S.MuthumaniForest college and research institute

CONTRACT FARMING IN TREES

CONTRACT FARMINGCONTRACT FARMING

Contract farming can be defined as agricultural production carried out according to

an agreement between a buyer and farmers, which establishes conditions for the

production and marketing of a farm product or products.

Contract farming is the contractual arrangement between farmer and the firm,

whether oral or written, specifying one or more conditions of production and/or

marketing of an agricultural product.

In contrast to agriculture, the production in

forestry is of long rotation in nature. Besides, the forests of the country are under acute socio- economic pressure and till recently, the deforestation rate in the country was estimated to be 1.5 million ha year -1. Currently the forest area in the country is around 23.57 % and Tamil Nadu state is around 17.41% (FSI, 2005),  which is low against the mandated requirement of 33%. The less forest area coupled with low productivity of Indian forest has ushered in a large gap between demand and supply of both domestic and industrial wood requirements.  

The biggest challenge faced by wood based industries is the raw material shortage.  A conservative forest policy coupled with promotion of farmers/ industries linked plantation activities on under-utilized cultivable and marginal agricultural lands will help to mitigate the crisis.  This necessitates a business farm forestry model, in order to expand the area under farm and agro forestry plantations through multi-stake holder’s participation.  A multi functional agroforestry systems in India has already been elaborately indicated .

Types of contract farmingLimited Management Contract where a farmer

gets production input and sells the produce to the firm. There is no real guarantee for the price for the produce. 

Full Management Contract where the farmer and the firm have entered into contract for certain amount of production. In this kind of contract the price is announced before the season thus the price risk is minimised. The firm provides market for the produce provided the quality specifications are met.

Contract Farming modelTo meet the needs and increase the area

under pulp wood plantation through farm forestry, the two paper industries in association with Tamil Nadu Agricultural University has developed a tripartite and quad-partite model for promotion of pulp wood based contract farming system. Through the system, it is intended to produce quality and sustained raw material through a strong supply chain.

Tri-partite ModelThis model incorporates industry, growers

and financial institutions. Under this system, the industry supplies quality planting material at subsidized rate and assures minimum support price of Rs. 2000 per tonnes or the prevailing market price which ever is higher. The financial institutions viz., Indian Bank, State Bank of India and Syndicate Bank provide credit facilities to the growers at the rate of Rs. 15000 to 20000 per acre in three installments.

Quad-partite ModelThis system is similar to tri-partite model

barring the involvement of research institute.  In this system, research institute particularly Forest College and Research Institute (TNAU) play a significant role for technological advancements through varietal development and also to advice site specific precision silvicultural technology to the growers. A pre and post-plantation scientific advice helps to develop human resources through on and off institute mode to farmers and plantation staff of the industries.

ADVANTAGES TO THE FARMERSADVANTAGES TO THE FARMERS

Inputs and production services are often supplied by the sponsor

This is usually done on credit through advances from the sponsor

Contract farming often introduces new technology and also enables

farmers to learn new skills

Farmers’ price risk is often reduced as many contracts specify prices in

advance

Assured market for the produce

Contract farming can open up new markets which would otherwise be

unavailable to small farmers

ADVANTAGES FOR SPONSORSADVANTAGES FOR SPONSORS

Contract farming with small farmers is more politically acceptable than, for

example, production on estates

overcomes land constraints when working with the small farmers

Production is more reliable than open-market purchases and the sponsoring

company faces less risk by not being responsible for production

More consistent quality can be obtained than if purchases were made on the

open market

PROBLEMS FACED BY FARMERSPROBLEMS FACED BY FARMERS

Particularly when growing new crops, farmers face the risks of both market failure and production problems

Inefficient management or marketing problems can mean that quotas are manipulated so that not all contracted production is purchased

Sponsoring companies may be unreliable or exploit a monopoly position

The staff of sponsoring organizations may be corrupt, particularly in the allocation of quotas

Farmers may become indebted because of production problems and excessive advances

PROBLEMS FACED BY SPONSORSPROBLEMS FACED BY SPONSORS Contracted farmers may face land constraints due to a lack of security of

tenure, thus jeopardizing sustainable long-term operations

Social and cultural constraints may affect farmers’ ability to produce to

managers’ specifications

Poor management and lack of consultation with farmers may lead to farmer

discontent

Farmers may sell outside the contract (extra-contractual marketing) thereby

reducing processing factory throughput

Farmers may divert inputs supplied on credit to other purposes, thereby

reducing yields

PRECONDITIONS FOR SUCCESSPRECONDITIONS FOR SUCCESS A profitable market Sponsor Must have identified a market for the planned production

Sponsor Must be sure that such a market can be supplied profitably on a

long-term basis

Farmer Must find potential returns more attractive than returns from

alternative activities and must find the level of risk acceptable

Farmer Must have potential returns demonstrated on the basis of realistic

yield estimates

Major Industries involving in Contract FarmingTamil Nadu Newsprint and Papers Limited (TNPL)

  Seshasayee Paper & Boards Limited (SPB)

TNPLAs per National Forest Policy 1988 guidelines,

Tamil Nadu Newsprint and Papers Limited (TNPL), Kagithapuram has introduced two contract farming models during 2004-05 to augment the pulp wood raw material in order to create sustainability and self reliant in meeting the raw material demands through establishing plantation in non forest area with a people centered participatory approach which will be economically viable, socially acceptable and environmentally compatible. 

Seshasayee Paper & Boards Limited

SPB launched the Contract Farming Programme under which SPB provides technical expertise for growing Eucalyptus and Casuarina wood by marginal farmers with buy back guarantee. Over 20000 acres of land are expected to be covered under the scheme in the next 5 years.