Agricultural Economics and Marketing

What to remember

• Agricultural economics applies economic principles to farming: how a farmer uses scarce land, labour, capital and management to get the best return.
• Cost, income and profit: Net income = Gross income − Total cost; Benefit-cost ratio (B:C) = Gross returns / Total cost.
• Agricultural marketing covers all steps from the farm gate to the consumer (assembling, grading, storage, transport, processing, sale); MSP, eNAM, APMC yards, Rythu Bazaars and Rythu Bharosa Kendras (RBKs) are the key institutions and tools for AP farmers.

Basic concepts

Economics studies the use of scarce resources with alternative uses. Farm management is the science of organising and running a farm to get maximum profit. Factors of production are:

Features of Indian agriculture: small and scattered holdings, dependence on monsoon, subsistence orientation, and large share of workforce. By size, holdings are classed as marginal (below 1 ha), small (1–2 ha), semi-medium (2–4 ha), medium (4–10 ha) and large (above 10 ha).

Law of diminishing returns: when more and more units of a variable input (e.g. fertilizer) are added to fixed inputs, the extra output from each additional unit first rises and then falls. Law of equi-marginal returns says that limited resources should be spread among uses so that the marginal return is equal in all. Opportunity cost is the income lost by choosing one use over the next best use. Law of substitution guides replacing one input by another.

Cost concepts

Fixed costs do not change with output in the short run (land revenue, rent, depreciation, interest on fixed capital). Variable costs change with output (seed, fertilizer, labour, irrigation, plant protection). Total cost = fixed + variable. Average cost = total cost / output. Marginal cost is the addition to total cost from producing one more unit.

Cost of cultivation (as defined by the national costing system) uses these cost concepts:

Depreciation (straight line) = (Original cost − salvage value) / useful life. Example: tractor cost ₹6,00,000, salvage ₹1,00,000, life 10 years, depreciation = ₹50,000 a year.

Farm income measures

• Gross income = total value of produce (including by-products).
• Net income = gross income − total cost.
• Farm business income = gross income − Cost A2 (or paid-out costs).
• B:C ratio > 1 means profit.
• Break-even output = fixed cost / (price per unit − variable cost per unit).

Example: gross income ₹60,000, total cost ₹40,000: net income ₹20,000 and B:C = 1.5. Another: fixed cost ₹10,000, price ₹20 per kg, variable cost ₹10 per kg: break-even = 10,000/10 = 1000 kg.

Agricultural marketing

Marketing is the process by which produce is moved from producer to consumer. Marketable surplus is the produce left after the farm family's needs (consumption, seed, payments in kind). Marketed surplus is the part actually sold. Marketing channel is the path (e.g. producer → village trader → wholesaler → retailer → consumer). A short channel gives the farmer a bigger share.

Marketing margin = price paid by the consumer − price received by the producer. Producer's share in consumer's rupee = farm price / retail price × 100. Example: retail price ₹50 per kg, farm price ₹30 per kg: margin = ₹20 and producer's share = 60%.

Functions: physical (storage, transport, processing), exchange (buying and selling) and facilitating (grading, standardisation, financing, risk bearing, market information). Grading sorts produce by quality; standardisation sets quality grades; AGMARK is the Government of India grade mark for agricultural products, while ISI/BIS covers processed items.

Market types: by area (village, primary, secondary, terminal), by time (daily, weekly, seasonal), by regulation (regulated and unregulated). Regulated markets run by Agricultural Produce Market Committees (APMC) reduce malpractices, ensure weighment and open auction, and charge fixed market fees. eNAM (National Agriculture Market), launched in 2016, is an online trading platform linking regulated mandis.

Support prices, institutions and AP initiatives

The Minimum Support Price (MSP) is announced by the Government of India on the recommendation of the Commission for Agricultural Costs and Prices (CACP) to protect farmers against price fall; it applies to notified crops (cereals, pulses, oilseeds, cotton and others). For sugarcane the price is called Fair and Remunerative Price (FRP). The Food Corporation of India (FCI) procures grain; NAFED handles pulses, oilseeds and some other produce at support price; the Cotton Corporation of India buys cotton.

AP has Rythu Bazaars (direct farmer-to-consumer markets where farmers sell vegetables and other produce without middlemen) and Rythu Bharosa Kendras (RBKs) in villages, which supply inputs, advice, and support procurement and e-crop booking. The Village Agriculture, Horticulture or Sericulture Assistant works through the RBK. Do not treat any numeric detail about these as fixed; check the latest official release.

Credit and risk

Credit sources: institutional (cooperatives, commercial banks, regional rural banks, NABARD refinance) and non-institutional (moneylenders, traders, relatives). Short-term credit is for seed, fertilizer and labour; medium-term for pumps, animals and implements; long-term for land development and large machinery. The Kisan Credit Card (KCC) gives farmers revolving credit for crop needs. Pradhan Mantri Fasal Bima Yojana (PMFBY) is the crop insurance scheme (introduced 2016) for yield and weather risks. Price risk is handled by MSP, forward contracts and warehouse receipt finance.

Price elasticity of demand shows how much quantity demanded changes with price; for most staples it is low (inelastic), which is why bumper crops can reduce farmers' total revenue. The cobweb pattern in prices arises because farmers decide acreage on last season's price.

Cooperative marketing, value addition and farm records

Cooperative marketing societies pool the produce of members, grade it, store it and sell it jointly, so farmers get a better price and share the profit. Farmer producer organisations (FPOs) work on a similar idea: farmers form a group to buy inputs in bulk and sell produce collectively. Value addition (cleaning, grading, packing, drying, processing into flour, oil, pulp or powder) raises the price per unit and cuts losses. Post-harvest losses occur during harvesting, threshing, transport and storage; improved handling, covered godowns and cold storage (for perishables like fruit and vegetables) reduce them.

Keeping simple farm records (inventory, receipts and expenses, crop-wise cost and income) helps a farmer see which crop pays best. A farm budget is an estimate of expected income and expenses; a partial budget looks only at the changes from a small adjustment, such as adopting a new variety. Farm planning chooses the combination of crops and enterprises (crop, dairy, poultry, sericulture, horticulture) that gives the best income from the available land, labour and capital, while keeping risk low through diversification.

Exam traps

• MSP is announced on CACP recommendation; FRP is the term for sugarcane.
• Cost C2 includes family labour and rental value of owned land; Cost A2 includes only paid-out costs plus leased-in rent.
• Marketable surplus and marketed surplus are not the same.
• Marketing margin is consumer price minus farm price, not a percentage of it.
• Fixed costs do not vary with output; seed and fertilizer are variable costs.
• AGMARK is for agricultural produce; ISI/BIS is for manufactured goods.
• Opportunity cost is the next best alternative forgone.
• B:C ratio uses gross returns, not net returns, in the numerator.

One-liners

• 1. Factors of production: land, labour, capital, management.
• 2. Rent is the return to land.
• 3. Marginal holding: below 1 hectare.
• 4. Net income = gross income − total cost.
• 5. Depreciation = (cost − salvage value) / life.
• 6. CACP recommends MSP.
• 7. FRP is the price fixed for sugarcane.
• 8. eNAM is an online national agricultural market.
• 9. NABARD was set up in 1982.
• 10. KCC provides revolving crop credit.
• 11. PMFBY is the crop insurance scheme.
• 12. Rythu Bazaars connect farmers directly with consumers.

Practice questions

1. Gross income is Rs 60,000 and total cost is Rs 40,000. The net income is

   1. Rs 60,000
   2. Rs 40,000
   3. Rs 1,00,000
   4. Rs 20,000
   Answer

   D. Rs 20,000

   60,000 - 40,000 = 20,000.

2. With gross income Rs 60,000 and total cost Rs 40,000, the benefit-cost ratio is

   1. 1.0
   2. 2.0
   3. 1.5
   4. 0.67
   Answer

   C. 1.5

   60,000/40,000 = 1.5.

3. A machine costs Rs 6,00,000, has salvage value Rs 1,00,000 and life 10 years. Straight-line depreciation per year is

   1. Rs 10,000
   2. Rs 50,000
   3. Rs 60,000
   4. Rs 70,000
   Answer

   B. Rs 50,000

   (6,00,000 - 1,00,000)/10 = 50,000.

4. Fixed cost Rs 10,000; price Rs 20 per kg; variable cost Rs 10 per kg. The break-even output is

   1. 1000 kg
   2. 500 kg
   3. 100 kg
   4. 2000 kg
   Answer

   A. 1000 kg

   10,000/(20 - 10) = 1000 kg.

5. Retail price is Rs 50 per kg and the farm price is Rs 30 per kg. The marketing margin is

   1. Rs 80
   2. Rs 15
   3. Rs 30
   4. Rs 20
   Answer

   D. Rs 20

   50 - 30 = 20.

6. With retail price Rs 50 and farm price Rs 30, the producer's share in the consumer's rupee is

   1. 80%
   2. 40%
   3. 60%
   4. 30%
   Answer

   C. 60%

   30/50 x 100 = 60%.

7. A farm family produces 100 quintals, consumes 20 quintals and keeps 5 quintals for seed. The marketable surplus is

   1. 75 quintals
   2. 95 quintals
   3. 25 quintals
   4. 80 quintals
   Answer

   A. 75 quintals

   100 - 20 - 5 = 75.

8. Total cost is Rs 90,000 for 30 quintals. The average cost per quintal is

   1. Rs 2,700
   2. Rs 3,000
   3. Rs 300
   4. Rs 30,000
   Answer

   B. Rs 3,000

   90,000/30 = 3,000.

9. Cost A1 is Rs 30,000, interest on owned fixed capital is Rs 4,000. Cost B1 is

   1. Rs 4,000
   2. Rs 30,000
   3. Rs 34,000
   4. Rs 26,000
   Answer

   C. Rs 34,000

   B1 = A1 + interest on owned fixed capital.

10. A farmer with 0.8 hectare of land is classed as

    1. medium
    2. small
    3. semi-medium
    4. marginal
    Answer

    D. marginal

    Below 1 ha is marginal.

11. A holding of 3 hectares is classed as

    1. semi-medium
    2. medium
    3. small
    4. large
    Answer

    A. semi-medium

    2-4 ha is semi-medium.

12. The return to land as a factor of production is called

    1. profit
    2. rent
    3. wage
    4. interest
    Answer

    B. rent

    Rent is the return to land.

13. The return to capital is

    1. rent
    2. wages
    3. interest
    4. profit
    Answer

    C. interest

    Interest is the return to capital.

14. Income lost by choosing one use over the next best use is

    1. opportunity cost
    2. fixed cost
    3. sunk cost
    4. marginal cost
    Answer

    A. opportunity cost

    This is opportunity cost.

15. Cost that does NOT change with the level of output in the short run is

    1. paid-out cost of seed
    2. fixed cost
    3. variable cost
    4. marginal cost
    Answer

    B. fixed cost

    Fixed cost remains the same.

16. Which of the following is a variable cost?

    1. Depreciation on building
    2. Land revenue
    3. Rent on land
    4. Fertilizer
    Answer

    D. Fertilizer

    Fertilizer varies with the level of production.

17. Cost A2 equals

    1. Cost A1 plus rent paid for leased-in land
    2. Cost C2 plus 10%
    3. Cost A1 plus family labour
    4. Cost B1 plus rent of owned land
    Answer

    A. Cost A1 plus rent paid for leased-in land

    A2 includes the rent paid for leased land.

18. Cost C2 includes

    1. only paid-out costs
    2. family labour and rental value of owned land
    3. only fixed costs
    4. only seed and fertilizer
    Answer

    B. family labour and rental value of owned land

    C2 = B2 + family labour value.

19. The law of diminishing returns means that

    1. output always falls with input
    2. costs never change
    3. output always rises in proportion to input
    4. extra output from each additional unit of variable input eventually declines
    Answer

    D. extra output from each additional unit of variable input eventually declines

    The marginal product falls after a point.

20. MSP is announced by the Government of India on the recommendation of

    1. FCI
    2. APMC
    3. CACP
    4. NABARD
    Answer

    C. CACP

    CACP recommends MSP.

21. The price fixed for sugarcane is called

    1. Market intervention price only
    2. Wholesale price index
    3. Retail price
    4. Fair and Remunerative Price
    Answer

    D. Fair and Remunerative Price

    FRP applies to sugarcane.

22. APMC stands for

    1. Association of Produce Market Cooperatives
    2. Agricultural Produce Market Committee
    3. Agricultural Price Monitoring Council
    4. Agricultural Planning and Marketing Corporation
    Answer

    B. Agricultural Produce Market Committee

    APMC manages regulated markets.

23. AGMARK is the grade mark for

    1. agricultural produce
    2. electrical goods
    3. textiles
    4. medicines
    Answer

    A. agricultural produce

    AGMARK certifies quality of farm products.

24. The apex bank for agriculture and rural development is

    1. SBI
    2. SIDBI
    3. NABARD
    4. RBI
    Answer

    C. NABARD

    NABARD was set up in 1982.

25. The Kisan Credit Card provides

    1. free seed
    2. insurance only
    3. price support
    4. revolving credit for crop needs
    Answer

    D. revolving credit for crop needs

    KCC is crop credit.

26. The crop insurance scheme introduced in 2016 is

    1. eNAM
    2. Pradhan Mantri Fasal Bima Yojana
    3. Rashtriya Krishi Vikas Yojana
    4. Soil Health Card
    Answer

    B. Pradhan Mantri Fasal Bima Yojana

    PMFBY covers crop loss.

27. Procurement, storage and distribution of food grains at national level is handled by

    1. NABARD
    2. APMC
    3. FCI
    4. BIS
    Answer

    C. FCI

    FCI procures and stores food grains.

28. A direct farmer-to-consumer market in Andhra Pradesh where middlemen are avoided is

    1. Rythu Bazaar
    2. terminal market
    3. futures exchange
    4. commission shop
    Answer

    A. Rythu Bazaar

    Rythu Bazaars let farmers sell directly.

29. Village-level centres in Andhra Pradesh that provide inputs, advice and procurement support are

    1. Mother and child centres
    2. Mandal Parishads
    3. Fair price shops
    4. Rythu Bharosa Kendras
    Answer

    D. Rythu Bharosa Kendras

    RBKs serve villages with agricultural services.

30. Which credit is best for buying a tractor?

    1. Consumption loan
    2. Overdraft for seed
    3. Medium to long-term credit
    4. Short-term credit
    Answer

    C. Medium to long-term credit

    Machinery is a medium or long-term need.

31. Crop loans for seed and fertilizer are generally

    1. long-term credit
    2. land mortgage loans
    3. short-term credit
    4. non-institutional only
    Answer

    C. short-term credit

    Crop loans are repaid after harvest.

32. A moneylender is a source of

    1. bank credit
    2. non-institutional credit
    3. cooperative credit
    4. institutional credit
    Answer

    B. non-institutional credit

    Moneylenders are non-institutional.

33. Sorting produce according to quality is called

    1. grading
    2. pooling
    3. standardisation
    4. processing
    Answer

    A. grading

    Grading classifies by quality.

34. Storage, transport and processing are

    1. physical functions of marketing
    2. facilitating functions
    3. exchange functions
    4. pricing functions
    Answer

    A. physical functions of marketing

    Physical functions change time, place and form.

35. Buying and selling are

    1. physical functions
    2. facilitating functions
    3. financial functions only
    4. exchange functions
    Answer

    D. exchange functions

    Exchange functions transfer ownership.

36. Consider the statements. 1. Rent is the return to land. 2. Interest is the return to labour. Which is/are correct?

    1. 2 only
    2. Both 1 and 2
    3. Neither 1 nor 2
    4. 1 only
    Answer

    D. 1 only

    Wages are the return to labour.

37. Consider the statements. 1. MSP is recommended by CACP. 2. FRP applies to sugarcane. Which is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    C. Both 1 and 2

    Both are correct.

38. Consider the statements. 1. Marketed surplus is the produce actually sold. 2. Marketable surplus is the same as total production. Which is/are correct?

    1. 2 only
    2. 1 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    B. 1 only

    Marketable surplus is production minus farm needs.

39. Consider the statements. 1. Short channels give farmers a higher share of the consumer's price. 2. Marketing margin is price paid by consumer minus price received by producer. Which is/are correct?

    1. Both 1 and 2
    2. 1 only
    3. 2 only
    4. Neither 1 nor 2
    Answer

    A. Both 1 and 2

    Both are true.

40. Consider the statements. 1. Land revenue is a variable cost. 2. Seed is a variable cost. Which is/are correct?

    1. 2 only
    2. 1 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Answer

    A. 2 only

    Land revenue is a fixed cost.

41. Match the pair correctly.

    1. Cost A1 - includes family labour
    2. Cost B2 - paid-out cost only
    3. Cost C1 - excludes family labour
    4. Cost C3 - Cost C2 plus 10% for management
    Answer

    D. Cost C3 - Cost C2 plus 10% for management

    C3 adds 10% management cost to C2.

42. When demand for a staple is inelastic, a bumper harvest generally

    1. raises the farmers' total revenue strongly
    2. lowers the farmers' total revenue
    3. leaves prices unchanged
    4. stops marketing
    Answer

    B. lowers the farmers' total revenue

    Prices fall more than quantity rises.

43. Farm business income is gross income minus

    1. Cost C3
    2. Cost A2
    3. Cost B2 only
    4. Fixed cost only
    Answer

    B. Cost A2

    Farm business income = gross income - A2.