Slide 1: Title Slide Title: Contract Farming Subtitle: A Partnership Between Farmers and Agribusinesses Include: your name, class, or organization 🧩 Slide 2: Introduction Contract farming is an agreement between farmers and buyers before production beg

Contract farming detailed ppy

1. CONTRACT FARMING 1

2. Contract farming refers to a system under which farmer sells his/her produce under forward contract to a known buyer. The buyer could be an agribusiness firm, a local processing unit or a multinational company. Contract is nothing but a commitment by a seller/farmer to supply an agricultural commodity of a particular quality, at a particular time, in requisite amount and at a pre agreed price to the contracted buyer. Contract farming usually involves the following basic elements - pre-agreed price, quality, quantity or acreage (minimum/maximum) and time. CONTRACT FARMING 2

3. The “Green Revolution” was a resounding success. Improved varieties & hybrids Assured availability of inputs Administered / Controlled pricing for fertilizer . Guaranteed procurement. Attractive & ever increasing output minimum support prices. RESULTS Food security was assured. Farm incomes boomed . Safeguarding our public distribution system. Employment for rural landless. 3 The Govt. Of India Runs The Largest Contract Farming Model

4. Success However Came At A Cost Agriculture today is not diversified. - Overemphasis on cereals & sugarcane. - Low or no focus on pulses & oilseeds. Marginal role for the Pvt. Sector. Essential Commodities Act became a means of ensuring Govt. procurement. MSP becomes a benchmark reference pricing, rather than a farmer safety net. Productivity decay - paucity of incentive 4

5. What Else Did It Do? Mono- culture,over fertilization & excessive water usage Soil degradation Singular focus on supported crops discourages diversification. Subsidised exports to liquidate stock creates a further distance between the international market & domestic reality To succeed in this context contract farming needs to go well beyond its simple definition 5

6. Why Contract Farming ? 6 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.

7. Moving From Food Security To Market Demand Farmer Mandi Buyer Processor Consumers Mfrs. Brand Marketeers Distributors Retailers CONTROL ZONE THE TRADITIONAL MODEL

8. Moving To A Value Delivery Sequence Choose the Value Provide the Value Communicate the Value R&D Activity Seed Selection Contract Farming Variety Evaluation Mfrs. Brand Marketeers Dist. Retail Consumer Processing SPAN OF INVOLVEMENT This is what we will be planning to adopt later on after ensuring of availability of raw material locally.

9. Assistances: For The Farmers R&D assistance Soil Testing, Hybrid Seeds, Fertilizers, Pesticides Evaluation of farmers economics model Technical Assistance Farmers Training Crop Timing & Crop Monitoring Soil preparation & Field selection Seed sowing & Usage of fertilizers, Pesticides Irrigation assistance Harvesting technology Commercial Assistance Procurement, transportation logistics assistance Prompt farmers payment system.

10. Types of Contract Market specification : Contracts are pre-harvest agreements that bind the buyer and the grower to a particular set of conditions governing the sale of the crop. These conditions often specify price, quality and timing. Resource provision : Contracts oblige the processor to supply crop inputs, extension, credit etc., in exchange for a marketing agreement. Production management : Contracts bind the farmer to follow a particular method or input regimen, usually in exchange for a marketing agreement or resource provision. 10

11. Contract farming serves as an assured market at doorsteps of the farmers, reducing thereby marketing and transaction costs and also price risk. Access to credit Skill transfer Guareanteed and fixed pricing structures Availability of an assured market acts as an incentive to farmers to use quality inputs, adopt improved technologies and scale up production systems. To enable farmers to cope up with risks, ex ante and expost , firms provide inputs, technology and services, impart training in production management and share risks as a part of contract. Advantages of Contract Farming to Farmers

12. A farmer, being a weaker partner, is prone to exploitation by the firm. Agribusiness firms can extract monopsonistic rent in the output market, if alternative marketing options are limited and farmers have locked sizeable investment into assets specific to the contract commodity or the commodity is perishable and not amenable to transformation into less perishable products on the farm. Firms can also extract monopoly rent in the input markets. Agribusiness firms may introduce new crops and technologies that can increase production and market risks. Bound by the contract to produce a specific commodity, farmers lose flexibility to adjust their production portfolio to emerging market opportunities. There is also an apprehension that farmers’ excessive dependence for credit on firms can lead them into perpetual indebtedness. Disadvantages of Contract Farming to farmers

13. Advantages for Sponsors Political acceptability; Overcoming land constraints; Production reliability and shared risk; Quality consistency; and Promotion of farm inputs. 13

14. Problems faced by Sponsors The main disadvantages faced by contract farming developers are: Land availability constraints; Social and cultural constraints; Farmer discontent; Extra-contractual marketing; and Input diversion. 14

15. Contract Farming - Industry Related Issues Honouring Contracts - there is no credible enforcement mechanism in place. Small size of land holdings. Need to contract with a larger number of farmers, thereby increasing risk. Lack of a comprehensive crop insurance scheme

16. Types of Contract farming Centralized model Nucleus Estate Model Multipartite model Informal Model Intermediary Model 16

17. Centralized Model - Outgrower Schemes Contracting company provides support to the production of the crop by smallholder farmers, purchases the crop from the farmers, and then processes, packages and markets the product, thereby tightly controlling its quality. Crops such as tobacco, cotton, paprika, sugar cane, banana, coffee, tea, cocoa and rubber May involve tens of thousands of farmers Level of involvement of the contracting company in production may vary

18. Nucleus Estate Model Variation of the centralized model Promoter also owns and manages an estate plantation (usually close to a processing plant) Estate is often fairly large in order to provide some guarantee of throughput for the plant Mainly tree crops, but also e.g. fresh vegetables and fruits for export Focus on smaller number of emergent or semi-commercial ‘satellite’ growers Close supervision of production

19. Multipartite Model Usually involves government statutory bodies and private companies jointly participating with farmers May have separate organizations responsible for credit provision, production, management, processing and marketing

20. Informal Model Individual entrepreneurs or small companies who make simple, informal production contracts with farmers on a seasonal basis Crops usually require only minimal amount of processing or packaging for resale to the retail trade or local markets Vegetables, watermelons, fruits Financial investment is usually minimal Most speculative of all contract-farming models, with a risk of default by both promoter and farmer

21. Intermediary Model Formal subcontracting by companies to intermediaries (collectors, farmer groups, NGOs) Intermediaries have their own (informal) arrangements with farmers Disconnects link between company and farmer Risks: losing control over production base losing control over prices paid to farmers poorer quality standards and irregular production

22. Organization Outgrower Schemes The processor employs its own field staff mobilizing and managing the outgrower smallholder farmers The processor uses local agents or other intermediaries, which work on the basis of a commission, and are the link to the outgrowers The processor is linked to cooperative societies or associations, which manage the individual member outgrowers

23. Farmer Organizations Formal cooperatives; or informal farmer associations, farmer production, women farmer or youth farmer groups/clubs, people’s participation groups, rural group businesses, etc. Organizing smallholder farmers means reaching economies of scale and reducing transaction costs – benefiting both company and farmers Could reduce farmer default in contract outgrower schemes through peer pressure Important to foster good company-farmer relationships

24. Features of Successful Farmer Organizations Generally involved in relatively simple input supply, marketing, and saving/credit operations Close match activity/services and capacity Begin with a single activity, as more complex operations often fail Concentrate on relatively high-value produce Built upon pre-existing organizations or social groups Small membership, member-driven agenda Viable business objectives (not subsidies)

25. Types of Successful Farmer Organizations Farmer organizations are found to be most successful with small, cohesive groups involved in simple activities in liaison with agribusiness the linkage-independent group , which can stand alone in the market, and provide smallholders with sufficient market presence to seek out independent relationships with other market intermediaries the linkage-dependent group , having a long-term commitment to a particular service provider

26. Facilitating Intermediary Organizations Can play an important role in organizing farmers Tendency to focus on promoting linkage-independent farmer organizations Formation/strengthening of farmer groups often objective in itself, without taken into account concerns and needs of the private sector Experiences in working with NGOs from perspective of private sector not always positive Masquerading as agribusiness enterprises or creating market distortions – lack of appropriate exit strategies

27. But ……. Despite these criticisms it is believed that donors and/or NGO’s still have a role to play in: facilitating group formation, assisting in reducing transaction costs, adding value at producers’ level through promoting quality control and/or processing, promoting savings by farmers, and understanding of the role and use of credit to make such farmer groups stronger

28. FACTORS THAT MAKE CONTRACT FARMING WORK: Contract farming works if its advantages outweigh the disadvantages for both agribusiness firms and farmers, and both feel better off with contract than without it. There are several factors - economic and non-economic, internal and external to the contracts - that influence relationship between farmers and firms, and hence the performance and the sustainability of contract farming. Contract farming exhibits in various forms, depending on the type of commodity, buyers and sellers, and the socio-economic environment surrounding farmers. Hence, the factors underlying performance of contract farming could be different under different production and socioeconomic environments. 28

29. Some successful Ventures of Contract farming For the purpose of identifying factors underneath the success of contract farming, three different models of contract farming in three different commodities viz., milk, broilers and vegetables are examined. 29

30. 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. Contracting with a large 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. 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. 30

31. The contract farming scheme of the Nestle now covers about 100 thousand dairy farmers in over 1500 villages in several districts of Punjab. 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 milk supplies it encourages farmers to use milking machines and quality inputs. 31

32. 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 supplies from scattered producers. The firm provides technical guidance, services and inputs to association members to ensure that farmers follow best production and marketing practices. 32

33. 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. 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. 33

34. 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 1970. 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. 34

35. Critical Success Factors 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. 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. 35

36. Table: Economics of contract versus non-contract production Milk Spinach Broilers Item Cont. Non-cont. % Diff. Cont. Non-cont. % Diff. Cont. Non-cont. % Diff. Yield 11.9 11.4 4.4 8.6 8.3 4.O 1.78 1.79 -0.6 Production cost 5586 5782 -2.5 1485 1630 -8.9 - - - Mark. & transaction costs 100 1442 -93.1 35 437 -92.0 38 90 -57.8 Total cost 5686 7170 -20.7 1520 2067 -26.5 - - - Price 9337 8991 3.8 3311 3074 7.7 - - - Net Revenue 3651 1821 100.5 1791 1007 77.9 2255 2003 12.6 36

37. Reducing Risk Despite lower marketing and transaction costs for the contract farmers, the difference in profits of contract and non-contract farmers in case of broilers is not as large as milk and spinach. 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. Some studies (Mehta et al., 2003; Fairoze et al., 2006) also indicate that contract farming in broilers is not as profitable as independent production. 37

38. Poultry production is capital-intensive and faces high production and price risks, as compared to many 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. If the contract farming in broilers is not so profitable then why it is widely prevalent in India as well as other countries? 38

39. 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% of the market risk to the firms. 39

40. 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 in terms of investment, time and skills. Output prices for contract farmers are marginally higher, and the unit cost of production is marginally lower than for non contract farmers. Further, output prices (milk and spinach) are not pre-determined, but are linked to market prices. 40

41. 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. These observations lead to the inference that the probability of success of contract farming is high if prices of output and inputs are linked to open market prices, and firms abstain from anti-competitive behaviour . 41

42. 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 schemes. 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. 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. 42

43. 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. 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 supplies of fruits and vegetables through growers associations promoted by it. 43

44. 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. Evidence from case studies on dairy, poultry and vegetables 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). 44

45. 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. Effective communication (monitoring) and transparency and flexibility in terms and conditions are needed to develop mutual trust. 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. 45

46. Scaling-out and scaling-up of contract farming are important for 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 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. Scaling-out and scaling-up: 46

47. A successful firm follows a combination of both scaling-out and scaling up not only to spread supply risk but also to discharge corporate responsibility of inclusive socio-economic development. It encourages and incentivizes its able partners to scale-up their production systems to climb-up income ladder, and makes new contracts with potential suppliers to reduce supply risk in case the scaled-up partners start exhibiting opportunistic tendency. The corollary is that in the long run the sustainability of contract farming would be influenced by the extent to which the agribusiness firms are able to scale it up horizontally and/or vertically, ceteris paribus. 47

48. Thanks 48