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Transcript of IFPRI - Workshop on Best Practices in Contract Farming: Challenges and Opportunities in Nepal -...
MODELS FOR LINKING FARMERS TO
MARKETS IN INDIA: IMPLICATIONS FOR
SMALLHOLDERS
Pratap S Birthal
National Institute of Agricultural Economics and Policy Research, New Delhi
Pallavi Rajkhowa & PK Joshi
IFPRI
IFPRI-IIDS- FNCCI Workshop on Best Practices in Contract Farming:
Challenges and Opportunities in Nepal
February 10-11, 2015, Kathmandu Nepal
WHY DIFFERENT MODELS? Farmers and farm heterogeneity
Farm size
Resource endowments and capabilities
Activity choices
Attitude toward production and price risk
Differential access to markets, financial and non-financial services
The less-endowed farmers require a different treatment
From agribusiness perspective
Dominance of smallholders, Disbursed production
Diseconomies of scale in aggregation of outputs and provision of technology, inputs and services
Higher transaction costs (contracting, monitoring, enforcement etc.)
Organization of production is essential to overcome problems or costs associated with diseconomies of small-scale, poor access to services, finances, technology, inputs; inconsistent volume and quality, lack of traceability and risk management
Business models Model Drivers Rationale
Producer-driven Small scale producers, as
groups such associations
or cooperatives
Large scale farmers
Access to new markets
Obtain higher market prices
Stabilize and secure market
positions
Buyer-driven Processors
Exporters
Traders
Retailers
Assure supply
Increase supply volumes
Serve niche markets
consumer preferences
Facilitator-driven Non-governmental
organizations
National and local
governments
Make markets work for the poor
Regional and local development
Integrated Lead firms
Supermarkets
Multinationals
New. higher value markets
Low prices for good quality
Market monopolies
Business Models in India
Direct marketing models: (Apani mandi; Raythu bazar; farmers’ mall)
Cooperatives—dairy (NDDB) : Fruits: Mahagrapes; Mahamango, Mahapomogranate); fruits and vegetables (HOPCOMS )
Producers’ associations: MDFVL (fruits and vegetables); Agrocell (Basmati rice), Agro-cell cotton
Contract /contact farming: most crops/commodities-Nestle; Dynamix Dairy Industries; Venkateshwara Hatcheries; Suguna Hatcheries; Bharati field fresh; ITC; Frito Lay; Chuapal fresh; Appachi cotton; Aditya Birla; Retail Ltd. Heritage; Reliance fresh; Namdhari fresh; Global green; Mcain
Producer companies: Cooperative spirit with corporate efficiency; FPOs,
Cooperative: Milk
National Dairy
Development Board State Federation
District Milk Union
Village Dairy Co-operatives
Member Dairy Farmers of
Village Co-operatives Bank/Financial
Institutions
Insurance
Investment finance for dairy
machinery, processing and packaging
equipment etc
Loan for investment in
machinery and
Infrastructure
VDC gives
insurance to
loanee farmers
Loan for purchase of
cattle
Retailers
Product Flow
Finance Flow
World Bank
Contract Farming: Milk
Retailers
Nestle India
Direct Contract with large
Dairy Farmers
Contracts with local
Commission
Agents/Collection Centre
Small farmers
Assistance and education regarding animal breeding, health, nutrition and food
safety and quality
Provides cattle feed to farmers
Financial support to farmers and agents who managemilk collection centre
Feed/Input Supplier
Finance to large dairy farms to
purchase milk coolers and milk
machines
Bank
Nest
le
Ind
ia
faci
lita
tes
fin
anci
ng
of
dai
ry
en
terp
rise
s fr
om
com
merc
ial b
ank
s
Product Flow
Finance/Service Flow
Animal Lease: Samridhi Agro-tech
Product Flow
Service & Finance Flow
Sancheta Financial Services Pvt
Ltd (NBFC-MFI)
Samridhi Agri-
Products Pvt Ltd Retailers
Livestock
Distribution
Centre
Milk
Collection
Centre
Ultra-Poor Women Non-Ultra-Poor
Women
Distribution and Marketing of
Processed Milk
Processing
Units
Supply of Cattle and
extension services,
information
dissemination, Training,
Vaccination
Pro
vid
es
ex
ten
sio
n
serv
ice
s, in
form
ati
on
dis
sem
ina
tio
n,
Tra
inin
g, V
acc
ina
tio
n
Contract farming: broilers
Supplies chicks, feed, medicines and provides supervisory, extension and veterinary services
Tripartite Agreement
Contract Farmer Bank/Financial Institutions
Poultry Firm/Integrator
Broiler segment for chicken, meat
market
Wholesaler/ Retailer
Feed Manufacturing
Unit
Sellers of Soy and other raw materials
Credit
Product Flow
Finance Flow
Input/Service Flow
Cooperative: Kesla Poultry Cooperative
Governmnet rural
development and poverty
allevation schemes
Feed and medicine
manufacturer
SHG-Bank Linkage Program
Kesla Poultry
Cooperative 5 Co-operatives
consolidated to form the
Madhya Pradesh
Women’s Poultry
Producers Company Ltd
Retailers
PRADAN
Bank/Financial
Institution
Individual Villagers/
Woman formed SHG
Facilitate SHG formation
Product Flow
Finance Flow
Input/Service Flow Hatcheries
Producer association: Fairtrade-Agrocell
Product Flow
Finance Flow
Input/Service Flow
Fairtrade Certification
Agrocel Pure & Fair Cotton
Growers’ Association
International Market
Inte
rest
Fre
e C
red
it Technical
assistance, quality seeds and inputs
Fair Trade International (FLO)
Fairtrade Minimum Price and social premium and
organic premium
Agrocel Pure
Individual Farmers
Agriculture Universities
Domestic Market
Farmer Producer Organization: GoI
Credit, Savings, Insurance,
Inputs, Extension
Kisan Producer
Co-operative
(1000 farmers from 10-12
villages)
Farmers Integrated into
Groups (FIG)
(15-20 farmers)
Farmers
Bank/Insurance Federation of Kisan
Producer
Co-operative at the state
level
FIG
Kisan Sahyogi/ Village
based Extension Cadre
Agriculture Specialist
Supports 10-15 Sahyogi in field implementation
1000 Farmers in 25 Villages
Business Manager
Chief Executive Officer of the Producer Company,
expands Farm-Business Efficiency Frontiers and builds
linkage with Resource & Research Institutions &
Marketing
Product Flow
Finance Flow
Service/Input/Flow
a. Higher income: 50-100%
Reduction in marketing and transaction cost (60-90%)
Reduction in production cost (lower input prices)
Higher yield (5-10%)
Higher output price (5-10%)
b. Access to credit (broiler)
c. Reduction in risk price and production risk (broiler),
dairying
d. Reduced uncertainty in input, supply and their quality
e. Access to infrastructure and improved technology
(Mahagrapes, Nestle)
f. Scaling up
Transparency in terms and conditions
Pricing, Timely payment
Incentives for efficiency, food safety
Monitoring, Mutual trust
Welfare Impact
Smallholder participation?
• Low volume, small marketable surplus, high transaction costs of participation, high cost of contracting, food safety compliance
Why small farmers are excluded?
• Less dependence on a few large producers; Spread supply risk; Optimal utilization of capacity, manpower; More labor, more efficient
Why small farmers should
not be excluded?
• Cooperatives • Producers’ associations • Intermediate contracts
How to include:
Are the Emerging Models Inclusive?
• Low transaction costs of contracting (negotiation, enforcement and monitoring), Large volume, Quality compliance, Economies of scale in provision of inputs, services and markets
Tend to contract with large producers
Mixed evidence
• Vegetables SAFAL (≤ 2ha) = 37%; Gherkin in Karnataka =51% ; All crops in Punjab (≤ 2ha)=15%
• Dairy: ≤ 5 in-milk animals = 56%; Broilers: ≤5000 chicks = 32% Indian experience
•Kenya’s :exporters of fresh fruits and vegetables source their requirement through contracts with small producers
•Malawi: exporters of paparika depend on small farmers
•Madagascar: exporters of french beans from small-scale producers
•Zimbabwe: exporters of flowers and vegetables from large farmers
•Other studies from China, Thailand, Mexico showed a preference for large farmers
International experience
There are not enough large farmers
• Diversified base is essential to reduce supply risk
• Political acceptance or community good will
Small farmers have comparative advantage in labor; lower implicit wage rate; low cost of production;
They are better motivated to respond to product quality, and better farm management
Small farmers are dependent on firms for inputs, services and technology, hence better compliance with terms and conditions
Why contract with small farmers?
Key lessons • Building efficient and inclusive value chains for agricultural commodities
is a big challenge, but is not insurmountable if firms follow innovative and targeted approaches.
• Collective action is essential to overcome scale limitation of smallholders’ participation in value chains, and to reduce transaction costs and risks
• Collective action may not happen in its own, and may require intermediation from the government or its subsidiaries, the non-governmental organizations or the lead firms driving the value chains.
• Mutual trust and incentives are essential for cementing the relationship between buyers and sellers
• For common commodities the prices must be linked with prevailing market prices to avoid side-selling, and breach of contract
• Financing value chain is largely internal to value chain, and limited to production credit in the form of inputs. Long-term and external financing is limited and mainly to large farmers (dairy, orchard, etc.)
• Microfinance institutions with an agribusiness orientation can act as catalyst in development of efficient and inclusive value chains.
• Risk sharing is important for commodities as contract broilers, (Kesla coop) but are rare for other commodities. While institutional insurance is limited.
Policy Implications Level playing field for private sector participation (regulations, taxes, etc. incentives)
Facilitate growers’ association
Check monopsony and monopoly Reduce transaction costs
Involve smallholders
Provide credit and insurance
Evolve policies for contract farming
Incentives to agro-processing industry
Market fee, taxes on processed foods
Strengthen public infrastructure (road, electricity, communication, etc.)