Rural Marketing- Contract Farming

IFIM

RURAL MARKETING TERM PAPER CONTRACT FARMING Suraj Kumar Sabat Kamalika Pal

14/07/2008

RURAL MARKETING: TERM PAPER ON “CONTRACT FARMING “

Contents: •

What is contract farming?

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Farmers perspective

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Corporate perspective

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Changes in the rural scene because of contract farming

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Recent cases and studies

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The downsides and failures

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Future

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learning

What is contract farming?

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 Pepsi-co 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 in2000, 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.ContractFarming is again vogue, and even tried for bulk production of subsistence crops, such as paddy rice, 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 2 | Page

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 local firms, Multinational companies, some international aid and lending agencies etc have been involved in these contract farming schemes Contract farming generally involves: a pre-agreed price between the company and the farmer, along with measures of quality, quantity, acreage to be farmed, and/or duration of the contract. In this system, the contractor supplies all the inputs required for cultivation, and the farmer is responsible for land and labor. However, the terms and nature of the contract vary according to the crops grown, the agencies involved, the farmers themselves, and the technologies and context in which contract farming is taken up. The farmers' participation is generally limited to production. At a very fundamental level, contract farming is essentially a means of allocating the distribution of risk, between processor & grower. The latter assumes risks associated with production while the former assumes the risks of marketing the final produce. As has been observed however in practical terms, there exists, considerable interdependence between the two parties. The development of contract farming will succeed if both parties share the risk & rewards. THE

BROAD OBJECTIVES OF PROMOTING CONTRACT FARMING WOULD BE:

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To reduce the load on the central & state level procurement system.

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To increase private sector investment in agriculture.

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To bring about a market focus in terms of crop selection by Indian farmers.

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To generate a steady source of income at the individual farmer level.

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To promote processing & value addition, thereby generating gainful rural employment.

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To reduce migration from rural to urban areas. Managed correctly, contract farming can facilitate a response and adjustment mechanism to changing economic forces. Identifying the nature of the crop, its marketability and then evolving the technology to be used for production and processing are critical determinants of contract farming. In general, crops easily incorporated in the contract farming are those that have high revenue per hectare and where the technological model gives significant improvements in yields. Recognizing that Indian agriculture holds the key to its own development, it will be required to create our own region & crop specific contract farming models.

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MAIN AGRICULTURAL PRODUCTS OF INDIA UNDER THE PROCESS OF CONTRACT FARMING ARE AS FOLLOWS

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Food Grains - Rice, Wheat, Pulses, Cereals, Corn, Maize, Rice Bran Extractions, Sorghum, Soy meal, Suji, Parmal, Lentils, Jowar, Bajra, Chick pea,

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Fruits & Nuts - Cashew Kernels, Cashew Nut, Cashews, Almonds, Roasted Dry Fruits, Peanuts, Groundnut, Walnut Kernels, Walnuts, Indian Peanuts, HPS Groundnuts

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Fruits - Bananas, Beans, Cherry, Cucumbers, Dried Fruits, Dried Truffles, Carrots, Lemon, Mandarins, Mango, Meslin, Shallots, Apples, Asparagus, Grapes, Oranges, Gherkins, Turnips, Oranges, Papaya, Pineapple,

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Vegetables – Potatoes, Bitter gourd, Stripe Gourd, Pumpkin, cauliflower, Cabbage, Tomato, Onion, Green Pepper, Drum Sticks, Lady's finger, Banana, Papaya, Spinach, Cucumber, Mushroom, Mushroom Spawn, Radiata, Seeds, Buds,

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Plantation & Related Products - Basil Seed, Cumin seeds, Dill Seed, Buds, Celery Seed, Hybrid Seeds, Sesame Seeds, Sesbania Seed, Sunflower Seeds, Mustard Seeds, Oil Seeds, Plant Products, Plantation, Plants, Psyllium Seed, Fennel Seed, Fenugreek Seed, Herb Seeds, Tamarind Seed, Vegetable Seeds

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Spices - Black Pepper, Chilly, Cinnamon, Cloves, Coriander Powder, Cumin, Dry Ginger, Dry Red Chilly, Cardamom, Anise, Salt, Pepper, Fenugreek, Clove, Ginger, Turmeric, Turmeric Powder,

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Tea & Coffee - Black Tea, Coffee, Coffee Beans, Darjeeling Teas, Assam Teas, Instant Coffee, Leaf Coffee, Leaf Tea, Packaged Tea, Green Tea, CTC Teas,

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Tobacco & Tobacco Products - Betel nut Leaves, Betel nut, Bidi Leaves, Chewing Tobacco, Arecanut, Snuff, Opium, Pan, Jute, Tobacco, Rubber etc

Farmers’ perspective ADVANTAGES FOR FARMERS 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; 4 | Page

2. Access to credit; 3. Introduction of appropriate technology; 4. Skill transfer; 5. Guaranteed and fixed pricing structures; and 6. Access to reliable markets. PROBLEMS FACED BY FARMERS 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;

Corporate perspective For a corporate, the objective of contract farming is to integrate the supply chain and ensure timely availability of materials, both in quality and quantity. It also reduces the procurement cost by eliminating the middlemen. Not only do the corporate’ get produce as per their specifications, the cost is much lower. The main disadvantages faced by contract farming are: 1. Land availability constraints; 2. Social and cultural constraints; 3. Farmer discontent; 4. Extra-contractual marketing; and 5. Input diversion.

Changes in the rural scene because of contract farming The process of Contract Farming in India Rural Economy is a new concept. The process of contract farming involves cultivating and harvesting for and on behalf of big business establishments or 5 | Page

Government agencies and forwarding the produce at a pre-determined price. In return, the contracted farmers are offered high price against their farm produce. The role of contract farming in India rural economy is becoming more and more important, since organized farming practice has become the need of the hour in the world of rapid industrialization. The rapid industrialization process in India has created shortage of farmland, which in turn has necessitated organized farming practice in India.

One of the most critical issues associated with contract farming is that there will be a shift from staple crops such as rice and wheat to crops required by the food-processing industry and those catering to the overseas market. The switch to contract farming leads to a rise in exports as well. But this may affect the country's food security, and increase dependence on imports. With agriculture increasingly seen as a risky proposition, the promise of economic security within the contract farming system is rather very attractive. The process of contract farming in India involves scientific and optimum use of land and farm resources for maximum output of agriculture produce. Small time farmers practicing primitive agricultural methods for cultivation and harvesting of crops dominate the Indian agriculture sector. But, with the liberalization of India economy, there has been a sudden spurt in contract farming in India. Moreover, today more and more established business houses are taking interest in the business of contract farming in India. This has happened as a result of rapid growth of retail industry in India. The growth of retail industry in India has propelled the growth of farm retail in India, which caters fresh vegetables and fruits from the farms to the Indian mass. The process of contract farming in India involves, engaging rural Indian farmers for the cultivation of agricultural produce under strict government policies. The role of Contract Farming in India Rural Economy involves government and private participation along with the rural workers. Further, it engages a good number of farmers and other rural workers to discharge other agriculture related activities Government’s involvement The Indian institutes engaged for marketing agricultural products under contract marketing are as follows:•

Karnataka State Agricultural Marketing Board

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Krishi Maratavahini

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Madhya Pradesh State Agricultural Marketing Board

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Maharashtra State Agricultural Marketing Board, Pune

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Meghalaya State Agricultural Marketing Board

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Orissa State Agricultural Marketing Board, Bhubaneswar

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Punjab State Marketing Board

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Rajasthan State Marketing Board

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AP Agricultural Marketing Board

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Domestic & Export Market Intelligence Cell

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Tamil Nadu Agricultural University and Agri Marketing Board

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HP State Agricultural Marketing Board

The acts and rules that governs the process of Contract Farming in India Rural Economy are as follows •

Agricultural Produce (Grading and Marking) Act, 1937 as amended in 1986.

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Agricultural Produce Grading and Marking Act, 1937

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Schedule Appended to AP (G&M) Act 1937

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General Grading and Marking Rules, 1988

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Commodity Grading and Marking Rules

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List of commodities whose Agmark Grade Standards have been covered under AP (G&M) Act 1937

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Manual on Standards of Paddy

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Manual on Standards of Wheat

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Manual on Standards of Maize

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Manual on Standards of Mustard an

Agri-export zones recently established in India State

Products

Andhra Pradesh

Mango pulp, fresh vegetables, grapes

Assam

Fresh and processed ginger

Bihar

Litchi

Himachal Pradesh

Apple

Jammu and Kashmir

Apple, walnut

Jharkhand

Vegetables

Karnataka

Gherkins, flowers

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Kerala

Horticultural products

Madhya Pradesh

Potato, onion, garlic, seed spices

Maharashtra

Mango, grape, onion, flowers, orange

Orissa

Ginger, turmeric

Sikkim

Flowers (orchids), cherry, pepper, ginger

Uttar Pradesh

Mango, potato, vegetables

Uttarakhand

Litchi, flowers, medicinal and aromatic plants

West Bengal

Litchi, pineapple, potato, mango, vegetables

Recent cases and studies 1. May 12 , 2008 : Fruits and Vegetables (DFV) contract farming model has seen more farmers from Narmada, Vadodara, Surat and other districts of the state queuing up to come under the contract system. Indrasinh Gohil, a banana contract farmer, said his decision to join DFV’s contract farming has benefited him immensely. He said he got minimum guarantee price, plus market linked incentive, including the production cost, salary and the profit. Gohil said he received a price of Rs 90 per kg for the production of banana in his field as against a price of Rs 60 per kg from the individual traders. “There is a waiting list of 5,000 farmers willing to come under DFV’s brand of contract farming,” said Ajit Desai, DFV chairman and managing director on Sunday. This enabled DFV to bring 2,500 acres of land from Narmada, Bharuch and Navsari districts under contract farming out of which 800 acres are under banana cultivation.

2. Gujarat has some good success story and prospective agreements of Contract farming in Gujarat At present among successful contract farming practices undertaken in Gujarat, Agrocell Corporation Ltd. is doing contract farming of organic cotton and seasame seeds covering about 5000 acres in Kutch and Surendranagar district of Gujarat since last 8 years. The farmers get 78 % more price than ordinary cotton in current market and concession in certain services from the company. Atreyas Agro Organic Pvt. Ltd. Plans to grow Jetrophs Curcas by contract farming. They have target of covering more than 50,000 acres of irrigated & non-irrigated land of Gujarat. Godrej Agrovat Ltd. Is also planning to grow high quality oil palm under contract farming in south Gujarat region by providing imported tissue culture plants and farming technology to the contract farmers. Pepsi India, Arvind mills, Jojoba Oil Industries Ltd., are some companies who have approached the govt. and shown keen interest in doing research and contract farming in Agro-products in Gujarat under their backward integration projects. 8 | Page

3. Bangalore: Pepsico India Holdings is looking at the State for large-scale contract farming in maize, chillies and tomatoes, for which it has commenced trials in Haveri district. Although these trials are on a small scale, the company is said to be looking at nearly 20,000 hectares of contract farming in maize to fall in place by next year in Haveri and neighbouring districts It is now running on a trial basis "pre-agreed price" system of farming through local aggregators (local people who deal with the farmers on behalf of the company) and the results should be known by early next year. "It has to be a win-win situation for both Pepsi and the farmers for the contract farming plan to materialise," says Abhiram Seth, Executive Director, Pepsico India Holdings. Mr. Seth told The Hindu that trial runs normally would be for a year before Pepsi can embark upon contract farming here. The company, which is enthused by the success in Punjab where it has contract farming in chillies, potatoes and basmati, finds the situation in Karnataka conducive for contract farming. "We need to study a whole lot of parameters such as agro-climatic conditions, marketing, policies and so on before we set off on a project," he says. The State Government has been helpful and there are no impediments from any quarter, Mr. Seth adds.

Although the company has not firmed up any plans, Mr. Seth says that Pepsi will be concentrating on maize and later think of exporting. Pepsi is looking at Haveri district as the maize yield in a hectare of land there is 3.5 tonnes, higher than the national average of two metric tonnes. It is said that maize is grown on about 80,000 hectares of land in the district with two crops a year.Sources say that the annual production last year stood at 2.21 lakh metric tonnes. With contract farming, there could be improvement in the yield levels as the company will be doing "hand-holding" and providing technology, good cropping practices and marketing inputs. Better price for farmers Farmers will get a better price and can avoid the market with all its fluctuations, they say. According to a company source, as of now, the local aggregator and the farmer determine the price. For the farmer, it works out well as he has a ready market and gets cash on the spot. We are studying how this works." Pepsi is keen on harnessing the agriculture/horticulture potential in these areas. Of late, the belt of Chitradurga, Davangere, Haveri, Bellary and Belgaum has seen a sudden increase in maize cultivation. According to the statistics provided by the Agriculture Department, Davangere had an yield of 7.9 lakh tonnes, followed by Belgaum with 3.37 lakh tonnes, Haveri 2.21 lakh tonnes, Chitradurga 1.88 lakh tonnes, and Bellary 1.41 lakh tonnes.

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The downsides and failures It is a good augury that agricultural scientists have discussed the issue of contract farming at a time when supermarkets and food chains are threatening to drive out the small next door retail shops. Fears have been expressed in the meeting that the rejection rate of agricultural produce by retail chains was high. The farmers then have to bear the extra cost. As the tie-up between retail chains and farmers is in the infant stage, it will take some time for the farmers to ensure high quality in their farm produce. Hence the supermarkets and retail chain stores should provide the required agricultural expertise and credit at a low rate of interest to the farmers. Contract farming in the country has not benefited the farmers. Appropriate institutional arrangements, legal provisions and government intervention are needed to protect the interests of farmers, said a study conducted by an expert from Ahmedabad-based Indian Institute of Management (IIM-A). The study conducted by Sukhpal Singh of the IIM-A’s Centre for Management in Agriculture noted “contract farming, in political economy, is one mode of capitalist penetration of agriculture for capital accumulation and exploitation of farming sector by the agribusiness companies.” It said that new concept is the result of the recent developments in marketing, food habits, technology and agriculture in the new economic environment. The entitled study ‘Contract Farming for Agricultural Development’ was commissioned by the Centre for Trade & Development (Centad), an initiative of Oxfam GB in India. The study noted contract farming is being practiced in India by MNCs like Cadbury in cocoa, PepsiCo in potato, chilies and groundnut, Unilever in tomato, chicory, tea and milk, ITC in tobacco, wood trees and oilseeds, and Cargill in seeds. There are also domestic corporate in the field like Ballarpur Industries, JK Papers and Wimco in eucalyptus and poplar trees, Green Agro Pack, VST Natural Products, Global Green, Intergarden India, Kempscity Agro Exports and Sterling Agro in gherkins, United Breweries in barley, Nijjer Agro in tomato, Tarai Foods in vegetables, M Todd in mint, and Namdhari Seeds in seeds. There are also various government and semi-government agencies involved. Financial institutions and banks assisting contract farming. The new changing dynamics of contract farming was the consortium approach note by the study. It noted a general monopoly of corporate and contracts being loaded against the interests of farmers. It also dwelt on the problems faced by contract growers, particularly in Punjab and Haryana. With an aim to mitigate the situation, the study suggested formation of “new generation of co-operatives” for increasing the bargaining power of contract growers.

SOME CASES OF DOWN FALL Chandigarh, May 26 Even though contract farming is proving to be a major hit in Punjab, corporates seem to be shying away from its neighboring state of Haryana. 10 | P a g e

A major contributing factor is the late amendment of the Agricultural Produce Marketing Committee Act (APMC). Though the state amended the rules of the Punjab Agricultural Produce Markets Act, 1961, in order to lure private players for contract farming, it has failed to produce good results. Moreover, private players who are procuring agricultural produce from farmers on a smaller scale are still awaiting the direct marketing scheme to be launched by the Haryana State Agricultural Marketing Board (HSAMB) to start procuring on a larger scale directly from farmers. There is only one corporate house which has so far partnered with HSAMB for contract farming of malting barley in Haryana. SABMiller India, the Indian arm of SABMiller Plc, one of world’s largest brewers with popular brands like Foster’s, Castle Lager, Haywards, Royal Challenge, etc, has roped in 400 farmers across 2,500 acres in the state for contract farming of barley. The initiative is spread out in the arid regions of the state that involve Gurgaon, Jhajjar and Sirsa regions. A senior official of HSAMB told The Indian Express, “At present, only SABMiller is undertaking contract farming in the state. Vijay Mallya’s United Breweries did approach us, but nothing has been finalized yet. The main reason why companies don’t evince much interest in contract farming here is that farmers have an assured income from wheat, for which the government is paying a good price. But for vegetables and fruits, corporates seem to be waiting for the direct marketing scheme to come into play so that they are not legally bound to the farmer. The draft scheme for direct marketing is ready and has gone to the government for approval. Once the scheme is approved, the companies are expected to enhance their presence in Haryana as well.” The official also shared that Reliance Retail, Subhiksha, ITC and Mother Dairy are procuring fruits and vegetables from farmers on demand basis and are paying 4 per cent marketing fee, but none has entered into contract farming yet. “The revenue generated from the marketing fee paid by these companies is close to Rs 1 crore per annum. We are also setting up an agro mall, whereby private participation will increase in the field of marketing,” he said. Sources in Reliance Retail and Subhiksha told ENS that the companies are procuring fruits and vegetables from farmers, but are not ready to enter into contract farming. “We are procuring from farmers in Sonepat, Kaithal, Karnal and Rohtak and so far we have about nine collection centres in Haryana with 20 retail outlets. We are looking forward to the direct marketing scheme so we can enhance our reach and focus, but contract farming is not on the cards in the near future,” said a Reliance Retail official.

Future The Dark Side The green revolution is part of India’s history. Grey revolution is the future. At least that’s what the blue print for agricultural reforms. Agricultural reforms being introduced in the name of increasing food production and minimizing the price risks for farmers will actually destroy the production capacity of the farm lands and lead to further marginalization of the farming communities. Encouraging contract farming, future trading in agriculture commodities, land leasing, forming land-sharing companies, allotment of homestead-cum-garden plots, 11 | P a g e

direct procurement of farm commodities and setting up of special purchase centers’ will drive out a majority of the 600 million farmers out of subsistence agriculture. Already contract farming has done irreparable damage to agriculture in countries like the Philippines, Zimbabwe, Argentina and Mexico. Allowing direct procurement of farm commodities, setting up special markets for the private companies to mop up the produce, and to set up land share companies, are all directed at the uncontrolled entry of the multinational corporations in the farm sector. Coupled with the introduction of the genetically modified crops, and the unlimited credit support for the agribusiness companies, the focus is to strengthen the ability of the companies to take over the food chain. Significantly, the state governments have opposed the agriculture reforms, terming it as a recipe for the entry of multinational corporations in agriculture. Two year earlier, the state governments had opposed the government’s plan to decentralize the food procurement system terming it as an effort to dismantle the procurement structure Future Growth Pepsico India Holding Ltd — Fritolay division — started off with a pilot project in 100 acres in Jharkhand in 2005-06 to grow potatoes for their chips, which spread to 500 acres next year and today, it covers 800 acres. They introduced seeds of Atlantic variety, Chipsona and Fritolay-1553, but Atlan- tic proved to yield the best potato in this region. Properly taken care of under the supervision of the technical hands of the organization, the yield could be 14 times of what is sown. Organic farming: consumers are becoming conscious and critical about the quality of food and byproducts that affect their health though the toxicity depends ,to some extent, on the type of food consumed. The organic agriculture includes growing of crops by a set of guidelines that prohibit the use of synthetic products/chemicals such as fertilizers, pesticides, plant growth promoters and livestock additives. There is an increasing demand throughout world for organic food and fiber. In India, efforts are being made for organic crop production through contract farming. Experiences showed that farmers are benefited from technical guidance, supply of quality farm inputs and assured purchasing at remunerative price. This venture, executed by a tripartite agreement, would bring about favorable changes in the present conventional agriculture to make it sustainable and commercial. Likewise, consumers would get certified organic products at reasonable price. Since the average growth for organic farming is about 20–25% and higher prices (15–50%) are possible in the international trade, export of organic food produced by contract farming will certainly increase in near future, as India is recognized as an international agricultural hub.

Conclusion Contract Farming is not a solution to all the 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 12 | P a g e

seen as a way or as a part of rural development and promoted to improve agricultural performance especially in India where productivity is lesser than many other developed countries. More over the corporate, farmers and government must realize that the practice will not be sustainable if all the parties are not benefitted. The model is good but can be made better with more favorable government policies,

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