Contract Farming

Sukhmandeep Singh

Contract Farming
An arrangement for the production and supply of agri./allied produce under advance contracts, with a commitment to provide a commodity of a type, at a time, place and a price, and in the quantity required by a known buyer. •Five aspects - pre-agreed price, quality, quantity/acreage (mini./maxi.), place, and time. •Procurement/marketing, Resource provision, and Production mgt. contracts

With section on Contract Farming in this act. Mode of payment (cash or cheque). Input supply and terms.Contract Farming Act Model Act for contract farming is adopted by State Agricultural Produce Marketing committees (Development and Regulation Act 2003). Some successful examples of Model contract act are certified seed production. Disputes to be referred to the prescribed authority of the committee under force of the decree of civil court. Payment stream (part or full). gherkin and broiler chickens. Contracting Company registers with the marketing committee. Price or compensation (fixed or market linked). It will sign an agreement with the firm and the farmers to be registered. Area committed (Quantity). Features of a Model Contract act includes. Transport (lifting at the farm or delivery at the factory). Quality parameters. . Monitoring and Supervision.

Importers insisted on use of pesticides permitted in those countries to ensure the use of right kind of pesticide. Companies organize production after getting firm orders as for this crop. a new crop introduced in the country in the early 1990s. Russia. Consumers of this crop were Europe. North America and Japan. . Processing should be done within 10 hours of picking.Gherkin. Company‟s commitment is heavy due to supply of seed and pesticide and also fulfilling the obligation to overseas clients. so all the production is supplied to the contracting company. new seed has to be supplied by the company. No local market is there.

improvement on yield. The seed company had invested on plant and machinery and in return farmer delivers whole quantity of produce to the company. on the condition of investing in agro processing industry. Breeder seed is supplied by the seed companies and cultural practices to be followed by farmer are according to company. Tomato was identified by the company as potential crop. Pepsico introduced tomatoes in Punjab. . prolong processing days.Certified seed production goes on smoothly for more than forty years in the country without much problem. solid matter. It entered into contract farming with the farmers on pre negotiated price higher than open market.

Reasons for CF • Flexible for both parties • Less resource demands on integrator • Sharing of risk • Non-availability/-viability of corporate farming option • Access to market/technology/credit for farmers .

organic trade/fair trade/ethical trade • banking and input industry push for CF • farming crisis • failure of traditional cooperatives.Rationale for Contract Farming • Supermarket chain growth including FDI in retail • international trade and quality issues like SPS measures. and • withdrawal of state from agricultural space .

Types of Contract Farming These are a few of the models of contract farming that are accepted globally: -Centralized model -Nucleus Estate model -Multipartite model -Informal model -Intermediary model .

packages and markets the product. . coffee. thereby tightly controlling its quality. cotton. The contracting company provides support to the production of the crop by smallholder farmers. tea. sugar cane. cocoa and rubber. This can be used for crops such as tobacco. banana. and then processes. This may involve tens of thousands of farmers. The level of involvement of the contracting company in supporting production may vary.Centralized model. paprika. purchases the crop from the farmers.

e. This is a variation of the centralized model.. It is mainly used for tree crops. but can also be for. The promoter also owns and manages an estate plantation (usually close to a processing plant) and the estate is often fairly large in order to provide some guarantee of throughput for the plant. fresh vegetables and fruits for export. .Nucleus Estate model.g.

processing and marketing of the produce . statutory bodies and private companies jointly participating with the local farmers. management.Multipartite model. The model may have separate organizations responsible for credit provision. production. The multipartite model usually involves the government.

Financial investment is usually minimal. with a risk of default by both promoter and farmer . This is perhaps the most speculative of all contract-farming models. informal production contracts with farmers on a seasonal basis. The crops usually require only a minimal amount of processing or packaging for resale to the retail trade or local markets. as with vegetables. and fruits. This model is basically run by individual entrepreneurs or small companies who make simple.Informal model. watermelons.

farmer groups. This model has formal subcontracting by companies to intermediaries (collectors.Intermediary model. NGOs) and the intermediaries have their own (informal) arrangements with farmers. The main disadvantage in this model is it disconnects the link between company and farmer. .

and •Corporate Farming including leasing of wastelands .Dampeners for CF in India •APMC regulation including Gujarat’s tripartite Arrangement •Improving open market efficiency •MSP policy.

and extension advice . 2)assured markets and prices (lower risks) especially for non-traditional crops. 3) assured and often higher returns. and 4) enhanced farmer access to production inputs.Key benefits of contract farming The key benefits of contract farming for farmers can be summarized as: 1) improved access to local markets. mechanization and transport services.

And 3) lower transport costs. such as roads and irrigation facilities in sugar outgrower areas. an especially important feature in the case of more dispersed producers.Additional key benefits for contract partners and rural development often include: 1) assured quality and timeliness in delivery of farmers’ products. 2) improved local infrastructure. . etc. dairy coolers/collection centres. as coordinated and larger loads are planned. tea roads.

Side selling by farmers to competing buyers is perhaps the greatest problem constraining the growth of contract farming. or the downgrading of produce quality by the buyer. there are potential disadvantages and risks associated with contract farming. Common contractual problems include farmer sales to a buyer other than the one to whom the farmer is contracted (side selling or extracontractual marketing). then the affected party stands to lose. a company's refusal to buy products at the agreed prices. If the terms of the contract are not respected by one of the contracting parties. .Issues of concern related to contract farming As with any form of contractual relationship. Contractors also may default by failing to pay agreed prices or by buying less than the pre-agreed quantities.

Indeed. may use their bargaining clout to their financial advantage. . extension services and market information and improving their contract negotiating skills can redress the potential for exploitation of farmers and poorly formulated contracts and their enforcement. downgrading crops on delivery so offering lower prices. if farmers are not well organised or where there are few alternative buyers for the crop or it is not easy to change the crop. Tactics sometimes used are changing pre-agreed standards. Strengthening farmer organisations to better access appropriate services such as credit.Another concern about contract farming arrangements is the potential for buyers to take advantage of farmers. Buying firms. which are invariably more powerful than farmers. there is a danger that farmers may have an unfair deal. or over-pricing for inputs and transport provided.

agencies and crops: • Bi-partite. bank. agril. input co. and farmer).. • Tri-partite (with Bank or Agri-facilitator) • Quad-partite (processor. • Intermediary (public/private (agent/franchisee) model .Indian Experience of CF Different Models across regions.

Cases of CF success in India •Frito Lay India (FLI/Pepsi) in Potato in Mah/Karnataka • AM Todd in Mint in Punjab • Agrocel in Basmati paddy in Haryana .

fixed contract price and market price based flexible price .Profile of Contracts • Two direct (Agrocel and AM Todd) and one thru’ middleman (Frito Lay India/Pepsi) • Fixed price generally but pricing option in case of FLI/Pepsi.

Profile of Contracts Limited input/Post-harvest material supply on credit and free extension • Very specific quality parameters • Purchase of lower quality produce at lower price • Delivery at specified point at farmer cost • Payment within specified time period after delivery of produce • No compensation for crop failure .

Farmer Logic of Contracting •Better and more reliable income due to assured market and better prices • Better quality inputs. on credit • New technology and seeds .

Experience of Mint in Punjab • Cost of production and transaction cost under contracts lower than that for noncontract production • Yields under contract lower by 35% due to new varieties but higher prices than under non-contract • Net income 60% higher than under noncontract .

Contract Design for Success • Minimize production costs and lower production risk (insurance by FLI and intercropping by AM Todd) • Minimize or share risk and uncertainty (insurance and flexible pricing by FLI) • Reduce the costs of pre. ‘menu of contracts’ for screening farmers so that they reveal their true type by choosing certain contracts.e.and post contractual opportunism (adverse selection and moral hazard) through contract allocation and monitoring mechanisms like social pressure. and individual risk rating/information collection before contract is signed (adverse selection) . incentive structure. group contracts. offer a contract suited only for some ‘good’ farmers. or group contract/incentives (moral hazard) and by rationing i.

Contract Design for Success •Encourage group or co-operative action among producers to lower transaction costs and ensure better compliance (Agrocel). • Motivate long term contracts to reduce hold up problem (Agrocel). • Design Clear terms contracts (AM Todd and FLI) • Reduce direct costs of contracting (FLI) and • Use transparent contracts .

Thanx .

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