Wednesday, May 19, 2010

What vegetable growers can teach you about risk management and stock market

Recently I made a trip to Nuwara Eliya in Sri Lanka to meet some of the farmers who are growing vegetables to supply to our chain of supermarkets. Speaking to all of them and also the office bearers of a farmer cooperative society made me realize one thing.

Depending on the price they fetch for a certain type of vegetable, the farmer communities tends to grow that vegetable during the next season. You know what? At the time of harvesting the particular vegetable is in abundance in the market thus driving down prices resulting some farmers making losses. 

According to the co-operative officials month after month it is a similar trend and a result they see irrespective of the farmers being educated about the trend. So what drives them? It is their emotions. When confronted with this question one farmer said irrespective of any logic when the potential to earn higher is available to you they tend to take the risk. When confronted with a subsequent question on why repeat the same mistake he just shook his head. Isn't this all too common in everyday life too and specially when you are dealing in the stock market?   

Another method of managing such a risk on perishable items is to grow the same vegetable but segregate the area of growing and grow it at different intervals with slight delays. For example instead of growing the identified vegetables across your entire land extent you could divide it into several blocks (number depends on the size of the land) and then grow the veggie in each land plot with fortnightly gaps in between. This would result in harvesting being spaced out and mitigating  whatever the sudden price drops in the market because vegetable prices fluctuate on a daily basis in the local market. However, I was told that even this method is difficult to practice among the farmers. They tend to maximise profits and nine times out of ten face detrimental price situations due to over supply. Food for thought indeed.

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