Choosing a Tomato Marketing Channel in Sonitpur
A farmer in Sonitpur has 1.0 ha and plans off-season tomato under low plastic tunnels. The budget is: tunnel plastic and structure Rs 40,000; labour Rs 60,000; seed and nursery Rs 12,000; fertilizer and manure Rs 15,000; plant protection Rs 8,000; land lease Rs 20,000; miscellaneous Rs 10,000. Expected marketable yield is 30 t/ha. A nearby FPO offers a contract at Rs 12/kg for Grade A fruit, but grading will reject about 10% as Grade B, which the FPO will buy at Rs 5/kg. The local trader offers Rs 8/kg for the whole lot at the farm gate with no grading. The FPO pays 45 days after delivery, and the farmer's working-capital loan costs 12% per year. Transport to the FPO is Rs 1.5/kg for the delivered quantity. The farmer asks which channel to choose and what price would make him indifferent.
1. Compute net returns for the two channels and identify the break-even spot price.
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Total cost = 40,000 + 60,000 + 12,000 + 15,000 + 8,000 + 20,000 + 10,000 = Rs 1,65,000.
FPO contract: 30,000 kg × 90% Grade A = 27,000 kg × Rs 12 = Rs 3,24,000. Grade B = 3,000 kg × Rs 5 = Rs 15,000. Gross = Rs 3,39,000. Transport = 30,000 × Rs 1.5 = Rs 45,000. Financing cost of the 45-day receivable ≈ 3,39,000 × 0.12 × 45/365 = Rs 5,015. Net = 3,39,000 − 45,000 − 5,015 = Rs 2,88,985. Profit = Rs 1,23,985.
Local trader: 30,000 × Rs 8 = Rs 2,40,000, no transport or grading. Profit = Rs 75,000.
The FPO is better by about Rs 48,985. The break-even farm-gate spot price is 2,88,985/30,000 = Rs 9.63/kg. Above that price, the local trader becomes the better choice, assuming no extra costs.
2. Assess the risks in the FPO contract beyond price, and recommend how the farmer should manage them.
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The contract shifts some price risk but introduces grading risk: the 10% Grade B assumption may be optimistic, and rejection could exceed 10% if fruit size or colour does not meet specification. There is payment-delay risk, because Rs 3.39 lakh is tied up for 45 days and the loan cost is real. Transport risk includes spoilage and delay on the 40 km route, and the FPO may reject loads on arrival. Yield risk from late blight or cold injury could leave the farmer short of the contracted volume.
The farmer should obtain the grading specification in writing, sort and grade on farm before transport, and send a small trial consignment first. He should confirm the FPO's payment record, negotiate part payment on delivery, and keep a backup local buyer. A simple contract should state quantity tolerance, quality standards, rejection procedure, transport responsibility and payment date. If late blight risk is high, the farmer should not commit the entire crop to one channel.
3. If expected yield falls 25% because of late blight, does the recommendation change? Show the numbers.
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Yield falls to 30,000 × 0.75 = 22,500 kg.
FPO: Grade A = 20,250 kg × Rs 12 = Rs 2,43,000; Grade B = 2,250 kg × Rs 5 = Rs 11,250; gross = Rs 2,54,250. Transport = 22,500 × Rs 1.5 = Rs 33,750. Financing ≈ 2,54,250 × 0.12 × 45/365 = Rs 3,764. Net = Rs 2,16,736. Profit over total cost = Rs 51,736.
Local trader: 22,500 × Rs 8 = Rs 1,80,000, which is Rs 15,000 above total cost, so profit = Rs 15,000.
The FPO remains better, but the margin shrinks to about Rs 36,736. The break-even spot price is unchanged at 2,16,736/22,500 = Rs 9.63/kg. The recommendation does not reverse, but the farmer should protect the crop with a late-blight spray programme, avoid overcommitting to a fixed volume, and consider crop insurance or a price floor because a further yield drop would make the venture marginal.