Linking Small Farmers to Global Markets: Role of Contracting Farming and Cooperatives in Asian...

Linking Small Farmers to Global Linking Small Farmers to Global Markets: Role of Contracting Markets: Role of Contracting

Farming and Cooperatives in Asian Farming and Cooperatives in Asian CountriesCountries

Purushottam K. MudbharySenior Policy Officer

Policy Assistance Branch

Regional Office for Asia and the Pacific

ContentsContents

IntroductionIntroduction Definition of contract farmingDefinition of contract farming Areas covered by contract farmingAreas covered by contract farming Contract farming modelsContract farming models Positive lessonsPositive lessons Risks for farmersRisks for farmers Risks for sponsorsRisks for sponsors Key preconditions for successKey preconditions for success Cooperatives in AsiaCooperatives in Asia Cooperatives in Asia: Selected ExamplesCooperatives in Asia: Selected Examples

INTRODUCTIONINTRODUCTION

“…“…globalization is more than the flow of globalization is more than the flow of money and commodities—it is the money and commodities—it is the growing interdependence of the world’s growing interdependence of the world’s people. And globalization is a process people. And globalization is a process integrating not just the economy but integrating not just the economy but culture, technology and governance. culture, technology and governance. People everywhere are becoming People everywhere are becoming connected–affected by events in the far connected–affected by events in the far corners of the world.”corners of the world.”

UNDP – Human Development Report UNDP – Human Development Report 19991999


Major features of the present globalizationMajor features of the present globalization New marketsNew markets—foreign exchange and capital markets —foreign exchange and capital markets

linked globally, operating 24 hours a daylinked globally, operating 24 hours a day New toolsNew tools—Internet links, cellular phones and media —Internet links, cellular phones and media

networks.networks. New actorsNew actors—WTO, —WTO, with authority over national with authority over national

governments, the MNCs with more economic power governments, the MNCs with more economic power than many states, the global networks of NGOs and than many states, the global networks of NGOs and other groups that transcend national boundaries.other groups that transcend national boundaries.

New rulesNew rules—multilateral agreements on trade, —multilateral agreements on trade, services and intellectual property, backed by strong services and intellectual property, backed by strong enforcement mechanisms and more binding for enforcement mechanisms and more binding for national governments, reducing the scope for national governments, reducing the scope for national policy.national policy.


Trade is a key link of globalizationTrade is a key link of globalization The farm sector need to be competitive to The farm sector need to be competitive to

survive and to contribute to poverty survive and to contribute to poverty alleviation and economic growth in low alleviation and economic growth in low income countriesincome countries

Ability to compete will depend on:Ability to compete will depend on:o the efficiency of production at the farm level,the efficiency of production at the farm level,o the efficiency of marketing and processing the efficiency of marketing and processing

systems,systems,o the domestic policies and market access the domestic policies and market access

conditionsconditions

INTRODUCTIONINTRODUCTION Market access also depends on the Market access also depends on the

ability to meet the quality and safety ability to meet the quality and safety standards of importersstandards of importers

Most farmers in Asia are small farmers Most farmers in Asia are small farmers and poverty is highly concentrated and poverty is highly concentrated among themamong them

Definition of small farmers differs, both Definition of small farmers differs, both in terms of size and organizationin terms of size and organization

There is duality in the organization of There is duality in the organization of the farming sector, but the farming sector, but commercialization is increasingcommercialization is increasing

INTRODUCTIONINTRODUCTION Development of cooperatives and contract farming Development of cooperatives and contract farming

schemes are the two key strategies for benefiting schemes are the two key strategies for benefiting from globalization through vertical coordination of from globalization through vertical coordination of small farms with processors and exporterssmall farms with processors and exporters

These can enhance the economy of scale and the These can enhance the economy of scale and the quality standards at the production, marketing quality standards at the production, marketing and processing leveland processing level

Public goods – policies, infrastructure and support Public goods – policies, infrastructure and support services including market info., research, testing services including market info., research, testing and certification – reducing transactions costs, and certification – reducing transactions costs, building human capital and removing credit building human capital and removing credit constraints are crucialconstraints are crucial

Vertical coordination with processors and Vertical coordination with processors and exporters and a pro-active public sector are exporters and a pro-active public sector are essentialessential

DEFINITION OF CONTRACT DEFINITION OF CONTRACT FARMINGFARMING

An Agreement between farmers and An Agreement between farmers and processing and/or marketing firms for processing and/or marketing firms for the production and supply of the production and supply of agricultural products under forward agricultural products under forward agreements, frequently at agreements, frequently at predetermined pricespredetermined prices

FAO; FAO; Contract Farming: Partnerships for Contract Farming: Partnerships for GrowthGrowth; 2001; 2001

AREAS COVERED BY AREAS COVERED BY CONTRACT FARMINGCONTRACT FARMING

Market provisionMarket provision: The grower and buyer : The grower and buyer agree to terms and condition for the future agree to terms and condition for the future sale and purchase of a crop or livestock sale and purchase of a crop or livestock productproduct

Resource provisionResource provision: In conjunction with the : In conjunction with the marketing arrangements, the buyer agrees to marketing arrangements, the buyer agrees to supply selected inputs, including on occasions supply selected inputs, including on occasions land preparation and technical adviceland preparation and technical advice

Management specificationsManagement specifications: The grower : The grower agrees to follow recommended production agrees to follow recommended production methods, inputs regimes, and cultivation and methods, inputs regimes, and cultivation and harvesting specificationsharvesting specifications

CONTRACT FARMING CONTRACT FARMING MODELSMODELS

The centralized model.The centralized model. The sponsor The sponsor purchases crops from farmers for processing, purchases crops from farmers for processing, and markets the product. Quotas are and markets the product. Quotas are distributed at the beginning of each growing distributed at the beginning of each growing season and quality is tightly controlled. season and quality is tightly controlled. Generally associated with tobacco, cotton, Generally associated with tobacco, cotton, sugar cane, bananas, coffee, tea, cocoa and sugar cane, bananas, coffee, tea, cocoa and rubber. Can also cover poultry, pork, dairy, rubber. Can also cover poultry, pork, dairy, fresh vegetables and fruits.fresh vegetables and fruits.Examples: sugarcane production in Thailand, Examples: sugarcane production in Thailand, tomato processing in Punjab, India, vegetable tomato processing in Punjab, India, vegetable canning in the Philippines. The extent of the canning in the Philippines. The extent of the sponsor’s involvement varies sponsor’s involvement varies


Nucleus estate model.Nucleus estate model. The sponsor owns The sponsor owns and manages a plantation, usually close to a and manages a plantation, usually close to a processing plant, and introduces technology processing plant, and introduces technology and management techniques to farmers and management techniques to farmers (sometimes called "satellite" growers). Mainly (sometimes called "satellite" growers). Mainly used for tree crops, but has also been applied used for tree crops, but has also been applied to dairy production.to dairy production.

Examples: Oil palm (in resettlement areas) Examples: Oil palm (in resettlement areas) and dairy in Indonesia, tea estates in India, and dairy in Indonesia, tea estates in India, Nepal and Sri Lanka.Nepal and Sri Lanka.


Multipartite model.Multipartite model. Usually involves Usually involves statutory bodies and private companies jointly statutory bodies and private companies jointly participating with farmers. Usually, contract participating with farmers. Usually, contract commitment to provide material and commitment to provide material and management inputs to farmers.management inputs to farmers.Example: common in China, where government Example: common in China, where government departments, township committees and foreign departments, township committees and foreign companies have jointly entered into contracts companies have jointly entered into contracts with villages and individual farmers. with villages and individual farmers.


Informal model.Informal model. Individual entrepreneurs or Individual entrepreneurs or small companies make simple, informal small companies make simple, informal production contracts with farmers on a seasonal production contracts with farmers on a seasonal basis, particularly for fresh vegetables and basis, particularly for fresh vegetables and tropical fruits. Supermarkets frequently purchase tropical fruits. Supermarkets frequently purchase fresh produce through individual developers. fresh produce through individual developers. Normally, minimal processing and few inputs to Normally, minimal processing and few inputs to farmers; availability of govt. support services farmers; availability of govt. support services crucial.crucial.Examples: Gherkins production in Sri Lanka; Examples: Gherkins production in Sri Lanka; bananas, squash and papaya production for bananas, squash and papaya production for export in the South Pacific and chrysanthemums export in the South Pacific and chrysanthemums and fresh vegetable production in northern and fresh vegetable production in northern provinces of Thailand.provinces of Thailand.


Intermediary model.Intermediary model. Formal subcontracting Formal subcontracting of crop production to intermediaries is of crop production to intermediaries is common in Southeast Asia. Large food common in Southeast Asia. Large food processing companies purchase crops from processing companies purchase crops from individual "collectors" or farmer committees, individual "collectors" or farmer committees, who make their own informal arrangements who make their own informal arrangements with farmers. The risk is that the sponsor with farmers. The risk is that the sponsor loses control over production and over prices loses control over production and over prices paid to farmers by middlemen.paid to farmers by middlemen.Examples: Soybean, green beans and baby Examples: Soybean, green beans and baby corn production in Northern Thailand; in corn production in Northern Thailand; in Indonesia, this practice is widespread and Indonesia, this practice is widespread and termed termed plasmaplasma. .

POSITIVE LESSONSPOSITIVE LESSONS

Can be effective in linking the small farm Can be effective in linking the small farm sector to sources of extension advice, sector to sources of extension advice, mechanization, seeds, fertilizer and mechanization, seeds, fertilizer and credit, and to guaranteed and profitable credit, and to guaranteed and profitable markets for producemarkets for produce

Private agribusiness will usually offer Private agribusiness will usually offer technology more effectively than technology more effectively than government agricultural extension government agricultural extension services, because it has a direct services, because it has a direct economic interest in improving farmers' economic interest in improving farmers' productionproduction


Skills transferred can include the Skills transferred can include the efficient use of farm resources, efficient use of farm resources, carrying out field activities according carrying out field activities according to a strict timetable, improved methods to a strict timetable, improved methods of applying chemicals and fertilizers, of applying chemicals and fertilizers, and a knowledge of the importance of and a knowledge of the importance of quality and of the demands of export quality and of the demands of export markets and good record keepingmarkets and good record keeping

Reduce price uncertainty to farmersReduce price uncertainty to farmers


Companies gain access to crop Companies gain access to crop production on land that would otherwise production on land that would otherwise be unavailable, with the additional be unavailable, with the additional advantage of not having to buy or lease advantage of not having to buy or lease itit

Enables them to share risks, find reliable Enables them to share risks, find reliable supplies of raw materials for processing supplies of raw materials for processing plants, and guarantee that their products plants, and guarantee that their products conform to quality standardsconform to quality standards

Can contribute to both increased Can contribute to both increased income for farmers and higher income for farmers and higher profitability for sponsorsprofitability for sponsors

RISKS FOR FARMERSRISKS FOR FARMERS

Uncertainty involved in growing new, unfamiliar Uncertainty involved in growing new, unfamiliar crops and producing for markets that might not crops and producing for markets that might not always live up to their expectations - or their always live up to their expectations - or their sponsors' forecastssponsors' forecasts

Loss of bargaining power vis-à-vis a large agro-Loss of bargaining power vis-à-vis a large agro-industry, monopsonistic market power and industry, monopsonistic market power and exploitative terms exploitative terms

Manipulation of quality standards by the Manipulation of quality standards by the sponsor in order to reduce purchasessponsor in order to reduce purchases

Debt caused by production problems, poor Debt caused by production problems, poor technical advice, significant changes in market technical advice, significant changes in market conditions, or a company's failure to honor conditions, or a company's failure to honor contracts contracts

RISKS FOR SPONSORSRISKS FOR SPONSORS

Insecurity of the access to landInsecurity of the access to land Farmers’ inability to meet strict Farmers’ inability to meet strict

timetables and regulations because of timetables and regulations because of social obligations or religious practicessocial obligations or religious practices

““Extra-contractual marketing" - Extra-contractual marketing" - farmers breaking the contract and farmers breaking the contract and selling their produce on alternative selling their produce on alternative markets – sometimes encouraged by markets – sometimes encouraged by rival sponsorsrival sponsors

KEY PRECONDITIONS FOR KEY PRECONDITIONS FOR SUCCESSSUCCESS

A profitable marketA profitable market For the sponsor an identified market for For the sponsor an identified market for

the planned production that such the planned production that such market can be supplied profitably on a market can be supplied profitably on a long-term basislong-term basis

The farmer must find the potential The farmer must find the potential returns attractive on the basis of returns attractive on the basis of realistic, demonstrated yield and realistic, demonstrated yield and acceptable risksacceptable risks


The physical and social The physical and social environmentsenvironments The physical environmentThe physical environment Utilities and communicationsUtilities and communications Land availability and tenureLand availability and tenure Inputs availabilityInputs availability Social considerationsSocial considerations


Government SupportGovernment Support Suitable laws of contract and an efficient Suitable laws of contract and an efficient

legal systemlegal system Awareness of unintended consequences Awareness of unintended consequences

of regulation and avoid tendency to over-of regulation and avoid tendency to over-regulateregulate

Provision of research and extensionProvision of research and extension Take steps to bring together agribusiness Take steps to bring together agribusiness

and suitable farmersand suitable farmers

COOPERATIVES IN ASIACOOPERATIVES IN ASIA

Agricultural cooperatives functioning in Agricultural cooperatives functioning in almost all countries of the regionalmost all countries of the region

Various forms: formal and informal Various forms: formal and informal farmers’ organizations, production groups, farmers’ organizations, production groups, producer cooperatives, collectives, producer cooperatives, collectives, marketing cooperatives, agricultural marketing cooperatives, agricultural credit cooperatives, multipurpose and credit cooperatives, multipurpose and single-purpose cooperatives single-purpose cooperatives

Started mostly with government Started mostly with government assistance and initiative or as a result of assistance and initiative or as a result of development projectsdevelopment projects

COOPERATIVES IN ASIACOOPERATIVES IN ASIA

The success spectrum varies from The success spectrum varies from country to country.country to country.

Many suffer from managerial problem, Many suffer from managerial problem, lack of membership participation, lack of membership participation, heavy participation and influence of heavy participation and influence of government, little involvement of government, little involvement of members in decision makingmembers in decision making

Primary cooperatives suffer from Primary cooperatives suffer from weaknesses and deficiencies due to weaknesses and deficiencies due to small size and low membershipsmall size and low membership

COOPERATIVES IN ASIA:COOPERATIVES IN ASIA:SELECTED EXAMPLESSELECTED EXAMPLES

IndiaIndiaOne of the oldest in the region and One of the oldest in the region and

largest in the world in terms of the largest in the world in terms of the number of cooperatives and number of cooperatives and membership; around 504,000 membership; around 504,000 cooperatives in 1998 serving 209 cooperatives in 1998 serving 209 million people of which 65% agricultural million people of which 65% agricultural cooperatives with 137 millioncooperatives with 137 million

Vertically integrated through respective Vertically integrated through respective federations at district, state and federations at district, state and national levelsnational levels


IndiaIndia Active in agro-processing – 320 cooperative Active in agro-processing – 320 cooperative

sugar factories producing more of 60% of sugar factories producing more of 60% of sugar produced in the country; around sugar produced in the country; around 90,000 dairy cooperatives making India the 90,000 dairy cooperatives making India the largest producer of milk; specialized largest producer of milk; specialized cooperatives for oilseeds, rubber, cooperatives for oilseeds, rubber, horticulture and fertilizerhorticulture and fertilizer

Strongly backed by cooperative education Strongly backed by cooperative education and staff training – largest in the world and staff training – largest in the world training managers and providing member training managers and providing member educationeducation


BangladeshBangladesh More than 40,000 traditional cooperatives More than 40,000 traditional cooperatives

and more than 100,000 farmers’ and more than 100,000 farmers’ cooperativescooperatives

Not very successful due administrative Not very successful due administrative interference and control, lack of managerial interference and control, lack of managerial skills, small size and low membershipskills, small size and low membership

Republic of KoreaRepublic of Korea Vertically organized into three levels: Vertically organized into three levels:

township level primary cooperatives, township level primary cooperatives, city/county cooperatives and national city/county cooperatives and national federation (NACF)federation (NACF)


Republic of KoreaRepublic of Korea Regional primary cooperatives engaged Regional primary cooperatives engaged

in grain production; special primary in grain production; special primary cooperatives for fruits and vegetablescooperatives for fruits and vegetables

Almost all farmers affiliated with the Almost all farmers affiliated with the cooperatives; 2 million members at the cooperatives; 2 million members at the end of 1997; number of regional end of 1997; number of regional cooperatives reduced due to cooperatives reduced due to amalgamation drive to achieve economy amalgamation drive to achieve economy of scaleof scale


Republic of KoreaRepublic of Korea Member-cooperatives perform Member-cooperatives perform

marketing of agricultural products, marketing of agricultural products, supply of farm inputs and consumer supply of farm inputs and consumer goods, agricultural extension, banking goods, agricultural extension, banking and credit and insuranceand credit and insurance

NACF has 40% share of local NACF has 40% share of local agricultural marketing and runs one of agricultural marketing and runs one of the largest deposit banking operation in the largest deposit banking operation in the countrythe country

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