This write up is in continuation of the last three write ups published in IC: “Doubling or Minimizing Farmers Income”, “Doubling Agri-business Income”, “Quadrupling Food Processing Industry Income”. In the first one I had highlighted that 95% of land holdings in India covering 68 per cent of the cultivated land area are marginal, small and semi-medium holdings which are mostly self cultivated and are running at terrible losses and those farmers are steeped in debts accumulated over several years and hence thousands of them are driven to suicide. There are several reasons for farming to remain still a loss-making occupation. One of the most important reasons is that farm sector is governed mostly by the “Law of Diminishing or Decreasing Returns” while agri-business and food processing industries are governed mostly by the “Law of Increasing Returns”. Many people including the highly educated ones are not aware of this phenomenon. For example a retired engineer from a rocket research centre bought about 20 acres of land and started cultivating thinking farming is a lucrative occupation. Within one year he incurred a huge loss and soon sold all the land and returned to teaching on contract in a private engineering college receiving Rs 60 thousand per month. If he stuck to farming his loss from 20 acres would have been same as the salary he is receiving now. I have come across several retired government officials including retired army officers making the same mistake.
When we deal with investment and returns or in an ordinary man’s language expenditure and income, there are many variables that affect the returns per unit input which we call in economics as marginal returns. If a man is selling fruits his daily income or returns per day will depend on several variables like the quantity of fruits sold, type of fruits sold, the price per unit of fruits sold, ability to store and reduce wastage, ability to deal with customers, location of his shop, ability to recycle the unsold fruits etc. They are called dependent variables: variables that affect the income directly. But the colour of the shop keeper or the shop, his age, education, caste, religion, number of children he has, his wife her educational qualification etc. will not affect the net income directly; they are called independent variables. Among the dependent variables the most important among them will be the quantity of fruits sold per day and the price at which they are sold. Thus in every economic enterprise there are some dependent variables and some independent variables. Also the degree of dependency of income on different dependent variables also will be different; again the number of dependent and independent variables also will be different. In the case of selling fruits the most important variable on which the net income depends will be the quantity of fruits sold.
With reference to any dependent variable three ways of return or income are possible: 1) increasing return, 2) constant return and 3) decreasing return. In increasing return for every additional unit of input the return increases proportionately; in the constant return successive units of input does not make any appreciatory difference in the output; in the decreasing return we find a decreasing trend in the output for every unit of input increase. These three stages of returns are graphically depicted in figure given as follows (Fig 5, Google). The curves are shown in straight lines for demonstration purpose but in actual situations the curves may not be in straight line.
Let me explain these three concepts further with some simple examples. In agri-business like fruit selling the return will go on increasing as you increase the quantity of fruits sold at a more or less constant price. If one sells 100 kg of fruits and gets 10,000 rupees net profit per month, his net profit can be increased to 20,000 or to 30,000 by selling 200 or 300 kg of the same types of fruits per month. All other inputs like his labour, rent for the shop he has rented in, number of employees he has engaged etc. will remain same. Similarly in the food processing also the return is governed by the law of increasing return for every unit increase in input. For example if you have one tomato ketchup making unit, the output will be certain number of bottles of ketchup per day; whereas if he employs two units the production or output will be doubled; if he employs three or four units the production will increase proportionately. These are examples of increasing return.
In farming such law of increasing return does not take place; rather it is governed mostly by the law of diminishing return. For example if one cultivates paddy crop and uses an input like fertilizer, in the beginning there will be some increase in the yield for a few additional units of fertilizers given. But soon the yield will come to a constant and then will assume the decreasing trend for every successively increasing unit of fertilizers applied. But if he goes on increasing the units of fertilizer the yield will go down even to zero level. In wheat if the farmer irrigates once a month he will have optimum return; but if he irrigates wheat like the paddy crop he may not get any wheat at all. The same is case with any other crop: if we go on increasing the inputs like seed or planting material rate, quantity of irrigation water, amount of fertilizer, pest or insecticides etc., the yield will go down following the law of decreasing return. The correct distance of planting coconut trees is 33 ft between two plants and exactly 40 coconut trees will be fitted in one acre. Somebody thought of planting 60 coconut trees per acre (about 26.9 ft distance) thinking more the number of coconut trees greater will be the yield, in actual reality the yield will decrease. Many of the coconut trees inside the plantation may not bear at all while the trees at the periphery will yield normally. Can you make 10 people to stay in a room meant for only one person? For any fruit tree to flourish it requires a fixed area of land and air volume: for a coconut 1089 square ft land area (33x33) and 35937 (33x33x33) cubic ft of air volume is required; the same is required for mango and sapota trees. Similarly an apple or pear tree also requires a specific area of land and air volume for their growth and development. This is true in all other inputs like seeds, fertilizers and pesticides. If a man over eats his health will be in danger; if a person takes one sleeping tablet he will sleep nicely; but if takes a dozen sleeping tablets he will sleep eternally. The same is the case with animals; if the animal is fed to become too fat then there will be infertility problems etc. Similarly we cannot keep twenty cows in five cows’ space. In short all biological production will show the trend of decreasing return beyond the optimum number of units of inputs. In short the return from all economic activities in agriculture and animal husbandry is governed by the law of diminishing return for every additional input after the optimum level of input.
When there are several inputs to be given to get some economic benefits the combined effect of all the inputs also will have multiplying and diminishing effects. For example if you apply half (1/2) a unit of input like irrigation and another half (1/2) unit of fertilizer input their multiplying effect will be one-fourth (1/2x1/2=1/4). If there are three inputs of half units each the multiplying effect will be one by six (1/6) and if there are five half units the combined effect will be 1/2x1/2x1/2x1/2x1/2=1/32. Note how the combined effect of several inputs reduces the output proportionately. Thus in agriculture production, greater the number of inputs, more will be the decreasingly combined effects of the inputs on the outputs/yield.
Whereas in agribusiness and in food processing for every unit increase in the dependent variables will have an increasing effect: selling 100 kg fruits per day yield 10,000 rupees net profit per month, if 200 kg it will be 20,000 and if 300 kg it will go up by 30,000 rupees per month. Similarly, as the number of tomato ketchup making units goes up the number of bottles of ketchup produced also will increase proportionately. In food processing a sort of quadrupling effect takes place. For example two and half kilos of fresh tomato costing at farmers field 5-7.5 rupees (2-3/kg) at the farmer’s field can yield one litre bottle of tomato ketchup costing 145 rupees. Now estimate the cost of processing, packing, transporting and marketing etc. When lakhs and lakhs of bottles are produced together the cost of production will around 10 or 15 rupees per bottle or even 20 rupees per bottle. Each bottle is sold at present at 145 rupees. Now the readers can estimate how many times the return has gone up: for every bottle nearly six times (5.8 times to be exact).
Similarly one can estimate the value addition rate of all the processed food items sold by any food processing company and you will see the value is added four to eight times. The price of products in fancy-glossy packing shoots sometimes 100 percent. More the inputs in the processing and marketing, greater will be the value of the agri-products; whereas more the inputs in the farming, lesser will be the return to the farmer: Invisible Injustice.
At present in India no farmer belonging to the small, marginal and semi-medium category can go in for agri-business or food processing which require a huge amount of starting capital. Most of them are already heavily indebted to private or public money lenders. Both agri-business and food processing requires infrastructural facilities like electricity, transport, technical knowledge, communication linkages and storage facilities. Most of the farmers in the above mentioned categories have no steady electricity supply even if they are said to be connected, no transport or communication facilities to their farms or no storage facilities. Most of them are illiterate and non-numerate which is another basic requirement for venturing into agri-business or food processing. In short all the small and marginal farmers are slaves in their own occupation and pawns of their own life stage having no control over their own occupation in life nor are they able to make living on their land. We must also remember that due to the law of succession and inheritance there is a continuous process of medium farmers becoming small farmers and small farmers becoming marginal farmers and marginal farmers becoming landless and livelihood-less besides the Law of Decreasing Return. Under such situation, for many farmers there is no other option than suicide or leave the farm life. Often people in the non-agricultural sector are not aware of these debilitating factors in the farm economy: Invisible Injustices.
(The writer is Retired Professor of Agriculture Economics at XIM, Bhubaneswar. Email: firstname.lastname@example.org)(Published on 21st August 2017, Volume XXIX, Issue 34)