contract farming

INTRODUCTION

Introduction1

Contract Farming has been in existence for many years as a means of organizing the

commercial agricultural production of both large – scale and small –scale farmers. In an

age of market liberalization, globalization and expanding agri business, there is a danger

that small- scale farmers will find difficulty in fully participating in the market economy.

The era of globalization, the concept of ‘Contract Farming’ is an effective way to co-

ordinate and promote production and marketing in agriculture. “Contract Farming can be

defined as an agreement between farmers and processing or marketing firms for the

production and supply of agricultural products under forward agreements, frequently at

predetermined prices.”

Contract Farming is essentially an agreement between unequal parties, companies,

Government bodies or individual entrepreneurs on the one hand and economically

weaker farmers on the other. The main feature of Contract Farming is that the

buyer/contractor supplies all the material inputs and technical advise required for

cultivation to the cultivator. This approach is widely used, not only for tree and cash

crops but also, increasingly for fruits and vegetables, poultry, pigs, dairy products and

even prawn and fish. Indeed, Contract Farming is characterized by its “enormous

diversity” not only with regard to the products contracted but also in relation to many

different ways in which it can carried out.

The advantages, disadvantages and problems arising from contract farming will vary

according to the physical, social and market environments. More specifically, the

distribution of risks will depend on such factors as the nature of the markets for both the

raw material and the processed product, the availability of alternative earning

opportunities for farmers, and the extent to which relevant technical information is

provided to the contracted farmers. These factors are likely to change over time, as will

the distribution of risks.

1 http://dspace.iimk.ac.in/bitstream/2259/520/1/637-647+.pdf

1

History of Contract Farming2

Contract Farming can be traced back to colonial period when commodities like Collin

Indigo were produced by the Indian farmers for English factories. Seed production has

been carried out through contract farming by the seed companies quite successfully for

more than four decades in the country. The new agricultural policy of 2000 sought to

promote growth of private sector participation in agribusiness through contract farming

and land bearing arrangements to accelerate technology transfers, capital inflows and

assured market for crops. The colonial period saw the introduction of cash crops such as

tea, coffee, and rubber, poppy and indigo in various parts of the country, mostly through

a central expatriate-owned estate surrounded by small out growers model. ITC introduced

cultivation of Virginia tobacco in Coastal Andhra Pradesh in the 1920’s incorporating

most elements of a fair contract farming system and met with good farmer response. This

was replaced by auctions in 1984. Organized public and private seed companies, which

emerged in the 1960’s. The Pepsico introduced tomato cultivation in Punjab in the 1990’s

under farming to obtain inputs for its paste-manufacturing facility established as a pre-

condition to its entry in to India. This was sold to Hindustan Lever in 2000, which had

earlier acquired the kissan Karnataka. Contract Farming was the strategy of choice for

almost all food processing projects contemplated in the 1980’s and 1990’s.Contract

Farming is again vogue, and even tried for bulk production of subsistence crops, such as

paddyrice, maize and wheat. Commodity co-operatives, which emerged in the 1950,s

provided most services envisaged under ideal contract farming to their members and

bought back the supplies offered at contracted prices, although these were not strictly

contract arrangements. The succeeded enormously, leading to their replication and

compelling private companies also to adopt similar approaches. Contract Farming is now

considered to be a corrective to market imperfections and serving a useful purpose in

India in its own limited sphere.

Contract Farming has been promoted in the recent three decades as an institutional

innovation to improve agricultural performance in less developed countries. This system

was accepted and used as one of the promising institutional frameworks for the delivery

of price incentives, technology and other agricultural inputs. Local Governments, private


2

local firms, Multinational companies, some international aid and lending agencies etc

have been involved in these contract farming schemes (Glover 1994).

ADVANTAGES FOR FARMERS3

The prime advantage of a contractual agreement for farmers is that the sponsor will

normally undertake to purchase all produce grown, within specified quality and quantity

parameters. Contracts can also provide farmers with access to a wide range of

managerial, technical and extension services that otherwise may be unobtainable.

Farmers can use the contract agreement as collateral to arrange credit with a commercial

bank in order to fund inputs. Thus, the main potential advantages for farmers are:

1.provision of inputs and production services;

2. access to credit;

3.introduction of appropriate technology;

4. skill transfer;

5.guaranteed and fixed pricing structures; and

6. access to reliable markets.

Provision of inputs and production services

Many contractual arrangements involve considerable production support in addition to

the supply of basic inputs such as seed and fertilizer. Sponsors may also provide land

preparation, field cultivation and harvesting as well as free training and extension. This is

primarily to ensure that proper crop husbandry practices are followed in order to achieve

projected yields and required qualities. There is, however, a danger that such

arrangements may lead to the farmer being little more than a laborer on his or her own

land. It is often difficult for small-scale farmers outside the contract-farming context to

gain access to inputs. In Africa, in particular, fertilizer distribution arrangements have

been disrupted by structural adjustment measures, with the private sector having yet to

fill adequately the void created by the closure of parasitical agencies. In many countries a

vicious circle has developed whereby the low demand for inputs provides no incentive

for the development of commercial distribution networks and this, in turn, further


3

adversely affects input availability and use. Contract farming can help to overcome many

of these problems through bulk ordering by management.

Access to credit

The majority of smallholder producers experience difficulties in obtaining credit for

production inputs. With the collapse or restructuring of many agricultural development

banks and the closure of many export crop marketing boards (particularly in Africa),

which in the past supplied farmers with inputs on credit, difficulties have increased rather

than decreased. Contract farming usually allows farmers access to some form of credit to

finance production inputs. In most cases it is the sponsors who advance credit through

their managers. However, arrangements can be made with commercial banks or

government agencies through crop liens that are guaranteed by the sponsor, i.e. the

contract serves as collateral. When substantial investments are required of farmers, such

as packing or grading sheds, tobacco barns or heavy machinery, banks will not normally

advance credit without guarantees from the sponsor.

The tendency of certain farmers to abuse credit arrangements by selling crops to buyers

other than the sponsor (extra-contractual marketing), or by diverting inputs supplied by

management to other purposes, has caused some sponsors to reconsider supplying most

inputs, opting instead to provide only seeds and essential agrochemicals. The policies and

conditions that control advances are normally described in attachments to contract.

Introduction of appropriate technology

New techniques are often required to upgrade agricultural commodities for markets that

demand high quality standards. New production techniques are often necessary to

increase productivity as well as to ensure that the commodity meets market demands.

However, smallscale farmers are frequently reluctant to adopt new technologies because

of the possible risks and costs involved. They are more likely to accept new practices

when they can rely on external resources for material and technological inputs.

Nevertheless, the introduction of new technology will not be successful unless it is

initiated within a well managed and structured farming operation. Private agribusiness

will usually offer technology more diligently than government agricultural extension

4

services because it has a direct economic interest in improving farmers’ production. Most

of the larger sponsors prefer to provide their own extension rather than rely on

government services.

Skill transfer

The skills the farmer learns through contract farming may include record keeping, the

efficient use of farm resources, improved methods of applying chemicals and fertilizers, a

knowledge of the importance of quality and the characteristics and demands of export

markets. Farmers can gain experience in carrying out field activities following a strict

timetable imposed by the extension service. In addition, spillover effects from contract

farming activities could lead to investment in market infrastructure and human capital,

thus improving the productivity of other farm activities. Farmers often apply techniques

introduced by management (ridging, fertilizing, transplanting, pest control, etc.) to other

cash and subsistence crops.

Guaranteed and fixed pricing structures

The returns farmers receive for their crops on the open market depend on the prevailing

market prices as well as on their ability to negotiate with buyers. This can create

considerable uncertainty which, to a certain extent, contract farming can overcome.

Frequently, sponsors indicate in advance the price(s) to be paid and these are specified in

the agreement. On the other hand, some contracts are not based on fixed prices but are

related to the market prices at the time of delivery.

Access to reliable markets

Small-scale farmers are often constrained in what they can produce by limited marketing

opportunities, which often makes diversification into new crops very difficult. Farmers

will not cultivate unless they know they can sell their crop, and traders or processors will

not invest in ventures unless they are assured that the required commodities can be

consistently produced.

Contract farming offers a potential solution to this situation by providing market

guarantees to the farmers and assuring supply to the purchasers. Even where there are

5

existing outlets for the same crops, contract farming can offer significant advantages to

farmers. They do not have to search for and negotiate with local and international buyers,

and project sponsors usually organize transport for their crops, normally from the farm

gate.

PROBLEMS FACED BY FARMERS4

For farmers, the potential problems associated with contract farming include:

1. increased risk;

2. unsuitable technology and crop incompatibility;

3. manipulation of quotas and quality specifications;

4. corruption;

5. domination by monopolies; and

6. indebtedness and over reliance on advances.

Increased risk

Farmers entering new contract farming ventures should be prepared to balance the

prospect of higher returns with the possibility of greater risk. Such risk is more likely

when the agribusiness venture is introducing a new crop to the area. There may be

production risks, particularly where prior field tests are inadequate, resulting in lower-

than-expected yields for the farmers. Market risks may occur when the company’s

forecasts of market size or price levels are not accurate. Considerable problems can result

if farmers perceive that the company is unwilling to share any of the risk, even if partly

responsible for the losses. In Thailand, for example, a company that contracted farmers to

rear chickens charged a levy on farmers’ incomes in order to offset the possibility of a

high chicken mortality rate. This was much resented by the farmers, as they believed that

the poor quality of the day-old chicks supplied by the company was one reason for the

problem.


6

Unsuitable technology and crop incompatibility

The introduction of a new crop to be grown under conditions rigorously controlled by the

sponsor can cause disruption to the existing farming system. For example, the managers

may identify land traditionally reserved for food crops as the most suitable for the

contracted crop.

Harvesting of the contracted crop may fall at the same time as the harvesting of food

crops, thus causing competition for scarce labour resources. Particular problems may be

experienced when contract farming is related to resettlement programmers. In Papua New

Guinea, for example, people from the Highlands were resettled in coastal areas to grow

oil palm and rubber. This required the farmers, who were traditionally sweet potato

eaters, to learn cultivation techniques for new food crops and to adapt their dietary

practices accordingly. Two factors should be considered before innovations are

introduced to any agricultural environment. The first is the possible adverse effect on the

social life of the community. When tobacco growers in Fiji were encouraged to cure

tobacco themselves rather than sell it in the fresh green form, it was found that they were

unable to handle the highly technical curing operation with any degree of continuity.

This was attributed to intermittent social commitments and customary obligations that

overrode contractual responsibilities and eventually resulted in the cancellation of their

contracts. The second factor is the practicality of introducing innovations or adaptations.

The introduction of sophisticated machines (e.g. for transplanting) may result in a loss of

local employment and overcapitalization of the contracted farmer. Furthermore, in field

activities such as transplanting and weed control, mechanical methods often produce less

effective results than do traditional cultivation methods. Field extension services must

always ensure that the contracted crop fits in with the farmer’s total cropping regime,

particularly in the areas of pest control and field rotation practices.

Manipulation of quotas and quality specifications

Inefficient management can lead to production exceeding original targets. For example,

failures of field staff to measure fields following transplanting can result in gross over

planting. Sponsors may have unrealistic expectations of the market for their product or

the market may collapse unexpectedly owing to transport problems, civil unrest, change

7

in government policy or the arrival of a competitor. Such occurrences can lead managers

to reduce farmers’ quotas. Few contracts specify penalties in such circumstances. In some

situations management may be tempted to manipulate quality standards in order to reduce

purchases while appearing to honor the contract. Such practices will cause sponsor-

farmer confrontation, especially if farmers have no method to dispute grading

irregularities. All contract farming ventures should have forums where farmers can raise

concerns and grievances relating to such issues.

Corruption

Problems occur when staff responsible for issuing contracts and buying crops exploit

their position. Such practices result in a collapse of trust and communication between the

contracted parties and soon undermine any contract. Management needs to ensure that

corruption in any form does not occur. On a larger scale, the sponsors can themselves be

dishonest or corrupt. Governments have sometimes fallen victim to dubious or “fly-by-

night” companies who have seen the opportunity for a quick profit. Techniques could

include charging excessive fees to manage a government-owned venture or persuading

the government and other investors to set up a new contract farming company and then

sell that company overpriced and poor quality processing equipment. In such cases

farmers who make investments in production and primary processing facilities run the

risk of losing everything.

Domination by monopolies

The monopoly of a single crop by a sponsor can have a negative effect. Allowing only

one purchaser encourages monopolistic tendencies, particularly where farmers are locked

into a fairly sizeable investment, such as with tree crops, and cannot easily change to

other crops. On the other hand, large-scale investments, such as for nucleus estates, often

require a monopoly in order to be viable. In order to protect farmers when there is only a

single buyer for one commodity, the government should have some role in determining

the prices paid. Drucker suggests that privately managed monopolies under public

regulation are preferable to non-regulated private or public monopolies. The greatest

abuses do tend to occur when there are public monopolies, where buying prices are set by

8

the government, or where farmers have made long-term investments in perennial crops.

In 1999 the Kenya Tea Development Authority experienced serious unrest amongst its

growers, reportedly because of the Authority’s inefficient extension services and alleged

“manipulation” of farmers. There was also discontent in Kenya among sugar farmers

because the price set by the government did not change between 1997 and 1999.

Indebtedness and over reliance on advances were high, as they thought contract farming

did not pay. One of the major attractions of contract farming for farmers is the

availability of credit provided either directly by the company or through a third party.

However, farmers can face considerable indebtedness if they are confronted with

production problems, if the company provides poor technical advice, if there are

significant changes in market conditions, or if the company fails to honour the contract.

This is of particular concern with long-term investments, either for tree crops or for on-

farm processing facilities. If advances are uncontrolled, the indebtedness of farmers can

increase to uneconomic levels. In one venture “compassionate” advances for school fees,

weddings and even alimony resulted in many farmers receiving no payments at the end of

the season. Dropout rates for farmers in that particular project.

ADVANTAGES FOR SPONSORS5

Companies and government agencies have a number of options to obtain raw materials

for their processing and marketing activities. The benefits of contract farming are best

examined in the light of the other alternatives, namely spot market purchases and large-

scale estates. The main potential advantages for sponsors can be seen as:

1.political acceptability;

2. overcoming land constraints;

3.production reliability and shared risk;

4. quality consistency; and

5.promotion of farm inputs.


9

Political acceptability

It can be more politically expedient for a sponsor to involve smallholder farmers in

production rather than to operate plantations. Many governments are reluctant to have

large plantations and some are actively involved in closing down such estates and

redistributing their land. Contract farming, particularly when the farmer is not a tenant of

the sponsor, is less likely to be subject to political criticism. As a result of the

restructuring of their economies, many African governments have promoted contract

farming as an alternative to private, corporate and stateowned plantations. In recent years

many countries have seen a move away from the plantation system of production to one

where smaller-scale farmers grow crops under contract for processing and/or marketing.

The decision to choose contract farming does not make a company totally immune from

criticism. For example, the considerable opposition to the role of multinational

corporations in India in the late 1990s had a negative effect on investment in contract

farming by foreign agribusiness corporations.

Overcoming land constraints

Most of the world’s plantations were established in the colonial era when land was

relatively plentiful and the colonial powers had few scruples about either simply

annexing it or paying landowners minimal compensation. That is, fortunately, no longer

the situation. Most large tracts of suitable land are now either traditionally owned, costly

to purchase or unavailable for commercial development. Moreover, even if it were

possible for companies to purchase land at an affordable price, it would rarely be possible

to purchase large enough parcels of land to offer the necessary economies of scale

achieved by estate agriculture. Contract farming, therefore, offers access to crop

production fromland that would not otherwise be available to a company, with the

additional advantage that it does not have to purchase it.

Production reliability and shared risk

The failure to supply agreed contracts could seriously jeopardize future sales. Plantation

agriculture and contract farming both offer reasonable supply reliability. Sponsors of

contract farming, even with the best management, always run the risk that farmers will

10

fail to honor agreements. On the other hand, plantation agriculture always runs the risk of

labour disputes. In the case of horticultural production some companies do prefer estate

rather than contracted production. In Gambia and Ghana, for example, a number of crops

are grown under the estate model, as are strawberries and flowers in Kenya. Working

with contracted farmers enables sponsors to share the risk of production failure due to

poor weather, disease, etc. The farmer takes the risk of loss of production while the

company absorbs losses associated with reduced or nonexistent throughput for the

processing facility. Where production problems are widespread and no fault of the

farmers, sponsors will often defer repayment of production advances to the following

season. Both estate and contract farming methods of obtaining raw materials are

considerably more reliable than making purchases on the open market. The open market

is rarely an acceptable option for organizations that have significant assets tied up in

processing facilities and need to have guaranteed quantities of raw material to justify

their investment. For example, it is hardly ever an acceptable option for companies who

make regular shipments of horticultural produce to supermarkets and for export.

Companies must ensure that crops are harvested and sold on a carefully scheduled and

consistent basis: a factor that is normally assured under a well-directed contract farming

scheme.

Quality consistency

Markets for fresh and processed agricultural produce require consistent quality standards.

Moreover, these markets are moving increasingly to a situation where the supplier must

also conform to regulatory controls regarding production techniques, particularly the use

of pesticides. For fresh produce there is an growing requirement for “traceability”, i.e.

suppliers to major markets increasingly need to be confident of identifying the source of

production if problems related to food safety arise. Both estate and contracted crop

production require close supervision to control and maintain product quality, especially

when farmers are unfamiliar with new harvesting and grading methods. Often, large

numbers of crops within a single project have to be transplanted, harvested and purchased

in a uniform manner so as to achieve product consistency. Agribusinesses producing for

markets demanding high quality standards, such as fruits and vegetables for export, often

11

find that small-scale farmers and their families are more likely to produce high-quality

products than farmers who must supervise hired labour. Also contract farming makes

quarantine controls more manageable. It is easier for quarantine authorities to inspect a

limited number of exporters of a single commodity, who closely supervise farmers, than

to inspect hundreds, or sometimes thousands, of individual producers selling through

open markets. Much of the production of “organic” foods is being done on contract, as an

integrated operation facilitates a clear crop identity from farmer to retailer. In some

highly sophisticated operations, containers are now being loaded on the farm for direct

delivery to the supermarket.

Promotion of farm inputs

An example of an unusual but, nevertheless, interesting benefit for sponsors comes from

the Philippines. A feed milling company experienced difficulties in marketing its feed,

which was more expensive than that produced by competing companies. To solve this

problem it developed rearing schemes for pigs and poultry under contract in order to

provide a market outlet for its feeds and to demonstrate their performance to other

farmers living near the contracted farmers.

PROBLEMS FACED BY SPONSORS6

The main disadvantages faced by contract farming developers are:

1. land availability constraints;

2.social and cultural constraints;

3. farmer discontent;

4. extra-contractual marketing; and

5. input diversion.

Land availability constraints

Farmers must have suitable land on which to cultivate their contracted crops. Problems

can arise when farmers have minimal or no security of tenure as there is a danger of the

sponsor’s investment being wasted as a result of farmer landlord disputes. Difficulties are


12

also common when sponsors lease land to farmers. Such arrangements normally have

eviction clauses included as part of the conditions.

Some contract farming ventures are dominated by customary land usage arrangements

negotiated by landless farmers with traditional landowners. While such a situation allows

the poorest cultivator to take part in contract farming ventures, discrete management

measures need to be applied to ensure that landless farmers are not exploited by their

landlords. Before entering into contracts, the sponsor must ensure that access to land is

secured, at least for the term of the agreement.

Social and cultural constraints

Problems can arise when management chooses farmers who are unable to comply with

strict timetables and regulations because of social obligations. Promoting agriculture

through contracts is also a cultural issue. In communities where custom and tradition play

an important role, difficulties may arise when farming innovations are introduced. Before

introducing new cropping schedules, sponsors must consider the social attitudes and the

traditional farming practices of the community and assess how a new crop could be

introduced. Customary beliefs and religious issues are also important factors. For

example, Easter for some Christians is an inappropriate time for sowing vegetable crops.

Harvesting activities should not be programmed to take place during festivals, and failure

to accommodate such traditions will result in negative farmer reaction. It must also be

recognized that farmers require time to adjust to new practices.

Farmer discontent

A number of situations can lead to farmer dissatisfaction. Discriminatory buying, late

payments, inefficient extension services, poor agronomic advice, unreliable

transportation for crops, a mid-season change in pricing or management’s rudeness to

farmers will all normally generate dissent. If not readily addressed, such circumstances

will cause hostility towards the sponsors that may result in farmers withdrawing from

projects.

13

Extra-contractual marketing

The sale of produce by farmers to a third party, outside the conditions of a contract, can

be a major problem. Extra-contractual sales are always possible and are not easily

controlled when an alternative market exists. For example, a farmer cooperative in

Croatia bought cucumbers, red peppers and aborigines on contract. The cooperative’s

advances to the farmers included all necessary production inputs. Unfortunately members

often sold their vegetables to traders at higher prices than the cooperative had contracted.

The outside buyers offered cash to farmers as opposed to the prolonged and difficult

collection of payments negotiated through the cooperative. Sponsors themselves can

sometimes be a cause of extra-contractual practices. There are several companies

working with the same crop (e.g. cotton in some southern African countries), they could

collaborate by establishing a register of contracted farmers. Managers must be aware of

produce being sold outside the project and also be aware of produce from outside being

channeled into the buying system. This occurs when non-contracted farmers take

advantage of higher prices paid by an established sponsor. Non-contracted crops are

filtered into the buying system by outside farmers through friends and family who have

crop contracts. Such practices make it difficult for the sponsor to regulate production

targets, chemical residues and other quality aspects.

Input diversion

A frequent problem is that farmers are tempted to use inputs supplied under contract for

purposes other than those for which they were intended. They may choose to use the

inputs on their other cash and subsistence crops or even to sell them. Clearly this is not

acceptable to the sponsor, as the contracted crop’s yields will be reduced and the quality

affected. Steps to overcome such problems include improved monitoring by extension

staff, farmer training and the issuing of realistic quantities of inputs. However, the

knowledge that a contract has the advantages of technical inputs, cash advances and a

guaranteed market usually makes the majority of farmers conform to the agreement.

Unless a project is very poorly managed, input diversion is usually an annoyance rather a

serious problem.

14

CONTRACT FARMING IN INDIA

Introduction7

The Indian agri-food system is undergoing rapid transformation and there is growing

evidence that contract farming will have an important role in this transformation. An

important concern in Indian agriculture is that while “front end” activities – including

wholesaling, processing, logistics, and retailing – are rapidly expanding and

consolidating, the “back end” activities of production agriculture have been continuously

fragmenting (Gulati, 2008). The challenge lies in linking the two ends and ensuring

viable business opportunities for both farmers and agri-businesses. Establishing farm-

firm linkages is not only about providing assured markets, reducing risk, and ensuring

‘remunerative’ prices, but also providing critical services such as credit, insurance,

grading and inspection, technology extension, and market information. These institutional

services can help elevate the scale at which small holders can operate, raise their

productivity and income, and mitigate the risks involved in participating in markets for

high value horticultural, livestock, and fishery products. The recent growth and

diversification of consumer demand and the expansion of organized agricultural

processing and marketing ventures in India has the potential to boost the market

opportunities, productivity, and incomes of farmers, including small holders. However,

achieving these goals will likely require creation of new institutions and innovations to

develop supply chains and facilitate linkages between farmers, wholesalers, processors,

and retailers. Among these institutions and innovations are various models of contract

farming, including those led by cooperatives, by farmer groups, and by various types of

private sector resource intermediation that develop backward linkages to growers.

Consolidation at the Top of the Value Chain

India is currently riding a tide of organized retail expansion, especially in the food and

grocery segments, which have been growing at annual rates between 16 and 50 percent

over the past few years (Reardon and Gulati, 2008). The top 10 Indian organized food

7 http://www.ncap.res.in/contract_%20farming/Resources/1.Introduction.pdf

15

http://www.ncap.res.in/contract_%20farming/Resources/1.Introduction.pdf

and grocery retailers grew at the rate of 72.4 percent from 2002 to 2007 (Planet Retail,

2008). While total food and groceries account for nearly 60 percent of total retail sales in

India, food and grocery sales by organized sector firms account for only a little more than

10 percent of total organized sector retail sales, indicating that there is ample scope for

scaling up of organized food and grocery retailing. The high growth rate of the top

players in India’s organized food and grocery segment suggests that this sector will

occupy a growing share of both the food and grocery market and the overall retail market

in India.

Growing demand for processed food products is an important component of India’s

expanding food and grocery business, providing a boost to India’s food processing sector,

which has grown about 13 percent annually from 2002-03 to 2006-07 (Trivedi, 2008). As

in retailing, the role of organized food processing firms within the overall food

processing industry (organized and unorganized) has increased from 64 percent in 1984-

85 to 81 percent in 2000-01, and is likely to have grown further in the last couple of years

(Bhavani et.al. 2007). Considerable new capacity is being added in the organized food

processing sector. The expansion of organized food processing and food and grocery

retailing is inducing greater competition among multiple private sector players,

contributing to a virtuous cycle of growth, consolidation, and modernization, capturing

scale economies in line with the rising market demand. This competition among firms has

created pressure to compress supply chains, cut costs, and achieve increased

competitiveness in the domestic and global market. In this context, contract farming

models are among the mechanisms for streamlining procurement and logistics services

that are high on the agenda of organized retailers and agro-processors.

Fragmentation at the Bottom of the Supply Chain

In production agriculture, the trend in India is towards fragmentation rather than

consolidation. The average size of landholdings declined from 2.2 hectares in 1970-71 to

1.06 hectares in 2003. Nearly 88 percent of the farmers have less than 2 hectares of land,

and account for about 44 percent of the operated area (NSSO, 2006). Although these

farms are small, indications are that they are more efficient than larger farmers in terms

of land productivity, presumably due to a high share of family labor on small farms. The

16

share of marginal and small farmers (of less than 2 hectares) in the total value of

agricultural output is about 51 percent, substantially higher than their 44 percent share of

area operated (Srivastava, 2008). While smallholders, by virtue of available family labor

and intensive cultivation practices, can be highly productive, they typically have a small

marketable surplus and face high transaction costs in marketing their produce.

Diversifying out of traditional crops towards high value agriculture poses two key

challenges. First, higher production risk (susceptibility to pest attack and climatic

adversities) and price risk associated with high value agriculture compared to grains often

deters diversification. Second, lack of resources (financial assets as well as access to

credit) coupled with inadequate market and crop knowledge often restricts shifts to new

enterprises and investments in variable and fixed inputs. Small farmers often find

themselves locked in a situation of income uncertainty and low risk bearing capacity, thus

constraining shifts towards higher value and income generating activities. Again, contract

farming models that can share risk and overcome resource constraints emerge as a

possible approach to facilitate the transformation of small holders to high value

agriculture.

Contract Farming and Farm-Firm Linkages

Indian agriculture has begun to diversify and future sources of agricultural income are

likely to come increasingly from the high value segment, driven by rising demand for

high value horticultural, livestock, and fishery products. While the potential benefits of

high value agriculture, including higher income and employment, are significant, it will

be necessary to overcome key challenges associated with meeting farmer resource needs

and mitigating production and marketing risk. The challenge is to identify innovative

solutions, possibly based on contract farming models, that are efficient and competitive

and also ‘inclusive’ in terms of working with small holders on sustainable basis.

Direct Procurement –There are different models of farm-firm linkage ranging from

simple marketing agreements, to risk sharing, to forward marketing and futures

contracting. In a bid to keep their supply chain moving, processors and retailers may

choose to source raw materials from government regulated market yards, small traders, or

17

directly from farmers. Direct procurement may be preferred given the transaction costs

and quality problems associated with procuring from government regulated markets

(mandis). In such an arrangement, there is no contractual tie-up with the farmers and

anyone is free to sell their produce subject to certain quality criteria. Indian retailers such

as Reliance, Spencer’s, Subhiksha, and Food Bazaar currently use this procurement

model. Direct procurement from farmers can be done only in states that have amended

their Agricultural Produce Marketing Committee (APMC) Act to permit buyers to

purchase directly from producers, farmers in line with the Model Act 2003 proposed by

the central government.2In states that have not amended their APMC Act, purchases must

be through government regulated mandis, paying the commissions and marketing fees

imposed in those markets.

Open-Source Intermediation – Another variant of farm-firm linkage is open-source

intermediation, involving provision of information about market prices, crop, and good

cultivation practices to farmers without any buy back guarantee. The idea is not to create

a backend supply line of a particular company, but bridge the knowledge and information

gap that exists at the farm level, and also supply inputs to farmers without any ‘lock in’

agreement. However, in due course, the model of open-source intermediation can be

adapted for specific supply lines, as and when an opportunity arises. This is well

observed in the case of the Choupal Sagar and Choupal Fresh models adopted by ITC

following the success of e-choupal.

There appears to be a large unmet demand for agricultural services and creation of rural

service platforms that has given rise to another option for forging effective firm-farm

linkages. Research and development activities lose their effectiveness unless they reach

farmers’ fields, and much depends on the effectiveness of the extension service network.

Rural business or “agri-hubs” led by public-private partnerships between panchayats and

the private sector (CII in partnership with the Ministry of Panchayati Raj) provide input

services for farmers and provide markets for their produce. Several private sector players

are also developing the concept of business hubs to reach out to farmers, including DSCL

Hariyali Kisan Bazar, TATA Kisan Kendras, Godrej Aadhaar, and ITC e-Choupal and

Choupal Sagar. The scale of these operations remains small in comparison to the needs of

18

farmers and rural areas, but this model may offer an opportunity to rapidly scale up the

activities of private firms, and resulting farm-firm linkages. These “agri-hubs” potentially

can provide ‘one stop shopping’ for farmers by providing inputs such as seed,

technology, and credit, and services such as extension and insurance, as well as daily

household products.

Limitations of Contract Farming

Theoretically, farmers stand to gain from contractual agreements that provide lower

transaction costs, assured markets, and better allocation of risks. On the other hand,

contracting firms have the advantage of more assured supplies, and reasonable control

over quality and other specifications. However, in practice, there are practical problems

that emerge in agricultural contracting that can result in losses to both farmers and firms.

Contracting agreements are often verbal or informal in nature, and even written contracts

often do not provide the legal protection in India that may be observed other countries.

Lack of enforceability of contractual provisions can result in breach of contracts by either

party. In India, there have been instances of farmers refusing to sell to contracting firms

when market prices exceed the contract price, and of firms refusing to purchase

contracted quantities or pay contracted prices due to market conditions. Neither the

contracting firm nor the farmers are keen to contest these issues in a court. Most often, it

is mutual understanding and faith that drives contractual relationships and it takes a long

time to win mutual trust and confidence. Contract farming arrangements are often

criticized for being biased in favor of firms or large farmers, while exploiting the poor

bargaining power of small farmers. In such situations, a viable approach seems to be to

form clusters of small farmers that can create a scale effect and also enhance the

bargaining position of the farmers. Success in developing contracting models or other

forms of farm-firm linkages that are effective for small holders will be a key challenge to

small holder participation in the transformation of Indian agriculture.

19

Some Successful Ventures of Contract Farming 8

For the purpose of identifying factors underneath the success of contract farming, we

examine three different models of contract farming in three different commodities viz.,

milk, broilers and vegetables4

Contract farming in dairying takes form of an intermediate contract. The model was

developed and is being implemented by the Nestle India Limited – a multinational firm –

to source milk from small-scale producers. It is well-known that dairying in India is an

integral part of rural economy, yet its scale of production is too small for a majority of

the households to generate cash benefits (Birthal, 2007)5 . Contracting with such a large

number of small-scale producers raises transaction costs to any firm. To reduce the cost

of contracting Nestle follows an intermediate model of contract farming where the

agreement is done with a local villager, called as an ‘agent’. The agent collects milk from

small-scale producers, and also facilitates distribution of inputs and delivery of services.

Nonetheless, overtime there has been some scaling-up of dairying in Nestle’s milk shed

area perhaps due to availability of an assured market in the form of contract farming. As

a result, the firm has also started direct contracting with large producers. The

intermediate contracting however remains the dominant form. In fact, majority dairy

processors in India use intermediate contracts to procure milk supplies.

The contract farming scheme of the Nestle now covers about 100 thousand dairy farmers

in over 1500 villages in several districts of Punjab. In 2005, Nestle collected 438 million

kg of milk from farmers. Most of the milk collected by Nestle firm is processed into

value- added products like baby food, butter, ghee, curd, etc. The firm observes strict

food safety and quality standards right from the milk production stage. It has a well-

developed traceability and milk chilling systems, and for quality milk supplies it

encourages farmers to use milking machines and quality inputs. The case of contract

farming in vegetables relates to the Mother Dairy Fruits and Vegetables Limited

(MDFVL) - a wholly owned subsidiary of the public sector parastatal, National Dairy

Development Board (NDDB). Horticultural production in India is geographically

dispersed; only about 15 percent farm households grow vegetables and 5 percent grow

fruits (Birthal et al., 2007). This means high transaction costs to the firm in securing

8 http://www.ncap.res.in/contract_%20farming/Resources/5.1%20Pratap%20S%20Birthal.pdf

20

supplies from scattered producers. To reduce these costs, the MDFVL secures supplies of

fruits and vegetables from growers’ associations promoted by it. The firm provides

technical guidance, services and inputs to association members to ensure that farmers

follow best production and marketing practices.

MDFVL (earlier called SAFAL) is an organized retail chain and was started in 1988 in

Delhi. As of now, the MDFVL secures its supplies from around 300 growers’

associations spread throughout the country, and has almost an equal number of retail

outlets in Delhi. SAFAL is the brand name for MDFVL products. Recently, the MDFVL

has established a 100 percent export-oriented HACCP certified processing plant in

Mumbai. The model of contract farming in broilers in India is a replica of what prevails

in most other countries. Firms provide day-old chicks, feed, vaccines and services to

farmers at no cost to them, and lift entire output by paying fixed growing charges (per

kilogram of body weight of bird) in lieu of their contribution to cost (labor, water and

electricity charges, litter and rent for poultry shed and equipment). Farmers are thus

insured against market risks.

The case of contract farming in broilers relates to the Venkateshwara Hatcheries Limited

(VHL) - one of the leading firms in poultry business in India since early 1970s. The firm

is engaged not only in contract farming poultry, but also manufacturing of poultry feed,

medicines, vaccines and value-added poultry products. Recently, the firm has started a

retail chain in poultry products with brand name ‘BROMARK’.

CRITICAL SUCCESS FACTORS 9

From the contract farming schemes mentioned above we distill out factors that have

played an important role in their success6. Table 1 provides some indicators of their

performance.

More profit, lower marketing and transaction costs: There is a striking difference in the

profits of contract and non-contract farmers particularly in the case of milk and spinach.

Contract farmers realize more profits as compared to non-contract farmers; the difference

is more than double in milk, and 78 percent in spinach. Other studies too indicate higher


21

profits for contract farmers. Birthal, Jha and others (2006) have reported contract dairy

farmers receiving 70 percent more profits over non-contract farmers. In potato, Kumar

(2006) finds 143 percent higher profit for contract farmers over non-contract farmers.

Table 1: Economics of contract versus non-contract production

Figures presented in table 1 provide that More profits with contract farming are due to

savings in marketing and transaction costs, which otherwise are very high in the wet

markets. For

milk and spinach, marketing and transaction costs guzzle 15-22 percent of the gross

revenue (sale price) of the non-contract farmers. Singh (2005) reports marketing costs

eating away 13-27 percent of the sale price of vegetables. Gandhi and Namboodri (2002)

also report high marketing costs and margins in fruits and vegetables. Through contracts

farmers can avoid marketing and transaction costs to a large extent (Table 1). Dairy and

spinach farmers could save as much as 90 percent of these costs over non-contract

farmers. There are other sources, e.g. yield, production cost and price, of difference in

profits of contract and non-contract farmers, their contribution however is not significant.

Similar results have been reported for milk by Birthal, Jha and others (2006). The

evidence leads to us to conclude that ceteris paribus success of any contract farming

scheme would depend on its capability to improve farm profitability and reduce

marketing and transaction costs.

22

Reducing Risk: The difference in profits of contract and non-contract farmers in case of

broilers is not as large as in case of milk and spinach, despite lower marketing and

transaction costs for the contract farmers (Table 1). The extent of marketing and

transaction costs however is too small for both contract and non-contract farmers to cause

any significant difference in profits9. So is the case with average yield (body weight of the

birds). Some studies (Mehta et al., 2003; Fairoze et al., 2006) also indicate that contract

farming in broilers is not as profitable as independent production10. If the contract farming

in broilers is not so profitable then why it is widely prevalent in India 11 as well as other

countries?

Poultry production is capital-intensive and faces high production and price risks (Figure

1), as compared to many other agricultural enterprises. Under such situations, contract

farming performs banking and insurance functions. Agribusiness firms provide critical

inputs, like day-old chicks and feed at no cost to the farmers, and farmers in lieu of their

contribution to cost of production receive fixed growing charges independent of market

prices, while profits for non-contract farmers depend on market prices, which are highly

volatile. The firms also share production risks limited to natural mortality of about 5

percent. Contract farming thus reduces uncertainty in availability, quality and prices of

inputs, eases capital constraint and insulates farmers against market risks. Ramaswami et

al. (2006) have estimated that through contracts broiler farmers could shift as much as 88

percent of the market risk to the firms. Birthal et al. (2005) too observe little variation in

profits of contract farmers (CV=3.5%) than of non-contract farmers (CV=70%).

The above discussion brings out that there is a tradeoff between returns and risks in

contract farming of commodities involving very high market risk. Studies on contract

farming of some other commodities, like cotton, potato and Basmati rice also indicate

that contract farming works well if agribusiness firms manage credit and insurance for

farmers (Anon., 2003; Singh, 2007).

23

Figure : Farm-gate prices of broilers in India, 2004-06

The corollary to this is that the success of contract farming in capital-intensive and

riskier enterprises would depend on the extent to which it can protect farmers against

production and market risks.

Competitive pricing: Contract farming is often criticized on the ground that it empowers

firms to extract monopsonistic rent in the output market and monopoly rent in the input

market, particularly if the markets are imperfect and farmers face high asset-specificity 12

in terms of investment, time and skills.

From a comparison of output prices and unit cost of production for contract and non-

contract farmers in Table 1 it however appears that firms abstain from extracting

monopsony and monopoly rents. Output prices for contract farmers are marginally

higher, and the unit cost of production is marginally lower than for non-contract farmers.

Further, output prices (milk and spinach) are not pre-determined 13 , but are linked to

market prices. Over and above market prices, firms pay some premium as to manage the

problem of extra-contractual sales. The firms have also advantage of scale economies in

procurement of inputs and services, and pass on a part of these benefits to farmers by

charging them less than the market prices. Singh (2007) also report similar evidence in

case of potato and Basmati rice.

24

Cementing partnership through non-price factors: Non-price factors, like regular off-

take of output, timeliness in payments and provision of inputs, technical advice and

services, and incentives for efficiency and clean production have played an important role

in the success of the contract farming schemes described above. Nestle rewards farmers

for efficiency and clean milk production and observes timeliness in payments, inputs and

services. VHL provides incentives to broiler farmers for better efficiency and also shares

with them the incremental profits due to higher market prices. Some other studies, too

have observed an important role of non-price factors in expanding/strengthening the

partnership between farmers and firms (Singh, 2007; Thirunavukkarasu and

Sudeepkumar, 2005). Thirunavukkarasu and Sudeepkumar (2005) have reported a strong

tendency among dairy farmers to switch over from informal markets to formal markets,

and also from one formal to another formal market mainly due non-price factors.

The corollary to this is that the non-price factors are as important in cementing the long-

run relationship and trust between firms and farmers as are the prices.

Spreading supply risks by contracting with small producers: Agribusiness firms, to

minimize costs of search, monitoring and enforcement of contracts with a large number

of small farmers, often tend to partner with those farmers who can supply large volumes.

Reliance on a few large suppliers, however, increases supply risk if the alternative supply

sources are limited. Contracts with a large number of small farmers, on the other hand,

spread supply risk. Firms can reduce transaction costs of contracting with small farmers

following innovative approaches, like use of intermediate contracts, growers’

associations and self-help groups to source raw material supplies and distribute inputs

and services. For example, Nestle uses intermediate contracts where a local villager

procures supplies from small dairy producers on behalf of the firm. MDFVL secures its

supplies of fruits and vegetables through growers’ associations promoted by it. Some

textile mills, for example Appachi Cotton Company in Tamil Nadu, organize farmers as

self-help groups to secure raw material supplies and provide inputs, services, credit and

insurance (Anon., 2003). Such innovations not only reduce transaction costs of

contracting with small farmers, but also supply risks. Further, it may be noted that in

smallholder dominated agrarian economies, exclusion of small farmers from contract

25

farming schemes is politically unacceptable and socially undesirable. Inclusion of small

farmers in contract farming increases its political acceptability. Evidence from case

studies on dairy, poultry and vegetables discussed in this paper show that firms could

involve small farmers in contract farming through some organizational structures. Of the

total milk suppliers to Nestle, 56 percent had less than or equal to 5 milch animals

(Birthal et al., 2005). Similarly, about half of the vegetable suppliers to MDFVL had land

holdings of less than or equal to 2 ha (Birthal and Joshi 2007). Erappa (2006) also reports

over half of the contract farmers in gherkin as small farmers.

A long-term commitment and mutual trust: Asset-specificity is very high in contract

farming. Agribusiness firms lock in huge investment in infrastructure and manpower for

processing, procurement and distribution, which, by and large, is commodity-specific.

Similarly, farmers too invest in commodity-specific assets. Some enterprises like fruit

plantation and poultry require considerable initial investment. Both firms and farmers

would fail to realize returns on such investments if there is lack of a long-term

commitment and trust between them.

Often, a lack of a long-term commitment and mutual trust are major causes of breach of

contract and disputes. Effective communication (monitoring), and transparency and

flexibility in terms and conditions are needed to develop mutual trust. For example,

Nestle has been sustaining its partnership with dairy farmers in Punjab for over the last

four decades because of a commitment and mutual trust. Nestle started its processing

facility in 1962 with 2 million kg of milk sourced from 4,660 farmers in 66 villages in

Punjab. Its operations now have expanded manifold; in 2005 it procured 438 million kg

milk from over 95 thousand farmers spread over 1,700 villages (Figure 2).

The corollary is that a long term commitment and mutual trust between firms and farmers

are essential to the success and sustainability of contract farming.

26

Figure : Scaling-up in dairy production in India

Scaling-out and scaling-up: Scaling-out and scaling-up of contract farming are important

for both the firm and farmers. For a firm scaling-out as well as scaling-up are important

to procure required volumes of agricultural produce as to optimally utilize its processing

capacity, infrastructure and manpower. Scaling-out and scaling-up however have their

own advantages and disadvantages. Scaling-out spreads supply risk, while scaling-up

may increase it. For farmers, scaling-out offers market opportunities to new entrants,

while scaling-up enables existing contract farmers to augment their income.

ROLE OF POLICIES IN PROMOTING CONTRACT FARMING10

The success factors identified in the previous section are intrinsic to the partnership

between firms and farmers, and provide that if managed properly contract farming can

create a win-win situation for both the parties. Yet, there are several other factors,

particularly those related to policy, that also play an important role in the performance,

outreach and sustainability of contract farming.

Contract farming in India is in the infant stage, and the evidence indicates it can be

developed as a pro-poor market institution through appropriate policies and strategies.

Also there are opportunities for farmers in contract farming. Sustained income growth, a


27

fast-growing urban population and increasing westernization of diets are fuelling rapid

growth in demand for high-value horticultural and animal food products, which have a

greater scope for production under contracts. Between 2005 and 2025 the demand for

different animal food products is projected to increase by 75-110 percent and for fruits

and vegetable by 85-90 percent, as compared to a 20 percent increase in the demand for

foodgrains (Kumar et al., 2007). The demand for processed food products and beverages

is expected to grow even faster; the share of processed foods and beverages in the total

food expenditure is projected to rise to 15 percent in 2020 from 9 percent in 1999 (Ravi

and Roy, 2006). Besides, export opportunities are also emerging with unfolding of

globalization. The share of high-value food products (dairy, poultry, fruits and

vegetables) in the total agricultural exports has steadily increased; from 13.5 percent in

2001-02 to 15.9 percent in 2005-06 (GoI, 2007).

Contract farming schemes are organized by large agribusiness firms including processors,

exporters and supermarket chains. Developing contract farming thus requires appropriate

policies, infrastructure and regulations that facilitate private investment in agribusiness.

During the last 15 years the Government of India has taken a number of initiatives, such

as de-regulation of food industry, pruning of the list of agricultural items reserved for

small-scale industries, 100 percent foreign direct investment (FDI) in food processing,

reduction in corporate taxes and excise duties on processed foods, establishment of agri-

export zones, priority sector lending to food processing industry, enactment of an

integrated food law, de-regulation of agricultural markets, etc. to boost food processing

and promote agribusiness and contract farming. The following issues however merit

further attention:

Invest in physical infrastructure: A firm’s decision to invest in agribusiness, to a great

extent, is influenced by the availability of good public infrastructure (roads, electricity,

communication network, electricity, etc.). Public infrastructure is essential to reduce

marketing and transaction costs and post-harvest losses, and for quick access and

dissemination of information. Unfortunately, the public infrastructure in India has

remained underdeveloped, leading to a slow growth in private investment in refrigerated

transport, cold storages and food processing. This is reflected in the low level of value-

28

addition to agricultural produce; only 2.2 percent of the production of fruits and

vegetables, 6 percent of the poultry meat, 21 percent of the buffalo meat and 15 percent

of the milk produced in the country are processed into value-added products by the

organized sector (GoI, 2005a). The evidence also shows a greater concentration of

production of high-value agricultural commodities (in which contract farming is more

pronounced) in the areas well-connected with roads and urban centers (Parthasarathy Rao

et al., 2006). Investment in public infrastructure is thus essential to trigger private

investment all along the supply/value chain.

FDI in food retailing: The Government of India allows 100% FDI in food processing14

but restricts FDI in retailing in general, because of opposition from traders’ lobby and

some political parties that argue that FDI in retailing would adversely affect livelihood of

millions of workers in the unorganized retailing. Restricting FDI in food retailing

however may act as barrier to FDI in food processing and thereby to the growth of food

processing industry, which is crucial to establish strong backward linkages with

agriculture. For example, despite a provision of 100% FDI in food processing the growth

in output of food processing sector has remained almost the same as in the pre-FDI

period.

Promote competition: By enacting the Model Act (The State Agricultural Produce

Marketing Development & Regulation Act) in 2003 the Government of India has taken a

noteworthy step towards creating a level playing field for the private investment in

agricultural markets, agribusiness and contract farming. Its implementation by the state

governments

Evolve mechanisms for resolution of conflicts: The Model Act, 2003 outlines provisions

for regulation of contract farming to protect interests of both agribusiness firms and

farmers. However, one of the provisions that merit attention concerns mechanism for

dispute resolution. Considering the lengthy legal procedures, the Act provides that

disputes between firms and farmers, if any should be mutually resolved or settled by the

Marketing Committee with which the contract farming scheme is registered. However, at

29

present a considerable number of contract farming schemes are informal and remain

unregistered with the Marketing Committee. Non-registration of contract farming

schemes creates a scope for opportunism, breach of contracts and rise in disputes. These

problems would appear in a severe form with spread of contract farming, which is likely.

Thus, there is a need to (i) enforce registration of contract farming schemes, and (ii)

establish a judicial or quasi-judicial body for speedy resolution of disputes.

Develop grades and standards: Price and quality of products are two major factors that

can render a contract farming scheme a success or failure. Agribusiness firms may reject

farm produce or pay a lower price on the ground of it poor quality. This happens because

of a lack of well-defined grades and standards for farm produce. Organized retailers,

exporters and processors are imposing their own grades and standards on producers. The

requirement for developing effective grades and standards and their compliance by both

sellers and buyers cannot be ignored with rising demand for safe and quality foods in

both the domestic and the international markets.

Promote farmers’ organizations and other intermediaries: Often, agribusiness firms

tend to ignore small farmers in contract farming schemes because of higher transaction

costs of dealing with a large number of them. An effective way of involving smallholders

in contract farming is to encourage them to organize themselves into cooperatives, self-

help groups and growers associations. Such organizational structures help them improve

their bargaining power vis-à-vis agribusiness firms, and also generate scale economies in

acquisition of inputs, technology, services and information. Non-governmental

organizations (NGOs) can also play an important role by acting as intermediaries

between firms and farmers.

Public-private partnership in agricultural research and extension: Contract farming is

more prevalent in high-value agricultural commodities that have a considerable market

demand. This implies a greater diversification of agricultural production portfolio, and

sets a demand-driven agenda for agricultural research and extension.

30

State-wise contract farming initiatives by private sector 11

11 http://mofpi.nic.in/images/File/FICCI%20Data/Indian%20Food%20Laws/Contract%20farming%20%20%20%20%20%20%20%20%20%20%20.pdf

31

Contract Farming Models 12


32

COMPARISON OF CONTRACT FARMING MODELS IN INDIA13


35

GROUPING OF MAJOR CONTRACT FARMING INITIATIVES OF CORPORATES UNDER DIFFERENT MODELS14


36

CONTRACT FARMING IN PUNJAB

Crops on contract 15

The failure of public institutions to provide farmers protection and support is the

reason that contract farming is still promoted.

PepsiCo and other companies have used the contract system for the cultivation of

basmati rice, chillies and groundnut, as well as for vegetable crops such as potato.

Contract farming is increasingly being presented as a solution for the problems of Indian

agriculture by major international donor agencies, multinational companies and even the

government. It is argued that private sector participation will be promoted through

contract farming, and land-leasing arrangements will allow accelerated technology

transfer, capital inflow and assured markets for crop production, especially of oilseeds,

cotton and horticultural crops.

15 http://www.hinduonnet.com/fline/fl2408/stories/20070504001904600.htm

37

http://www.hinduonnet.com/fline/fl2408/stories/20070504001904600.htm

The United Progressive Alliance (UPA) government's Approach Paper to the Eleventh

Plan gives priority to the development of contract farming. Now, a working group set up

by the National Development Council, under the leadership of then Punjab Chief

Minister Amarinder Singh, has also made a set of proposals to promote contract farming.

In addition to suggesting greater liberalisation of laws and rules for crop contracts, it has

proposed tax rebates for food processing, duty-free imports of machinery and equipment,

exemption of market fees, and liberalised imports of seed varieties for contract farming

programmes.

Contract farming is defined as a system for the production and supply of agricultural or

horticultural products under forward contracts between producers/suppliers and buyers.

The essence of such an arrangement is the commitment of the cultivator to provide an

agricultural commodity of a certain type at a time and a price and in the quantity required

by a known and committed buyer, typically a large company.

According to the contract, the farmer is required to plant the contractor's crop on his land

and harvest and deliver a certain amount of produce calculated on the basis of anticipated

yield and contracted acreage. This could be at a pre-agreed price but need not always be

so. The typical contract is one in which the contractor supplies all the material inputs and

technical advice required for cultivation, while the farmer supplies land and labour.

This system has historical resonances, such as the infamous contracts enforced by indigo

planters in eastern India during the early colonial period. But the more recent pattern of

contract farming has been developed especially in the United States, where corporate

penetration of agriculture is probably the most advanced. Agricultural trade globally is

dominated by transnational corporations, such as Cargill, Archer Daniels Midland and

Monsanto, which are increasingly involved at each stage of the agriculture system. These

corporations achieve domination over the market by a combination of horizontal and

vertical integration.

This has increased the margins for the procuring and processing firms while at the same

time reducing farm incomes and increasing the prices for the consumers. This explains

the rising spread between retail prices and the prices received by farmers and livestock

breeders, which has been so marked in the U.S. over the past two decades. It is not

generally known that U.S. farmers have not really gained from the continuing

38

government subsidies to agriculture - instead large agribusinesses have made huge and

increased profits.

American farmers are financially and politically much stronger than Indian cultivators,

many of whom are already operating at the margin of subsistence. So it is important to be

fully aware of the implications and the need for adequate regulation of contracts.

PepsiCo model

The recent spate of contract farming in India effectively began with the entry of Pepsi

Foods Ltd. (PepsiCo) in 1989 when it installed a tomato processing plant in Hoshiarpur,

Punjab. PepsiCo followed a method whereby the cultivator plants the company's crops on

his land and the company provides selected inputs such as seeds/saplings, consultation on

agricultural practices and advisory services on crop management, besides conducting

regular inspections of the crop.

Subsequently, PepsiCo and other companies used similar methods for the cultivation of

foodgrains (basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from

vegetable crops such as potato. Until recently, this model of contract farming was

considered a success in terms of diversifying cultivation in Punjab and improving

incomes of farmers.

The Punjab government has argued that contract farming is the best means of crop

diversification in a region where there is a real question on ecological survival and the

sustenance of natural resources such as water and soil in a reasonably healthy state.

However, since contract farming is based on private corporate interests that are inherently

profit-driven, there is no reason why these should coincide with the ecological

requirements of the region.

Indeed, much of the recent corporate interest in Punjab's agriculture has been in basmati

farming, which is one of the great water-guzzlers. Crop diversification can be encouraged

more effectively through a system of changing the relative prices of crops accompanied

by a supportive system of public agricultural extension services.

Farmers resent system

Farmers in Punjab have become increasingly resentful of a system that has put them

under the total control of corporations, which decide not only the crops grown but also

the procurement price. The growing incidents of the pre-determined prices being reduced

39

on the pretext of inferior quality of the grain or crop have added to such resentment. The

issue became so critical that several times in recent years the Punjab Agro Foodgrains

Corporation, the State government agency that designed the contract farming programme

in the first place, was forced to step in and buy the basmati rice rejected by the

contracting companies.

Contract farming in Punjab has certainly led to more employment opportunities for some

labour, since the labour intensity of most vegetable crops, except potato, is much higher

than that for traditional crops such as wheat or paddy. However, wages have been pushed

to subsistence levels by increased competition for work through migration. Also, male

labour is being displaced by mechanisation, while lower-paid women and children are

increasingly employed for the more labour-intensive activities. The problem of finding

alternative employment for displaced cultivators has become a serious concern.

The Punjab experience is generally considered to be among the more successful in India

thus far, but even this shows that contract farming holds numerous problems for

agriculture in developing countries like India.

It tends to displace labour quite substantially; marginalise direct cultivators, who lose

control over the production process and often even over their land; encourage more

capital-intensive and often less sustainable patterns of cultivation; result in greater

insecurity and lower incomes for farmers because of the use of quality measures to lower

the effective output price paid by contractors; even deny farmers the benefit of higher

prices, which could be instead absorbed by corporate contractors with local monopolistic

power; propagate monoculture, which reduces food security and the possibility of

livelihood diversification through livestock; rely excessively on the use of lower-paid

women workers and child labour; increase and accelerate the process of casualisation of

labour.

Given these evident problems, why is contract farming still promoted so assiduously?

This is really because public institutions have failed to provide farmers with the essential

protection and support required for viability on a sustained basis. What cultivators in

rural India need most of all today is the following combination: a basic price-support

mechanism that ensures that costs are covered; efficient extension services that provide

information about possible crops, new inputs and their implications and new agricultural

40

practices relevant for the particular area; and the availability of reliable and assured credit

at reasonable rates of interest.

There is no reason why this combination cannot be delivered by the public sector and by

healthy and efficiently functioning marketing cooperatives. But the last decade has seen a

collapse of agricultural extension services and of agricultural credit across rural India.

The Minimum Support Price system is also being run down. And cooperatives have been

shackled by over-regulation, bureaucratic control and political interference so that they

have also mostly not shown the desired results.

However, private corporate firms will not necessarily deliver these requirements either,

since their interest would be to maximise profits in the short term rather than ensure the

long-term sustainability of cultivation.

Of course, not all contract farming need be bad for farmers - in the best case scenario it

can add to and diversify farmers' incomes while creating sustainable cultivation practices.

However, to promote this more desirable type requires active state involvement. If

contract farming is to improve the condition of cultivators rather than intensify the

ongoing agrarian crisis, it is important to have a system of state regulation, intermediation

and monitoring of contract farming practices to ensure the interests of farmers.

Bharti Wal-Mart piloting contract farming in Punjab16

Bharti Wal-Mart has initiated a development programme with the farmers of Punjab,

which could well turn out to be the precursor to contract farming in the country. The

programme will help farmers grow high-quality vegetables and fruits with assistance

from the company at each stage of cultivation.

The company also coaches farmers on post-harvest technology after which the

farmers sell their produce to the retail company.

“Our associates engage with the farmers at every stage of cultivation,” the Bharti Wal-

Mart spokesperson told Hindustan Times. “We also help the farmers with post-harvest

practices and help them reduce wastage and improve quality.”

Is this the beginning of contract farming? “Fruits and vegetables are believed to be a

key footfall driver in retail stores and large retailers would eventually resort to contract 16 http://www.hindustantimes.com/Bharti-Wal-Mart-piloting-contract-farming-in-Punjab/Article1-476733.aspx

41

farming to secure availability and consistency in quality and price,” the spokesperson

said.

The company said it has launched a pilot programme with 65 farmers in Punjab. “The

farmers currently supply 16 vegetables to the stores on a daily basis.”

Bharti Wal-Mart says it is trying to build an efficient supply chain as the current system

of mandis is inefficient. “The inefficiency is evident by more than 100 per cent price

build up between farmer and consumer,” the company spokesperson said. “It is not just

about negotiating better prices with the suppliers, than removing any inefficiency in the

supply chain.”

Escorts enters contract farming in Punjab17

Escorts Ltd, a $500 million turnover conglomerate, decided to join a group of corporates

undertaking contract farming, with the signing of a agreement with Punjab Agro

Industries Corporation (PAIC).

Under the terms of the memorandum of understanding signed Wednesday by Escorts

Chairman Rajan Nanda, the company will develop a business plan with state-owned

PAIC to facilitate contract farming for long-grained aromatic basmati rice and durum

wheat in Ludhiana, Moga, Sangrur, Muktsar, Faridkot and Bhatinda districts of Punjab

over 50,000 acres of farm land.

"The company will provide all the inputs including seeds, pesticides, fertiliser,

appropriate agriculture equipment and other services to help farmers diversify and grow

quality produce, primarily basmati rice, durum wheat and oil seeds," Nanda told

reporters.

Punjab Chief Minister Amarinder Singh has set a target of helping farmers in 300,000

acres of land to diversify from the traditional grain cultivation with the help of contract

farming.

Taking advantage of this, several corporates and multinationals like PepsiCo, Rallis,

Mahindra & Mahindra have taken up contract farming in the state.

17 http://www.siliconindia.com/shownews/Escorts_enters_contract_farming_in_Punjab___-nid-19143.html

42

http://www.siliconindia.com/shownews/Escorts_enters_contract_farming_in_Punjab___-nid-19143.html


Tractor manufacturing major Escorts will also work on the business plan drawn up with

PAIC to set up grain handling and storage facilities like conveyor belts and silos.

"We will help farmers in the post-harvest handling like processing, grading and storage

without any manual handling. In addition, we plan to act as facilitators to help farmers

find better markets for their produce," a company spokesperson said.

Escorts has earmarked Rs.1 billion for contract farming and creating post-harvest

infrastructure in Punjab and other states over the next three years.

"Punjab is moving from agriculture to agribusiness and we are proud to make a signal

contribution in this direction," said Nanda.

43

CASE STUDIES

1. PEPSI18

Partnership With Farmers

PepsiCo India continues to strengthen its partnerships with farmers across the

country to boost their productivity and income. The plan is to strengthen farmer

connect from 21,000 in 2009 to 50,000 by 2012.

Helping farmers improve yield and income

The company's vision is to create a cost-effective, localized agri supply chain for its

business by:

Strengthening farmer connect from 21,000 in 2009 to 50,000 by 2012.

Building PepsiCo's stature as a development partner by helping farmer grow more and

earn more.

Introduction of new high yielding varieties of Potato, Oats, Citrus and others.

Introduction of sustainable farming methods and contract farming.

Making world class agricultural practices available to farmers.

Working closely with farmers and state governments to improve agri sustainability,

crop diversification and enhance farmer incomes.

Helping farmers refine their farming techniques and raise farm productivity.

Customized solutions to suit specific geographies and locations.

Facilitate financial and insurance services so as to de-risk farming.

High Quality Seed Program

In order to provide its farmers “The best quality potato seeds”, PepsiCo collaborated with

the Thapar Institute of Technology to develop quality potato mini-tubers.

PepsiCo has also made an investment in a world class potato mini-tuber facility at Zahura 18 http://www.google.co.in/search?hl=en&source=hp&q=Given+the+small+land+holdings+of+the+farmers+in+these+states%2C+the+company+decided+to+work&meta=&aq=f&aqi=&aql=&oq=&gs_rfai=

44

in Punjab which would help getting robust and disease-free seeds to its contract farmers.

The facility would be operational by the end of 2009.

Contract Farming

Partner In Progress Model

PepsiCo has pioneered the concept of contract farming under which the company

transfers agricultural best practices and technology and procures the produce at a pre-

agreed price.

A 27-acre research and demonstration farm was set up in Punjab to support the

initiative to conduct farm trials of new varieties of potato, chilli, corn, peanut and

other crops.

PepsiCo India's technical team implemented a high quality seed programme to

deliver early generation and disease-free seeds to farmers.

Potato Farming

The Impact

World class, top quality, high-yielding potato varieties introduced.

High yielding potato seeds have enabled farmers to produce world class potatoes and

procure higher returns.

PepsiCo India has partnered with more than 11,000 farmers working across Punjab,

U.P., Karnataka, Bihar, West Bengal, Gujarat and Maharashtra for the supply of world

class chip-grade potatoes.

Partnered with State Bank of India to get soft loans to all its contract farmers to reduce

their cost of cultivation and save them from the clutches of money lenders (higher

interest rates).

PepsiCo India has also partnered with 1,200 farmers in Rajasthan to cultivate barley in a

tie-up with the United Breweries Group.

45

PepsiCo Citrus Project

The PepsiCo and PAGREXCO (Punjab Agri Export Corporation) partnered to start a

Citrus Development initiative in 2002, marked a step forward in PepsiCo's commitment

to diversification of agriculture and improvement in quality of life for farmers.

The Impact

Initiative has emerged as one of the most successful models of public-private

partnerships in Indian agri-business and would create a localized supply base for

citrus juice for Tropicana business.

Project played a significant role in introducing a less water intensive alternative to

crops such as paddy.

Today, farmers can choose from 16 varieties of rootstock and 34 varieties of

citrus, largest collection at a commercial nursery.

Technical support and expertise were extended to the Punjab Government to set

up two fruit processing plants in Hoshiarpur and Abohar - prime citrus growing

areas in Punjab.

Each plant is capable of processing multiple fruits and capable of acting as a

catalyst for farmers to adopt horticulture.

Frito Lay India to up contract farming by four-fold19

Frito Lay India is looking at increasing contract farming of potato in India by almost

four-fold over the next three years.

“Currently, there are 15,000 farmers doing contract farming of potato for us while we are

sourcing the commodity from 40,000 farmers. Our intent is to build a win-win self-

sustaining contract farming model to improve quality,” Frito Lay India executive vice-

president Ruchira Jaitly, told mediapersons here.

The company, which already has contract farming agreements with farmers in Punjab,

Karnataka, Maharashtra, Madhya Pradesh, Uttar Pradesh, Jharkhand, Uttaranchal and

19 http://www.potatopro.com/Lists/News/DispForm.aspx?ID=3695

46

http://www.potatopro.com/Lists/News/DispForm.aspx?ID=3695

West Bengal, is also contemplating entering into similar tie-ups in Andhra Pradesh and

Tamil Nadu.

2. NESTLE 20

The Company started milk collection in Moga in 1961 with a collection of 511 Kgs of

milk from 180 farmers. It has substantially expanded its operations with over 85,000

farmers in its own milk district. Nestlé uses local raw materials and develops local

resources wherever possible. Milk Collection Centres with farm cooling tanks to preserve

the quality of milk were established by the Company.

Besides this, milking machines were provided to the farmers maintaining large dairy

farms. Farmers were advised on good breeding and feeding practices, and on the health of

dairy herds. Techniques for increasing milk yields at the farm were introduced. Nestlé

has invested in Chilling Centres and Farm Cooling Tanks. In addition to this, the

Company provides assistance to farmers in the areas of cattle feed, quality fodder seeds,

veterinary medicines and mineral mixture and procurement of bank loans.

Nestlé support goes further than the work with the dairy farmers. The Company is

helping with the construction of facilities for drinking water and lavatories in village

schools in the Moga Factory Milk District. This is a joint effort with the schools, parent

associations and village administrations.

Another project involved the funding of medicines for a Tuberculosis clinic which is

treating residents from Moga town and the nearby villages.

By working very closely with the farmers of the Moga Milk District and local

administrators, Nestlé has helped to raise the quality and hygiene of the milk produced

there and improve the health and life style of the farmers and other residents. Its

contribution to the creation of prosperity on an on-going and sustainable basis has not

only transformed Moga into a prosperous and vibrant milk district today, but also a

thriving hub of industrial activity.

20 http://www.nestle.in/mogasuccess.aspx

47

http://www.nestle.in/mogasuccess.aspx

3. TATA21

Tatas, Punjab team up for basmati contract farming

The Tatas and the Punjab government have teamed up to undertake contract farming of

basmati rice in Punjab. Under the plan, the Punjab government will provide 35,000 acres

of land to cultivate basmati rice in the state.

Tata group company Rallis India, Punjab Agro Industrial Corporation (PAIC) and the

New Delhi-based company LT Overseas have formed a partnership to execute the

project. ICICI will provide credit to farmers for participating in the initiative. LT

Overseas markets the Dawat basmati rice brand. While Rallis will provide farm end

support services, LT overseas will buy the rice that is produced. PAIC has signed an

agreement with ICICI Bank for covering a broad gamut of services. In addition to

providing credit for financing the distribution of seeds and fertilisers, the agreement

provides for assistance to farmers for introducing new crops, varieties and in

diversification of cropping systems.

The initiative is part of the Punjab government’s effort to bring about large-scale crop

diversification in the state during the next 5 to 10 years. As part of the plan, PAIC is

planning to forge marketing alliances with huge basmati rice exporters. "Rallis has

established farm management services to offer customised packages to farmers. The

partnership will give us a chance to work closely with farmers in Punjab and help

develop the best crop," said Rajeev Dubey, managing director, Rallis India. LT Overseas,

which has 40 years of experience in basmati rice processing and trading, is expected to

buy the entire produce from the cultivators.

Rallis had earlier formed an alliance with Hindustan Lever (HLL) for a contract farming

project for wheat in Madhya Pradesh. This is mainly intended to help farmers grow and

sell wheat for making atta and basmati rice for export in Madhya Pradesh and Haryana.

Rallis and ICICI have also tied up with big retail chains like Food World and Nilgiris,

and juice maker Sunsip.

21 http://www.tata.com/company/Media/inside.aspx?artid=dFXx5XAy4Lg=

48

http://www.tata.com/company/Media/inside.aspx?artid=dFXx5XAy4Lg

Tata Kisan Sansar: Enabling, empowering22

The Tata Kisan Sansar (TKS) is a network of nearly 600 farmer resource centres that

caters to more than 3.5 million farmers in 22000 villages in the northern and eastern part

of India. The centres are one-stop solution shops that provide farmers access to a wide

range of agricultural inputs such as vital fertilizers, seeds, and pesticides along with

agricultural services such as soil testing, crop advisory and foliar application services.

New services being explored include financial services and IT enabled market

information.

Empowerment: The objective of the TKS network is to enable and empower the farmer

in creating and generating more value for farm produce by providing information on new

and improved agronomic practices and by facilitating better and more efficient use of

agricultural inputs. The philosophy behind TKS is to become a change agent for the

Indian farming community.

Structure: TKS functions as a hub and spoke model. Each TKS centre is a franchised

retail outlet and solution provider that caters to about 30-40 villages in the surrounding

area. The centres are in turn serviced by about 30-odd resource centres (known as Tata

Krishi Vikas Kendras or TKVK), with each resource centre looking after 17-18 TKS

centres.

Benefits: TKS provides the following

Access to expert advice: There are more than 60 agronomists available at the hubs to

provide advice on crops and farming issues. There are more than 150 organisers at the

TKS level.

Inputs: TKS centres provide generic as well as store brands of

Fertilisers: Urea, DAP, MOP, NPK, etc

Specialty fertilisers: Zinc sulphate, boron, micronutrients, calcium nitrate,

organics, water soluble fertilisers

Seeds: Field crops, vegetable crops

Pesticides: Entire range

22 http://www.tatachemicals.com/farm_centre/overview.htm

49

http://www.tatachemicals.com/farm_centre/overview.htm

Cattlefeed

Farm implements

Training: In nutrient and pest management

Services:

Soil and water testing

Contract farming

Seed production

Application services

Advisory services

Relationship building:

Farmer membership (individual & group)

Accident insurance to members

Farmer meets

Crop seminars

4. FLI (Pepsi) Potato CF in Maharashtra and Karnataka

Given the small land holdings of the farmers in these states, the company decided to work

through an intermediary called Hundekari in Maharashtra who manages the relations with

small contract growers, who own 1-2 hectares and grow 1-2 acres of potato crop under

contracts, on behalf of the company, right from registering farmers, input supply, credit

and buy back arrangements. On the other hand, in Karnataka, the company has organised

informal associations of growers who manage the local operations like seed distribution,

supply schedules for delivery of produce and so on among themselves, for the company.

The farmers generally own about 2-4 hectares of land and grow 2-4 acres under contract.

There are a total of 11000 growers of the company in Maharshtra and 3500 in Karnataka

which deliver to the Ranjan Gaon plant of the company (table 1). Not only has the

company been able to send right quality signals by buying only quality price under two

price options – fixed contract and open market linked prices, but also has managed

production risk of the growers by bringing in insurance, and low cost input supply and

50

credit into contracting with formal contracts and tie ups (fig. 1). The market linked price

is 4-14 paise per Kg. lower, depending on the level of price in the market; higher the

market price which can vary from a minimum of Rs. 3/kg. to Rs. 10/kg., higher the gap

between market price and purchase price offered by the company. Reference rate for chip

potato purchase is the average of the preceding three days’ block of published newspaper

rates for potato at Gultekadi market yard, Pune and is inclusive of transportation cost

upto factory. Further, there are quality incentives in terms of solid % and total potato

defects (TPOD) (table 2). This CF system of the company is different from its individual

contract grower system being used in Punjab where farmers are larger land holders and

even lease large chunks of land for contract farming.

51

5. AM TODD MINT CF

AM Todd which started with just 69 acres contracting in 1996 for mint crop, had 10,000

acres in 2004 working with more than 2000 growers. It organizes contract production of

peppermint, spearmint and even buys Koshi variety oil from contract and non-contract

growers. It has even started contract farming in UP recently (table1). The company has

helped and advised local growers to set up mint oil extraction units besides the three

which are owned by the company in Punjab. There are 15 such units which are tied to the

company for extraction and sale of mint oil. The mint oil extraction at the company plants

is free of cost. Though the crop is a third crop for most of the farmers in Punjab and

therefore quite profitable, the company also advises farmers for intercropping of mint

with other crops especially wheat for better economics of the crop (Singh, 2005c). The

successful and smooth functioning of the CF system in mint by AM Todd in the state

(Punjab) with no involvement of the state, largely due to the nature of the crop, clear

terms of the contract, assured returns to growers by competitive prices and the

commitment of the company, corroborates the point that CF is best left to the company

and the growers (Singh, 2005c). This was also the case in Thailand where the state

facilitated it from outside with credit and extension (Singh, 2005d).

6. AGROCEL ORGANIC BASMATI PADDY CF

The Kaithal operations in organic Basmati by Agrocel Industries started in 1998 and

certified organic Basmati production had begun with 35 farmers and 277 acres in 2001.

Today, there are a total of 260 farmers including 70 farmers with 600 acres for Piciric

52

Ltd., another rice exporting company based in Delhi with a plant in Sonepat for which

Agrocel co-ordinates CF for a service fee. The company has been working for Picric

since 2000. Company has been in Kaithal since 1995 in ICM promotion and input sales.

Of the total, 160 are certified organic and others in-conversion farmers. These farmers are

spread over a total of 30 villages with 27 in Kaithal and 3 in Kurukshetra district and

Picric farmers in 15 of these Kaithal villages, with all of the villages being in 25 kms.

from Kaithal. Besides, there are 20 farmers in U.P. and Uttaranchal also which are looked

after by the Kaithal project. Agrocel charges Rs. 500/- per acre from Picric as service

charge for co-ordinating contract organic basmati production with farmers (Fig.3). The

Agrocel direct contract farmers number 190 with 814 acres of which only 212 acres are

under conversion with new and old farmers. Most of the farmers have put only a part

(28.5%) of their farmland under organic which is certified and rest of the acres is being

put to organic in stages. The land holding of the organic growers ranges from 5 to 60

acres with average being 32 acres. The acreage under organic crop varies from 2 to 30

acres with average being 9 acres.

The contract with individual growers, some of whom are members of the fair trade group

called Agrocel Pure and Fair Rice Growers’ Association (registered under the Societies

Act) across 12 villages with 70 members, are written and for five years after certification.

Agrocel supplies some of the organic inputs which are SKAL certified including seed

supplied by PICRIC from their contract seed production programme, and procures the

produce from the farmers (Fig. 3). All the inputs are on credit and the recoveries are

made from payment for the produce. The certification cost was borne by Agrocel and

Picric for their respective farmers. Of the 34 certified organic farmers surveyed, 5.85%

were in the 3rd year, 18% in 4th year, 38% in 5th year, 21% in 6th year and18% in 7th

year of the contract. More of the very large and large growers were into long

relationships with the company as they were the first ones to align with the company. The

ICS followed is documented by the staff entirely with three supervisors for 16 villages

and 260 farmers.

Agrocel uses SGS certification for product quality purposes and SKAL for organic

process certification. Due to certification problems, some farmers have been also

excluded from the groups. Only bio-compost is sourced by farmers on their own from a

53

local cooperative society which promotes vermiculture and also supplies cow urine and

herbal abstracts for bio-pesticide applications, in unbranded bottles. But organic

weedicides are not available which causes a major problem in organic production. In fact,

small farmers make their own inputs while large farmers buy them from the market.

There is no subsidy on inputs by the company. The company has made arrangements

with ICICI bank since last year under which a loan of Rs.10,000/- per acre in cash and

kind is given under the guarantee of the company.

All of the farmers described land improvement as the major reason for organic farming.

About 70% valued price premium for organic produce, 29.4% low input use, 53% own

consumption, , 17.6% regular monitoring, 11.8% organic husk, 8.8% assured market

14.7% self esteem and 38.2% lower pest attack. Only about 1/4th of the growers reported

54

some instance of crop failure. About 85% of the farmers entered into the contract because

of premium considerations. 32.3% did so for the sake of interest free inputs on credit.

One time payment ( 20.6%), lower input cost (41.2%), regular monitoring (32.3%) and

improved land fertility (14.7%) were the other major reasons for contract farming (Singh,

2006).Another study of 60 organic paddy growers in Kaithal and Sonepat districts also

found that the contract price was higher that the local market price of basmati paddy with

share of producer in consumer rupee being higher in this organic channel as compared to

that in the conventional paddy channel though the marketing margin was same in both the

channels. Though the farmers reported problems like difficulty in meeting quality

requirements, lack of independent testing and certification facilities in the producing area,

lack of government regulation on quality of inputs and their prices, poor service provision

by the contracting firms, lower prices, lack of market information, and discount in the

name of quality, they agreed that contract organic production increased income and

reduced marketing risk (Chikkamath et al, 2005). 85.3% of the farmers wanted to

continue to work under contract, major reasons being land improvement, premium, and

better quality of produce. All the farmers were of the view that increased incomes and

better soil management was ensured under contract organic farming. Further, 23.5%

viewed the better faming skills as the major benefit of contract farming. The reported

problems included delayed payment (32.3%), lower price (32.3%), and only single crop

contract (17.6%). Other factors that could contribute to improving effectiveness of the

contract included timely procurement, higher premium, soil and water testing, crop

insurance, improved inputs, timely payments, prior price information, more crops

coverage, direct purchase from farm, collective payment of bonus and produce price,

better extension, and transparency in grading system (Singh, 2006).

55

CONCLUSION

Farming is an age-old means of livelihood for millions of Indians. However, there have

been few systems/models in which farmers are assured of a market for their produce,

leave alone a remunerative price. Farmers have on occasion had to throw their produce

away for want of buyers. This is one side of the coin. On the other is the agri-based and

food industry, which requires timely and adequate inputs of good quality agricultural

produce. This underlying paradox of the Indian agricultural scenario has given birth to

the concept of Contract Farming, which promises to provide a proper linkage between the

‘farm and market. Farmers in India are all set to see a sea-change in agriculture sector

soon, thanks to contract farming. contract farming is emerging as an important

institutional arrangement in India that promotes coordination between production and

marketing activities.

There is no single recipe to make contract farming work in smallholder agriculture. A

number of factors, intrinsic and extrinsic to the contract, influence the relationship

between agribusiness firms and farmers, and therefore the performance and the

sustainability of contract farming. We have distilled out some important factors from the

empirical literature for consideration of agribusiness firms and policymakers to manage

and promote contract farming more effectively. Agribusiness firms while improving their

own profits should ensure that contract crop/commodity is more remunerative for farmers

than the competing crops/commodities and they earn more with contract farming than

without it; and the marketing and transaction costs associated with farmers’ disposal of

produce and acquisition of inputs, technology and services are lower with contract

farming. Second, for high-risk commodities firms must share production and marketing

risks to the extent possible, and also assist farmers managing production risks. Third,

firms should abstain from a tendency of extracting monopsony and monopoly rents.

Fourth, firms should base their pricing strategy on the market trends, and create incentives

for farmers for better efficiency and product quality as to manage problem of extra-

contractual sales or any problem of moral hazards. Fifth, firms should value timeliness in

off take of produce, and delivery of payments, inputs, technology and services. Sixth, to

make contract farming politically acceptable and socially desirable it is important to adopt

innovative approaches such intermediate contracts, growers’ associations, self-help

groups, etc. to create opportunities for smallholders to participate in contract farming, and

56

also to reduce their own transaction costs of contracting and supply risks. Finally, for

making contract farming a sustainable institution, it is important for firms to win

confidence and trust of the farmers through price and non-price instruments. To develop

contract farming as a pro-poor market institution the central and state governments should

create a conducive climate for private investment in agribusiness, promote competition

among various market players whilst curbing any tendency of regional monopsony and

collusive oligopsony, develop and facilitate implementation of grades and standards,

improve farmers’ access to credit, insurance, technology and extension services, and

facilitate smallholders to organize themselves into cooperatives, growers’ associations

and self-help groups as to empower them to effectively deal with big business firms.

Contract Farming is not a panacea to solve all related problems of agricultural production

and marketing systems. But contract farming could be evaluated as a way of providing

earlier access to credit, input, information and technology and product markets for the

small scale farming structure. Contract farming might also be seen as a way or as a part

of rural development and promoted to improve agricultural performance especially in

Third World Countries. Besides farming to both sides, there is some problems. For

successful implementation of contract farming, having co-ordination and collaboration

consciousness and acting in an organized manner are advisable for both sides. On the

Other hand, Government attitudes and incentives are also important aspects.

To establish an agrarian economy that ensures food and nutrition

security to a population of over a billion, raw material for its expanding

industrial base, surpluses for exports, and a fair and equitable

rewarding system for the farming community, ‘commitment driven’

contract farming is no doubt a viable alternative farming model, which

provides assured and reliable input service to farmers and desired

farm produce to the contracting firms. Several Indian and multinational

companies have already begun such initiatives in India and have

demonstrated repeated success. The successful cases should

encourage the rest of the producing and the consuming enterprises to

emulate them for mutual benefits in specific and Indian agriculture in

general.

57

RECOMMENDATIONS

Contract farming can be developed as a pro–poor institution through

appropriate policies and regulations. Though, the central and state

governments have taken a number of policy initiatives in this direction,

some issues that are generic in nature merit more attention.

Improve Physical Infrastructure: A firm’s decision to invest in

agribusiness, to a great extent, is influenced by the availability of

public infrastructure (roads, electricity, communication network,

electricity, etc.), government policies and regulations. Public

infrastructure in India, however, is not well–developed, leading to

a slow growth in private investment in infrastructural

developments like refrigerated transport, cold storages and food

processing. It is reflected in low level of value-addition to

agricultural produce in the organized sector. Only 1.4 per cent of

the fruits and vegetables, 13 per cent of the milk, 6 per cent of

the poultry meat, 21 per cent of the buffalo meat and 8 per cent

of the fish produced in the country undergoes processing in the

organized sector (GoI, 2005).

Promote Competition: By enacting the Model Act (The State

Agricultural Produce Marketing Development & Regulation Act) in

2003 the Government of India has taken a bold step towards

creating a level playing field for the private investment in

agricultural markets, agribusiness and contract farming. Its

implementation has remained poor. Only a few states have

amended their existing Marketing Acts in true spirit, and others

have made some cosmetic changes. It is however cautioned that

while implementing such policies the governments should take

appropriate measures to curb any tendency of regional

monopsony and collusive oligopsony.

Evolve Mechanisms for Resolution of Conflicts: The Model

Act, 2003 outlines provisions for regulating contract farming to

protect interests of both firms and farmers. However, one of the

provisions that merit attention is the mechanisms for dispute

58

resolution. Considering lengthy legal procedures, the Act

provides that any dispute between the firm and farmer should be

mutually resolved or settled by the market committee with which

the contract farming scheme is registered. It is a novel

recommendation. However, many contract farming schemes

remain unregistered and are not legally vetted, at present.

Nevertheless, the need for some judicial or quasi-judicial body for

resolution of disputes cannot be ignored as contract farming

becomes widespread.

Promote Farmers’ Organizations and Other

Intermediaries: An effective way to involve smallholders in

contract farming is to encourage and facilitate them to organize

into cooperatives, self-help groups or growers associations. Such

organizational structures also improve their bargaining power vis-

à-vis agribusiness firms, and generate scale economies in

acquisition of inputs, technology, services and information.

Develop Grades and Standards: Price and quality of output

are two important factors that can make or mar contract farming.

Agribusiness firms can reject farm produce or pay a lower price

on the pretext of its poor quality. This happens due to lack of

well-defined grades and standards and transparency thereof in

the contract agreement. Organized retailers, exporters and

processors often impose their own grades and standards. The

need for developing effective grades and standards cannot be

ignored with rising demand for safe and quality foods in both

domestic and international markets.

Improve Farmers’ Capacity to Invest, and Cope-up with

Risks: Two important factors in scaling-out/up of contract

farming relate to credit and insurance. An overwhelming majority

of smallholders lack capacity to invest in high-value agriculture

and are risk averse. Some activities like poultry and plantations

are capital-intensive and riskier, and need institutional support in

terms of finance and insurance. In India although formal rural

59

credit system is fairly well-developed, institutions for agricultural

insurance remain under-developed. It is therefore imperative to

enhance farmers’ access to financial institutions using the string

of contract farming or otherwise.

To develop contract farming as a pro-poor market institution, the

governments should create a conducive climate for private investment

in agribusiness, promote competition in the market whilst curbing any

tendency of regional monopsony and collusive oligopsony, develop and

facilitate implementation of grades and standards, improve farmers’

access to credit, insurance, technology and extension services, and

sensitize and facilitate smallholders to organize into cooperatives,

growers’ associations and self-help groups so as to effectively deal

with agribusiness firms.

60

BIBLIOGRAPHY

Websites :

http://dspace.iimk.ac.in/bitstream/2259/520/1/637-647+.pdf


http://www.ncap.res.in/contract_%20farming/Resources/5.1%20Pratap%20S

%20Birthal.pdf

http://mofpi.nic.in/images/File/FICCI%20Data/Indian%20Food%20Laws/

Contract%20farming%20%20%20%20%20%20%20%20%20%20%20.pdf


http://www.hindustantimes.com/Bharti-Wal-Mart-piloting-contract-farming-in-

Punjab/Article1-476733.aspx

http://www.siliconindia.com/shownews/

Escorts_enters_contract_farming_in_Punjab___-nid-19143.html

http://www.google.co.in/search?

hl=en&source=hp&q=Given+the+small+land+holdings+of+the+farmers+in+these

+states

%2C+the+company+decided+to+work&meta=&aq=f&aqi=&aql=&oq=&gs_rfai=



http://www.tata.com/company/Media/inside.aspx?artid=dFXx5XAy4Lg=


61


http://www.tata.com/company/Media/inside.aspx?artid=dFXx5XAy4Lg







contract farming

Documents