As You Sow, So Shall You Reap

Invest in businesses as if you are investing in farmland.

Look at the earning capability of the asset and how that will increase consistently over time, and hold it for decades.

This, or something to that effect, is what Warren Buffett said in his latest shareholder letter – drawing parallels with his own investment in farmland over 30 years back and how it has grown without his knowing anything about farming. Except that he knew that earnings yields were decent and crop prices grew over years, he had a son who knew a thing or two about corn and soybean farming, and he made no attempts to sell it for 30 years.

And hence, he says – evaluate businesses as if you are buying farmland.

Nice advice – with a big underlying assumption. That buying farmland to do farming is a great business.

Given the current state of agriculture in India, it doesn’t take much to conclude that it doesn’t pay to be a farmer in India. Buying farmland to do farming is not a great business as of now in India.

It may not be strictly because farming as such is a non-profitable business fundamentally. But it is more because – in its current form and state – if one makes a simple evaluation of farming as a profession, it is virtually impossible to make a serious living out of it. Specially for someone who has any aspiration of a good life.

To begin with – Firstly, is the capacity of the asset itself. Most owners of farmland don’t own the 400 acres that Buffett bought in 1986. It is more like half an acre to two acres, perhaps a bit more if you are a bit better off. Whatever capital investments  are needed to get output from such a small piece of land are more or less fixed and will likely not be affordable. It is like starting a textile factory with one machine producing 50 shirts. So whatever you do in such small land, it is not going to be great sizable output.

Second, farming is capital-intensive. The farmer needs to invest first and then wait. At least 75% of his expenses like seeds, fertilizers, water are recurring for every crop. He needs money to even start expecting any output.

Thirdly, whether the crop will actually come out safe and sound is largely dependent on the rain gods. Well – not just whether rains happen in general – but in most cases, the rains need to be in the right quantity (not too less or not too much) and at the right time (when the crop needs it – not in April when he is waiting for it in July). He doesn’t have an easy ‘insurance’ against these vagaries.

Finally, last but not the least, if and when the output comes, he has little control over the selling price. Part of it is because of the vagaries of food demand and supply, but a significant part is due to affordability and reach issues.

He must sell his produce within a short period of time else it will perish as he can’t afford storage or further processing. He has no access to markets that will give him the best price, and no ability to afford things like transport even if he has access. To this desperate situation, add the multiple layers of middlemen distributors, and he ends up being at the receiving end of all price negotiations. In short, the selling price of his output is not in his control – very often ending up lower than his wildest expectation.

So those are the realities of the business of farming – in India. Some of them are fixable, many of them are not trivial problems to solve.

Now add to that, the complexities and costs of financing farming – both operating costs and capital costs – and you have a lethal combination of a capital intensive, not-so-profitable, highly unpredictable business financed regularly at high interest rates. In short, a high risk venture financed by high cost capital with direct personal liability.

Is it any surprise that the ‘farming entrepreneur’ (I would call it that – rather than the farmer) is facing such desperate times – year after year?

Which farming entrepreneur can seriously make a living out of just farming? I heard that survey after survey says hardly 1 in 5 farmers are dependent only on farming. Perhaps less than 20% of farmers want their children to do it. Perhaps the land can be used for another purpose, if it is available.

It is quite clear that they have evaluated the facts and are fending for themselves. People, by and large, are logical when thinking individually for themselves.

Well – that’s the logic part. And that’s where the analysis of farming as a business ends.

The problem is when emotion gets mixed with it. And human beings, by and large, aren’t driven by logic, specially in groups. They are driven by emotion.

And it is the job of politicians to provoke it and use it to their advantage.

No one loves farming – but everyone wants to love the farmer. Because the farmer votes. That’s the logic.

The rush to love the farmer without fixing his farming problem is currently on. Every political party, in its own way, is part of that rush. And if you can find a twisted way of linking it to some legislation or rich vs poor debate, even better. I am not hopeful that will change. And I will never be able to figure out who is right and who is wrong.

In the Chronicles of Narnia, there is a wonderful piece on logic.

“Logic!” said the Professor half to himself. “Why don’t they teach logic at these schools? There are only three possibilities. Either your sister is telling lies, or she is mad, or she is telling the truth. You know she doesn’t tell lies and it is obvious that she is not mad. For the moment then and unless any further evidence turns up, we must assume that she is telling the truth.”

The truth is – in this mad rush to love the farmer, I can’t figure out who is right, who is mad and who is telling lies. But I can figure out that unless some of the things change, I don’t want my son to be a farmer in India.

And I am sure, most farmers would figure that out too. The problem is – if not a farmer, then what? Well – that is again not a trivial problem with easy answers. But at least it is a question that deserves to be asked.

Therefore, make no mistake – the farmer is not a fool. If he uses his logic and demands solutions to his real problems, he will ask the right questions and get the right answers. If he doesn’t, well – he will not – all he will get is emotional rants that lead nowhere.

But I am hopeful that the farmer will use his logic dispassionately – for his own good. After all – who knows it better? As you sow, so shall you reap.

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