Presented by

N.Satheeshkumar

(virusat87@gmail.com)

LEVERAGING CONTRACT FARMING IN LEVERAGING CONTRACT FARMING IN AGRICULTURE FOR TRIANGULAR BENEFITAGRICULTURE FOR TRIANGULAR BENEFIT

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Contents

• Definition• Need & Importance• History of Contract farming• Area under CF• Clauses of contract• Advantages & Disadvantages• Types• Success stories & Failure• Conclusion

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• Agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product/products

(FAO,2009)

• Contract farming (CF) is defined as forward agreements specifying the obligations of farmers and buyers as partners in business. Federal Ministry for Economic Cooperation and Development (BMZ),2011

Definitions – Contract Farming

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• Contract farming is an understanding between farmers and

processing units or marketing firms for the production and

supply of agricultural products under forward agreements,

frequently at predetermined prices.”

In General

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Importance

• To increase private sector investment in agriculture

• Crop selection by Indian farmers

• To generate a steady source of income

• To promote processing & value addition

• To generate gainful employment

• To reduce migration

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• Production and marketing are very critical.

• Overcome inadequate linkages with markets

• Presence of fragmented land holdings

• Lack of capital, poor infrastructure, Technology transfer, etc

• To avoid Post harvest losses

• Unfavorable conditions for procurement

FICCI, 2005

Need for contract farming in India

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• The liberalized marketing system coming up in India

• The growing role played by supermarkets

• Changes in consumption habits

• Increasing number of fast-food outlets

• Continued expansion of world trade

Need for contract farming in India

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FICCI, 2005

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• Farmer – Companies

• Farmer – Government bodies

• Farmer – Individual Entrepreneur

• Farmer – Unequal parties

• Farmer – NGO / Facilitator

PartnershipPartnership

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Pre – Arrangements in Contract farmingPre – Arrangements in Contract farming

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State wise area under CF

STATESTotal cropped area

(In ‘000 ha)

Area under contract farming

(Ha)

Assam 3962 160

Bihar 7882 20

Goa 169 1924

Gujarat 11311 2000

Haryana 6388 1416

Mizoram 98 2447

Orissa 8637 5990

Punjab 7931 121457

Tamil Nadu 5316 236610

India 190641 425834

www.indiastat.com,200712

• Need and plan for the targeted raw material• Selection of geographic area• Selection of contract farmers• Signing of agreements with contract farmers• Distribution of inputs• Technical assistance + Monitoring of production• Procurement of production• Payment• Storage and Shipment• Processing

Contract farming approachFrom Company’s perspective

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• Practical experience on the targeted crop• Resources to cultivate selected crop• Residence in the targeted area• Suitability of land for targeted crop• Good reputation in the community• Farmers who have their own land/acceptable leased

arrangement• Not involved with competing companies for same crop• Have time to devote to contract farming

Criteria to identify the contract farmers

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• Commitment by the farmer towards quantity & quality

• Commitment by the industry to procure the produce at fixed price & time.

Basics of Arrangements

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Preconditions to be Met

• From Industry– Supply for long term– Production meets required quantity– Prediction on yield should be positive– Economic viability

• From Farmers– Hope to get good yield from practiced crop cultivation– Best market potential than other alternatives– Manageable risk

16Premjit Sharma – Contract Farming, 2007

• Providence of agreed quantities of specific product

• Same quality standard of produce

• Supply at right time

Conditions from Farmer’s side

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Conditions from Government side

• Should make a platform to both buyer and Seller

• Legislative clearance for the type of produce

• Act as a facilitator, if needed

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Conditions from buyer’s side

• Standby commitment of purchase.

• Should support production

• Fit to the pre determined price.

• Timely payment

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Signing the agreement

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Clauses of contract

• General obligations

• Product specification

• Production technology

• Terms and conditions

• Determination of final prices after deducting loans

• Choice of jurisdiction

• Reference to a dispute settlement

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Problems faced by Farmers

• Increased risk (Production problem)

• Unsuitable technology and crop incompatibility

• Manipulation of quotas and quality specifications

• Corruption

• Domination by monopolies

• Indebtedness and overreliance on advances

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Problems faced by Industry

• Land availability constraints

• Social and cultural constraints

• Farmer discontent

• Extra-contractual marketing

• Input diversion

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Problems faced by Government

• Legislative issues

• Issues from the public faced by fraudulent

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Favourable situations

• Physical environment

• Utilities and communications

• Land availability and tenure

• Input availability

• Social considerations

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Government support

• Enabling and regulatory role

• Developmental role

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Extension servicesExtension services

• Recruitment & Training

• Execution of Technology transfer

• Selection of Farmer & Contracting

• Farmer Training & Education

• Provision of Implements

• Provision of Agricultural Inputs

• Nursery & Seed Supplies

• Post Transplantation Care

• Maturity & Harvest Prediction

ProcurementProcurement

• Harvesting

• Registration/ based buying

• Produce Collection

• Quality Inspection

• Transportation of the produce to the

processing unit

• Management of Information system

• Management of Farmer payments

Key Functions Rendered by Corporate

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Types

• Centralized model

• Multipartite model

• Informal model

• Intermediary model

• Nucleus estate model

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Model to be selected

• Depends on

– The product

– The resources of the company and

– The intensity of the relationship between farmer and

company that is necessary

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Centralized Model

Corporate Corporate

Extension Arm

FarmerFarmer30

www.fao.org

Multipartite Model

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Intermediary Model

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Corporate

NGO / Lead farmers / Govt body

Farmer

Informal model

Corporate

Implementing Agency

Farmer

Agri InputsSeeds

FertilizersPesticides

Bank for Crop loans

Insurance for Crop /

Life

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Nucleus Estate Model

• Promoter also owns and manages an estate plantation (usually close to a processing plant)

• Estate is often fairly large in order to provide some guarantee of throughput for the plant

• Mainly tree crops, but also e.g. Fresh vegetables and fruits for export

• Close supervision of production

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Specifications of CF

• Legal framework – Based on the law of the country

• Formula – Clarification of managerial responsibilities

• Format – Prescribed manner

• Specifications – Details of implementation of contract

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Monitoring performance

• Monitoring quality and yield– Quality controls– Yield estimations– Calculated yield indicators– Production matrices

• Monitoring Human Resources– Appraising employees– Reviewing farmer performance

• Protecting the environment

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Impact on society

• Child labour

• Small holder

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CF in Developing countries

• Spot markets and plantations

• Transaction costs– Costs of drafting contracts– Maladaption costs– Set-up and running costs– Bonding costs

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Criteria for success in CF

• Economic, Technical and Social environment– Strong markets– Land ownership– Macro institutional policies– Sophisticated technology

• Management of environment– Farm groups– Farmers selection– Contract default– Conflict resolution

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Poverty reduction & Equity

• Welfare of small holders

• Equity amongst small holders

• Collective action

• Regional development

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Commercialization of CFCommercialization of CF

• Income generation

• Dislocation of alternative crops

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Consequences Consequences

• Effect of contracts• Barriers to entry• Small seed firms• Collective action by farmers• Role of institutions• Vertically integrate the sector

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State Crop Company Area (ha)Karnataka Ashwagantha Himalaya Health Care Pvt

Ltd700

Karnataka Dhavana Mysore S N C oil company 400-500

Karnataka Marigold & Caprica chilli

AVT Natural Pvt Ltd 4000

Karnataka Coleus Natural Remedies Pvt Ltd 150

Karnataka Gherkins 20 Pvt companies (Global green company pvt ltd, Unicorn agrotech ltd,etc.,)

8000 (Including of TN & AP)

Madhya Pradesh

Soybean Tinna oils and chemicals 134800

Madhya Pradesh

Several fruits, Vegetables, Spices, Cereals & Pulses

IEEFL -

State wise contract farming initiatives by Private sector

(NIAM, 2003, Times Agriculural journal) 43

State Crop Company Area (ha)Madhya Pradesh Wheat, Maize,

SoybeanCargil India Ltd

Madhya Pradesh Wheat Hindustan Lever Ltd

15000

Madhya Pradesh Several Fruits, Vegetables,Spices, Cereals & Pulses

IEEFL

Madhya Pradesh Soybean, Tomato & Chilli

ITC, IBD 1200

Punjab Tomato & Chilli Nijjer Agro foods Ltd

250

Punjab Barley United Breweries Ltd

2270

Punjab Basmati & Maize Satnam overseas, Pepsico

4000

State wise contract farming initiatives by Private sector

(NIAM, 2003, Times Agriculural journal)44

State Crop Company Area (ha)

Punjab Basmati Satnam overseas, Amira foods India Ltd

14700

Punjab Basmati, Tomato, Chilli, Potato & G.nut

Pepsico 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

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State wise contract farming initiatives by Private sector

(NIAM, 2003, Times Agriculural journal)45

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Pepsico’s contract farming

Steps of contract farming

• R&D Activities

• Transfer of technology

• Commercialization

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FICCI, 2005

Pepsico’s impact in PunjabPepsico’s impact in Punjab

• Tomato yields increased threefold

• Production technology spread to non Pepsi growers

• Farm income increased due to price fixation

• Chilli yields increased from 2.5 MT to 9 MT / acre

• Crop diversification

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Pre - operativePre - operative

• Need of technical team, with an applied & commercial focus

• Research the site & location well

• Conduct trials – Intensive R&D efforts

• Poll grower attitudes to your crop

• Assess availability & Sustainability of other resources and

infrastructure

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The NurseryThe Nursery

• Low cost tunnel technology works.

• Land preparation is critical.

• Siting nursery operations on elevated ground.

• Mechanization of operations.

• Proper maintenance.

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The Main fieldThe Main field

• Extension services team should be available at the farmer’s call

• Never offer your growers any commercially, untested technology

• Break the hard pan in clay, encourage deep rooting

• Ensure availability of adequate and appropriate inputs

• Agricultural implements offered gratis to growers – an investment that yields long term benefits

• Field record maintenance

• Make payments at priority

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Contract farming Vs A price support mechanismContract farming Vs A price support mechanism

Contract farming• Planting material supplies• Technology transfer• Assured price• Assured quantity• Free equipment• Partnership approach• Builds commitment• Long term

Price support• Usually none• None• Minimum guaranteed• No assured quantity• No free equipment• Usually adversarial• Builds mistrust• Short term

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www.fao.org

A Lot can be done despite the absence A Lot can be done despite the absence of a legal frameworkof a legal framework

• Maintain a proper database on farmers

• Incentives, rewards & public recognition

• Publicising the names of defaulters in the locality of default

• Farmer encouraged to set own targets, assist with draft of QC standards etc.,

• Clearly allocate quantities for the fresh market

• Repeat defaulters are not considered again

• Maintains a high motivation level

• The social stigma usually suffices as a disincentive to default

• Promotes “Ownership” of the business, builds loyalty over the long term

• The difference becomes apparent very quickly

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Policies neededPolicies needed

• Single tier regulatory authority at the district level • Make purchase interference by a third party as a

cognizable offence

• For a registered contract farming programme

– Abolish all fees, taxes, duties, levies on procurement – Exempt taxes and duties on import of agri equipments– Eliminate red tape in import of varieties / hybrids

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Policies neededPolicies needed

• Introduce insurance policies

• Exposure of Agricultural students to CF

• Development of crop and region specific agendas through SAU.

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Factors to failureFactors to failure

• Reluctance of farmers in production

• Clashes & Disagreements

• Violation of agreement when price change

• Weather harshness

• Deviation from commitment

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Challenges to IndustryChallenges to Industry

• Highly restricted and regulated agricultural marketing system

• Monopoly of the state govt. to set up markets

• Mandi revenues not deployed for infra structure

development

• Price setting not transparent

• Processing industries cannot buy directly from farmers

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ConclusionConclusion

• Contract farming plays an important role in agricultural

growth and it leads to increase in GDP

• Contract farming leveraging multi sector growth in India

• ‘Commitment driven’ contract farming is always viable

• Government should take necessity step towards small holders

growth simultaneously.

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My special thanks to Dr.K.Vaiyapuri