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Food Processing and Contract Farming in AP In any analysis of contract farming there needs to be a greater clarity of what defines this kind of relationship between farmers and companies. There must in essence be pre-negotiated terms and conditions between the two regarding supply of the produce.

S R Asokan, Gurdev Singh

This refers to the article ‘Food Processing and Contract Farming in Andhra Pradesh: A Small Farmer Perspective’ by S Mahendra Dev and N Chandrasekhara Rao (EPW, June 25, 2005). It appears from the article that the authors lack clarity in their understanding of what contract farming is. Contract farming is an arrangement in which a buyer purchases the crop produce from independent farmers at pre-negotiated terms and conditions, usually price, quantity and quality. Roy (1963) defines contract farming as those contractual arrangement between farmers and companies, whether oral or written, specifying one or more conditions of production and marketing of an agricultural product. This definition was considered broad as it included marketing or forward contract. So, other scholars tried to come up with more precise definition of contract farming. Davis (1979), for example, explains contract farming as a “relation between growers and agribusiness enterprise that substitute for open market exchanges by linking normally independent family farmers of widely variant assets with a central processing, export or purchasing unit that regulates in advance price, production practices, product quality and credit”. Little and Watts (1994) provide a more comprehensive definition of contract farming. They define it as a “form of vertical coordination between growers and buyer-processors that directly shape production decisions through contractually specifying market obligations (by volume, value, quality, and, at times, advanced price determination); provide specific inputs; and exercise some control at the point of production”. Thus, contract farming could range from just buying certain quantity at a pre- negotiated price to have complete control over production from supplying inputs to harvesting. The type of the contract and the intensity of the arrangement depend on the nature of the commodity, the company’s objective, area of operation, etc. Under contract farming, the firm is able to reduce much of uncertainty in getting the needed raw materials, for the farmer the major benefit is that he is insulated from the volatility of the market. Oil Palm Cultivation Going by the above criteria, for a relationship between the farmer and an agri-business firm (buyer/processor) to be termed contract farming, there must be pre-negotiated terms and conditions between them regarding supply of the produce. Pre-negotiated price is fundamental to contract farming. If the firm is contracting, say, for certain quality or quantity, by implication it is at certain price. The oil palm cultivation in Andhra Pradesh, reported by the authors, does not qualify as contract farming. First, there is no pre-negotiated price of the produce between the company and the oil palm growers. The price, in this case, is fixed every quarter by the Price Fixation Committee of the state government, that too, not at the beginning of the season. Under this arrangement, farmers continue to face price volatility as in any open market transaction. There is neither an agreement on the quality of the fruits to be delivered by the growers to the company nor about quantity to be supplied. In fact, farmers are “free to sell whomsoever he wants”. The involvement of the company seems to be restricted to ensuring some area under oil palm by routing the subsidy from the government to the farmers under the oil palm development programme of the technology mission on oilseeds. The authors have mentioned that the company supplied inputs and “deduct the cost of inputs from the payments to be made for the fresh fruit bunches”. It sounds incongruous, when the company had to collect its dues from the farmers how do they allow them the freedom to sell the crop to whomsoever they want. Perhaps the authors have missed some crucial points on the arrangement by relying on secondary sources rather than getting first-hand information from the processors.

Regarding cost calculation only the operational cost for the year is taken and returns worked out (Table 3). The total investment cost from planting to fruiting is ignored. In fact, an investment analysis could have been carried out considering total cost and the economic life of the plantation to understand better the economics of the activity. Gherkin Processing For gherkin the authors have studied the practice of a facilitator. These facilitators organise production in anticipation of demand from the processors. They generally are not exclusive for any processor but supply to whoever contacts them. The authors have termed the gherkin processing as ‘nucleus estate’ model which is erroneous. Under the nucleus estate model the firm gets raw materials for its processing requirements from its own farm and gets some supply from farmers normally located nearby known as satellite growers [Eaton and Shepherd 2001]. This type of model is prevalent in plantation crops such as tea, coffee, rubber, etc. None of the 12 gherkin processors in Karnataka and the one in Andhra Pradesh and one in Tamil Nadu own land for producing gherkin. They directly deal with farmers by having a written agreement for the supply of gherkin. The contract provisions include price, quality parameters, quantity (area by proxy), mode of delivery, payment, etc. These processors approach the facilitators only when there is a shortfall in production in their own contract arrangement. There seems to be some mistake in the cost and returns (Table 8) calculated for large farmers in gherkin cultivation. Cultural practices of the crop are standardised. It is largely dictated by the processors and carried out by the farmers. The variable cost for the large farmers is 40 per cent lower than the overall sample and 46 per cent lower compared to small farmers. The authors have not explained the huge difference in cost and returns between the large farmers and other categories of farmers. It is conventional wisdom that even for ordinary crops the costs incurred by large farmers are normally higher than the small farmers. The authors might have failed to include some costs in case of large farmers. In both cases, the authors have concluded that the contract seems to be working well, may be based on the returns to the farmers. However, gherkin producers reported 10 to 20 per cent loss in weight due to rejections at the factory level and demanded grading to be done at collection centres. Normally, the interaction under this kind of arrangement is between the facilitator and the farmers and between the firm and the facilitator. Therefore, farmers’ payment must be based on the quantity and quality they delivered to the facilitator, not on the basis of grading at the factory. (If the facilitator and the farmers agreed for the grading at the factory to be final then the farmers have no complaint.) In case of oil palm the farmers were apprehensive of the recovery percentage reported by the processors. This shows there is no transparency and there is lack of trust. Therefore, it would have been better had the authors studied the contracts and their provisions (though it may be oral) before making their conclusions.