Lessons from Contract Farming Experiences 2004
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Transcript of 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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