Financingfunction

FINANCING
There is a long interval between the time of production and consumption. Between these two
points, the ownership of commodities shifts many times – a fact which necessitates financial
arrangements. Middlemen need finance not only for the purchase of stocks, but for the
performance of various marketing functions, such as processing, storage, packaging, transport
and grading. The financing function of marketing involves the use of capital to meet the financial
requirements of the agencies engaged in various marketing activities.
No business is possible nowadays without the financial support of other agencies because the
owned funds available with the producers and market middlemen (such as wholesalers, retailers
and processors) are not sufficient. The financial requirements increase with the increase in the
price of the produce and the cost of performing various marketing services. In the words of Pyle:
“Money or credit is the lubricant that facilitates the marketing machine.”
Factors affecting Capital Requirements of an Agricultural Marketing Firm:
The capital requirement of a marketing agency for its marketing business varies with the
following factors:
(i) Nature and Volume of Business: Financial requirements for trading in high value crops like
cumin, chillies, cotton and oilseeds are higher than for trading in foodgrains. For the wholesale
business too, financial requirements are higher than for retail business.
(ii) Necessity of Carrying Large Stocks: It is essential to carry over large stocks throughout the
year, of goods which are seasonally produced and marketed on a wholesale basis.
(iii) Continuity of Business during Various Seasons: If business is continuous throughout the
year, the financial requirements will be greater than if business is conducted only during a
particular season.
(iv) Time Required between Production and Sale: Some goods are sold immediately after
production – perishables, for example – while others are diposed for after a certain time – rice
and cheese, for example. Financial requirements in the marketing of the latter goods are,
therefore higher.
(v) Terms of Payment for Purchase and Sale: The terms of transactions – whether payment will
be in cash, on credit or by instalments – affect the financial requirements of the marketing
middlemen.
(vi) Fluctuations in Prices: Financial requirements are higher for goods which suffer frequent
price fluctuations than for goods that are subject to less frequent price fluctuations.
(vii) Risk-taking Capacity: The financial needs of the market middlemen vary with their risk-
taking capacity. A middleman with a low risk-taking capacity often resorts to hedging, and needs
less finance than a middleman who takes risks.
(viii) General Conditions in the Economy: During the period of price fall or recession, the
financial requirements increase. The marketing agency has to hold stocks for a longer period in
anticipation of a price rise. Moreover, the recovery of old bills tends to be slow. Whenever,
therefore, a new product is introduced, the dealer needs more finance temporarily till the demand
for it picks up in the economy.
The marketing finance required by the marketing middlemen is of two types – fixed capital for
land, buildings (shops and godowns), equipment and machinery (weighbridge, grading
equipment, etc.), and working capital which is required to meet the marketing costs, purchase
value, and salaries of the employees. The proportion of working capital is higher than that of
fixed capital. It is also necessary to make arrangements for financing the farmers during the
period between the production and sale of their produce. This is necessary to improve their
holding capacity and to avoid the post-harvest sale of the produce when prices are low in the
market. Because of their acute financial needs, many farmers market their standing crops – of
fruits, for example – or borrow money in advance from local traders/commission agents against
their crops, and bind themselves to sell the crop through the trader/commission agent. This
checks their freedom to sell the produce in the open market.
To improve the financial position of the farmers and to strengthen their holding capacity, the
following steps have been taken by the government.
(i) Since July 1969, with the nationalization, commercial banks have started financing the
agricultural sector in a big way and meeting the increasing needs of the farmers for production
purposes.
(ii) The co-operatives, too, have developed and entered the field of agricultural financing. An
integrated scheme of credit and marketing has been introduced.
Under this scheme, co-operative credit societies can realize their credit, together with the interest
due on it, by the sale proceeds of the produce directly by intimation to Co-operative Marketing
Societies. These may make the payments for the produce to the farmer after deducting their dues.
A rapid progress has been made in this area.
(iii) With the development of warehousing facilities in the country, farmers can now meet 70 to
80 percent of their credit needs by placing the produce in the warehouses. Banks extend the
financing facility to farmers against the mortgage of the warehouse receipt. This scheme has
lessened the financial problems of the farmers and of market middlemen. As a result, the
tendency to sell the produce immediately after the harvest should have been checked.
However, it has met with only limited success. So long as the interest rate continues to be more
than the intra-year rise in prices, storage cannot be a profitable proposition.

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FINANCING

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