The Potential for Scale and Sustainability in Weather Index Insurance

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CASE STUDY 2
PEPSICO CONTRACT FARMING IN INDIA
Table 6: Approximate gross margins of PepsiCo processing potatoes
versus table potatoes
Processing potatoes Table potatoes
Budget items Rs US$ Rs US$
Approximate cost of production (per acre)
Seed 16 000 320 12 000 238
Fertilizer 4 000 80 3 500 69
Pesticides 5 000 100 3 500 69
Irrigation 5 000 100 5 000 99
Labour costs 7 000 140 7 000 138
Index insurance 1 500 30
Total 38 500 770 31 000 613
Approximate yield and revenue per acre
Average yield (ton) 12.5 11.0
Yield after quality control (ton) 11.0
PepsiCo base buy-back price (Rs/kg) 6.50 0.130
Use of recommended chemicals (Rs/kg) 0.25 0.005
Index insurance(Rs/kg) 0.15 0.003
Low or zero sugar content (Rs/kg) 0.30 0.006
PepsiCo buy-back price with incentives (Rs/kg) 7.20 0.140
Market price quality potatoes (Rs/kg) 5.00 0.10
Profit (Rs/acre) 79 200 1 571 55 000 1 088
Gross margin (Rs/acre) 40 700 808 24 000 474
the incentives, can range from Rs 7 to Rs 10/kg. As farmers are required to pay all upfront
costs of production, side-selling is not a significant concern to PepsiCo, as it does not have
costs to recoup. Its priority is sourcing inputs for processing. The average yield for
processing potatoes in India is 8-10 tons/acre; PepsiCo farmers produce 11-14 tons/acre.
History
PepsiCo was motivated to add index insurance to its contract farming package both to limit
the risk to farmers and to limit the risk in its supply chain, as part of a larger effort to
establish long-term relationships with farmers. Index insurance was appealing to the
company because the national area-yield insurance was not considered sufficiently
transparent and its record in India has been very poor. Nevertheless, PepsiCo did express
some concern that since index insurance is not well-known in India, it may be hard to
market; farmers may also not consider it to be a good value, as it covers only their
production costs and not lost sales.