripreneurs
23
• 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 the
International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) in partnership
with India’s Department of Science and Technology (DST).
• It pro¬motes agricultural technologies developed by ICRISAT, other R&D centers
of excellence, universities, and other institutions, separately and jointly.
• Its approach features a dual service and outreach strategy. The outreach strategy
involves collaborative business incubation to bring a wider range of expertise
and resources to bear on business development to foster agricul¬tural development
in other regions.
ABI ADMINISTRATION:
ABI is governed by a board of advisors headed by the Director General of ICRISAT
and by a standing advisory committee that counsels the board on strategy and client intake
and exit.
OBJECTIVES OF ABI
• ABI represents a new resource to promote enterprise development in agriculture
and facilitate business among entrepreneurs
• ABI is the only incubator with an inclusive, market-oriented development plan
that seeks to improve farmers’ livelihoods through business incubation.
ABI model
ABI has been provided with initial startup as recurring grant provided by National
Science and Technology Entrepreneurship Development Board (NST¬EDB) and managed
by close linkages and coordination with world-class committed Professionals. It works on
two financial models:
• Capital gain model: ABI takes an equity share in companies it incubates. This
model is useful for startup companies with highly proprietary technologies and
strong entrepreneurship capabilities. It requires less management support, but
the new technology must be very strong.
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• The revenue-generation model: It is a franchisee model in which revenue for ABI
is generated through service fees, royalties, rental fees, and one-time fees. It is
useful for small-scale entrepreneurs who need significant manage¬ment support
but do not require strong technology inputs; their business is based on incremental
technolo¬gies or pure services.
1.6 GUIDELINES FOR STARTING FARM ENTERPRISES
A broad guideline is given here to start farm enterprises. The frame work prescribed
here will serve as a blue print to any entrepreneur. An intensive effort to answer the items
will 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 analysis
is required to evaluate oneself to know how far we have to deal the favourable and
unfavourable items.
Personal interests and resources
• Whether you have adequate and full fledged interest on the enterprises going to
start?
• 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 skills
required?
• 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, environmental
l 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, supporting
institutions
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 said
plans 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 a
common practice for consultants, lenders, potential business partners, and other business-
associated individuals to request a business plan to make a more informed decision
concerning 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. In
so doing, they become more knowledgeable of the business, the industry, and the market
environment in which their business operates. The process also helps to define business
goals 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 the
business. Therefore, it can be used to keep all employees moving toward the common
goals 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 the
proper direction or to formally alter the firm’s course if circumstances dictate that this is
necessary. Again, the systematic review of the business plan forces the owner, and
potentially 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, corresponding
to the four functional areas of management: marketing, production, finance, and human
resources.
1.7 Why a Business Plan?
Not everyone who starts and runs a business begins with a business plan, but it
certainly helps to have one. If you are seeking funds from a venture capitalist, you will
certainly 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 are
worthy of financial support is to show them a great business plan. Make sure that your
plan is clear, focused and realistic. Then show them that you have the tools, talent and
team to make it happen. Your business plan is like your calling card, it will get you in the
door where you’ll have to convince investors and loan officers that you can put your plan
into action.
Once you have raised the money to start or expand your business, your plan will
serve as a road map for your business. It is not a static document that you write once and
put away. You will refer it often, making sure you stay focused and on track, and meet
milestones. 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 is
to it—a document that describes what you plan to do and how you plan to do it. If you jot
down a paragraph on the back of an envelope describing your business strategy, you’ve
written a plan, or at least the germ of a plan.
Business plans can help perform a number of tasks for those who write and read
them. They’reused by investment-seeking entrepreneurs to convey their vision to potential
investors. They may also be used by firms that are trying to attract key employees, prospects
for new business, deal with suppliers or simply to understand how to manage their
companies better.
So what’s included in a business plan, and how do you put one together? Simply
stated, 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, the
organizational 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 breaks
even.
Enterpreneurship Developmant and Agri-Business Plan
If put together properly a good business plan follows generally accepted guidelines
for 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 business
structure, your particular product or service, and how you plan to make your
business a success.
• The second is the marketplace section, in which you describe and analyze potential
customers: who and where they are, what makes them buy and so on. Here, you
also describe the competition and how you’ll position yourself to beat it.
• Finally, the financial section contains your income and cash flow statement, balance
sheet and other financial ratios, such as break-even analyses. This part may require
help from your accountant and a good spreadsheet software program.
Breaking these three major sections down even further, a business plan consists of
SEVEN 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 and
table 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 complex
enterprise, more than 100 pages. A typical business plan runs 15 to 20 pages, but there’s
room for wide variation from that norm.
Much will depend on the nature of your business. If you have a simple concept, you
may be able to express it in very few words. On the other hand, if you’re proposing a new
kind of business or even a new industry, it may require quite a bit of explanation to get the
message across.
The purpose of your plan also determines its length. If you want to use your plan to
seek millions in seed capital to start a risky venture, you may have to do a lot of explaining
and convincing. If you’re just going to use your plan or internal purposes to manage an
ongoing 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 help
start a new venture. Many great companies had their starts on paper, in the form of a plan
that 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 that
only cash-starved startups need business plans. Business owners find plans useful at all
stages of their companies’ existence, whether they’re seeking financing or trying to figure
out how to invest a surplus.
Established firms seeking help. Not all business plans are written by starry-eyed
entrepreneurs. 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 a
business plan complete with sales forecasts to convince their stake holders which included
share holders, financiers and customers. It helped make the new venture a winner long
before the big day arrived. These middle-stage enterprises may draft plans to help them
find funding for growth just as the startups do, although the amounts they seek may be
larger and the investors more willing. They may feel the need for a written plan to help
manage an already rapidly growing business. Or a plan may be seen as a valuable tool to
be 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 one
applies 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 an
updated plan to help them make financing decisions.
3. There’s been a significant market change. Shifting client tastes, consolidation trends
among customers and altered regulatory climates can trigger a need for plan
updates.
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4. Your firm develops or is about to develop a new product, technology, service or
skill. If your business has changed a lot since you wrote your plan the first time
around, it’s time for an update.
5. You have had a change in management, new managers should get fresh information
about 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 job
last time; may be things have just changed faster than you expected. But if your
plan seems irrelevant, redo it.
Business plans tend to have a lot of elements in common, like cash flow projections
and marketing plans. And many of them share certain objectives as well, such as raising
money or persuading a partnerto join the firm. But business plans are not all the same any
more than all businesses are.
Depending on your business and what you intend to use your plan for, you may
need a very different type of business plan from another entrepreneur. Plans differ widely
in their length, their appearance, the detail of their contents, and the varying emphasis
they place on different aspects of the business.
The reason that plan selection is so important is that it has a powerful effect on the
overall impact of your plan. You want your plan to present you and your business in the
best, most accurate light. That’s true no matter what you intend to use your plan for, whether
it’s destined for presentation at a venture capital conference, or will never leave your own
office or be seen outside internal strategy sessions.
1.11Types 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 least
cursory attention to such key matters as business concept, financing needs, marketing plan
and financial statements, especially cash flow, income projection and balance sheet. It’s a
great way to quickly test a business concept or measure the interest of a potential partner
or 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. It
has to be long on detail but may be short on presentation. As with a miniplan, you can
probably afford a somewhat higher degree of candor and informality when preparing a
working plan.A plan intended strictly for internal use may also omit some elements that
would be important in one aimed at someone outside the firm. You probably don’t need
to include an appendix with resumes of key executives, for example. Nor would a working
plan especially benefit from, say, product photos.
Internal consistency of facts and figures is just as crucial with a working plan as with
one aimed at outsiders. You don’t have to be as careful, however, about such things as
typos in the text, perfectly conforming to business style, being consistent with date formats
and so on.
Presentation Plan: If you take a working plan, with its low stress on cosmetics and
impression, and twist the knob to boost the amount of attention paid to its looks, you’ll
wind up with a presentation plan. This plan is suitable for showing to bankers, investors
and others outside the company.
Essentials
• Almost all the information in a presentation plan is going to be the same as that of
a working plan, although it may be styled somewhat differently. For instance, one
should use standard business vocabulary, omitting the informal jargon, slang and
shorthand 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 the
working plan, this plan isn’t being used as a reminder but as an introduction.
• Among investors’ requirements for due diligence is information on all competitive
threats and risks. Even if you mention some of only peripheral significance, you
need to address these concerns by providing the information.
• The big difference between presentation and working plans is in the details of
appearance and polish. A working plan may be run off on the office printer and
stapled 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 booklet
that 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. A
mistake here could be construed as a misrepresentation by an unsympathetic
outsider.
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
Enterpreneurship Development for Agripreneurs
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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 ————.
Capital Requirements
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 three
years, we will strive to ——————. During this time, we will also be —————. To
complement 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 storage
capacity 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 births
expected in ——. This will be our founding herd of ——, with ——— additional births
expected in ——. After the 2001 births, the herd size will have grown to ————. At which
point, the ———original females and now the females born in ——— will be bred. We
expect we can realize —— pregnancies at this time, which will bring the herd to ——. The
males 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%
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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 also
established an operating agreement to augment the articles of organization. See Exhibits.—
—— professional accounting software will be used to administer the accounts of the
business. —— — – CPA, will provide additional professional accounting services on an as
needed basis.
The Market
Sales
Explain who buys your product and why. Show the bank that you have done your
research. ——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 through
this 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
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41
associations, etc.)—————— which has numerous exclusive membership rights and
privileges, 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 provide
similar ——— 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 expects
you to be able to foresee everything, but researching this section can prepare you for bumps
in 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 you
want to do this.
Capital Requirements
We seek ———— of financing to fund ————. A positive cash flow is projected in
approximately — ———. This funding will be used to ————. Here is a breakdown of
how 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 to
be ———— 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 here
for 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 Coimbatore
respectively during April-June, 2002. They have taken up an “Agro input promoter and
Agro output marketers” project in Mettur Dam area. The project aims at providing all
inputs to farmers on credit to raise vegetable crops and offers technical advice and support
through weekly follow-up field visits. The vegetables produced will be marketed by them
in major vegetable markets located at Thalaivasal, Salem, Erode and Coimbatore. The output
sale proceeds will be paid back to the farmers the very next day after deducting 10% on
sales as service charge and the actual transport cost. Input cost provided to the farmers
will be deducted daily from commencement of marketing @ 5% per day. Thus all the
outstandings get zeroed in 20 days from the day of commencement of marketing. They
have started the project on 15th July 2002. A further aim is to create 8-10 centres within a
radius of 30 km of Mettur Dam.
• Rakshak Agri-Business Center
Sri. Bhavesh Sodha was working as a Gardener in United Phosphorus Ltd. And was
earning Rs. 5000/-per month prior to his training. He started the Rakshak Agri-Business
Center at Vapi and inducted Kisan Bharat Kendra, an innovative service where information
on production technologies of crops, weather and market information services are provided
to 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 an
annual income of Rs. 1.50 lakhs. He has 60 workers and maintains a nursery. He has also
Enterpreneurship Development for Agripreneurs
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taken up pest control work in the city of Vapi for which he is charging the Corporation and
Gujarat 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 and
agribusiness center scheme, established to develop biodynamic farming and gardening in
rural and urban areas. The focus areas are farming technologies and advisory services
about organic and biodynamic agriculture, training and development of bio-dynamic and
organic farming, designing and development of agrofarms, greenery development systems
and earth sciences, marketing network of organically grown agri produce. The society has
established its own biodynamic training center at Aruka Valley in Andhra Pradesh and
also conducted training programmes for about 200 farmers in organic and biodynamic
farming 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 voluntary
basis and promote seed production, vermiculture etc. During Rabi season 2002-03 she has
started paddy seed production in 100 acres with G. Samba Murthy. They have also started
a vermiculture unit with an investment of Rs. 1 lakh. His capacity of the unit is 5 tonnes per
month, banks have been approached for financial support.
• Biopesticide industries
Dr. Suresh Choudhary an agricultural consultant who has established “Indraprastha
Agriclinic center” at Faridabad has extended its services to pesticides and biopesticides
industries services for setting up new pesticide and biopesticide industries. Source of
availability of new/old machinery, manpower chemist, production-manager, quality
controller and also plant protection consultancy.
• Project report & feasibility report consultancy
Dr. Santosh Agarwal has started agro consultancy in Agribusiness management and
agro-industries for agripreneurs to prepare feasibility report and project report for starting
enterprises and availing financial help.
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1.14Let us Sum Up
We have discussed the meaning, importance and concept of entrepreneur,
entrepreneurship and scope of entrepreneurship in promotion of agribusiness and creating
employment in the agricultural sector. Thereafter ,we have studied the entreprenurial
characteristics,Phases of Entrepreneurial Development Programme, Institutional support
to business entrepreneurs, Institutional Intervention and Capacity building for Agri
Business Entrepreneurship and Guidelines for starting Farm Enterprises. We have also
learnt that, business plan is a prerequesite for putting innovative ideas of an entrepreneur
into action.
As noted above, the preparation of an agribusiness plan is not something to take
lightly. The long-term future of your business may well depend on its ability to attract the
interest of lenders and/or investors. Such a comprehensive plan involves both dedication
and 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. If
your agribusiness firm has not already prepared such a comprehensive plan, it is very
likely that it will have to do so in the near future. I hope this discussion will provide you
with some help in determining the contents of such a plan.
Cash Management
45
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
On completing this unit you will be able to understand
• 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 the
business going. A business concern should always keep sufficient cash for meeting its
obligations. Any shortage of cash will hamper the operations of a concern and any excess
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of it will be unproductive. Cash is the most unproductive of all the assets. While fixed
assets like machinery, plant etc., and current assets such as inventory will help the business
in increasing its earning capacity, cash in hand will not add anything to the concern. It is in
this context that cash management has assumed much importance.
What is cash management? Every undertaking is desirous of utilizing the available
cash most effectively so as to accomplish the goals of the undertaking i.e., maximization of
profits or wealth of the owners of capacity with the minimum of efforts. But management
of cash is not as simple as it appears. In case, the undertaking does not keep sufficient cash
in hand, it may not be in a position to meet the unexpected challenges that may bring
down its credit in the market. On the other hand, if the undertaking maintains excessive
cash 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 for
unforeseen contingencies, the company will not be in a position to carry on its day-to-day
working efficiently. It is where the real problem of cash management comes, i.e. how much
cash should be set aside for unexpected challenges and how much for regular day-to-day
working. Therefore, the aim of cash management is to maintain a sound cash position to
keep the firm sufficiently liquid and to use the excessive cash, if any, in some profitable
way.
2.2 Entrepreneurial skills and Cash Management
Managerial skills involve entrepreneurial skills too. For any business, the cash
management is so vital for the successful running of the enterprises. It involves a serious
of composite activities like searching and arranging financial sources, cash planning, cash
budgeting, optimum of utilization of fund, credit management, cash transaction etc.,. Each
listed activities require some basic skills and specialized entrepreneurial skills to bring
out good performance. Different task basically requires certain competency to perform.
Since, cash management is a specialized activity, it also require intended skills to perform
in efficient way. The relationship between cash management and associated broad
entrepreneurial skills are presented below for better understanding. Each listed activities
may require one or more entrepreneurial skills to perform the activities.
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Activities related to Cash management
Associated Entrepreneurial skills
Mobilizing fund sources Interpersonal relations skill, Information seeking skill,
Communication
cash planning Planning skill, visionary
cash budgeting Decision-making skill, Accounting skill
credit management Credit orientation, Management orientation
cash transaction Technical and operating skill( e-transfer,e-payment)
Cash handling Risk-seeking , risk taking ability
Payment settlement Interpersonal relations skill, Negotiation skill
Control of inflow of fund Fund management skill, technical skill
Control 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 under
the 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 unforeseen
obligations. What that minimum amount of cash should be is really a problem for financial
management to solve. In deciding the level of cash the following considerations should be
taken into account:
i. Predictable discrepancies: The basic tool for management to forecast the predictable
discrepancies between cash inflow and outflow is cash budget. Cash budget reveals
the timing and the size of net cash flow as well as the period during which surplus
cash may be available for temporary investment. In small concerns, preparation of
cash budget is a very minor job while in large companies, the job is assigned to the
controller of finance and is a full time job. Cash budget may be short range cash budget
and 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 operating
cash requirements, to anticipate the need for short term financing and to manage
investments. The short term forecasts may be of great help in optimizing bank
relationship by indicating the highest and lowest of the cash and the timing of its flow
in and out of the company. It also helps in planning education of long term bets, guiding
dividend policy, co- coordinating divisional financial needs, taking advantage of cash
discourse planning forward purchasing etc. In addition, revision and review is a regular
feature. Informal reviews are carried on between formal reviews. Some big companies
have developed their own standard forms to maintain uniformity information.
ii. Unpredictable discrepancies: In addition to the predictable discrepancies, there are
certain unpredictable discrepancies like strike, lock out, recession, rise in the cost of
material etc. It is desirable to reserve an adequate balance of cash to meet such
contingencies. These events either may interrupt the inflow of cash or cause a sudden
outflow of cash which the undertaking did not expect. The amount kept in reserve for
such eventualities is in the nature of insurance. The amount should be very carefully
earmarked 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 been
invested in business.
iii. Sources of funds: Cash level depends very much on the sources of funds from which a
company can obtain funds at short notice. Creditability of the company counts much
in this regard. The better the credit standing the smaller the amount of cash to be
maintained by the company. The company is required to maintain less cash, if it has
internal sources of funds to meet unpredictable expenses. It may sell its redundant
machinery 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 by
relationship of a company with banks. Relationship with banks very much depends
upon 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. Company
will have to maintain less cash to meet its unexpected challenges. On the other hand, it
depends 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. In
this connection, points of major importance are financial condition of the bank, its
location, 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 business
executive with a view not only to prevent fraudulent diversion of cash receipts but also to
collect cash speedily. Fraudulent diversion of cash can be checked easily by installing an
internal check system by breaking the job of cash receipts into several stages, each handled
by a different employee. But collections of cash speedily i.e. inflow of cash can be controlled
by 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 speedy
collection of cash from debtors. Under this system, deposit accounts are opened with
now or more banks, geographically so located that remittances from customers do not
take more than one day in transit. Customers mail their remittances to the lock-box in
the post office that serves the company’s regional bank. The bank collects cheques
from the lock-box several times a day, clears them and deposits the amount in the
account of the customers, bank emits the excess funds to the company in accordance
with the arrangement after maintaining the minimum balances to cover the costs or
may be drawn by the company treasurer at his discretion. This system speeds up
collections of cheques. The company comes to know of dishonored cheques and weak
credit situations sooner. It also reduces the chances of fraud in the collection process of
cash as it controls the cash incoming better.
b) Collections through regional branch officers: It is another method for collecting cash
speedily. Under this system the company’s regional branch officers are authorized to
collect the payments from the customers and deposit them in the local office of the
banks. 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 remittances
paid by them. The Head office either collects the amount or may instruct the regional
officers to make the payments to suppliers. The system is good when business of the
company is spread over throughout the country and the amounts to be colleted are of
small value.
3. Controlling Outflow of Cash
Controlling outflow of cash is as important as controlling inflow in the interest of the
customers 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 outflows
which must be planned properly, in the absence of any proper planning there shall either
be overflow of cash or unnecessary drain on un-liquid cash. In order to control the outflow
of cash, most of the companies flow the system of centralizedcash payments. Under this
system, all receipts are transferred from subsidiaries to the central office and central office
in turn accepts and pays the creditor’s bills direct to the parties. Bills for local expenses
are, 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 investment
of surplus cash available with the company, for a short period. The finance executive will
have 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 of
funds available for investment on short term basis as they are required to meet the regular
obligations 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 of
the primary responsibilities of financial management to maintain an adequate supply of
cash. Ample cash funds are the index of liquidity of financial resources and the profitability
of the firm. Inadequacy of funds or non- availability of cash when it is needed may have
serious setback to an undertaking, but this does not imply that there must be ample funds
to remain unutilized in the business., In order to maintain the flow of cash, cash planning
is necessary.
What is Cash Planning and Control?
Cash planning is nothing but simply to forecast the cash needs well in advance for a
given period with a view to maintain adequate cash balance in hand, sufficient to meet the
payments and obligations as and when they mature. Thus it includes forecasting of cash
inflows and cash outflows. Cash planning includes cash control as well. Cash planning is
a technique to plan for and control the use of cash. It involves formation and sound cash
management policies, procedures and practices. Sound cash planning does not only cover
the 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 normal
operations is easy to predict but it is not so easy to forecast the requirements of cash for
contingencies. Cash control involves proper implementation of policies and procedures
regarding inflow and outflow of cash. It includes short-term investment plans when cash
is 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 planning
and controlling the cash. Business exigencies and government policies should also be taken
into account while planning the control of cash. We can control the cash position with the
following 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 cash
flow 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 ratios
are 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 outflows
for a given period.
ii) Cash Budget: Cash Budget is the second tool of cash planning. It is a systematic forecast
of cash requirement i.e. forecast of cash inflows and outflows and thus shows the
probable surplus or deficiency of cash flow, policies regarding other functions such
sales, production, Marketing etc.
iii) Forecasting an overall working capital position: Forecast of the overall working capital
position is also an important tool of cash planning. Working capital analysis forecasts
the value of current assets and current liabilities to know the cash position of the
business.
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2.5 Cash Budget
What is Cash Budget?
One of the major responsibilities of financial management is to maintain an adequate
cash balance to ensure the business to make available sufficient cash to meet its needs as
and when they arise.
• Cash budget is an analytical device to estimate the flow of cash in any business
over a future period of time.
• It presents an estimate of cash inflows and outflows. It involves a projection of
future cash receipts and cash disbursement of the firm over various intervals of
time.
• It reveals to the financial manager the timing and amount of expected cash inflows
and 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 the
financial performance by comparing the actual performance with the budget
figures. 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 sound
consistent dividend policy.
• Helpful in planning: Cash budget helps planning for most efficient use of cash. It
points out cash surplus or deficiency at selected points of time and enables the
management to arrange for the deficiency before time or to plan for investing the
surplus money as profitably as possible withoutany threat to the liquidity.
• Controlling cash expenditure: Cash budget acts as a controlling device. The
expenses of various departments in the firm combustible?? controlled so as not to
exceed the budgeted limit.
• Testing the influence of proposed expansion programmed: Cash budget forecasts
the inflows from a proposed expansion or investment programmed and testifies
its impact on cash position.
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• Forecasting the future needs of funds: Cash budget forecasts the future needs of
funds, its time and the amount well in advance. It, thus, helps planning for raising
the 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 balances
for 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 any
goods or services. Certain essential entrepreneurial skills also required for effective cash
management A business has to keep required cash o meet business needs. A financial
manager synchronizes the cash inflows and outflows.
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AEM- 202
Agri-Business and Entrepreneurship Development
(3 Credits)
Block-II
Agri Business
Unit – 1 : Marketing Management in Agri Business 55 - 72
Unit – 2 : Rural Marketing 73 - 89
Unit – 3 : Procurement 90 - 109
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Unit- 1
Marketing Management for Agri Business
‘Marketing is a social and managerial process by which individuals and groups obtain
what they want and need through creating, offering and exchanging products of value
with 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
On completing this unit you will be able to understand
• 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 to
produce more; conveys changing needs of the economy to enable production planning;
and fosters competition among traders, and eliminates exploitation, particularly among
the small and marginal farmers.
The Agricultural market in India today is dominated by rural primary markets that
meet local demand, secondary markets that service distant demands and wholesale markets
that 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 farms
where it is produced to the consumers or manufacturers. This covers physical handling
and 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 the
continuing demands of consumers throughout the year. For the farmer, the strategic function
of the marketing system is to offer him a convenient outlet for his produce at a remunerative
price. To the consumers and the manufacturers of agricultural raw materials, assurance of
a steady supply at a reasonable price is the vital service. Prices are determined through
free market process by negotiations at rural purchase, wholesale and retail stages, and
represent a balance between the consumers’ ability to pay and the farmers’ need for incentive
to produce An effective marketing system will be geared towards expanding the range
and types of consumer service, and thus offer procurement outlets.
Agricultural marketing also includes the marketing of production inputs and services
to 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 the
developing world becomes aware of the value of these supplies, the organization of
distribution systems adapted to their needs becomes vital. Through all the stages of
marketing, 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 of
principles 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 of
planning 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. The
environment is “dynamic”—what customers want today is not necessarily what they want
tomorrow.
• 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 selling
existing products. The philosophy here is that if a product is not selling, more aggressive
measures must be taken to sell it e.g., cutting price, advertising more, or hiring more
aggressive sales-persons. Manufacturers of typewriters were too slow to realize that
consumers wanted the ability to process documents and not typewriters per se. The
marketing concept, in contrast, focuses on getting consumers what they seek, regardless of
whether 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 following
four categories:
• Product
• Price
• Place (distribution)
• Promotion
These 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 the
target 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 blending
these fourmarketing mix variables in an optimal manner. The 4Ps marketing mix can be
reorient in terms of contemporary model popularly known as SAVE model experimented
by 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. Hence
the 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 of
physical 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 to
offset the farmers problems should yield a solution . It clearly states the importance of
solution 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 technology
process could be reenergised and assume highest social responsibility.
Place= Access
Place (or placement) decisions are those associated with channels of distribution
that serve as the means for getting the product to the target customers. The distribution
system performs transactional, logistical, and facilitating functions.Distribution decisions
include market coverage, channel member selection, logistics, and levels of service. This
aspects is so important for an extension functionaries in the sense that the product/service
advised to the farmers to find solution should available in the nearby place. He has to
provide details like where it is available? From Whom ? and the quantity available? Time
frame needed to arrange etc.,
Price=Value
Pricing decisions should take into account profit margins and the probable pricing
response 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 give
advisory 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 such
items.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 to
them and make them to felt that they paid for value of the product/service rendered
rather than mere Price.
Promotion= Education
Promotion decisions are those related to communicating and selling to potential
consumers. Since these costs can be large in proportion to the product price, a break-even
analysis should be performed when making promotion decisions. It is useful to know the
value of a customer in order to determine whether additional customers are worth the cost
of acquiring them.Promotion decisions involve advertising, public relations, media types,
etc. As a one step ahead the extension functionaries instead of limit only to promotion
point of view, he shoud educate the clientele interms of value based education involving
all the three kinds of knowledge(awarness, how-to-do and principle knowledge). By doing
so it is believed that.it gives comparatively good sustainable results. Eg. Educating the
farmers on insurance( Crop insurance, Animal insurance, Property insurance), future trading
etc.,
Product
Products come in several forms. Consumer products can be categorized as convenience
goods, for which consumers are willing to invest very limited shopping efforts. Thus, it is
essential 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 of
time and effort. For example, consumers will spend a great deal of time looking for a new
car or a medical procedure.
Specialty goods are those that are of interest only to a narrow segment of the
population— e.g., drilling machines. Industrial goods can also be broken down into
subgroups, depending on their uses. It should also be noted that, within the context of
marketing decisions, the term product refers to more than tangible goods—a service can
be a product, too.
There are 3 levels of products 1) Core P Marketers must first define what the core
BENEFITS the product will provide the customer. Eg. Oil Engine is the core product of
Kirlosker 2) Actual Prod Marketer must then build the actual product around the core
product. 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), then
design the actual product and find ways to augment it in order to create the bundle of
benefits that will best satisfy the customer.
A firm’s product line or lines refers to the assortment of similar things that the firm
holds. Boeing, for example, has both a commercial aircraft and a defense line of products
that each take advantage of some of the same core competencies and technologies of the
firm.
Price
To a manufacturer Price represents the quantity of money received by the firm or
sellers 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 aspects
of strategy. Let’s have a look at some of them and try to understand the best policy/strategy
in various situations.
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Premium Pricing
Use a high price where there is uniqueness about the product or service. This approach
is used where a substantial competitive advantage exists. Such high prices are charge for
luxuries 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 gain
market share. Once this is achieved, the price is increased. This approach was used by
France 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 a
minimum. 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 the
market, and the price inevitably falls due to increased supply. Manufacturers of digital
watches used a skimming approach in the 1970s. Once other manufacturers were tempted
into the market and the watches were produced at a lower unit cost, other marketing
strategies and pricing approaches are implemented. Eg. Price for organic products follows
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skimming pricing Premium pricing, penetration pricing, economy pricing, and price
skimming 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 an
emotional, 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 of
the range.
For example car washes. Basic wash could be Rs 200, wash and wax Rs 150, and the
whole package Rs 350.
Optional Product Pricing
Companies will attempt to increase the amount customer spend once they start to
buy. Optional ‘extras’ increase the overall price of the product or service. For example
airlines will charge for optional extras such as guaranteeing a window seat or reserving a
row of seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price where
the consumer is captured. For example a razor manufacturer will charge a low price and
recoup 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 move
old 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 examples
of 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 parts
of 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 increased
competition 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 the
activities utilised to move a product and its title from production to consumption place is
also known as channel, distribution, or intermediary. It is the mechanism through which
goods and/or services are moved from the manufacturer/ service provider to the user or
consumer.
There are six basic ‘channel’ decisions:
1. Do we use direct or indirect channels? (e.g. ‘direct’ to a consumer, ‘indirect’ via a
wholesaler).
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. infighting
between local distributors).
Selection Consideration
• Market segment - the distributor must be familiar with your target consumer and
segment.
• Changes during the product life cycle - different channels can be exploited at different
pointsi in the distribution.
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• Producer - distributor fit - Is there a match between their polices, strategies, image, and
yours?
Look for ‘synergy’.
• Qualification assessment - establish the experience and track record of your
intermediary.
• How much training and support will your distributor require?
Types of Channel Intermediaries
There are many types of intermediaries such as wholesalers, agents, retailers, the
Internet, overseas distributors, direct marketing (from manufacturer to user without an
intermediary), and many others. The main modes of distribution will be looked at in more
detail.
1. Wholesalers
They break down ‘bulk’ into smaller packages for resale by a retailer. They buy from
producers and resell to retailers. They take ownership or ‘title’ to goods whereas agents
do not . They provide storage facilities. For example, cheese manufacturers seldom wait
for their product to mature. They sell on to a wholesaler that will store it and eventually
resell to a retailer. Wholesalers offer reduce the physical contact cost between the producer
and consumer e.g. customer service costs, or sales force costs. A wholesaler will often take
on the some of the marketing responsibilities. Many produce their own brochures and use
their own telesales operations.
2. Agents
Agents are mainly used in all big markets. An agent will typically secure an order
for a producer and will take a commission. They do not tend to take title to the goods. This
means that capital is not tied up in goods. However, a ‘stockist agent’ will hold consignment
stock (i.e. will store the stock, but the title will remain with the producer. This approach is
used 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 the
physical distances involved. They are difficult to motivate. Eg. Commission agents for
agricultural commodities
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3. Retailers
Retailers will have a much stronger personal relationship with the consumer. The
retailer will hold several other brands and products. A consumer will expect to be exposed
to 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 retailer
will 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 is
that niche products reach a wider audience. There are low barriers to entry as set up costs
are low. Use e-commerce technology (for payment, shopping software, etc). There is a
paradigm 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 the
marketer for ‘marketing communication’. As with Neil H.Borden’s marketing mix, marketing
communications has its own ‘promotions mix.’ Think of it like a cake mix, the basic
ingredients 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’ different
aspects of the promotions mix to deliver a unique campaign. The elements of the
promotions 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. As
with all forms of communication the message from the marketer follows the
Marketing Management for Agri Business
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‘communications process’ as illustrated above. For example, a TV advertisment made for
popularising the Kissan Call Center(KCC).
The KCC(sender) pays for a specific advert which contains a message specific to a
target audience ie Farmers (encoding).It is transmitted during a set of commercials from a
TVstation (Message / media). The message is decoded by TV (decoding) and the target
consumer(Farmers) interprets the message (receiver). He/she might call toll free call to
enquire his doubts(Response). The farmers may mind set to adopt/not adopt (feedback).
This information will reinforced during integrated promotional campaign conducted by
the concern department would push the farmer to the point of decision. The disturbance
in 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. The
sales person acts on behalf of the organization. They tend to be well trained in the
approaches and techniques of personal selling. However sales people are very expensive
and should only be used where there is a genuine return on investment. Eg. The farm and
home visit made by extension personnel would comparativlely convinincing the farmers
to 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, free
accessories , introductory offers and so on. Each sales promotion should be carefully priced
and compared with the next best alternative. Similar promotional methods can adopted
by agripreneurs who venturing in to the agriclinic and agribusiness centre. He can suitably
mix the diagnostice service of his centre with sale of their products to match intended
purpose.
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3. Public Relations
Public Relations is defined as ‘the deliberate, planned and sustained effort to establish
and maintain mutual understanding between an organization and its publics’. It is relatively
cheap, but certainly not cheap. Successful strategies tend to be long-term and plan for all
eventualities.
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 and
similarities. Creative agencies work with marketers to design a highly focused
communication in the form of a mailing. The mail is sent out to the potential consumers
and 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 have
liking towards consumption of organic products trhough social networking and contacting
them 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 awareness
and to encourage trial. They offer the opportunity for companies to meet with both the
trade and the consumer. Eg. Use of AgriExpo trade fair and exhibitionswould bring all the
stakeholders in a singleplateform.
6. Advertising
Advertising is a ‘paid form of ‘communication. It is used to develop attitudes, create
awareness, 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, outdoor
advertising (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
Marketing Management for Agri Business
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associated with the sponsoring organization. The elements of the promotionalmix are then
integrated to form a unique, but coherent campaign.Eg.CODDISIA Agri- Intex Expo of
every year is an joint venture of CODDISIA, TNAU AND NABARD. Here the organistion
will 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 and
stimulate consumers are known as consumer promotional tools. Here the goal is to increase
the volume of sales by creating a demand among the public. Samples: Samples are offers
of a free trail of a product conducted for consumers and distributed for introducing a new
product. 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 the
newspaper, magazines. Premiums: An offer of a certain amount of a product at no cost to
consumers who buy a specified amount of the product Eg. Gift is packed along with
purchased materials. Price off: It is a technique of offering goods at a reduced price and
mostly followed to clearance of sale other ways in reduction sale.
Contests: It is an indirect way of introducing a new product. Here an opportunity is
given to consumers to contest with chances of winning attractive prizes. While purchasing
the 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 of
the purchase made. Later these stamps can be exchanged for goods at stamp redemption
counters.
Demonstrations: It is actual public performance of a product for convincing its
reliability. It may be arranged in stores, exhibition/fairs, temple festivals and some time
door 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 the
manufacturers 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 new
products. 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 lower
than the normal price. This is to encourages dealers to buy a standard quantity pack or to
carry a newly launched product.
3. Business level promotion
Bonus to sales force: Here the sales person assigned with stipulated quoto /target
over specific period of time. In excess of the target achieved bonus will be issued. Sales
force contest: It is designed to redouble the interest of the sales force It will motivate the
sales force to use full or maximum capacity. Sales meetings/conventions/conferences: It
is arranged by the manufacturing company with a view to educate, inspire and some time
rewarding the sales force. In such an occasion new products, new schemes, new selling
techniques will be introduced.
The above discussed promotional techniques can be used according to the nature of
products/service, market segments, and occasion with an element of creativity and
innovation 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 and
Irijalkuda) with a sample of 100 customers. The firm used Master Card, Free Goods, Price
Off, 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 firm
through Store communication, displays, announcements and advertisements. Majority of
the 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. In
the above process of agricultural marketing, there may be possibility of middlemen exploit
Marketing Management for Agri Business
71
farmers as well as consumers. Consequently farmers has not get fair price and even not
able to meet the cost of cultivation results in indebt ness. In order to eliminate the
middlemen between farmers and consumers, government level intervention worked out
by the policy makers in different state introduces the farmer market concept as an alternate
to agricultural marketing. It is being known by different names like Uhavar santhai(Tamil
Nadu), 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 evolved
modern 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 his
production 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 avoiding
middlemen in the process and ensure farm fresh.
Objectives
• To create a venue for farmers to sell their own produce directly to consumers as
farm fresh at comparatively lower prices
• To act as a hub for various activities related to farming, farm families etc and
provide 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 their
products
• To help the local administration streamline all operations relating to marketing at
one 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 bazaar
Special features
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• Farmers are oriented towards market driven produce
• Farmer owned and farmer managed with government felicitation in the initial
years.
• 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 over
the years, model envisages self-sufficiency in its operation and management
• Various services required for both the consumers and sellers will be provided on
cost basis at the Bazaar such as Bank, STD Booth, internet facilities to know the
market 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 fosters
competition among traders, and eliminates exploitation, particularly among the small and
marginal farmers. The Agriculture market in India today is dominated by rural primary
markets that meet local demand, secondary markets that service distant demands and
wholesale markets that gather large amounts of produce from different sources for the
retailers in the country.
Agricultural marketing has assumed increased importance after launching of the new
economic policy and consequent opening up of India’s markets to foreign suppliers and
buyers and access by Indians to world markets. Efficient marketing practices enable Indian
farmers derive the full benefits from the new liberalized world trade regime. A better
understanding of Marketing principles in general and Agri-Marketing Practices in particular
will remove various constraints and deficiencies in the existing domestic markets and
marketing 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
On completing this unit you will be able to understand
• 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 in
the purchasing power of the rural communities. On account of the green revolution, the
rural areas are consuming a large quantity of industrial and urban manufactured products.
In this context, a special marketing strategy, namely, Rural Marketing has emerged. Rural
Marketing means delivering manufactured or processed inputs or services to rural
producers or consumers.
2.2 Rural Marketing
Rural marketing facilitates flow of goods and services from rural producers to urban
consumers at a possible time at reasonable prices, and agriculture inputs/ consumer goods
from urban to rural. Marketing is an exchange function; it started much earlier when
civilization began, but was not recognized as marketing. All economic goods are marketed
in terms of goods and services (Barter system). Now money is used as a good exchange
medium. The surplus produce is brought to sophisticated places where both buyers and
sellers meet and exchange goods, services and ideas in terms of money. The market may
be 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 importance
of 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 seasonal
nature of income and consumption. Rural markets are small, non- contiguous settlement
units of village relatively low infrastructure facilitates, low density of population, their
life style is different. Rural consumers are mostly farmers whose income receipts are
dependent on the vagaries of monsoon and nature Following are the facts related to Indian
Rural Market (According to the Estimates of 2000)
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75
• 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 in
urban) with cumulative credit of Rs 977 billion resulting in tremendous liquidity.
• 42 million rural House Holds availing banking services in comparison to 27 million
urban
House Holds.
• Investment in formal savings instruments: 6.6 million HHs in rural and 6.7 million in
urban
2.4 Features of Indian Rural Markets
• Heterogeneity: Rural markets comprise of heterogeneous population. Various
tiers are present depending on the incomes like Big Landlords; Traders, small
farmers, Marginal farmers, Labors, Artisans. State wise variations exist in rural
demographics like Literacy (Kerala 90%, Bihar 44%), Population below poverty
line (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 million
for urban sector. Rural incomes CAGR was 10.95% compared to 10.74% in urban
between 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 brings
brand 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 dumping
grounds for low-end products basically designed for an urban audience.
Product
The winning strategy of organisations in rural markets is to focus on their core
competency such as technological expertise to design specific products for the rural
economy. Launch of sachets is the most remarkable example in this context which has
transformed the rural market considerably as packaging in smaller units and lesser-priced
packs increases the product’s affordability. Along with the cultural dynamics, the needs
and latent feelings of the rural people have to be well understood by the marketers before
launching products in rural segments. Marketers would do well to first understand this
and then designing products accordingly. Another very important factor is the proliferation
of spurious products. Majority of rural masses are illiterate people and they identify a
product by its packaging (color, visuals, size etc.). So it becomes very easy for counterfeit
products to eat into the market share of established reputed brands. The retailer also gets
a larger profit on selling the counterfeits rather than the genuine products and hence is
biased towards the fakes.
Pricing
The rural market remains quite price-sensitive and thus squeezing costs at every
stage is of vital importance. Some marketers like HLL are in process of enhancing their
control on the rural supply chain through a network of rural sub-stockists, who are based
in the villages only.
Sales
Marketers need to understand the psyche of the rural consumers and then act
accordingly. Rural marketing involves more intensive personal selling efforts compared
to urban marketing. Firms should refrain from designing goods for the urban markets and
subsequently pushing them in the rural areas. Marketers should reach the customers by
utilizing the various rural folk media like celebrations, festivals, melas and other activities
where they assemble.
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Distribution
Companies would also do well to have a proper sales and distribution network. In
terms of sheer reach the companies can gain significant competitive advantages as the
rural market is highly fragmented and a brand needs to be on the shop shelf before it can
be sold. Companies should also make sure that the prices of their products are not pushed
up because of a channel of middlemen who are neither required nor add any value to the
product. One of the ways could be using company delivery vans which can serve two
purposes- it can take the products to the customers in every nook and corner of the market
and it also enables the firm to establish direct contact with them and thereby facilitate sales
promotion.
Annual “melas” organized are quite popular and provide a very good platform for
distribution because people visit them to make several purchases. Rural markets have the
practice of fixing specific days in a week as Market Days (often called “Haats’) when
exchange of goods and services are carried out. This is another potential low cost
distribution channel available to the marketers. Also, every region consisting of several
villages 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 use
these 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 rural
markets will be an effective promotional strategy. The need for unconventional media
arises 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 and
personalized communication system will help in realizing the goal. Besides this when the
advertisement is couched in entertainment it goes down easily with the villager. The
advantages of traditional media which make it a powerful marketing communication
channel 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 reaped
rich dividends. Brooke Bond Lipton India Ltd (BBLIL) markets its rural brands
through magic shows and skits.
Firms must be very careful in choosing the mode of communication. Access to a
vernacular newspaper is very low. Hence, audio visuals must be planned to convey
a 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 a
major share of rural markets. Though the list is not exhaustive, it enables “The Rural
Players” 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) in
agriculture value chain for the improvement. Especially, the farmers and traders are helped
by providing the market information of agricultural commodities by way of publishing in
the Newspapers, Magazines and Government Bulletins, transmitting/broadcasting on the
Radio, 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 in
the agriculture value chain. Different agencies from Government, private and NGos has
made a significant initiative in the form of research models , projects in providing
information to the online with agricultural market information. Some of the novel attempts
viz, 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 the
experiments helps the policy makers to think of scaling up of the successive model wherever
applicable. The comprehensive details of ICT initiatives in agricultural marketing are
presented 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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81
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82
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83
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
2002http://www.eidparry.com/about
us.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 fromhttp://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 in
deciding the future of many big business houses. In many product/service areas rural
markets have not been completely tapped for its buying power. Rural market comprises
of 700+ million people. Estimated market potential in rural markets are quite huge and
impressive. Rural markets need non-conventional and market specific marketing practices
for any business firm to be successful. Structure of the rural markets are different from the
urban markets. Firms face many challenges in marketing their products/services to rural
markets. Communication practices in rural markets are quite different from those of urban
markets 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 Pyramid
viz., selling goods/services to rural markets. With the advent of ICT and its various
application in agricultural marketing will bring the value chain actors in a common
platfform.
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Unit- 3
Procurement
Structure
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, large
organized retailers, and exporters.
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91
• Meaning of the right quality, the right source of supply, the right price, the right time
and the right quantity.
• Procurement associated activities such as transportation, receiving and storage,
planning techniques used in procurement and general procedures followed for a typical
purchase.
3.1 Importance of Procurement
Purchase (procurement) is as important a function as production and marketing in
contributing to profit and other objectives of an organization. It deserves all the skills and
knowledge of modern professional management. The importance of procurement function
in agro-business is even more since (1) cost of raw material constitutes a very high
percentage of the total cost of processed products; (2) it involves operations under highly
fluctuating markets, and (3) it affects the economy of large number of producers (farmers)
often inviting government intervention. The importance of agro-processing is increasing
in view of the expected large growth of demand for processed products for internal
consumption and exports, Entry of a number of large national and multinational
corporations in organized retailing of processed agro-based products, fresh fruits and
vegetables and other agricultural commodities has further created demand for professional
procurement managers. On socio-economic front agri-business has a high potential for
generation of non-farm employment. Hence, procurement of agricultural raw materials is
expected 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 literature
available exclusively to deal with procurement of agricultural raw material for direct
marketing and/or processing are relatively limited. However, an attempt has been made
to 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 management
structure 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 minimized
before these reach the consumer. Season specific: Some of the agricultural raw materials
are produced during specific season. For example wheat is produced in winter (Rabi
Procurement
93
season), harvested in March-April and arrives in mandis, April onwards. Paddy is cultivated
in rainy season (Kharif) and generally harvested in November (though in some regions of
the country it is cultivated all the year round). Hence, procurement period for these crops
is different. Similarly, there are fruits and vegetables that are available only in certain
seasons. Thus, the seasonality of production determines the timing of procurement.
Region and agro-climatic specific: There are certain crops which grow only in certain
locations having the needed agro-climatic conditions e.g. apples in Kashmir and Himachal
Pradesh, grapes in and around Nasik and Hyderabad, onions, while cultivated all over
India, are primarily available in and around Nasik. Tea is grown in North Bengal and
Ooty Hills. Coffee and spices in South India’s coastal belt.
Essential commodities:
There are certain commodities which are considered as essential commodities since
these form a major part of the food and consumption of these is essential for survival and
health of the people. These are cereals, pulses, oilseeds, oil, milk, sugar, salt etc. Central
and State governments keep a constant watch on production, movement, availability and
prices of such commodities. It keeps large buffer stock of cereals and controls the prices of
many essential commodities. A procurement manager has to be aware of government policy
and regulations while dealing with such commodities.
Price variations: Because of these said reasons agricultural commodities are subjected
to high price variations.The price variations greately affects the purchasing decision interms
of quantity purchased for production of finished products, fixation of price for the
consumable products, difficult in competiting with alternate products etc., Thus, you as a
procurement 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 be
purchased, and (iv) government policy and regulations related to marketing of agricltural
commodities 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 produce
by plants, livestock and other animals (both land and aquatic) insects and micro-organisms
each covering numerous species and subspecies.
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Every primary agricultural commodity and organic residue, animal by-products and
waste, 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.The
biomass providesnumerous opportunities for commercial and industrial exploitation,
which contribute to economic growth.The biomass processing chain provides a variety of
products even from common food crops. For example, the below table portrays the range
of major products and bye-products from the paddy explores the scope and possibility of
various 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 could
also be developed from cultivation / procurement of wild plants (especially
medicinalcrops) and rearing of wild animals like rabbit, crocodile, snake, butterflies. In
fact, there are number ofbig companies having vertically integrated plants processing
primary products, associated products,and by-products. Common among these are paddy,
sugarcane, cotton, maize, castor, etc. While the basic concepts and principles of material
management are applicable to procurement of agricultural raw materials, while applying
these concepts you should be aware of the above mentioned differences between the
industrial raw materials and agricultural raw materials. Hence the agricultural commodities
should 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 as
are fishery and livestock raising (Annexure 1). The small size causes two problems. On
one hand, providing knowledge of modern agricultural practices (extension services),
credit, inputs, irrigation, power and other services (including infrastructure) to each farmer
and 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 of
somewhat different qualities. From this small produce he keeps some for his consumption
and some for seed for next season. This marketable surplus is even smaller. This small
surplus somehow gets pooled and then reaches the market. Procurement managers of
companies involved in buying commodities for marketing / processing / organized
retailing and exports often list the problems that they face in getting the material of right
quality, in the right quantity, at the right time and at the right price, caused by small and
varied offerings of individual producers. Agricultural export business has been particularly
affected by this, since exporters have to function in markets which are competitive in terms
of quality, quantity, time and price. To have better knowledge and understanding ,a
procurement manager may aware of the constraints discussed below.
Constraints of Procurement- Agricultural commodities
Here, problems encountered in procurment of agricultural commodities needed for
proceseing units and exporters aregiven below.
• Strengthening the backward and forward linkages of agro-processing with farming
operations and better price and higher share in value addition to reach the farmers
on account of agro- processing activities” should be key areas needing policy
intervention…
• Poor yields and quality, cost-ineffective processing, expensive and unsuitable
packing material, are the reasons for dismal Indian performance in fruit and
vegetable exports.
• Foremost problem is supply of good quality of raw material in sufficient quantity
to ensure high quality of finished products.
• Since Black pepper is grown as a garden crop in Kerala, it is very difficult to
improve the yield…..Export oriented corporate and co-operative farms could play
a 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 fully
appreciated….Inhabitants of the forest area should be trained in scientific methods
of herb collection.
• India lost Middle-East meat market due to some inherent drawbacks, such as
unhygienic breeding, slaughter at an unproductive age which produced poorer
meat and a traditional butcher style which increased the risk of infection.
• Production of high quality sericulture raw material needs to be planned by
inducing farmers to accept advanced silkworm rearing technology.
In leather industry, defective technologies, inadequate storage facilities, poor market
intelligence, indifferent grading of hides and excessive retention by trade intermediaries
coupled with the diminished bargaining capacity of primary producers were the
main problem Farmers suffer avoidable losses in handling and transport due to poor
packaging, especially in case of horticultural and floricultural crops, medicinal plants.
• The Indian trade (as distinct from multinationals) in agricultural products is yet
to understand the significance of packaging in market penetration, sustenance
and expansion.
• The crux of the problem lies in the absence of effective backward linkages of food
processing industry with small farmers……even contract farming arrangements
have failed to ensure that farmers kept their end of the contract……..this mechanism
(contract farming) could be effectively strengthened if the tripartite arrangement
between farmers, industry and State/ Central Government could be worked out.
• Low yields combined with the excessive number of intermediaries in the
procurement chain, the waste, and loss of value, lock India’s food chain into a
vicious cycle of low investment, low skill, low yield, low efficiency, and low added
value…..Their solution comprises both backward integration for reducing costs
and forward integration for adding value.
From the above, we can find that the processing units and exporters of agricultural
commodity or product face identical problems.
Source: National workshop on “Strategies for Accelerating Agro-processing and
Exports”1988
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3.5 Types of Purchasing
There are two types of purchasing: (i) purchasing for resale and (ii) purchasing for
conversion or consumption. (i) Purchasing for resale : In this type buyer purchases the
material for resale. This is done by traders, merchants, speculators and trading firms. For
example, small traders/merchants buy wheat, paddy, oilseed, etc from the farmers in
villages and/or mandis (regulated markets) and resale these to bigger merchants/
commission agents, retail shops, processing companies etc. Speculators and trading firms
buy such commodities and take physical delivery, stock these for sometime and sell these
when the prices are high, and make profit. For resale, the buyer knows in advance and
certain extendthe market price and what his customer wants and sells the commodity at a
price which includes his cost of buying (i.e. price he paid for the commodity plus his cost
of travel,weighing, packaging, transport, octroi, and losses in trading the material), and
profit.
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 costs
likely to be incurred on weighing, packaging, handling and transport. It is because of this
knowledge 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 housing
colonies or parks his cart at roadsides, and sell these to consumers.
Eg. Even large companies buy fruits and vegetables from farmers and mandis and
after 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 Food
Bazaar, ITC’s e-choupal system for purchasing & reselling of farm produce. This kind of
system 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 own
consumption or conversion i.e., for converting the material in different finished or semi-
finished products by processing. The folowing table indicates with the examples of
purchasing 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/Pi
neapples
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. For
example, 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 or
canned juices and soft drinks. We thus see that company purchasing agricultural
commodities 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 open
mandi 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 of
buying 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 they
always buy high quality products. Many a time budget available is also one of the factor
considerd for purchase decision. In purchasing high quality is not something that has always
to be insisted upon. It is also accepte fact that best quality raw materials gives best
production.
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 going
for procurement of mango pulp
1. Which mango variety it should purchase? Alphanso(High quality but costly ) or
Keshar 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 depending
on quality attributes (taste, colour, thichness, flavour etc.,) the consumer wants it has to
purchase different varieties of mangoes and blend them to produce the preferred quality.
Therefore quality has altogether different meaning.(suitability, satisfaction of the
need,function and cost etc.) The best quality is one that satisfies the intended need at the
lowest cost.
3.7.1 How is quality determined?
While determining the quality of raw materials to be purchased ,following three
major considerations has to be keep in mind
Major considerations for quality Determinants
The technical consideration of suitability
• Whether machines are designed to suit a pa
rti-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 quality
of 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 value
analysis one can achieve a balance among price, cost and value received and reduces cost
by 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 of
material the company must develop “supplier good will”. The system should develop
and sustain good buyer and seller relationship. Some practical tips to build good buyer
and seller relationship are
• A good procurement manager motivates the suppliers and builds up such buyer-
seller relationship which is mutually profitable and advantageous with continuing
relationship.
• 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 the
other just because he is friend of a friend or a relative of some friend or relative. The
reputation of fairness to all vendors is a valuable asset and goes a long way in developing
a 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 vendor
Reliability of seller: If a seller regularly supplies the agreed quality and quantity at right
time and place, then he is Considered to be reliable. From own experience , track record
and 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 conditions
such as due to market, increasecost of transportation, strikes,weather conditions; crop
failure in the region from where the supplier procures the material etc. In all such
conditions ,the reliable seller finds out ways and means and ,continues, to deliver the
material as agreed upon.
Accessibility of seller
A good seller is accessible to the company at all time. To cope up with some of the
occasion like uncertainities, sudden rush order for finished product needs, sudden revision
of supply schedule due to temporary breakdown of plant , warranted quick decisions.
While taking such key decisions accessibility of seller is very imperative to support the
contingency measures.
Low prices
Price is another important factor while selecting one vendor over another. Vendor
who regularly offers lower price and interested to establish long term relationship with
the company would obviously preferredto get the bulk order on regular basis. On the
other hand there are vendors who are opportunists and believe in one-shot, high profit in
their deals and move from company to company taking advantage of short-term demand
and 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 the
cost of inventory cost and some times quick deliveries are alsoimportant when there is a
sudden 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 one
over 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 other
processors, it should take following steps for evaluating a new supplier. The Procurement
Manager should personally visit the plant of the new supplier, and check the following
listed 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 to
one 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 time
and place There are constantly changing variables, such as demand and supply at a
particular place and at a particular time. These have to be evaluated to arrive at the right
price for a specific purchase. For this we have to understand: (i) Condition of competition
and (ii) What constitutes a fair profit.
3.9.1 Condition of Competition
The condition of competition depends upon market structure prevailing. To
understand and determine, what would be the right price, it is essential to know on the
different market structure. Traditionally the markets are determined as indicated in the
following 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 see
that the farmer/producer gets a fair profit so that he is motivated to have a continuing
mutually profitable relationship with the company. The buyer company should see that
the price is high enough to keep the vendor in business. In agriculture, profit to farmer
producer 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 current
interest rate charged by banks for medium term loan, and the interest rate for medium
term deposits. The cost plus fair profit should be price of the produce purchased at farm
gate by a company. Many large companies buy semi-finished products from small
processors. 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 calculating
the profit is to first calculate the capital investments made by the processors and then work
out 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 is
obtained 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 price
within which buyer can take decision.
• A procurement manager has to investigate price from various sources to get an
idea 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, transport
and other services should also be agreed upon.
3.9.4. Contracts
Written contract between buyer and seller is a significant part of purchasing. There
are 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 contract
market conditions (demand and supply, prices, availability, transport and other services
etc.) do not significantly change. However, as there is no guarantee that changes may be
significant, 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 may
negotiate 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 by
two factors: (i) availability and (ii) price.
Markets of agricultural are unstable. Here supply and price fluctuate substantially
producing a highly unstable short-run situation. For example, in vegetable markets, which
generally start operations early morning, prices may change hour-on-hour. Certain
vegetables are available in certain seasons. Early arrivals of crops such as cauliflower may
fetch higher price which goes down during the season. Highly perishable crops like green
leafy vegetables loose their value if not sold early in the day. Same is the case with many
soft 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 for
industrial products and hardware are stable. Here, factors of supply and price are reasonably
stable 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 later
with profit motive
(iii) Forward Buying: Here company purchases quantity which is more than its current
Requirement and surplus quantity is stored for its future use.
(iv) Hand-to-mouth Buying: There are companies which do not keep any inventory of
material.
But buy the quantity needed according to their daily or weekly capacity and/or demand
for 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 total
quantity of raw material needed by the company.
Eg.soybean processing plant with installedcapacity of 300 MT/day operating
continuously 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. For
example, say60% capacity utilization is needed to satisfy the demand, then quantity
needed 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 factors
taken together decide the right quantity at a specific transaction.
• Close relation between Quality and Quantity of raw materials in deciding the right
quantity
Eg. Agricultural commodities are biological produce. As such, these are affected during
transport and storage. There could be weight loss due to loss of moisture (as often
happens in case of paddy), losses due to poor packaging and handling during transport
and storage, spoilage due to unscientific storage, pest attack and fungus etc. Often
external matter such as small stones, sticks, mud, unripe or over ripe seeds affect the
quantity and quality of the material. All these have to be taken into account while
determining 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 the
basis 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 any
organization. Procurement decides the price, quality, quantity and availability of raw
materials 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 are
organic in nature and their procurement is affected by their perishability, seasonality,
productions density and quality etc., Procurement manager should be well versed with
the characteristics of the commodities, place of their production, location of mandis and
related Government policies. There are two types of purchasing viz., Purchasing for resale
and Purchasing for consumption. Purchasing plans differ depending on the reasons to
purchase. Known sources of purchase are Contract farmers, Open Mandis, Direct from
farmers, Farmer cooperatives and Semi finished products from other companies. Purchase
manager has o decide on either few or many sources of supply depending on the need of
the 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 supply
vendors are to be rated periodically to ensure the desired standards with respect to various
factors the organization considers as the most important ones. Written contract between
buyer and seller is a significant part of purchase. Though transportation, packaging and
storage 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
Agri-Business and Entrepreneurship Development
(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
Commodity Markets
111
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 is
the backbone of our economic system. India is primarily an agricultural country. The
fortunes 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 were
different kinds of markets based on products, nature of competition, time etc. This Unit
will 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 without
qualitative differentiation across a given market. It refers to any good that possesses a
physical 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 asset
classes.
• 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 and
the same commodity from another producer.
• Generally they do not have brands.
• Include physical substances, such as food, grains, and metals, which are
interchangeable with another product of the same type, and which investors buy
or 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 their
production and consumption centers are far apart
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113
• They have wide variations in quality and hence certain grades are taken as
standards
4. Commodity Markets
The term market means not a particular place in which things are bought and sold
but the whole of any region in which buyers and sellers are in such a free intercourse with
one 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 following
aspects.
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 accordance
with the rules and regulations framed by the statuary market organization
representing different sections involved in markets. The marketing costs in such
markets are standardized and marketing practices are regulated. Eg. Regulated
market 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 undertaken
either by open auction or by the close tender method.
ii) Weighment of produce: Weighment of the produce is done by a licensed standard
weights and platform scale.
iii) Grading: the produce in the regulated markets is expected to be sold only after
grading.
iv) Licensing of market functionaries: all the market functionaries , from the hamals
(loaders) to traders, working in the regulated markets have to obtain license from
market committee.
b. Unregulated Markets: these are the markets in which business is conducted without
any set rules and regulations. Traders frame the rules for the conduct of the business
and run the market. These markets suffer from many ills, ranging from non-uniform
charges 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 much
processing. They lie near the origin of commodities. In primary markets, the producers of
goods sell their farm products to the wholesalers and their agents. Eg. Mostely farmers
sell their produce in the farmgate, characterised by large volume of proudction of single
most commodity attracts the wholesaler/agents to procure from that place for further
activities in the chain.
b. Secondary Markets
These markets are mostly far away from the primary centers of production and located
at the consumption centers. This is the market where the wholesalers sell their goods to
the retailers for onward selling to the consumer. The middlemen buy goods from producers
and manufacturers and sell to the retailers. Eg. Ottanchatiram whole sale market of Tamil
Nadu. Here vegetables are bring to the market and distributed to various whole sale
markets 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. The
retailers sell their goods to consumers. This market is one where the produce is either
finally disposed of to the consumers or processors, or assembled for exports. In these
markets, merchants are well organized and use modern methods of marketing.Eg.
Organised retail shops like Reliance Fresh, More, Big bazzar, Kannan Deparmental Stores
of coimbatore etc.,Recently ,in this particular type of market the direct participation of
farmers are much encouraged with evolution Of “Farmers market “ an innnovative
agricultural market concept ,where in farmers they themselves bring the produce to market
and engaged in direct selling experience through the established market set up like Uzhavar
Udhaviyagam (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 perishables
and enhance their efficiency and thus increase farmers income,
ii) Provide professionally managed competitive alternative marketing structures that
provide multiple choices to farmers for sale of their agricultural produce,
iii) To drive reforms in the agricultural marketing sector resulting in accelerated
development of marketing and post harvest infrastructure including cool chain
infrastructure in the country through private sector investment.
iv) To bring transparency in the market transactions and price fixation for agricultural
produce and through provision of backward linkages to enable the farmers to
realise 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 the
products. Largely small-scale transactions take place at retail level. Retailers are scattered
all over – mostly in residential areas. In short retail refers to a market where goods are sold
in small quantity directly to the consumer. Eg. Retail shops at junction place, traditional
kirana 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 transactions
take 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 and
manufacturers. Wholesaling is normally characterized by a system of delivery by the
wholesaler 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/future
contracts for delivery on a specified future date. Futures exchanges act as a platform
facilitating and regulating trade. A futures contract is an agreement between two parties to
buy or sell a specified and standardized quantity and quality of an asset at a certain time
in the future at a price agreed upon. It is a market in which the buyers and sellers make
agreement for delivery of goods in future. The contract is made on a certain date but the
goods 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 a
future date for a price agreed upon by both. Contracts are booked in advance, to mitigate
risk. 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 physical
markets. In this market, delivery is taken immediately. Cash settlement is done within a
maximum of 11 days. The spot market is a ready market where the sellers on the spot
physically hand over goods to the buyers. There is an exchange of goods for money at the
same 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 called
as virtual markets / online market place – eg e-bay. In Futures exchanges also, now trading
is taking place electronically
b. Physical Markets
A market in which commodities, such as grain, gold, crude oil etc. are bought and
sold 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 at
the 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 family
use. 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 will
hold 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 cost
of supplies.
b. Imperfect Markets: The markets in which the conditions of perfect completion are
lacking are characterized as imperfect markets. The following are the situations
based on the imperfections:
i. Monopoly: It is a persistent situation where there is only one provider of a product
or service in a particular market. Monopolies are characterized by a lack of
economic com- petition for the good or service that they provide and a lack of
viable substitute goods.
ii. Oligopoly: It is a market form in which a market or industry is dominated by a
small number of sellers (oligopolists).
i. Duopoly: This is a specific type of oligopoly where only two producers exist in
one market
1.3 Market Players and Motives
There are different kinds of participants in the markets, which are listed below. Their
activities vary slightly according to the markets they operate and they also carry different
names according to the place of operation. – eg. speculators, hedgers & arbitragers in futures
market.
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 sells
when 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 the
markets for profit motive is an investor. He works in the market by buying goods and
selling 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 the
fluctuations 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 or
more markets, time periods etc Eg. a person buying in the spot market and selling in the
futures 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 forward
linkages
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 commercial
crops like sugarcane, cotton, tea, coffee, etc. The concept has, however, gained importance
in recent times in the wake of economic liberalization. The main feature of contract farming
is that farmers grow selected crops under a buy back agreement with an agency engaged
in 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 Andhra
Pradesh, seed production contracts for hybrids seed companies in Karnataka, cotton in
Tamil Nadu and Maharashtra etc. which helped the growers in realization of better returns
for their produce. In our country contract farming has considerable potential where small
and marginal farmers can no longer be competitive without access to modern technologies
and support. The contractual agreement with the farmer provides access to production
services and credit as well as knowledge of new technology. Pricing arrangements can
significantly reduce the risk and uncertainty of the market place.
Small-scale farmers are frequently reluctant to adopt new technologies because of
the possible risks and costs involved. In contract farming, private agribusiness firms
normally offer improved methods and technologies because they have a direct economic
interest in improving farmers’ production to meet their needs. In many instances, the larger
companies provide their own extension support to contracting farmers to ensure that
production is according to the specification. The farmer learns many skills through contract
farming like record keeping, improved methods of applying chemicals, fertilizers and
knowledge of the importance of quality and of the demands of export markets. In view of
the above, contract-farming arrangements need to be encouraged widely. This would
require arrangement for registration of sponsoring companies and recording of contract
farming 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, if
any, arising between the farmers and the company under a quasi-judicial manner. The
farmers while raising the contracted crops, run the risk of incurring debt and consequent
displacement 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. The
company recently imported 15,000 citrus plants from California, which are being distributed
in 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 business
organizations in order to produce for their captive processing requirements or for the open
market.
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 the
largest mango orchard in Asia with highest social responsibilityto ensure
environmental protection and functioning as profitable venture .
2. Forward linkage
Forward linkage means the dealings with retail chains and processors. The most
essential 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. they
will not agree with any pre-agreed price with farmer, however they give the prevailing
market 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 existing
open 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 meanwhile
proactively prepare farmer group to establish linkage with retailers.
• Necessary infrastructure in order to provide, Multi commodity service, preserving
quality, 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 following
organizations.
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) was
established in 1964 as a permanent intergovernmental body, UNCTAD is the principal
organ of the United Nations General Assembly dealing with trade, investment and
development issues.
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123
• To maximizing the trade and development prospects of developing countries and
economies in transition,
• Assisting them in their beneficial integration into the globalizing and liberalizing
world economy and the international trading system, and
• Aims to strengthen human, institutional and policy-making capacities by
formulating and implementing national trade policy frameworks conducive to
economic, human and social development and poverty alleviation, as well as in
participating effectively in multilateral, regional and sub regional trade
negotiations.
• To develop Comprehensive computer-based information system on trade control
measures 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 setting
up of a full- fledged trading platform for Fruits and Vegetables at Bangalore. It has been
formed to establish an alternative market set-up that operates parallel to mandis to stimulate
production, 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 Mandis
and get remunerative prices
• APMC Act emphasises on regulation and restrictions on marketing activity which create
a 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 link
directly with rural farmers for the procurement of agricultural/aquaculture produce like
soya, coffee, and prawns. E-Choupal was conceived to tackle the challenges posed by the
unique features of Indian agriculture, characterized by fragmented farms, weak
infrastructure and the involvement of numerous intermediaries. Traditionally, these
commodities are being procured in ‘mandis’ (major agricultural marketing centres in rural
areas of India), where the middleman used to make most of the profit. These middlemen
used unscientific means to judge the quality of the product, the price difference in the
payout for good quality and inferior quality was less and hence there was no incentive for
the farmers to produce good quality yield. With e-choupal, role of the middleman was
restricted.
ITC Limited has now established computers and Internet access in key rural areas
where the farmers can directly negotiate the sale of their produce with ITC Limited. The
PCs and Internet access at these centers enable the farmers to obtain information on mandi
prices, good farming practices and place orders for agricultural inputs like seeds and
fertilizers. This helps farmers in improving the quality of produce, and also helps in
realizing a better price. Each ITC Limited kiosk having an access to Internet is run by a
sanchalak—a trained farmer. The computer housed in a farmer’s house is linked to the
Internet via phone lines or by a VSAT connection and serves an average of 600 farmers in
10 surrounding villages within about a 5 km radius. The sanchalak bears some operating
cost but in return gets commissions for the e-transactions done through his eChoupal. The
warehouse hub is managed by middle-men called samyojaks. The samyojak acts as a local
commission agent for ITC Limited.
The system saves procurement costs for ITC Limited. The E-Choupal model is quite
different from the other models, as the farmers do not pay for the information and
knowledge 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 and
delivery are replaced with discounts. Metro’s Cash & Carry’s business model brings
together small, medium and large-sized producers, farmers, agricultural cooperatives and
manufacturers, with the dispersed community of hotels, restaurants, caterers, traders,
retailers and small to medium business enterprises, under one roof. They buy directly
from producers and manufacturers and sell to business customers at wholesale centers.
This way, they shorten the supply chain and thereby eliminate the high costs associated
with a fragmented supply chain. They also cut costs and wastage by building modern
trade 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 bulk
quantities at lower costs, a part of which is passed on to the customers.
1.7.4. GROUP MARKETING – Case of Vegetable and Fruit Promotion Council
Keralam (VFPCK) Kerala Horticulture Development Programme (KHDP) is the precursor
to the farmer led company known as Vegetable and Fruit Promotion council of Kerala. It
has explored the feasibility of introducing SHG in agricultural sector with empowerment
intervention model Vegetable and Fruit Promotion Council Keralam (VFPCK) is an ISO
9001-2000 certified company registered under section 25 of Indian Companies Act 1956
and has been established to bring about overall development of fruit and vegetable sector
in Kerala and established in 2001. At present 260 VFPCK Swasraya Karshaka Samithis are
functioning in across Kerala. About 98460 MT of produce worth Rs.157.54 crores were
traded by these SKS during the financial year 2010-11
Organizational setup:The Director Board with 11 members is chaired by the Minister
for Agriculture, Government of Kerala ,and acts as the governing body of the Council. The
board members include senior Government officials like Agricultural Production
Commissioner, Secretary (Finance), Chief Executive Officer of VFPCK, four persons
including a woman to be elected from the SHGs and one representative each from
participating 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 in
production, 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 visit
by the Extension professional, supplemented with mass awareness programmes like
campaigns and demonstrations
3. Group Marketing
A group of 7 to 15 neighbouring SHGs will constitute a Field Centre (FC), wherein
the SHG farmers bring their produce to a common place for marketing and traders will
procure the produce directly from the farmers.
4. ParticipatoryCredit
VFPCK signed an MOU with 11 banks in the State for disbursement of credit based
participatory credit planning session to farmers ,facilitates members for easy and timely
access of credit.
5.Participatory Technology Development
The experimental capacities of the farmers are enhanced through PTD approach and
empower 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 and
facilitating the farmers to take more effective decisions for marketing of their produce. It
provides SHG farmers better access to markets and therefore a greater share in the
consumer’s rupee.
Clustering of SHG – Market centric approach
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127
Under group marketing, 10-15 Self Help Groups (SHGs), numbering about 250-300
farmers, come together under the banner of Swasarya Karshaka Samithi (SKS) and trade
their 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), wherein
the SHG farmers bring their produce to a common place for marketing.
• Traders are coming to the Field Centers and this will increase the bargaining power
of the member farmers.
• The Market Information Centre (MIC) associated with VFPCK provides the daily
market prices of banana and all other vegetables collected from different markets
in 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 elevated
to Swasraya Karshaka Samithis (SKS)
• Each SKS provided with stage by stage various other supports like additional
platform weighing scale, furniture, telephone, major expense reimbursement for
a 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 ensuring
careful handling of the produce.
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4. Guaranteed Prompt payment within the prescribed period due to collective effort
in recovery from among debtor traders
5. Assures the fair profit and eliminate the traders lobby and improve the bargaining
power for farmers
6. helps the farmers to have a good volume of transaction of produce and negotiate
with the wholesalers in order to 'optimize their returns'
7. Large volumes of produce, induces traders to buy from the Swasarya Karshaka
Samithis.
Infrastructural Supports from VFPCK
Adequate and timely training is ensured for the Marketing Master Farmer committee
members. 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 agricultural
production. Commodity markets have been serving the livelihood in the Indian economy.
A commodity is anything for which there is demand, but which is supplied without
qualitative differentiation across a given market. The markets in which the commodities
are trading are called as commodities markets. There are different kinds of commodities
markets, which have been classified based on functioning, stage, scale of business, time
and nature of business transaction, place and area, products sold and competition. In the
markets, largely there are four kinds of participants, namely buyers, sellers, stockists and
trade facilitators. The market participants have investment, speculative and arbitrage
motives.
The markets are bound with forward and backward linkages. The backward linkages
consist of contract farming and corporate farming models. In contract farming the farmers
grow selected crops under a buy back agreement with an agency engaged in trading or
processing. Corporate farming involves the direct ownership or leasing in of farmland by
business organizations to produce for their captive processing requirements or for the
open market. Dealing with retail chains and processing units are termed as forward
linkages. Under the changing scenario, commodity markets arefacing many challenges
such as increased infrastructure requirement, market access to farmer, improving the
bargaining power of farmers, introduction of de-intermediation process. To pace up the
challenges, market functionaries have been introducing innovations in marketing such as
E-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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131
2.1. Introduction to Derivatives
In the world of liberalization it is most indispensable to predict the future. It becomes
more requisite for agriculture, which faces more flux than other sectors. So the Government
of 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 underlying
variables 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 financial
instruments. Unlike financial instruments such as stocks and bonds, a derivative is a
contract 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 commodity
derivative market and financial derivatives markets. As the name suggests, commodity
derivatives markets trade contracts for which the underlying asset is a commodity. It can
be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals
like gold, silver, etc. Financial derivatives markets trade contracts that have a financial
asset 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 to
buy or sell the underlying asset at a future date at a future price. Futures contracts differ
from 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 the
right but not the obligation to buy a given quantity of the underlying asset, at a given price
on or before a given future date. Puts give the buyer the right, but not the obligation to sell
a 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 options
traded on options exchanges having a maximum maturity of nine months. Longer dated
options are called warrants and are generally traded over the counter.
Swaps: Swaps are private agreements between two parties to exchange cash flows in
the future according to a prearranged formula. They can be regarded as portfolios of forward
contracts.
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2.2. Instruments available for Trading
In recent years, derivatives have become increasingly popular due to their applications
for hedging, speculation and arbitrage. Before we study about the applications of
commodity derivatives, we will have a look at some basic derivative products. There are
three 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 a
specified price. One of the parties to the contract assumes a long position and agrees to
buy 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 for
the same price. Other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded outside
the 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 same
counter 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 a
certain time in the future at a certain price. But unlike forward contracts, the futures contracts
are standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. It is a standardized contract
with standard underlying instrument, a standard quantity and quality of the underlying
instrument 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 maturity
by entering into an equal and opposite transaction. Majority of the futures transactions are
offset 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 contracts
on 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 which
the 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. For
instance, 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 a
different 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 be
summarized in terms of what is known as the cost of carry. This measures the storage cost
plus 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 time
a 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 adjusted
to reflect the investor’s gain or loss depending upon the futures closing price. This is called
marking to market.
Maintenance margin: This is somewhat lower than the initial margin. This is set to
ensure that the balance in the margin account never becomes negative. If the balance in the
margin account falls below the maintenance margin, the investor receives a margin call
and is expected to top up the margin account to the initial margin level before trading
commences on the next day.
Short position: The sale of a security or commodities futures not owned by the seller
at the time of the trade. Short sales are usually made in anticipation of a decline in the
price.
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 holder
does not have the obligation to exercise this right. In contrast, in a forward or
futures contract, the two parties have committed themselves to the act of buying
and selling. Whereas it costs nothing (except margin requirements) to enter into a
futures 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 corporate
that is organizing futures trading in commodities. A commodity futures contract is a
contractual agreement between two parties to buy or sell a specified quantity and quality
of commodity at a certain time in future at a certain price agreed at the time of entering into
the 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, technology
platforms, 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 authority
before 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 the
Commodity Exchange as a Trading-Cum-Clearing Member (TCM) conferring upon them a
right 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) besides
trading on behalf of registered approved / authorized users and to clear/ settle them.
Professional Clearing Member (PCM) - Any Financial Institution or Bank, which is registered
as PCM is conferred the right only to clear and settle trades through the clearing-house of
the exchange. They may clear and settle trades of such members of the exchange who
choose 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 price
movements 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 other
participants 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 in
the price of an asset. Futures and options contracts can give them leverage; that is, by
putting 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 large
gains as well as large losses.
Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy
between prices of the same product across different markets. If, for example, they see the
futures price of an asset getting out of line with the cash price, they would take offsetting
positions 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 Commodity
Derivatives Exchanges in India, which is overseen by the Ministry of Consumer Affairs
and Public Distribution, Government of India. It is a statutory body set up in 1953 under
the 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 withdrawal
of recognition from any association or in respect of any other matter arising out of
the administration of the Forward Contracts (Regulation) Act 1952.
(b) To keep forward markets under observation and to take such action in relation to
them, as it may consider necessary, in exercise of the powers assigned to it by or
under the Act.
(c) To collect whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions
of the act is made applicable, including information regarding supply, demand
and prices, and to submit to the Central Government, periodical reports on the
working of forward markets relating to such goods;
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(d) To make recommendations generally with a view to improving the organization
and working of forward markets;
(e) To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever
it 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 and
efficient, accorded approval for setting up of national level multi commodity exchanges.
Accordingly three national level exchanges are there which deal in a wide variety of
commodities 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 and
advantages to a large cross section of the participants including Producers / Processors,
Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives and
Associations.
a. National Commodities Derivatives Exchange (NCDEX)
NCDEX is a nation-level, technology driven de-mutualized on-line commodity
exchange with an independent Board of Directors and professionals. It is a professionally
managed by ICICI Bank, LIC, NABARD and (NSE). NCDEX is a public limited company
incorporated 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 on
November 2003. It has permanent recognition from Government of India for facilitating
online trading, clearing and settlement operations for commodity futures markets across
the country. Key shareholders of MCX include Financial Technologies (I) Ltd., State Bank
of 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 was
granted approval by the Government to organize trading in the edible oil complex. It has
operationalized from November 26, 2002. It is being supported by Central Warehousing
Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas
Limited. It got its recognition in October 2002. Apart from these national exchanges there
are other regional commodities exchanges in India.
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2.6 Exchange Transactions
There are three components in exchanges transaction viz: trading, clearing and
settlement.
1. Trading
The trading system on the electronic exchanges provide a fully automated screen
based trading for futures on commodities on a nationwide basis as well as an online
monitoring and surveillance mechanism, which is called as terminal. It supports an order
driven market and provides complete transparency of trading operations. The system
supports an order driven market, where orders match automatically. Order matching is
essentially on the basis of commodity, its price, time and quantity. All quantity fields are
in specified units and price in rupees. The exchange specifies the unit of trading and the
delivery unit for futures contracts on various commodities. The exchange notifies the regular
lot size and tick size for each of the contracts traded from time to time. When any order
enters the trading system, it is an active order. It tries to find a match on the other side of
the book. If it finds a match, a trade is generated. If it does not find a match, the order
becomes 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 complete
audit trail if required. How to invest/trade in commodities exchange
The following diagram should give an investor/trader clear understanding of how
to go about investing/trading in commodities market. The prerequisite for trading in
commodities markets are
a.1 Client code: The client who is interested to trade in commodity exchanges has to
open 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 validity
of client agreement will be verified in the exchanges and specific client code is allotted to
trade in the exchanges.
a.2. Depositing initial margin
An initial amount has to be deposited by a customer at the time of entering into a
contract, which is termed as initial margin. The initial margin will differs based on the
commodities. The exchanges fix the margin for each commodity and it is a small percentage
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141
(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 trade
with broker through NCDEX/MCX terminals. The trade placed at brokers terminal is
submitted to the exchange terminal. When any order enters the trading system, it is an
active order. It tries to find a match on the other side of the book. If it finds a match, a trade
is generated. From the exchange terminal the trade confirmation is sent to the broker and
broker 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 the
particular date. If the difference is positive the exchanges credit that particular amount
into the client account. In case the difference is negative, the exchanges deduct that particular
amount from the credit account. If the account does not have balance then pay in request is
sent to the clients.
2. Clearing
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of
trades executed on the exchanges. The settlement guarantee fund is maintained and
managed 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 matching
for deliveries takes place firstly, on the basis of locations and then randomly, keeping in
view the factors such as available capacity of the vault/ warehouse, commodities already
deposited and dematerialized and offered for delivery etc. Matching done by this process
is binding on the clearing members. After completion of the matching process, clearing
members are informed of the deliverable/ receivable positions and the unmatched
positions. Unmatched positions have to be settled in cash. The cash settlement is only for
the 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 happens
on a continuous basis at the end of each day, and the final settlement, which happens on
the last trading day of the futures contract. On the Exchanges, daily MTM settlement and
final MTM settlement in respect of admitted deals in futures contracts are cash settled by
debiting/ crediting the clearing accounts of CM (Clearing Member) with the respective
clearing bank. All positions of a CM, either brought forward created during the day or
closed out during the day, are marked to market at the daily settlement price or the final
settlement price at the close of trading hours on a day. On the date of expiry, the final
settlement price is the spot price on the expiry day. The responsibility of settlement is on
a trading cum clearing member for all trades done on his own account and his client’s
trades. 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, members
submit delivery information through delivery request window on the trader workstations
provided by the exchanges for all open positions for a commodity for all constituents
individually. Exchanges on receipt of such information match the information and arrive
at a delivery position for a member for a commodity. The seller intending to make delivery
takes the commodities to the designated warehouse. These commodities have to be assayed
by the exchange specified assayer. The commodities have to meet the contract specifications
with allowed variances. If the commodities meet the specifications, the warehouse accepts
them. Warehouse then ensures that the receipts get updated in the depository system giving
a credit in the depositor’s electronic account. The seller then gives the invoice to his clearing
member, who would courier the same to the buyer’s clearing member. On an appointed
date, 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 agricultural
commodity production system and serving as a platform for discovering market prices in
the recent past. Here farmers selling a future contract and committed to deliver their produce
at 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 of
trading the future prices are viewed as bench mark for farmers as well as to traders. They
support 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 price
realization.
At what circumstances the future trading will be advantageous?
Some of the occasion the futures will advantageous to the stake holders of the
system. 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 such
commodities. This kind of issues greately supported by futures trading, by
helping even out prices of seasonal commodities through the year.
• This trading system also helps in deciding the level of farm diversification. Being
market driven, futures trading help growers in their diversification decision.
Commodities that have a good market value are traded on the futures market and
farmers with fair knowledge on this perspective can decide on diversifying their
farm as per the market demand.
• The price of a certain crop fluctuates; it is a win-win situation for a farmer as he
can hedge his risk in futures platform.
• The organized and unorganized retailers at the delivery end would use this
platform 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 knowledge
and empowerment on futures trading to farmers will help them to get better prices for the
produce. The periodical monitoring of market intelligence reports and advisory from the
credible 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 the
government of India introduced commodity futures trading in India through commodity
exchanges. A commodity exchange is an association or a company or any other body
corporate that is organizing futures trading in commodities. The members of Exchanges
are 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 Trade
Association Ltd.” in 1875. The consequent gradual trade and industry liberalization in
both the domestic and external sectors emphasized the need for futures trading and on
1.4.2003 the Government permitted futures trading in the commodities. The national
commodity 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, Chicago
Board of Trade, New York Board of Trade, Chicago Mercantile Exchange and London
Metal Exchange. Exchange transactions involve trading, clearing and settlement. To start
trading the participant has to create trading account in exchange and has to place the trades
at broker terminals. The exchanges undertake the pay in and pay out of trades executed.
National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of trades
executed on the exchanges. At last the contracts are settled. Finally an orientation of futures
trading 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 agricultural
produce would create uncertainty and risks, which could hamper the performance of the
agricultural 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 poverty
alleviation. Therefore understanding agricultural risks and the ways for managing it
becomes important. Price volatility is perhaps the most pressing issue facing the producers
of primary commodities. Agricultural production implies an expected outcome or yield
to 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 basically
the risk that returns from the investment in physical agricultural goods or commodities
will 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 well
known that agricultural prices vary from month to month and year to year. However, if the
variation were predictable, farmers would face no price risk. There are many numbers of
risks that are associated with the agricultural commodities, especially at the production,
storage, transport, marketing and processing stages. Hence it becomes important to identify
the 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 to
production variations are magnified in price variations. Agricultural production risks may
be due to those arising out of weather related factors, pests or diseases, farm and
management practices, genetics, machinery efficiency, quality of inputs and also due to
risks from variable prices.
b. Financial or Credit Risk
Farm credit has always been an important factor in improving agricultural
productivity and strengthening the rural economy. However, complicated operational
mechanism of farm credit services, high transaction costs, uncomfortable repayment
schedules, 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 profound
impact on the prices. The government intervention sometimes instead of protecting may
result in distortion of trade, as it does not let the natural market forces of supply and
demand in identifying the prices.
Eg. Reform measures like restriction on storage and movement of produces, direct
price support measures, subsidies etc.
d. Market linked Risks
In a developing economy like India, wild swings in market prices due to supply and
demand factors arise due to nascent nature of such markets. Lack of participation, non-
availability or low dissemination of market information, infrastructure bottlenecks, market
structure 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 get
some 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 expectation
of price fall in the season and adequate price rise later. However financial resources
and storage space are required which may limit the scope of this kind of risk
management.
c. Diversification – It is the combining of different production processes so that low income
in one will be compensate by higher income from other enterprises. It can include
growing of different crops or different types of the same crop, mixed farming with
combining 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 money
lenders. If collateral is insisted on advancing of the loan then this measure may not be
feasible 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 to
obtaining 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 against
the natural perils. Eg. Insuring the Paddy crops under modified NAIS as loanee farmer
as well as non loanee farmers
g. Hedging in futures
Here the risk averse producers can buy protection from the risk taking speculators
looking for profit.It involves establishing a position in the futures market that is equal
and 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 Hedging
Hedging 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 objective
of transferring cash price risk.
What it means?
• Taking a position in the futures market that is opposite to a position in the physical
market (i.e. buying in futures markets the quantity soldi n spot markets and
vice versa, thus offsetting any loss attained in one market by a gain in the other
market)
• 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 gain
in another
• A temporary substitution of futures market transaction for a planned cash market
transaction 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 of
price changes remains unchanged
2. The mechanics of hedging includes the making of simultaneous transaction, but of
opposite Nature, in the futures and cash markets.
Who could be the Hedgers?
Hedgers could be Government institutions, private corporations like financial
institutions, trading companies and even other participants in the value chain, for instance
farmers, 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 trade
profit
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b. Hedging enables him to keeep the trade margins at a lower level to casue there is
no risk
c. It facilitates the financing of inventories of stored commodities to the maximum
possible 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 asset
underlying the futures contract.
• Often the hedgemay require the futures contract to be closed out well before its
expiration date. This could result in an imperfect hedge.
• The expiration date of the hedge may be later than the delivery date of the futures
contract. When this happens, the hedger would be required to close out the futures
contracts entered into andtake the same position in futures contracts with a later
delivery date. This is called a rollover.
• Hedgescan be rolled forward many times. However, multiple rollovers could lead
to 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 pressing
issue facing the producers of primary commodities. The different causes of price risks are
production risks, financial risks, institutional risks, and market-linked risks. There are
different methods for handling price risks. One among them is hedging in futures. Hedging
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 objective of transferring cash
price 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 that
requires a short position in futures contracts. It is appropriate when the hedger already
owns 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 processors
etc, who have taken or will be taking an exposure in the physical market. Cross hedging is
the 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 crop
insurance(14%) all other have got very negligible out reach. Hence , there is great challenges
are rest on the extension machinery to diffuse these tools with an element of educating the
pros and cons. Since these tools are to be handled with expert guidance only, our role will
be more important. Therefore great care should be taken before advocating this knowledge
to the farmers.
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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 futures
trading
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 futures
trading
4.1 Introduction to Warehouses and Warehousing
The production of most of the agricultural goods is seasonal, though their
consumption takes place throughout the year. This phenomenon has led to the growth of
warehousing concept where goods are physically stored till the time of consumption or
sales. The warehousing concept has assumed immense importance after the recent
developments in the market like increase in futures trading at the exchanges, increased
role of banks and other institutions in agricultural trading in the context of liberalization of
the Indian markets in the WTO regime.
A warehouse is a location with adequate facilities where volume shipment are received
from a production center, broken down, reassembled into combinations representing a
particular order or orders, and shipped to the customer’s location or locations. In other
words a warehouse is a scientifically designed storage structure technically designed to
protect the quality and quantity of the stored produce.
Warehousing may be defined as a function, which involves assuming the
responsibility for quality and quantity of the stored goods in the warehouses. Thus
warehousing involves the technical aspects related to designing safe and sound structures
as per the type of goods to be stored and the prevailing conditions around the storage
structures. Warehousing also involves having the knowledge of safekeeping of grains while
they are inside the warehouses through techniques like fumigation and record keeping
related 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 the
material 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 safe
collaterals 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 to
the farmers and the traders to store the produce when the prices are too low. They also
sometimes 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 food
grains, fertilizers, etc. Special Commodity Warehouses: These are warehouses, which are
specially constructed forthe storage of specific commodities like cotton, tobacco, wool and
petroleum products.
1. Refrigerated Warehouses/Cold Storages: These are warehouses in which low
temperature is
Private warehouses: These are owned by individuals, large business houses or
wholesalers for the storage of their own stocks. They also store the products of others for a
rent.
Public warehouses: These are the warehouses, which are owned by the government
and are meant for the storage of goods. In India, Central Warehousing Corporation (CWC)
and State Warehousing Corporations (SWC) are the government organizations, which have
the 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 and
reliable storage facilities for about 120 agricultural and industrial commodities.
Separate warehousing corporations have been also set up in different States of the
Indian Union. The areas of operation of the State Warehousing Corporations are centers of
district importance. The total share capital of the State Warehousing Corporations is
contributed equally by the concerned State Govt. and the Central Warehousing Corporation.
Apart from CWC and SWCs, the Food Corporation of India has also created storage
facilities. The Food Corporation of India is the single largest agency which as a capacity of
25.2 million tons. maintained as per requirements and are meant for such perishable
commodities 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 an
airport and accept imported goods for storage till the payment of customs by the importer
of goods. These warehouses are licensed by the government for this purpose. The goods
stored 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 experts
in commodity trading and there is a need to create further investment in the sector. The 11
th plan says that a further capacity of 35 million tons should be created in the Warehousing
sector.
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4.4 Warehouse Receipt
A warehouse receipt is simply a document stating the ownership of a commodity. It
is a warrant issued by the warehouse to the person depositing the goods/produce in the
warehouse 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 certification
of the stored goods. The warehouse receipt can perform various functions. It converts
agricultural produce or other inventory to a tradable warrant, which can be sold or used to
raise a loan and even used for delivery against a derivative instrument like futures contract.
Different banks have different guidelines for providing loans against the stored
produce. The amount of loan advanced depends on the market price, minimum support
price and the guidelines issued by the bank. The interest charged also depends on the
norms of the bank for that type of commodity. The other charges may involve collateral
management charges and other fixed charges as stipulated by the banks. By and large
there are two systems prevalent:
1. Hypothecation/Pledge of stocks
This system is prevalent mostly for the small private warehouses where the entire
warehouse is occupied with material belonging to a single entity. The material deposited
in the warehouse is pledged /Hypothecated as security. Once the loan is repaid after
negotiations 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 Private
gowdons/ private licensed warehouses. These receipts are issued by collateral managers
of an agency known to the bank who will have control over the commodity by lock-key
method. In this way, the bank finances the depositor only if the collateral manager approves
the 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 warehouse
receipt issued by the warehouse. The warehouse receipt duly endorsed in favor of the
Bank is to be deposited at the bank and the material is released once the bank receives the
payment 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 lending
norms 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 the
agricultural sector. The Planning Commission has also recently reinforced its commitment
to double the farm sector’s growth from a low 2% per annum to 4% a year during the 11th
Five Year Plan. The government is now keen to break the logjam of low production and
productivity of the farming sector by beefing up infrastructure and irrigation sectors
simultaneously. Therefore, in the near future agricultural commodities will flow more
steadily from farms. The management of these commodities will prove to be both a challenge
and 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 loan
advanced. It may be defined as a third-party commitment accepted by the collateral taker
to secure an obligation of the collateral provider. In the context of warehouse based
financing, the obligation is the amount lent and the collateral is the goods stored. The need
of collateral is intended to protect against performance risk of counter party i.e. the risk of
non-repayment of loan. Collateral Management involves managing the collateral on behalf
of the collateral taker. The collateral is the only security, which provides protection against
the financing done by the financial institution in case of warehouse financing; collateral
management has developed into a highly specialized technique. Collateral management
basically involves management of risk associated with maintaining the value of the
collateral. It therefore is associated not only with physically maintaining the quality and
quantity of the stored products in the warehouses but also mitigating risks associated
with 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 and
quantity of the collateral.
2. Testing and Certification
Timely testing helps to mitigate the quality risks that are ever-present in the
commodities.
3. Market Intelligence for Price Risk Management
Development of price prediction models based on information on spot and futures
prices, 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 options
trading at the national and international commodity exchanges.
5. Developing Market Linkages
Prefixed buying and selling arrangements between buyers and sellers is also a very
useful 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 to
commodity exchanges. Collateral management ensures efficient and risk-free physical
delivery systems. In the recent past we have seen increased integration of collateral
management and commodity exchanges.
Companies like National Bulk Handling Corporation (NBHC) and National Collateral
Management Services Limited (NCMSL) have developed as specialized agencies, which
provide 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 the
efficiency ofsettlement of trades on stock exchanges and improving settlement efficiency.
The concept involves holding shares in electronic form with a depository and transacting
the same on-line without any signatures. With the increase in activity in the commodities
futures market and establishment of national level screen-based multi-commodities
exchanges, need for an efficient settlement system in that market is felt. Broadly, a
commodity futures contract may be settled either by cash or by delivery of the commodity
depending 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 clearing
house of the commodity exchange will receive warehouse receipts from the seller instead
of actual commodities and pass such warehouse receipts over to the buyer. In case of
national commodity exchanges, buyers and sellers could operate from different parts of
the country and if warehouse receipts are in physical form, the warehouse receipts have to
be delivered across the country from the seller to the buyer, which could lead to systemic
inefficiencies. Either the original depositor or the holder in due course (transferee) can
claim the commodities from the warehouse for negotiable warehouse receipts. Warehouse
receipts 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 to
transfer 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 NSDL
and CDSL exchanges have worked out a scheme to extend depository services for settling
trades in commodity futures. Investors trading in commodity futures may avail depository
services for receiving and delivering warehouse receipts. A demat account for commodities
has to be opened with empanelled DPs (Depository Participants).
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Warehouses, that have entered into an agreement with depositories and commodity
exchanges, can issue depository eligible warehouse receipts. For example, NSDL has
agreements with two multi-commodity exchanges viz., National Commodity & Derivatives
Exchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX) and
few warehouses that hold designated commodities in their custody. The warehouse receipts
in demat form can be used to give delivery and also physical delivery of goods can be
obtained against warehouse receipts credited in the demat account, through prescribed
procedures. In fact the smooth functioning of commodity exchanges is enabled through
electronic warehouse receipts increasing the association between the warehousing and
futures 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 futures
market
d) Better information on crop fundamentals like stock positions helps to reduce risk
of excess volatility in prices
Extension Professional: How to use this Knowledge?
Having studied the Warehouse and warehouse receipts advantages, as extension
personnel, 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 received
from a production center, broken down, reassembled into combinations representing a
particular 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 the
type of goods to be stored and the prevailing. conditions around the storage structures as
well as knowledge of safekeeping of grains while they are inside the warehouses through
techniques like fumigation and record keeping. Warehouses are classified according to
type of commodities stored as General Warehouses, Special purpose Warehouses and
Cold storages. On the basis of ownership they could be Private or Public or Bonded
Warehouses.
A warehouse receipt is a document stating the ownership of commodity. It specifies
the quantity, quality and grade of produce stored, warehouse location, storage fee and
other details.
The warehouse receipt can perform various functions. As it converts agricultural
produce or other inventory to a tradable warrant, which can be sold or used to raise a loan
and even used for delivery against a derivative instrument like futures contract.
The Term Collateral Management refers to a third-party commitment accepted by
the collateral taker to secure an obligation of the collateral provider. Thus, collateral is the
security, which provides protection against the financing done by the financial institution.
Collateral management basically involves management of risk associated with maintaining
the value of the collateral and deals with aspects like Storage and Preservation,, Testing
and Certification and other aspects related to price risk management of commodities serving
as collateral. Negotiable warehouse receipts can be traded, sold, swapped, used as collateral
to support borrowing, or accepted for delivery against a derivative instrument such as a
futures contract. The Warehousing (Development and Regulation) Bill, 2005, which has
been passed in the Parliament in early 2007 has features that would create a regulatory
framework for making the warehouse receipts fully negotiable.
Negotiable warehouse receipts have many advantages such as low risk for the banker
and high credibility apart from efficient usage in delivery against a futures contract. Recent
advancements in dematerialization of Warehouse Receipts i.e. Holding Warehouse Receipts
in Electronic Form has solved problems of splitting the warehouse receipt, high risk of
losing the document and the risk of forgery. This has brought greater integration between
warehousing and futures trading. Later we have also seen the relevance and importaance
of WRDA in agriculture.
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Business Laws and Ethics Course -202
166
AEM- 202
Agri-Business and Entrepreneurship Development
(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
Business Laws and Ethics
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Unit- 1
Business Laws and Ethics
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 growing
divergence bettween the two
• To review business opportunities and laws governing them in India
• To survey the prevailing notions about the mutual exclusiveness of ethics and
business
• To review the thoughts of Indian Gurus and Western Scholars about ethics and
business
• To highlight important elements of business ethicso know about the codes of
conduct for business executives and theiresponsibilities ofmanagement boards
in 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 and
ethics. It has to be followed even in our life as well as in the business. The social
responsibility of individual of any profession has to observe a minimum code of conduct
and moral and ethics. In the absence of such moral and ethics the role of law and legislation
has take its course of action. Any entrepreneur who engaged in agribusiness also follow
moral and ethics in every activities of business venture. He has the social responsibility to
augument good inputs to produce quality outputs with a reasonable margin.
1.1 Introduction
• Ethics encompasses the larger domain of human behavior. There are three main
Western Perspectives on human behavior while doing a business activityare:
• Extols the virtues ofjustice, charity and generosity to act in a way that benefits
both the person possessing thosedispositions and the society he relates to.
• Makes the concept of duty central tomorality, encoding the principle of mutual
respect in all relationships and dealings.
• All conduct should be guided by the principle of greatest happiness or the benefitto
the greatest number.
• According to Milton Friedman ‘it is socially irresponsible and economically
damaging for business to be concerned with anything but business results
• While the objective of a business is to maximize profits and returns to shareholders
money, ethics are perceived to be benevolence, charity and social responsibility.
• However, the holistic meaning of ethics is much wider and covers the entire gamut
of business operations carried out in a transparent manner following some
principles. Ethical practices are deeply embedded in business plans and form the
core 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 good
reasons for the same. Some of the major facts about India, which may seem amazing to
some 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 of
dishonesty 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 the
ethical 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 liquid
or gas, to save his profits, Standard norms: These are widely accepted and adopted without
violation. 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 for
such specific morms. Unlearn to accept unethical practices: Learn to say ‘NO’, even if it is
the 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 themselves
congruence 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 been
evolved.
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1. Legal framework: Laws are created to help society function. One has to consider
whether the action he is contemplating is legal.
2. Rules and Procedures: Companies create specific policies and procedures to help
the business function appropriately to run successful ly and avoid problems.
3. Principles: These social doctrines help create society’s laws and a company’s
policies and procedures. In turn, laws and policies reinforce values.
4. Sense of Right and Wrong: This internal sense of right and wrong develops from
an early age. Your conscience recognizes certain principles that lead to feelings of
guilt if you violate the principles.
5. Trust and Commitment: Business is based upon trust. It is believed that what is
stated 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 role
model. 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 for
your 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 sexual
harassment.
• 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 them
with responsibillity.
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• It is unethical to give false information to the employer or other government
agencies.
• Senior executives should not take advantage of juniors for doing their personal
work.
1.6 Let us Sum Up
This module highlights the growing divergence between business and ethics in the
introductory part. Modern day business and young managers are guided by the principle
of maximizing efficiency and profits with very little concern for ethical values. In India
business is regulated by a large number of legislations. But despite so manylaws, instances
of scams and dishonest practices hit the press every day, making one wonderwhat
ishappening to business ethics. The three pillars of business ethics arethen summarized in
the form of three R’s: Respect, Responsibility, and Results, and some of the importantbasic
ethics and values are listed. Then, Seven Parameters of ethical conduct are discussed. The
codes ofconduct that should be followed by the business executives are enumerated. This
unit also prescribes a moral code of conduct for the manager of today’s business followed
by Stephen Covey’s Seven Steps to be an effective manager are listed.
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173
Unit- 2
Indian Contract Act, 1872
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 becomes
a 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 of
the agency.
2.1 Introduction
In the present commercial world we find commercial transactions taking place every
second. These include trading in goods, supply of material, service contracts etc. On account
of volume of contract being done daily, it was proposed to make an enactment which shall
bind 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 is
enforceable under the Law. Law of the contracts regulates the actions of parties to the
contract. Contract Act is not exhaustive as it only regulates the freedom of contracting
parties for the smooth functioning of commercial transactions. In the module we shall find
definitions to the various terms as per the Indian Contract Act, 1872. Along with the
definitions the module also covers the different doctrines, which explain the rights between
parties 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 is
an agreement.
Void Agreement: Any agreement, which is not enforceable under court of law, is a void
agreement. From the above definition of the contract and the agreement, we can very well
presume 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 a
valid 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 void
contract.
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Voidable Contract: When any agreement is enforceable upon the option of one or more
parties thereto but not at the option of other or others then such contract is called voidable
contract.
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 basic
requirement, as by arriving at the contract, both the parties must achieve a common
objective.
3. There must be intention between the parties to the contract to create a legal
relationship 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 free
consent 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 and
must not be illegal or opposed to public policy
8. An agreement, which is proposed to be entered between parties, must not be
expressly declared as void under any provisions of the Act or any other law, which
is presently under existence.
9. In case of certain contracts, if the law requires them to be in writing or for entering
any contract if registration is mandatory, then such contracts are enforceable only
upon 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 the
other 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 by
one person
• Made to the other person with a view to seek his positive response to do or abstain
from doing any act
• In the above cases, person can be a natural person or an artificial person such as
company etc.
• Offer can be a specific offer made to a particular person or persons or it can be a
general offer made to a larger community.
• Offer can be an express offer by use of words or written offer or implied by the
conduct 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 a
standard 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 of
Tea ,then it amounts to invitation to offer and not the offer by the company. It is only
expression of desire of the company to conduct auction sale. In case the person participates
in the auction sale of the company and bids for a product then it amounts to offer from the
side of the person to the company.
Acceptance
As per section 2(b) of the Act, when the person to whom the offer is made, signifies
his assent to the offer, then the proposal is said to be accepted. A proposal when accepted
shall 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 in
the 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 contract
in 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 and
to 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 insolvency
proceedings 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 from
doing 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 thing
and 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 other
person 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 is
called 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 the
promisee
Doctrine of privity of contract
As per this doctrine only parties who are in agreement to the contract have the right
to 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 between
them, which gives advantage to one party over the other and creates obligation on the first
party to transfer such benefits to the other. Justification of the law: Fundamental justification
of the quasi contract is that one person cannot have unjust enrichment at the cost of the
other. If one party gets such unfair advantage over the other then the law does not allow to
enrich at the cost of the other.
Example: If A purchases goods from B and B on account of a mistake delivers such
goods to C instead of A and C accepts such goods from B then there exists Quasi contract
between B and the C. C is responsible to B to account for the sale consideration of goods
received.
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 lapse
of reasonable time. On account of occurrence of any event which makes
performance of the contract impossible
• By breach of terms of the contract by one party to the contract. Such breach can be
the 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 caused
to 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 liability
of the third person in case of default.
• In case of contract of guarantee there shall be three parties, a debtor, a creditor and
a guarantor.
Contingent Contract
A contingent contract is a contract to do or not to do something in event of
occurrence of some uncertain future event.
Examples: a) Insurance Contracts where insurance company insures the insured
to safeguard him and his family from the occurrence of some uncertain future
event.
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 otherwise
disposed of according to the direction of the person delivering them.
Person who delivers goods is called bailor and the person to whom the goods are
delivered 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 special
nature of his goods.
• To indemnify the bailee for the loss occurred to him on account of his goods or on
account 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 any
contract is called pledge. In this case, bailor is called pawnor and bailee is called
pawnee.
2.12 Let us Sum Up
• In the above module we have started with the need for a separate legislation and
then we have understood what is a contract. We defined some topics in the Act
and then we went on to understand the difference between a contract and an
agreement.
• We have understood the essentials of the valid contract and we have discussed
each topic in detail.
• First we have understood principles underlying in the Offer and Acceptance in
the contract.
• We have also discussed on competent persons of the contract and we have studied
contracts 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 understood
rules 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 and
discussed about contracts, which are expressly declared to be void.
• We have understood about the breach of the contract and remedies for the breach
of the contract.
• We then came to special contracts such as, Quasi Contracts, Bailment, Pledge, and
rules governing the agency
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Unit - 3
Sale of Goods Act, 1930
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 legislation
was 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 sale
intends to take place and when the property in goods passes from the seller to
buyer.
• The rights of the aggrieved part on the breach of contract of sale by any person
and 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, goods
shall form the subject matter of the contract. However, under this Act, only transactions
pertaining to movable properties are covered. Transactions pertaining to immovable
properties are outside the scope of the Act. On account of numerous day-to-day commercial
transactions involving goods it was sought to have a separate legislation on such
transactions 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 or
agrees 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 than
money and actionable claims, including shares, stock, growing crops and things
attached to or forming part of land which are agreed to be severed before sale or
under the contract of sale.
Agreement to Sell: An agreement wherein the seller intends to transfer ownership
of goods for a consideration is called agreement to sell and when the seller actually
transfers the ownership then it is called a sale. Under sale, ownership of goods
passes from a seller to a buyer and in agreement to sell there is no such transfer of
ownership.
Hire-Purchase Contract: Hire purchase contract is a contract wherein one person
transfers goods to another for hire charges. There is no transfer of ownership in
goods.
Eg. Hiring of Tractor and other machinery for Paddy culltivation from the service
provider Price at which, goods are transferred by one person to another is called
consideration 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 of
the contract, which are in physical possession of the person at the time of entering
of the contract.
Existing goods can be specific goods or un-ascertained goods. Specific goods are
the goods, which are identified at the time of sale and in case goods are not identified
at the time of sale then they are called un-ascertained goods. Eg. Harvested
produce 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 or
occurrence of contingency are called contingent goods.
Destruction of Goods
If goods forming the subject matter of the contract are destroyed after the transfer of
ownership 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 breach
of which gives the other party to repudiate the contract.
Example: Papain Processing Company (A) enters a contract with group of Papaya
growers ( B )for supply of goods suitable for any specified manufacturing activity. If the
goods supplied by papayin growers (B) are not suitable for such activity then A can
repudiate 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 to
deliver the car after making necessary repairs. If B delivers the car without making such
repairs and A is liable to incur after the said car is purchased then B is liable to make good
the repair charges incurred by A. Conditions and warranties can be expressed in the
contract or can be implied.Express conditions and warranties are those conditions having
a degree of significance in them. Implied conditions and warranties are those conditions
which are required to be complied in respect of goods, depending upon the nature of the
goods unless any contrary in this regard is mentioned in the contract. The following are
the 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 description
then 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 samples
are distributed in respect of such goods, then the goods must correspond to the goods
issued 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. Condition
as 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 knowing
about the same.
If the above conditions are satisfied then goods supplied by the seller are supposed
to be fit forthe purpose of the buyer’s use.
Conditions as to merchantability – There arises implied condition on the seller that
goods 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 means
that the buyer is responsible for his fault in identifying damages in the goods if such
damages can be found easily or are apparent from such goods when the buyer has been
given 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 description
then 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 samples
are distributed in respect of such goods then the goods must correspond to the goods
issued 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 knowing
about the same.
If the above conditions are satisfied then goods supplied by the seller are supposed
to be fit for the purpose of the buyer’s use.Conditions as to merchantability – There arises
implied condition on the seller that goods produced by him must posses the basic qualities
for which they are known.
• Where seller is guilty of fraud or misrepresentation then this doctrine shall not
apply.
• In case of express condition pertaining to quality and content made by the seller
then 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 than
the owner himself. If any person who does not own ownership in particular goods sells
them, 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 the
contract or by the court.
3.7 Auction Sale
An auction sale is a public sale of goods through the process of open bidding by the
prospective buyers of the goods. An advanced method of auction ie e-auction is being
carried out for cardomum, facilitated by the Spice board, Kochi Following are the rules
for 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 the
hammer (or) in any customary manner. Bidder has the right to call off the bid before
the 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 safeguard
themselves 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 requirement
of separate legislation for the act. We have also discussed the scope of the legislation. We
have 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 a
sale and the agreement to sell under the provisions of the Act.We have also discussed the
express 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 a
seller to a buyer under this Act We have then discussed about the doctrine of Caveat Emptor
and its exceptions and further we have also discussed Nemo dat quad non habet and
exceptions to the same. We have discussed on sale on approval basis and when the sale is
deemed to have concluded in such cases. We have discussed performance of contract by
the parties and discussed about the remedies available to the unpaid seller and his right of
lien on goods. We also discussed about the case breach of duties by the seller and remedies
available to the buyer in this regard. We have concluded the topic with the auction sale
and 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 features
of the company; the different types and categories of companies and their nature.
• Understand how the company is incorporated, the powers and the limitations of
the company and the liability of its members and its directors on account of the
acts of the company.
• Understand how the capital of the company is raised and about the ownership
and control of the company
• Understand how decisions are taken on behalf of the company and how meetings
of 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 in
commrcial transactions, formation of companies has become mandatory and company law
was established to govern the acts of the companies. Now in India, Companies Act, 1956,
governs all companies. Unlike partnership, company shall come into existence on
registration. We shall conclude this module with the corporate governance and duty, which
it 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 under
the provisions of this act. Existing company means any company, which was formed before
the enactment of Companies Act, 1956. A company is an association of many persons who
contribute money or money’s worth to a common stock and is employed in some trade or
business and who share profits and losses among themselves. Common stock is denoted
as 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 are
executedby its board of directors as its agents.
(c) Separate legal entity: A company has a separate legal entity separate from its
members. It has the power to own a particular property and has power to be liable
or borrow money from others. Company has legal entity separate from its
promoter.
Example: Separate legal entity of the company can be well understood from a famous
case Salmon vs. Salmon & co ltd. Salmon is a shoe merchant having his own business. He
converted 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 £10000
was 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 he
should have the first right on the money received out of the sale of assets. Creditors of the
company claimed that both Salmon and Salmon & co ltd are one and the same and that
Salmon 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 and
in 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 business
beyond 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 can
make 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 called
statutory companies.
Ex: Life insurance Corporation of India & Food Corporation of India, Agricultural
Insurance company Registered companies: Companies, which are registered under
Company’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 having
subscribed 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 company
or the past employees of the company who subscribe for company’s shares while
they 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 than
members, 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 of
the 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 shall
run with the guarantee given by members of the company. It shall call for such sums upon
the liquidation of the company and liability of such members shall be limited to guarantee
given 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 is
more than the unpaid value of shares, if any, held by them. Unless the company’s articles
expressly 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 subsidiary
company 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 a
company 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 formed
for promotion of sports or one of an art or of commerce. Such a company does not distribute
excess of income generated over expenditure but applies the same for furtherance of its
objective. 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 share
capital is owned by the central government or state government or any other company
owned by the central or state government. (Sec. 617)
3. Foreign companies
Foreign companies means any company incorporated outside India according to the
laws 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 and
continues 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 powers
then 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 business
by virtue of memorandum of the company. If the company does not have the power to do
such transaction then they cannot proceed against the company for any loss they have
incurred on account of such a transaction.
Articles of the company
Articles of association of the company frame the internal rules of conduct within the
company. They are drafted keeping in mind the memorandum and the provisions of the
company’s act, 1956. For a private limited company articles of association is compulsory
and must have the restrictions as to the maximum number of members, transfer of shares
etc. Public limited company may adopt articles which are contained in table A of schedule
I to this Act.
Section 28 to 30 of the companies act, governs the provisions with regard to form and
contracts 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 in
accordance with the listing agreement with any of stock exchanges where the shares of the
company 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 is
reserved for storage of funds in the hands of the company to pay off its liabilities incase of
liquidation 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 shareholders
are entitled to have dividend only after satisfying claims of creditors, financiers and
preference shareholders. At the time of liquidation, equity shareholders shall be paid last
after 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 hostile
takeovers.
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 dividends
and 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 perform
their duties, obligations and responsibilities diligently and act in the best interests of the
company. They must be made accountable to the shareholders and other beneficiaries of
the company.
Corporate governance is concerned with establishing a system whereby directors are
entrusted 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 the
company. Effective corporate governance shall provide mechanism for regulating duties
of the directors and restraining them from abuse of the powers and act in the best interests
of the company. Corporate governance is also concerned with the ethics, values and morals
of the company and its directors. Corporate governance is mandatory for all listed
companies. It discusses about
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• Composition of the board, independent directors in the board and non-executive
directors in the board
Constitution of audit committee and manner in which it meetings are held and its
reports to be discussed. It also defines the powers, rights of the audit committee
etc.
• Disclosure of compensation structure of the management
• Disclosure of contingent liabilities of the company
• Requires Management discussion and analysis report about the performance and
the operations of the company to be annexed with annual report to the shareholders.
• Details of new management personnel appointments with their qualification and
their remuneration package
• Requirement of the period wherein annual report to be prepared and tabled to
the 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 of
companies and their nature. We have learnt about the separate legal entity status to the
company, which enables a company to own properties on its own and incur liabilities for
carrying out its operations. Ownership in the company rests in the shareholders but control
of management of the company is vested on the board of the company. We have understood
how the memorandum defines the scope of powers of the company and how its articles
regulate the internal management of the company. We have also understood as to how the
capital of the company is raised and different kinds of capital of the company. Decisions of
the company are taken in either board or in shareholders meeting and based on requisite
majority, resolution is passed. We have concluded the module by understanding corporate
governance and the duty of the directors to act in good faith in exercise of functions in the
conduct of management of the company.
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Unit- 5
Negotiable Instrument Act, 1881
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, what
are the requirements of negotiable instruments; and also understand the special
features of negotiable instruments.
• Necessity of the negotiable instrument in the modern day world; parties to
negotiable instrument and rights and liabilities of the parties of the instrument
and 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 exchange
apart from money have been evaluated such as bills of exchange, hundi, cheques, bank
drafts etc. These documents are substituting money as a medium of exchange. On account
of these changes, a law to govern these transactions was proposed and the Negotiable
Instrument Act, 1881 was enacted. Hereinafter for this module the Negotiable Instrument
Act, 1881 is referred to as Act. The module is supported by examples in order to explain
the 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 either
to 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 value
then even if the transferor of the same has defect in it shall be entitled to enforce in
court 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 unconditional
promise, signed by the maker to pay a certain sum of money to, or to the order of a certain
person or to the bearer of the instrument.
Negotiable Instrument Act, 1881
201
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 after
date, 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 certain
sum of money to pay a certain sum of money only to or to the order of a certain person or
to 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 the
bill.
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 only
for 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
Negotiable Instrument Act, 1881
203
Only the Bill can be dishonored by non-acceptance.
Dishonor by Non-payment: A promissory note or bill of exchange is said to be
dishonored when the maker of the note and acceptor of the bill defaults in making payment
to the holder of the bill. Effect of the Dishonor: When a negotiable instrument gets
dishonored, then the holder in due course has the right to sue the maker of the note and the
cheque, acceptor of the bill, maker of the bill, all prior indorses to the instrument. All such
parties 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 with
regard to dishonor of the instrument to the person liable on account of dishonor
of the instrument. It acts as a warning to the other person and also prepares the
other 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 remains
liable and the other party shall, further in reasonable time, communicate to all
prior parties.
c) Notice must be in writing or by word of mouth. If the notice is in writing than it
must 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 unconditionally
the 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 are
discharged from being liable under the Act unless the notice is not required to be
served 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, which
can be en-cashed at the counter. In case of crossed cheques, the holder has to deposit cheques
in his bank account and the bank shall collect money in his account. Crossing of cheques
safeguards the holder against the cheque being mis-utilized by any other person A cheque
is said to be crossed when two parallel lines are drawn across with or without the mention
of words.
Types of crossing
a) General Crossing: This is a normal crossing with or without mentioning any words
thereon.
b) Special Crossing: Under special crossing between the lines the name of the
collecting 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 not
negotiable then the holder of cheque shall not have better title against the person
from 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 payee
only 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 the
cheque refuses to make the payment. The banker shall refuse to make payment either on
account of insufficient funds in the account of the drawer or for any technical reasons The
drawer of the cheque whose bank has rightfully dishonored the cheque for insufficient
funds 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
Negotiable Instrument Act, 1881
205
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 within
30 days from the date of dishonor, the holder of the cheque has sent a notice to him in
writing and the drawer has failed to make payment within 15 days from receipt of such
notice.
5.8 Let us Sum Up
We started this topic with an introduction to negotiable instruments and requirement
of having separate enactment for the same. We then defined the various terms. We have
understood the types of negotiable instruments and their essential features. We have then
studied the parties to the instrument and their rights and liabilities individually towards
the other parties to the instrument. We have studied about the Holder-in due course and
his rights against the other parties to the negotiable instrument. We studied as to how the
instrument needs to be presented and the circumstances when the instrument gets
dishonored and remedies of aggrieved parties on dishonor of the instrument; noting
and protest and the manner in which they are done. We then have studied about the
discharge of the instrument and modes of discharge of the instrument; cheques, crossing
of cheques and concluded with the bouncing of cheques and remedies on the same.
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Unit- 6
The Essential Commodities Act, 1955 and
Agribusiness 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 and
Entrepreneurship
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 commodities
of daily usage i.e. Essential Commodities Act.
The Essential Commodities Act, 1955
207
• Significance of the legislation to regulate the production, supply, sale, distribution
etc. of essential commodities.
• How the government regulates the production, distribution and black marketing
in 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 contravention
of the act and
• The relief available to the aggrieved persons against the orders of the Central
Government or any officer authorized by the government
6.1 Introduction
The Essential Commodities Act, 1955 is an important legislation in the interest of the
general public for the control and regulation of production, sale, supply, distribution of
and trade and commerce in certain commodities, increase supply of those commodities in
the market and ensure than those commodities are available at reasonable prices. The
object of the enactment is to secure fair and equitable distribution of essential commodities
at fair prices to the public and punish hoarding and black marketing in essential
commodities. For all purposes Essential Commodities Act is hereinafter referred to as Act
in this Unit.
6.2 Definitions
Collector: Collector includes an additional collector and such other person not below
the rank of sub- divisional officer as may be authorized by the collector to perform functions
and 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 order
declares 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 or
powder 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 essential
commodities or for securing equitable distribution of goods or to secure availability of
goods for defense of India or for any other military purposes, may by order regulate or
prohibit 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 essential
commodity
b) Bring under cultivation waste or arable land for growing food crops and thereby
increase 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.
The Essential Commodities Act, 1955
209
e) Prohibit withholding of sale of any essential commodity
f) Require any person holding stock of essential commodity or is engaged in the
business 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 any
specified part of quantity likely to be held or produced,
To central government or state government or any officer or agent of such
government or to any corporation owned or controlled by such government or to
such class or classes of person as specified by such Government.
g) Regulate or prohibit any class of commercial or financial transaction relating to
food stuffs Or cotton textiles, which are in the opinion of government detrimental
to 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 such
commodity to maintain such books of accounts and produce the same for
inspection and shall pro-vide such information
• Levy such sum as may be prescribed as fee for licenses, permits etc and shall ask
to deposit such sum as may be prescribed to the people engaged with essential
commodity.
j) For any other incidental or supplementary matters. Government has the power to
initiate Search, examination and inspection of premises of any person and shall
authorize an Officer to conduct search, examination and inspection of and
subsequent seizure of:
• Articles or the commodities in respect of which authorized person has reason to
believe that contravention with respect to provisions of the act has taken place
• Vessels, aircraft, vehicles etc or any other conveyance used to carry commodities
in respect of which contravention has taken place.
• Of any books of accounts and documents which give sufficient proof of such
contravention and is authorized to take copies of such books of accounts and
documents.
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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 prevent
raising of prices, or to prevent hoarding and black marketing of goods it shall by notification
in official gazette order that such goods shall be sold to the government.
6.5 Manner of fixation of prices on compulsory acquisition by
government
Where any person is required by virtue of order to sell any goods to the central
government, 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 to
controlled price.
• When both the above conditions are not satisfied then at the market price prevailing
with 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 or
agent appointed by the government or corporation owned or controlled by the government
any variety or grade of food grains, edible oilseeds or edible oil by virtue of order under
section 2 and not by virtue of section 3A then he shall be paid the price as determined by
the state government with the previous approval of the central government and the same
shall be determined considering:
a) Controlled price if any fixed for such variety or grade of food grains, edible oils
and oil seeds
b) General crop prospects
c) Need for making such goods or edible oils or oil seeds available at reasonable
prices to all sections of the society
d) Recommendations if any of Agriculture Price Commission in respect of such food
grains and edible oils.
Where any producer is required to sell sugar to government or any officer or agent
appointed by the government or corporation owned or controlled by the government then
price of sugar shall be calculated by the central government keeping in mind: (section 3 C)
The Essential Commodities Act, 1955
211
• 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 to
deliver, remove sugar even if the same are in bonded godowns of the factory. Further, the
central government shall give such directions to any producer, importer, and exporter
with 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 essential
goods or the commodity or to maintain price of any essential commodity it may authorize
such person or the class of persons to exercise control over the whole or any part of
undertaking where such commodity is manufactured. Upon such order:
• Authorized person shall exercise such functions in accordance with the provisions
of 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 issued
by 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 be
notified 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 in
the premises of the undertaking or any office of the person.
Every order made in this regard by the central government or any officer or
authority of the central government needs to be tabled in both the houses of
parliament (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 the
Act such commodity shall be brought before the collector of the district or the presidency
town and shall be produced for inspection before him and if the collector is satisfied that
contravention 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 commodity
If 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 seizure
then the collector may relieve such animal, vehicle, vessel, and aircraft etc.
When the collector is of the opinion that the essential commodity which was confiscated
is 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 such
commodity
b) If no such controlled price exists for such commodity then auction such commodity
Otherwise collector may for equitable distribution of goods order the sale of
essential commodities through fair price shops.
When goods are sold then such sale proceeds after deducting the expenses incurred
for making such sale shall be paid to the owner of such goods from whom goods are
seized, 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 contravention
of 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 vessel
carrying such commodity can be passed without:
The Essential Commodities Act, 1955
213
a) Giving a reasonable notice in writing mentioning the grounds under which goods
need to be confiscated
b) Giving an opportunity of making a representation against the grounds of
confiscation in reasonable time
c) Giving an opportunity of being heard No such vehicle, vessel, animal, aircraft or
any other conveyance, etc. be confiscated if the owner of such conveyance proves
that he was not aware that such carrying of essential commodity and he has taken
all the precautions under the Act.
6.8 Relevance of the Legislative Acts and its application to
agribusiness and Entrepreneurship
Here an attempt has been made to give a contextual relevance of the legislative Acts
to agribusiness and marketing in capsule form for the easy understanding and
comprehension of the readers.
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Besides the above Acts we discussed, an entrepreneur should have adequate
knowledge and understanding of following legislative Acts which are very pertinent for
the agribusiness unit. Some legislation related market perspective and agriculture
perspective are comprehended and given below:
The Essential Commodities Act, 1955
215
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, 5
th
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)
The Essential Commodities Act, 1955
217
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 will
be greatly helpful to the people who are engaged in extension services though State
Department of Agriculture, Krishi vigyan Kendra(ICAR), Private Extension service
organizations(Private Company/ NGos/ Cooperatives/ Farmer led organization).Here
before, we have compelled to give production led information to the farmers and not much
of market led information or post production information. Now there is a policy level shift
to 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 secondary
agriculture where the value chain become one of the potential component will effectively
attempted to links all the stakeholders.
6.11 Let us Sum Up
In the present module we have understood the basic need for the legislation and
economic importance of the legislation. Essential commodities are defined under the act,
though the definition is an inclusive one giving power to government to include more
goods under the definition of essentialcommodities.
Then the Act mentions the powers of the Central Government to ensure free movement
of essential commodities in the market and enable them to be available in good quantities
at reasonable prices. Powers of the central government range from the issue of licenses,
compulsory acquisition, taking control of undertaking manufacturing essential
commodities, confiscation of essential commodities and sale of essential commodities to
ensure that there exists smooth flow of essential commodities in the market.
We have also discussed the penalties under the act for the contravention of provisions
of the act and have also studied the penalties on the offences by the companies. We have
also studied the appeals available under the act to aggrieved persons.
Lastly we have also seen the relavance of the various business law and its application
to agribusiness entrepreneurship . Additionally we do also discussed the market and
agriculture legislative laws for our better extension service in the field.
* * *
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