There has been a great deal of bleeding heart treatment of farmer suicides [link, link]. A few sane voices have pointed out that there are enormous problems with the underlying policy framework in agriculture. [link, link]. Many people are peddling more distortions, such as forcible debt write-offs (which will hurt credit access for the living) or a big MSP style system for cotton (which will hurt the cotton market).
In an article Making sense of farmer suicide in Business Standard today, I try to engage in some rational thinking on these issues.
The risk of cotton farming
Cotton cultivation has risen sharply in Andhra Pradesh, and two regularities about cotton are: (a) A sharp rise in volatility of some grades with (b) Very low correlations across grades. The low correlations seem to suggest a lack of goods arbitrage - if cotton was moving freely across the country, pockets of very high / very low prices (and high price volatility) would not happen. A set of policy responses which will get the cotton market to work properly are well worth emphasising.
The volatility of the cotton price of some grades rose sharply. That got me thinking in terms of corporate finance. If I was a firm, and my cashflow volatility went up, I'd need more equity capital to cope with these shocks. What appears to be going on with farmers is a mixture of high leverage plus an increase in output price volatility - either out of a shift from cereal to cotton, or an increase in in the volatility of cotton. A firm / entrepreneur who plys this trade needs more equity capital on the table.
Modifying the rules of the game of credit
A great deal of the public discussions have emphasised giving out more credit, at lower rates, and with easier debt write-offs. I think the picture is more complex than meets the eye, and there can easily be unexpected effects:
Example: What happens if the government pushes more credit? In the bad old days, there was acute credit rationing, farmers were equity financed and there were no defaults. If the government does a big push to get more credit to farmers - e.g. by giving banks quotas for loans to farmers - then bankers are forced to dole out credit even when the leverage is excessive. Alternatively, improved credit access could help households jump from a low-risk business like wheat to a high-risk business like cotton. So giving out more access to easy credit could lead to wrong results, giving us more farm households with acutely high leverage and/or a more risky cashflow, i.e. more farm households which are under a high probability of default.
Example: What happens if lenders are forced to take losses and forgive debt that borrowers "cannot" repay? A government that emphasises writing off debt gives lenders strong incentives to not give out debt. The debt relief initiatives that are being bandied about in response to farmer suicides look worrisome in terms of the future of credit access for poor people. I am all for a carefully thought out "Chapter 11" procedure for the treatment of personal bankruptcy. But knee-jerk responses owing to 4000 people who killed themselves shouldn't reduce the credit market access and thus the welfare of 40 million people who didn't.
The man-bites-dog syndrome of democracy
Farmer suicide is a bit of a man-bites-dog story in terms of getting heightened focus from the media and the political system. There is something disproportionate in State expenditure of Rs.4,000 crore for a problem where 4,000 people kill themselves a year, while bigger crises like 150,000 mothers who die in pregnancy every year are burning unabated, with no juicy stories to attract the attention of the media.
The nature of the agricultural firm
How are farmers going to bring equity capital, scientific knowledge, risk management using futures markets, etc. to bear on the problem of agriculture? I suspect such bulking up will just not happen as long as an individual entrepreneur holds an acre or two of land. The growing complexity of agriculture requires a shift from small farmer-entrepreneurs to sophisticated organisation structures.
As I say in the article, asking a lay farmer to be a full-fledged entrepreneur - with skills spanning across biology and futures trading, and requiring substantial equity capital - is as daunting as taking a typical industrial or office worker and asking him to become a full-fledged entrepreneur. We are trying to put square pegs into round holes. It would be like taking a small mom-and-pop retailer and asking him to become a modern retailing business. I suspect a lot of today's entrepreneurial farmers could be better off being employees of firms engaged in agriculture.
This is about building modern firms, not about collectives or cooperatives. A merger between 10 mom-and-pop stores does not make a modern retailer. If there are 2 small farmers with little equity capital, low knowledge, and 1 acre of land each, putting them together into a cooperative or a collective which now controls 2 acres of land achieves little. The merged entity continues to have a deficit of equity capital and of knowledge; in addition it has the decision making problems and meddling by politicians that afflict a cooperative.