SWOT Analysis on Contract Farming

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SWOT analysis on Contract FarmingSachin Lakade 09020242032

Current scenario of indian agricultureTotal Geographical Area - 328 million hectares Net Area sown - 142 million hectares Gross Cropped Area 190.8 million hectares Major Crop Production (1999-2000) Rice

89.5 million tonnes Wheat 75.6 million tonnes Coarse Cereals 30.5 million tonnes Pulses 13.4 million tonnes Oilseeds 20.9 million tonnes Sugarcane 29.9 million tonnes

Some factsContributes to 27% of GDP Provides food to 1Billion people Sustains 65% of the population : helps alleviate poverty Produces 51 major Crops Provides Raw Material to Industries Contributes to 1/6th of the export earnings

One

of the 12 Bio-diversity centers in the world with over 46,000 species of plants and 86,000 species of animals. 5198 units processing fruits and vegetable.

What is contract farming Contract

Farming (CF) can be defined as a system for the production and supply of agricultural and horticultural produce by farmers/primary producers under advance contracts, the essence of such arrangements being a commitment to provide a agricultural commodity of a type, at a specified time, price, and in specified quantity to a known buyer.

History 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. ITC introduce Virginia tobacco cultivation in Coastal Andhra Pradesh in the 1920s under CF. The Pepsico introduced tomato cultivation in Punjab in the 1990s under CF.

The

recent spate of contract farming in India effectively began with the entry of Pepsi Foods Ltd (PepsiCo) in 1989 by installing a tomato processing plant in Hoshiarpur, Punjab. PepsiCo followed a method whereby the cultivator plants the companys crops on his land, and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management.

Types of cf1)procurement contracts: under which only sales and purchase conditions are specified. 2) Partial contracts: only some of the inputs are supplied by the contracting firm and produce is bought at preagreed prices. 3) Total contracts: under which the contracting firm supplies and manages all the inputs on the farm and the farmer becomes just a supplier of land and labour.

Strength To Firm:1) Overcome capital market: Farmer needs capital

Suguna poultry farm limited tied up with SBI to provide finance to poultry & maize grower

Appachi Cotton Company (ACC) provides crop loan at 12 per cent rate of interest to its grower

3) Transferring the production risks from firms to farmers 4)Monitor the labour supervision low or without any cost.

Strength

To farmerof certain quality and quantity of commodities. transfer.

Supply

Skill

Weakness

To the firm:-

Firms

face problems like labour shirking and supervision problem when they follow vertical integration strategy In many of the states, the present APMR Acts still restrict the processors/manufacturers etc .

Extra

cost to the company(If company purchase raw material from other farmer, then cost of it is less than the cost of product purchased from contract faming)

Weakness contd..

To farmer:

The

problem of monopsony. Sometimes supply of low quality seeds.about 15.5 per cent of the Pepsi potato growers reported crop failure due to bad seed Some

corrupt arrangement between the firm and the pesticide dealers about the sale of particular pesticides and insecticide brands. Farmers risk is not covered in CF.

Sponsoring

firm do not discharge social responsibilities for the farmers in respect of health, hygiene, education. Tenant can not participate in contract farming. Corruption.

Opportunities

To the firm:gives an opportunity to develop backward linkages with farmers. acceptability.

It

Political

60

AEZ will be set up in 20 different state to integrate the complete process from production to export stage.

Punjab

plans to diversify crops in 1.5 million acres in next 4 years through contract farming.

Opportunities contdTo To

farmer:-

production of high value crops like vegetables, flowers, fruits etc and benefit from market led growth. To standardized the pattern of production. To provide homogeneous quality of product to international market hence increase in export.

Only

2 percent of Indian fruits and vegetables are processed, compared with 80 per cent in the United States 38% of horticultural crop wastage due to post harvest losses. Inspite India produces 57 major crop,only cotton ,sugar, wheat, soybean, and potato are traded.(Business Today, 10 July 2006) India account for 1 percent of the worlds in exports of fruits and vegetables.

ThreatsTo

Firm:

Farmer

may avoiding repayment credits strategic default.

Entrance

of foreign player in market. Input diversion by farmer. Contract Farming Sponsor prohibited from raising permanent structure on Contract Farming Producers' land

Threats cont

To farmer:failure

Production

Exclusion

of weaker farmers Increased the risk because diversification of farm business is not followed. Sponsor can sometimes wind up playing games with farmers who have contracted in good faith

Arbitrarily

raising quality standards.

Firm may provide input facilities only progressive farmers and large farmers who have more bargaining and political power compare to others.

A case of Jisl 100percent

export oriented unit. JISL largest processor of onion in the country (10,000 tons of DHO). The company entered into contract farming way back in 2001-02 . The principal objective of ensuring assured and consistent supply of onion bulbs, to enhance productivity and uniformity with better agronomical practices and also to improve the quality of onion bulbs

The

seeds of high-yielding onion varieties. Criteria for Selection Farms located within 200-km radius from Jalgaon are preferred for easy accessibility Jalgaon, Dhule, Nandurbar districts have therefore been selected for contract farming Farmers should be willing to adopt modern hi-tech precision farming practices Experience in onion cultivation, past production record

Reasons for success Jain

Gram Sevaks

52

trained and committed jain gram sevak. It supplies elite seeds at a subsidized rate. Good

Agricultural Practices . Benefits to Farmers. Double Price Formula Rs 3/kg Linking with Banks SBI ICICI

Close

quality Monitoring.

Unique the

approach to dispute redressal.

company gave a compensation of Rs.6 lakhs to farmers due to problems with quality of imported seeds . Re-supply of onion seed at 50percent of the original rate. The onions were purchased from the farmers at a whopping at Rs.16.3 crores (@Rs. 7.00/kg) as against Rs.6.9 crores (if it had been on MGP of Rs. 3/kg).

recommendations National

and State level Contract Farming Policies should be framed. Different models of contract farming should be allowed to evolve as per the situation, instead of strait jacketing the models in to a particular fixed definition. Registration : There should be an institutional arrangement for registration of sponsoring companies and recording of contract farming agreements with some Government machinery.

The

market committee should not be registration authority for contract farming and the Contract Farming Sponsor shall get the contract farming agreement recorded with the Sub Divisional Magistrate , who, inturn, shall verify the credentials of the sponsoring company Like Punjab and Maharashtra state governments , other state government should also totally exempt levy of market fees in respect of commodities procured under a contract framing agreement.

THANK YOU

Bibliogrphy www.iimahd.ernet.in www.manage.gov.in. www.isec.ac.in www.ncap.res.in www.iied.org. http://mpra.ub.uni-muenchen.de/18683

Apmc actThe APMC Act in each state of India requires all agricultural products to be sold only in government regulated markets. Under the present Act, the processing industry cannot buy directly from farmers

These markets impose substantial taxes on buyers, in addition to commissions and fees taken by middlemen, but typically provide little service in areas such as price discovery, grading or inspection. . A key impact of this regulation is the inability of private sector processors and retailers to integrate their enterprises directly with farmers or other sellers, eliminating middlemen in the process.

This

leaves no incentives for farmers to upgrade, and inhibits private and foreign investments in the food process sector.

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