Contract farming in India

TABLE OF CONTENTS
S.NO. CONTENTS P.NO.

1. 2. 3.

4.

INTRODUCTION SET UP THE BUILDING BLOCKS FOR BUSINESS ADVANTAGES OF CONTRACT FARMING 3.1 TO THE FARMER 3.2 TO THE COMPANY 3.3. TO THE COUNTRY CASE OF CONTRACT FARMING 4.1 THE CLASSIC CASE OF PEPSI FOOD LT D. 4.2 APACHE'S INTEGRATED COTTON CULTIVATION 4.3 UGAR SUGAR'S EXPERIENCE WITH BARLEY PROS AND CONS OF CONTRACT FARMING 6.1 CORPORATE FARMING IN INDIA 6.2 CASES CORPORATE FARMING IN INDIA 6.3 CORPORATE FARMING : A TOOL OF GROWTH OR NOT BOTTLLENECKS AND CRITICISMS A LOT CAN BE DONE DESPITE THE ABSENCE OF A LEGAL FRAMEWORK SUGGESTIONS TO SUM UP REFERENCE

5-8 9 10-11

12-23

5. 6.

24-30 31-34

7. 8. 9. 10. 11.

35 36 37-38 39 40

Contract farming in India

INTRODUCTION
Farming is an age-old means of livelihood for millions of Indians. However, there have been few systems/models in which farmers are assured of a market for their produce, leave alone a remunerative price. Farmers have on occasion had to throw their produce away for want of buyers. Globalisation has already affected the farm sector in India, as in many other developing countries, in a range of adverse ways. The most evident is the squeeze on farmersincomes, and the threat to the viability of cultivation, which has come about because of rising input costs and falling output prices. This reflects the combination of reduced subsidy and protection to farmers in developing countries, and trade liberalisation which exposes these farmers to competition from highly subsidised production in the developed world. This combination, along with deflationary policies which have hit rural public expenditure, has created unprecedented agrarian crisis over much of the developing world, including in India. However, until now, the Indian agricultural sector had been relatively spared from the most extravagant excesses of neoliberal interference, in the form of the corporatisation of agriculture. That reprieve now seems to be over, as the central government and several state governments in India are gradually won over by the dubious charms of contract farming. This is increasingly being presented as the great new hope and the way out of the morass in which Indian agriculture now finds itself, and is being actively promoted by major international donor agencies as well as by multinational companies that stand to gain from this process, and has recently been promoted by the central government as well.

This is one side of the coin. On the other is the agri-based and food industry, which requires timely and adequate inputs of good quality agricultural produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of contract farming, which promises to provide a proper linkage between the farm and market.

Contract farming in India

Recognizing the need for and merits of such a linkage with the farming/producing community, several corporate involved in agrocommodity trading, processing, exports, etc. have attempted to establish convenient systems/models that ensure timely and consistent supply of raw material of the desired quality and low cost. This article discusses a few successful cases of contract farming and a brief note on the bottlenecks and criticisms leveled against this emerging alternative farm business model.

Contract farming is defined as a system for the production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the producer/ seller to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer.

Contract farming usually involves the following basic elements-preagreed price, quality, quantity or acreage (minimum/maximum) and time.

According to the contract, the farmer is required to plant the contractors crop on his land, and to harvest and deliver to the contractor a quantum of produce, based upon anticipated yield and contracted acreage. This could be at a pre-agreed price. Towards these ends, the contractor supplies the farmer with selected inputs, including the required technical advice. Thus, the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crops to be grown, agencies, farmers, and technologies and the context in which they are practised.

For example, contract farming in wheat is being practised in Madhya Pradesh by Hindustan Lever Ltd (HLL), Rallis and ICICI. Under the system, Rallis supplies agri-inputs and know-how, and ICICI finances (farm credit)
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the farmers. HLL, the processing company, which requires the farm produce as raw material for its food processing industry, provides the buyback arrangement for the farm output. In this arrangement, farmers benefit through the assured market for their produce in addition to timely, adequate and quality input supply including free technical know-how; HLL benefits through supply-chain efficiency; while Rallis and ICICI benefit through assured clientele for their products and services. The consortium is also planning to rope in other specialist partners including insurance, equipment and storage companies.

The Government of Indias National Agriculture Policy envisages that private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oilseeds, cotton and horticultural crops. The NDA government at the Centre has already drafted a model law on agricultural marketing to provide, among other things, legal support to contract farming agreements. Several state governments, in Andhra Pradesh, Gujarat, Karnataka, Punjab and Tamil Nadu, are actively promoting Contract farming, changing laws to enable and support it, and providing companies interested in it with a variety of incentives, including lifting of land ceilings, subsidies and tax rebates. Other state governments, including in West Bengal, are under active pressure to change their policy towards contract farming. In this context, it becomes urgent to assess the experience with contract farming both internationally and in the recent Indian context. Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/suppliersand buyers. The essence of such an arrangement is the commitment of the cultivator to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer, typically a large company. According to the contract, the farmer is required to plant the contractors crop on his land, and to harvest and deliver to the contractor a certain amount of produce, based upon anticipated yield and

Contract farming in India

contracted acreage. This could be at a pre-agreed price, but need not always be so. Typically, the contractor supplies the farmer with selected inputs and technical advice. The typical contract is one in which the contractor supplies all the material inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crops to be grown, the agencies or companies concerned types of farmers, and technologies and the context in which they are practised.

Contract farming in India

Set Up The Building Blocks For The Business

Commercialization
Land Preparation & Planting, Crop Monitoring During Growing Period Harvesting & Procurement, Transportation Logistics Prompt Farmer Payment System

Technology Transfer
The Extension Services Team - Selection and Training Farmer Education Program Field Trials at Farmer Fields - Multi-locational & Crop Timing

R & D Activities
Evaluation of Promising Varieties and Hybrids Multi Locational Trials and Short-listing - Selection Blueprint for Agricultural Practices After Adapting To Local Conditions, To Suit Intellectual & Financial Means Of The Farmer Evaluation of Farmer Economics Model Demonstration Farming

Contract farming in India

THE ADVANTAGES OF CONTRACT FARMING

To the Farmer: Exposure To World Class Mechanized Agro Technology. Obtains An Assured Up Front Price & Market Outlet For His Produce. No Requirement To Grade Fruit, As Mandatory For Fresh Market Sale. Bulk Supplies Versus Small Lots As Again Reqd By The Fresh Market. Crop Monitoring On A Regular Basis. Technical Advice, Free Of Cost At His Doorstep. Supplies Of Healthy Disease Free Nursery Agricultural Implements Technical Bulletins Etc Remunerative Returns To the Company: Uninterrupted & Regular Flow Of Raw Material. Protection From Fluctuation In Market Pricing. Long Term Planning Made Possible.

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Concept Can Be Extended To Other Crops. Builds Long Term Commitment Dedicated Supplier Base Generates Goodwill For The Organisation. To the Country: 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. To generate gainful employment in rural communities, particularly for landless agricultural labour. To flatten as far as possible, any seasonality associated with such employment. To reduce migration from rural to urban areas. To promote rural self-reliance in general by pooling locally available resources & expertise to meet new challenges. New markets are necessary.
New marketing strategies.

New thinking to boost Indian agriculture.

Building capabilitie.

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Contract farming in India Promoting investment.

Technology enhancements improve the lot of our farmers.

Broad based contract farming programs can be one possible solution.

1. The Classic Case of Pepsi Foods Ltd. Launching its agro-business in India with special focus on exports of valueadded processed foods, Pepsi Foods Ltd. (PepsiCo' hereafter) entered India in 1989 by installing a Rs 22 crore state- of-the-art tomato processing plant at Zahura in Hoshiarpur district of Punjab. The company intended to produce aseptically packed pastes and purees for the international market. However, before long, the company recognized that investment in agro-processing plants would not be viable unless the yields and quality of agricultural produce to be processed were up to international standards. At that point of time, tomato had never been cultivated in Punjab for its solid content, with a focus on high yields and other desirable processing characteristics such as colour, viscosity and water binding properties. Furthermore, little effort had been made to create a database on the performance of various varieties and hybrids, or to introduce modern farming practices.

There were no logistically efficient procurement models for fruits and vegetables that could be built on by the company. These apart, there were simply not enough quantities of tomato available even if the grown varieties/hybrids were procured from the open market. The total Punjab tomato crop was 28000 tons, available over a 25-28 day period, while PepsiCo required at least 40000 tons of tomato to operate its factory, which had a gigantic capacity of 39 tons fresh fruit per hour. The company required this intake over a minimum 55-day time frame, and in 1989, the season in Punjab did not last beyond 28 days. Sceptics had expressed doubts over the feasibility of the Zahura tomato processing plant, and had said that it would remain a museum piece! There a wereformidable challenge before the company and nothing short of a horticultural revolution was required to solve the problem. There was no choice but to alter the tomato production

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and logistics situation in Punjab. This led to the birth of PepsiCos backward linkage with farmers of Punjab.

PepsiCo follows the contract farming method described earlier, where the grower plants the companys crops on his land, and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management The PepsiCo model of contract farming, measured in terms of new options for farmers, productivity increases, and the introduction of modern technology, has been an unparalleled success. The company focused on developing region- and desired produce-specific research, and extensive extension services. It was thus successful in bringing about a drastic change in the Punjab farmers production system towards its objective of ensuring supply of right produce at the right time in required quantities to its processing plant. Another important factor in PepsiCos success is the strategic partnership of the company with local bodies like the PunjabAgricultural University (PAU) and Punjab Agro Industries Corporation Ltd. (PAIC). Right from the beginning, PepsiCo knew that changing the mindset and winning the confidence of farmers would not be an easy task for outsiders. The companys unique partnership with PAU and PAIC fuelled its growth in Punjab. Encouraged by the sweeping success of contract farming in tomato in several districts of Punjab, PepsiCo has been successfully emulating the model in food grains (Basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from other vegetable crops like potato. The company, which had been involved in the export of Basmatirice since 1990, was the first processor in India to invest and strengthen backward linkages for Basmati rice. After extensive multi-locational field trials at its 27-acre R&D farm at Jallowal near Jalandhar, PepsiCo ventured into contract farming in Basmati rice on a commercial scale four years ago. The company invested over Rs 5 crore in a modern processing plant at
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Sonepat in Punjab. It is involved right from the stage of selecting varieties of Basmati (based on customer preference), seed multiplication and development of a package of practices for farmers. PepsiCosscientists, who ensure successful transfer of technology from the trial to the commercial field levels, closely monitor the performance of the crop. At the time of harvest, the company procures the entire pre-agreed quantum of the harvested produce at the farm gates, at the pre-agreed price. The raw material so procured is transferred to PepsiCos ISO 9002 and Hazard Analysis Critical Control Point (HACCP) certified Rice Mill located at Sonepat for processing, packing and export, ensuring that the product remains completely traceable from field to consumers. During 2002-03 crop year, farmers from Jalandhar, Amritsar, Hoshiarpur and Sangrur districts of Punjab, and parts of Western Uttar Pradesh were contracted for Basmati rice cultivation. The seasons acreage for the crop stood at 800 hectares. In 2001-02, contracted farmers reaped yields of 2.5 tons/hectare. By the end of 2004, the company plans to increase the acreage under Basmati rice to 4000 hectares to meet the complete requirement of its manufacturing plant. Similarly, PepsiCo planned a foray into contract farming in groundnut with the farmers of Punjab with the objective of producing export-quality, value-added groundnut such as roasted and salted peanuts, flavoured and coated peanuts, and peanut butter. Using plastic mulch groundnut (PMG) technology sourced from China has enabled PepsiCo to take up two crops in a year - one in the kharif and the other in the rabi season. The company has demonstrated yields of 3.0 and 4.0 tons per hectare on field trials for kharif and rabi crops respectively, much above the national average of 1.0 ton/ha. Till date, there have been no serious defaults; as long as you are offering technology that offers predictable results that are in line with the expectations of the farmers, defaults remain minimal says Mr. Abhiram
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Seth, ExecutiveDirector (Exports and External Affairs) of PepsiCo, sharing his experience. The company proposes to extend its contract farming in groundnut to farmers in Rajasthan and Uttar Pradesh, who have shown great interest. A sound R&D program backed by committed extension personnel to transfer the resulting technologies has been the intrinsic strength of PepsiCo. Its focused research on increasing yield levels, to the advantage of farmers (which in turn brings down the cost of raw material to the company) has resulted in their increased trust and loyalty towards the company. PostPepsiCo entry has seen the tripling of yield levels in chilli (from 6.0 tons/ha to 20 tons/ha) and tomato (14-16 tons/ha to 52 tons/ha). As part of its expansion plans, the company has been conducting initial trials at Neelamangala in Karnataka to evaluate varieties/ hybrids of chilli for their yield, colour, total solids, pungency and other traits/parameters. We plan to go commercial with chilli farmers of Karnataka next year, says Mr. Seth. On the company's plans, he said, Our immediate focus would be to consolidate and strengthen the existing activities. With this kind of a backward linkage with farmers of Punjab and Haryana, PepsiCo developed a perfect contract farming model involving an enduring relationship with local agencies including the State Government.

Key elements of PepsiCos success Core R&D team Unique partnership with local agencies including a public
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sector enterprise Execution of technology transfer through well-trained extension personnel Supply of all kinds of agricultural implements free of cost to contracted farmers Supply of timely and quality farm inputs on credit Prompt dispatch/delivery/procurement of the mature produce from every individual contracted farmer through the system of Quota Slips Effective adoption/use of modern communication technology like pagers for communication with field executives Regular and timely payment to contracted farmers through computerized receipts and transparent system Maintenance of perfect logistics system and global marketing standards.

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2. Appachis Integrated Cotton Cultivation: Innovative Model Appachi Cotton Company (ACC), the ginning and trading house from Pollachi (Coimbatore district of Tamil Nadu, India) hit the headlines in May 2002 for the street play it employed to encourage farmers in the Nachipalayam village in Kinathukadavu block of Coimbatore to sow cotton seeds in their fields. The singer in the street play assured cotton farmers that, unlike in the past, they would not be disappointed if they cultivated cotton on their fields, as they would be backed by a model called the Integrated Cotton Cultivation (ICC), which would guarantee a market-supportive mechanism for selling their produce. ACC caters to top-bracket, quality-conscious clients from the textile industry in India and abroad, and their client specific operation has won them laurels. ACC is the only private ginner in the country to have successfully entered backward and forward integration between the grower (farmer) and the consumer (textile units). Well in advance of the 2002 kharifsowing season, ACC undertook the Herculean task of integrating about 600 farmers belonging to various districts of Tamil Nadu on a holistic plank. This was done at a time when failure of monsoon for the third consecutive year was imminent. This led to the farmers perceiving the ICC programme as a boon, as their traditional sources of finance and support had refused further funds due to non-recovery of earlier loans.

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The Appachi formula ensured that its farmer members never went short of money and materials during the crucial 100 days of the crop cycle. The contract assured the farmers easy availability of quality seeds, farm finance at an interest rate of 12% per annum, door delivery of unadulterated fertilizers and pesticides at discounted rates, expert advice and field supervision every alternate week, and a unique selling option through a MoU with the coordinating agency (ACC). The core principle of the formula lies in the formation of farmers Self-Help Groups (SHGs). Each farmer belonging to a SHG is sanctioned Rs 8000/acre as crop loan @ 12 % p.a. interest. Disbursement of this amount is strictly need-based. Allocation and disbursement is at the behest of the coordinating agency. Hence all requests are scrutinised, evaluated, authenticated, and only then recommended to the lending bank. All the participating farmers are asked to issue PDCs (Post Dated Cheques) for the loan they avail. Hence, the moral responsibility of fulfilling the banks obligation squarely lies on the participating farmer. The Appachi formula differs significantly from other existing contract farming models on its pricing front in that no prior price fixing is done in this model. As cotton is a commodity prone to price fluctuations due to domestic and international market forces, ACC did not wish to create a climate of uncertainty due to pre-fixed prices with the contracting farmers. Our unique and transparent MoU allows the farmer to sell his commodity at the market prices prevailing during the time of negotiation. The coordinating agency has the first right to negotiate, but in the event of disagreement about price during negotiation, the farmer groups can call for a tender/auction to sell the accumulated cotton says Mr. Chinnaswamy. The MoU clearly stipulates conditions to be followed in case of open tender/auction, and allows the coordinating agency to participate in the proceedings. The formula has built some checks and balances into the system for early identification of troublemaking farmers or wilful defaulters and their
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elimination at an early stage to protect the interest of the Group, the bank and the coordinating agency. This is the first time ever that a cotton farmer in India has been forwardly integrated to the consumer textile industry. Various methods including street plays, village level meetings, display and print materials, door-to-door campaigns, and press meets were used to attract farmers attention and gain their confidence. A major portion of our energies were dedicated to bringing together all the linkage players such as the banks, insurance company, farm service providers, and consuming textile units and ensuring that they stayed committed to the programme. The successful implementation of this programme with active participation of 12 farmer groups belonging to various backgrounds and the linkage players itself amplifies the clarity and the transparency the formula holds, says Mr. Mani Chinnaswamy,Managing Partner of ACC. During the 2002 kharif season, about 950 acres of land in various blocks of Coimbatore (Pollachi and Kinathukadavu), Theni (Bodi and Andipatti) and Nammakal (Thiruchangode) districts of Tamil Nadu were contracted, involving 900 farmers. During the season, the contracted farmers witnessed a remarkable reduction (by 25%) in cost of cultivation. The programme is poised to make a greater impact on cotton agronomy than the existing method of cotton cultivation in the country exults Mr. Mani. By integrating backward and forward with the producing and the consuming communities, ACC has attempted to address all the existing maladies of the cotton supply chain. According to the leading ginner, who spearheaded the unique supply chain model, such a system is the need of the hour today not for the growth of textile industry in India but for its very survival given the imminent hardships and emerging challenges arising out of the perils of WTO (World Trade Organization) and MFA (Multi Fiber Agreement). Commenting on the future expansion plans of the company, Mr. Mani said The current membership size of these groups is expected to double/triple by the next sowing season.

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Key principles of the ACC model One village, one group (SHG) One village, one variety/hybrid of cottonseed Crop loan at 12% per annum on Groups guarantee Door delivery of quality inputs at discounted rates Cotton crop insurance Synchronised sowing Integrated crop management through competent Farm Service Centres Contamination control measures from farm to factory Assured buyback of final produce from farmers doorsteps The sponsor (ACC) plays the role of a perfect coordinator/ facilitator between the producer and the consumer.

The Appachi Formula of contract forming has been so successful that the Tamil Nadu Government is now keenly interested in replicating this formula in various cotton-growing districts of the State. After successive high-powered meetings with concerned State Ministers and officials, the formula has got a new fillip.The State machinery is actively participating in propagation of this model in Theni and Namakkal Districts. With the active participation of farmers, the State Government and other stakeholders, the programme is sure to revolutionize the cotton economy and set a successful precedent for many players to emulate the same in their respective enterprises.

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3. Ugar Sugars experience with barley The story of the Belgaum (Karnataka)-based Ugar Sugar Works Ltd., which established a successful backward linkage with farmers of Northern Karnataka for supply of barley for its malt unit, is quite interesting and insightful. Farmers surrounding Ugar Sugar in Belgaum, who had been cultivating sugar under intensive irrigation found themselves with the problem of salinity in soils. Ugar Sugar took this opportunity to begin creating awareness among the farming community about alternative crops suitable for saline soils. Of these, barley was known to give economic yields of good quality in saline soils. The company assured the farmers of a market for their produce if they agreed to growbarley, as well as the required technical and input support. All this happened way back in 1997, when the company required 5000 tons of barley annually for its malt unit. At that point of time, barley was cultivated on a commercial scale only in the northern parts of India, which meant huge transportation costs for the company to source from there. Furthermore, such lots carried a mixture of feed and malt grade barley, which meant no surety of consistent quality raw material. The company had no land of its own to start barley production near its malt plant. This led to the birth of Ugar Sugars unique contract farming system for barley production. After intensive research and field testing of over 800 varieties of barley, the company supplied UBE425 variety of barley to its 470 contracted farmers, who mostly owned between 2-5 acres land, were within the radius
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of 40 kilometer from the companys malt plant, and had resources enough to irrigate the crop at least twice during the crop cycle. The acreage under the contract grew from 356 acres in 1997-98 to 1350 in 2000-01 (It dipped to 819 acres in 2001-02). This acreage was able to satisfy only 8-10% of the total annual requirement of barley for the malt plant. The contract farming system helped us get barley with high starch, less protein (<12%) and homogeneity, at the right time, in required quantities, and the most competitive prices says Mr. P.V.Shirgaokar, Executive Director of Ugar Sugar Works Ltd. Ugars barley contract farming model : Key elements The company supplies genetically pure seed on credit to the contracted farmers without interest. The price of barley seeds supplied for sowing and the final produce that procured by the company is the same i.e. cost of the seed is same as that of the pre-agreed price of barley. Hence, the quantity of seed supplied for sowing is recovered from the time of procurement of the produce. A technical person from the company visits the farmers fields at least four times in a crop cycle, giving free technical assistance. The company supplies seed at the sowing points in farmers fields, and the final produce is procured from the fields at the company's transportation cost. Under the contract, it is obligatory on part of both the contracting farmer and the company to sell and buy respectively the entire contracted quantity at the pre-agreed price. As there is no market for barley in the surrounding areas, there is no other alternative for the farmer except to sell the produce to Ugar Sugar. There have been no defaults till date. Even if a contracting farmer tries to sell the produce in the local market, he would lose about Rs 350/quintal clarifies Mr. Shirgaokar.

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The price of barley fixed by Ugar Sugar varied from year to year depending on the market for barley and malt. It was increased from Rs 600/quintal in 1997-98 to Rs 700 in 1999-2000, with a further rise of another Rs 50/quintal during the 2001-02 crop season. However, owing to a dip in the international malt prices, Ugar Sugar did not contract for barley production during the recently concluded 2002-03 crop season. This experience of Ugar Sugar clearly speaks of the price dimension (market dynamics) that needs to be addressed in a long-term relationship like contract farming. However, the company remains undeterred by the losses of about Rs 42 lakh it suffered (owing to price difference of Rs 315/quintal of barley between the domestic market where the company was forced to clear its huge quantities of unprocessed barley, and the landing cost per quintal of barley at the domestic market yards). The Executive Director says- Contract farming is one of the best models for ensuring timely and desired quality of barley. If malt prices start climbing, then Ugar Sugar will definitely think of restarting its barley processing by sourcing the raw material through backward linkage. Belgaum, Bijapur and Bagalkot are the potential districts for barley contract farming in Karnataka. Elaborating on the companysfuture plans on the lines of its venture in barley, Mr. Shirgaokar said We are also interested in implementing the contract farming system for high density plants such as Casuarina and Eucalyptus to source fuel for our 44 MW cogeneration plant. Biodiesel plants such as Pongamia also have a great future in the contract farming system. The Executive Director feels that the absence of legal framework for contract farming is not a serious impediment to the success of the system. In his view, creation of awareness among the producing community about the advantages of the system, attractive and prompt payment, and assured market support even at times of market-induced price crisis are the guiding principles of success for the system.

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The cases discussed here are a few among several such successful ventures by corporate involved in food processing, agro-commodity and food products exports. The demonstrated successes of gherkin exporters of Southern India, which is over 90% based on contract farming, and that of Maricos safflower procurement through a successful backward linkage model, are worth remembering here.

PROS AND CONS OF CONTRACT FARMING

Farmers in India are all set to see a sea-change in agriculture sector soon, thanks to contract farming. Winds of change are blowing across the Indian agricultural landscape with the advancement of contract farming. While earlier it was limited to a certain small initiatives by the corporate sector, it is likely to become a norm rather than exception, thanks to the entry of business giants like Reliance [Get Quote] and ITC and also because of the encouraging change in the government policies. The size of agreements for contract farming with the farmers is also increasing manifold. The central government is so serious about the issue that it is mulling a contract farming policy for India. Recently, Union Agriculture Minister Sharad Pawar said contract farming is emerging as an important institutional arrangement in India that promotes coordination between production and marketing activities. "The main issue is to upscale contract farming. This will require both public and private sector investments in roads, cold chains, electrification and processing," he pointed out. The minister added that the government's
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main concern is that smallholders are not left out in the process. He also asked agro-business firms to integrate farmers on their supply chains through institutions like cooperatives, producers' associations and contract farming. Pawar made it clear that the contract farming model that to be implemented in India will ensure that land is permanently owned and cultivated only by farmers. "We are not encouraging a model of leasing land and allowing the private sector to acquire it for cultivation," he said. He also disclosed that the Centre is encouraging farmers to form grass-root level associations or informal cooperatives owned and managed by farmers themselves or producer companies. While the corporate will have us believe that contract farming is the panacea for all the ills affecting the agriculture sector in the country today, it remains to be seen whether it really turns out to be so. Contract farming involves a pre-agreed price between the company and the farmer. The agreement is defined by the commitment of the farmer to provide an agricultural commodity of a certain type at a time and a price and in the quantity required by a committed buyer, mostly a large company. It is clear why the business sector is gunning for contract farming. They seek to integrate the supply chain to ensure timely availability of quality and quantity of raw material. Significantly, it also reduces the procurement cost for them by doing away with the middlemen. It leads to significant gains for them, as not only do they get the raw material as per their specific demands, the cost is also much less. It is also believed that the participation of the corporate sector in the farming segment will play a crucial role in technology transfer, capital inflow as well as lead to assured markets for crop production. PepsiCo was the first company in India to start contract farming of tomatoes in Hoshiarpur district of Punjab. Reliance Life Sciences, ITC (agri25

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business division) and McDonalds are some of the prominent business giants, which have either started contract farming projects already or are in the process of actively discussing them with various state governments. PepsiCo and other companies have used the contract system for the cultivation of Basmati rice, chilli and groundnut, as well as for vegetable crops such as potato. "PepsiCo's involvement in Indian agriculture stems from its vision of creating a cost-effective, localized agri-base in India by leveraging its access to world class agricultural practices," PepsiCo spokesperson said. Till today, PepsiCo India's project with the Punjab Agro Industries Corporation and Punjab Agriculture University remains one of the most ambitious contracts farming projects in the country. "The programme focuses on evolving agricultural practices to help Punjab farmers produce crops that would make Indian products internationally competitive," says the spokesperson. What has been of crucial help to the business houses venturing into contract farming is the amendment of the Agriculture Produce Marketing Committee Act in 14 states, which allows farmers to sell their produce in open markets. This has opened the gates for the companies to enter this segment. The United Progressive Alliance government's 'approach paper' to the Eleventh Plan gives clear priority to the development of contract farming. A working group set up by the National Development Council has also made a set of proposals to promote contract farming. The group suggests greater liberalization of laws and rules for crop contracts. It has also proposed tax rebates for food processing, duty-free imports of machinery and equipment and liberalized imports of seed varieties for contract farming. The model which is most popular in the country today is the one in which the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the
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contracts vary according to the crops grown, the agencies involved, the farmers themselves and technologies and the context in which contract farming is taken up. Generally, a farmer's participation is limited to production in the fields. However, in the present context, contract farming is clearly a win-win situation for both the corporates and the farmers. Agriculture sector is facing a number of problems in the country and farmers actually don't have many options in the matter of deciding whether or not to go in for contract farming. With rising debt and soaring seed and fertilizer costs, contract farming seems to be the only choice left open to them. This is mainly because the company provides all the material including seeds as well as technical knowhow and there is also a guarantee of purchase of the produce after harvest. In most cases, the minimum price of the produce is fixed in advance. In the present scenario, the increasing number of farmers' suicides is seen as a reflection of the fact that agriculture is no longer seen as a profitable venture. This makes the economic security offered by the contract farming very attractive. The detractors of the contract farming believe that far from being a panacea for agriculture sector, contract farming is likely to increase the problems. The main concern is that the land, which is currently used to grow staple crops like wheat and rice, will be used to grow crops required by the food-processing industry, which also has a significant overseas market. The switch to contract farming, therefore, leads to a rise in exports. In fact, many corporates enter contract farming to fulfill their export obligations. It is believed that contract farming would double agriculture exports from India to $20 billion by 2010. Many believe that the rampant increase in contract farming will eventually lead to loss of food security of the country, implying that the country might become dependent on imports.

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"We are bound to lose food security considering the way the government is supporting contract farming without thinking of farmers. The main thing is that farmers don't have any role to play in contract farming except providing the corporates with labour and land. The government should also take into account that the situation is very different in our country as compared to other countries. About 70 per cent of the population is dependent on agriculture. The government should involve the farmers in policy making otherwise their concerns are likely to be left out," says Dr Kishan Bir Chaudhary of Bharat Krishak Samaj, which claims to represent around 5,000 farmers in the country. There is also a belief that it might also lead to the loss of natural seeds. Many times, the crop required by the company is not recommended for that particular area. This can also have negative implications on the quality of soil. There have been numerous studies to examine the impact of contract farming on farmers. Recently, Dr Sukhpal Singh of Indian Institute of Management, Ahmedabad, conducted a study - 'Contract Farming for Agricultural Development: Experience of the Indian Punjab and Northern Thailand'. He observes in his study, "Contract farming, in a political economy, is one mode of capitalist penetration of agriculture for capital accumulation and exploitation of the farming sector by agri-business companies." But for farmers, this is a matter of survival. It is also because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis. "Farming was hardly a profit making venture but thanks to the company people we also can afford to have some self-respect now. Of course, there are problems associated with companies also like if a crop doesn't meet their requirements they will not take it. For instance, if they want chilli, it has to be a particular variety and it's not like anything will do,"

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says Shirish Mane, who owns a 3-acre farm at Loni Khand village, about 20 kms from Pune. Certainly, not all contract farming is bad for farmers. It can lead to sustainable cultivation practices. However, there is a need for the government to step in and monitor the contract farming practices.

Map 1: Waste land area as percentage of geographical area in each state of India, 2003

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Contract farming in India

Map 2: Percentage share of different states in total waste lands in India, 2003.

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Contract farming in India

Corporate Farming
Corporate farming is a term that describes the business of agriculture, specifically, what is seen by some as the practices of would-be mega corporations involved in food production on a very large scale. It is a modern food industry issue, and encompassed not only the farm itself but also the entire chain of agriculture-related business, including seed supply,
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Contract farming in India

agrichemicals, food processing, machinery, storage, transport, distribution, marketing advertising and retail sales. The term also includes the influence of these companies on education, research and public policy, through their educational funding and government lobbying effort. Corporate farming is a fairly broad term deals with the general practices and effects of a small number of large global corporations that dominate the food industry. It does not refer simply to any incorporated agribusiness enterprise, although most agricultural business today are in some way economically connected to the dominant food industry players. Corporate farming is often used synonymously with agribusiness.

Corporate Farming in India

Corporate farming is not a new concept to India. Historical evidences show that such practices have been prevalent since British colonization when the farmers had contracts with East India Company. Post independence period brought about many agrarian reforms, with green revolution being an important milestone, changing the position of the country from importer to exporter thus helping in attaining selfsufficiency but still their is a need of further improvement. Recognising the need of such improvement in the farming sector, several corporates involved in agro-commodity trading, processing, exports etc. have attempted to establish convenient systems/models that ensure timely and consistent supply of raw material of the desired quality and low cost.

Cases of Corporate Farming in India

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Corporate Farming: A Tool for Growth or

Company 1. IEEFL, Pune (subsidiary of the Ion Exchange India set up in1995) 2. Jamnagar Farms Pvt. Ltd.- a subsidiary of Reliance Industries (Mukesh Ambani group) 3. Anil Dhirubhai Ambani Group (Reliance) 4. SYP Agro, Ahmedabad 5. Agri Gold Hyderabad 6. Field Fresh an equal partnership venture between Bharti Enterprises (Airtel group) and Rothschild 7. Satluj Agriculture Pvt. Ltd. New Delhi 8. Council for Citrus and Agro Juicing in Punjab (A state govt. Sponsored agency) 9. Nijjer Agro, Amritsar 10. Vimal Dairy with a capacity to process 2.5 lakh litres of milk ( a part of the Rs. 900 crore Vimal Group), Ahmedabad Area/region and crops Maharashtra, Tamilnadu, and Goa. Plantations mainly fruit trees Gujarat, and Punjab; agro forestry, And horticultural crops Punjab; Fruits and vegetables Gujarat; Onions and other spices and vegetables A.P. Punjab; fresh fruits and vegetables

Punjab, mainly vegetables for Field Fresh Punjab, fruits

Punjab, fruits and vegetables Narmada canal area in north Gujarat; milk for captive consumption

not
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It is argued that large-scale corporate agriculture is more efficient than peasant farming prevalent in the country. It leads to better allocative efficiency, induces higher private investment in agriculture, and results in higher output, income and exports (Mishra, 1997). The average size of the operational marginal holdings was only 0.35 hectares and those of the small holdings 1.41 hectares in 1992 compared with 2.69 and 5.79 hectares respectively of the semi- medium and medium category holdings and 15.41 hectares in the case of large category holdings. The ownership holding averages for these categories were even smaller with the exception only of large category holdings which was slightly larger (Singh, 2005). In fact, it has been argued that the small and marginal farms even in states like Punjab are not viable for sustaining a family and need larger holdings (Johl, 1995). These small holders should get out of farming if they are not able to move on to more export-oriented and commercial crops like fruit and vegetables as it will not be viable to grow food crops on small holdings. Even some farmer leaders like Sharad Joshi of Shetkari Sanghatana argue that the state should facilitate the exit of small and marginal farmers from farming by buying their land at market prices and provide them capital and training to go for non-farm occupations. Only those who have the mindset, technology, management, and financial resources to face the challenge of the Second Green Revolution should be permitted to do farming as an agribusiness (Joshi, 2006). Further, small farms are highly fragmented. Land transactions have led to further fragmentation making them non-viable in terms of resource use as well as family sustenance. The costs of fragmentation included increased travel time between farms and hence lower labour productivity, higher transportation costs of inputs and outputs, negative externalities for land quality improvement like irrigation, loss of land on boundaries and greater potential for disputes (Mani and Pandey, 1995). A study of a Tamil Nadu village found that, of the small farmers (60% of all) who owned less than three hectares of land each, 35% had 3-5 plots and 25% had 5-10 plots and the remaining less than three plots. On the other hand, of all the farmers in the village, only 20% farmers had more than five plots each, another 40% had 3-5 plots each and remaining less than three plots each. Thus, small farms were somewhat more fragmented. Further, the
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study showed that fragmentation had adverse impact on the technical efficiency and the production of most of the crops, and consolidation led to large gains in technical efficiency. But, still markets have not even led farmers to consolidate their operational holding, if not owned holdings (Parikh and Nagarajan, 2004). Further, export-oriented agriculture requires large investments which only big agri-business enterprises can afford (Rangswamy, 1993). It is argued that India has been exporting some agricultural products which are available for exports after meeting domestic requirements. It is alleged that she has never produced for export. This not only leads to instability of supplies in domestic markets, but also a failure to meet export commitments, which results in losing the established markets. Besides, India ends up going to the world market for importing for domestic consumption as well. It is here, that corporate farming is a must for stable production and export performance (Singh, 1994). It is also said that allowing foreign companies to buy and operate land would open the doors to their technology in horticulture, food processing, etc. Further, if there is no ceiling on the assets of a firm, why should there be such a restriction on the farm firms or agribusiness enterprises?

Bottlenecks and Criticisms

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Contract farming in India

In all the existing (currently working) models of contract farming, farmers participation remains limited to production in the field - seeds, inputs, technology packages and technical guidance through regular supervision are usually provided by the contracting company. Critics in the industry are of the opinion that the results are very promising in early years. Farmers benefit from improved technology and higher productivity, quality and production. The contract price does not appear to matter much in the early years. Once the farmers are confident of being able to deploy new technology, problems start cropping up. If the market price is more advantageous than the contract price, farmers renege on the contract. The present legal systems make it impossible to enforce the performance under contract says Mr. Sharad Joshi, Former Chairman of the Task Force on Agriculture, GoI and Founder of Shetkari Sanghatana, a peasants organization in Maharashtra. Contract farming models can sustain in the long run only if the initiative/empowerment comes from the farmers rather than the user (corporate). Another moot point is that in the existing models, farmers are largely price takers, while the contracting firm makes the price. Other criticisms leveled against contract farming in India include less generation of employment, labour-saving farm practices, low level of commitment of corporates over rural development, lack of transparency and communication etc. Enforceability of the agreement, and standardisation and operationalisation of contract farming agreements are the major bottlenecks plaguing contract- farming ventures in India.

A Lot Can Be Done Despite The Absence Of A Legal Framework

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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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Some Suggestions To Promote Contract Farming

Government Policy Support Technology Leverage the ICAR, University System to provide region specific crop solutions - make them part of public information domain. Facilitate import of varieties / hybrids for contract farmers. Growth will be led by productivity enhancement & market focus. Incentivise Ph.D. Candidates in agri studies to work on contract farming programs Research system synergy with both farmers & private sector

Government Policies & Regulations

Make purchase interference by a third party in a contract farming

program, a cognisable offence.

Required - a quasi judicial system of contract enforcement. Single tier regulation for contract farming at the state level. Contract farming organizations are allowed to take out realistic &

deregulated crop insurance policies.

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Government Fiscal Support

Collect no taxes from food processors involved in contract farming.

Compel them to invest in lieu in rural infrastructure & farmer upliftment to the extent of tax saved.
Offer 150% deduction on investments made in the creation of

extension services for participating farmers linked to procurement of output. Legislation needs to be clarified in order to determine whether or not it is permissible to procure agricultural produce directly from the farmers.
No taxes or duties on import of agri equipment to be used in a

registered contract farming program.

Abolish all fees, taxes, cess, duties, levies on procurement effected by

a registered contract farming program.

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To sum up
To establish an agrarian economy that ensures food and nutrition security to a population of over a billion, raw material for its expanding industrial base, surpluses for exports, and a fair and equitable rewarding system for the farming community, commitment driven contract farming is no doubt a viable alternative farming model, which provides assured and reliable input service to farmers and desired farm produce to the contracting firms. Several Indian and multinational companies have already begun such initiatives in India and have demonstrated repeated success. The successful cases should encourage the rest of the producing and the consuming enterprises to emulate them for mutual benefits in specific and Indian agriculture in general.

REFERENCES
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1.

Agrawal, R C (2000): Perspectives for Small Farmers in Developing Countries Benziger, V (1996):"Small Fields, Big Money Chadha, G K (1996): Wastelands in Rural India: Policy initiatives and programmes for their development Dogra, B (2002): Land Reforms, Productivity and Farm Size Agri Business The Analyst(2007) Parikh, K and H K Nagarajan (2004): How Important is Land Consolidation? Singh, S (2006a): Leveraging Contract Farming for Agricultural Development in India

2.
3.

4. 5. 6. 7.

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