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Agricultural Marketing & Agri-Business

International organizations Govt. of India
National organizations Govt. of Tamilnadu
CONTRACT FARMING
Farmers Markets
Contract farming refers to varied formal and informal agreements between producers and processors or buyers. It may
Regulated Markets include loose buying arrangements, simple purchase agreements and supervised production with input provision, withAgmarknet
Commodity Markets tied loans and risk coverage. DEMIC
DMI
In this system for the production and supply of agricultural/horticultural produce are under forward contracts between
producers/suppliers and buyers. The essence of such an arrangement is the commitment of the producer/ seller to
provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and
committed buyer. Contract farming usually involves the following basic elements-pre-agreed price, quality, quantity or
Central Silk Board India
acreage (minimum/maximum) and time (Manage 2003). Contracts can range from oral deals to formal, registered written
Coconut Development Board contracts. - Assam
Coffee Board - Maharastra
Coir Board Features - Manipur
Rubber Board 1. Creating New Markets - Gujarat
Spices Board 2. Efficiency and Economics of Scale - Kerala
Tea Board India 3. Ensuring Quality Standards - Tamil Nadu
Tobacco Board 4. Facilitating Diffusion of Modern Technologies
5. Minimizing' Transaction Costs
6. Coping with Information Asymmetries
Department of Agricultural
7. Price Volatility
Marketing & Agri-Business, Agricultural Marketing
8. Sharing of Risk
Government of Tamil Nadu Agribusiness
Agroprocessing
Why Contract farming

Publications
To reduce the load on the central & state level procurement system.
To increase private sector investment in agriculture.
 To bring about a market focus in terms of crop selection by Indian farmers.
To generate a steady source of income at the individual farmer level.
To promote processing & value addition.
To generate gainful employment in rural communities, particularly for landless agricultural labor.
To flatten as far as possible, any seasonality associated with such employment.
To reduce migration from rural to urban areas.
To promote rural self-reliance in general by pooling locally available resources & expertise to meet new
challenges

Contract Farming Models

There is a wide range of organizational structures that are embraced by the term `contract farming'. The choice of the
most appropriate one to use depends on the product, the resources of the company, the social and physical
environments, the needs of the farmers and the local farming system (Eaton and Shepherd, 2001). Some of the contract
farming models practiced in India are presented below.

I. Private – Farmer Model

Poultry sector in Tamil Nadu made an impressive mark in promoting contract farming as an effective institutional
alternative for promotion of broiler production. Suguna Poultry Farm Ltd, has emerged as one of the leading integrated
broiler producers in the country, with contract farming. Contract poultry farming managed to free the small farmers from
the worries of production and market planning of the poultry products. At present, nearly 90 per cent of the poultry farming
in Tamil Nadu has come under the contract farming concept.

2. Public-Private-Farmer model
State Department of Agriculture under 'tripartite public-private partnership' proposed contractual cotton cultivation
programme in Thanjavur, Nagapattinam, Tiruvarur (coastal), 'I'irunelveli, Salem, Erode and Namakkal Districts. The
farming focus will be on clustervillages in these districts and the contract farming facilitation will be through supply of
credit-linked quality inputs to the farmers enrolled under the project which will be organised through the agricultural
extension centers. The model to be followed will involve banking and insurance companies for credit input and loss
guarantee and the choice of the cotton and their quality parameters would be decided in consultation with the Tamil Nadu
Agricultural University and the textile mills in the State through Southern India Mills’ Association. The farming model would
also receive incentive support from various State and Central Government schemes.

3. Private-Community Grower Group-Farmer Model

Ion Enviro undertakes contact farming with Community Grower Groups (CGG) having large acreage, on a profit-sharing
basis. Farmers are trained in-house in scientific organic farm management and certification. Community Grower Groups
are promoted through non-governmental-organisation or sell-help group or registered association. They follow fair trade
practices wherein middlemen are eliminated, child labour is banned, men and women are given equal status, and
transparency in trade is maintained. In the process, they bring to rural areas the best of organic processes and water
management techniques, thereby educating and empowering farmers. Production is executed in accordance with
protocol requirements as per EEC 2092/91 standards. Written and documentary accounts are recorded to trace the
origin, nature and quantities of raw materials procured and their usage (Ion exchange Enviro farms, 2005). The crops
cultivated include Banana, Wheat, Cotton, Papaya, Pineapple, Basmati, Mango, Soybean, Tur, Black Gram, Green Gram,
Tumeric, Grapes, Bengal Gram, Groundnut, Sesame and Cashew.

4. Private Consortium - Farmer model

Hindustan Lever Ltd (HLL), Rallis and ICICI jointly promote contract farming in wheat in Madhya Pradesh. Under the
system, Rallis supplies agri-inputs and know-how, ICICI provide farm credit to the farmers and HLL buysback the farm
output. In this model, farmers benefit through the assured market for their produce in addition to timely, adequate and
quality input supply including free technical know-how; HLL benefits through supply-chain efficiency; while Rallis and
ICICI benefit through assured clientele for their products and services. The model can he extended by including
insurance firms, warehouses and manufacturers of equipments and machinery.

5. Industry - Research Institute- Farmer model

Pepsi Foods Ltd. entered India in 1989 by installing a tomato processing plant at Gahura in Hoshiarpur district of' Punjab
to produce aseptically packed pastes and purees for the international market. Grower 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. The PepsiCo model of contract farming, in terms of' new options for
farmers, productivity increases, and the introduction of, modern technology, has been an unparalleled success. Another
important factor in PepsiCo's success is the strategic partnership of the company with local bodies like the Punjab
Agricultural University (PAU) and Punjab Agro Industries Corporation Ltd. PepsiCo is successfully emulating the above
model in food grains (13asinati rice), spices (chillies) and oilseeds (groun(nut) and vegetable crops like potato. It also
brings in the state of art technology. At Sonepet, the company has a ISO 9002 and Hazard Analysis Critical Control Point
(LIACCP) certified Rice Mill. Belgaum (Karnataka)-based Ugar Sugar Works Ltd., which established a successful
backward linkage with farmers of Northern Karnataka for supply of barley for its malt unit.

6. Grading House - SHG - Farmer model

Appachi Cotton Company (ACC), the ginning and trading house in Pollachi under the name Integrated Cotton Cultivation
(ICC), established backward and forward integration between the `grower' (farmer) and the `consumer' (textile units). The
contract assured the farmers easy availability of quality seeds, farm finance at an interest rate of 12% per annum, door
delivery of unadulterated fertilisers and pesticides at discounted rates, expert advice and field supervision every alternate
week, and a unique selling option through a MoU with ACC. The core principle of the formula lies in the formation of
farmers' Self Help Groups (SHGs).

The cases discussed here are a few among several such successful ventures by corporates involved in food processing,
agro-commodity and food products exports. The demonstrated successes of gherkin exporters of Southern India, which
is over 90% based on contract larrning, and that of Marico's safflower procurement through a successful backward
linkage model, are also worth mentioning.
Contract categories
1) Marketing Contract.
2) Production Contract
3) Basis Contracts.
4) Technology License Agreements

Advantages

To The Farmer:

Exposure to world class mechanized agro technology.

Obtains an assured up front price & market outlet for his produce.
No requirement to grade fruit, as mandatory for fresh market sale.
Bulk supplies versus small lots as again required by the fresh market.
Crop monitoring on a regular basis, technical advice, free of cost at his doorstep.
Supplies of healthy disease free nursery, agricultural implements, technical bulletins etc, and remunerative
returns
To The trader:

Uninterrupted & regular flow of raw material.

Protection from fluctuation in market pricing.
Long term planning made possible.
Concept can be extended to other crops, builds long term commitment
Dedicated supplier base
Generates goodwill for the organization.

Contract Framing by the Government resulted in, assured food security, increased farm incomes, Safeguarded our public
distribution system and increased employment opportunities for rural landless

One of the examples of success of contract farming is Punjab Pepsi, Punjab Agro Industries Corporation (PAIC) and
Punjab Agricultural University (PAU) Partnership in Profile and the impact of contract farming in Punjab is what follows
¨Tomato yields increased threefold, from 16 - 52 MT / hectare. Chilli & potato yields improvements were equally dramatic
¨Production of tomato in the state of Punjab went up to 200,000 MT, from 28,000. Technology spread to non-Pepsi
growers

¨Fresh market prices for tomato dropped, with increased availability. However farm incomes increased.
¨Chilli yields increased from 2.5 MT to 9 MT per acre
¨Move to contract farming of other crops - Groundnut, Basmati & non-Basmati paddy
¨Contract farming of broilers between Coimbatore hatcheries with farmers
¨Marigold farmers and extraction units in Coimbatore

Beyond the limit of advantages in contract farming some of the problems also analyzed such as,

Problems in Contract Farming

Small size of farmer landholdings.

Need to contract with a larger number.
No mechanism to discourage default. No legal recourse when faced with large scale contravention of contracts.
Lack of a comprehensive crop insurance scheme to protect against natural calamities.

India, given the diverse agro climatic zones, can be a competitive producer of a large number of crops.
Need to convert our factor price advantage into sustainable competitive advantage. Contract farming offers one possible
solution. Contract farming provides farmers with access to markets that would not otherwise have been available to them.
Without the quality control and tight coordination offered by contract farming, it is frequently unlikely that smallholders
would be able to sell perishable goods overseas through open market sales. The most significant income increases
have been generated from contract farming.

Contract farming could reduce food production if a new contract cash crop displaced a previously grown food crop.
Evidence suggests that such displacement does not frequently occur when farmers are allowed to make their own
decisions. In such cases, the contract crop tends to displace a less profitable cash crop rather than a food crop. Local
governments often favour contract farming in the belief that it will produce greater spillover or linkage effects with the local
economy than would plantation production
PRIVATE SECTOR COMPANIES INVOLVED IN CONTRACT FARMING IN TAMILNADU

Sl.No Name of the Company Email Id/ Phone Number States Commodity

1 Appachi Cotton Company Ph: 04259 234666, 309666, TN, Karnataka Cotton
Zamin Uthukuli, Pollachi, E-mail: appachi@vsnl.com
Coimbatore Mob: 093452 33000

2 Ion Exchange EnviroFarms Ph: 020-7145118/7146108 TN, MP, Organic Products of

Ltd, Neeta Towers, Pune- Fax: 020-7146109 Gujarat, Banana, Pineapple,
Mumbai Highway, Dapodi, E-mail: Haryana, Papaya, Wheat,
Pune - 411012 schellappa@ionexchange.co.in. Maharashtra Basmati, Cotton
sreeram_c@hotmail.com

3 Pepsi Foods Pvt Ltd, 3B, Ph: 95124 - 2355880 Punjab, TN Chillies, Groundnut,
DLF Corporate Park, S Fax: 95124 -2356270 seaweed, Tomato
Block, Qutub Enclave, and Basmati Rice
Phase III, Gurgaon - 122
002

4 Rallis India, Appejay Ph: 022-56652700 Punjab, UP, Basmati, Wheat,

House, 7th Floor, 3 Fax: 022-56352996 MP, Fruits, Vegetables
Dinshaw Vaccha Road, E-mail: annahita@rallis.co.in Maharashtra,
Churchgate, Mumbai- Karnataka, TN
400020

5 Suguna Poultry Farm Ltd, Ph: 0422-5392503/5392504/05 TN, AP Broiler

Corp Off: 5th Floor, Jaya Fax: 0422-5392507
Enclave, 1057, Avinashi E-mail: sugies@md3.vsnl.net.in
Road, Coimbatore -
641018

6 Super Spinning Mills Ltd, Ph: 0422-2311711/2314511 (D) Tamil Nadu Cotton
"ELGI Towers" PB#7113, E-mail: 0422-2311611
Green Fields, 737-D, E-mail: super@ssh.saraelgi.com
Puliakulam Road
Coimbatore - 641045
 7 United Breweries, UB Ph: 080-2272806/7/8 Punjab Barley
House, 1/1, Vittal Mallaya Fax: 080-2274884/5/6
Road, Bangalore-560001 E-mail: cmoblr@ubmail.com

8 Venkateshwara Hatcheries Ph: 23413986/87/88 TN Broiler

Ltd, 1-5, Upper Ground Fax: 2341398
Floor, World Trade Centre, E-mail:
Babar Road, Cannuaght shyamkuldeepsingh@rediffmail.com
Place, New Delhi- 110001

Remark: Users are requested to cross-verify the details with individual companies .

Source: http://agmarknet.nic.in/ConFarm.htm

Source: Principles And Practices In Contract Farming*

* K. R. Ashok, Professor, Dept.of Agrl .Economics, TNAU, Coimbatore-3.

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