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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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