CONTRACT FARMING

Contract farming refers to varied formal and informal agreements between producers and processors or buyers. It may include loose buying arrangements, simple purchase agreements and supervised production with input provision, with tied loans and risk coverage.

In this system for the production and supply of agricultural/horticultural produce are 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 (Manage 2003). Contracts can range from oral deals to formal, registered written contracts.

Features
1. Creating New Markets
2. Efficiency and Economics of Scale
3. Ensuring Quality Standards
4. Facilitating Diffusion of Modern Technologies
5. Minimizing' Transaction Costs
6. Coping with Information Asymmetries
7. Price Volatility
8. Sharing of Risk

Why Contract farming

Contract Farming Models
There is a wide range of organizational structures that are embraced by the term `contract farming'. The choice of the most appropriate one to use depends on the product, the resources of the company, the social and physical environments, the needs of the farmers and the local farming system (Eaton and Shepherd, 2001). Some of the contract farming models practiced in India are presented below.

I. Private – Farmer Model   
Poultry sector in Tamil Nadu made an impressive mark in promoting contract farming as an effective institutional alternative for promotion of broiler production. Suguna Poultry Farm Ltd, has emerged as one of the leading integrated broiler producers in the country, with contract farming. Contract poultry farming managed to free the small farmers from the worries of production and market planning of the poultry products. At present, nearly 90 per cent of the poultry farming in Tamil Nadu has come under the contract farming concept.

2. Public-Private-Farmer model
State Department of Agriculture under 'tripartite public-private partnership' proposed contractual cotton cultivation programme in Thanjavur, Nagapattinam, Tiruvarur (coastal), 'I'irunelveli, Salem, Erode and Namakkal Districts.  The farming focus will be on cluster­villages in these districts and the contract farming facilitation will be through supply of credit-linked quality inputs to the farmers enrolled under the project which will be organised through the agricultural extension centers. The model to be followed will involve banking and insurance companies for credit input and loss guarantee and the choice of the cotton and their quality parameters would be decided in consultation with the Tamil Nadu Agricultural University and the textile mills in the State through Southern India Mills’ Association. The farming model would also receive incentive support from various State and Central Government schemes.

3. Private-Community Grower Group-Farmer Model
Ion Enviro undertakes contact farming with Community Grower Groups (CGG) having large acreage, on a profit-sharing basis. Farmers are trained in-house in scientific organic farm management and certification. Community Grower Groups are promoted through non-governmental-organisation or sell-help group or registered association. They follow fair trade practices wherein middlemen are eliminated, child labour is banned, men and women are given equal status, and transparency in trade is maintained. In the process, they bring to rural areas the best of organic processes and water management techniques, thereby educating and empowering farmers. Production is executed in accordance with protocol requirements as per EEC 2092/91 standards. Written and documentary accounts are recorded to trace the origin, nature and quantities of raw materials procured and their usage (Ion exchange Enviro farms, 2005). The crops cultivated include Banana, Wheat, Cotton, Papaya, Pineapple, Basmati, Mango, Soybean, Tur, Black Gram, Green Gram, Tumeric, Grapes, Bengal Gram, Groundnut, Sesame and Cashew.

4. Private Consortium - Farmer model
Hindustan Lever Ltd (HLL), Rallis and ICICI jointly promote contract farming in wheat in Madhya Pradesh. Under the system, Rallis supplies agri-inputs and know-how, ICICI provide farm credit to the farmers and HLL buysback the farm output. In this model, 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 model can he extended by including insurance firms, warehouses and manufacturers of equipments and machinery.

5. Industry - Research Institute- Farmer model
Pepsi Foods Ltd. entered India in 1989 by installing a tomato processing plant at Gahura in Hoshiarpur district of' Punjab to produce aseptically packed pastes and purees for the international market. 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, in terms of' new options for farmers, productivity increases, and the introduction of, modern technology, has been an unparalleled success. Another important factor in PepsiCo's success is the strategic partnership of the company with local bodies like the Punjab Agricultural University (PAU) and Punjab Agro Industries Corporation Ltd. PepsiCo is successfully emulating the above model in food grains (13asinati rice), spices (chillies) and oilseeds (groun(nut) and vegetable crops like potato. It also brings in the state of art technology.   At Sonepet, the company has a ISO 9002 and Hazard Analysis Critical Control Point (LIACCP) certified Rice Mill. Belgaum (Karnataka)-based Ugar Sugar Works Ltd., which established a successful backward linkage with farmers of Northern Karnataka for supply of barley for its malt unit.

6. Grading House - SHG - Farmer model
Appachi Cotton Company (ACC), the ginning and trading house in Pollachi under the name Integrated Cotton Cultivation (ICC), established backward and forward integration between the `grower' (farmer) and the `consumer' (textile units). The contract assured the farmers easy availability of quality seeds, farm finance at an interest rate of 12% per annum, door delivery of unadulterated fertilisers and pesticides at discounted rates, expert advice and field supervision every alternate week, and a unique selling option through a MoU with ACC. The core principle of the formula lies in the formation of farmers' Self­ Help Groups (SHGs).

The cases discussed here are a few among several such successful ventures by corporates involved in food processing, agro-commodity and food products exports. The demonstrated successes of gherkin exporters of Southern India, which is over 90% based on contract larrning, and that of Marico's safflower procurement through a successful backward linkage model, are also worth mentioning.
Contract categories
1) Marketing Contract.
2) Production Contract
3) Basis Contracts.
4) Technology License Agreements

Advantages

To The Farmer:

To The trader:

Contract Framing by the Government resulted in, assured food security, increased farm incomes, Safeguarded our public distribution system and increased employment opportunities for rural landless

One of the examples of success of contract farming is Punjab Pepsi, Punjab Agro Industries Corporation (PAIC) and Punjab Agricultural University (PAU) Partnership in Profile and the impact of contract farming in Punjab is what follows
¨Tomato yields increased threefold, from 16 - 52 MT / hectare. Chilli & potato yields improvements were equally dramatic
¨Production of tomato in the state of Punjab went up to 200,000 MT, from 28,000. Technology spread to non-Pepsi growers

¨Fresh market prices for tomato dropped, with increased availability. However farm incomes increased.
¨Chilli yields increased from 2.5 MT to 9 MT per acre
¨Move to contract farming of other crops - Groundnut, Basmati & non-Basmati paddy
¨Contract farming of broilers between Coimbatore hatcheries with farmers
¨Marigold farmers and extraction units in Coimbatore

Beyond the limit of advantages in contract farming some of the problems also analyzed such as,

Problems in Contract Farming

India, given the diverse agro climatic zones, can be a competitive producer of a large number of crops.
Need to convert our factor price advantage into sustainable competitive advantage. Contract farming offers one possible solution. Contract farming provides farmers with access to markets that would not otherwise have been available to them. Without the quality control and tight coordination offered by contract farming, it is frequently unlikely that smallholders would be able to sell perishable goods overseas through open market sales. The most significant income increases have been generated from contract farming.

Contract farming could reduce food production if a new contract cash crop displaced a previously grown food crop. Evidence suggests that such displacement does not frequently occur when farmers are allowed to make their own decisions. In such cases, the contract crop tends to displace a less profitable cash crop rather than a food crop. Local governments often favour contract farming in the belief that it will produce greater spillover or linkage effects with the local economy than would plantation production


PRIVATE SECTOR COMPANIES INVOLVED IN CONTRACT FARMING IN TAMILNADU

Remark: Users are requested to cross-verify the details with individual companies.

Source: http://agmarknet.nic.in/ConFarm.htm

Source:  Principles And Practices In Contract Farming*

            * K. R. Ashok, Professor, Dept.of Agrl .Economics, TNAU, Coimbatore-3.

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