Choosing Between Mulberry Expansion and On-Farm Reeling
A farmer has 1.0 ha of irrigated mulberry and rears 1,000 dfls per year in five crops. Average cocoon yield is 55 kg per 100 dfls, and cocoons sell at ₹520/kg. Annual variable costs are ₹140,000 and fixed costs are ₹60,000. A subsidized loan is offered either to expand mulberry to 2.0 ha or to install a small reeling unit. Expansion would raise fixed costs by ₹35,000 per year and require 30% more hired labour, which is scarce at peak season. The reeling unit needs ₹450,000 investment, would process the current 550 kg of cocoons at renditta 8.5, and raw silk sells at ₹4,200/kg; annual reeling cost is ₹90,000 plus the cocoon cost. The farmer asks which option is safer and more profitable. Advise with calculations.
1. Calculate the current gross and net margin and state the benchmark for comparing the options.
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Current cocoon output is 1,000 dfls × 55 kg/100 dfls = 550 kg. Revenue is 550 × ₹520 = ₹286,000. Total cost is ₹140,000 variable + ₹60,000 fixed = ₹200,000. Net margin is ₹286,000 − ₹200,000 = ₹86,000 per year, or about ₹156/kg cocoon. This ₹86,000 net margin is the benchmark: any expansion or forward integration must beat it after counting extra labour, investment and risk. The calculation also shows that the farm is not highly profitable at present, so a large loan should be judged against a modest base.
2. Evaluate the mulberry expansion option using the given assumptions and identify the main operational risk.
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Expansion to 2.0 ha at the same yield gives 2,000 dfls and 1,100 kg cocoons. Revenue is 1,100 × ₹520 = ₹572,000. If variable costs double to ₹280,000 and fixed costs rise to ₹95,000, total cost is ₹375,000 and net margin is ₹197,000. Incremental net margin is ₹197,000 − ₹86,000 = ₹111,000 per year. However, this assumes leaf yield, cocoon yield and price remain constant and ignores the cost of establishing the second hectare. The 30% extra peak labour is the main operational risk: if labour cannot be hired, rearing will be delayed and cocoon quality will fall. Expansion is profitable on paper but should not proceed until labour is secured and the loan repayment is included.
3. Evaluate the reeling option and recommend a course of action with risk reasoning.
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At renditta 8.5, 550 kg cocoons give 550/8.5 = 64.7 kg raw silk. Revenue is 64.7 × ₹4,200 = about ₹271,700. If the farmer uses own cocoons, their opportunity cost is ₹286,000; adding reeling cost of ₹90,000 gives ₹376,000, a loss of about ₹104,000. Buying cocoons at the same market price does not remove that loss. Reeling would make sense only if cocoons can be bought well below ₹520/kg, raw silk price is higher, or renditta improves substantially. Recommendation: do not install the reeling unit on these figures. Expand mulberry only after securing labour and a full cost estimate; otherwise stay at 1.0 ha and improve yield and price. A phased trial is safer than a large loan.