IIMB Managerial Communication

Case Handout

Varun Nagar Agricultural Cooperative Society

The Varun Nagar Agricultural Cooperative Society (VNACS), located in Jadhara District, was a village level agricultural 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 agricultural produce from the farmers and market it to the district mandies. The Society also procured and supplied agricultural inputs (seeds, fertilizers and pesticides) to 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 for 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 time, 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 6 months to sell the paddy, it could get better returns. Mr. Sharma said that he had examined the price movement over many years and had found that in about one season in four, the price increased after 6 months to Rs. 7,500 per ton. Mr. Sharma suggested that Mr. Agarwal could use the cash balance of Rs. 5 Lakh the Society had to pay the members, so that the society could store the 100 tons of paddy for a further 6 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 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 seasons hard work. He felt
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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. Test case prepared by Prof. S. Vathsala, Indian Institute of Management, Ahmedabad. Page 1 of 2

IIMB Managerial Communication

Case Handout

that after all, the members joined a cooperative society because they believed that it would be better to buy their inputs together, and 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 of the society. The next day, Mr. Agarwal received a letter from the National Fertilizer Corporation offering 2,000 bags of fertilizer, the Societys normal annual requirement. This offer was at a special price of Rs. 250 a bag if delivery were accepted within 2 weeks. The fertilizer would not be needed by the farmers for 6 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 not be used for storing the fertilizer. The Society did not have any other storage space of its own. If he could find a space 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 learned that about 5% of the fertilizer stock would be lost in storage during the 6 month 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 interests of the members of the society. #####

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