24

Transcript

Hello friends in our previous class we discussed about corporate social responsibility. Wherein we learnt that there is certain social commitment for every entrepreneur and he is bound by the rules and regulations framed by the government and he is also having certain responsibility towards the society. In the background of that so now in this class we will be discussing about the contract farming.

Contract farming is emerging as one of the popular model especially benefitting small and marginal farmer as well as the medium farmers throughout the country. So there are good number of positive aspect at the same time there are good number negative aspects that are associated with the contract farming. So that we will be discussing one by one. But before that let us understand what exactly the contract farming means.

Contract farming is an agreement between the farmer and the processing and marketing firms. Whether it is a processing firm or marketing firm there is an agreement between the primary producer and the processor or the marketer it may be for production or it may be for supply of agricultural products under forward agreements, frequently at predetermined prices. It means the moment when we enter into the contracts we are going to have the agreement of the prices at this particular price the farmer is going to sell and at this particular price the buyer is going to buy may be he is using it for processing or maybe he is using it for marketing whatever it is. So this is in a nutshell about contract farming.

Now coming to different forms of contract farming what we have:

The first type contract farming that we come across is the procurement contracts wherein under which there are only two processors the sale and the purchase and the conditions are specific for the buyers and the sellers. So apart from this there are no other agreements and there are no other commitments that I will be supplying you the seeds and other inputs and various other things nothing doing. So you have to produce and you have to give it to me and I will purchase your product at this particular price and this is the only agreement under the procurement contracts because the buyer is interested only in the procurement and not to supply other inputs or to provide extension services and all those things. The second form of the contract farming that we come across is the partial contract. Wherein only some of the inputs are supplied by the contract farming firm and the produce is brought at the pre-agreed price. It means the company is interested in a specific variety of the agricultural commodity. For example a chip manufacturing company will be interested in those types of potato which are suitable for the chips. So it is no  that not all the varieties that are available in the market are suitable for chips. So that is how the seed material will be supplied by the firm who wants to buy the potatoes for manufacturing the chips. So wherein they will enter into only the partial agreement or the tomato sauce manufacturing company will be supplying a particular variety of tomato so that they can come out with an excellent variety of tomato sauce so that is how they are providing only the seeds of tomato. They are not concerned with other inputs and that is what identified as the partial contracts. The third type of contract is the total contracts under which the contracting firm supplies and manages all the inputs on the farm and the farmer becomes just a supplier and the labour. It is just like the firm itself is taking up all the agricultural operations and farmer is providing only his land resources to him and he himself has become a labor into that particular system. So this is known as the total contract. So these are the three different forms of contract farming that we can observe as on day in the field. Now coming to the examples of contract farming what we have in Indian context. The most popular example that we come across is the ITC limited which is Indian Tobacco Company. So it is having the contract with the tobacco growers in Andhra Pradesh wherein they are having the purchase contracts with them. The Nestle India so which is a multinational company it is having the contract farming with the dairy farmers of Punjab because they are into the milk processing they need huge quantities of milk for processing. Then the Pepsico India which is having contract with the potato growers especially in Gujarat for manufacturing of chips and in case of Karnataka and West Bengal also they are entering into the contract with the farmers for supply of potatoes. Again the same company that is the pepsico India is has conducted an experiment to the tomato growers in Punjab also for manufacturing of sauce then ITC has agreement with the vegetable growers in Punjab. So these are some of the examples. Apart from this there are various other firms because these are the major firms that we are putting here. There are various other firms that are entering into contracts with the farmers and they are successfully taking up this particular experiment and benefitting the farmers also.

The positive lessons that we can learn from this process of contract farming is the effective linkage of specially the small farmers to the extension advices mechanization, seeds, fertilizers and credit and all these essential supplies are to be ensured under this contract and that is what is the positive aspect of contract farming. Then the private agribusiness firms usually offer technology only to more effectively than the governmental agricultural extension services and farmers are the beneficiary of that. Otherwise the small farmers or the marginal farmers are the more dependent on the government sources of information but with a contract farming processors they can expose themselves to information sources of the multinationals and the private sector so that they can get the most beneficial information for the as far as the agricultural operations are considered. Then the most important thing is the process of contract farming is going to reduce the price uncertainty to the farmers. This is what is the most common observation that we have in our market is as I have already mentioned agriculture being biological process the time of harvest of agriculture produce is almost similar throughout the country. Maybe there is gap of fortnight from north to south or east to west. Within the range fortnight or to the maximum extent we can say that within a month range the entire crop which is meant for that particular season either Rabi or the Kharif is harvested. So when the produce reaches the market as the economic theories puts it there is glut in a market when the supply is more the prices of the commodities are going to come in down and that is what is harshly influencing the primary producers especially the farmer. Just to combat that particular situation contract farming is one of the mechanism wherein because they have entered into the contract well in advance before beginning of the season so that they are in a most comfortable situation as far as the price uncertainty is considered. Then the companies gain an access to the crop production otherwise to own that much of land to maintain that much amount of land it is very difficult for the companies, the private firms and monitoring various agricultural operations is also very difficult at the same time it is very costly process as far as the entrepreneurs are considered and that is how both the parties are in a win win situation when we look into the positive lessons. Is it that there are only positive lessons associated with the contract farming. There are good numbers of negative aspects also that we come across that we will be analyzing as the risk for farmers. As a part of risk there is uncertainty involved in growing new, unfamiliar crop and producing for markets that might not always live up to their expectations of our buyers. For example potato is not a traditional crop of Karnataka, potato is not a traditional crop of Gujarat, wherein in the northern parts of India and in the eastern parts of India it is a traditional crop. Under such circumstances when you are going for an unfamiliar crop there are good numbers of risk factor as far as the farmers are considered. Then the loss of bargaining power as far as the farmer is considered vis-à-vis a large agro industry because of monopsonistic market power and exploitative terms. Let me explain you what exactly this monopsonistic market means. Monophonic is a situation where their suppliers are more but the buyer is only one, because you are going for nontraditional crop in a particular region there is no established market or that particular crop and that is how because you are entering into the contract there is only one buyer with whom you have entered into the contract. Under such circumstances there is every possibility, there is every risk that, that particular firm may put exploitative terms for the farmers. At any point of time there might be breach of the contract also, that is another important risk as far as farmers is considered. Then manipulation of quality standards by the sponsor in order to reduce the purchases. This is the thing which is of major concern as far as the farmers are considered. Because in the contracts firms are going to provide you good numbers of quality standards and many of these quality standards the farmers are not much aware of and both the parties are putting the signatures s part of the contract. And when it comes to the purchase of the produce by the firm then the firm will say that the product that you have produced is not as per the quality standards mentioned in our agreement and that is how he is going to reduce the price drastically and ultimately farmer is not able to understand all those intricacies of quality standards and that is how it becomes one of the important risk factor. And there are any stories wherein the farmers have suffered because of these quality standards as framed by the firms. Then the debt caused by production problems, poor technical advice, significant changes in the market conditions or the company’s failure to owner the contract. These are some of the other risks that are associated with the farmers as far as the contract farming is considered. Is it that only the farmers are at risk? The equal amounts of risk the companies are also facing the buyer’s are also facing or the firms are also facing. There might be the situations like insecurity of the access to the land. In the beginning a farmer may enter into the contract and the later part of the season farmer may say that no I will not go for this because the firm having faith of the farmer they have planned so meticulously as well as the future four or five months or six or seven months planning or the entire year planning is there if the farmer reaches the contract the company is also in trouble because all the future planning’s are going to be influenced. So that is how that one of the important risk as far as the sponsors are considered. Then the farmer’s inability to meet strict time tables and regulations because of social obligations or the religious practices. This is how we have discussed these factors well in advance the strategic implications of the social as well as various other factors on the entrepreneurship development. Until and unless we understand the social forces and the social factors it becomes very difficult for an entrepreneur to enter into such farming. So that is how he has to have a holistic understanding of the social system the religious system which is regulating that particular region. Because if you move from place to place there is lot of variations as far as these practices are considered and that is how you need to adjust yourself and you to understand and you need to study and enter into the contracts accordingly otherwise it is going to pose certain amounts of thefts. Then extra contractual marketing by the farmers. Even though incidences are very very less but this is one of the major risk for the farmers. For example because of the inputs, because of the quality inputs, because of the quality information and various other factor framers have come out with excellent crop, excellent produce and as per the agreement the price quoted by the firm is comparatively less but in the market in the open market there is higher price that are being offered by various other firms maybe in some cases it the rival sponsors. So obviously a farmer has an opportunity of breaching the contract by selling through the extra contractual marketing processes. Under such circumstances the sponsoring company is facing lots of risk. So these are some of the issues associated with the sponsors. Put together we can say that some preconditions for success we can enter into the contract farming and make it a profitable venture for both the sponsors and the primary producers. The first condition is a profitable market. For the sponsors an identified for the planned production that such market can be supplied profitably on a long term basis. The moment we ensure this definitely contract farming is going to be a most successful experiment. Then the farmer must find the potential returns attractive on the basis of realistic, demonstrated yield and acceptable risks. The moment the farmer is also ready to accept the risk as we have already mentioned the list of things so then both are going to be entering into a profitable market. Then the second precondition is the physical and the social environment. What type of environment that we are going to create? It may be related to the social considerations, it may be related to the supply of inputs, it may be related to the land availability and the tenure or the utilities and communications and the physical environment. Put together is going to influence the contract farming. Last but not the least that is the government support because I have already said about the risk factors as far as the farmers as well as the firms are considered so both the parties are facing this problem in the absence of the suitable laws for the contract farming. There should be a legal framework as far as the contract farming is considered so that both the parties the primary producers as well as the buyers or the farms who are investing on this are going to be beneficiaries. Then the awareness of unintended consequences of the regulation and avoid tendency to over-regulate that is under pre condition and the provision of research and extension as far as the contract farming is considered so that we can take this cause to longest possible distance and ultimately take steps to bring together agribusiness and the suitable farmers so that both the parties are going to enter into the win situations. In a nutshell we can say that contract farming is a process wherein the farmer is going to enter into a forward contract with an organization or with a company to produce a particular crop and company permits a particular price for the produce and in the process they may supply certain amounts of inputs and all these things are mutually agreed by both the parties and ultimately the farmer as well as the buyer are going to be the beneficiaries of this particular process. Yes, in between there are certain risks for both the primary producer as well s the buyer so with this we are coming to end of today’s discussion and in the next class we will be discussing about Public Private Partnership.

Thank You.