Contract farming
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04-10-2010, 03:51 PM

Contract farming

In India agriculture is still based largely on small family holdings, seasonal production and traditional cultivation and management practices. most small farmers are independent producers, who sell their produce individually and have little bargaining power with input suppliers and produce markets. Agricultural marketing is similarly underdeveloped, with overlapping marketing channels, inadequate infrastructure and price information, a lack of postharvest management expertise and poor packaging of produce.But now trends are changing.
Farmers and agribusinesses are linking up in mutually beneficial contracting arrangements that offer producers lower market risk and greater access to inputs and financing, and ensure processors a guaranteed supply of farm produce. Corporate have understood now the huge potential of agricultural sector. Moreover corporate interest in contract farming and agri-businesses could prove the magic formula for reviving rural economies.
What is Contract farming?
Contract farming is an organizational arrangement that allows firms to participate in and exert control over the production process without owning or operating the farms. Independent growers perform the cultivation.

What are the different types of contracts?
The contracts can be classified into three, not mutually exclusive categories viz., market
specification, resource providing and production management. The market specification contracts are pre-harvest agreements that bind the firm and grower to a particular set of conditions governing the sale of the crop. The conditions specify price, quality
and pricing. Resource providing contracts oblige the processor to supply crop inputs, extension or credit, in exchange for a marketing agreement.Production management contracts bind the farmer to follow a particular production method or input management, usually in exchange for a marketing agreement or resource provision. In various combinations these contract forms permit the firms to influence the production technology and respond to the markets without having to operate their own plantations.

Contract farming is not totally new to our country. When the white revolution was born in India,
Contract farming also came into being by the introduction of Operation Flood I & II. Milk cooperatives of Gujarat under the banner Amul are running examples of a type of Contract farming. The Sugar Cooperatives of Maharashtra and also in many
states, growing of fruit crops (papaya, passion fruit, pine apple) and seed cotton in Tamil Nadu on similar pattern, cultivation of oil seeds especially Sunflower in North are examples of the currently practiced systems of Contract farming.

Why Contract farming in India?
1. In our country the farmers face the problems of traditional technology and management practices,little bargaining power with input suppliers and produce markets, inadequate infrastructure and market information, lack of post-harvest management expertise, poor package of produce and inadequate capital to grow a quality crop. They are waiting for change for better living standards.
2. Contract farming helps small farmers to participate in the production of high value crops
like vegetables, flowers, fruits etc and benefit from market led growth.

3. Extensive areas are required by the Agroprocessors for an intensive cultivation to build an uniform method of cultivation that would reduce their production and transaction costs with the growers.

4. Effective & efficient monitoring of production operations, extension activities and credit
delivery in a conjugal area is easy in Contract farming.

5. Contract farming will maximise the profits to the farmers and minimise risk in farming like
production related risks, transfer price risk and produce risk.

6. There is a tendency amongst the users to go in for environmental friendly, value added quality agroproducts in their daily life.

7. The farmers find it easy to get under one roof inputs, technological & extension services, postharvest processing facilities and more importantly, the marketing of their produce with
assured cash returns.

8. Contract farming facilitates more and more private Companies to develop backward linkages
with the farmers.

9. Access to crop loans at attractive terms through tie-ups with Banks is facilitated through contract farming.
10. There is a tendency amongst farmers to go in for an alternate cropping systems for better monetary returns.

What is the present stage of contract farming in India?
1. The Union Agriculture Ministry is putting its weight behind contract farming – drafting a
model law to give legal support to a practice that can give small farmers access to modern
technology and resources. An institutional mechanism is being contemplated to record
contractual arrangements and help resolve possible disputes.

2. The farm ministry detailed an agenda for expansion of agricultural credit to the tune of
Rs.7,36,570 cr. during 10th Plan and the official note to the finance ministry gave financing of
contract farming by banks priority.

3. Agricultural and Processed Food Products Development Authority is developing policy
guidelines on contract farming for forwarding to state governments for implementation. The
guidelines will focus on regularising the relation between producers and processors of food
materials. During this year, 20 Agri-Export zones will be set-up in different states that would
integrate the complete process from production to export stage and contract farming is being
encouraged to rope in local farmers to join these export zones as members to pool in their

4. The national agricultural policy, announced last year, had highlighted the need for an increase in the private sector participation in farming by leasing private land for agri-business and contract
farming to private companies.

5. The Standing Committee on Food Management and Agricultural Exports had recommended
suitable amendments to the State Agricultural Produce Marketing Regulation Act to promote
development of marketing infrastructure in private and co-operative sectors, direct marketing
and contract farming.

6. Contract farming is already undertaken in tea estates by major companies including Pepsi
Food, ITC, Hindustan Lever and for crop diversification by Mahindra Shubhlab Services
with Punjab Agro Food grains Corporation; Escort Limited with Punjab Agro for Basmati
rice and durum wheat besides drawing a plan to set up grain handling and storage facilities like
conveyor belts and silos and earmarkingRs.1 billion for contract farming and creating
post-harvest infrastructure in Punjab and otherstates in next 3 years.

7. Punjab plans to diversify crops in 1.5 million acres in next 4 years through contract farming.
Already 3 lacs acres under contract farming have been diversified from paddy and wheat to
commercial crops like maize, barley, white mustard, Basmati rice and oil seeds during this

8. In Karnataka, wide varieties of vegetables, gherkins, lime, pomegranate, grapes for resins,
pearl onions, asparagus and mangoes for pulp are already covered under contract farming.
Agri input marketing
India's agri-input market is estimated at over Rs. 45,000 crores, including the tractors business. India's low consumption of high-yield seeds, fertilizers, and pesticides in comparison with other countries indicates a huge potential for market growth. Many farmers do not use high-quality agri-inputs. Others tend to misuse agri-inputs thus leading to higher costs and lower yields. In the interiors of rural India, farmers lack access to a wide choice of agri-inputs.These farmers have disadvantages of price and accessibility.
Hence, extensive and efficient supply chains have to be built to service these farmers. While the untapped parts of the rural market present profitable opportunities, companies will have to innovate and adapt products to suit rural operating conditions. New marketing tools would be critical for companies eyeing rural markets to enlarge their rural pie. Also the rural consumers need to be educated of new concepts, relevant to the environment and thereby increasing their income.

Companies have traditionally distributed their agri input products through their own distributors and through collaboration with a local distribution network. The need of the hour is to increase the accessibility of rural Amarkets by companies. This is possible only through decentralization of the whole chain. For better delivery of agri inputs and services, HLL has proposed a model that would create a partnership between agri input companies, banks, insurance companies, grain handling and storage companies and food processors. This would make the agri inputs directly available to the farmer, credit and insurance would be available to the farmers at reasonable rates, increase the accessibility of information .
When it comes to deploying innovative distribution strategy, several companies are exploring alternative cost effective channels. Direct selling through company delivery vans, syndicated distribution between non-competitive marketers, setting up of temporary stalls in rural melas/ haats are few successful examples. Use of stockists and their staff for effecting direct sales to rural consumers has also been found to be successful by companies. Rural markets /mandis are emerging as target centers for direct sales.

Challenges of change in farming business:,
The entry of corporates in the farming business is bound to change the dynamics of input marketing scenario in India. ITC e-choupal, DSCL's Hariyali, Farmers World Supermarket concept by the Karnataka Government, Shubh Labh stores of Mahinda & Mahindra, Kisan Seva Kendras of Indian Oil, Escorts rural stores, the opening up of retail FDI into foods with farmers being project and implimentationed as direct beneficiaries, the advent of contract farming and such other new age initiatives are sure to change the way of agri-input marketing from the present trade sales to non-trade bulk sales.

For effective communication, different target segments require different marketing approach and rural market is no exception to it. Experience suggests that mere extension of urban marketing strategies in rural India will fail unless they are customized to the needs, ethos of rural India. It could be as simple as use of rural media, rural folk, local language, melas to reach out and communicate effectively with the rural masses. Several Agrochemical companies such as Rallis India Limited, Wockhardt and tractor companies like Escort, Mahindras have successfully employed melas, local communication to get higher sales
Another significant channel of delivery of agri inputs, i.e, extension mechanism. Firms now find it increasingly relevant to extend themselves beyond mere input suppliers or buyers of agricultural produce. These companies invest know how, experience gathered from different situations, and their potential for innovation in problem solving packages and assume responsibility for their implementation in practice. This helps them attend the markets with better and more reliable supplies.
In recent times companies like ITC, Tata Chemicals, Pepsi, Mahindra & Mahindra, ICICI, NFCL, DSCL, Chambal Fertilizers, HLL, IFFCO, KRIBHCO, have forayed into provision of extension services.
Some issues in marketing of agri inputs:
• Growth of commodity exchanges and their focus on farmers does creates opportunities for delivering structured financial products to farmers. This requires the introduction of weather derivatives, which is not allowed today as per the existing structure of the Forward Contract Regulation Act.
• Contribution of cooperatives in inputs supply is declining fast owing to poor loan recovery. Streamlining the cooperative credit structure for facilitating hassle free flow of credit and enhance consumption of agri
• Increase cropping intensity by bringing additional area under irrigation through watershed development and water saving devices such as drip and sprinkler irrigation system.
• Demonstrate agro technology on farmers field using extension services, IT, print & electronic media. Involve State Agricultural Universities, Krishi Vigyan Kendra, Research Institutes and NGO's in field programmes for transfer of technology.
• Promote contract farming.
• Encourage food processing.
• Permit FDI in food retail.
• Capacity building of extension workers and sales point personnel in various areas of agri inputs.
• Treat 150 per cent of investment by private sector in agri infrastructure as deduction of expenditure like in the case of R & D. Investment in the entire agri value chain like creation of cold chain, new agricultural marketing infrastructure or modernization of existing markets, pre and post harvest infrastructure de velopment, should be eligible for agricultural loans under 'priority sector' lending.
To establish an agrarian economy that ensures food and nutrition security of over a billion, raw material for its expanding industrial base, surpluses for exports, and a fair and equitable rewarding system for the farming community, ‘commitment driven’contract farming and other measures must be adopted which provides assured and reliable input services to farmers,better market price for their produce which finally helps in full fledged development of rural India .

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