Repay Now or Store the Wheat? A Farmer's Cash-Flow Decision
Sunita Devi grows wheat on 3 hectares and holds a Kisan Credit Card crop loan of ₹1,80,000 sanctioned at 7 per cent per annum simple interest. The scheme gives a 3 per cent interest subvention only if principal and interest are repaid within 12 months of disbursal; the loan was disbursed 10 months ago. She expects 66 quintals of wheat. Today the mandi price is ₹4,800 per quintal. A warehouse 18 km away charges ₹10 per quintal per month, and she would store for four months, by which time she expects ₹5,400 per quintal. Any money not realised now would have to be borrowed at 9 per cent per annum. She also expects 1 per cent weight loss in storage. Her neighbour advises her to sell today and close the loan before the subvention window shuts; the warehouse agent advises her to wait for festive demand.
1. Compute what the loan will cost her under each of the two choices, and explain why the two figures differ by more than a simple extension of two months.
Read the worked answer
Sell today and repay now (month 10): the subvention applies, so the effective rate is 7 − 3 = 4 per cent for 10 months.
Interest = 1,80,000 × 4% × 10/12 = ₹6,000.
Store and repay at month 14: the 12-month window closes before she repays, so the subvention is lost entirely and the full 7 per cent runs for 14 months.
Interest = 1,80,000 × 7% × 14/12 = ₹14,700.
The gap is ₹8,700, not the ₹2,100 that two extra months at 7 per cent would suggest. The reason is that missing the window does not merely add two months of interest - it re-prices the whole fourteen months from 4 per cent to 7 per cent. Candidates who compute 1,80,000 × 3% × 14/12 will get roughly ₹6,300 and will be wrong, because the subvention is conditional on repayment within 12 months, not on the loan being alive.
2. Work out whether storing for four months beats selling at harvest, on a full cash basis.
Read the worked answer
Sell at harvest: 66 × 4,800 = ₹3,16,800 realised, loan interest ₹6,000.
Store for four months:
- Quantity after 1 per cent weight loss = 66 × 0.99 = 65.34 quintals.
- Revenue = 65.34 × 5,400 = ₹3,52,836.
- Storage charge = 66 × 10 × 4 = ₹2,640 (charged on quantity stored, before shrinkage).
- Opportunity cost of money locked up = 3,16,800 × 9% × 4/12 = ₹9,504.
- Extra loan interest versus repaying now = ₹8,700.
Net from storing = 3,52,836 − 2,640 − 9,504 − 8,700 = **₹3,32, - ** which is ₹3,31,992, against ₹3,16,800 − ₹6,000 = ₹3,10,800 for selling now. Storing is better by about ₹21,192. Note that the ₹21,000 gain is only about 7 per cent of the crop value and rests on an assumed ₹600 price rise; if the price rise is half of that, storage turns negative once the lost subvention is counted.
3. At what stored price does the decision reverse, and what practical safeguard would you insist on before recommending storage?
Read the worked answer
Set the break-even price so that the stored revenue covers the harvest proceeds plus every storage cost.
Required revenue = 3,16,800 (harvest value she gives up) + 2,640 (storage) + 9,504 (interest on locked money) + 8,700 (extra loan interest) = ₹3,37,644.
Divide by the saleable quantity after shrinkage, 65.34 quintals: 3,37,644 ÷ 65.34 = about ₹5,168 per quintal.
So storage wins only if the price four months out exceeds roughly ₹5,168 - her expectation of ₹5,400 clears it by about ₹230, a margin thin enough that a single mandi arrival glut wipes it out.
Safeguards before recommending storage:
- Do not store without a negotiable warehouse receipt from a WDRA-registered warehouse; it converts stock into collateral and permits a pledge loan if cash is needed.
- Insure or at least inspect for moisture and rodent damage; 1 per cent shrinkage is an assumption, not a guarantee.
- Sell in two tranches rather than betting the whole 66 quintals on one price.
- Repay at least the interest before month 12 to preserve the subvention on the principal already paid.