Contract farming and joint

venture

Submitted by-Shikha Mehta

H.(B.Tech)2010-02-09
INTRODUCTION
 More specifically, farmers' groups can perform the
following beneficial functions to facilitate and
improve contract farming ventures:
 Facilitate communication between firm and farmer
 Provide technical transfer and farmer training
 Facilitate credit provision and group guarantee
 Achieve economies of scale
 Aid quality control and assurance
 Improve bargaining power and upgrade processes
 DEFINITION
Joint ventures :Working with others to
save time and money.
 By sharing resources with other farming

businesses whether land or machinery or

expertise to minimise the level of capital
investment and also benefit significantly
from economies of scale.
 PURPOSE
 Management of existing contract farming
companies for improving their operations.
 Necessary for success.
 To promote new contract farming

operations or monitor existing operations.

 Advantages for farmers

 Inputs and production services are often supplied by

the sponsor.
 This is usually done on credit through advances from

the sponsor.
 Contract farming often introduces new technology

and also enables farmers to learn new skills.

 Farmers' price risk is often reduced as many

contracts specify prices in advance.

 Contract farming can open up new markets which

would otherwise be unavailable.

 Problems faced by farmers
 Particularlywhen growing new crops,
farmers face the risks of both market
failure and production problems.
 Inefficient management or marketing

problems.
 Sponsoring companies may be unreliable

or exploit a monopoly position.

 The staff of sponsoring organizations may

be corrupt.
Advantages for sponsors

 Contract farming with small farmers is more

politically acceptable than production on estates.
 Working with small farmers overcomes land

constraints.
 Production is more reliable than open-market

purchases and the sponsoring company faces

less risk by not being responsible for production.
 More consistent quality can be obtained than if

purchases were made on the open market.

Problems faced by sponsors

Social and cultural constraints may affect farmers’

ability to produce to managers’ specifications.
 Poor management and lack of consultation with

farmers may lead to farmer discontent.

 Farmers may sell outside the contract (extra-

contractual marketing) thereby reducing

processing factory throughput.
 Farmers may divert inputs supplied on credit to

other purposes, thereby reducing yields.

 TYPES
 1. The centralized model.
 2. The nucleus estate model.
 3. The multipartite model.
 4. The informal model.
 5. The intermediary model.
 The centralized model

 Involves a centralized processor and/or packer

buying from a large number of small farmers.
 It is used for tree crops, annual crops, poultry,

dairy products.
 Often require a high degree of processing, such

as tea or vegetables for canning or freezing.

 Sponsors’ involvement in production varies.

 The nucleus estate model

 It is a variation of the centralized model where

the sponsor also manages a central estate or
plantation.
 The central estate is usually used to guarantee

throughput for the processing plant but is

sometimes used only for research or breeding
purposes.
 It is often used with resettlement or

transmigration schemes.
 The multipartite model

 Itmay involve a variety of organizations,

frequently including statutory bodies.
 Develop from the centralized or nucleus

estate models, e.g. through the

organization of farmers into cooperatives
or the involvement of a financial institution.
 The informal model

 It is characterized by individual
entrepreneurs or small companies.
 It Involves informal production contracts,

usually on a seasonal basis.

 It Often requires government support

services such as research and extension.

 It Involves greater risk of extra-contractual

marketing
 The intermediary model

 There is a danger that the sponsor loses

control of production.
 And quality as well as prices received by

farmers.
 It Involves sponsor in subcontracting

linkages with farmers to intermediaries.

ADVANTAGES OF CF & JV
 Access to capital and land
 Access to skilled labour
 More efficient use of machinery
 Greater marketing and input buying strength
 Taxation benefits
SPECIFICATIONS

 Contracts will need to specify some or all of the following

aspects of the sponsor-farmer agreement:
 Contract duration
 Quality standards
 Production quotas
 Cultivation practices
 Crop delivery arrangements
 Pricing arrangements
 Payment procedures
 Insurance arrangements
KEYS FOR A SUCCESFULL CF &
JV
 Utilities and communications must be suitable for
both: farming, e.g. feeder roads, and for agro-
processing, and electricity.
 Land availability and tenure – contracted farmers
require unrestricted access to the land they farm.
 Input availability – sources of inputs need to be
assured.
 Social considerations – cultural attitudes and
practices should not conflict with farmers’ obligations
under the contract .
 And managers must develop a full understanding of local
practices.