VARUN NAGAR AGRICULTURAL

CO-OPERATIVE SOCIETY
-Case Study Report

Submitted by

Velavan S
FPM 2017
IIM Bangalore
Problem Statements:

1. Whether to fund the farmers now or defer it by six months

2. Whether to purchase the fertilizers at a discounted price or purchase after six months
at a normal price
3. Whether to sell the paddy now & settle the overdraft or hold the paddy for six
months and sell it

Evaluation:

Figure 1: Decision tree analysis for problem statement

The primary objective of the society is to procure agricultural produce from the members
(farmers) and sell in the market and also to procure agricultural inputs and supply to
farmers.

The society has to honour the payment of Rs. 5 lakhs to farmers, which is due on March 31,
1991. As per the current balance sheet position (Annexure 1), the society has a cash balance
of Rs. 5 lakhs, which can be used to pay the farmers. After paying the farmers, the society
will have Rs. 5 lakhs worth of inventory (in the form of paddy) and overdraft of Rs. 5 lakh
availed from JDC bank.

The society has got the offer for purchasing fertilizer at a discounted price of Rs. 5 lakhs
now, compared to the market price of Rs. 6 lakhs after 6 months. This seems to be a 16.67%
discount on the price of fertilizer. However, as per the cost-benefit analysis (Annexure 2),
the total savings is only Rs. 12,000 (2.0% on Rs. 6 lakhs), after considering all the expenses. If
the society intends to save this amount by purchasing the fertilizer now, it has to sell the
paddy and use the proceeds. It doesn’t make economic sense to purchase the fertilizers now
for the savings of 2.0%, by selling the paddy.

The society can sell the paddy now for Rs. 5 lakhs and settle the overdraft. As per the
breakeven analysis (Annexure-3), if the society is willing to hold the paddy and sell it after
six months, the minimum breakeven price expected is Rs. 5,350 per ton. As per the historical
trends of paddy price, the price has increased above Rs. 7,500 per ton once in four years.
Also, the price of paddy increased to Rs. 6,200 and Rs 6,300 in the last two seasons. So, we
can assume that the price of paddy will increase more than Rs. 5,350 this season, to break-
even.
Recommendation:

In the view of the interest of the members of the society and the analysis done above, it is
recommended that

1. the society can pay the farmers by using the cash balance, to maintain the reputation
that the farmers entrusted on it
2. not to purchase the fertilizers now, considering the minimal savings of ~2%
3. hold the paddy and sell it after six months for good returns
 Annexure

1. Current Balance Sheet position of VNACS:

Liabilities Rs. Assets Rs.

Overdraft 5,00,000.00 Cash balance 5,00,000.00
Payment due to farmers 5,00,000.00 Inventory (Paddy stock) 5,00,000.00
Total 10,00,000.00 Total 10,00,000.00

2. Cost-Benefit analysis of Purchasing fertilizers after six months vs. Purchasing

fertilizers now Rs.
Purchase after 6
months Cost 2,000 bags x Rs. 300 6,00,000.00
Cost 2,000 bags x Rs. 250 5,00,000.00
Storage cost 6 months x Rs. 500 3,000.00
Labour and equipment cost for
storing fertilizer 25,000.00
Purchase now and
store it Insurance Rs. 20,000 annually 10,000.00
Lost in storage 5% of fertilizer stock 25,000.00
10% on Rs. 5,00,000
Interest on overdraft for six months 25,000.00
Total Expenses 5,88,000.00
Total Savings
from purchasing
now 12,000.00

3. Breakeven analysis for storing paddy and selling after six months Rs.

Sell now (Selling price same as procurement

cost) 100 tons x Rs. 5,000 5,00,000.00
Insurance cost for paddy Rs. 20,000 annually 10,000.00
10% on Rs. 5,00,000
Store and sell after Interest on overdraft for six months 25,000.00
six months Minimum selling price for
breakeven (procurement cost +
Insurance + Interest) 5,35,000.00
Break-even price Rs. 5,350 per ton