Contract Farming In Pepsi

Raveendhar.k R08PGDM034 Section-1

About PepsiCo With 5 largest food and beverage companies

which includes 16 brands available in nearly 200 countries Entered India in 1989 and its investment is 700million $ Employment to more than 60,000 people. Brand Pepsi is now the 2nd biggest brand in the country

About Frito Lay  It was started by Elmer Doolin of San Antonio and Herman

W. Lay of Nashville in 1935.  The two companies Frito and Lay was merged in 1961.  In 1965 Frito Lay and PepsiCo was merged.  It has more than 15 brands.  LAY'S®, FRITOS®, CHEE.TOS®, BAKEN-ETS®, RUFFLES® DORITOS®, FUNYUNS®, TOSTITOS®, BAKED LAY'S®, WOW!®, SUNCHIPS®, MUNCHIES®, OBERTO®, ROLD GOLD®, GRANDMA'S® Cookies and Quaker Chewy Bars®, Quakes® and Fruit & Oatmeal Bars®.

Concept of contract farming? ESSENTIALLY The farmer is contracted to plant the contractor’s crop on his land Harvest and deliver to the contractor, a quantum of produce, based upon anticipated yield and contracted acreage This could be at a pre agreed price Towards these ends, the contractor can supply the farmer with selected inputs

THE ADVANTAGES OF CONTRACT FARMING Farmer gets exposure to world class agro technology  Planting materials/healthy disease free nursery  Crop monitoring technical advice free at his doorstep  Agricultural implements

The farmer obtains an assured up front price & market

outlet for his produce Focus shifts from prices to returns per acre - driven by productivity increases The private sector gets requisite quality material regularly at predetermined prices Promotes long term planning and investments

THE PROBLEMS THAT BESET CONTRACT FARMING Small size of farmer landholdings. Need to contract with a larger number. No mechanism to discourage default. No legal recourse

when faced with large scale contravention of contracts. Lack of a comprehensive crop insurance scheme to protect against natural calamities.

Contract Farming in PepsiCo FLI (Pepsi) Potato CF in Maharashtra and Karnataka The company decided to work through an intermediary

called Hundekari in Maharashtra and informal groups in Karnataka  This CF system of the company is different from its individual contract grower system being used in Punjab where farmers are larger land holders and even lease large chunks of land for contract farming Buying only quality potato under two price options – fixed contract and open market linked prices. Managed production risk of the growers by bringing in insurance, and low cost input supply and credit into contracting with formal contracts

BUILDING BLOCKS FOR A SUSTAINABLE CONTRACT FARMING PROGRAMME IN PEPSI CO Land preparation & planting, crop monitoring during growing period harvesting & procurement, transportation logistics Commercialization prompt farmer payment system The extension services team - selection and training Farmer education program Field trials at farmer fields - multi-locational & crop timing

Technology Transfer

Evaluation of promising varieties and hybrids Multi locational trials and short-listing - selection Blueprint for agricultural practices after adapting to local conditions, to suit intellectual & financial means of the farmer Evaluation of farmer economics model R & D Activities Demonstration farming

Grower

Tri-partite (Intermediary) model of contract farming by FLI Local (Pepsi) Middlema Contract production organization, supply of

Procurement at fixed or mkt. linked price, grading & quality testing of produce by facilitator

Su pro pply fac duc of tri ilita e th ag parti tor roug no reem te unde h r co liab ent m i w los pa lity ith ny o s for n an y

Grow er

company seed (with part advance payment by n/ grower), extension, and input credit under Facilitator agreement with no liability on company / Fa productio of rmer pro prac sel n e t c d i far uc ce tio organiser Farm su mer e (th s, pa n, p ag perv and ru b yme acka and er adop ree isi fa an nt ge t t me on cili k* for agre ripartite ion See eme nt und tat to d p n o r t o s er r), com supply cure & , m m an qual exte ission payme d ity l ent, loc nt o n ab m und al f & se sion, p for er rocu g e d t . d serv agre r ices istribut ement eme ion & re u nt im nder

Compan y Collectio n Centr

Compan y

seed burse agree m / m repl other c ent of ent acem osts & se ent ed

Company Parameter

FLI(Pepsi)

Area ( states) No. of farmers Contracted Acreage Average size holding (acres)

Maharashtra and Karnataka 14500 28,000 of 5 acres

Average area under contract per grower

2 acres

Nature of contract

Acreage

Pricing formula

Fixed price of Rs. 5 per Kg. for September, October harvest and Rs. 5.50/kg. for the November 03 harvest of multiplied chip grade potatoes delivered by the GROWER to FLI plus an incentive based on the solids and TPOD (table 1) OR Market linked price plus an incentive based on the solids and TPOD

Nature of Contract growers thru Hundekari in Maharshtra and through informal farmer Organisation of associations in Karnataka (bi-and tri-partite agreements). A commission of -growers paisa/kg. on the total accepted quantity of potatoes procured by FLI from the specified farmers. Hundekari to manage local quality labs for cook test & solids measurement and to provide inputs given by FLI and loans from his account to growers for purchase of inputs. For this, he gets a service charge of -- paisa/Kg. of seed supplied to specified farmers, and another service charge of -paisa/kg. on the total accepted quantity of potatoes procured by FLI from specified farmers for providing extension support including lab operation and FLI board maintenance. In Karnataka, an elected farmer representative manages most of these functions.

Input Supply

Through Hundekari but FLI shall replace the rejected seed at the time of delivery in case the seed is found to be of inferior grade or of lower germination. FLI shall replace the seeds in case the germination fails due to virus; 50% advance payment for seed, 50% on delivery of produce

Technical advice and Extension

Free of cost

Quality

Under size/over size potatoes to be paid @ 30% of FLI rate. Rotten/soil/green mechanical damage potato to be returned the same day.

Delivery point

Factory

Payment

Within 15 days

Seeds/root and Produce

Not to be sold to anyone w/o company permission

Major markets

Domestic and export

Crop failure

No liability of co.

Key elements of PepsiCo’s success:  Core R&D team  Unique partnership with local agencies including a public sector enterprise  Execution of technology transfer through well-trained extension personnel  Supply of all kinds of agricultural implements free of cost to contracted

farmers  Supply of timely and quality farm inputs on credit

.

Contd..,  Prompt dispatch/delivery/procurement of the mature produce from every

individual contracted farmer through the system of ‘Quota Slips’  Effective adoption/use of modern communication technology like pagers

for communication with field executives  Regular and timely payment to contracted farmers through computerised

receipts and transparent system  Maintenance of perfect logistics system and global marketing standards

Conclusion: Co-ordination, Motivation, and Transaction costs are

three pillars of a contract arrangement (ii)co-ordinating to minimize production costs (iii)balancing decentralization and centralisation in farm decisions (iv)minimizing or sharing risk and uncertainty (v)encouraging group or co-operative action

motivating long term contracts to reduce hold up problem II. balancing pros and cons by renegotiation of contracts over time III. reducing direct costs of contracting IV. using transparent contracts I.

Several Indian and Multinational companies have begun such initiatives in India and have demonstrated repeated success .

Thank u.,,