Contract farming – retrospect and prospect

ALIYA NASIRF-2015-01-M

meaningContract farming may be defined as agricultural

production carried out according to prior agreement in which the farmer commits to producing a given product in a given manner and the buyer commits to purchasing it. Often, the buyer provides the farmer with technical assistance, seeds, fertilizer, and other inputs on credit and offers a guaranteed price for the output (Minot N, 2007).

• Glover and Kusterer (1990) define contract farming as those contractual arrangements between farmers and other firms, whether oral or written, in which non-transferable contracts specify one or more conditions of marketing and production

History Contract farming was traced back to Colonial period.For the first time it was introduced in Taiwan in 1895 by

Japanese government IN 1920’s ITC introduced cultivation of Virginia tobacco

in Coastal Andhra Pradesh on a fair contract farming system.

In 1990’s PEPSICO introduced tomato cultivation in Punjab for the establishment of its paste manufacturing. This was sold to Hindustan Lever in 2000

Need for contract farming in India

• Production and marketing are very critical in India.

• Over come inadequate linkages with market.

• Lack of capital, poor infrastructure, technology transfer,

etc…

• To avoid post harvest losses.

• Unfavorable conditions for procurement.

• To avoid migrations.

objectivesTo achieve consistent quality

To achieve regular supply

To improve quality of produce

To stabilize the agro-raw produce

price is not affected by market prices

Contract farming – triangular benefit :

Benefits to the FarmerAssured markets & returns

Risk elimination due to price fluctuation

Timely transport

Reduces exploitation from middlemen

Reduces lending from private money lenders

Adequate input supply

Employment generation

Benefits to the Company Uninterrupted & Regular Flow of Raw Material

Protection From Fluctuation In Market Pricing.

Long Term Planning Made Possible.

Builds Long Term Commitment

Dedicated Supplier Base

Generates Goodwill For the Organization

Benefit to the government• There will be increase in the level of

employment• There will be increase in the national income• There will be no need for the government to

give subsidies• There will be increase in agricultural

productivity

advantages of contract farming

Provision of inputs and production services.

Access to credit

Introduction of appropriate technology

Skill transfer

Guaranteed and fixed pricing structures and

Access to reliable markets.

Nature of contract farmingThe farming contracts may fall into three categories

• Market specification contracts :- are pre harvest agreement that bind the

processing firm and the growth to a particular set of conditions governing

the sale of the crop. These conditions often specify price, quality and timing.

• Resource –Providing Contracts :- obliges the processor to supply crop

inputs, extension or credit, in exchange for a marketing agreement.

• Production management contracts – binds the farmer to fallow a particular

production method a input regimen, usually in exchange for a marketing

agreement or resource provision.

Models of contract farming

Three models of contract farming

1. Bipartite Agreement model

2. Tri-partite Agreement model

3. Quad-partite Agreement model

Bipartite Agreement model

•

Tri-Partite Agreement Model

Quad-Partite Agreement Model

PRECONDITIONS FOR SUCCESS

A profitable marketSponsor Must have identified a market for the planned production

Sponsor Must be sure that such a market can be supplied profitably on a long-

term basis

Farmer Must find potential returns more attractive than returns from

alternative activities and must find the level of risk acceptable

Farmer Must have potential returns demonstrated on the basis of realistic yield

estimates

Government Support- Regulatory Role

Suitable laws of contract and other laws are required as well

as an efficient legal system

Governments need to be aware of the possible unintended

consequences of regulations and should avoid the tendency

to over regulate

Governments should provide services such as research and,

sometimes extension.

Government Support-Developmental Role

Provision of agricultural extension services to ventures that do not employ their own field staff.

At the national level, it is a precondition that specialized services are available to provide institutional support to production, processing and marketing

TYPES OF CONTRACTS1. Marketing contract Only purchase at predetermined price. No input supply. 2. Partial contract Provides only some inputs at predetermined price. Purchase of produce. 3. Total contract All the inputs at predetermined price. Purchase of produce

State wise under contract farming:

PARTIAL LIST OF COMPANIES ESTABLISHED

CONTRACT FARMING IN INDIA :HUL

ITC

SUGUNA POULTRY

VENKATESHWARA HATCHERIES

PEPSICO

RALLIS

NESTLE

State-wise Contract Farming Initiatives by Private SectorSTATE CROP COMPANY AREA

KARNATAKA ashwagandha Himalya health care ltd

700

KARNATAKA dhavana Mysore S N C oil company ltd

400-500

KARNATAKA Merigold and chilli AVT NATURAL PRODUCT LTD

4000

KARNATAKA coleus Natural remedy pvt ltd

150

KARNATAKA gherkin 20 Pvt companies 8000MAHARASHTRA soyabean Tinna oil &

Chemicals154800

MAHARASHTRA Several fruit veg and cereal

Ion exchange Enviro farms ltd(IEEFL)

19

MADHYA PRADESH Wheat maize soyabean

Cargil india ltd 17000

Contd.....State Crop

Madhya Pradesh Wheat, Maize & Soybean

Cargil india ltd 17000

Madhya Pradesh Wheat Hindustan lever ltd 12098Madhya Pradesh Fruits,

Vegetables, Cereals, Spices &

Pulses

Ion exchange environ farm ltd

1200

Madhya Pradesh Soybean ITC 250Punjab Tomato & Chilly NIJJER agro food ltd 2270Punjab Barley United breweries

ltd4000

Punjab Basmati, Maize Satnam overseas and sukhjit starch ltd

4000

State Crop Company Area(ha)

Punjab Basmati Satnam Overseas, Amira Indian Foods Ltd

14700

Punjab Basmati , Groundnut, potato &chilli

Pepsico Indian Ltd

Around 6000

Punjab Milk Nestle India Ltd 65000000 kg/day

Tamil Nadu Cotton Super spinning mills

570

Tamil Nadu Maize Bhuvi Care Pvt Ltd

800

Tamil Nadu Paddy Bhuvi Care Pvt Ltd

200

Tamil Nadu Cotton Appachi cotton company

260

Different study on contract farming

A STUDY ON BASMATI RICE UNDER CONTRACT FARMING IN PUNJAB (Sharma 2007)

Wheat 42%

Non Basmati rice 37%

Basmati Rice 1%

Sug-arcane 11%

Fodder crops

5%

Maize 1%

Others 3%

Non- Contract Farmers (2002)

Wheat 37%

Non Basmati rice 28%

Basmati Rice 9%

Sug-arcane

7%

Fod-der

crops 6%

Maize 3%

Pulses 2% Oilseeds

6%Vegetables

1%

Non- Contract Farmers (2007)

Wheat 43%

Non Basmati rice 35%

Basmati Rice 10%

Sug-arcane

4%

Fodder crops 5%

Maize 3%

Others 0%

Contract Farmers (2002)

Wheat 35%

Non Basmati rice 20%

Basmati Rice 21%

Sug-arcane

6%

Fodder crops

7%

Maize 1%

Pulses 2%

Oilseeds 1%

Vegetables 7%

Others 1%

Contract Farmers (2007)

Per hectare income from different crop from contract farm and non contract farm in karnataka (Jagdish and prakash 2008)

Crop

Farms(Rs/ha)

Contract  

Farms(Rs/ha)

Non-contract

farms

Change over

non-contract

Gherkin 77066 - -Baby corn 64681 - -

Paddy 31602 27257 4345(15.3)Groundnut 30462 28821 1641(5.7)

Sunflower 28553 30477 -1924(-6.3)Chilli 20372 - -Ragi 16671 12250 4421(36.1)

Average level of yearly employment on contract and non-contract farms (Jagdish and Prakash 2008)

Particulars farms Contract Non- contractfarms (human-days)

Hired human labour

Male 48 (15.5) 22 (19.8)

Female 261 (84.5) 89(80.2)

Total hired human labour 309 (100) 111 (100)

Familylabour-use in crop production

Male 197(70.4) 64 (73. 6)Female 83 (29.6) 23 (26.4)

Total family human labour 280(100) 87 (100)

Success Story of Farmers

Gujarat’s contract farmers reap profits even as potato prices crash

• Deesa, a town in Gujarat’s northern Banaskantha district, 145 refrigerated potato warehouses in Deesa, The district’s area under potato rose from 45,000 ha to 52,000 ha.

• Govt. decided MSP of Potato is Rs 4 a Kg.

• Those on contract to McCain, a Canadian company which sells tikkies, wedges and fries under its own frozen foods brand and also supplies to McDonald’s, the US fast-food chain, are relieved. The Rs 8 a kg guaranteed to them is double the spot market price. This will recompense for the notional loss they suffered last year when they had to make do with Rs 7.5 a kg. “Contract farming is good because the risk factor is zero,” says Kantibhai B Patel, 45, of Iqbalgarh village in Banaskantha’s Amirgarh taluka. A post-graduate in chemistry, Kantibhai has grown potatoes on most of his 30 acres, all of it under contract, a practice that he has not broken for about a decade. Assured of price, he focuses on productivity to increase his income per acre.

SUCCESSFUL INITIATION IN INDIA

Contract farming in wheat is being practiced

in Madhya Pradesh by Hindustan Lever Ltd

(HLL), Rallis and ICICI

Appachi’s integrated cotton company model –Coimbatore, Tamil

Nadu backed by a model called the Integrated Cotton Cultivation

(ICC), which guarantees a market- supportive mechanism for selling

the produce to growers.

Contract farming in ‘Gherkin’ in Karnataka Andhra Pradesh and Tamil

Nadu .In Karnataka alone approximately 30,000 small and marginal

farmers have taken up contract farming of gherkins. Karnataka

exported 50,000 metric tons of gherkins valued at

Rs. 143 crores during 2004-05

PepsiCo inDIA

• Pepsi co is world leader in convenient food and beverages

• Pepsi co India snacks (frito lays) is one the largest convenient food company in India. Entered in 1989

• Has 3 state of the art snack food plant in India• directly employ more than 4600 people and

indirectly 6000

• Focussing on Potato, Citrus, Corn, Paddy and Barley

• Started investment and partnership with PAU to develop agro-tech program Punjab farmers

• Number of farmers benefitted by pepsico has increased from 800 in 2003 to 11000 in 2013

• PepsiCo contract farmer are getting significant benefits in insurance bank blight control package and attractive price

Nestle India’s Success

• Nestle milk processing factory was started in India in 1959 in moga.

• it has grown from 4600 farmers providing 2000T of milk to 100000 farmers in 2600 villages producing more than 300000T

• Field camp run Nestle Agricultural Services have help farmers improve their farming practices and milk qualities.

• Village Women Development Programme has trained 30000 women dairy farmers.

• Moga factory has also helped-Set up drinking water facilities in 91 schools

benefiting more than 33000 studentsIntroducing local tree planting programmeFund a tuberclosis clinic

Kay Bee’s contract farming• KAY BEE EXPORTS is located at Navi Mumbai in

the state of Maharashtra• Kay Bee Exports is a leading company, exporting

vegetables such as okra, chili, Baby corn, Bottleguard as well as fruits like pomegranate and mango to the European market

• with exports of more than 5000 tonnes per annum. Food Chain Partnership agreement between Bayer Crop Science and Kay Bee was signed the 2009

Problems of contract farmingPROBLEMS FACED BY FARMERSPossibility of greater riskOutdated technology and crop incongruityManeuvering in quotas and quality

specificationsCorruption

• PROBLEMS FACED BY SPONSORS

• Limitation on land availability• Social and Cultural constraints• Farmers disgruntlement• Below quality agro-inputs• Sale of crops by the farmers beyond

contractual agreement

Scope and Opportunities of Contract Farming

Dairy Contract Farming

Poultry Contract Farming

Fruit and Vegetables Farming

diary• Operation Flood (1970-1996) was a major breakthrough in the

Indian dairy sector that rendered dairying a profitable occupation for millions of farmers, resulting in a significant impact on the livelihoods of small and marginal farmers.

• with the amendment of the MMPO in March 2002, a number of private companies have entered the dairy market and are scaling up their procurement and processing activities.

• Recently, Reliance has ventured into dairying, also starting its operations from Punjab, and there are reports of it rapidly expanding procurement volumes of liquid milk and network of contract farmers.

•

poultryhighly susceptible to production and marketing

risks which periodically affect profitabilityto minimize the risks to the producers and sustain

the growth and profitability of the industry, some large poultry firms began vertically integrating breeding, hatchery, feed, and veterinary enterprises with broiler production for example, Venkateshawara Hatcheries Ltd., Suguna Poultry Farm Ltd., and Godrej Agrovet Ltd.)

Fruit and vegetable• Mother Dairy, organized as a cooperative, is one of oldest players in

this sector, entering into retailing of fresh fruit and vegetables and some processed items under the ‘Safal’ brand in Delhi in 1988

• Mahagrapes is an example contract farming led by a farmer group in Maharashtra.

• In an example of a public-private partnership, the Council for Citrus and Agri Juices in Punjab has ventured into contract farming of citrus orchards to supply “Tropicana” juices, a product of Pepsico

• Sam Agritech is a private company in Andhra Pradesh engaged in contract farming for grapes, pomegranates, mangoes, chikoos, and exotic vegetables. Initially, Sam Agritech contracted with large farmers based on the condition of their orchards and other details, but now is tying up with small farmers as well.

threat• Soil fertility concerns• Environmental issues:• Bio-diversity issues• Food security concerns• Labour problems• Seed problems• Contract disputes:• Middle man’s influence:

Challenges ahead for contract farming in india

1. Diversion of inputs to other purpose. 2. Default of the farmer. 3. Ill effects of technology disseminated. 4. Monopsony in the locality by the company. 5. Farmers bear most of the risk. 6. scope for corruption. 7. Manipulation of quotas and quality

specifications

Future strategies of contract farming

• provisions of institutional arrangement to record all contractual arrangements should be made effective

• contract farmers association or cooperatives at the plant level should be improved to improve bargaining power of the farmers and the sponsors and promote equality of partnership

• selection of appropriate plant genotype is one of the crucial factors for Contract Farming

Conclusion

From the ongoing presentation, it can be concluded that the India, given the diverse agro climatic zones, can be a competitive producer of a large number of crops. There is a Need to convert our factor price advantage into sustainable competitive advantage. Contract farming offers one possible solution.