Lessons from Contract Farming Experiences to date

CII Conference on Contract Farming Agrotech 2004, Chandigarh, 6 Dec 2004

S Sivakumar, ITC Limited

Theoretically, conditions in India are very appropriate for contract farming…
Markets are transforming
• From supply driven production systems to demand driven value chains • There is a need for market alignment in terms of cost & quality

60% of India’s workforce is still in agriculture Food processing industry is underdeveloped

• Majority of the farmers are small with limited resources • Corporate farming is a socially inappropriate option for India

• Good scope for value addition through processing • The industry also needs quality raw material in sufficient volumes
S Sivakumar, ITC Limited

…with ideal complementary strengths to integrate production & consumption thru contracts
Agri Business
Inputs & Technology Land & Labour

Farmer

Market Linkages

Traditional Knowledge

Quantity, quality & price being the variable terms of the contract
S Sivakumar, ITC Limited

The Experience Todate

☺ ☺

Some good examples of successful contract farming (Seed Industry, Poultry Industry, WIMCO, Pepsico)

Good examples of collaboration without contract (Sugarcane Industry, Amul, ITC eChoupal)

And, a large number of reneged written contracts (Farmers and corporates blaming each other, and looking to Government for help in contract execution)
S Sivakumar, ITC Limited

The Key Lesson

Contract farming is not a solution for all problems

S Sivakumar, ITC Limited

Multiple farming models co-exist around the world
and multiple farm-market linking mechanisms
Farmer
Independent Farmer

Main Driver of the Chain
Farmer Cooperatives Farm Management

Corporate
Captive Farming

Farmer

Main Linking Mechanism
Contract Farming

Corporate

Auctions

eChoupal

S Sivakumar, ITC Limited

When will contract farming work? (1)
When there is natural reciprocal dependency between the two contracting parties i.e. the game is not “zero-sum”
produced to special specs (e.g. seeds, processing oriented horticulture crops, organic, produce traceable to farms) early stages of technology adoption (e.g. Poplar, when it was introduced) highly perishable, where economic vicinity becomes critical (e.g. sugar cane, milk, horticulture) early stages of market evolution (e.g. medicinal & aromatic plants, traditional crops in new geographies)

S Sivakumar, ITC Limited

When will contract farming work? (2)
When the market institutions provide risk transfer mechanisms
(again, to ensure that the game is not “zero-sum”)

Price Risk through Derivative Markets (price at which the seller sells need not be the price at which the buyer buys!)

Yield Risk through Crop / Weather Insurance (reducing the risk of the contracting parties, by spreading the same on to market)

S Sivakumar, ITC Limited

When will contract farming work? (3)
When the environment does not give opportunity to one party to exploit the disadvantaged counterparty

Vibrant Competition (offering choices) Strong Regulatory Framework (swift dispute resolution)

Conducive Social Infrastructure (farmer awareness levels i.e. informed, superior bargaining power i.e. empowered)

S Sivakumar, ITC Limited

Three Roles Government must Play

Facilitator

• Model Rules, Awareness Communication

Regulator

• Screening Companies, Registering contracts

Player

• Party to contracts, Arbitrator, Safety net for pricing

S Sivakumar, ITC Limited

Conclusion
Write the contracts • With knowledge (where they will work & won’t) • Choosing right terms (prefixed or determinant formula for price, quantity and quality) • Fairly (use simple language & equitable terms) So that both parties gain by honouring the contracts than by reneging!

S Sivakumar, ITC Limited

Thank You

S Sivakumar, ITC Limited

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