Mr. Kabool Muhammad Khatian is a progressive farmer with interest in lemon, mango and ‘ber’ (jujube) among other crops including sugarcane. After working as vice president of Sindh Chamber of Agriculture (SCA) for eight years, Kabool worked as its president for two years ending November 2019. Currently serving as Chairman Left Bank Area Water Board, Badin, Kabool serves on several boards relating to water and agriculture policy in Sindh, including Sindh Sugarcane Board, and Sindh Enterprise Development Fund. He has also been a member of the central bank’s committee on Agriculture Credit Policy in Pakistan.

In this interview, BR Research picks his brains on the growing cost of production of various crops, informal lending, and its dynamics and the scope for corporate farming in Pakistan. Below are edited transcripts.

BR Research: Tell us a little about Sindh Chamber of Agriculture (SCA). Whom does it represent and how does it engage with the government when compared to other business chambers and associations?

Kabook Muhammad Khatian: It is basically a farmers’ society. Anyone can become the member of SCA. We have both large landholding farmers as well as small farmers who have no more than one or two acres of land. Anyone who has anything to do with farming, including poultry farming, can be its member. The membership fee is very small, Rs1,500 per year, whereas only few senior members who are district heads pay about Rs15,000 a year.

Our principle tool is continuous engagement with the government. For instance, when the provincial government fixes the rates for various crops, the SCA represents the interests of the farmers. However, the SCA does not have sufficient funds to engage in under-the-table negotiations as some business associations are able to do so by buying the SROs. Nor does it have enough funds for business research and advocacy as perhaps the Pakistan Business Council. It is a chamber of farmers, and contrary to popular perception, farmers’ incomes have decreased consistently over the last many years.

The input cost of agriculture has gone up sharply over the years, squeezing farmers’ profit margins significantly. Over the last ten years that I have closely observed the farming sector and have observed a consistent margin reduction that has made farming an exceedingly difficult business. Farmers do not have money to purchase agriculture machinery.

BRR: Walk us through the cost of production of a typical farm unit.

KMK: Most of input costs are directly influenced with the exchange rate. Diesel, DAP fertiliser, pesticides, and even seeds in many cases, especially if the farm is progressively managed.

Currency depreciation is the biggest hit to the farming sector. Unless dollar is pushed back to Rs60-100 per USD, you will see raw agriculture exports increasing substantially in the long run, leading to higher foreign exchange but at a cost of food security risks.

More importantly, one will also see rising cost of farming production. If pesticides were previously imported from the US and Switzerland, today it is being imported from China. All of pesticides is imported; at the most it is packaged in Pakistan.

Second biggest hit has come from the worsening quality of local farming research over the last few decades as agriculture research departments have failed in Pakistan. Locally produced seeds do not offer the yield necessary to make farming profitable and sustain those profits for more than one crop. Some locally produced seed will give one good crop but next year their yield would drop substantially. Today, some imported hybrid seeds can yield about 80 tons of rice per acre. Local seeds can barely meet half of that.

BRR: But can you share the math behind these costs; say on average for typical cotton farm.

KMK: Let’s start with diesel which is needed to run tube wells, tractors and other agriculture machinery. In 2001, diesel cost us Rs9-10 per litre; today (before the recent crude oil price crash) it costs about Rs130 per litre. To run a tractor for one hour, and in one hour it cannot even properly plough one acre of land, it requires 5 litres of diesel, which means diesel about Rs700 per hour. So, you can do the math!

The cost of production per acre is Rs45,000 for a typical cotton farm. Of this, about Rs12,000 per acre is the cost of diesel. If you include the cost of laser levelling, which is done once every few years, then the cost goes up even higher since laser levelling alone costs about Rs40,000 per acre.

In addition, DAP fertiliser and other types of fertiliser also cost about Rs13,000 per acre on average, whereas pesticide, which has seen significant price increase over the last few years, costs about Rs15,000 on average. Tube well costs have also grown manifold today to about Rs10,000 per acre since ground water levels have dropped further over the last two decades.

Seed is another cost. To this date, Pakistan has been unable to make its own cotton seed. A company in Lahore has recently started producing cotton seeds, but they are at an early stage, having planted at 600 acres for testing purposes.

Lastly, for those farming on rented or leased land, the rentals have also increased since the cost of land per acre has increased to at least Rs1 million and in some cases even Rs10 million.

BRR: Are these costs indicative of the costs of other produce such as vegetables and sugarcane.

KMK: In some cases, yes. Or at least to some degree. For instance if you want to grow vegetables, the cost of production would be about Rs40,000-Rs45,000 per acre, whereas the ratio of various costs would also be roughly the same with some differences on case to case basis. However, in other cases, the cost is higher. Cost of production for sugarcane is about Rs100,000-120,000 per acre, where the cost of diesel is about Rs15,000-16,000 per acre.

BRR: What about the cost of farm labour?

KMK: Labour costs depends on the nature of working arrangement. If a ‘hari’ is managing the land, which is mostly the case in Sindh, as self-cultivation has been on a decline in the province over the last two decades, then he is usually a partner in the endeavours, sharing fifty percent in profit or loss.

In such arrangements, the farmer being the landowner, pays the upfront costs, and the hari invests his time and effort. However, you might be surprised to find out that in some parts of Sindh and Punjab some small farmers have become so poor that they ask the haris to pay upfront costs, and in such cases haris’ share in profit or loss increases.

However, interest cost, whether of formal or informal loan is usually not included in average cost of production that I shared. It is paid by the farmer – the landowner – and does not become part of the profit/loss sharing arrangement between the ‘hari’ and the farmer (aka landowner)

Bear in mind that sometimes bank staff of private banks asks farmers for his personal cut of 5-7 percent of the loan size, as the necessary price to ‘successfully process’ bank loan. Reported cases of these instances are not readily available. Farmers feel uneasy to report these cases fearing that next time they will not be able to get bank loan if they report these banking malpractices.

BRR: Let’s move to informal lending. What are the various types, and what is its estimated size in your opinion?

KMK: There are two major types of informal lenders in Pakistan’s rural sector. Some provide farmers agricultural supplies; it is akin to suppliers’ credit for inputs at an annualised interest rate of 50 percent. Some of these are distributors of various farm inputs themselves; whereas others are ‘banyas’ or moneyed people who purchase farm inputs from distributors and supply to the farmer at an annualised interest rate of about 50 percent. Then there are others who provide you loans in hard cash – and charge an interest of about 120 percent annualised.

I think the size of informal lending is at least equal to the total size of formal agriculture lending which is about Rs1300 billion per annum as per central bank statistics. This is mainly because the farmer does not have many documents that bankers demand before approving a loan.

There are no precise numbers of farmers in Sindh but whatever that number one can safely say that no more than 10-15 percent of farmers in Sindh rely on self-financing; the rest take either rely on formal or informal sector loans. Of the remainder 85 percent, 35 percent borrow from banks, and 50 percent borrow informally, which means about 65 percent of the farmers in Sindh take loan from informal lenders.

BRR: Given lack of documentation and poor law enforcement how does this system work?

KMK: Central to the informal way of doing business is trust. Or what we call ‘zaban daina’ (which roughly translates as ‘giving your word’). Newcomers to farming business even if they are locals are not usually entrusted with loans. Twenty years ago, when I started out as a farmer, I was not given agriculture supplies on loans; so, I bought on cash. It took me few years to gain that trust. But when trust is lost then you cannot operate in Pakistan’s farming market unless you have smooth cash flow stream and can afford to buy everything on cash.

BRR: What about ‘arthis’ or brokers? How much interest do they charge?

KMK: Arthis also provide informal lending. But it depends what kind of arthi it is. A tomato arthi will only supply cash loan to those who farm tomatoes. Informal lending for vegetables or fruits – being shorter 2-4 months crops – are usually priced at 10 percent per crop, which roughly translates to 40 percent per annum.

BRR: Some economists in Pakistan say that informal lender sets his interest rate in light of changes in the discount rate. Some even use this argument as a justification to include rural inflation in the monetary policy decision making process. How does the ‘arthi’ and other informal lenders set their interest rates.

KMK: I can with certainty state that ‘arthis’ and other informal lenders do not fix their interest rates on the basis of Kibor or changes in the discount rate. Their rates are already so high; you can say they work on fixed interest rate regardless of whatever may be the price of loan in the formal sector.

BRR: Some people say that ‘arthis’ being brokers make the biggest buck in agriculture value chain. In fact, former FBR chairman once said that ‘arthis’ run Pakistan. What is your take on it?

KMK: I disagree. ‘Arthis’ take about 10 percent profit whereas retailers have a margin of about 100 percent. As a lemon producer I can assure you that at Sabzi Mandi Karachi, lemon is sold by the ‘arthi’ at Rs70-100 per kilogram of which he keeps 10 percent, whereas on the same day retailers in Karachi would be selling lemons at Rs300 per kilogram.

‘Arthi’ does not have any holding cost. He is a broker. He gives cash payment to the farmer, but mostly sells on credit to retailers. But even after accounting for rental costs and cost of transportation, retailers earn 100 percent margins on average. They just happen to be large in numbers with little barrier to entry and exit from the market, thus people don’t realise that it’s the retailers who make the biggest buck.

We need the government to allow farmers to directly sell their produce in urban centres. This can be done once a week – say every Sunday morning - in various urban parks and grounds. A few months ago, a farmers’ market of this sort was set up in Hyderabad for the first time, where consumers were able to buy fresh produce directly from the farmers at prices of at least about 40 percent less than retailers’ market rates.

BRR: If margins are really that great and if so many inefficiencies exist in the system then why is it that big super store chains, or big business houses such as Mansha, Sapphire, Habib and others don’t get into farming business, even if based on contract or lease farming models.

KMK: Some have tried. But they are, and will be, unable to lease farmlands because of the nature of landholding.

Average landholding size in Sindh is between 25 to 30 acres. Perhaps no more than 10 percent of landowners have an average of 100 acres of land, and no more than 5 percent have bigger land sizes. Over the years, land sizes have become smaller due to inheritance law. Someone may have 50 acres, some 100 acres, but in between these bigger lands most have 5-6 acres and so forth.

To achieve the intended economies of scale with professionalisation of farm management, these corporate houses will need to lease large landholdings, which are not available. It is very difficult to get 20 farmers on board in a single stretch of land to achieve what you want to achieve.

Global practices have shown that you need at least 10,000 acres of farms, if not 25,000 acres or more, to be able to gain the benefits of professional farm management with proper mechanisation. There is a reason why small farmers are committing suicides in India.

No thanks to sharp rupee deprecation that we have witnessed in the last two years, a controlled shed for poultry costs about Rs15 million. A controlled shed for vegetables costs about Rs10 million. And if you aim for European standards then it costs about 5 million euros, which hardly any farmer has in Pakistan.

We need to attract foreign agriculture firms in Pakistan’s farming sector based on corporate farming model, but with a UAE or Saudi Arabia styled ‘kafeel’ system where local landowner is made 50 percent shareholder of the enterprise along with government funding for skill development of local ‘haris’ since farming practices in Pakistan harken back to 1950-60s with very little mechanisation.

BRR: Why can’t local corporate investors on the same model?

KMK: I do not think local investors have sufficient money, given that the situation has worsened over the last few years. Besides, local corporate investors do not have the background in crop farming. It is one thing to set up a dairy farm in sub-urban areas with the help of foreign trained or professional farm managers, and altogether different to raise crops in the hinterlands. Raising crops is a far more comprehensive and daunting exercise than a dairy farm selling milk of imported cows to UHT processors.

BRR: What’s the extent of losses you expect from locusts?

KMK: Unless the federal government takes urgent action, we might see farm output losses of up to 50 percent, leading to food security risks. We cannot take locusts lightly. Twenty years ago, it had wiped off nearly half of Pakistan’s farm production. I am told the federal government has allocated Rs10 billion to address the locust problem. But they must start spraying urgently; and go for aerial spraying. If they don’t have airplanes for aerial spraying then they should rent these from China if they must, but it needs immediate action.

BRR: How has Covid-19 affected farming sector in Sindh; have there been job losses in farming sector.

KMK: Farming sector has not seen job losses as much since ‘haris’ cannot do anything else but work on the farm, and farmers do not have any other use for their lands, so they keep on farming as per usual in most cases. However, farming income level have dropped significantly as both exports and domestic consumption has dropped significantly.

Prices of farm produce at ‘mandis’ have been halved since Covid started affecting Pakistan, be it in the case of mangoes or lemons. Even in the case of potato and onions, mandi prices of staple commodities have dropped sharply by more than 25-30 percent. However, even in this case, retailers are making the biggest buck as they have not passed on the benefit of lower prices to consumers.