05-10-2012, 05:03 PM
CONTRACT FARMING IN INDIA
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INTRODUCTION
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.
Globalisation has already affected the farm sector in India, as in many other developing countries, in a range of adverse ways. The most evident is the squeeze on farmers’incomes, and the threat to the viability of cultivation, which has come about because of rising input costs and falling output prices. This reflects the combination of reduced subsidy and protection to farmers in developing countries, and trade liberalisation which exposes these farmers to competition from highly subsidised production in the developed world. This combination, along with deflationary policies which have hit rural public expenditure, has created unprecedented agrarian crisis over much of the developing world, including in India.
However, until now, the Indian agricultural sector had been relatively spared from the most extravagant excesses of neoliberal interference, in the form of the corporatisation of agriculture. That reprieve now seems to be over, as the central government and several state governments in India are gradually won over by the dubious charms of contract farming. This is increasingly being presented as the great new hope and the way out of the morass in which Indian agriculture now finds itself, and is being actively promoted by major international donor agencies as well as by multinational companies that stand to gain from this process, and has recently been promoted by the central government as well.
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.’
Recognizing the need for and merits of such a linkage with the farming/producing community, several corporate involved in agro-commodity trading, processing, exports, etc. have attempted to establish convenient systems/models that ensure timely and consistent supply of raw material of the desired quality and low cost. This article discusses a few successful cases of contract farming and a brief note on the bottlenecks and criticisms leveled against this emerging alternative farm business model.
Contract farming is defined as a system for the production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the producer/ seller 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.
Contract farming usually involves the following basic elements-pre-agreed price, quality, quantity or acreage (minimum/maximum) and time.
According to the contract, the farmer is required to plant the contractor’s crop on his land, and to 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 supplies the farmer with selected inputs, including the required technical advice.
Thus, the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crops to be grown, agencies, farmers, and technologies and the context in which they are practised.
For example, contract farming in wheat is being practised in Madhya Pradesh by Hindustan Lever Ltd (HLL), Rallis and ICICI. Under the system, Rallis supplies agri-inputs and know-how, and ICICI finances (farm credit) the farmers. HLL, the processing company, which requires the farm produce as raw material for its food processing industry, provides the buyback arrangement for the farm output. In this arrangement, farmers benefit through the assured market for their produce in addition to timely, adequate and quality input supply including free technical know-how; HLL benefits through supply-chain efficiency; while Rallis and ICICI benefit through assured clientele for their products and services. The consortium is also planning to rope in other specialist partners including insurance, equipment and storage companies.
The Government of India’s National Agriculture Policy envisages that “private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oilseeds, cotton and horticultural crops”. The NDA government at the Centre has already drafted a model law on agricultural marketing to provide, among other things, legal support to contract farming agreements. Several state governments, in Andhra Pradesh, Gujarat, Karnataka, Punjab and Tamil Nadu, are actively promoting
Contract farming, changing laws to enable and support it, and providing companies interested in it with a variety of incentives, including lifting of land ceilings, subsidies and tax rebates. Other state governments, including in West Bengal, are under active pressure to change their policy towards contract farming. In this context, it becomes urgent to assess the experience with contract farming both internationally and in the recent Indian context. Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/suppliersand 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 to harvest and deliver to the contractor a certain amount of produce, based upon anticipated yield and contracted acreage. This could be at a pre-agreed price, but need not always be so.
Typically, the contractor supplies the farmer with selected inputs and technical advice. The typical contract is one in which the contractor supplies all the material inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crops to be grown, the agencies or companies concerned types of farmers, and technologies and the context in which they are practised.
THE ADVANTAGES OF CONTRACT FARMING
To the Farmer:-
Exposure To World Class Mechanized Agro Technology.
Obtains An Assured Up Front Price & Market Outlet For His Produce.
No Requirement To Grade Fruit, As Mandatory For Fresh Market Sale.
Bulk Supplies Versus Small Lots As Again Reqd By The Fresh Market.
Crop Monitoring On A Regular Basis. Technical Advice, Free Of Cost At His Doorstep.
Supplies Of
Healthy Disease Free Nursery
Agricultural Implements
Technical Bulletins Etc
Remunerative Returns
To the Company:-
Uninterrupted & Regular Flow Of Raw Material.
Protection From Fluctuation In Market Pricing.
Long Term Planning Made Possible.
Concept Can Be Extended To Other Crops.
Builds Long Term Commitment
Dedicated Supplier Base
Generates Goodwill For The Organisation.
To the Country:-
To reduce the load on the central & state level procurement system.
To increase private sector investment in agriculture.
To bring about a market focus in terms of crop selection by Indian farmers.
To generate a steady source of income at the individual farmer level.
To promote processing & value addition.
To generate gainful employment in rural communities, particularly for landless agricultural labour.
To flatten as far as possible, any seasonality associated with such employment.
To reduce migration from rural to urban areas.
To promote rural self-reliance in general by pooling locally available resources & expertise to meet new challenges.
New markets are necessary.
New marketing strategies.
New thinking to boost Indian agriculture.
Building capabilitie.
Promoting investment.
Technology enhancements improve the lot of our farmers.
Broad based contract farming programs can be one possible solution.
The Classic Case of Pepsi Foods Ltd.
Launching its agro-business in India with special focus on exports of value-added processed foods, Pepsi Foods Ltd. (‘PepsiCo' hereafter) entered India in 1989 by installing a Rs 22 crore state- of-the-art tomato processing plant at Zahura in Hoshiarpur district of Punjab. The company intended to produce aseptically packed pastes and purees for the international market. However, before long, the company recognized that investment in agro-processing plants would not be viable unless the yields and quality of agricultural produce to be processed were up to international standards. At that point of time, tomato had never been cultivated in Punjab for its solid content, with a focus on high yields and other desirable processing characteristics such as colour, viscosity and water binding properties. Furthermore, little effort had been made to create a database on the performance of various varieties and hybrids, or to introduce modern farming practices.
There were no logistically efficient procurement models for fruits and vegetables that could be built on by the company. These apart, there were simply not enough quantities of tomato available even if the grown varieties/hybrids were procured from the open market. The total Punjab tomato crop was 28000 tons, available over a 25-28 day period, while PepsiCo required at least 40000 tons of tomato to operate its factory, which had a gigantic capacity of 39 tons fresh fruit per hour. The company required this intake over a minimum 55-day time frame, and in 1989, the season in Punjab did not last beyond 28 days. Sceptics had expressed doubts over the feasibility of the Zahura tomato processing plant, and had said that it would remain a museum piece! There a wereformidable challenge before the company and nothing short of a horticultural revolution was required to solve the problem. There was no choice but to alter the tomato production and logistics situation in Punjab. This led to the birth of PepsiCo’s backward linkage with farmers of Punjab.
PepsiCo follows the contract farming method described earlier, where the grower plants the company’s crops on his land, and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management The PepsiCo model of contract farming, measured in terms of new options for farmers, productivity increases, and the introduction of modern technology, has been an unparalleled success. The company focused on developing region- and desired produce-specific research, and extensive extension services. It was thus successful in bringing about a drastic change in the Punjab farmers’ production system towards its objective of ensuring supply of right produce at the right time in required quantities to its processing plant.
Another important factor in PepsiCo’s success is the strategic partnership of the company with local bodies like the PunjabAgricultural University (PAU) and Punjab Agro Industries Corporation Ltd. (PAIC). Right from the beginning, PepsiCo knew that changing the mindset and winning the confidence of farmers would not be an easy task for outsiders. The company’s unique partnership with PAU and PAIC fuelled its growth in Punjab.
Encouraged by the sweeping success of contract farming in tomato in several districts of Punjab, PepsiCo has been successfully emulating the model in food grains (Basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from other vegetable crops like potato.
The company, which had been involved in the export of Basmatirice since 1990, was the first processor in India to invest and strengthen backward linkages for Basmati rice. After extensive multi-locational field trials at its 27-acre R&D farm at Jallowal near Jalandhar, PepsiCo ventured into contract farming in Basmati rice on a commercial scale four years ago. The company invested over Rs 5 crore in a modern processing plant at Sonepat in Punjab. It is involved right from the stage of selecting varieties of Basmati (based on customer preference), seed multiplication and development of a package of practices for farmers. PepsiCo’sscientists, who ensure successful transfer of technology from the trial to the commercial field levels, closely monitor the performance of the crop.
At the time of harvest, the company procures the entire pre-agreed quantum of the harvested produce at the farm gates, at the pre-agreed price. The raw material so procured is transferred to PepsiCo’s ISO 9002 and Hazard Analysis Critical Control Point (HACCP) certified Rice Mill located at Sonepat for processing, packing and export, ensuring that the product remains completely traceable from field to consumers.
During 2002-03 crop year, farmers from Jalandhar, Amritsar, Hoshiarpur and Sangrur districts of Punjab, and parts of Western Uttar Pradesh were contracted for Basmati rice cultivation. The season’s acreage for the crop stood at 800 hectares. In 2001-02, contracted farmers reaped yields of 2.5 tons/hectare. By the end of 2004, the company plans to increase the acreage under Basmati rice to 4000 hectares to meet the complete requirement of its manufacturing plant.
Similarly, PepsiCo planned a foray into contract farming in groundnut with the farmers of Punjab with the objective of producing export-quality, value-added groundnut such as roasted and salted peanuts, flavoured and coated peanuts, and peanut butter.
Using plastic mulch groundnut (PMG) technology sourced from China has enabled PepsiCo to take up two crops in a year - one in the kharif and the other in the rabi season. The company has demonstrated yields of 3.0 and 4.0 tons per hectare on field trials for kharif and rabi crops respectively, much above the national average of 1.0 ton/ha.
“Till date, there have been no serious defaults; as long as you are offering technology that offers predictable results that are in line with the expectations of the farmers, defaults remain minimal” says Mr. Abhiram Seth, ExecutiveDirector (Exports and External Affairs) of PepsiCo, sharing his experience.
The company proposes to extend its contract farming in groundnut to farmers in Rajasthan and Uttar Pradesh, who have shown great interest.
A sound R&D program backed by committed extension personnel to transfer the resulting technologies has been the intrinsic strength of PepsiCo. Its focused research on increasing yield levels, to the advantage of farmers (which in turn brings down the cost of raw material to the company) has resulted in their increased trust and loyalty towards the company. Post-PepsiCo entry has seen the tripling of yield levels in chilli (from 6.0 tons/ha to 20 tons/ha) and tomato (14-16 tons/ha to 52 tons/ha).
As part of its expansion plans, the company has been conducting initial trials at Neelamangala in Karnataka to evaluate varieties/ hybrids of chilli for their yield, colour, total solids, pungency and other traits/parameters. “We plan to go commercial with chilli farmers of Karnataka next year,” says Mr. Seth.
On the company's plans, he said, “Our immediate focus would be to consolidate and strengthen the existing activities”.
With this kind of a backward linkage with farmers of Punjab and Haryana, PepsiCo developed a perfect contract farming model involving an enduring relationship with local agencies including the State Government.
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