An Overview of Contract Farming in Sri Lanka: Lessons Learned

Vajira Balasuriya and Jeevika Weerahewa Department of Agricultural Economics & Business Management

University of Peradeniya Sri Lanka

OUTLINE

• Tenant Contracts

• Farmer Companies

• Contract Grower or Buy-back system

• (Hybrid) Cooperative Enterprises

• Participatory / Partnership Contracts

• Conclusions

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TENANT CONTRACTS (Mainly Paddy Cultivation)

• The tenant farming system is still continuing in Sri Lanka, even though it no longer exists in many countries of the world (Gamage, 2000; Jayasuriya & Hemaratne, 2011)

• In 1958 Paddy Lands Bill and 1956 The Agrarian Development Act • Assist tenants to purchase the land they worked • Protect them against eviction • Establish a rent ceiling at around 25 percent of the crop.

• ¾ of the profit (yield) goes to the tenant farmer who cultivates the field • ¼ of the profit (yield) to the owner of the agricultural land

• Agrarian Banks to grant bank loans to the tenant farmers (difficult times)

• Established cultivation committees, composed of rice farmers, to assume general responsibility for rice cultivation in their respective areas, including the direction and control of minor irrigation projects

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Issues and Constraints of Tenant (Paddy) Farming

• Asymmetric information (distance of land owner and farmer)

• Deteriorating landlord-tenant relationship

• Uncultivated land was acquired by the government and was transferred to various government agencies or to cooperative organizations

• Productivity and the adoption of new technology both are hampered

• Deviating from paddy to vegetables (necessity driven)

• Tendency of losing interest of the land owner (opting for formal wage)

• absence of a suitable institutional framework

• Lack of coordination among the agencies with overlapping mandates

• Lack of transparency

• Lack of technical expertise to handle the issues efficiently

• Lack of accessibility

• High transaction costs 4

Tenant Contracts; Contd.

FARMER COMPANIES organizing small farmers into collective groups

Promoter Nature of Organisation Major Activity

Export Development Board People’s companies Export Production Villages (EPVs) • 36 EPVs established • ̴ 20 in agricultural products

United State Agency for International Development (USAID)

Shared Control of Natural Resource

• Huruluwewa Farmer Company : Soya bean project • Nilwala Farmer Company : Dairy project

Department of Agriculture Farmer companies • 32 farmer companies • Main aim -

commercialization

• Provide inputs • Credit facilities • Seed paddy Production

In the 80s : Government initiatives

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In the 80s : Government initiatives; Contd.

Promoter Nature of Organisation Major Activity

Ministry of Irrigation Farmer companies • Based on major irrigation

schemes (e.g., Udawalawa)

• Provide inputs • Paddy purchasing • Milk collection • Irrigation management • Credit facilities

Mahaweli Authority Farmer companies • Originated from farmer

federations in the Mahaweli scheme.

• Commercialization • Irrigation management

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Lessons Learned from Farmer Companies

Issue Context Concerns

Viewing institutions as service providers rather than business enterprises

Majority of farmer shareholders perceived the company as a service providing organization.

Many farmers just own the minimum number of shares to have access to the services provided by the company

Professional fees Farmers believe that the company should neither charge a fee for coordinating farmers-agribusiness linkages nor charge a market-based interest rate for credit

Capital base as well as the business orientation of the company

Private sector participation

limited as only about 10% farmers are involved in farmers-agribusiness linkages

No significant activities to add value to products in the scheme

Irrigation management Improvement in irrigation water use efficiency/maintenance of structures

problems like inadequacy, timeliness, unreliability, water stealing, violation of rotation, water wastage and structural issues 7

CONTRACT GROWER OR BUY-BACK SYSTEM Broiler industry

• Dressed whole chicken represents more than 60% of the chicken sale in the Sri Lankan market • Large companies with environmentally controlled-houses; form of out-growers

• Inputs and technological assistance

• The uncertainty about sales price is often reduced; contracts typically specify at the beginning of

the growing cycle the prices to be paid at product delivery.

• Market outlet is secured for the contracted production • Income stability and access to credit is enhanced

• by-products and residues from the contracted farming activity is used in complementary farm

enterprises 8

Contract Grower or Buy-back system; Contd.

• Established for sugar cane cultivation to reduce the country's dependency of imported sugar

• Cane cultivation under rain fed conditions and setting up a sugar factory in

Southwest of Sri Lanka • It has the lease ownership of a nucleus estate of approximately 4300 ha, settler

area of 6300 ha (1500 families), and 3000 private outgrowers

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Pelwatte Sugar Industries

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Provisions Made by the Contracting Firm Challenges

Inputs on credit and extension services Lack of farmers’ representation in company management

Fertilizer at subsidized rate, seeds, pesticide Corrupt field staff and bad communication

Land development costs on credit Weak legal framework protecting the farmer

Nutrition supplements Disagreements in the financial relationship

picking bags, tillage and transportation on credit/ subsidized

Exploitation of monopolistic position by the companies

Technical assistance Low preference for smallholders (Pelwatte)

Few alternative income possibilities

Lack of farmers’ organizations (sugar cane)

(HYBRID) COOPERATIVE ENTERPRISES Case of Bio Foods (Pvt.) Ltd - Organic and Fairtrade Company

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5 -50 farmers create a society

3 members from each society

Board of Representatives MOPA (cinnamon & ginger)

Marginalized Organic Producers Association

•1500 farmers •4 years

5 -50 farmers create a society

3 members from each society

Board of Representatives NEOPA (lemon-grass & chilli) North East Organic Producers

Association

•500 farmers •1.5 years

5 -50 farmers create a society

3 members from each society

Board of Representatives SOFA (tea, ginger & spices)

Small Organic Farmers Association

•3000 farmers •16 years

Case of Bio Foods (Pvt.) Ltd - Organic and Fairtrade Company; Contd.

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Bio Foods (Pvt.) Ltd • Purchase Directly • Only communicate with MOPA, SOFA & NEOPA • Legal contact with ‘no compensation’ policy

MOPA (cinnamon & ginger)

SOFA (tea, ginger & spices)

NEOPA (lemon-grass & chilli)

Farmer Cooperatives

Challenges • Conversion to organic takes 2 -3 years • Volume (capacity) problems • Meeting fair trade standards • Issues in (initial) predictions of yield • Fluctuations of Premium price • Abundant regulatory requirements • Farmer enrollment : prominent key informant

Challenges • Systematic conversion is a challenging process • Only trade agreement (absence of legal agreements) • Large players purchase the produce (farmers sell to local outlets

when market price is high) • Meeting fair trade standards • Increasing labour costs • farmers’ perception of comparatively lower yield; in spite of

premium price

PARTICIPATORY / PARTNERSHIP CONTRACTS

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Building Bridges with Papaya Local Empowerment through Economic Development

(ILO Country Office for Sri Lanka and Maldives)

Creation of Partnerships

Disparate Communities Improve Livelihood Market Linkages

• Newly resettled farming community • Little assets other than small land holdings • Farmer’s preference to continue farming • No markets for their products • Joint-venture formed; fruit exporter and a newly formed fruit growers cooperative • Involvement of a wide range of state and local authority actors

Building Bridges with Papaya; Contd.

• Necessity to develop new value chains based on studies in the fruit and vegetable sector – 2011

(gender focused value chain analysis)

• Fair trade approach to economic growth in a newly emerging post conflict national market

• Identification of exporter

• Technical assistance from Department of Agriculture

• 200 vulnerable families identified by Divisional Secretary offices

• Support provided for inputs, training and extension service to the 200 farmers

• Farmers organized themselves into a cooperative with assistance from the Department of

Cooperative Development

• Cooperative and Exporter established a joint venture company (North South Fruit Processors)

• Grant of US$100,000 - 5000m2 packing shed

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200 Members

Vavuniya North

Dept. of Agriculture

VN Divisional Secretariat

Dept. of Coop Development

LEED project of ILO

Vavuniya North Fruit Grower’s Cooperative Society

Joint Company North South Fruit Processors (Pvt.) Ltd

C.R. Exports (Pvt.) Ltd

Fruit Processing Plant – Vavuniya North

55% 45%

•Guaranteed Price •Share of Profits

• 100 -150 MT / Month • Rs. 30 per (US$ 0.23) 1kg @ farm gate

Lessons learned • Risk is a feature of all enterprise but in the case of very vulnerable households

failure is not an option • Measures to reduce risk through income support for the six months prior to

the first crop being harvested is critical to the startup of the fruit growers scheme

• Household incomes of individual poor farmers, in some cases raising incomes by 700%

• Form a cooperative empowering them to negotiate for better terms with suppliers and buyers

• As shareholders of a joint venture company, farmers are gaining a deeper appreciation of agricultural markets and are becoming more conscious of planning their activities to be more responsive to market demand

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Building Bridges with Papaya; Contd.

Challenges

• Price fluctuation in the open market make it hard to keep the balance

• Since minimum value addition is done, viability of the company is at a stake

• Highly vulnerable for disease outbreaks and natural disasters

• Majority of the vulnerable people are at the lower end of the value chain

• Spread of the income is weak, contribution from the big farmers need to be controlled

• Diversification for other crops and other business ventures remain another challenge

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CONCLUSIONS • Appropriate enabling environment; institutional and political setting

•labour relations, land tenure, property rights, anti-trust measures, and commercial licensing

• The normative framework must also deal explicitly with the issue of contractual hold-up

• Through associations, farmers can have stronger voices in negotiation processes and in this way better protect their interests

• Appropriate consideration of production risks in the contract design

• High valued crops and livestock, destined to processing or to export markets, seem to be the better candidates for contracting

• Designing contract models based on market recognition and providing adequate training and knowledge dissemination of technical, managerial, marketing

• If entrepreneurship is to be triggered among the farmers, entrepreneurial skills needs to be identified; farmer enterprises

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Thank you

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Constraints that account for this situation are:

• Politicization of farmer companies

• Lack of managerial and entrepreneurial skills due to poor recruitment of management staff

• Lack of sound plans and poor management by incompetent board of directors without professional advice

• Lack of proper mechanisms to monitor and evaluate

• Mistrust between farmer company management and farmers – shareholders’ petite knowledge of the activities undertaken by the company

• Confusion regarding the role of the farmer company, as it is believed that the farmer company has replaced the farmer organizations.

• Low quality of input materials (seeds, fertilizer)

Lessons Learned from Farmer Companies; Contd.

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Process

Fruits are purchased from the farmers by cooperatives

Sell to North South at an agreed price

North South prepares the fruit for exports

Sell to C.R. Exports (Pvt.) Limited

At a price that covers cost and a profit margin for the Joint Venture Company

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Building Bridges with Papaya; Contd.

Typical Organisational Structure of a Farmer Organisation

Board of Directors

Crop Production Manager

Animal Production Manager

Credit Manager Accounts and Administrative

Manager

Water Resources Manager

Agriculture Assistant

Salesman

Agriculture Assistant

Water Masters

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Farmers-agribusiness linkages arranged by a Farmer Company

Farmer Farmer

Company Supermarket Chain

Agro Industries

Agrarian Service Centres

Produce

Input/Credit/Extension

Seed paddy/Vegetable

Rice varieties

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