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INTRODUCTION

Introduction1
Contract Farming has been in existence for many years as a means of organizing the
commercial agricultural production of both large – scale and small –scale farmers. In an
age of market liberalization, globalization and expanding agri business, there is a danger
that small- scale farmers will find difficulty in fully participating in the market economy.
The era of globalization, the concept of ‘Contract Farming’ is an effective way to co-
ordinate and promote production and marketing in agriculture. “Contract Farming can be
defined as an agreement between farmers and processing or marketing firms for the
production and supply of agricultural products under forward agreements, frequently at
predetermined prices.”
Contract Farming is essentially an agreement between unequal parties, companies,
Government bodies or individual entrepreneurs on the one hand and economically
weaker farmers on the other. The main feature of Contract Farming is that the
buyer/contractor supplies all the material inputs and technical advise required for
cultivation to the cultivator. This approach is widely used, not only for tree and cash
crops but also, increasingly for fruits and vegetables, poultry, pigs, dairy products and
even prawn and fish. Indeed, Contract Farming is characterized by its “enormous
diversity” not only with regard to the products contracted but also in relation to many
different ways in which it can carried out.
The advantages, disadvantages and problems arising from contract farming will vary
according to the physical, social and market environments. More specifically, the
distribution of risks will depend on such factors as the nature of the markets for both the
raw material and the processed product, the availability of alternative earning
opportunities for farmers, and the extent to which relevant technical information is
provided to the contracted farmers. These factors are likely to change over time, as will
the distribution of risks.

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History of Contract Farming2
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 Pepsico 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 in 2000, 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.Contract
Farming is again vogue, and even tried for bulk production of subsistence crops, such as
paddyrice, 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 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

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local firms, Multinational companies, some international aid and lending agencies etc
have been involved in these contract farming schemes (Glover 1994).

ADVANTAGES FOR FARMERS3


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;
2. access to credit;
3.introduction of appropriate technology;
4. skill transfer;
5.guaranteed and fixed pricing structures; and
6. access to reliable markets.

Provision of inputs and production services


Many contractual arrangements involve considerable production support in addition to
the supply of basic inputs such as seed and fertilizer. Sponsors may also provide land
preparation, field cultivation and harvesting as well as free training and extension. This is
primarily to ensure that proper crop husbandry practices are followed in order to achieve
projected yields and required qualities. There is, however, a danger that such
arrangements may lead to the farmer being little more than a laborer on his or her own
land. It is often difficult for small-scale farmers outside the contract-farming context to
gain access to inputs. In Africa, in particular, fertilizer distribution arrangements have
been disrupted by structural adjustment measures, with the private sector having yet to
fill adequately the void created by the closure of parasitical agencies. In many countries a
vicious circle has developed whereby the low demand for inputs provides no incentive
for the development of commercial distribution networks and this, in turn, further

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adversely affects input availability and use. Contract farming can help to overcome many
of these problems through bulk ordering by management.

Access to credit
The majority of smallholder producers experience difficulties in obtaining credit for
production inputs. With the collapse or restructuring of many agricultural development
banks and the closure of many export crop marketing boards (particularly in Africa),
which in the past supplied farmers with inputs on credit, difficulties have increased rather
than decreased. Contract farming usually allows farmers access to some form of credit to
finance production inputs. In most cases it is the sponsors who advance credit through
their managers. However, arrangements can be made with commercial banks or
government agencies through crop liens that are guaranteed by the sponsor, i.e. the
contract serves as collateral. When substantial investments are required of farmers, such
as packing or grading sheds, tobacco barns or heavy machinery, banks will not normally
advance credit without guarantees from the sponsor.
The tendency of certain farmers to abuse credit arrangements by selling crops to buyers
other than the sponsor (extra-contractual marketing), or by diverting inputs supplied by
management to other purposes, has caused some sponsors to reconsider supplying most
inputs, opting instead to provide only seeds and essential agrochemicals. The policies and
conditions that control advances are normally described in attachments to contract.

Introduction of appropriate technology


New techniques are often required to upgrade agricultural commodities for markets that
demand high quality standards. New production techniques are often necessary to
increase productivity as well as to ensure that the commodity meets market demands.
However, smallscale farmers are frequently reluctant to adopt new technologies because
of the possible risks and costs involved. They are more likely to accept new practices
when they can rely on external resources for material and technological inputs.
Nevertheless, the introduction of new technology will not be successful unless it is
initiated within a well managed and structured farming operation. Private agribusiness
will usually offer technology more diligently than government agricultural extension

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services because it has a direct economic interest in improving farmers’ production. Most
of the larger sponsors prefer to provide their own extension rather than rely on
government services.

Skill transfer
The skills the farmer learns through contract farming may include record keeping, the
efficient use of farm resources, improved methods of applying chemicals and fertilizers, a
knowledge of the importance of quality and the characteristics and demands of export
markets. Farmers can gain experience in carrying out field activities following a strict
timetable imposed by the extension service. In addition, spillover effects from contract
farming activities could lead to investment in market infrastructure and human capital,
thus improving the productivity of other farm activities. Farmers often apply techniques
introduced by management (ridging, fertilizing, transplanting, pest control, etc.) to other
cash and subsistence crops.

Guaranteed and fixed pricing structures


The returns farmers receive for their crops on the open market depend on the prevailing
market prices as well as on their ability to negotiate with buyers. This can create
considerable uncertainty which, to a certain extent, contract farming can overcome.
Frequently, sponsors indicate in advance the price(s) to be paid and these are specified in
the agreement. On the other hand, some contracts are not based on fixed prices but are
related to the market prices at the time of delivery.

Access to reliable markets


Small-scale farmers are often constrained in what they can produce by limited marketing
opportunities, which often makes diversification into new crops very difficult. Farmers
will not cultivate unless they know they can sell their crop, and traders or processors will
not invest in ventures unless they are assured that the required commodities can be
consistently produced.
Contract farming offers a potential solution to this situation by providing market
guarantees to the farmers and assuring supply to the purchasers. Even where there are

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existing outlets for the same crops, contract farming can offer significant advantages to
farmers. They do not have to search for and negotiate with local and international buyers,
and project sponsors usually organize transport for their crops, normally from the farm
gate.

PROBLEMS FACED BY FARMERS4


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;
4. corruption;
5. domination by monopolies; and
6. indebtedness and over reliance on advances.

Increased risk
Farmers entering new contract farming ventures should be prepared to balance the
prospect of higher returns with the possibility of greater risk. Such risk is more likely
when the agribusiness venture is introducing a new crop to the area. There may be
production risks, particularly where prior field tests are inadequate, resulting in lower-
than-expected yields for the farmers. Market risks may occur when the company’s
forecasts of market size or price levels are not accurate. Considerable problems can result
if farmers perceive that the company is unwilling to share any of the risk, even if partly
responsible for the losses. In Thailand, for example, a company that contracted farmers to
rear chickens charged a levy on farmers’ incomes in order to offset the possibility of a
high chicken mortality rate. This was much resented by the farmers, as they believed that
the poor quality of the day-old chicks supplied by the company was one reason for the
problem.

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Unsuitable technology and crop incompatibility
The introduction of a new crop to be grown under conditions rigorously controlled by the
sponsor can cause disruption to the existing farming system. For example, the managers
may identify land traditionally reserved for food crops as the most suitable for the
contracted crop.
Harvesting of the contracted crop may fall at the same time as the harvesting of food
crops, thus causing competition for scarce labour resources. Particular problems may be
experienced when contract farming is related to resettlement programmers. In Papua New
Guinea, for example, people from the Highlands were resettled in coastal areas to grow
oil palm and rubber. This required the farmers, who were traditionally sweet potato
eaters, to learn cultivation techniques for new food crops and to adapt their dietary
practices accordingly. Two factors should be considered before innovations are
introduced to any agricultural environment. The first is the possible adverse effect on the
social life of the community. When tobacco growers in Fiji were encouraged to cure
tobacco themselves rather than sell it in the fresh green form, it was found that they were
unable to handle the highly technical curing operation with any degree of continuity.
This was attributed to intermittent social commitments and customary obligations that
overrode contractual responsibilities and eventually resulted in the cancellation of their
contracts. The second factor is the practicality of introducing innovations or adaptations.
The introduction of sophisticated machines (e.g. for transplanting) may result in a loss of
local employment and overcapitalization of the contracted farmer. Furthermore, in field
activities such as transplanting and weed control, mechanical methods often produce less
effective results than do traditional cultivation methods. Field extension services must
always ensure that the contracted crop fits in with the farmer’s total cropping regime,
particularly in the areas of pest control and field rotation practices.

Manipulation of quotas and quality specifications


Inefficient management can lead to production exceeding original targets. For example,
failures of field staff to measure fields following transplanting can result in gross over
planting. Sponsors may have unrealistic expectations of the market for their product or
the market may collapse unexpectedly owing to transport problems, civil unrest, change

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in government policy or the arrival of a competitor. Such occurrences can lead managers
to reduce farmers’ quotas. Few contracts specify penalties in such circumstances. In some
situations management may be tempted to manipulate quality standards in order to reduce
purchases while appearing to honor the contract. Such practices will cause sponsor-
farmer confrontation, especially if farmers have no method to dispute grading
irregularities. All contract farming ventures should have forums where farmers can raise
concerns and grievances relating to such issues.

Corruption
Problems occur when staff responsible for issuing contracts and buying crops exploit
their position. Such practices result in a collapse of trust and communication between the
contracted parties and soon undermine any contract. Management needs to ensure that
corruption in any form does not occur. On a larger scale, the sponsors can themselves be
dishonest or corrupt. Governments have sometimes fallen victim to dubious or “fly-by-
night” companies who have seen the opportunity for a quick profit. Techniques could
include charging excessive fees to manage a government-owned venture or persuading
the government and other investors to set up a new contract farming company and then
sell that company overpriced and poor quality processing equipment. In such cases
farmers who make investments in production and primary processing facilities run the
risk of losing everything.

Domination by monopolies
The monopoly of a single crop by a sponsor can have a negative effect. Allowing only
one purchaser encourages monopolistic tendencies, particularly where farmers are locked
into a fairly sizeable investment, such as with tree crops, and cannot easily change to
other crops. On the other hand, large-scale investments, such as for nucleus estates, often
require a monopoly in order to be viable. In order to protect farmers when there is only a
single buyer for one commodity, the government should have some role in determining
the prices paid. Drucker suggests that privately managed monopolies under public
regulation are preferable to non-regulated private or public monopolies. The greatest
abuses do tend to occur when there are public monopolies, where buying prices are set by

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the government, or where farmers have made long-term investments in perennial crops.
In 1999 the Kenya Tea Development Authority experienced serious unrest amongst its
growers, reportedly because of the Authority’s inefficient extension services and alleged
“manipulation” of farmers. There was also discontent in Kenya among sugar farmers
because the price set by the government did not change between 1997 and 1999.
Indebtedness and over reliance on advances were high, as they thought contract farming
did not pay. One of the major attractions of contract farming for farmers is the
availability of credit provided either directly by the company or through a third party.
However, farmers can face considerable indebtedness if they are confronted with
production problems, if the company provides poor technical advice, if there are
significant changes in market conditions, or if the company fails to honour the contract.
This is of particular concern with long-term investments, either for tree crops or for on-
farm processing facilities. If advances are uncontrolled, the indebtedness of farmers can
increase to uneconomic levels. In one venture “compassionate” advances for school fees,
weddings and even alimony resulted in many farmers receiving no payments at the end of
the season. Dropout rates for farmers in that particular project.

ADVANTAGES FOR SPONSORS5


Companies and government agencies have a number of options to obtain raw materials
for their processing and marketing activities. The benefits of contract farming are best
examined in the light of the other alternatives, namely spot market purchases and large-
scale estates. The main potential advantages for sponsors can be seen as:
1.political acceptability;
2. overcoming land constraints;
3.production reliability and shared risk;
4. quality consistency; and
5.promotion of farm inputs.

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Political acceptability
It can be more politically expedient for a sponsor to involve smallholder farmers in
production rather than to operate plantations. Many governments are reluctant to have
large plantations and some are actively involved in closing down such estates and
redistributing their land. Contract farming, particularly when the farmer is not a tenant of
the sponsor, is less likely to be subject to political criticism. As a result of the
restructuring of their economies, many African governments have promoted contract
farming as an alternative to private, corporate and stateowned plantations. In recent years
many countries have seen a move away from the plantation system of production to one
where smaller-scale farmers grow crops under contract for processing and/or marketing.
The decision to choose contract farming does not make a company totally immune from
criticism. For example, the considerable opposition to the role of multinational
corporations in India in the late 1990s had a negative effect on investment in contract
farming by foreign agribusiness corporations.

Overcoming land constraints


Most of the world’s plantations were established in the colonial era when land was
relatively plentiful and the colonial powers had few scruples about either simply
annexing it or paying landowners minimal compensation. That is, fortunately, no longer
the situation. Most large tracts of suitable land are now either traditionally owned, costly
to purchase or unavailable for commercial development. Moreover, even if it were
possible for companies to purchase land at an affordable price, it would rarely be possible
to purchase large enough parcels of land to offer the necessary economies of scale
achieved by estate agriculture. Contract farming, therefore, offers access to crop
production fromland that would not otherwise be available to a company, with the
additional advantage that it does not have to purchase it.

Production reliability and shared risk


The failure to supply agreed contracts could seriously jeopardize future sales. Plantation
agriculture and contract farming both offer reasonable supply reliability. Sponsors of
contract farming, even with the best management, always run the risk that farmers will

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fail to honor agreements. On the other hand, plantation agriculture always runs the risk of
labour disputes. In the case of horticultural production some companies do prefer estate
rather than contracted production. In Gambia and Ghana, for example, a number of crops
are grown under the estate model, as are strawberries and flowers in Kenya. Working
with contracted farmers enables sponsors to share the risk of production failure due to
poor weather, disease, etc. The farmer takes the risk of loss of production while the
company absorbs losses associated with reduced or nonexistent throughput for the
processing facility. Where production problems are widespread and no fault of the
farmers, sponsors will often defer repayment of production advances to the following
season. Both estate and contract farming methods of obtaining raw materials are
considerably more reliable than making purchases on the open market. The open market
is rarely an acceptable option for organizations that have significant assets tied up in
processing facilities and need to have guaranteed quantities of raw material to justify
their investment. For example, it is hardly ever an acceptable option for companies who
make regular shipments of horticultural produce to supermarkets and for export.
Companies must ensure that crops are harvested and sold on a carefully scheduled and
consistent basis: a factor that is normally assured under a well-directed contract farming
scheme.

Quality consistency
Markets for fresh and processed agricultural produce require consistent quality standards.
Moreover, these markets are moving increasingly to a situation where the supplier must
also conform to regulatory controls regarding production techniques, particularly the use
of pesticides. For fresh produce there is an growing requirement for “traceability”, i.e.
suppliers to major markets increasingly need to be confident of identifying the source of
production if problems related to food safety arise. Both estate and contracted crop
production require close supervision to control and maintain product quality, especially
when farmers are unfamiliar with new harvesting and grading methods. Often, large
numbers of crops within a single project have to be transplanted, harvested and purchased
in a uniform manner so as to achieve product consistency. Agribusinesses producing for
markets demanding high quality standards, such as fruits and vegetables for export, often

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find that small-scale farmers and their families are more likely to produce high-quality
products than farmers who must supervise hired labour. Also contract farming makes
quarantine controls more manageable. It is easier for quarantine authorities to inspect a
limited number of exporters of a single commodity, who closely supervise farmers, than
to inspect hundreds, or sometimes thousands, of individual producers selling through
open markets. Much of the production of “organic” foods is being done on contract, as an
integrated operation facilitates a clear crop identity from farmer to retailer. In some
highly sophisticated operations, containers are now being loaded on the farm for direct
delivery to the supermarket.

Promotion of farm inputs


An example of an unusual but, nevertheless, interesting benefit for sponsors comes from
the Philippines. A feed milling company experienced difficulties in marketing its feed,
which was more expensive than that produced by competing companies. To solve this
problem it developed rearing schemes for pigs and poultry under contract in order to
provide a market outlet for its feeds and to demonstrate their performance to other
farmers living near the contracted farmers.

PROBLEMS FACED BY SPONSORS6


The main disadvantages faced by contract farming developers are:
1. land availability constraints;
2.social and cultural constraints;
3. farmer discontent;
4. extra-contractual marketing; and
5. input diversion.

Land availability constraints


Farmers must have suitable land on which to cultivate their contracted crops. Problems
can arise when farmers have minimal or no security of tenure as there is a danger of the
sponsor’s investment being wasted as a result of farmer landlord disputes. Difficulties are

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also common when sponsors lease land to farmers. Such arrangements normally have
eviction clauses included as part of the conditions.
Some contract farming ventures are dominated by customary land usage arrangements
negotiated by landless farmers with traditional landowners. While such a situation allows
the poorest cultivator to take part in contract farming ventures, discrete management
measures need to be applied to ensure that landless farmers are not exploited by their
landlords. Before entering into contracts, the sponsor must ensure that access to land is
secured, at least for the term of the agreement.

Social and cultural constraints


Problems can arise when management chooses farmers who are unable to comply with
strict timetables and regulations because of social obligations. Promoting agriculture
through contracts is also a cultural issue. In communities where custom and tradition play
an important role, difficulties may arise when farming innovations are introduced. Before
introducing new cropping schedules, sponsors must consider the social attitudes and the
traditional farming practices of the community and assess how a new crop could be
introduced. Customary beliefs and religious issues are also important factors. For
example, Easter for some Christians is an inappropriate time for sowing vegetable crops.
Harvesting activities should not be programmed to take place during festivals, and failure
to accommodate such traditions will result in negative farmer reaction. It must also be
recognized that farmers require time to adjust to new practices.

Farmer discontent
A number of situations can lead to farmer dissatisfaction. Discriminatory buying, late
payments, inefficient extension services, poor agronomic advice, unreliable
transportation for crops, a mid-season change in pricing or management’s rudeness to
farmers will all normally generate dissent. If not readily addressed, such circumstances
will cause hostility towards the sponsors that may result in farmers withdrawing from
projects.

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Extra-contractual marketing
The sale of produce by farmers to a third party, outside the conditions of a contract, can
be a major problem. Extra-contractual sales are always possible and are not easily
controlled when an alternative market exists. For example, a farmer cooperative in
Croatia bought cucumbers, red peppers and aborigines on contract. The cooperative’s
advances to the farmers included all necessary production inputs. Unfortunately members
often sold their vegetables to traders at higher prices than the cooperative had contracted.
The outside buyers offered cash to farmers as opposed to the prolonged and difficult
collection of payments negotiated through the cooperative. Sponsors themselves can
sometimes be a cause of extra-contractual practices. There are several companies
working with the same crop (e.g. cotton in some southern African countries), they could
collaborate by establishing a register of contracted farmers. Managers must be aware of
produce being sold outside the project and also be aware of produce from outside being
channeled into the buying system. This occurs when non-contracted farmers take
advantage of higher prices paid by an established sponsor. Non-contracted crops are
filtered into the buying system by outside farmers through friends and family who have
crop contracts. Such practices make it difficult for the sponsor to regulate production
targets, chemical residues and other quality aspects.

Input diversion
A frequent problem is that farmers are tempted to use inputs supplied under contract for
purposes other than those for which they were intended. They may choose to use the
inputs on their other cash and subsistence crops or even to sell them. Clearly this is not
acceptable to the sponsor, as the contracted crop’s yields will be reduced and the quality
affected. Steps to overcome such problems include improved monitoring by extension
staff, farmer training and the issuing of realistic quantities of inputs. However, the
knowledge that a contract has the advantages of technical inputs, cash advances and a
guaranteed market usually makes the majority of farmers conform to the agreement.
Unless a project is very poorly managed, input diversion is usually an annoyance rather a
serious problem.

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CONTRACT FARMING IN INDIA

Introduction7
The Indian agri-food system is undergoing rapid transformation and there is growing
evidence that contract farming will have an important role in this transformation. An
important concern in Indian agriculture is that while “front end” activities – including
wholesaling, processing, logistics, and retailing – are rapidly expanding and
consolidating, the “back end” activities of production agriculture have been continuously
fragmenting (Gulati, 2008). The challenge lies in linking the two ends and ensuring
viable business opportunities for both farmers and agri-businesses. Establishing farm-
firm linkages is not only about providing assured markets, reducing risk, and ensuring
‘remunerative’ prices, but also providing critical services such as credit, insurance,
grading and inspection, technology extension, and market information. These institutional
services can help elevate the scale at which small holders can operate, raise their
productivity and income, and mitigate the risks involved in participating in markets for
high value horticultural, livestock, and fishery products. The recent growth and
diversification of consumer demand and the expansion of organized agricultural
processing and marketing ventures in India has the potential to boost the market
opportunities, productivity, and incomes of farmers, including small holders. However,
achieving these goals will likely require creation of new institutions and innovations to
develop supply chains and facilitate linkages between farmers, wholesalers, processors,
and retailers. Among these institutions and innovations are various models of contract
farming, including those led by cooperatives, by farmer groups, and by various types of
private sector resource intermediation that develop backward linkages to growers.

Consolidation at the Top of the Value Chain


India is currently riding a tide of organized retail expansion, especially in the food and
grocery segments, which have been growing at annual rates between 16 and 50 percent
over the past few years (Reardon and Gulati, 2008). The top 10 Indian organized food
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and grocery retailers grew at the rate of 72.4 percent from 2002 to 2007 (Planet Retail,
2008). While total food and groceries account for nearly 60 percent of total retail sales in
India, food and grocery sales by organized sector firms account for only a little more than
10 percent of total organized sector retail sales, indicating that there is ample scope for
scaling up of organized food and grocery retailing. The high growth rate of the top
players in India’s organized food and grocery segment suggests that this sector will
occupy a growing share of both the food and grocery market and the overall retail market
in India.
Growing demand for processed food products is an important component of India’s
expanding food and grocery business, providing a boost to India’s food processing sector,
which has grown about 13 percent annually from 2002-03 to 2006-07 (Trivedi, 2008). As
in retailing, the role of organized food processing firms within the overall food
processing industry (organized and unorganized) has increased from 64 percent in 1984-
85 to 81 percent in 2000-01, and is likely to have grown further in the last couple of years
(Bhavani et.al. 2007). Considerable new capacity is being added in the organized food
processing sector. The expansion of organized food processing and food and grocery
retailing is inducing greater competition among multiple private sector players,
contributing to a virtuous cycle of growth, consolidation, and modernization, capturing
scale economies in line with the rising market demand. This competition among firms has
created pressure to compress supply chains, cut costs, and achieve increased
competitiveness in the domestic and global market. In this context, contract farming
models are among the mechanisms for streamlining procurement and logistics services
that are high on the agenda of organized retailers and agro-processors.

Fragmentation at the Bottom of the Supply Chain


In production agriculture, the trend in India is towards fragmentation rather than
consolidation. The average size of landholdings declined from 2.2 hectares in 1970-71 to
1.06 hectares in 2003. Nearly 88 percent of the farmers have less than 2 hectares of land,
and account for about 44 percent of the operated area (NSSO, 2006). Although these
farms are small, indications are that they are more efficient than larger farmers in terms
of land productivity, presumably due to a high share of family labor on small farms. The

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share of marginal and small farmers (of less than 2 hectares) in the total value of
agricultural output is about 51 percent, substantially higher than their 44 percent share of
area operated (Srivastava, 2008). While smallholders, by virtue of available family labor
and intensive cultivation practices, can be highly productive, they typically have a small
marketable surplus and face high transaction costs in marketing their produce.
Diversifying out of traditional crops towards high value agriculture poses two key
challenges. First, higher production risk (susceptibility to pest attack and climatic
adversities) and price risk associated with high value agriculture compared to grains often
deters diversification. Second, lack of resources (financial assets as well as access to
credit) coupled with inadequate market and crop knowledge often restricts shifts to new
enterprises and investments in variable and fixed inputs. Small farmers often find
themselves locked in a situation of income uncertainty and low risk bearing capacity, thus
constraining shifts towards higher value and income generating activities. Again, contract
farming models that can share risk and overcome resource constraints emerge as a
possible approach to facilitate the transformation of small holders to high value
agriculture.

Contract Farming and Farm-Firm Linkages


Indian agriculture has begun to diversify and future sources of agricultural income are
likely to come increasingly from the high value segment, driven by rising demand for
high value horticultural, livestock, and fishery products. While the potential benefits of
high value agriculture, including higher income and employment, are significant, it will
be necessary to overcome key challenges associated with meeting farmer resource needs
and mitigating production and marketing risk. The challenge is to identify innovative
solutions, possibly based on contract farming models, that are efficient and competitive
and also ‘inclusive’ in terms of working with small holders on sustainable basis.

Direct Procurement –There are different models of farm-firm linkage ranging from
simple marketing agreements, to risk sharing, to forward marketing and futures
contracting. In a bid to keep their supply chain moving, processors and retailers may
choose to source raw materials from government regulated market yards, small traders, or

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directly from farmers. Direct procurement may be preferred given the transaction costs
and quality problems associated with procuring from government regulated markets
(mandis). In such an arrangement, there is no contractual tie-up with the farmers and
anyone is free to sell their produce subject to certain quality criteria. Indian retailers such
as Reliance, Spencer’s, Subhiksha, and Food Bazaar currently use this procurement
model. Direct procurement from farmers can be done only in states that have amended
their Agricultural Produce Marketing Committee (APMC) Act to permit buyers to
purchase directly from producers, farmers in line with the Model Act 2003 proposed by
the central government. In states that have not amended their APMC Act, purchases must
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be through government regulated mandis, paying the commissions and marketing fees
imposed in those markets.

Open-Source Intermediation – Another variant of farm-firm linkage is open-source


intermediation, involving provision of information about market prices, crop, and good
cultivation practices to farmers without any buy back guarantee. The idea is not to create
a backend supply line of a particular company, but bridge the knowledge and information
gap that exists at the farm level, and also supply inputs to farmers without any ‘lock in’
agreement. However, in due course, the model of open-source intermediation can be
adapted for specific supply lines, as and when an opportunity arises. This is well
observed in the case of the Choupal Sagar and Choupal Fresh models adopted by ITC
following the success of e-choupal.
There appears to be a large unmet demand for agricultural services and creation of rural
service platforms that has given rise to another option for forging effective firm-farm
linkages. Research and development activities lose their effectiveness unless they reach
farmers’ fields, and much depends on the effectiveness of the extension service network.
Rural business or “agri-hubs” led by public-private partnerships between panchayats and
the private sector (CII in partnership with the Ministry of Panchayati Raj) provide input
services for farmers and provide markets for their produce. Several private sector players
are also developing the concept of business hubs to reach out to farmers, including DSCL
Hariyali Kisan Bazar, TATA Kisan Kendras, Godrej Aadhaar, and ITC e-Choupal and
Choupal Sagar. The scale of these operations remains small in comparison to the needs of

18
farmers and rural areas, but this model may offer an opportunity to rapidly scale up the
activities of private firms, and resulting farm-firm linkages. These “agri-hubs” potentially
can provide ‘one stop shopping’ for farmers by providing inputs such as seed,
technology, and credit, and services such as extension and insurance, as well as daily
household products.

Limitations of Contract Farming


Theoretically, farmers stand to gain from contractual agreements that provide lower
transaction costs, assured markets, and better allocation of risks. On the other hand,
contracting firms have the advantage of more assured supplies, and reasonable control
over quality and other specifications. However, in practice, there are practical problems
that emerge in agricultural contracting that can result in losses to both farmers and firms.
Contracting agreements are often verbal or informal in nature, and even written contracts
often do not provide the legal protection in India that may be observed other countries.
Lack of enforceability of contractual provisions can result in breach of contracts by either
party. In India, there have been instances of farmers refusing to sell to contracting firms
when market prices exceed the contract price, and of firms refusing to purchase
contracted quantities or pay contracted prices due to market conditions. Neither the
contracting firm nor the farmers are keen to contest these issues in a court. Most often, it
is mutual understanding and faith that drives contractual relationships and it takes a long
time to win mutual trust and confidence. Contract farming arrangements are often
criticized for being biased in favor of firms or large farmers, while exploiting the poor
bargaining power of small farmers. In such situations, a viable approach seems to be to
form clusters of small farmers that can create a scale effect and also enhance the
bargaining position of the farmers. Success in developing contracting models or other
forms of farm-firm linkages that are effective for small holders will be a key challenge to
small holder participation in the transformation of Indian agriculture.

19
Some Successful Ventures of Contract Farming 8
For the purpose of identifying factors underneath the success of contract farming, we
examine three different models of contract farming in three different commodities viz.,
milk, broilers and vegetables 4

Contract farming in dairying takes form of an intermediate contract. The model was
developed and is being implemented by the Nestle India Limited – a multinational firm –
to source milk from small-scale producers. It is well-known that dairying in India is an
integral part of rural economy, yet its scale of production is too small for a majority of
the households to generate cash benefits (Birthal, 2007) . Contracting with such a large
5

number of small-scale producers raises transaction costs to any firm. To reduce the cost
of contracting Nestle follows an intermediate model of contract farming where the
agreement is done with a local villager, called as an ‘agent’. The agent collects milk from
small-scale producers, and also facilitates distribution of inputs and delivery of services.
Nonetheless, overtime there has been some scaling-up of dairying in Nestle’s milk shed
area perhaps due to availability of an assured market in the form of contract farming. As
a result, the firm has also started direct contracting with large producers. The
intermediate contracting however remains the dominant form. In fact, majority dairy
processors in India use intermediate contracts to procure milk supplies.
The contract farming scheme of the Nestle now covers about 100 thousand dairy farmers
in over 1500 villages in several districts of Punjab. In 2005, Nestle collected 438 million
kg of milk from farmers. Most of the milk collected by Nestle firm is processed into
value- added products like baby food, butter, ghee, curd, etc. The firm observes strict
food safety and quality standards right from the milk production stage. It has a well-
developed traceability and milk chilling systems, and for quality milk supplies it
encourages farmers to use milking machines and quality inputs. The case of contract
farming in vegetables relates to the Mother Dairy Fruits and Vegetables Limited
(MDFVL) - a wholly owned subsidiary of the public sector parastatal, National Dairy
Development Board (NDDB). Horticultural production in India is geographically
dispersed; only about 15 percent farm households grow vegetables and 5 percent grow
fruits (Birthal et al., 2007). This means high transaction costs to the firm in securing

8
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20
supplies from scattered producers. To reduce these costs, the MDFVL secures supplies of
fruits and vegetables from growers’ associations promoted by it. The firm provides
technical guidance, services and inputs to association members to ensure that farmers
follow best production and marketing practices.
MDFVL (earlier called SAFAL) is an organized retail chain and was started in 1988 in
Delhi. As of now, the MDFVL secures its supplies from around 300 growers’
associations spread throughout the country, and has almost an equal number of retail
outlets in Delhi. SAFAL is the brand name for MDFVL products. Recently, the MDFVL
has established a 100 percent export-oriented HACCP certified processing plant in
Mumbai. The model of contract farming in broilers in India is a replica of what prevails
in most other countries. Firms provide day-old chicks, feed, vaccines and services to
farmers at no cost to them, and lift entire output by paying fixed growing charges (per
kilogram of body weight of bird) in lieu of their contribution to cost (labor, water and
electricity charges, litter and rent for poultry shed and equipment). Farmers are thus
insured against market risks.
The case of contract farming in broilers relates to the Venkateshwara Hatcheries Limited
(VHL) - one of the leading firms in poultry business in India since early 1970s. The firm
is engaged not only in contract farming poultry, but also manufacturing of poultry feed,
medicines, vaccines and value-added poultry products. Recently, the firm has started a
retail chain in poultry products with brand name ‘BROMARK’.

CRITICAL SUCCESS FACTORS 9


From the contract farming schemes mentioned above we distill out factors that have
played an important role in their success . Table 1 provides some indicators of their
6

performance.

More profit, lower marketing and transaction costs: There is a striking difference in the
profits of contract and non-contract farmers particularly in the case of milk and spinach.
Contract farmers realize more profits as compared to non-contract farmers; the difference
is more than double in milk, and 78 percent in spinach. Other studies too indicate higher

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21
profits for contract farmers. Birthal, Jha and others (2006) have reported contract dairy
farmers receiving 70 percent more profits over non-contract farmers. In potato, Kumar
(2006) finds 143 percent higher profit for contract farmers over non-contract farmers.
Table 1: Economics of contract versus non-contract production

Figures presented in table 1 provide that More profits with contract farming are due to
savings in marketing and transaction costs, which otherwise are very high in the wet
markets. For
milk and spinach, marketing and transaction costs guzzle 15-22 percent of the gross
revenue (sale price) of the non-contract farmers. Singh (2005) reports marketing costs
eating away 13-27 percent of the sale price of vegetables. Gandhi and Namboodri (2002)
also report high marketing costs and margins in fruits and vegetables. Through contracts
farmers can avoid marketing and transaction costs to a large extent (Table 1). Dairy and
spinach farmers could save as much as 90 percent of these costs over non-contract
farmers. There are other sources, e.g. yield, production cost and price, of difference in
profits of contract and non-contract farmers, their contribution however is not significant.

22
Similar results have been reported for milk by Birthal, Jha and others (2006). The
evidence leads to us to conclude that ceteris paribus success of any contract farming
scheme would depend on its capability to improve farm profitability and reduce
marketing and transaction costs.
Reducing Risk: The difference in profits of contract and non-contract farmers in case of
broilers is not as large as in case of milk and spinach, despite lower marketing and
transaction costs for the contract farmers (Table 1). The extent of marketing and
transaction costs however is too small for both contract and non-contract farmers to cause
any significant difference in profits . So is the case with average yield (body weight of the
9

birds). Some studies (Mehta et al., 2003; Fairoze et al., 2006) also indicate that contract
farming in broilers is not as profitable as independent production . If the contract farming
10

in broilers is not so profitable then why it is widely prevalent in India as well as other
11

countries?
Poultry production is capital-intensive and faces high production and price risks (Figure
1), as compared to many other agricultural enterprises. Under such situations, contract
farming performs banking and insurance functions. Agribusiness firms provide critical
inputs, like day-old chicks and feed at no cost to the farmers, and farmers in lieu of their
contribution to cost of production receive fixed growing charges independent of market
prices, while profits for non-contract farmers depend on market prices, which are highly
volatile. The firms also share production risks limited to natural mortality of about 5
percent. Contract farming thus reduces uncertainty in availability, quality and prices of
inputs, eases capital constraint and insulates farmers against market risks. Ramaswami et
al. (2006) have estimated that through contracts broiler farmers could shift as much as 88
percent of the market risk to the firms. Birthal et al. (2005) too observe little variation in
profits of contract farmers (CV=3.5%) than of non-contract farmers (CV=70%).
The above discussion brings out that there is a tradeoff between returns and risks in
contract farming of commodities involving very high market risk. Studies on contract
farming of some other commodities, like cotton, potato and Basmati rice also indicate
that contract farming works well if agribusiness firms manage credit and insurance for
farmers (Anon., 2003; Singh, 2007).

23
Figure : Farm-gate prices of broilers in India, 2004-06

The corollary to this is that the success of contract farming in capital-intensive and
riskier enterprises would depend on the extent to which it can protect farmers against
production and market risks.

Competitive pricing: Contract farming is often criticized on the ground that it empowers
firms to extract monopsonistic rent in the output market and monopoly rent in the input
market, particularly if the markets are imperfect and farmers face high asset-specificity 12

in terms of investment, time and skills.


From a comparison of output prices and unit cost of production for contract and non-
contract farmers in Table 1 it however appears that firms abstain from extracting
monopsony and monopoly rents. Output prices for contract farmers are marginally
higher, and the unit cost of production is marginally lower than for non-contract farmers.

24
Further, output prices (milk and spinach) are not pre-determined , but are linked to
13

market prices. Over and above market prices, firms pay some premium as to manage the
problem of extra-contractual sales. The firms have also advantage of scale economies in
procurement of inputs and services, and pass on a part of these benefits to farmers by
charging them less than the market prices. Singh (2007) also report similar evidence in
case of potato and Basmati rice.
Cementing partnership through non-price factors: Non-price factors, like regular off-
take of output, timeliness in payments and provision of inputs, technical advice and
services, and incentives for efficiency and clean production have played an important role
in the success of the contract farming schemes described above. Nestle rewards farmers
for efficiency and clean milk production and observes timeliness in payments, inputs and
services. VHL provides incentives to broiler farmers for better efficiency and also shares
with them the incremental profits due to higher market prices. Some other studies, too
have observed an important role of non-price factors in expanding/strengthening the
partnership between farmers and firms (Singh, 2007; Thirunavukkarasu and
Sudeepkumar, 2005). Thirunavukkarasu and Sudeepkumar (2005) have reported a strong
tendency among dairy farmers to switch over from informal markets to formal markets,
and also from one formal to another formal market mainly due non-price factors.
The corollary to this is that the non-price factors are as important in cementing the long-
run relationship and trust between firms and farmers as are the prices.

Spreading supply risks by contracting with small producers: Agribusiness firms, to


minimize costs of search, monitoring and enforcement of contracts with a large number
of small farmers, often tend to partner with those farmers who can supply large volumes.
Reliance on a few large suppliers, however, increases supply risk if the alternative supply
sources are limited. Contracts with a large number of small farmers, on the other hand,
spread supply risk. Firms can reduce transaction costs of contracting with small farmers
following innovative approaches, like use of intermediate contracts, growers’
associations and self-help groups to source raw material supplies and distribute inputs
and services. For example, Nestle uses intermediate contracts where a local villager
procures supplies from small dairy producers on behalf of the firm. MDFVL secures its

25
supplies of fruits and vegetables through growers’ associations promoted by it. Some
textile mills, for example Appachi Cotton Company in Tamil Nadu, organize farmers as
self-help groups to secure raw material supplies and provide inputs, services, credit and
insurance (Anon., 2003). Such innovations not only reduce transaction costs of
contracting with small farmers, but also supply risks. Further, it may be noted that in
smallholder dominated agrarian economies, exclusion of small farmers from contract
farming schemes is politically unacceptable and socially undesirable. Inclusion of small
farmers in contract farming increases its political acceptability. Evidence from case
studies on dairy, poultry and vegetables discussed in this paper show that firms could
involve small farmers in contract farming through some organizational structures. Of the
total milk suppliers to Nestle, 56 percent had less than or equal to 5 milch animals
(Birthal et al., 2005). Similarly, about half of the vegetable suppliers to MDFVL had land
holdings of less than or equal to 2 ha (Birthal and Joshi 2007). Erappa (2006) also reports
over half of the contract farmers in gherkin as small farmers.

A long-term commitment and mutual trust: Asset-specificity is very high in contract


farming. Agribusiness firms lock in huge investment in infrastructure and manpower for
processing, procurement and distribution, which, by and large, is commodity-specific.
Similarly, farmers too invest in commodity-specific assets. Some enterprises like fruit
plantation and poultry require considerable initial investment. Both firms and farmers
would fail to realize returns on such investments if there is lack of a long-term
commitment and trust between them.
Often, a lack of a long-term commitment and mutual trust are major causes of breach of
contract and disputes. Effective communication (monitoring), and transparency and
flexibility in terms and conditions are needed to develop mutual trust. For example,
Nestle has been sustaining its partnership with dairy farmers in Punjab for over the last
four decades because of a commitment and mutual trust. Nestle started its processing
facility in 1962 with 2 million kg of milk sourced from 4,660 farmers in 66 villages in
Punjab. Its operations now have expanded manifold; in 2005 it procured 438 million kg
milk from over 95 thousand farmers spread over 1,700 villages (Figure 2).

26
The corollary is that a long term commitment and mutual trust between firms and farmers
are essential to the success and sustainability of contract farming.

27
Figure : Scaling-up in dairy production in India

Scaling-out and scaling-up: Scaling-out and scaling-up of contract farming are important
for both the firm and farmers. For a firm scaling-out as well as scaling-up are important
to procure required volumes of agricultural produce as to optimally utilize its processing
capacity, infrastructure and manpower. Scaling-out and scaling-up however have their
own advantages and disadvantages. Scaling-out spreads supply risk, while scaling-up
may increase it. For farmers, scaling-out offers market opportunities to new entrants,
while scaling-up enables existing contract farmers to augment their income.
1
2 ROLE OF POLICIES IN PROMOTING CONTRACT FARMING10
The success factors identified in the previous section are intrinsic to the partnership
between firms and farmers, and provide that if managed properly contract farming can
create a win-win situation for both the parties. Yet, there are several other factors,
particularly those related to policy, that also play an important role in the performance,
outreach and sustainability of contract farming.
Contract farming in India is in the infant stage, and the evidence indicates it can be
developed as a pro-poor market institution through appropriate policies and strategies.
Also there are opportunities for farmers in contract farming. Sustained income growth, a
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28
fast-growing urban population and increasing westernization of diets are fuelling rapid
growth in demand for high-value horticultural and animal food products, which have a
greater scope for production under contracts. Between 2005 and 2025 the demand for
different animal food products is projected to increase by 75-110 percent and for fruits
and vegetable by 85-90 percent, as compared to a 20 percent increase in the demand for
foodgrains (Kumar et al., 2007). The demand for processed food products and beverages
is expected to grow even faster; the share of processed foods and beverages in the total
food expenditure is projected to rise to 15 percent in 2020 from 9 percent in 1999 (Ravi
and Roy, 2006). Besides, export opportunities are also emerging with unfolding of
globalization. The share of high-value food products (dairy, poultry, fruits and
vegetables) in the total agricultural exports has steadily increased; from 13.5 percent in
2001-02 to 15.9 percent in 2005-06 (GoI, 2007).
Contract farming schemes are organized by large agribusiness firms including processors,
exporters and supermarket chains. Developing contract farming thus requires appropriate
policies, infrastructure and regulations that facilitate private investment in agribusiness.
During the last 15 years the Government of India has taken a number of initiatives, such
as de-regulation of food industry, pruning of the list of agricultural items reserved for
small-scale industries, 100 percent foreign direct investment (FDI) in food processing,
reduction in corporate taxes and excise duties on processed foods, establishment of agri-
export zones, priority sector lending to food processing industry, enactment of an
integrated food law, de-regulation of agricultural markets, etc. to boost food processing
and promote agribusiness and contract farming. The following issues however merit
further attention:

Invest in physical infrastructure: A firm’s decision to invest in agribusiness, to a great


extent, is influenced by the availability of good public infrastructure (roads, electricity,
communication network, electricity, etc.). Public infrastructure is essential to reduce
marketing and transaction costs and post-harvest losses, and for quick access and
dissemination of information. Unfortunately, the public infrastructure in India has
remained underdeveloped, leading to a slow growth in private investment in refrigerated
transport, cold storages and food processing. This is reflected in the low level of value-

29
addition to agricultural produce; only 2.2 percent of the production of fruits and
vegetables, 6 percent of the poultry meat, 21 percent of the buffalo meat and 15 percent
of the milk produced in the country are processed into value-added products by the
organized sector (GoI, 2005a). The evidence also shows a greater concentration of
production of high-value agricultural commodities (in which contract farming is more
pronounced) in the areas well-connected with roads and urban centers (Parthasarathy Rao
et al., 2006). Investment in public infrastructure is thus essential to trigger private
investment all along the supply/value chain.

FDI in food retailing: The Government of India allows 100% FDI in food processing 14

but restricts FDI in retailing in general, because of opposition from traders’ lobby and
some political parties that argue that FDI in retailing would adversely affect livelihood of
millions of workers in the unorganized retailing. Restricting FDI in food retailing
however may act as barrier to FDI in food processing and thereby to the growth of food
processing industry, which is crucial to establish strong backward linkages with
agriculture. For example, despite a provision of 100% FDI in food processing the growth
in output of food processing sector has remained almost the same as in the pre-FDI
period.

Promote competition: By enacting the Model Act (The State Agricultural Produce
Marketing Development & Regulation Act) in 2003 the Government of India has taken a
noteworthy step towards creating a level playing field for the private investment in
agricultural markets, agribusiness and contract farming. Its implementation by the state
governments

Evolve mechanisms for resolution of conflicts: The Model Act, 2003 outlines provisions
for regulation of contract farming to protect interests of both agribusiness firms and
farmers. However, one of the provisions that merit attention concerns mechanism for
dispute resolution. Considering the lengthy legal procedures, the Act provides that
disputes between firms and farmers, if any should be mutually resolved or settled by the
Marketing Committee with which the contract farming scheme is registered. However, at

30
present a considerable number of contract farming schemes are informal and remain
unregistered with the Marketing Committee. Non-registration of contract farming
schemes creates a scope for opportunism, breach of contracts and rise in disputes. These
problems would appear in a severe form with spread of contract farming, which is likely.
Thus, there is a need to (i) enforce registration of contract farming schemes, and (ii)
establish a judicial or quasi-judicial body for speedy resolution of disputes.

Develop grades and standards: Price and quality of products are two major factors that
can render a contract farming scheme a success or failure. Agribusiness firms may reject
farm produce or pay a lower price on the ground of it poor quality. This happens because
of a lack of well-defined grades and standards for farm produce. Organized retailers,
exporters and processors are imposing their own grades and standards on producers. The
requirement for developing effective grades and standards and their compliance by both
sellers and buyers cannot be ignored with rising demand for safe and quality foods in
both the domestic and the international markets.

Promote farmers’ organizations and other intermediaries: Often, agribusiness firms


tend to ignore small farmers in contract farming schemes because of higher transaction
costs of dealing with a large number of them. An effective way of involving smallholders
in contract farming is to encourage them to organize themselves into cooperatives, self-
help groups and growers associations. Such organizational structures help them improve
their bargaining power vis-à-vis agribusiness firms, and also generate scale economies in
acquisition of inputs, technology, services and information. Non-governmental
organizations (NGOs) can also play an important role by acting as intermediaries
between firms and farmers.

Public-private partnership in agricultural research and extension: Contract farming is


more prevalent in high-value agricultural commodities that have a considerable market
demand. This implies a greater diversification of agricultural production portfolio, and
sets a demand-driven agenda for agricultural research and extension.

31
State-wise contract farming initiatives by private sector 11
1

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2

3
Contract Farming Models 12

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5

34
6

35
7 COMPARISON OF CONTRACT FARMING MODELS IN
INDIA13

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GROUPING OF MAJOR CONTRACT FARMING INITIATIVES OF
CORPORATES UNDER DIFFERENT MODELS14
8
9

10

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CONTRACT FARMING IN PUNJAB

Crops on contract 15
The failure of public institutions to provide farmers protection and support is the
reason that contract farming is still promoted.

PepsiCo and other companies have used the contract system for the cultivation of
basmati rice, chillies and groundnut, as well as for vegetable crops such as potato.

15
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38
Contract farming is increasingly being presented as a solution for the problems of Indian
agriculture by major international donor agencies, multinational companies and even the
government. It is argued that private sector participation will be promoted through
contract farming, and land-leasing arrangements will allow accelerated technology
transfer, capital inflow and assured markets for crop production, especially of oilseeds,
cotton and horticultural crops.
The United Progressive Alliance (UPA) government's Approach Paper to the Eleventh
Plan gives priority to the development of contract farming. Now, a working group set up
by the National Development Council, under the leadership of then Punjab Chief
Minister Amarinder Singh, has also made a set of proposals to promote contract farming.
In addition to suggesting greater liberalisation of laws and rules for crop contracts, it has
proposed tax rebates for food processing, duty-free imports of machinery and equipment,
exemption of market fees, and liberalised imports of seed varieties for contract farming
programmes.
Contract farming is defined as a system for the production and supply of agricultural or
horticultural products under forward contracts between producers/suppliers and 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 contractor's crop on his land
and harvest and deliver a certain amount of produce calculated on the basis of anticipated
yield and contracted acreage. This could be at a pre-agreed price but need not always be
so. The typical contract is one in which the contractor supplies all the material inputs and
technical advice required for cultivation, while the farmer supplies land and labour.
This system has historical resonances, such as the infamous contracts enforced by indigo
planters in eastern India during the early colonial period. But the more recent pattern of
contract farming has been developed especially in the United States, where corporate
penetration of agriculture is probably the most advanced. Agricultural trade globally is
dominated by transnational corporations, such as Cargill, Archer Daniels Midland and
Monsanto, which are increasingly involved at each stage of the agriculture system. These

39
corporations achieve domination over the market by a combination of horizontal and
vertical integration.
This has increased the margins for the procuring and processing firms while at the same
time reducing farm incomes and increasing the prices for the consumers. This explains
the rising spread between retail prices and the prices received by farmers and livestock
breeders, which has been so marked in the U.S. over the past two decades. It is not
generally known that U.S. farmers have not really gained from the continuing
government subsidies to agriculture - instead large agribusinesses have made huge and
increased profits.
American farmers are financially and politically much stronger than Indian cultivators,
many of whom are already operating at the margin of subsistence. So it is important to be
fully aware of the implications and the need for adequate regulation of contracts.
PepsiCo model
The recent spate of contract farming in India effectively began with the entry of Pepsi
Foods Ltd. (PepsiCo) in 1989 when it installed a tomato processing plant in Hoshiarpur,
Punjab. PepsiCo followed a method whereby the cultivator plants the company's crops on
his land and the company provides selected inputs such as seeds/saplings, consultation on
agricultural practices and advisory services on crop management, besides conducting
regular inspections of the crop.
Subsequently, PepsiCo and other companies used similar methods for the cultivation of
foodgrains (basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from
vegetable crops such as potato. Until recently, this model of contract farming was
considered a success in terms of diversifying cultivation in Punjab and improving
incomes of farmers.
The Punjab government has argued that contract farming is the best means of crop
diversification in a region where there is a real question on ecological survival and the
sustenance of natural resources such as water and soil in a reasonably healthy state.
However, since contract farming is based on private corporate interests that are inherently
profit-driven, there is no reason why these should coincide with the ecological
requirements of the region.

40
Indeed, much of the recent corporate interest in Punjab's agriculture has been in basmati
farming, which is one of the great water-guzzlers. Crop diversification can be encouraged
more effectively through a system of changing the relative prices of crops accompanied
by a supportive system of public agricultural extension services.
Farmers resent system
Farmers in Punjab have become increasingly resentful of a system that has put them
under the total control of corporations, which decide not only the crops grown but also
the procurement price. The growing incidents of the pre-determined prices being reduced
on the pretext of inferior quality of the grain or crop have added to such resentment. The
issue became so critical that several times in recent years the Punjab Agro Foodgrains
Corporation, the State government agency that designed the contract farming programme
in the first place, was forced to step in and buy the basmati rice rejected by the
contracting companies.
Contract farming in Punjab has certainly led to more employment opportunities for some
labour, since the labour intensity of most vegetable crops, except potato, is much higher
than that for traditional crops such as wheat or paddy. However, wages have been pushed
to subsistence levels by increased competition for work through migration. Also, male
labour is being displaced by mechanisation, while lower-paid women and children are
increasingly employed for the more labour-intensive activities. The problem of finding
alternative employment for displaced cultivators has become a serious concern.
The Punjab experience is generally considered to be among the more successful in India
thus far, but even this shows that contract farming holds numerous problems for
agriculture in developing countries like India.
It tends to displace labour quite substantially; marginalise direct cultivators, who lose
control over the production process and often even over their land; encourage more
capital-intensive and often less sustainable patterns of cultivation; result in greater
insecurity and lower incomes for farmers because of the use of quality measures to lower
the effective output price paid by contractors; even deny farmers the benefit of higher
prices, which could be instead absorbed by corporate contractors with local monopolistic
power; propagate monoculture, which reduces food security and the possibility of
livelihood diversification through livestock; rely excessively on the use of lower-paid

41
women workers and child labour; increase and accelerate the process of casualisation of
labour.
Given these evident problems, why is contract farming still promoted so assiduously?
This is really because public institutions have failed to provide farmers with the essential
protection and support required for viability on a sustained basis. What cultivators in
rural India need most of all today is the following combination: a basic price-support
mechanism that ensures that costs are covered; efficient extension services that provide
information about possible crops, new inputs and their implications and new agricultural
practices relevant for the particular area; and the availability of reliable and assured credit
at reasonable rates of interest.
There is no reason why this combination cannot be delivered by the public sector and by
healthy and efficiently functioning marketing cooperatives. But the last decade has seen a
collapse of agricultural extension services and of agricultural credit across rural India.
The Minimum Support Price system is also being run down. And cooperatives have been
shackled by over-regulation, bureaucratic control and political interference so that they
have also mostly not shown the desired results.
However, private corporate firms will not necessarily deliver these requirements either,
since their interest would be to maximise profits in the short term rather than ensure the
long-term sustainability of cultivation.
Of course, not all contract farming need be bad for farmers - in the best case scenario it
can add to and diversify farmers' incomes while creating sustainable cultivation practices.
However, to promote this more desirable type requires active state involvement. If
contract farming is to improve the condition of cultivators rather than intensify the
ongoing agrarian crisis, it is important to have a system of state regulation, intermediation
and monitoring of contract farming practices to ensure the interests of farmers.

Bharti Wal-Mart piloting contract farming in Punjab16


Bharti Wal-Mart has initiated a development programme with the farmers of Punjab,
which could well turn out to be the precursor to contract farming in the country. The

16
http://www.hindustantimes.com/Bharti-Wal-Mart-piloting-contract-farming-in-Punjab/Article1-
476733.aspx

42
programme will help farmers grow high-quality vegetables and fruits with assistance
from the company at each stage of cultivation.
The company also coaches farmers on post-harvest technology after which the
farmers sell their produce to the retail company.
“Our associates engage with the farmers at every stage of cultivation,” the Bharti Wal-
Mart spokesperson told Hindustan Times. “We also help the farmers with post-harvest
practices and help them reduce wastage and improve quality.”
Is this the beginning of contract farming? “Fruits and vegetables are believed to be a
key footfall driver in retail stores and large retailers would eventually resort to contract
farming to secure availability and consistency in quality and price,” the spokesperson
said.
The company said it has launched a pilot programme with 65 farmers in Punjab. “The
farmers currently supply 16 vegetables to the stores on a daily basis.”
Bharti Wal-Mart says it is trying to build an efficient supply chain as the current system
of mandis is inefficient. “The inefficiency is evident by more than 100 per cent price
build up between farmer and consumer,” the company spokesperson said. “It is not just
about negotiating better prices with the suppliers, than removing any inefficiency in the
supply chain.”

Escorts enters contract farming in Punjab17


Escorts Ltd, a $500 million turnover conglomerate, decided to join a group of corporates
undertaking contract farming, with the signing of a agreement with Punjab Agro
Industries Corporation (PAIC).
Under the terms of the memorandum of understanding signed Wednesday by Escorts
Chairman Rajan Nanda, the company will develop a business plan with state-owned
PAIC to facilitate contract farming for long-grained aromatic basmati rice and durum
wheat in Ludhiana, Moga, Sangrur, Muktsar, Faridkot and Bhatinda districts of Punjab
over 50,000 acres of farm land.

17
http://www.siliconindia.com/shownews/Escorts_enters_contract_farming_in_Punjab__
_-nid-19143.html

43
"The company will provide all the inputs including seeds, pesticides, fertiliser,
appropriate agriculture equipment and other services to help farmers diversify and grow
quality produce, primarily basmati rice, durum wheat and oil seeds," Nanda told
reporters.
Punjab Chief Minister Amarinder Singh has set a target of helping farmers in 300,000
acres of land to diversify from the traditional grain cultivation with the help of contract
farming.
Taking advantage of this, several corporates and multinationals like PepsiCo, Rallis,
Mahindra & Mahindra have taken up contract farming in the state.
Tractor manufacturing major Escorts will also work on the business plan drawn up with
PAIC to set up grain handling and storage facilities like conveyor belts and silos.
"We will help farmers in the post-harvest handling like processing, grading and storage
without any manual handling. In addition, we plan to act as facilitators to help farmers
find better markets for their produce," a company spokesperson said.
Escorts has earmarked Rs.1 billion for contract farming and creating post-harvest
infrastructure in Punjab and other states over the next three years.
"Punjab is moving from agriculture to agribusiness and we are proud to make a signal
contribution in this direction," said Nanda.

44
11 CASE STUDIES

12
1. PEPSI18

Partnership With Farmers


PepsiCo India continues to strengthen its partnerships with farmers across the
country to boost their productivity and income. The plan is to strengthen farmer
connect from 21,000 in 2009 to 50,000 by 2012.

Helping farmers improve yield and income


The company's vision is to create a cost-effective, localized agri supply chain for its
business by:
• Strengthening farmer connect from 21,000 in 2009 to 50,000 by 2012.
• Building PepsiCo's stature as a development partner by helping farmer grow more and
earn more.
• Introduction of new high yielding varieties of Potato, Oats, Citrus and others.
• Introduction of sustainable farming methods and contract farming.
• Making world class agricultural practices available to farmers.
• Working closely with farmers and state governments to improve agri sustainability,
crop diversification and enhance farmer incomes.
• Helping farmers refine their farming techniques and raise farm productivity.
• Customized solutions to suit specific geographies and locations.
• Facilitate financial and insurance services so as to de-risk farming.

High Quality Seed Program


In order to provide its farmers “The best quality potato seeds”, PepsiCo collaborated with
the Thapar Institute of Technology to develop quality potato mini-tubers.

18
http://www.google.co.in/search?
hl=en&source=hp&q=Given+the+small+land+holdings+of+the+farmers+in+these+states
%2C+the+company+decided+to+work&meta=&aq=f&aqi=&aql=&oq=&gs_rfai=

45
PepsiCo has also made an investment in a world class potato mini-tuber facility at Zahura
in Punjab which would help getting robust and disease-free seeds to its contract farmers.
The facility would be operational by the end of 2009.

Contract Farming
Partner In Progress Model
PepsiCo has pioneered the concept of contract farming under which the company
transfers agricultural best practices and technology and procures the produce at a pre-
agreed price.
• A 27-acre research and demonstration farm was set up in Punjab to support the
initiative to conduct farm trials of new varieties of potato, chilli, corn, peanut and
other crops.
• PepsiCo India's technical team implemented a high quality seed programme to
deliver early generation and disease-free seeds to farmers.

Potato Farming
The Impact
• World class, top quality, high-yielding potato varieties introduced.
• High yielding potato seeds have enabled farmers to produce world class potatoes and
procure higher returns.
• PepsiCo India has partnered with more than 11,000 farmers working across Punjab,
U.P., Karnataka, Bihar, West Bengal, Gujarat and Maharashtra for the supply of world
class chip-grade potatoes.
• Partnered with State Bank of India to get soft loans to all its contract farmers to reduce
their cost of cultivation and save them from the clutches of money lenders (higher
interest rates).
PepsiCo India has also partnered with 1,200 farmers in Rajasthan to cultivate barley in a
tie-up with the United Breweries Group.

46
PepsiCo Citrus Project
The PepsiCo and PAGREXCO (Punjab Agri Export Corporation) partnered to start a
Citrus Development initiative in 2002, marked a step forward in PepsiCo's commitment
to diversification of agriculture and improvement in quality of life for farmers.

The Impact
• Initiative has emerged as one of the most successful models of public-private
partnerships in Indian agri-business and would create a localized supply base for
citrus juice for Tropicana business.
• Project played a significant role in introducing a less water intensive alternative to
crops such as paddy.
• Today, farmers can choose from 16 varieties of rootstock and 34 varieties of
citrus, largest collection at a commercial nursery.
• Technical support and expertise were extended to the Punjab Government to set
up two fruit processing plants in Hoshiarpur and Abohar - prime citrus growing
areas in Punjab.
• Each plant is capable of processing multiple fruits and capable of acting as a
catalyst for farmers to adopt horticulture.

Frito Lay India to up contract farming by four-fold19


Frito Lay India is looking at increasing contract farming of potato in India by almost
four-fold over the next three years.
“Currently, there are 15,000 farmers doing contract farming of potato for us while we are
sourcing the commodity from 40,000 farmers. Our intent is to build a win-win self-
sustaining contract farming model to improve quality,” Frito Lay India executive vice-
president Ruchira Jaitly, told mediapersons here.
The company, which already has contract farming agreements with farmers in Punjab,
Karnataka, Maharashtra, Madhya Pradesh, Uttar Pradesh, Jharkhand, Uttaranchal and

19
http://www.potatopro.com/Lists/News/DispForm.aspx?ID=3695

47
West Bengal, is also contemplating entering into similar tie-ups in Andhra Pradesh and
Tamil Nadu.

2. NESTLE 20
The Company started milk collection in Moga in 1961 with a collection of 511 Kgs of
milk from 180 farmers. It has substantially expanded its operations with over 85,000
farmers in its own milk district. Nestlé uses local raw materials and develops local
resources wherever possible. Milk Collection Centres with farm cooling tanks to preserve
the quality of milk were established by the Company.
Besides this, milking machines were provided to the farmers maintaining large dairy
farms. Farmers were advised on good breeding and feeding practices, and on the health of
dairy herds. Techniques for increasing milk yields at the farm were introduced. Nestlé
has invested in Chilling Centres and Farm Cooling Tanks. In addition to this, the
Company provides assistance to farmers in the areas of cattle feed, quality fodder seeds,
veterinary medicines and mineral mixture and procurement of bank loans.
Nestlé support goes further than the work with the dairy farmers. The Company is
helping with the construction of facilities for drinking water and lavatories in village
schools in the Moga Factory Milk District. This is a joint effort with the schools, parent
associations and village administrations.
Another project involved the funding of medicines for a Tuberculosis clinic which is
treating residents from Moga town and the nearby villages.
By working very closely with the farmers of the Moga Milk District and local
administrators, Nestlé has helped to raise the quality and hygiene of the milk produced
there and improve the health and life style of the farmers and other residents. Its
contribution to the creation of prosperity on an on-going and sustainable basis has not
only transformed Moga into a prosperous and vibrant milk district today, but also a
thriving hub of industrial activity.

20
http://www.nestle.in/mogasuccess.aspx

48
3. TATA21

Tatas, Punjab team up for basmati contract farming


The Tatas and the Punjab government have teamed up to undertake contract farming of
basmati rice in Punjab. Under the plan, the Punjab government will provide 35,000 acres
of land to cultivate basmati rice in the state.
Tata group company Rallis India, Punjab Agro Industrial Corporation (PAIC) and the
New Delhi-based company LT Overseas have formed a partnership to execute the
project. ICICI will provide credit to farmers for participating in the initiative. LT
Overseas markets the Dawat basmati rice brand. While Rallis will provide farm end
support services, LT overseas will buy the rice that is produced. PAIC has signed an
agreement with ICICI Bank for covering a broad gamut of services. In addition to
providing credit for financing the distribution of seeds and fertilisers, the agreement
provides for assistance to farmers for introducing new crops, varieties and in
diversification of cropping systems.
The initiative is part of the Punjab government’s effort to bring about large-scale crop
diversification in the state during the next 5 to 10 years. As part of the plan, PAIC is
planning to forge marketing alliances with huge basmati rice exporters. "Rallis has
established farm management services to offer customised packages to farmers. The
partnership will give us a chance to work closely with farmers in Punjab and help
develop the best crop," said Rajeev Dubey, managing director, Rallis India. LT Overseas,
which has 40 years of experience in basmati rice processing and trading, is expected to
buy the entire produce from the cultivators.
Rallis had earlier formed an alliance with Hindustan Lever (HLL) for a contract farming
project for wheat in Madhya Pradesh. This is mainly intended to help farmers grow and
sell wheat for making atta and basmati rice for export in Madhya Pradesh and Haryana.
Rallis and ICICI have also tied up with big retail chains like Food World and Nilgiris,
and juice maker Sunsip.

21
http://www.tata.com/company/Media/inside.aspx?artid=dFXx5XAy4Lg=

49
Tata Kisan Sansar: Enabling, empowering22
The Tata Kisan Sansar (TKS) is a network of nearly 600 farmer resource centres that
caters to more than 3.5 million farmers in 22000 villages in the northern and eastern part
of India. The centres are one-stop solution shops that provide farmers access to a wide
range of agricultural inputs such as vital fertilizers, seeds, and pesticides along with
agricultural services such as soil testing, crop advisory and foliar application services.
New services being explored include financial services and IT enabled market
information.
Empowerment: The objective of the TKS network is to enable and empower the farmer
in creating and generating more value for farm produce by providing information on new
and improved agronomic practices and by facilitating better and more efficient use of
agricultural inputs. The philosophy behind TKS is to become a change agent for the
Indian farming community.
Structure: TKS functions as a hub and spoke model. Each TKS centre is a franchised
retail outlet and solution provider that caters to about 30-40 villages in the surrounding
area. The centres are in turn serviced by about 30-odd resource centres (known as Tata
Krishi Vikas Kendras or TKVK), with each resource centre looking after 17-18 TKS
centres.
Benefits: TKS provides the following
Access to expert advice: There are more than 60 agronomists available at the hubs to
provide advice on crops and farming issues. There are more than 150 organisers at the
TKS level.
Inputs: TKS centres provide generic as well as store brands of
Fertilisers: Urea, DAP, MOP, NPK, etc
Specialty fertilisers: Zinc sulphate, boron, micronutrients, calcium nitrate,
organics, water soluble fertilisers
Seeds: Field crops, vegetable crops
Pesticides: Entire range
Cattlefeed
Farm implements

22
http://www.tatachemicals.com/farm_centre/overview.htm

50
Training: In nutrient and pest management
Services:
Soil and water testing
Contract farming
Seed production
Application services
Advisory services
Relationship building:
Farmer membership (individual & group)
Accident insurance to members
Farmer meets
Crop seminars
13
4. FLI (Pepsi) Potato CF in Maharashtra and Karnataka
Given the small land holdings of the farmers in these states, the company decided to work
through an intermediary called Hundekari in Maharashtra who manages the relations with
small contract growers, who own 1-2 hectares and grow 1-2 acres of potato crop under
contracts, on behalf of the company, right from registering farmers, input supply, credit
and buy back arrangements. On the other hand, in Karnataka, the company has organised
informal associations of growers who manage the local operations like seed distribution,
supply schedules for delivery of produce and so on among themselves, for the company.
The farmers generally own about 2-4 hectares of land and grow 2-4 acres under contract.
There are a total of 11000 growers of the company in Maharshtra and 3500 in Karnataka
which deliver to the Ranjan Gaon plant of the company (table 1). Not only has the
company been able to send right quality signals by buying only quality price under two
price options – fixed contract and open market linked prices, but also has managed
production risk of the growers by bringing in insurance, and low cost input supply and
credit into contracting with formal contracts and tie ups (fig. 1). The market linked price
is 4-14 paise per Kg. lower, depending on the level of price in the market; higher the
market price which can vary from a minimum of Rs. 3/kg. to Rs. 10/kg., higher the gap
between market price and purchase price offered by the company. Reference rate for chip
potato purchase is the average of the preceding three days’ block of published newspaper
rates for potato at Gultekadi market yard, Pune and is inclusive of transportation cost

51
upto factory. Further, there are quality incentives in terms of solid % and total potato
defects (TPOD) (table 2). 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.
14

15

52
5. AM TODD MINT CF
AM Todd which started with just 69 acres contracting in 1996 for mint crop, had 10,000
acres in 2004 working with more than 2000 growers. It organizes contract production of
peppermint, spearmint and even buys Koshi variety oil from contract and non-contract
growers. It has even started contract farming in UP recently (table1). The company has
helped and advised local growers to set up mint oil extraction units besides the three
which are owned by the company in Punjab. There are 15 such units which are tied to the
company for extraction and sale of mint oil. The mint oil extraction at the company plants
is free of cost. Though the crop is a third crop for most of the farmers in Punjab and
therefore quite profitable, the company also advises farmers for intercropping of mint
with other crops especially wheat for better economics of the crop (Singh, 2005c). The
successful and smooth functioning of the CF system in mint by AM Todd in the state
(Punjab) with no involvement of the state, largely due to the nature of the crop, clear
terms of the contract, assured returns to growers by competitive prices and the
commitment of the company, corroborates the point that CF is best left to the company
and the growers (Singh, 2005c). This was also the case in Thailand where the state
facilitated it from outside with credit and extension (Singh, 2005d).

16
17
6. AGROCEL ORGANIC BASMATI PADDY CF
The Kaithal operations in organic Basmati by Agrocel Industries started in 1998 and
certified organic Basmati production had begun with 35 farmers and 277 acres in 2001.
Today, there are a total of 260 farmers including 70 farmers with 600 acres for Piciric

53
Ltd., another rice exporting company based in Delhi with a plant in Sonepat for which
Agrocel co-ordinates CF for a service fee. The company has been working for Picric
since 2000. Company has been in Kaithal since 1995 in ICM promotion and input sales.
Of the total, 160 are certified organic and others in-conversion farmers. These farmers are
spread over a total of 30 villages with 27 in Kaithal and 3 in Kurukshetra district and
Picric farmers in 15 of these Kaithal villages, with all of the villages being in 25 kms.
from Kaithal. Besides, there are 20 farmers in U.P. and Uttaranchal also which are looked
after by the Kaithal project. Agrocel charges Rs. 500/- per acre from Picric as service
charge for co-ordinating contract organic basmati production with farmers (Fig.3). The
Agrocel direct contract farmers number 190 with 814 acres of which only 212 acres are
under conversion with new and old farmers. Most of the farmers have put only a part
(28.5%) of their farmland under organic which is certified and rest of the acres is being
put to organic in stages. The land holding of the organic growers ranges from 5 to 60
acres with average being 32 acres. The acreage under organic crop varies from 2 to 30
acres with average being 9 acres.
The contract with individual growers, some of whom are members of the fair trade group
called Agrocel Pure and Fair Rice Growers’ Association (registered under the Societies
Act) across 12 villages with 70 members, are written and for five years after certification.
Agrocel supplies some of the organic inputs which are SKAL certified including seed
supplied by PICRIC from their contract seed production programme, and procures the
produce from the farmers (Fig. 3). All the inputs are on credit and the recoveries are
made from payment for the produce. The certification cost was borne by Agrocel and
Picric for their respective farmers. Of the 34 certified organic farmers surveyed, 5.85%
were in the 3rd year, 18% in 4th year, 38% in 5th year, 21% in 6th year and18% in 7th
year of the contract. More of the very large and large growers were into long
relationships with the company as they were the first ones to align with the company. The
ICS followed is documented by the staff entirely with three supervisors for 16 villages
and 260 farmers.
Agrocel uses SGS certification for product quality purposes and SKAL for organic
process certification. Due to certification problems, some farmers have been also
excluded from the groups. Only bio-compost is sourced by farmers on their own from a

54
local cooperative society which promotes vermiculture and also supplies cow urine and
herbal abstracts for bio-pesticide applications, in unbranded bottles. But organic
weedicides are not available which causes a major problem in organic production. In fact,
small farmers make their own inputs while large farmers buy them from the market.
There is no subsidy on inputs by the company. The company has made arrangements
with ICICI bank since last year under which a loan of Rs.10,000/- per acre in cash and
kind is given under the guarantee of the company.

18
19
All of the farmers described land improvement as the major reason for organic farming.
About 70% valued price premium for organic produce, 29.4% low input use, 53% own
consumption, , 17.6% regular monitoring, 11.8% organic husk, 8.8% assured market
14.7% self esteem and 38.2% lower pest attack. Only about 1/4th of the growers reported

55
some instance of crop failure. About 85% of the farmers entered into the contract because
of premium considerations. 32.3% did so for the sake of interest free inputs on credit.
One time payment ( 20.6%), lower input cost (41.2%), regular monitoring (32.3%) and
improved land fertility (14.7%) were the other major reasons for contract farming (Singh,
2006).Another study of 60 organic paddy growers in Kaithal and Sonepat districts also
found that the contract price was higher that the local market price of basmati paddy with
share of producer in consumer rupee being higher in this organic channel as compared to
that in the conventional paddy channel though the marketing margin was same in both the
channels. Though the farmers reported problems like difficulty in meeting quality
requirements, lack of independent testing and certification facilities in the producing area,
lack of government regulation on quality of inputs and their prices, poor service provision
by the contracting firms, lower prices, lack of market information, and discount in the
name of quality, they agreed that contract organic production increased income and
reduced marketing risk (Chikkamath et al, 2005). 85.3% of the farmers wanted to
continue to work under contract, major reasons being land improvement, premium, and
better quality of produce. All the farmers were of the view that increased incomes and
better soil management was ensured under contract organic farming. Further, 23.5%
viewed the better faming skills as the major benefit of contract farming. The reported
problems included delayed payment (32.3%), lower price (32.3%), and only single crop
contract (17.6%). Other factors that could contribute to improving effectiveness of the
contract included timely procurement, higher premium, soil and water testing, crop
insurance, improved inputs, timely payments, prior price information, more crops
coverage, direct purchase from farm, collective payment of bonus and produce price,
better extension, and transparency in grading system (Singh, 2006).

56
20 CONCLUSION
21
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. 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. Farmers in India are all set to see a sea-change in agriculture sector
soon, thanks to contract farming. contract farming is emerging as an important
institutional arrangement in India that promotes coordination between production and
marketing activities.
There is no single recipe to make contract farming work in smallholder agriculture. A
number of factors, intrinsic and extrinsic to the contract, influence the relationship
between agribusiness firms and farmers, and therefore the performance and the
sustainability of contract farming. We have distilled out some important factors from the
empirical literature for consideration of agribusiness firms and policymakers to manage
and promote contract farming more effectively. Agribusiness firms while improving their
own profits should ensure that contract crop/commodity is more remunerative for farmers
than the competing crops/commodities and they earn more with contract farming than
without it; and the marketing and transaction costs associated with farmers’ disposal of
produce and acquisition of inputs, technology and services are lower with contract
farming. Second, for high-risk commodities firms must share production and marketing
risks to the extent possible, and also assist farmers managing production risks. Third,
firms should abstain from a tendency of extracting monopsony and monopoly rents.
Fourth, firms should base their pricing strategy on the market trends, and create incentives
for farmers for better efficiency and product quality as to manage problem of extra-
contractual sales or any problem of moral hazards. Fifth, firms should value timeliness in
off take of produce, and delivery of payments, inputs, technology and services. Sixth, to
make contract farming politically acceptable and socially desirable it is important to adopt
innovative approaches such intermediate contracts, growers’ associations, self-help
groups, etc. to create opportunities for smallholders to participate in contract farming, and

57
also to reduce their own transaction costs of contracting and supply risks. Finally, for
making contract farming a sustainable institution, it is important for firms to win
confidence and trust of the farmers through price and non-price instruments. To develop
contract farming as a pro-poor market institution the central and state governments should
create a conducive climate for private investment in agribusiness, promote competition
among various market players whilst curbing any tendency of regional monopsony and
collusive oligopsony, develop and facilitate implementation of grades and standards,
improve farmers’ access to credit, insurance, technology and extension services, and
facilitate smallholders to organize themselves into cooperatives, growers’ associations
and self-help groups as to empower them to effectively deal with big business firms.
Contract Farming is not a panacea to solve all related 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 seen as a way or as a part
of rural development and promoted to improve agricultural performance especially in
Third World Countries. Besides farming to both sides, there is some problems. For
successful implementation of contract farming, having co-ordination and collaboration
consciousness and acting in an organized manner are advisable for both sides. On the
Other hand, Government attitudes and incentives are also important aspects.
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.

58
22 RECOMMENDATIONS
Contract farming can be developed as a pro–poor institution through
appropriate policies and regulations. Though, the central and state
governments have taken a number of policy initiatives in this direction,
some issues that are generic in nature merit more attention.
• Improve Physical Infrastructure: A firm’s decision to invest in
agribusiness, to a great extent, is influenced by the availability of
public infrastructure (roads, electricity, communication network,
electricity, etc.), government policies and regulations. Public
infrastructure in India, however, is not well–developed, leading to
a slow growth in private investment in infrastructural
developments like refrigerated transport, cold storages and food
processing. It is reflected in low level of value-addition to
agricultural produce in the organized sector. Only 1.4 per cent of
the fruits and vegetables, 13 per cent of the milk, 6 per cent of
the poultry meat, 21 per cent of the buffalo meat and 8 per cent
of the fish produced in the country undergoes processing in the
organized sector (GoI, 2005).
• Promote Competition: By enacting the Model Act (The State
Agricultural Produce Marketing Development & Regulation Act) in
2003 the Government of India has taken a bold step towards
creating a level playing field for the private investment in
agricultural markets, agribusiness and contract farming. Its
implementation has remained poor. Only a few states have
amended their existing Marketing Acts in true spirit, and others
have made some cosmetic changes. It is however cautioned that
while implementing such policies the governments should take
appropriate measures to curb any tendency of regional
monopsony and collusive oligopsony.
• Evolve Mechanisms for Resolution of Conflicts: The Model
Act, 2003 outlines provisions for regulating contract farming to
protect interests of both firms and farmers. However, one of the

59
provisions that merit attention is the mechanisms for dispute
resolution. Considering lengthy legal procedures, the Act
provides that any dispute between the firm and farmer should be
mutually resolved or settled by the market committee with which
the contract farming scheme is registered. It is a novel
recommendation. However, many contract farming schemes
remain unregistered and are not legally vetted, at present.
Nevertheless, the need for some judicial or quasi-judicial body for
resolution of disputes cannot be ignored as contract farming
becomes widespread.
• Promote Farmers’ Organizations and Other
Intermediaries: An effective way to involve smallholders in
contract farming is to encourage and facilitate them to organize
into cooperatives, self-help groups or growers associations. Such
organizational structures also improve their bargaining power vis-
à-vis agribusiness firms, and generate scale economies in
acquisition of inputs, technology, services and information.
• Develop Grades and Standards: Price and quality of output
are two important factors that can make or mar contract farming.
Agribusiness firms can reject farm produce or pay a lower price
on the pretext of its poor quality. This happens due to lack of
well-defined grades and standards and transparency thereof in
the contract agreement. Organized retailers, exporters and
processors often impose their own grades and standards. The
need for developing effective grades and standards cannot be
ignored with rising demand for safe and quality foods in both
domestic and international markets.
• Improve Farmers’ Capacity to Invest, and Cope-up with
Risks: Two important factors in scaling-out/up of contract
farming relate to credit and insurance. An overwhelming majority
of smallholders lack capacity to invest in high-value agriculture
and are risk averse. Some activities like poultry and plantations
are capital-intensive and riskier, and need institutional support in

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terms of finance and insurance. In India although formal rural
credit system is fairly well-developed, institutions for agricultural
insurance remain under-developed. It is therefore imperative to
enhance farmers’ access to financial institutions using the string
of contract farming or otherwise.
To develop contract farming as a pro-poor market institution, the
governments should create a conducive climate for private investment
in agribusiness, promote competition in the market whilst curbing any
tendency of regional monopsony and collusive oligopsony, develop and
facilitate implementation of grades and standards, improve farmers’
access to credit, insurance, technology and extension services, and
sensitize and facilitate smallholders to organize into cooperatives,
growers’ associations and self-help groups so as to effectively deal
with agribusiness firms.

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BIBLIOGRAPHY

Websites :

• http://dspace.iimk.ac.in/bitstream/2259/520/1/637-647+.pdf

• http://www.ncap.res.in/contract_%20farming/Resources/1.Introduction.pdf

• http://www.ncap.res.in/contract_%20farming/Resources/5.1%20Pratap%20S
%20Birthal.pdf

• http://mofpi.nic.in/images/File/FICCI%20Data/Indian%20Food
%20Laws/Contract%20farming
%20%20%20%20%20%20%20%20%20%20%20.pdf

• http://www.hinduonnet.com/fline/fl2408/stories/20070504001904600.htm

• http://www.hindustantimes.com/Bharti-Wal-Mart-piloting-contract-farming-in-
Punjab/Article1-476733.aspx

• http://www.siliconindia.com/shownews/Escorts_enters_contract_farming_in_Punj
ab___-nid-19143.html

• http://www.google.co.in/search?
hl=en&source=hp&q=Given+the+small+land+holdings+of+the+farmers+in+these
+states
%2C+the+company+decided+to+work&meta=&aq=f&aqi=&aql=&oq=&gs_rfai=

• http://www.potatopro.com/Lists/News/DispForm.aspx?ID=3695

• http://www.nestle.in/mogasuccess.aspx

• http://www.tata.com/company/Media/inside.aspx?artid=dFXx5XAy4Lg=

• http://www.tatachemicals.com/farm_centre/overview.htm

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