Raveendhar.kR08PGDM034

Section-1

About PepsiCoWith 5 largest food and beverage companies

which includes 16 brandsavailable in nearly 200 countriesEntered India in 1989 and its investment is

700million $Employment to more than 60,000 people.Brand Pepsi is now the 2nd biggest brand in

the country

About Frito LayIt was started by Elmer Doolin of San Antonio and Herman

W. Lay of Nashville in 1935.The two companies Frito and Lay was merged in 1961.In 1965 Frito Lay and PepsiCo was merged.It has more than 15 brands.LAY'S®, FRITOS®, CHEE.TOS®, BAKEN-ETS®,

RUFFLES® DORITOS®, FUNYUNS®, TOSTITOS®, BAKED LAY'S®, WOW!®, SUNCHIPS®, MUNCHIES®, OBERTO®, ROLD GOLD®, GRANDMA'S® Cookies and Quaker Chewy Bars®, Quakes® and Fruit & Oatmeal Bars®.

Concept of contract farming?ESSENTIALLYThe farmer is contracted to plant the

contractor’s crop on his landHarvest and deliver to the contractor, a

quantum of produce, based upon anticipated yield and contracted acreage

This could be at a pre agreed priceTowards these ends, the contractor can

supply the farmer with selected inputs

THE ADVANTAGES OF CONTRACT FARMINGFarmer gets exposure to world class agro technology

Planting materials/healthy disease free nurseryCrop monitoring technical advice free at his doorstep Agricultural implements

The farmer obtains an assured up front price & market outlet for his produce

Focus shifts from prices to returns per acre - driven by productivity increases

The private sector gets requisite quality material regularly at predetermined prices

Promotes long term planning and investments

THE PROBLEMS THAT BESET CONTRACT FARMING

Small size of farmer landholdings.Need to contract with a larger number.No mechanism to discourage default. No legal recourse

when faced with large scale contravention of contracts.Lack of a comprehensive crop insurance scheme to protect

against natural calamities.

Contract Farming in PepsiCoFLI (Pepsi) Potato CF in Maharashtra and KarnatakaThe company decided to work through an intermediary

called Hundekari in Maharashtra and informal groups in Karnataka

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

Buying only quality potato under two price options – fixed contract and open market linked prices.

Managed production risk of the growers by bringing in insurance, and low cost input supply and credit into contracting with formal contracts

BUILDING BLOCKS FOR A SUSTAINABLE CONTRACT FARMING PROGRAMME IN PEPSI CO

Land preparation & planting,crop monitoring during growing periodharvesting & procurement, transportation logisticsprompt farmer payment system

The extension services team - selection and trainingFarmer education programField trials at farmer fields- multi-locational & crop timing

Evaluation of promising varieties and hybrids Multi locational trials and short-listing - selectionBlueprint for agricultural practices after adaptingto local conditions, to suit intellectual & financial means of the farmerEvaluation of farmer economics modelDemonstration farming

Commercialization

Technology Transfer

R & D Activities

Grower

LocalMiddleman/ Facilitator/ production organiser

CompanyCollectionCentr

Company

Grower

Contract production organization, supply of company seed (with part advance payment by grower), extension, and input credit under agreement with no liability on company

Farmer adoption and tripartite

agreements &procurement, local

quality lab mgt. underagreement

Seed supply, payment of

commission for extension, procurement

& seed distribution

services under agreement

& reimbursement of

seed/other costs & seed

replacement

Procurement at fixed or mkt. linked price, grading & quality testing of produce by facilitator

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Farmer selection, package

of practices, payment for

produce (thru bank* to

farmer and facilitator), and

supervision under

agreement

Tri-partite (Intermediary) model of contract farming by FLI (Pepsi)

CompanyParameter

FLI(Pepsi)

Area ( states) Maharashtra and Karnataka

No. of farmers 14500

Contracted Acreage 28,000

Average size ofholding (acres)

5 acres

Average area under contract per grower 2 acres

Nature of contract Acreage

Pricing formula Fixed price of Rs. 5 per Kg. for September, October harvest and Rs. 5.50/kg. for the November 03 harvest of multiplied chip grade potatoes delivered by the GROWER to FLI plus an incentive based on the solids and TPOD (table 1) OR Market linked price plus an incentive based on the solids and TPOD

Nature ofOrganisation of growers

Contract growers thru Hundekari in Maharshtra and through informal farmer associations in Karnataka (bi-and tri-partite agreements). A commission of -- paisa/kg. on the total accepted quantity of potatoes procured by FLI from the specified farmers. Hundekari to manage local quality labs for cook test & solids measurement and to provide inputs given by FLI and loans from his account to growers for purchase of inputs. For this, he gets a service charge of -- paisa/Kg. of seed supplied to specified farmers, and another service charge of -- paisa/kg. on the total accepted quantity of potatoes procured by FLI from specified farmers for providing extension support including lab operation and FLI board maintenance. In Karnataka, an elected farmer representative manages most of these functions.

Input Supply Through Hundekari but FLI shall replace the rejected seed at the time of delivery in case the seed is found to be of inferior grade or of lower germination. FLI shall replace the seeds in case the germination fails due to virus;50% advance payment for seed,50% on delivery of produce

Technical advice andExtension

Free of cost

Quality Under size/over size potatoes to be paid @ 30% of FLI rate.

Rotten/soil/green mechanical damage potato to be returned the same day.

Delivery point Factory

Payment Within 15 days

Seeds/root andProduce

Not to be sold to anyone w/ocompany permission

Major markets Domestic and export

Crop failure No liability of co.

Key elements of PepsiCo’s success:

Core R&D team

 Unique partnership with local agencies including a public sector enterprise

Execution of technology transfer through well-trained extension personnel

 Supply of all kinds of agricultural implements free of cost to contracted

farmers

 Supply of timely and quality farm inputs on credit

.

Contd..,Prompt dispatch/delivery/procurement of the mature produce from every

individual contracted farmer through the system of ‘Quota Slips’

 Effective adoption/use of modern communication technology like pagers

for communication with field executives

 Regular and timely payment to contracted farmers through computerised

receipts and transparent system

 Maintenance of perfect logistics system and global marketing standards

Conclusion:Co-ordination, Motivation, and Transaction costs are

three pillars of a contract arrangement

(i)co-ordinating to minimize production costs

(ii)balancing decentralization and centralisation in farm decisions

(iii)minimizing or sharing risk and uncertainty

(iv)encouraging group or co-operative action

V. motivating long term contracts to reduce hold up problem

VI. balancing pros and cons by renegotiation of contracts over time

VII. reducing direct costs of contracting

VIII.using transparent contracts

Several Indian and Multinational companies have begun such initiatives in India and have

demonstrated repeated success .

Thank u.,,