Lessons from Contract Farming Experiences 2004

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    Lessons from Contract FarmingExperiences to date

    S Sivakumar, ITC Limited

    CII Conference on Contract Farming

    Agrotech 2004, Chandigarh, 6 Dec 2004

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    Theoretically, conditions in India are very

    appropriate for contract farming

    From supply driven production systems todemand driven value chains

    There is a need for market alignment in terms ofcost & quality

    Markets aretransforming

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    Majority of the farmers are small with limitedresources

    Corporate farming is a socially inappropriateoption for India

    60% of Indiasworkforce is still

    in agriculture

    Good scope for value addition throughprocessing

    The industry also needs quality raw material insufficient volumes

    Food processingindustry is

    underdeveloped

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    with ideal complementary strengths to

    integrate production & consumption thru contracts

    Inputs &Technology

    AgriBusiness

    Land & Labour

    Farmer

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    Market LinkagesTraditionalKnowledge

    Quantity, quality & price being

    the variable terms of the contract

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    The Experience Todate

    Some good examples of successful contract farming(Seed Industry, Poultry Industry, WIMCO, Pepsico)

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    Good examples of collaboration without contract(Sugarcane Industry, Amul, ITC eChoupal)

    And, a large number of reneged written contracts(Farmers and corporates blaming each other, and

    looking to Government for help in contract execution)

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    The Key Lesson

    Contract farmin is not

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    a solution for all problems

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    Multiple farming models co-exist around the world

    and multiple farm-market linking mechanisms

    IndependentFarmer

    FarmerCooperatives

    FarmManagement

    CaptiveFarming

    Main Driver of the ChainFarmer Corporate

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    AuctionsContractFarming

    eChoupal

    Main Linking MechanismFarmer Corporate

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    When will contract farming work? (1)

    When there is natural reciprocal dependencybetween the two contracting parties

    i.e. the game is not zero-sum

    produced to special specs highly perishable,

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    . . ,

    oriented horticulture crops,organic, produce traceable to

    farms)

    early stages of technologyadoption

    (e.g. Poplar, when it wasintroduced)

    becomes critical(e.g. sugar cane, milk,

    horticulture)

    early stages of marketevolution (e.g. medicinal &aromatic plants, traditionalcrops in new geographies)

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    When will contract farming work? (2)

    When the market institutions provide risk

    transfer mechanisms(again, to ensure that the game is not zero-sum)

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    Price Risk

    through DerivativeMarkets (price at whichthe seller sells need not

    be the price at which thebuyer buys!)

    Yield Risk

    through Crop / WeatherInsurance (reducing therisk of the contracting

    parties, by spreading thesame on to market)

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    When will contract farming work? (3)

    When the environment does not give opportunity

    to one party to exploit the disadvantagedcounterparty

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    Vibrant Competition(offering choices)

    Strong Regulatory

    Framework (swift disputeresolution)

    Conducive SocialInfrastructure (farmerawareness levels i.e.informed, superior

    bargaining power i.e.empowered)

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    Three Roles Government must Play

    Model Rules, Awareness Communication

    Facilitator

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    Screening Companies, Registering contractsRegulator

    Party to contracts, Arbitrator, Safety net for pricingPlayer

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    Conclusion

    Write the contracts

    With knowledge (where they will work & wont)

    Choosing right terms (prefixed or determinant

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    ,

    Fairly (use simple language & equitable terms)

    So that both parties gain by honouring the contractsthan by reneging!

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