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IFIM

RURAL MARKETING
TERM PAPER
CONTRACT FARMING
Suraj Kumar Sabat
Kamalika Pal

14/07/2008
RURAL MARKETING: TERM PAPER ON “CONTRACT FARMING “

Contents:

• What is contract farming?

• Farmers perspective

• Corporate perspective

• Changes in the rural scene because of contract farming

• Recent cases and studies

• The downsides and failures

• Future

• learning

What is contract farming?

Contract Farming can be traced back to colonial period when commodities like Collin
Indigo were produced by the Indian farmers for English factories. Seed production has been carried out
through contract farming by the seed companies quite successfully for more than four decades in the
country. The new agricultural policy of 2000 sought to promote growth of private sector participation in
agribusiness through contract farming and land bearing arrangements to accelerate technology transfers,
capital inflows and assured market for crops .The colonial period saw the introduction of cash crops such
as tea, coffee, and rubber, poppy and indigo in various parts of the country, mostly through a central
expatriate-owned estate surrounded by small out growers model. ITC introduced cultivation of Virginia
tobacco in Coastal Andhra Pradesh in the 1920’s incorporating most elements of a fair contract farming
system and met with good farmer response. This was replaced by auctions in 1984. Organized public and
private seed companies which emerged in the 1960’s. The Pepsi-co introduced tomato cultivation in
Punjab in the 1990’s under farming to obtain inputs for its paste-manufacturing facility established as a
pre-condition to its entry in to India. This was sold to Hindustan Lever in2000, which had earlier acquired
the Kissan Karnataka.
Contract Farming was the strategy of choice for almost all food processing projects contemplated
in the 1980’s and 1990’s.ContractFarming is again vogue, and even tried for bulk production of
subsistence crops, such as paddy rice, maize and wheat. Commodity co-operatives, which emerged in the
1950’s, provided most services envisaged under ideal contract farming to their members and bought back
the supplies offered at contracted prices, although these were not strictly contract arrangements. The
succeeded enormously, leading to their replication and compelling private companies also to adopt similar
approaches. Contract Farming is now considered to be a corrective to market imperfections and serving a
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useful purpose in India in its own limited sphere. Contract Farming has been promoted in the recent three
decades as an institutional innovation to improve agricultural performance in less developed countries.
This system was accepted and used as one of the promising institutional frameworks for the delivery of
price incentives, technology and other agricultural inputs. Local Governments, private local firms,
Multinational companies, some international aid and lending agencies etc have been involved in these
contract farming schemes
Contract farming generally involves: a pre-agreed price between the company and the farmer,
along with measures of quality, quantity, acreage to be farmed, and/or duration of the contract. In
this system, the contractor supplies all the inputs required for cultivation, and the farmer is
responsible for land and labor.

However, the terms and nature of the contract vary according to the crops grown, the agencies
involved, the farmers themselves, and the technologies and context in which contract farming is
taken up. The farmers' participation is generally limited to production.

At a very fundamental level, contract farming is essentially a means of allocating the distribution
of risk, between processor & grower. The latter assumes risks associated with production while
the former assumes the risks of marketing the final produce. As has been observed however in
practical terms, there exists, considerable interdependence between the two parties. The
development of contract farming will succeed if both parties share the risk & rewards.

THE BROAD OBJECTIVES OF PROMOTING CONTRACT FARMING WOULD BE:

• To reduce the load on the central & state level procurement system.

• To increase private sector investment in agriculture.

• To bring about a market focus in terms of crop selection by Indian farmers.

• To generate a steady source of income at the individual farmer level.

• To promote processing & value addition, thereby generating gainful rural employment.

• To reduce migration from rural to urban areas.

Managed correctly, contract farming can facilitate a response and adjustment mechanism to
changing economic forces. Identifying the nature of the crop, its marketability and then evolving
the technology to be used for production and processing are critical determinants of contract
farming. In general, crops easily incorporated in the contract farming are those that have high
revenue per hectare and where the technological model gives significant improvements in yields.

Recognizing that Indian agriculture holds the key to its own development, it will be required to
create our own region & crop specific contract farming models.

THE MAIN AGRICULTURAL PRODUCTS OF INDIA UNDER THE PROCESS OF CONTRACT FARMING ARE AS FOLLOWS

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• Food Grains - Rice, Wheat, Pulses, Cereals, Corn, Maize, Rice Bran Extractions, Sorghum, Soy
meal, Suji, Parmal, Lentils, Jowar, Bajra, Chick pea,

• Fruits & Nuts - Cashew Kernels, Cashew Nut, Cashews, Almonds, Roasted Dry Fruits, Peanuts,
Groundnut, Walnut Kernels, Walnuts, Indian Peanuts, HPS Groundnuts

• Fruits - Bananas, Beans, Cherry, Cucumbers, Dried Fruits, Dried Truffles, Carrots, Lemon,
Mandarins, Mango, Meslin, Shallots, Apples, Asparagus, Grapes, Oranges, Gherkins, Turnips,
Oranges, Papaya, Pineapple,

• Vegetables – Potatoes, Bitter gourd, Stripe Gourd, Pumpkin, cauliflower, Cabbage, Tomato,
Onion, Green Pepper, Drum Sticks, Lady's finger, Banana, Papaya, Spinach, Cucumber,
Mushroom, Mushroom Spawn, Radiata, Seeds, Buds,

• Plantation & Related Products - Basil Seed, Cumin seeds, Dill Seed, Buds, Celery Seed,
Hybrid Seeds, Sesame Seeds, Sesbania Seed, Sunflower Seeds, Mustard Seeds, Oil Seeds, Plant
Products, Plantation, Plants, Psyllium Seed, Fennel Seed, Fenugreek Seed, Herb Seeds, Tamarind
Seed, Vegetable Seeds

• Spices - Black Pepper, Chilly, Cinnamon, Cloves, Coriander Powder, Cumin, Dry Ginger, Dry
Red Chilly, Cardamom, Anise, Salt, Pepper, Fenugreek, Clove, Ginger, Turmeric, Turmeric
Powder,

• Tea & Coffee - Black Tea, Coffee, Coffee Beans, Darjeeling Teas, Assam Teas, Instant Coffee,
Leaf Coffee, Leaf Tea, Packaged Tea, Green Tea, CTC Teas,

• Tobacco & Tobacco Products - Betel nut Leaves, Betel nut, Bidi Leaves, Chewing Tobacco,
Arecanut, Snuff, Opium, Pan, Jute, Tobacco, Rubber etc

Farmers’ perspective

ADVANTAGES FOR FARMERS

The prime advantage of a contractual agreement for farmers is that the sponsor will normally undertake to
purchase all produce grown, within specified quality and quantity parameters. Contracts can also provide
farmers with access to a wide range of managerial, technical and extension services that otherwise may be
unobtainable. Farmers can use the contract agreement as collateral to arrange credit with a commercial
bank in order to fund inputs. Thus, the main

Potential advantages for farmers are:

1. Provision of inputs and production services;


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2. Access to credit;

3. Introduction of appropriate technology;

4. Skill transfer;

5. Guaranteed and fixed pricing structures; and

6. Access to reliable markets.

PROBLEMS FACED BY FARMERS

For farmers, the potential problems associated with contract farming include:

1. Increased risk;

2. Unsuitable technology and crop incompatibility;

3. Manipulation of quotas and quality specifications;

Corporate perspective

For a corporate, the objective of contract farming is to integrate the supply chain and ensure timely
availability of materials, both in quality and quantity. It also reduces the procurement cost by eliminating
the middlemen. Not only do the corporate’ get produce as per their specifications, the cost is much lower.

The main disadvantages faced by contract farming are:

1. Land availability constraints;

2. Social and cultural constraints;

3. Farmer discontent;

4. Extra-contractual marketing; and

5. Input diversion.

Changes in the rural scene because of contract farming

The process of Contract Farming in India Rural Economy is a new concept. The process of contract
farming involves cultivating and harvesting for and on behalf of big business establishments or

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Government agencies and forwarding the produce at a pre-determined price. In return, the contracted
farmers are offered high price against their farm produce. The role of contract farming in India rural
economy is becoming more and more important, since organized farming practice has become the need of
the hour in the world of rapid industrialization. The rapid industrialization process in India has created
shortage of farmland, which in turn has necessitated organized farming practice in India.

One of the most critical issues associated with contract farming is that there will be a shift from staple
crops such as rice and wheat to crops required by the food-processing industry and those catering to the
overseas market. The switch to contract farming leads to a rise in exports as well. But this may affect the
country's food security, and increase dependence on imports. With agriculture increasingly seen as a risky
proposition, the promise of economic security within the contract farming system is rather very attractive.

The process of contract farming in India involves scientific and optimum use of land and farm resources
for maximum output of agriculture produce. Small time farmers practicing primitive agricultural methods
for cultivation and harvesting of crops dominate the Indian agriculture sector. But, with the liberalization
of India economy, there has been a sudden spurt in contract farming in India. Moreover, today more and
more established business houses are taking interest in the business of contract farming in India. This has
happened as a result of rapid growth of retail industry in India. The growth of retail industry in India has
propelled the growth of farm retail in India, which caters fresh vegetables and fruits from the farms to the
Indian mass. The process of contract farming in India involves, engaging rural Indian farmers for the
cultivation of agricultural produce under strict government policies. The role of Contract Farming in India
Rural Economy involves government and private participation along with the rural workers. Further, it
engages a good number of farmers and other rural workers to discharge other agriculture related activities

Government’s involvement

The Indian institutes engaged for marketing agricultural products under contract marketing are as
follows:-

• Karnataka State Agricultural Marketing Board

• Krishi Maratavahini

• Madhya Pradesh State Agricultural Marketing Board

• Maharashtra State Agricultural Marketing Board, Pune

• Meghalaya State Agricultural Marketing Board

• Orissa State Agricultural Marketing Board, Bhubaneswar

• Punjab State Marketing Board

• Rajasthan State Marketing Board

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• AP Agricultural Marketing Board

• Domestic & Export Market Intelligence Cell

• Tamil Nadu Agricultural University and Agri Marketing Board

• HP State Agricultural Marketing Board

The acts and rules that governs the process of Contract Farming in India Rural Economy are as follows -

• Agricultural Produce (Grading and Marking) Act, 1937 as amended in 1986.

• Agricultural Produce Grading and Marking Act, 1937

• Schedule Appended to AP (G&M) Act 1937

• General Grading and Marking Rules, 1988

• Commodity Grading and Marking Rules

• List of commodities whose Agmark Grade Standards have been covered under AP (G&M) Act
1937

• Manual on Standards of Paddy

• Manual on Standards of Wheat

• Manual on Standards of Maize

• Manual on Standards of Mustard an

Agri-export zones recently established in India

State Products

Andhra Pradesh Mango pulp, fresh vegetables, grapes

Assam Fresh and processed ginger

Bihar Litchi

Himachal Pradesh Apple

Jammu and Kashmir Apple, walnut

Jharkhand Vegetables

Karnataka Gherkins, flowers

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Kerala Horticultural products

Madhya Pradesh Potato, onion, garlic, seed spices

Maharashtra Mango, grape, onion, flowers, orange

Orissa Ginger, turmeric

Sikkim Flowers (orchids), cherry, pepper, ginger

Uttar Pradesh Mango, potato, vegetables

Uttarakhand Litchi, flowers, medicinal and aromatic plants

West Bengal Litchi, pineapple, potato, mango, vegetables

Recent cases and studies

1. May 12 , 2008 : Fruits and Vegetables (DFV) contract farming model has seen more farmers from
Narmada, Vadodara, Surat and other districts of the state queuing up to come under the contract
system. Indrasinh Gohil, a banana contract farmer, said his decision to join DFV’s contract
farming has benefited him immensely. He said he got minimum guarantee price, plus market
linked incentive, including the production cost, salary and the profit. Gohil said he received a
price of Rs 90 per kg for the production of banana in his field as against a price of Rs 60 per kg
from the individual traders. “There is a waiting list of 5,000 farmers willing to come under DFV’s
brand of contract farming,” said Ajit Desai, DFV chairman and managing director on Sunday.
This enabled DFV to bring 2,500 acres of land from Narmada, Bharuch and Navsari districts
under contract farming out of which 800 acres are under banana cultivation.

2. Gujarat has some good success story and prospective agreements of Contract farming in Gujarat

At present among successful contract farming practices undertaken in Gujarat,


Agrocell Corporation Ltd. is doing contract farming of organic cotton and seasame seeds covering
about 5000 acres in Kutch and Surendranagar district of Gujarat since last 8 years. The farmers get 7-
8 % more price than ordinary cotton in current market and concession in certain services from the
company.
Atreyas Agro Organic Pvt. Ltd. Plans to grow Jetrophs Curcas by contract farming. They have
target of covering more than 50,000 acres of irrigated & non-irrigated land of Gujarat.
Godrej Agrovat Ltd. Is also planning to grow high quality oil palm under contract farming in south
Gujarat region by providing imported tissue culture plants and farming technology to the contract
farmers.
Pepsi India, Arvind mills, Jojoba Oil Industries Ltd., are some companies who have approached
the govt. and shown keen interest in doing research and contract farming in Agro-products in Gujarat
under their backward integration projects.

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3. Bangalore: Pepsico India Holdings is looking at the State for large-scale contract farming in
maize, chillies and tomatoes, for which it has commenced trials in Haveri district. Although
these trials are on a small scale, the company is said to be looking at nearly
20,000 hectares of contract farming in maize to fall in place by next year in
Haveri and neighbouring districts

It is now running on a trial basis "pre-agreed price" system of farming through local aggregators (local
people who deal with the farmers on behalf of the company) and the results should be known by early
next year. "It has to be a win-win situation for both Pepsi and the farmers for the contract farming plan to
materialise," says Abhiram Seth, Executive Director, Pepsico India Holdings. Mr. Seth told The Hindu
that trial runs normally would be for a year before Pepsi can embark upon contract farming here. The
company, which is enthused by the success in Punjab where it has contract farming in chillies, potatoes
and basmati, finds the situation in Karnataka conducive for contract farming.

"We need to study a whole lot of parameters such as agro-climatic conditions, marketing, policies and so
on before we set off on a project," he says. The State Government has been helpful and there are no
impediments from any quarter, Mr. Seth adds.

Although the company has not firmed up any plans, Mr. Seth says that Pepsi will be concentrating on
maize and later think of exporting. Pepsi is looking at Haveri district as the maize yield in a hectare of
land there is 3.5 tonnes, higher than the national average of two metric tonnes. It is said that maize is
grown on about 80,000 hectares of land in the district with two crops a year.Sources say that the annual
production last year stood at 2.21 lakh metric tonnes.

With contract farming, there could be improvement in the yield levels as the company will be doing
"hand-holding" and providing technology, good cropping practices and marketing inputs.

Better price for farmers

Farmers will get a better price and can avoid the market with all its fluctuations, they say.

According to a company source, as of now, the local aggregator and the farmer determine the price. For
the farmer, it works out well as he has a ready market and gets cash on the spot. We are studying how this
works." Pepsi is keen on harnessing the agriculture/horticulture potential in these areas.

Of late, the belt of Chitradurga, Davangere, Haveri, Bellary and Belgaum has seen a sudden increase in
maize cultivation.

According to the statistics provided by the Agriculture Department, Davangere had an yield of 7.9 lakh
tonnes, followed by Belgaum with 3.37 lakh tonnes, Haveri 2.21 lakh tonnes, Chitradurga 1.88 lakh
tonnes, and Bellary 1.41 lakh tonnes.

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The downsides and failures

It is a good augury that agricultural scientists have discussed the issue of contract farming at a time when
supermarkets and food chains are threatening to drive out the small next door retail shops. Fears have
been expressed in the meeting that the rejection rate of agricultural produce by retail chains was high. The
farmers then have to bear the extra cost.

As the tie-up between retail chains and farmers is in the infant stage, it will take some time for the farmers
to ensure high quality in their farm produce. Hence the supermarkets and retail chain stores should
provide the required agricultural expertise and credit at a low rate of interest to the farmers.

Contract farming in the country has not benefited the farmers. Appropriate institutional arrangements,
legal provisions and government intervention are needed to protect the interests of farmers, said a study
conducted by an expert from Ahmedabad-based Indian Institute of Management (IIM-A).

The study conducted by Sukhpal Singh of the IIM-A’s Centre for Management in Agriculture noted
“contract farming, in political economy, is one mode of capitalist penetration of agriculture for capital
accumulation and exploitation of farming sector by the agribusiness companies.”

It said that new concept is the result of the recent developments in marketing, food habits, technology and
agriculture in the new economic environment.

The entitled study ‘Contract Farming for Agricultural Development’ was commissioned by the Centre for
Trade & Development (Centad), an initiative of Oxfam GB in India.

The study noted contract farming is being practiced in India by MNCs like Cadbury in cocoa, PepsiCo in
potato, chilies and groundnut, Unilever in tomato, chicory, tea and milk, ITC in tobacco, wood trees and
oilseeds, and Cargill in seeds.

There are also domestic corporate in the field like Ballarpur Industries, JK Papers and Wimco in
eucalyptus and poplar trees, Green Agro Pack, VST Natural Products, Global Green, Intergarden India,
Kempscity Agro Exports and Sterling Agro in gherkins, United Breweries in barley, Nijjer Agro in
tomato, Tarai Foods in vegetables, M Todd in mint, and Namdhari Seeds in seeds. There are also various
government and semi-government agencies involved. Financial institutions and banks assisting contract
farming. The new changing dynamics of contract farming was the consortium approach note by the study.

It noted a general monopoly of corporate and contracts being loaded against the interests of farmers. It
also dwelt on the problems faced by contract growers, particularly in Punjab and Haryana.

With an aim to mitigate the situation, the study suggested formation of “new generation of co-operatives”
for increasing the bargaining power of contract growers.

SOME CASES OF DOWN FALL

Chandigarh, May 26 Even though contract farming is proving to be a major hit in Punjab, corporates
seem to be shying away from its neighboring state of Haryana.

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A major contributing factor is the late amendment of the Agricultural Produce Marketing Committee Act
(APMC). Though the state amended the rules of the Punjab Agricultural Produce Markets Act, 1961, in
order to lure private players for contract farming, it has failed to produce good results.

Moreover, private players who are procuring agricultural produce from farmers on a smaller scale are still
awaiting the direct marketing scheme to be launched by the Haryana State Agricultural Marketing Board
(HSAMB) to start procuring on a larger scale directly from farmers.

There is only one corporate house which has so far partnered with HSAMB for contract farming of
malting barley in Haryana. SABMiller India, the Indian arm of SABMiller Plc, one of world’s largest
brewers with popular brands like Foster’s, Castle Lager, Haywards, Royal Challenge, etc, has roped in
400 farmers across 2,500 acres in the state for contract farming of barley. The initiative is spread out in
the arid regions of the state that involve Gurgaon, Jhajjar and Sirsa regions.

A senior official of HSAMB told The Indian Express, “At present, only SABMiller is undertaking
contract farming in the state. Vijay Mallya’s United Breweries did approach us, but nothing has been
finalized yet. The main reason why companies don’t evince much interest in contract farming here is that
farmers have an assured income from wheat, for which the government is paying a good price. But for
vegetables and fruits, corporates seem to be waiting for the direct marketing scheme to come into play so
that they are not legally bound to the farmer. The draft scheme for direct marketing is ready and has gone
to the government for approval. Once the scheme is approved, the companies are expected to enhance
their presence in Haryana as well.”

The official also shared that Reliance Retail, Subhiksha, ITC and Mother Dairy are procuring fruits and
vegetables from farmers on demand basis and are paying 4 per cent marketing fee, but none has entered
into contract farming yet. “The revenue generated from the marketing fee paid by these companies is
close to Rs 1 crore per annum. We are also setting up an agro mall, whereby private participation will
increase in the field of marketing,” he said.

Sources in Reliance Retail and Subhiksha told ENS that the companies are procuring fruits and vegetables
from farmers, but are not ready to enter into contract farming. “We are procuring from farmers in Sonepat,
Kaithal, Karnal and Rohtak and so far we have about nine collection centres in Haryana with 20 retail
outlets. We are looking forward to the direct marketing scheme so we can enhance our reach and focus,
but contract farming is not on the cards in the near future,” said a Reliance Retail official.

Future

The Dark Side

The green revolution is part of India’s history. Grey revolution is the future. At least that’s what the blue
print for agricultural reforms.

Agricultural reforms being introduced in the name of increasing food production and minimizing the price
risks for farmers will actually destroy the production capacity of the farm lands and lead to further
marginalization of the farming communities. Encouraging contract farming, future trading in agriculture
commodities, land leasing, forming land-sharing companies, allotment of homestead-cum-garden plots,

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direct procurement of farm commodities and setting up of special purchase centers’ will drive out a
majority of the 600 million farmers out of subsistence agriculture.

Already contract farming has done irreparable damage to agriculture in countries like the Philippines,
Zimbabwe, Argentina and Mexico.

Allowing direct procurement of farm commodities, setting up special markets for the private companies to
mop up the produce, and to set up land share companies, are all directed at the uncontrolled entry of the
multinational corporations in the farm sector. Coupled with the introduction of the genetically modified
crops, and the unlimited credit support for the agribusiness companies, the focus is to strengthen the
ability of the companies to take over the food chain. Significantly, the state governments have opposed the
agriculture reforms, terming it as a recipe for the entry of multinational corporations in agriculture. Two
year earlier, the state governments had opposed the government’s plan to decentralize the food
procurement system terming it as an effort to dismantle the procurement structure

Future Growth

Pepsico India Holding Ltd — Fritolay division — started off with a pilot project in 100 acres in Jharkhand
in 2005-06 to grow potatoes for their chips, which spread to 500 acres next year and today, it covers 800
acres. They introduced seeds of Atlantic variety, Chipsona and Fritolay-1553, but Atlan- tic proved to
yield the best potato in this region. Properly taken care of under the supervision of the technical hands of
the organization, the yield could be 14 times of what is sown.

Organic farming: consumers are becoming conscious and critical about the quality of food and by-
products that affect their health though the toxicity depends ,to some extent, on the type of food
consumed. The organic agriculture includes growing of crops by a set of guidelines that prohibit the use of
synthetic products/chemicals such as fertilizers, pesticides, plant growth promoters and livestock
additives.

There is an increasing demand throughout world for organic food and fiber. In India, efforts are being
made for organic crop production through contract farming. Experiences showed that farmers are
benefited from technical guidance, supply of quality farm inputs and assured purchasing at remunerative
price. This venture, executed by a tripartite agreement, would bring about favorable changes in the present
conventional agriculture to make it sustainable and commercial. Likewise, consumers would get certified
organic products at reasonable price. Since the average growth for organic farming is about 20–25% and
higher prices (15–50%) are possible in the international trade, export of organic food produced by
contract farming will certainly increase in near future, as India is recognized as an international
agricultural hub.

Conclusion

Contract Farming is not a solution to all the problems of agricultural production, and marketing systems.
But contract farming could be evaluated as a way of providing earlier access to credit, input, information
and technology and product markets for the small scale farming structure. Contract farming might also be
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seen as a way or as a part of rural development and promoted to improve agricultural performance
especially in India where productivity is lesser than many other developed countries. More over the
corporate, farmers and government must realize that the practice will not be sustainable if all the parties
are not benefitted. The model is good but can be made better with more favorable government policies,

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