Case Report on Varun Nagar Agricultural Cooperative Society

Submitted By: Akash Jain, 2210003, Section A

During the mid-year review meeting1 of the operations of the society, it is found that the
Society has multiple options for how to carry out the operations for the rest of the year.
VNACS faces a situation where a decision must be made from several available alternatives
keeping in mind that the Society’s goals must be fulfilled. One decision is whether to sell the
paddy now at current prices or store it for six months and then sell it at higher prices. Another
decision is whether to buy the fertilizer in advance, which is not required for another six
months at discounted prices, or to buy it when needed at higher market prices. Another
decision is whether to pay the overdraft pending to the bank or keep it for another six months
and pay the accrued interest. Also, the payment to the members is due for the paddy, which is
procured recently. Meanwhile, all this must be decided keeping in mind the limited cash
available to the Society because only 5 lakh rupees cash is available to the society and 5 lakh
more will be available in case the society decides to sell the paddy at the current prices3.
The main problem the Society is facing is in deciding which option to choose from so many
available alternatives, as each alternative provided different risks and returns. The option is to
be selected in such a way that all stakeholders, such as members, the bank and the suppliers
are satisfied with the performance of the society. Since the available alternatives are
conflicting in nature, only a single optimized option can be chosen which provides the
maximum benefit to the society while maintaining its responsibilities to its members.
The society was formed with the mission of achieving collective good for all its members.
The power of cooperative society lies in the principle that higher benefits can be achieved by
working in a collective manner as compared to working as individual units. The decision to
be made must be in line with these objectives and these goals with which the society was
formed. The members of the society expect timely payment for their crops sold to the society.
The society aims to maintain a good image in the views of the bank by paying the accrued
interest and the overdraft on time and in the views of the members of the society by paying
for the procured paddy on time. The society wants to prove that it can achieve its goal of
providing benefits to its members in terms of higher profits and cheaper raw materials, which
the members cannot achieve individually to ensure the constant support of the members of
the society.
Since the society’s objective is to maximize the collective benefits and minimize the costs for
the members, the criteria to evaluate the multiple alternatives should reflect those goals. In
other words, the net benefits the society is able to achieve in each of the alternatives is one
parameter to compare all the options. Any option with poor benefits or resulting in deficits
will be considered unfeasible. Also, there are some constraints in this decision-making
process. One such constraint is that the payment to the members of the society for the
procured crops cannot be delayed, as this will contradict the society’s mission. So, the
payment to the members must be made without any delay. Also, to remain in the good books
of the bank, no more funds can be borrowed as the society has already made use of the
overdraft facility, which comes into effect when the standard borrowing limit has been
exhausted.
The options available2 to the society considering the constraints are:
1. Sell the paddy at current prices and pay the bank and the members
2. Sell the paddy at current prices, pay the members from cash, and buy the fertilizer
3. Pay the members from the cash and retain the paddy for the six months
The first option of selling the paddy at the current prices and then using the money received
to pay the members and the repayment of the overdraft to the bank satisfies the criteria of
timely repayment to the members. 5 lakh rupees payment would be made to the members and
the remaining 5 lakh rupees would be paid to the bank against the overdraft facility6.
However, in doing so, the interest amount of 25000 rupees6 on the overdraft facility would be
recorded as a net deficit to the society as the society has insufficient funds to make this
payment in the current situation. While the society can maintain its good image in the bank’s
view in this option, this does not satisfy the members’ benefit maximization criteria.
The second option of paying the members from the 5 lakh rupees cash available and selling
the paddy to get 5 lakh rupees more and then buying the fertilizer by utilizing this amount
satisfies the criteria of timely repayment to the members7. However, the overdraft facility will
have to be utilized for a period of 6 months more, and the subsequent interest will be charged
to the society. Since the fertilizer won’t be used for the next six months, additional expenses
would have to be made for storage, labor, equipment, and insurance. Also, 5% of the fertilizer
would be lost in storage. Considering this factor, if fertilizer is bought after six months, it
would cost 5,70,000 rupees (95% of 6 lakhs), while the total cost of buying fertilizer in
advance at a discounted price, comes out to be 5,88,000 including the interest expenses of the
overdraft to the bank. This option results in a net deficit of 18000 rupees7 after the payment
of the overdraft to the bank, which does not meet the second criterion of benefit
maximization to the members of the society.
The third option of paying the members from the cash available satisfies the timely
repayment condition. In this option, paddy is retained for the next six months to be sold at
higher prices. The interest will be accrued for more six months as no payment is made to the
bank, and fertilizer is also not bought due to insufficient funds. However, as per the industry
trends, once in four seasons, the paddy prices reached 7500 rupees per ton in October, and the
last two seasons saw the prices reach 6200 and 6300 rupees per ton, respectively. The
probability of prices hitting 7500 per ton this October is 50%. Considering the increasing
trend of paddy prices, it would be safe to assume the minimum price level to be 7000 rupees
per ton this October4. If the paddy is sold at 7000 rupees per ton, the society gains 7 lakh
rupees as revenue. The total expenses for the six months of carrying paddy will be the
insurance expenses amounting to 10,000 rupees. The interest expenses will be 50,000 rupees
of the overdraft facility. The net gain of the society after repayment of the overdraft to the
bank would be 1,40,000 rupees8. In this scenario, the society can buy the fertilizer at the
market price of 300 rupees per bag, amounting to 6 lakh rupees for 2000 bags. By utilizing
this amount of 1,40,000 rupees in that transaction, the society can offer fertilizer bags to its
members at a discounted price of 230 rupees8 per bag instead of 300 rupees per bag. This
option also satisfies the criteria of benefit maximization for its members. This is when the
price is assumed to reach up to 7000 rupees per ton only. In case, the prices reach 7500
rupees per ton of paddy, probability of which happening is 50%, then this will result in an
even higher discount on fertilizer for the members of the society.
Considering all the options and their benefits, the third option of paying the members on time
and retaining the paddy for the next six months is the best option. All other options result in
an unfavorable situation, while this option results in the highest benefits to the members.
Timely payment is made to the members, which is of utmost importance. Although the
payment to the members is made based on the procured price of the paddy, the society is able
to provide benefits to its members by providing the fertilizer at a discounted price. The
society is also able to pay the overdraft, including the accrued interests, to the bank. The
Society should select this way forward for their operations to satisfy their members of the
benefit capability of the society while maintaining their good image in the view of banks.
In order to achieve these results, a clear action plan is necessary. The storage of paddy for a
period of six months poses a risk of crop failure if not done correctly. The management must
prioritize the stock’s safety so that no quantity loss occurs. Having an insurance plan for the
paddy is a step in the right direction in case of any calamities. Continuously monitoring the
market prices is also a vital aspect of this plan. Whenever paddy prices reach the desired
level, the society should be quick enough to make the transaction. Dedicated personnel
should be tasked with the responsibility of continuously monitoring the paddy prices in the
market and timely reporting it to the top management for effective decision-making. Only by
the continuous monitoring of the market prices of paddy prices will the society be able to
achieve the desired results as discussed in this report.
The option of paying the farmers now from the available cash and retaining the paddy for the
next six months to be sold at favorable higher prices depends on the future market situation.
It would be advisable to create a contingency plan in case the market does not move in our
favor. The prices of 7000 rupees per ton in October are considered in this report, but it could
also be possible that the ideal price level of 7500 rupees per ton is achieved, or the prices may
fall below the current market prices of 5000 rupees per ton as well. Excellent harvesting
season resulting in an excess supply of paddy in the market can be one of the factors for the
reduced paddy prices. To safeguard the society from this situation, dedicated personnel must
continuously monitor paddy prices. In the case when prices do not increase to the society’s
desired levels, the society should sell the paddy at the minimum price of 5600 rupees9 per ton
in order to avoid any deficits. This will ensure that the society’s operations keep running in
an efficient way so that the confidence of members and the banks remain with the society.
 APPENDIX
1.
Date Description
Sep-90 Overdraft of 5 Lakh drawn from the Bank
Feb-91 Procured 100 tons of paddy from members
20-Mar-91 Mid-Year Review Meeting
25-Mar-91 Assumed Deadline to Make a Decision
31-Mar-91 Payment Due for Procured Paddy to members
07-Apr-91 Payment for Fertilizer if bought
Oct-91 Paddy if Retained, to be sold
Oct-91 Requirement of Fertilizer
Table 1: Timeline of Events

2.
Option Pay Members Sell Paddy Retain Paddy Pay Overdraft Buy Fertilizer
1 ✔ ✔ X ✔ X
2 ✔ ✔ X X ✔
3 ✔ X ✔ X X
Table 2: Available Options

3.
Financial Position of VNACS as of March 1991
Assets Liabilities
Paddy Crop 500000 Overdraft 500000
Cash 500000 Payment to Members 500000
Table 3: Balance Sheet

4.

Figure 1: Trend of Paddy Prices

 5.
Assumptions
1 The interest is unpaid for the period between Sep-90 to Mar-91
2 The Paddy Prices show an increasing trend from March to October of each year
3 Paddy can only be sold either in March or October
4 No more Overdraft can be drawn from the bank
5 Interest Rates remain constant throughout the year
6 The bank uses Simple Interest to calculate interests on Overdraft
Table 4: Assumptions taken for Calculation

6.
Particular Calculation Amount
Cash available 500000
Cash Generated after Selling Paddy 5000*100 500000
Total Cash Available 1000000

Payment to Members 500000

Overdraft Due 500000
Interest of Overdraft for 6 months 500000*(10%/2) 25000
Total Payment to Bank 500000+25000 525000
Total Payment to be done 525000+500000 1025000

Net Benefit/Deficit 1000000-1025000 -25000

Table 5: Option 1 Cost-Benefit Calculation

7.
Particular Calculation Amount
Cash available 500000
Cash Generated after Selling Paddy 5000*100 500000
Total Cash Available 1000000

Payment to Members 500000

Overdraft Due 500000
Fertilizer Bought 2000*250 (a) 500000
Interest of Overdraft for 12 months 500000*(10%) (b) 50000
Storage Cost (c) 3000
Labor Cost (d) 25000
Insurance Cost 20000/2 (e) 10000
Total Cost of Fertilizer a+b+c+d+e 588000
Fertilizer Cost if bought after 6 months 95% of 600000 570000

Net Benefit/Deficit 570000-588000 -18000

Table 6: Option 2 Cost-Benefit Calculation
 8.
Particular Calculation Amount
Cash available 500000

Total Cash Available 500000

Payment to Members 500000

Overdraft Due 500000
Paddy Insurance 20000/2 10000
Interest of Overdraft for 12 months 500000*10% 50000
Paddy Price Assumed after 6 months Rs/Ton 7000
Revenue after Selling Paddy 7000*100 700000
Total Expenses 50000+10000 60000

Capital Gain 700000-500000-60000 140000

Fertilizer Cost after 6 months 2000*300 600000

Discounted Price of Fertilizer after 6 months (600000-140000)/2000 230
Table 7: Option 3 Cost-Benefit Calculation

9.
Particular Calculation Amount
Paddy Cost (a) 500000
Interest Expense for 12 months 500000*(10%) (b) 50000
Insurance Expense 20000/2 (c) 10000
Total Cost a+b+c 560000
Quantity to be sold ton 100
Break-even Price 560000/100 5600
Table 8: Break-Even Cost Calculation for Contingency Plan