Farm economics and the food supply chain: yields, inputs and the cold chain
Income per hectare for a smallholder, the value of higher yields, how a cold chain pays for itself, and how food moves, including into the Gulf.
Industry brief, with a one-minute summary: Agriculture and foodKey takeaways
- For a farmer, income is yield times price minus input costs. For the chain, much value is lost after harvest.
- Seasonality: most crops are harvested once or twice a year, but people eat every day.
- Aggregation: traders, cooperatives and collection centres gather small amounts from many farms, check quality and grade it.
- Public procurement: some governments buy staples at set prices.
Key idea
For a farmer, income is yield times price minus input costs. For the chain, much value is lost after harvest. Raising yields and cutting losses are usually the two biggest levers.
Worked case
Income from wheat on a smallholder farm in India
The prompt
A farmer in Madhya Pradesh grows wheat on 2 hectares. The yield is 3.5 tonnes per hectare and the price received is INR 25,000 per tonne (an illustrative price). Costs per hectare are: seed INR 4,000, fertilizer INR 7,000, crop protection INR 3,000, irrigation and power INR 5,000, machinery hire INR 6,000 and hired labor INR 5,000. What is the farmer's net income from the crop? What if the yield rises by 20 percent with the same costs?
The structure
- Net income = hectares x (yield x price minus cost per hectare)
- Revenue = hectares x yield x price
- Costs = hectares x sum of input costs per hectare
- Sensitivity: yield
Working it through
1. Revenue
2 hectares x 3.5 tonnes x INR 25,000.
Revenue (INR):2 × 3.5 × 25,000 = 175,0002. Costs
Input costs add up to 30,000 per hectare.
Total costs (INR):2 × (4,000 + 7,000 + 3,000 + 5,000 + 6,000 + 5,000) = 60,0003. Net income
Revenue minus costs.
Net income (INR):175,000 - 60,000 = 115,0004. Net income with 20 percent higher yield
Revenue rises by 20 percent; costs stay the same.
Net income with higher yield (INR):175,000 × 1.2 - 60,000 = 150,000
The recommendation
The crop earns about INR 115,000 for a season, before counting the family's own labor or land rent. A 20 percent higher yield adds INR 35,000, a 30 percent rise in income, because costs stay the same. That is why better seeds, soil testing, timely fertilizer and irrigation are high-value levers, as are a second crop in the year and better prices through collective selling.
Risks: Weather can cut yields sharply; Prices at harvest may be below the illustrative price; Higher yields may need more inputs in practice.
The cold chain: cutting losses
A cold chain keeps perishable food (fruit, vegetables, milk, meat, fish, some medicines) cold from farm to shop: pre-cooling at the farm or collection point, cold storage, refrigerated trucks and containers, and chilled display. Without it, a large share of perishable produce can spoil. Building a cold chain costs money, so the case question is whether the value of food saved and better prices is higher than the cost.
Worked case
Does a cold store pay for itself for a tomato cooperative?
The prompt
A farmer cooperative in Kenya handles 1,000 tonnes of tomatoes a season and sells them at KES 30,000 (Kenyan shillings) per tonne. Without cold storage, 25 percent is lost. With a cold store and a refrigerated truck, losses fall to 10 percent. The cold chain costs KES 3 million a season to run and finance. Is it worth it?
The structure
- Gain = extra tonnes sold x price minus cold chain cost
- Tonnes sold = tonnes handled x (1 minus loss rate)
- Compare revenue with and without the cold chain
Working it through
1. Extra revenue
900 tonnes sold instead of 750, at KES 30,000.
Extra revenue (KES):1,000 × (1 - 0.1) × 30,000 - 1,000 × (1 - 0.25) × 30,000 = 4,500,0002. Net gain
Extra revenue minus the cost of the cold chain.
Net gain per season (KES):4,500,000 - 3,000,000 = 1,500,000
The recommendation
The cooperative should invest in the cold chain, because it earns about KES 1.5 million more than it costs each season. First, cutting losses from 25 to 10 percent saves 150 tonnes, worth KES 4.5 million at KES 30,000 a tonne. Second, the cold chain costs KES 3 million a season, and the gain comes before any price gain from selling later. The risk is unreliable power, since cold stores need electricity. As a next step, confirm power supply and enough volume to keep the store full.
Supply chain and operations
- Seasonality: most crops are harvested once or twice a year, but people eat every day. Storage, imports and processing smooth the gap.
- Aggregation: traders, cooperatives and collection centres gather small amounts from many farms, check quality and grade it.
- Public procurement: some governments buy staples at set prices. India announces minimum support prices (MSP) for key crops and holds large stocks of wheat and rice through public agencies, which it uses for subsidized food distribution.
- Global trade: a small number of countries export most of the world's traded wheat, maize, rice and soybeans. Grain moves in bulk ships through a few ports and straits, so disruptions travel fast.
- Inputs supply chain: fertilizer production depends on natural gas (for nitrogen fertilizers such as urea) and on mined phosphate and potash. The Gulf, Russia, China, Morocco and Canada are large exporters of different fertilizers.
- Gulf food imports: Gulf countries import most of their staple foods through a few ports, hold strategic reserves, invest in farmland and food companies abroad, and build local production such as greenhouses, vertical farms, poultry and dairy.
A poultry farm in Saudi Arabia needs 1.6 kg of feed for each kg of live chicken. Feed costs USD 0.40 per kg. What is the feed cost per kg of live chicken, in USD?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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