Business model for a not-for-profit organization based on the arbitrage opportunities in the seeds market

Abstract

Mr. Dhirajlal Virjibhai Thummar, a groundnut farmer in Gujarat, switched to better quality seeds after his crop got infested in 2004 resulting in complete crop failure. Not only his yield improved but also the oil content in the groundnut, which led to better prices for his crop. But not all farmers have access to good quality seeds and not many know the benefits of good quality seed. The power of quality seeds is a common knowledge and yet with so many inefficiencies and distortions in the market it becomes difficult for small and marginal farmers to obtain good quality seeds. Good quality seeds can help increase the yield up to 20-30% and thus increasing the farmers profits by about 50%. A simple calculation shows that even by small intervention, social welfare of in excess of Rs 1 Crore can be created benefitting more than 3000 families by organizing the seeds market as it is available to small and marginal farmers of Andhra Pradesh cultivating groundnut. This idea is extendable to various seed varieties across the nation and particularly in rain-fed areas. Our data analysis of daily groundnut prices for the past five years in Andhra Pradesh and Karnataka shows that there exist ample arbitrage opportunities to create a sustainable model for a seed enterprise. These arbitrage opportunities exist across seasons i.e. buying in harvest season and selling in sowing season, as well as across locations i.e. buying in one location and selling in another. Some of our case studies show that seasons arbitrage of about 25% consistently existed for all the five years in different regions (mandals) of Andhra Pradesh. Location arbitrage also offered 10%+ margins between various locations. The reason for existence of these arbitrage opportunities is that when farmers sell their produce to local traders during the harvest season, price pressure is downwards and hence farmers get less money for their produce. And during thes owing season when farmers demand seeds, local traders usually make good margins in selling back to farmers. Local traders, who occupy more than 60% of the market, also contaminate the seeds bringing the quality down. This results in poor germination, poor yield and deterioration of output. Big and medium farmers are usually capable of saving a part of their produce for seed purpose but scarce resources limits the ability of small farmers to do so. As a result their only resort is either to turn to local traders or to big farmers, who ask for 150% return on the amount of seeds provided. Some of the major constraints of the seed sector are i) Weak distribution and marketing network ii) Farmers lack of awareness iii) Presence of large volume of inferior seeds, adulteration and inconsistency; and iv) Sub-optimum production and supply of quality seed. Idea underlying our plan is simple and seemingly powerful. We plan to buy seeds, meeting basic quality criteria, from the farmers at the prevailing market prices during the harvest season and sell them back to farmers during the sowing season at the prevailing market prices. Not only we would eliminate the exploitation created by demand conditions but will also make good quality seeds available to the farmers. Our financial analysis shows that the margins are enough to cover the operating expenses, cost of capital and growth requirements.