Raveendhar.

k
R08PGDM034
Section-1
 About PepsiCo
With 5 largest food and beverage companies
which includes 16 brands
available in nearly 200 countries
Entered India in 1989 and its investment is
700million $
Employment to more than 60,000 people.
Brand Pepsi is now the 2nd biggest brand in
the country
About Frito Lay
 It was started by Elmer Doolin of San Antonio and Herman
W. Lay of Nashville in 1935.
 The two companies Frito and Lay was merged in 1961.
 In 1965 Frito Lay and PepsiCo was merged.
 It has more than 15 brands.
 LAY'S®, FRITOS®, CHEE.TOS®, BAKEN-ETS®,
RUFFLES® DORITOS®, FUNYUNS®, TOSTITOS®,
BAKED LAY'S®, WOW!®, SUNCHIPS®, MUNCHIES®,
OBERTO®, ROLD GOLD®, GRANDMA'S® Cookies and
Quaker Chewy Bars®, Quakes® and Fruit & Oatmeal Bars®.
Concept of contract farming?
ESSENTIALLY
The farmer is contracted to plant the
contractor’s crop on his land
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 can
supply the farmer with selected inputs
THE ADVANTAGES OF
CONTRACT FARMING
Farmer gets exposure to world class agro technology
 Planting materials/healthy disease free nursery
 Crop monitoring technical advice free at his doorstep
 Agricultural implements
The farmer obtains an assured up front price & market
outlet for his produce
Focus shifts from prices to returns per acre - driven by
productivity increases
The private sector gets requisite quality material regularly
at predetermined prices
Promotes long term planning and investments
THE PROBLEMS THAT BESET
CONTRACT FARMING

Small size of farmer landholdings.

Need to contract with a larger number.
No mechanism to discourage default. No legal recourse
when faced with large scale contravention of contracts.
Lack of a comprehensive crop insurance scheme to protect
against natural calamities.
Contract Farming in PepsiCo
FLI (Pepsi) Potato CF in Maharashtra and
Karnataka
The company decided to work through an intermediary
called Hundekari in Maharashtra and informal groups in
Karnataka
 This CF system of the company is different from its
individual contract grower system being used in Punjab
where farmers are larger land holders and even lease large
chunks of land for contract farming
Buying only quality potato under two price options – fixed
contract and open market linked prices.
Managed production risk of the growers by bringing in
insurance, and low cost input supply and credit into
contracting with formal contracts
 BUILDING BLOCKS FOR A SUSTAINABLE
CONTRACT FARMING PROGRAMME IN PEPSI CO
Land preparation & planting,
crop monitoring during growing period
harvesting & procurement, transportation logistics
prompt farmer payment system Commercialization

The extension services team

- selection and training
Technology Transfer
Farmer education program
Field trials at farmer fields
- multi-locational & crop timing

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 R & D Activities
 Grower

Tri-partite (Intermediary) model of contract farming by FLI

Local
(Pepsi) Contract production organization, supply of Middlema
company seed (with part advance payment by n/
Grow grower), extension, and input credit under Facilitator
agreement with no liability on company /
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Company FLI(Pepsi)
Parameter
Area ( states) Maharashtra and Karnataka
No. of farmers 14500
Contracted Acreage 28,000
Average size of 5 acres
holding (acres)
Average area under
contract per grower 2 acres

Nature of contract Acreage

Pricing formula Fixed price of Rs. 5 per Kg. for September, October harvest and Rs.
5.50/kg. for the November 03 harvest of multiplied chip grade potatoes
delivered by the GROWER to FLI plus an incentive based on the solids and
TPOD (table 1) OR Market linked price plus an incentive based on the
solids and TPOD
Nature of Contract growers thru Hundekari in Maharshtra and through informal farmer
Organisation of associations in Karnataka (bi-and tri-partite agreements). A commission of --
growers paisa/kg. on the total accepted quantity of potatoes procured by FLI from the
specified farmers. Hundekari to manage local quality labs for cook test & solids
measurement and to provide inputs given by FLI and loans from his account to
growers for purchase of inputs. For this, he gets a service charge of -- paisa/Kg.
of seed supplied to specified farmers, and another service charge of --
paisa/kg. on the total accepted quantity of potatoes procured by FLI from
specified farmers for providing extension support including lab operation and
FLI board maintenance. In Karnataka, an elected farmer representative manages most
of these functions.

Input Supply Through Hundekari but FLI shall replace the rejected seed at the time of delivery in
case the seed is found to be of inferior grade or of lower germination. FLI shall
replace the seeds in case the germination fails due to virus;
50% advance payment for seed,
50% on delivery of produce
Technical advice and Free of cost
Extension
Quality Under size/over size potatoes to be paid @ 30% of FLI rate.

Rotten/soil/green mechanical damage potato to be returned the same day.

Delivery point Factory

Payment Within 15 days

Seeds/root and Not to be sold to anyone w/o

Produce company permission

Major markets Domestic and export

Crop failure No liability of co.

Key elements of PepsiCo’s success:
 Core R&D team

 Unique partnership with local agencies including a public 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

.
Contd..,
 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 computerised

receipts and transparent system

 Maintenance of perfect logistics system and global marketing standards

Conclusion:
Co-ordination, Motivation, and Transaction costs are
three pillars of a contract arrangement
(ii)co-ordinating to minimize production costs
(iii)balancing decentralization and centralisation in farm
decisions
(iv)minimizing or sharing risk and uncertainty
(v)encouraging group or co-operative action
I. motivating long term contracts to reduce
hold up problem
II. balancing pros and cons by renegotiation of contracts
over time
III. reducing direct costs of contracting
IV. using transparent contracts
Several Indian and Multinational companies have
begun such initiatives in India and have
demonstrated repeated success .
Thank u.,,