150 Quintals of Wheat, Three Buyers and a College Admission
Harjit farms 3 hectares in Bathinda district and has harvested 150 quintals of wheat. He has three ways to sell it. (a) The government procurement centre pays the announced MSP of ₹2,275 per quintal, but insists on grain at 12% moisture or less, clean and bagged; the queue takes about three days and payment reaches his bank account in two to four weeks. His bagging, cartage and arhatiya charges come to about ₹35 per quintal. (b) A private trader will collect the grain from his village, pay ₹2,120 per quintal in cash on the spot, and accepts damp grain, charging him about ₹15 per quintal for delivery. (c) A warehouse registered with the Warehouse Development and Regulatory Authority will store the grain, issue a receipt against which a bank will lend him 75% of its value at 7% a year, and he can sell in March. He needs ₹60,000 within three weeks for his daughter's college admission. He has an unused Kisan Credit Card limit at 4% effective interest; the village moneylender charges 5% a month.
1. Work out which of the first two options leaves Harjit better off, taking the cost of borrowing into account, and state the conditions under which your recommendation would fail.
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Compare net realisation, then subtract the cost of bridging the cash gap.
- Option (a), procurement centre: 150 q × ₹2,275 = ₹3,41,250; less ₹35/q of bagging, cartage and arhatiya charges (₹5,250) = ₹3,36,000, paid in about three weeks.
- Option (b), private trader: 150 q × ₹2,120 = ₹3,18,000; less ₹15/q delivery (₹2,250) = ₹3,15,750, paid at once.
Difference in favour of the procurement centre ≈ ₹20,250.
The admission money does not overturn this if he can borrow sensibly. ₹60,000 for three weeks from the moneylender at 5% a month costs 60,000 × 0.05 × 21/30 = ₹2,100. From the unused Kisan Credit Card at 4% a year it costs about ₹140. Selling at the procurement centre and bridging with the KCC therefore leaves him roughly ₹18,000-20,000 better off than the cash sale.
Recommendation: option (a), and use the KCC, not the moneylender, for the three weeks.
Where this fails: if his grain is damp or dirty enough to be rejected or heavily downgraded; if the queue costs him more than about ₹20,000 in hired labour and lost days; if payment actually takes months rather than weeks; or if he must borrow the entire ₹3 lakh rather than ₹60,000, because at 5% a month that interest (about ₹15,000 a month) can wipe out the entire advantage within six weeks.
2. Under what circumstances would selling to the private trader actually be the rational choice, even though the price is lower? Explain the principle you are applying.
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The principle is opportunity cost and risk, not price alone. A lower price today can be the better deal if the higher-priced option costs more in time, rejection risk or interest.
Circumstances that favour the trader:
- Quality risk. If rain at harvest has pushed moisture above 12%, the procurement centre may reject or downgrade the lot, and a rejected trolley in a three-day queue is a total loss of the season's timing. The trader's tolerance of damp grain has a real value.
- Delay that costs more than the gap. The ₹20,250 advantage disappears if the payment delay forces him to borrow a large sum at the moneylender's 5% a month. He should compare the expected date of payment with the date the interest bill exceeds ₹20,250.
- No credit line. If the KCC limit is already used or the bank branch will not release it in time, the choice is cash now versus a moneylender at 60% a year - and the trader wins.
- Small lots and distance. For a small quantity, the fixed cost of transport and a three-day queue can exceed the price difference per quintal.
- Immediate, unavoidable cash need - a hospital bill, not a college fee that could be paid in instalments.
However: he should get the trader's price in writing, weigh the bag on a licensed scale, and record the moisture and quantity. Selling cheap is sometimes rational; selling without a record is never wise, because it is the door through which under-weighing and delayed payment enter.
3. Evaluate the warehouse-receipt option. Would you advise Harjit to store the wheat and sell in March, or to take the pledge loan and sell now?
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What the option really offers: a WDRA-registered warehouse receipt is a negotiable document, so he can borrow 75% of the grain's value at 7% a year without selling - that solves a liquidity problem elegantly. Whether it solves a price problem is a different question.
Costs to set against any price rise: storage charges per quintal per month, interest at 7%, insurance, transport to and from the warehouse, and quality loss from moisture, insects and rodents. Together these usually amount to something over 1% a month. To gain, the March price must exceed today's price by more than that, and the sale must be certain, not hoped for.
The market reality in Punjab: wheat procurement is open-ended at MSP, which is precisely why the open-market price rarely rises far above MSP - there is little seasonal scarcity to exploit. So the speculative gain is usually small and the downside (a fall in price, or a rejected lot in March) is real.
Advice: use the warehouse receipt for liquidity, not for speculation. If he needs ₹60,000, the cleaner answer is to sell at the procurement centre and use the KCC, which is cheaper and quicker than storage plus 7% interest. Store only if he has a forward contract at a known higher price or a genuine reason to hold. General rule for the exam answer: storage pays when the expected price rise clearly exceeds storage cost plus interest plus quality loss; otherwise the MSP counter is the rational buyer.