Issues and Challenges in Financing Organic Agriculture

Organic Agriculture is growing from a movement among a small group of elite farmers into a mainstream activity that benefits a large number of farmers, especially small farmers. It is going to throw up several new and unique opportunities for bank lending. Banks need to prepare for the emerging business opportunities.

It is by now well recognised that Organic Agriculture is a low external input regimen. This implies that there will be limited need to bring in purchased inputs for cultivation, and will therefore mean a reduction in financial outgo, obviously not a scenario to whet the appetite of bankers. A study by the Ghokale Institute, Pune of sugarcane farmers of Jalgaon district in Maharashtra provides comparative data on the cost of organic and inorganic agriculture (Table 1).

Table 1

 level, more due to a better bottom line even with a reduced top line. The improved bottom line will not be from a so called "Organic Premium" (which could be a temporary phenomenon) but rather from reduction in costs., A look at the comparative costs based on empirical data (Table 2), clearly brings out the dimension of “viability” of Organic Agriculture in comparison to Inorganic Agriculture.

Table 2

Table 3

and it is therefore going to in turn de-risk of the agricultural portfolio of the bank.

As of today, there exist no standard recommended package of practices for organic agriculture and therefore, the cash flow streams are not known. Because of this, it has not been possible to specify the scale of finance for various crops under Organic Agriculture which forms the basis for extending crop loans.

Further, most organic farmers would not be fresh entrants but would be transiting from Inorganic to Organic Agriculture.  Thus most of them being progressive farmers (as would be the first adopters of many innovations) would already most likely be clients of the banking system.

Investment opportunities emerging from Organic Agriculture

Organic Agriculture will throw up several new investment opportunities for farmers and thus lending opportunities for banks. Listed below are some, which is no way exhaustive.

1.         Land Development and Water Conservation measures:

Organic Agriculture involves conservation of natural resources on the farm and the two most precious resources are soil and water.  The run off of top soil needs to be stopped, for which steps like contour bunding, terracing and contour trenching        may have to be done.  Similarly, saving water through constructions of small storage structures will be necessary.  All these are investments with medium-term pay-back.

2.          Acquisition of plough animals, poultry, and fishery - Integrated Farm Model:

Unlike Green Revolution technology, Organic Agriculture is an integrated farming model.  Most farmers have got rid of their farm animals after adopting Inorganic Agriculture.  Under Organic Agriculture, it will be essential to re-acquire farm animals both for draught and farm nutrient purposes for which capital investment would be required.

1. Increased Labour Engagement:

Organic Agriculture while reducing external inputs will increase the demand for farm labour.  In a competitive labour market, this will result in increase in labour costs and to match cash flow cycles, such labour costs will require to be funded.

4.         Transition Cost:

The process of transition from Inorganic to Organic Agriculture will take between three and five years, during which time there is most likely a drop in farm yields and therefore the income of the farmer. Banks will have to design products to cover the income deficit during this period to enable farmers to maintain their cash flow by capitalizing the transition income gap and stretching-out the repayment by considering this an investment cost rather than working capital. 

5.         Learning Organic Agriculture & Farmers' Field Schools:

Organic Agriculture Knowledge/wisdom rests with some progressive individual farmers like Shri Bhaskar Save of Gujarat.  Farmers who wish to take the plunge will find that the institutional research and extension mechanism are not geared to respond to the challenge.  There will thus be an increasing need for farmers to go out and in the “guru-shishya” tradition of old, acquire wisdom at the "feet of the masters".  There will not only be a direct cost in this of travel, stay and tuition, but also indirect costs of replacing own labour and supervision by hired hands.  All this will throw up tremendous funding opportunities.

Enterprising Organic farmers will also require to structure their transfer of knowledge through the establishment of farmers field schools and such farmer to farmer training delivery mechanism will get organised into an institutional mould, again a lending opportunity for banks.

6.         Manufacture of Organic Inputs:

This is one of the areas where banks have already taken a lead and are financing `Commercial Production units of Organic Inputs such as Bio-fertiliser units, Vermicompost hatcheries and Fruit and Vegetable waste compost units under the Government of India’s Capital Subsidy scheme of the National Project on Organic Farming. Among these, a critical area is fruit and vegetable waste composting, which is estimated to produce four lakh tones of garbage in urban centres each day from villages, which is actually precious organic manure. Not only does it cause urban waste disposal problems and loss of organic nutrients, but results in unnecessary use of fertiliser to replace lost nutrients and fuel in transport, both of which involve an outgo of precious foreign exchange. A working group of the planning commission under eminent agricultural scientist, Dr. SS Acharya, estimates that this activity alone can create 2.5 lakh jobs in rural areas.

7.         Certification Costs:

Obtaining Organic Certification is an elaborate and expensive process, especially for small farmers. Even if done in a group certification mode, there will be a significant financial cost involved for the farmer. The benefits of certification being enormous, and it being a pre-requisite for access to export markets, funding the cost to the farmer by banks would be a necessity.

8.         On-farm Processing:

Organic produce may often not have the physical appearance and the qualities of inorganic produce (such as thick skin in improved tomatoes), which enable the produce to withstand the stress of handling and long distance transport, and may therefore have a shorter shelf life and require greater care in handling, packing and transportation.  As per current estimates, post-harvest losses in fruit and vegetables are close to 40%.  Farm level pre-processing of sorting grading, packing and pre-cooling need to be developed to build an effective supply chain for agri-produce.  These activities if undertaken by farmers' collectives could be more viable.

9.         Integrating farm with non-farm activities to move up the value chain:

Creation of value in agriculture is possible only by processing for value addition.  Agro-processing units need to be integrated with farming both for de-risking agriculture and providing gainful employment opportunities during the off season.  If preliminary level processing is done at the farm, the benefits of value addition will accrue to the farmer.  Activities such as mini-rice mills, dal mills, milk processing, fruit jellies, jams and pickles etc. are some immediate options, but these could go beyond to activities like mushroom, sericulture etc.

10.       Unique Farm Products:

Under Organic Agriculture, every individual farmers produce would be unique and may have features that would attract consumers to demand produce from a particular farmer. Such farmers can even develop their own identity and brand, as has been done by an enterprising apple farmer in Himachal Pradesh (see box). Such initiatives will require capital for development.

11.       Demands beyond Agriculture:

A stable and viable agricultural economy is going to be the backbone of rural India. As this happens, there will be an increasing need for resource transfers to the secondary and tertiary sector, which has been a normal economic route in most developed nations which transited from agriculture to industrial and service driven economies.  Farmers' children would require funding for higher education, to be paid for from future crops and farmers will be looking to discount future cash flows from agriculture to acquire more than transactions such as televisions, refrigerators and two or four wheelers and this would be a booming market.

12.       Financing Network Organisations & Farmers' Collectives:

Today, there is a lot of talk of creating producers organisations in a producer company mode.  While this kind of interest is encouraging, producers companies being limited companies will have only their capital base mobilized from farmer members as resources. In the initial phase, the capital base is going to be low.  Agricultural produce being seasonal and markets being year-round, there will be need for accumulation of stocks and storage by these companies.  Such companies will therefore often require more working capital than block capital.  Funding of such large amounts by banks for commodities having high price volatility and risk of spoilage, calls for developing/structuring innovative financing instruments.  The earlier initiatives of this nature on a significant scale were undertaken by the National Dairy Development Board (NDDB) Vegetable Oil Project, where the resources were generated through the monetisation of gifted commodities from donors such as the USAID, CIDA and EEC.

Conclusion

Financing Organic Agriculture is thus going to be a challenge for bankers and would be difficult for conventional banking.  Being more stable than conventional agriculture, it makes eminent sense financing Organic agriculture.  But bankers will be called upon to come in and play a role even before financing, in promoting it, popularising it and developing cultivation standard and practices.

Prepared by Shri EV Murray, Member of Faculty, College of Agricultural Banking, Reserve Bank of India, Pune 411 016