Varun Nagar Case Study

Varun Nagar Agricultural Cooperative Society
The Varun Nagar Agricultural Cooperative Society (VNACS) located in

Jaldhara district was a village level agriculture cooperative society. The society
started functioning in 1976 with 50 members. In 1991, the society had 300
members. The main functions of the society were to procure the agricultural
produce from the farmer members and market it to the district mandies. The
society also procured and supplied agricultural inputs (seeds, fertilizers and
pesticides) to the farmer members.
In September 1990, the society had drawn from the Jaldhara District
Cooperative Bank an overdraft of Rs. 5 lakh, under its cash credit
arrangements1, and this was yet to be repaid. In the first week of March 1991,
when Mr. Agarwal, Manager, VNACS met Mr. Dwivedi, Manager, Jaldhara
District Cooperative Bank. Mr. Dwivedi had indicated that he considered
VNACS to be a well managed cooperative society secure in its operations.
Therefore, he would be willing to allow the society, if it required, to continue
the use of the overdraft of Rs. 5 lakh. The bank, of course, charged an annual
interest of 10%.
In mid-March 1991, the society reviewed its operations of the year. The society
had with it 100 tons of paddy in storage for a month now, waiting for disposal.
Payment of Rs. 5 lakh to members towards this procurement was due by March
31, 1991. After meeting all the expenses of the operations of the society and
before repaying the overdraft from the bank. The society had a cash balance of
Rs. 5 lakh.
Mr. Agarwal was planning to sell in a few days the 100 tons of paddy in
storage, at about Rs.5,000 per ton. He knew that this would mean the realization
of just the procurement price.
To review the operations of the society for the year, the executive committee of
the society met on March 20, 1991. During the discussions, Mr. Sharma, one of
the members of the committee, pointed out that if the society waited for six
months to sell the paddy it could get better returns. Mr. Sharma said that he had
examined the price movements over many years and had found that about one
season in four the price increased after six months to Rs. 7,500 per ton. In other
years, it rose to about Rs. 6,000 per ton. Mr. Sharma argued that it would be
worth storing the paddy for six months to get about Rs. 1,000 per ton more, it
could be a gainful windfall if they could get Rs. 7,500 per ton. Mr. Sharma
suggested that Mr. Agarwal could use the cash balance of Rs. 5 lakh the society
1
Under the cash credit arrangements, the society could borrow up to ten times of its deposits at any given time.
The overdraft was over and above this borrowing limit.
had to pay the members so that the society could store the 100 tons of paddy for
a further six months to get better returns. Mr. Agarwal remembered that in the
last two seasons the price per ton of paddy did go up to Rs. 6,200 and Rs. 6,300
by October.
As Mr. Agarwal was contemplating on the suggestion made by Mr. Sharma, he

also thought that the members, when they turned over their crops to the society
for sale, entrusted him with the result of their whole season’s hard work. He felt
that after all the members joined a cooperative society because they believed
that it would be better to buy their inputs together and to sell their outputs
together, rather than each individual buying and selling as best as he could. In
this process, he further mused, that it was necessary to sustain the good image
his society could earn over the years, which helped in ensuring the support of
the bank, and of the members for the society.
The next day, Mr. Agarwal received a letter from the National Fertilizer
Cooperation offering 2,000 bags of fertilizer, the society’s normal annual
requirement. This offer was at a special price of Rs. 250 a bag if delivery is
accepted within two weeks. The fertilizer would not be needed by the farmers
for six months, at which time it would cost Rs. 300 a bag. But if the society
decided to take advantage of the special price, it would have to take delivery of
the fertilizer and pay for it by the first week of April 1991.
The space used now for storing the 100 tons of paddy could be used for storing
the fertilizer; the society did not have any other storage space of its own. If he
could find a place for storage, Mr. Agarwal estimated that it would cost Rs. 500
per month. Mr. Agarwal found out that labour and equipment for storing the
fertilizer would cost about Rs. 25,000: the annual insurance charges for storing
either paddy or fertilizer would be about Rs. 20,000. Mr. Agarwal also learnt
that about 5% of the fertilizer stock would be lost in the storage during the six
months period, but that there would not be any deterioration in the quality of
fertilizer.
Mr. Agarwal thought that whatever he decided within the next one week should
be in the best interest of the members of the society.

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Varun Nagar Agricultural Cooperative Society

The Varun Nagar Agricultural Cooperative Society (VNACS) located in

As Mr. Agarwal was contemplating on the suggestion made by Mr. Sharma, he

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