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WELCOME

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CONTRACT FARMING

Srinidhigowda,G.E.MBA 9271ST MBA(ABM)

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What is contract farming

• Contract Farming (CF) can be defined as a system for the production and supply of agricultural and horticultural produce by farmers/primary producers under advance contracts, the essence of such arrangements being a commitment to provide a agricultural commodity of a type, at a specified time, price, and in specified quantity to a known buyer.

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History

• Contract Farming can be traced back to colonial period when commodities like Collin Indigo were produced by the Indian farmers for English factories.

• Seed production has been carried out through contract farming by the seed companies quite successfully for more than four decades in the country.

• ITC introduce Virginia tobacco cultivation in Coastal Andhra Pradesh in the 1920’s under CF.

• The Pepsico introduced tomato cultivation in Punjab in the 1990’s under CF.

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• The recent spate of contract farming in India effectively began with the entry of Pepsi Foods Ltd (PepsiCo) in 1989 by installing a tomato processing plant in Hoshiarpur, Punjab.

• PepsiCo followed a method whereby the cultivator 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.

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Types of CF

1. Procurement contracts:- under which only sales and purchase conditions are specified.

2. Partial contracts:- only some of the inputs are supplied by the contracting firm and produce is bought at pre-agreed prices.

3. Total contracts:- under which the contracting firm supplies and manages all the inputs on the farm and the farmer becomes just a supplier of land and labour.

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Contents of a private contract

• Define the parties• Specify type and quality of the produce• State the quantity of the produce• State clearly the responsibilities of both parties concerning

production and marketing practices• Indicate the manner including timing of delivery and collection• Determine the price ( specific or formula ) & other

considerations ( manner and timing of payment )• Indicate duration of contract & the way in which it may be

terminated or renewed• Appoint an arbitrator or otherwise how disputes are to be

resolved• Provide an assignment of the contract

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Main Products of CF

• Food grains• Fruits & Nuts• Vegetables• Spices• Medicinal Plants• Meat• Tobacco and Tobacco products etc…

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Indian institutes engaged for marketing agricultural products under CF

• Krishi Maratavahini• Madhya Pradesh State Agricultural Marketing Board• Karnataka State Agricultural Marketing Board• Maharashtra State Agricultural Marketing Board, Pune• Meghalaya State Agricultural Marketing Board• Orissa State Agricultural Marketing Board, Bhubaneswar• Punjab State Marketing Board• Rajasthan State Marketing Board• AP Agricultural Marketing Board• Domestic & Export Market Intelligence Cell• Tamil Nadu Agricultural University and Agri Marketing Board• HP State Agricultural Marketing Board

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Corporates in CF• Amira Foods India Ltd• Appachi Cotton Company• AVT Natural Products Ltd• Cargill India Pvt Ltd• DD international Inc.• Escorts Machinery Group• Gherkin Exporters• Global Green Company Pvt Ltd• Green Agro Park Pvt Ltd• Himalaya Drugs Pvt Ltd• Hindustan Lever Ltd• ICICI Bank Ltd• IDBI

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• Ion Exchange Enviro Farms Ltd• ITC-International Business Division• Ken Agritech• Marico• Mahindra Shubhlabh Services Ltd• Natural Remedies Pvt Ltd• Nestle India Ltd• Nijjer Agro Foods Ltd• Pepsi Foods Pvt Ltd• (PepsiCo)• Rallis India• Saguna Hatcheries Ltd• Satnam Overseas Ltd• Soyabean-Tinna Oils &

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• Chemicals ltd• Southern India Mills Associations• State Bank of India• Super Spinning Mills Ltd• Tinna Oils and Chemicals Ltd• Ugar Sugar• Unicorn Agrotech Ltd• United Breweries Ltd• Unit Trust of India• Venkateshwara Hatcheries etc…

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Contract Farming in KarnatakaCrop Company (Corporate) Area (ha)

Ashwagandha Himalaya Health Care 700

Dhavana Mysore SNC Oil Company 400-500

Marie Gold and Caprica chilli

AVT Natural Products Ltd 4000

Coleus Natural Remedies Private Ltd 150

Gherkins 20 Pvt Companies (GlobalGreen Company Pvt Ltd,

Unicorn Agrotech Ltd, GreenAgro Park Pvt Ltd, KenAgritech Pvt Ltd,etc)

8000 (inc of Tamil Nadu and

AP)

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The acts and rules that governs the process of Contract Farming in Indian Rural Economy

• Agricultural Produce Grading and Marking Act, 1937• Agricultural Produce (Grading and Marking) Act, 1937 as

amended in 1986.• Schedule Amended to AP (G&M) Act 1937• General Grading and Marking Rules, 1988• Commodity Grading and Marking Rules• List of commodities whose Agmark Grade Standards have

been covered under AP (G&M) Act 1937• Manual on Standards of Paddy• Manual on Standards of Wheat• Manual on Standards of Maize• Manual on Standards of Mustard and Rapeseed

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SWOT ANALYSIS

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Strengths (To Firms)

1. Overcome capital market2. Farmer needs of capital

• Suguna poultry farm limited tied up with SBI to provide finance to poultry & maize grower

• Appachi Cotton Company (ACC) provides crop loan at 12 per cent rate of interest to it’s grower

3. Transferring the production risks from firms to farmers4. Monitor the labour supervision low or without any cost.

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Strength (To farmers)

• Supply of certain quality and quantity of inputs.• Skill transfer.• Less Risk• Expert advice

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Weakness (To Firms)

• Firms face problems like labour shrinking and supervision problem.

• In many of the states, the present APMR Acts still restrict the processors/manufacturers etc .

• Extra cost to the company(If company purchase raw material from other farmer, then cost of it is less than the cost of product purchased from contract faming)

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Weakness (To Farmers)

• The problem of monopsony.• Sometimes supply of low quality seeds.

• about 15.5 per cent of the Pepsi potato growers reported crop failure due to bad seed

• Some corrupt arrangement between the firm and the pesticide dealers about the sale of particular pesticides and insecticide brands.

• Farmers risk is not covered in CF• Sponsoring firm do not discharge social responsibilities for the

farmers in respect of health, hygiene, education.• Tenant can not participate in contract farming.• Corruption.

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Opportunity (For Firms)

• It gives an opportunity to develop backward linkages with farmers.

• Political acceptability.• 60 AEZ will be set up in 20 different state to integrate the

complete process from production to export stage. • Punjab plans to diversify crops in 1.5 million acres in next 4

years through contract farming.

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Opportunity (For Farmers)

• To production of high value crops like vegetables, flowers, fruits etc and benefit from market led growth.

• To standardized the pattern of production.• To provide homogeneous quality of product to international

market hence increase in export.• Only 2 percent of Indian fruits and vegetables are processed,

compared with 80 per cent in the United States• 38% of horticultural crop wastage due to post harvest losses.• Inspite India produces 57 major crop, only cotton ,sugar, wheat,

soybean, and potato are traded.(Business Today, 10 July 2006)• India account for 1 percent of the world’s exports of fruits and

vegetables.

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Threats (For Firms)

• Farmer may avoiding repayment credits – strategic default.• Entry of foreign player in market.• Input diversion by farmer.• Contract Farming Sponsor prohibited from raising permanent

structure on Contract Farming Producers' land

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Threats (For Farmers)

• Production failure• Exclusion of weaker farmers• Increased the risk because diversification of farm business is

not followed.• Sponsor can sometimes wind up playing games with farmers

who have contracted in good faith• Arbitrarily poor quality standards.• Firm may provide input facilities only progressive farmers and

large farmers who have more bargaining and political power compare to others.

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THANK YOU