basics of contract farming
DESCRIPTION
Overview Presentation about Contract Farming What, Who, Where, When, Why and HowTRANSCRIPT
Basics ofContract Farming
Jayaram S
June 2010June 2010 Bangalore
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WhatDefinitionsContract farming is a unique business practice followed by agribusiness firms to Co ac a g s a u que bus ess p ac ce o o ed by ag bus ess s oprocure quality raw materials
Little and Watts ( 1994 )
Contract Farming as a form of vertical coordination between growers and buyerContract Farming as a form of vertical coordination between growers and buyer processors that directly shape production decisions through contractually specifying market obligations like value, volume, quality and at times price, provides certain inputs and exercise some control at the point of production.
Key and Runsten ( 1999 )
Contract farming is explained as an institutional response to imperfections in the market for credit, insurance, information, factors of production and raw product.
Gurudev and Asokan ( 2005)
Contract farming is a system in which agricultural commodities are produced and supplied to particular buyers, mostly processors under pre-negotiated arrangement about price quality and quantity It brings producers and processors closer onabout price, quality and quantity. It brings producers and processors closer on mutually beneficial terms.
In simple words, Contract farming is a purchasing mechanism used by Agribusiness firms to purchase raw material by getting into contracts with farmers Firms resort to
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firms to purchase raw material by getting into contracts with farmers. Firms resort to this practice when required raw materials cannot be procured from the free market.
Who
Agribusiness FirmgFirms which gives commitment to customer community to deliver specific products and fulfills the same by procuring quality raw materials and by doing special value additions to increase the value
FarmEntity which owns or leases the land and which is in the business of producing agricultural commodities. The objective of the farm is to maximize the asset ( land ) tili ti (i ) t lit d t ith i i i t t d hi h ill f t hutilization (ie) to grow quality products with minimum input cost and which will fetch
maximum price in the market in the shortest possible time
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WhereFree Market for the output product is imperfect (ie) where the farm output cannot be purchased in required quality, quantity at the right price and right time
Market is willing to pay premium for specific products and where the Farm is operating in an sub optimal level
Productivity of the farms can be increased significantly with quality inputs ( seeds, saplings, fertliser ), additional capital ( for labour, water, power and other inputs), knowledge ( good agricultural practices )
Farmer who is ambitious and who is looking for opportunities to increase the productivity of the farm and who is willing to take additional risks
Environment where required quantity can be produced from a geographical area and where farms and farmers are living in similar socio-economic conditions
Environment where farmers have basic literacy ( to read the contract and write fewEnvironment where farmers have basic literacy ( to read the contract and write few words – to accept etc ) and where farmers are willing to enter into a formal long term agreement and operate like a small business
Legal political and social conditions around the farm facilitate contract farming
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Legal, political and social conditions around the farm facilitate contract farming
WhenWhen there is a stable and predictable demand for the farm products
When Agri Businesses has the ability to find the right market linkages for the output products
Suppliers ie ( Farms ) have been identified and are educated about the basic operating procedures
When Farms consider growing the required output as the best possible option after g g q p p pconsidering other potential alternatives
When the Agri Business has the sufficient knowledge, capital, time and access to required input materials to develop supplier baseequ ed put ate a s to de e op supp e base
When the free market does not have the ability to scale up and deliver required products at the right time, right quality, quantity and price
When the output products can fetch enough premium to Agri Business to cover the investments incurred in educating and developing the Farms and when Agri Businesses are satisfied with the profit margin.
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WhyGovernment does not allow Firms to hold large parcel of Agricultural lands in order to protect the rights of farmers who hold small farms
Farmers does not have required knowledge about what kind of output products are in demand
Lack of Cooperatives - Farmers cannot come together on their own to decide what to produce, how to produce at what cost and at what time – to satisfy the requirements in terms of quantity and quality for the Agri Business Firms
Farmers lack knowledge to produce special products that demand premium in the market
Agri Business firms have access to right technology to process, preserve, pack and transport the products from the point of production to the point of consumption
Competing companies try to enter into long term agreement with farms to produceCompeting companies try to enter into long term agreement with farms to produce products in order to develop a stable predictable supplier base
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HowProcess Steps followed by Agribusiness
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1. Find Customer2. Issue Farm Contracts3. Arrange Funds4. Provide knowhow5. Provide inputs
6. Receive product7. Process product8. Pack product9. Ship product
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