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WORKING PAPER
■
(M
ontract Farming for
Agricultural Development
Review ofTheory and Practice
with Special Reference to India
Centre for Trade & Development
An Oxfam GB Initiative
Contract Farming for
Agricultural Development
Review of Theory and Practice with
Special Reference to India
Sukhpal Singh
Centre for Management in Agriculture
Indian Institute of Management, Ahmedabad
Copyright © Centad March 2005
Centad Working Papers are intended to disseminate the preliminary find
ings of ongoing research both within and outside Centad on issues around
trade and development for the purpose of exchanging ideas and catalysing
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may not necessarily reflect the views or position of Centad or Oxfam GB.
Readers are encouraged to quote or cite this paper with due acknowledge
ment to the author and Centad.
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Foreword
Contract farming is fast emerging as a very prominent issue in agriculture, especially in the
context of globalisation and liberalisation. The advent of globalisation and liberalisation has
intensified the role of the agribusiness firms who are entering into contract with primary
producers and farmers for supplying raw materials. There are diverse views on the merits
and demerits of contract farming. Many argue that since the primary producers or the
farmers lack the bargaining capacity to negotiate the contract, they often end up on the
losing side by entering into contracts that are detrimental to their interests. There are also
arguments to suggest that if contract farming is rooted in appropriate policy, statutory and
institutional framework, it has tremendous potential to help the agricultural community in
general and the small and marginal farmers in particular.
This paper addresses all these issues by exploring the basic economic rationale of contract
farming and the existing practices and their implications. The nature and the practice of the
'contract' are central to the issue of contract farming. The paper argues that it is of utmost
importance to cogently draft the contract with apposite pricing clauses to protect the ben
efits of the primary producers and farmers. The need to have a comprehensive statutory
protection from ill effects of contract farming for the farmers also need not be overempha
sised. The paper also points out the need to strengthen the agricultural co-operatives, the
Non Governmental Organisations (NGOs) and the civil society, so as to enable them play a
prominent role in protecting the interests of farmers in contract farming.
It is expected that the analysis in this paper will be useful for policy-makers, researchers
and the civil society. Any suggestions or feedback on the paper would be welcome.
Samar Verma
Regional Policy Advisor
Oxfam GB
Abbreviations
ACC
:
Appachi Cotton Company
AoF
:
Association of Farmer
APMC
:
Agricultural Produce Market Committee
AoP
:
Association of Persons
BILT
:
Ballarpur Industries Limited
CCI
:
Cotton Corporation of India
CGG
:
Community Grower Group
GAP
Green Agro Pack
Gol
Government of India
HLL
Hindustan Lever Limited
ICICI
Industrial Credit and Investment Corporation of India
IFC
International Finance Corporation
rrc
Indian Tobacco Company
MNCs
Multi National Corporations
MoU
Memorandum of Understanding
MSSL
Mahindra Shubhlabh Services Limited
NABARD
National Bank for Agriculture and Rural Development
NDDB
National Diary Development Board
NGOs
Non Governmental Organisations
NGCs
New Generation Co-operatives
PAFC
Punjab Agro Foodgrains Corporation
PAIC
Punjab Agro Industries Corporation
RKKs
Rallis Kissan Kendras
SAP
Structural Adjustment Programme
SBI
State Bank of India
SHG
Self-help Group
TICA
Tobacco Industry Control Authority
UB
United Breweries
UPASI
United Planters Association of South India
USAID
US Agency for International Development
UTI
Unit Trust of India
Contents
Foreword
Hi
Abbreviations
iv
Executive Summary
vii
1.
Introduction
1
2.
The Logic of Contract Farming
2
3.
Nature of Contracts and Growers
5
3.1
4.
5.
6.
Understanding Contracts
5
3.2
Nature of Contracts
5
3.3
Nature of Contract Growers
6
Practice and Implications of Contract Farming
7
4.1
Firms and Contract Growers
4.2
Impact on Peasantry and Labour
8
4.3
Equity and Efficiency
9
4.4
Effect on Food Markets and Non-Contract Growers
9
4.5
Social and Economic Differentiation
10
4.6
Effect on Environment and Gender
10
4.7
Contracting and Local Organisations
11
The Indian Experience in Contract Farming
12
5.1 Corporate-led Contract Farming
12
7
5.2
Practice of Contract Farming in India
5.3
Changing Dynamics of Contract Farming in India: The Consortium Approach 14
5.4
State-led Contract Farming
16
Conclusions and Policy Suggestions
19
14
List of Figures
Figure 1: Bi-partite contract farming model
13
Figure 2: Tri-partite contract farming model
13
Figure 3: The quad-partite contract farming model
15
Figure 4: The five-partite CF in India
17
Figure 5: State-led contract farming system in Punjab
18
List of Tables
Table 1: Relative benefits of alternative marketing structures for small farmers
References
20
22
Execotnve Smimmairy
Contract farming refers to a system wherein,
a farmer/primary producer agrees to supply a
pre-agreed quantity/acreage of a certain quality/
variety produce at a pre-agreed price and time,
to a processing/marketing firm (a known buyer).
It is also known as outgrower scheme, and sat
ellite farming. The contracts could be only pro
curement arrangement or resource providing as
well. The relevance and importance of each type
varies from crop/product to product over time
and these types are not mutually exclusive.
A farmer may prefer a contract due to:
» access to additional sources of capital,
° a more certain price,
o access to new technology and inputs.
For a processor or distributor, contracts:
° make smaller demands on scarce capital
resources,
o are an alternative to costly and risky cor
porate farming,
o provide an access to unpaid family labour
and a route to make use of State funds
directed at farmers by development
agencies.
•
®
•
•
•
°
•
°
•
•
•
•
•
•
At a more macro-economic level, contracting
can help remove market imperfections in pro
duce, capital (credit), land, labour, information
and insurance markets. But, contract farming is
viewed, in political economy terms, as one mode
of capitalist penetration of agriculture for capital
accumulation and exploitation of farming sector
by the agribusiness companies.
The review reveals that in most of the situa
tions:
• The contracts are highly biased against the
growers,
• Firms favour large farmers and relatively
better endowed regions,
Companies work with small farmers only
when the area is dominated by small farmers
or they are dictated/encouraged by the state
or the nature of the crop,
There is 'agribusiness normalisation' in con
tract price over time,
There is little bargaining power of the farmer
due to 'monopsony' of the firm,
Farmers compete with each other to get con
tracts,
Companies refuse to buy or reject with qual
ity standards manipulation,
The extension is poor and there is no com
pensation for crop failure,
Small farmers are excluded,
There is inter-locking of markets,
Higher costs are passed on to the farmers,
There are bribes/cheating by company offi
cials and 'tying of contracts',
Labour conditions are poor and exploitative
in terms of wage rates, gender discrimina
tion, use of child labour, and causal employ
ment,
Contracts encourage 'reverse tenancy',
Contracting has serious equity and efficiency
implications,
Contracting also leads to food insecurity,
social and economic differentiation, and
ecological degradation like over-pumping of
groundwater, salination and chemicalisation
of soil and water.
In India, where contract farming is prevalent
across regions and crops, it has moved from firm
farmer (two-party) system to tri- and quad-par
tite arrangement wherein state and its apparatus
have been involved e.g. in Punjab. There have also
been some cases of group contracting. In both,
state and agribusiness models, contract growers
have faced many problems like:
• undue quality cut on produce by firms,
• delayed deliveries at the factory,
delayed payments,
low price and
pest attack on the crop with no compen
sation.
•
The reasons for failure of contract farming have
been mainly in the design and the management
of the projects by the companies and their part
ner institutions. The model has moved onto the
franchisee route more recently. Whereas compa
nies are sharing their risk with other companies/
intermediaries and banks, the farmer's risk is not
being shared.
•
•
•
•
The above discussion suggests that it is not the
contract perse which spells hardship or doom for
growers, particularly small growers as a system,
but how it is practised in a given context. In fact,
all over the world, contracting of some kind is a
necessity for modern commercial agriculture due
to the wide support for contract farming under
the SAP and the international and national com
petitive pressures in agribusiness sector world
wide. Contract farming has the potential to lead
to a betterment of all the parties, especially the
small and marginal farmers, if it is promoted and
undertaken judiciously and if there can be cer
tain mechanisms in place.
The lessons and mechanisms are:
• Contract farming need not be promoted for
all crops, and there is no single model suit
able for all conditions but a series of alterna
tives.
• Contracts require frequent and independent
scrutiny so that they remain competitive both
with similar contracts and with open market
transactions.
•
•
•
•
•
•
Vigorous bargaining co-operatives or other
agricultural producer organisations are needed
to negotiate equitable contracts. A New Gen
eration Co-operative (NGC) is the need of the
hour.
A legal protection to contract growers as
a group is a must to protect them from illeffects of contracting.
There can also be a quasi-judicial system at
the local level to monitor the contracts and
resolve any conflict with appropriate penal
ties to any of the defaulting parties. A gen
eral code of conduct for both the parties in
order to avoid conflicts and breaking down of
contracts can help.
A careful examination and design of the pric
ing and other aspects of the contracts and
a reduction in the number of intermediaries/parties in contracts is required in India.
Preferably, it should be a farmer-company
arrangement.
State agencies and NGOs should intervene in
contract situations as intermediaries to pro
tect the farmer and broader local community
interests.
Companies and state should promote group
contracts with the intermediation of local
NGOs and other organisations and institu
tions so that contractual relationships are
more durable, enforceable, and fair.
An insurance component in contract farming
interventions is a must to protect the farmer's
interest.
The most important thing is to ensure market
for the farmer produce at better price and to
build trust with small and timely steps.
1. Introduction
The developments in the field of marketing, food
habits, technology, and agriculture in the new
economic environment have brought about a
new arrangement in raw material production and
procurement known as contract farming. Under
the contract system, a farmer agrees to supply a
pre-agreed quantity of a certain quality produce
at a pre-agreed price and time, to the processing
or marketing firm, which may or may not provide
certain facilities like provision of inputs, finance,
etc. This is happening as good quality, timely
raw material is a pre-requisite for any success
ful agribusiness firm, whether operating in the
domestic or international market. It is important
to recognise that this reorganisation or restruc
turing of the agricultural production sector is
taking place due to policy and market changes
outside the sector i.e. in the industrial and trade
sectors, and, these macro-policy changes drive
micro-changes like contract farming which have
the potential to change the production structure
and relations of production in the agricultural
sector. As a part of the internationalisation pro
cess in agriculture which involves production,
capital, and trade, contract farming encom
passes all the three dimensions through inter
vention in input supply and production decisions,
supply of capital and finance, and global market
ing of agro-products. In fact, it is nothing but an
extension of the phenomenon of global sourcing
wherein a firm can produce anything anywhere,
by sourcing inputs from anywhere, to be sold in
any market in the world.
The proponents of agribusiness promotion argue
that contract farming leads to big jumps in
incomes and employment in agriculturally back
ward regions and brings a break from low levels
of productivity and instability in production, thus
putting the local economy on a dynamic path of
growth and development. This is possible not
only because of the technological and capital
resources of these firms, but also because of the
international character of agribusiness processes,
which gives access to international markets. The
agribusiness firms take risk by undertaking new
projects in processing and marketing and provide
a stream of cash flow to the local economy. This
brings not only benefits to the local economy but
also helps earn foreign exchange and increase food
supply nationally and locally (Williams and Karen,
1985; Leisinger, 1987; Benziger, 1996). Contract
farming has also been used to promote new high
value crops which are more input intensive, risky,
high-tech, and market dependent for profitabil
ity, to lower costs either by yield improvement
or cutting input costs through better extension,
and to raise returns by value addition to primary
produce (Benziger, 1996; Singh, 2002). However,
it is important to recognise the role of the state
in encouraging or discouraging the agribusiness
firms and in protecting the producers in contract
situations (Asano-Tamanoi, 1988; Christensen,
1992; Grosh, 1994; Benziger, 1996). There is also
a need to look at the potential role of agribusiness
more specifically for different commodity sectors
and regions, and not as a blanket solution since
there are certain sectors which may require a
more effective public sector or state intervention
especially in technology and institutional inno
vations, instead of a private agribusiness effort
(Christensen, 1992).
But, looking at agribusiness growth from a differ
ent perspective (political economy) makes it clear
that it is nothing but a process of industrialisation
of agricultural and rural production which takes
place through simultaneous processes of appropriationism and substitutionism. Whereas appropriationism operates as a process of exploitation
of land and other biological sources of supply by
the application of modern and advanced technol
ogy to get more and cheaper raw materials, sub
stitutionism operates as a process which tries to
move industry or agribusiness away from direct
and linear dependence on crop and other direct
sources of raw materials by way of application of
technology to create new products and sources
of products. Thus, the two processes are con
tradictory to each other though they are driven
Contract Farming for Agricultural Development
Contract farming is more like
the practice of subcontracting
in industrial sector where the
large firms can farm out many
production activities to small firms
and benefit from lower costs and
better skills.
by the same agribusiness sector and forces. Fur
ther, the application of biotechnology accelerates
these processes and leads to what can be called
bio-industrialisation (Goodman et al., 1987). In
fact, contract farming directly promotes the pro
cess of appropriationism. Further, contract farm
ing is more like the practice of subcontracting in
the industrial sector where large firms can farm
out many production activities to small firms and
benefit from lower costs and better skills (Wilson,
1986; Watts, 1992; White, 1997).
Given the failure of government mechanisms to
support agriculture, and wide support for con
tract farming under the Structural Adjustment
Programme (SAP) and liberalisation policies
everywhere, in the presence of promotion of
contract farming by the international develop
ment agencies like the World Bank, the USAID,
the IFC and the CDC (Little and Watts, 1994;
White, 1997), it is inevitable that new forms
of contracts will be tried by the agribusiness
firms as it is the only way to ensure quality
and timely availability of raw material for pro
cessing, especially when, in some countries like
India, captive farming is not allowed legally
under Ceilings on Land Holding Act. Besides,
captive farming means putting large resources
in raw material production which may not be
the best economic option for many agri-busi
ness firms especially small scale ones. Since
contract farming also leads to changes in
the way agricultural production, processing
and marketing are organised (White, 1997),
it is important to understand its practice and
dynamics. This paper examines the logic of
contract farming (section 2), and its practice
and implications from the producers' and the
local economy's point of view with the help of
an exhaustive review of various strands of lit
erature (section 3). It also discusses the Indian
experience of contract farming (section 4) and
concludes by examining some possible alterna
tive institutional mechanisms to use contract
ing as a developmental vehicle (section 5).
2. The Logic of Contract Farming
Contract farming can be defined as a system for
the production and supply of agricultural and hor
ticultural produce by farmers/primary producers
under advance contracts, the essence of such
arrangements being a commitment to provide an
agricultural commodity of a type, at a specified
time, price, and in specified quantity to a known
buyer. In fact, contract farming can be described
as a halfway.house between independent farm
production and corporate/captive farming and
can be a case of a step towards complete ver
tical integration or disintegration depending
on the given context. It basically involves four
things - pre-agreed price, quality, quantity or
acreage (minimum/maximum) and time. From
a developmental intervention point of view, it
Review of Theory and Practice with Special Reference to India
is a situation in which the relationship between
the agribusiness firm and the farmers takes the
form of an expert endowing the apprentice with
resources, knowledge and skills. Or alternatively,
it is more a case of bringing the market to the
farmers which is navigated by agribusiness firms
(Christensen, 1992). Contract farming is known
by different variants like centralised model which
is company-farmer arrangement, outgrower
schemes, which is run by government/public
sector/joint venture, nucleus-outgrower scheme
involving both captive and contract farming by
the contracting agency, multi-partite arrange
ment involving many types of agencies, inter
mediary model where middlemen are involved
between the company and the farmer, and satel
lite farming referring to any of the above models
(Eaton and Shepherd, 2001; Gol, 2003). In
fact, contract farming varies depending on the
nature and type of contracting agency, technol
ogy, nature of crop/produce, and the local and
national context.
Contracts could be of three types; (i) procure
ment contracts, under which only sale and
purchase conditions are specified; (ii) partial
contracts, wherein only some of the inputs are
supplied by the contracting firm and produce is
bought at pre-agreed prices; and (iii) total con
tracts, 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. The relevance and importance of each
type varies from product to product and over
time these types are not mutually exclusive (Hill
and Ingersent, 1987; Key and Runsten, 1999).
Whereas the first type is generally referred to as
marketing contracts, the other two are types of
production contracts (Scott, 1984; Welsh, 1997).
But, there is a systematic link between product
and factor markets under the contract arrange
ment, as contracts require definite quality of pro
duce and, therefore, specific inputs (Scott, 1984;
Little and Watts, 1994). Also, different types of
production contracts allocate production and
market risks between the producer and the pro
cessor in different ways.
Contract farming emerged as an important phe
nomenon in the developed countries of the West
during the 1950s and the 1960s. By 1980, about
one-third of the total US farm output, and as
much as 100 percent of poultry meat, milk and
certain vegetables, was produced under con
tracts (Little and Watts, 1994). Even in Tasmania
island of Australia, by the mid-1990s, 95 percent
of the potato production was under contracts
compared to almost nil in the 1950s (Fulton and
Clark, 1996). On the other hand, in the devel
oping countries, the Multi-National Corporations
(MNCs) brought in the system of contract farm
ing during the late 1970s and the early 1980s.
Besides private and multinational enterprises,
contract farming is also practised by statal and
parastatal agencies in many countries in differ
ent commodity sectors like tea production in
Kenya, tobacco and livestock in Thailand, rubber
in Malaysia, coconut in Indonesia, palm oil in
the Philippines, and seed in India (Nanda, 1995;
White, 1997; Shiva and Crompton, 1998).
The production, marketing and distribution of
agricultural products are becoming increasingly
sophisticated for several reasons. Firstly, modern
advances in technology have made it feasible for
agricultural products to be produced to 'specifi
cation' and preserved in a fresh condition. Sec
ondly, the optimum scale of operations has been
increasing, especially in processing and distribu
tion. Thirdly, new selling methods have emerged
emphasising a brand image based on consis
tent quality. On the demand side, due to rising
incomes, consumers are becoming increasingly
discriminating in their tastes, especially about
the timing of production and marketing, and
the quality of products. This increased sophis
tication in consumer demand gives an added
impetus to the search for ways of improving the
co-ordination of production, processing and dis
tribution, especially with respect to timing and
quality control (Hill and Ingersent, 1987). In fact,
value addition is increasingly taking place in the
upstream stages of the agribusiness chain, as
the downstream stages have been more or less
exhausted so far as quality and value of product
are concerned. This provides a strong rationale,
from the demand side, for contract farming as a
means of raw material supply.
For different reasons, both farmers and farm
product processors/distributors may prefer con
tracts to complete vertical integration. A farmer
may prefer a contract which can be terminated
at reasonably short notice. Also, contracting
gives access to additional sources of capital, and
a more certain price by shifting part of the risk
Contract farming varies depending
on the nature and type of contracting
agency, technology, nature of crop/
produce, and the local and
national context.
Contract Farming for Agricultural Development
3
extension system is unable to help farmers
adapt/meet these standards (Allen, 1972 as
quoted in Hill and Ingersent, 1987, p. 169).
of adverse price movement to the buyer (Hill
and Ingersent, 1987). Farmers, also get access
to new technology and inputs through contracts
which otherwise may be outside their reach. For
a processor or distributor, contracts are more
flexible in the face of market uncertainty, make
smaller demands on scarce capital resources,
and impose less of an additional burden of
labour relations, ownership of land, and produc
tion activities, on management (Buch-Hansen
and Marcussen, 1982; Kirk, 1987). The firm
even gets an access to unpaid family labour
(White, 1997) and can make use of state funds
indirectly through agricultural production sector
which are directed at farmers by development
agencies (Clapp, 1988). Also, food processors
can minimise their overhead costs per unit of
production by operating their plants at or near
full capacity as contracting gives assured and
stable raw material supplies from farms. The
firm can also project an image of working with
local producers as a partner when it undertakes
contract farming and may even obtain statal and
international agency incentives for its activities
as developmental projects, instead of corporate
farming (Kirk, 1987). Allen (1972) identifies cer
tain pre-conditions for development of contract
farming practice i.e. (a) Producers geographi
cally concentrated in an area/s, which is rela
tively distant from the final market, so that bulk
assembly prior to distribution in retail outlets
is a necessary condition of efficient marketing;
(b) Producers not shielded by government price
support or a strong producers' organisation, so
that significant scope exists for reducing uncer
tainty regarding supplies and prices; (c) Buyers
demand rigorous grading standards but exist
ing standards (govt./producer) are inadequate
or incapable of upgrading, and (d) Agricultural
From an institutional economic perspective,
the logic for contract farming could also come
from the creation of positive externalities like
employment, market development or infra
structure, if agribusiness firms create them
better than the open market or the state (Key
and Runsten, 1999). In other words, can con
tract farming help people other than those who
have direct stakes and pay for it? Contract farm
ing figures as an institutional arrangement for
agricultural development in the fields of inputs,
product exchange, and product upgrading,
the last referring to research and innovations
(Christensen, 1992).
Contract farming is also seen as a
way to reduce costs of cultivation
as it can provide access to better
inputs and more efficient production
methods. The increasing cost of
cultivation was the reason for the
emergence of contract farming in
Japan and Spain in the 1950s.
However, a political economy view of contract
farming rejects its benefits to consumers and
farmers and argues that contracts develops only
when there is diminished role of the state in
agriculture, increased specialisation of agricul
tural production processes, and the agricultural
markets like farm produce or credit become less
competitive or inefficient (Wilson, 1986). In fact,
it argues that contract production is one mode
'_________ 4
Review of Theory and Practice with Special Reference to India
At a more macro-economic level, contracting
can help remove market imperfections in pro
duce, capital (credit), land, labour, information
and insurance markets; facilitate better co-ordi
nation of local production activities which often
involve initial investment in processing, exten
sion etc.; and can help in reducing transaction
costs (Grosh, 1994; Key and Runsten, 1999). It
has also been used in many situations as a policy
step by the state to bring about crop diversifi
cation for improving farm incomes and employ
ment (Benziger 1996; Singh, 2000). Contract
farming is also seen as a way to reduce costs
of cultivation as it can provide access to better
inputs and more efficient production methods.
The increasing cost of cultivation was the reason
for the emergence of contract farming in Japan
and Spain in the 1950s (Asano-Tamanoi, 1988)
and in the Indian Punjab in the early 1990s
(Singh, 2000).
of capitalist penetration of agriculture for capital
accumulation and exploitation of farming sector.
This leads even to processes of'self-exploitation'
of the farmers, and the companies gain indirect
control of land. The political economy approach
rejects the various rationale of contracting like
perishability of produce, specialisation of a
crop, capital intensity of production etc. as it is
the social relations of production which deter
mine these aspects of the production system.
And, product differentiation and monopolistic
tendencies cause contracting (Wilson, 1986).
Though there are many benefits of contract pro
Contract farming should be
viewed as a cultural and historical
phenomenon rather than as
an imposed legal category of
relationships as these contexts
determine the response of the
farmers to the new arrangement.
duction for the farmers, what happens when
yields stagnate, costs rise and there are open
market gluts?
3. Nature of Contracts and Growers
3.1 Understanding Contracts
Since the system of contract farming has its influ
ences on the entire local and regional economy,
all producers and organisations have to recog
nise the intervention of such a system and bear
the consequences. Even for individual farmers,
it is not contract per se but the relationship it
represents, which is crucial as the divergence
between the two may prove crucial in determin
ing the development of contract farming as an
institution (Clapp, 1988; White, 1997). Further, it
is the context of the contract which can make a
whole lot of difference as there are many actors
and factors in the environment which influence
the working and outcome of contracts and lead
to a culture of contracting which is location and
community specific. The way farmers perceive
contract farming, i.e., define their relationship
with companies, differs in each cultural context
(Asano-Tamanoi, 1988; White, 1997). In fact,
there is so much diversity in the type of firms,
farmers, nature of contracts, crops, and socio
economic environment that it is better to focus
on specific situation than the generic institution
of contract farming (Little, 1994; White, 1997).
Some others argue that contract farming should
be viewed as a cultural and historical phenom
enon rather than as an imposed legal category
of relationships as these contexts determine the
response of the farmers to the new arrangement
(Asano-Tamanoi, 1988).
3.2 Nature of Contracts
Contracts differ in their nature and effect due to
the variations in the nature of crops, contract
ing agencies, farmers, crop technology, and the
context in which they are practised. Even within
a crop, different companies can have different
types of contracts. For example, contract sys
tems adopted by different seed companies in
India differ in their provisions as far as relation
ship with farmer is concerned (Shiva and Cromp
ton, 1998). A review of evidence reveals that
farming contracts are generally oral or unwrit
ten, if written then in non-local language, and
are quite loose in their specifications. For exam
ple, seed companies in India do not have written
contracts, and do not even guarantee a price,
though the farmer is assured of a profit in terms
of seed being bought at a rate higher than the
market price of the grain. Some of them do not
even assure of the purchase of seed (Shiva and
Crompton, 1998). Only a delivery slip or a credit/
seed/seedling slip is the proof of the contract a
grower has.
Contracts are highly biased against the growers.
The company obligations are not specified. The
contracting agencies end up rejecting low qual
ity produce without any compensation for the
grower, and the defaulters, on the other hand,
are expelled from future contracts. Firms favour
large farmers for various reasons, discussed in
Contract Farming for Agricultural Developmpnt
the following paragraphs, and finally large farm
ers also become dependent on these firms due
to large volumes of produce they grow (CDC,
1989; Little and Watts, 1994). In Jamaica, the
state Tobacco Industry Control Authority (TICA)
guaranteed a minimum price of tobacco before
planting, paid for the produce delivered within
two weeks, deducted all input costs from the
payment for the produce, and distributed bonus
as and when warranted, under contracts. On
the other hand, the MNC (CCJ) worked with
selected growers including former company
employees, provided all the inputs, and had
total control over farming operations, though it
did allow diversified cropping by the growers
and ensured farmer participation in manage
ment of contracts through grower committees
(Lewis, 1985).
Plantation contracts are much more stringent in
that the quality standards are tough, companies
control plantations, and a very early advance
notice (three years) is necessary to withdraw
from contracting for both the parties. The com
pany can refuse to procure produce and the
growers are not even allowed to grow food crops
(Sachikoyne, 1989; Porter and Phillips-Howard,
1995). Generally, grower's fixed price is the price
formula followed in most contracts, though there
are other possibilities like processor's fixed price,
sharing of profits between firm and farmers, and
administered prices which are rarely practised
in contract situations (CDC, 1989; Little and
Watts, 1994).
3.3 Nature of Contract Growers
Contract farming may involve medium or large
capitalist farmers relying on wage labour, small
peasant producers who depend, to a larger
Contract farming may involve
medium or large capitalist farmers
relying on wage labour, small
peasant producers who depend to
a larger or smaller extent on family
labour, and even landless who lease
in land for contract production.
6
Review of Theory and Practice with Special Reference to India
extent on family labour, and even landless who
lease in land for contract production as was the
case in Thailand and India (USAID, 1994; Singh,
2002). But, agribusiness corporations tend to
prefer large farmers for contract farming because
of their capacity to produce better quality crops
due to the efficient and business-oriented farm
ing methods, large volumes of produce which
reduces the cost of collection for the firm, their
capacity to bear risk in case of crop failure, and
various services provided by these large produc
ers like transport, storage, etc. (Wilson, 1986;
Winson, 1990; Key and Runsten, 1999). This
happened in Australia where the MNCs started
working with only large producers and ratio
nalised the grower numbers as soon as the
government withdrew from contract regulation.
Also, the companies resorted to growers groups
and group contracts to reduce farmer freedom
to hold multiple contracts which was prevalent
earlier (Burch and Pritchard, 1996). As a result
of contracting, the number of potato growers
declined from 7000 in 1950s to just 550 in the
1990s (Fulton and Clark, 1996).
On the other hand, small farmers are picked
up by firms for contracts only when the area
is dominated by them, there is government
directive to do so or they are found to be
low cost producers in certain areas and crops
(CDC, 1989). Further, firms may work with
small farmers to make use of the state sup
port (financial and technical) to these produc
ers under various development programmes
(Glover and Kusterer, 1990), and to benefit
from lower cost production on these farms as
these farmers have access to cheaper family
labour, and being residual claimants of their
labour, work more conscientiously than hired
labour (Key and Runsten, 1999). Companies
often engage local procurement agents, NGOs,
and state agencies as intermediaries to pro
cure and to enforce contracts respectively
(Clapp 1988; and USAID, 1994). In fact, some
of them even use large growers, rural elite,
and local small processors as sub-contrac
tors to procure from the small growers for the
company (Kirk, 1987). The seed companies in
India use small companies as sub-contractors
to procure seeds produced under contracts
(Shiva and Crompton, 1998).
In Canada, small tomato growers were preferred
as the crop required hand-picking which only
small farmers do as the large ones do mechani
cal harvesting, especially when weather limits
the use of mechanical harvesters (Winson,
1990). Similarly, in India, gherkin contract farm
ing is carried out by small and marginal farm
ers as the crop requires plenty of labour inputs
which these farming families can provide from
within (Dev and Rao, 2004). Also, working with
many small farmers in the case of small pro
cessors gives the required flexibility in procure
ment schedule helping to extend the processing
season and use the equipment efficiently, and
helps spread risk of supply failure as compared
Contracting helped farmers
become better farmers, gave
more reliable incomes, generated
employment especially for women,
provided new skills of farming
and did away with patron-client
relationship between large and
small producers.
to working with a few large farmers. Further,
the small producers are at a greater risk work
ing with small processors as these processors
could go broke quicker than the large ones, in
the face of competition and restructuring of
markets (Winson, 1990).
4. Practice and Implications of
Contract Farming
The studies of contract farming effects can be
grouped into three broad categories; a) agribusi
ness management studies which look at con
tracts only as a management tool and a strategy
to overcome procurement and related business
problems; b) project evaluation studies which
view it as a project and evaluate it in terms of
tangible development objectives of the projects
like income, employment, and technology trans
fer; and c) political economy studies, which go
beyond the tangible outcomes and look at the
broader production and social relations effects
of the contracting system, in terms of changes
in economic opportunity and welfare of different
classes, and in rural social structures.
4.1 Firms and Contract Growers
Many project evaluation type studies show
that contracting helped farmers become better
farmers, gave more reliable incomes, generated
employment especially for women, provided
new skills of farming, did away with patron
client relationship between large and small pro
ducers, and farmers got better help in farming
than without the contract (Glover and Kusterer,
1990, USAID, 1994; Dunham, 1995; Porter and
Phillips-Howard, 1995; Fulton and Clark, 1996;
Singh, 2002). Farmers were also found to switch
between companies for deliveries under contract
as well as to default on the produce delivery
and the relevant use of inputs supplied by the
firm (Christensen, 1992; USAID, 1994; Singh,
2002). But, farmers generally found that the
contract firms provided poor extension service,
overpriced their services, passed on the risk to
the producers, offered low prices of produce,
delayed payments, and did not explain the pric
ing method (Glover and Kusterer, 1990; Grosh,
1994; White, 1997; Singh, 2002). In fact, con
tracting in a way reinforces or reintroduces the
phenomenon of 'interlocking of markets' under
the control of firms, which was criticised as an
exploitative mechanism in rural development
literature and something which needed to be
eliminated.
In certain other situations like in Africa, the
farmers faced problems of bribes by company
officials, manipulation of inspection standards
by companies, tying of one contract to another,
Contract Farming for Agricultural Development
7
Though contracts do lead to
increase in income and employment
initially, they may not be stable
and sustainable, and prove to
be costly in terms of use of local
resources in the presence of unstable
international commodity and
product markets.
and outright cheating in accounts (Little and
Watts, 1994; Glover and Kusterer, 1990). On
a larger level, farmers felt that they had little
bargaining power compared to that of the com
pany which they perceived benefited more than
the farmers in the contracting process, and that
they had become dependent on the firms for
credit and other inputs (Glover and Kusterer,
1990; Fulton and Clark, 1996; Burch, 1996).
There is generally a monopsony of the process
ing firm in a given area and the contracts are
one-sided i.e. they favour the firm and their
enforcement is carried out very strictly on the
farmers (Kirk, 1987; Grosh, 1994; White, 1997;
Singh, 2002). Further, firms backtrack in times
of surplus produce and do not compensate the
farmers for natural calamity losses (Collins,
1993; Singh, 2002). Due to their unequal bar
gaining power vis-a-vis a few large buyers or
suppliers, contracting farmers may not be able
to negotiate a 'fair' contract price (Hill and
Ingersent, 1987). But, wherever there have
been collective responses, through co-opera
tives or farmer groups, to contracting situations
due to the cultural and historical reasons, the
farmers have managed their relationships with
companies well, as in Japan (Asano-Tamanoi,
1988). Contracting leads finally to the worsen
ing of the relationship between producers and
the firms to the disadvantage of the farmers.
Even the market choices become limited, and
contracting tends to reinforce itself over time.
Finally, how can a contract between a processor
and a farmer be equitable, as the two are not
equal entities? (Wilson, 1986).
Though contracts do lead to increase in income
and employment initially, they may not be stable
and sustainable, and prove to be costly in terms
8
Review of Theory and Practice with Special Reference to India
of use of local resources in the presence of
unstable international commodity and product
markets for which the produce is meant and due
to the way the contracts are practiced (Dunham,
1993; Little, 1994; Dunham, 1995; Torres, 1997).
In the Australian case, the firms were using
local resources for global competition and it was
doubtful whether they will continue to procure
locally. They did not show any concern for the
local economy, as it was only a route to access
Asian markets (Burch and Pritchard, 1996). The
firms also tend to practice "agribusiness normali
sation" over time which means that they reduce
the prices and other benefits offered to the
growers with which they commence operations,
when the procurement base is created and there
are enough farmers to procure from (Glover and
Ghee, 1992; Burch, 1996; Singh, 2002). Fur
ther, the contracting farmers are exposed to the
adverse impact of the misjudgement of market
requirements by the firm, and other policy deci
sions (Hill and Ingersent, 1987; Little and Watts,
1994; Torres, 1997).
Contract farming can lead to change in social
relations of production, in terms of relations
between the farmers and the companies. The
loss of independence, if at all, suffered by the
farmer and the dominance of local production
systems by an outside firm may be counted as
a social cost. The loss of autonomy is espe
cially pronounced when contract farmers incur
heavy debts with the corporations. The contract
growers in Australia agreed that field officers
exercised significant influence on farmer deci
sions of tactical nature and more day to day
decisions like use of inputs and timing of har
vest of crop. Also, farmers become depen
dent on companies for financial requirements
due to the use of high cost inputs (Fulton and
Clark, 1996).
4.2 Impact on Peasantry and Labour
It is frequently argued that agribusiness in gen
eral, and contract farming in particular, reinforces
the trend toward proletarianisation of the peas
antry (Korovkin, 1992) though it is of an incom
plete or impure character. In the case of peasant
contract farming, the trend towards proletari
anisation appears in a disguised form, whereby
peasant producers preserve their access to land
but lose their productive autonomy to agri-cor
porations and become "piece-workers with their
own tools for the job" (Clapp, 1988). In Indo
nesia, the outgrowers on the contract farming
schemes are referred to, in the official docu
ments, as "plasma farmers" as against industrial
workers who are known as "black ants" (White,
1997). To reduce their production costs, transna
tional corporations and capitalist farmers rely on
seasonal rather than stable labour. As a result,
the majority of workers employed in agribusi
ness are either semi-proletarianised peasants or
pauperised labourers - the rural semi and sub
proletariat with little or no land and no stable
jobs (Payer, 1980; Clapp, 1988; Little and Watts,
1994). Even the wage rate for the landless work
ers may be lowered over time due to contract
ing as workers from outside may in-migrate and
the out-migration may stop from the given area
(Kirk, 1987; Little and Watts, 1994).
Contract farming also reinforces reverse tenancy
wherein small and marginal farmers lease out
land to large and medium farmers who are often
contract growers for the companies as was the
case in the Indian Punjab (Singh, 2002). Further,
the contract farm labour is generally composed
of women and child labour that too female child
labour as they are docile, flexible, and quality
labour besides being low cost (Singh, 2003).
Contracting also leads to monocropping which in
turn leads to deskilling of the farmers and labour
over time as they no longer grow other crops
or the same crop with different local techniques
(Clapp, 1988; White 1997). The companies tend
to prefer monocropping as it is necessary to
meet processing unit needs, gives better con
trol over farmers and is easy to manage. But,
from farmer's side, this reduces the efficiency
of farmer's other crop initiatives, reduces food
availability, leads to duplication of input services
as farmers have to approach another source for
procuring inputs for the non-contracted crops,
increases farmer risk, leads to underutilisation
of his labour time as each crop has only certain
periods of work requirement, and chances and
implications of the misuse of cash crop money
are high (CDC, 1989).
4.3 Equity and Efficiency
The equity and efficiency implications of con
tracting is an important economic issue as it
creates asymmetries of both static as well-as
dynamic type. The static asymmetries created by
the monopsony of the firm, incomplete contract
specifications, and crop specific access to inputs
lead to allocational inefficiencies and reduce
grower income, thus creating inequity. On the
other hand, dynamic asymmetries in the produc
tion contracting arrangement like quality control
exercised by the processor, transfer of skills to
growers, and the relative bargaining power of
the growers lead to very uncertain or unfavour
able outcomes for efficiency and equity depend
ing on the local context of the participating grow
ers, processors, and the markets (Scott, 1984).
Though inequality generated by contract farming
does not create poverty, it can exacerbate exist
ing poverty (Kirk, 1987; Baumann, 2000).
4.4 Effect on Food Markets and Non-Contract Growers
The effect of contracting on non-contract farm
ers and the surrounding areas may not always
be positive, and contracting therefore, needs to
be examined in its totality. What is favourable for
the contracting firms and farmers may harm other
actors and sectors of the local economy (Little
and Watts, 1994; Porter and Phillips-Howard,
1995). It is argued by some that contract pro
duction tends to shift the production in favour
of export-oriented and cash crops at the cost of
basic food crops for the poor. This can lead to
higher prices of the food commodities and prod
ucts, especially for non-contract farmers and the
Contract farming reinforces reverse
tenancy wherein small and marginal
farmers lease out land to large and
medium farmers who are often
contract growers for the companies
as was the case in the
Indian Punjab.
Contract
labour households who do not benefit from con
tracting in terms of higher incomes. Even regional
differentiation tends to be increased as the firms
choose relatively better off areas for contracting
(Little and Watts, 1994). The growth of contract
ing might also reduce the volume of trading in
the open market such that prices may no longer
reflect overall market conditions. In other words,
the open market might become so narrow that
prices may cease to be truly representative of the
total market situation and the contracting farmer
no longer has a reliable benchmark for judging
the fairness of his contract price. But, effective
competition in agricultural markets need not be
reduced by contractual arrangements, provided
firms are competing with each other for the con
tracts of adequately informed producers (Hill and
Ingersent, 1987).
4.5 Social and Economic Differentiation
It is feared that by favouring the large-scale
farmer, who is better able to meet the exact
ing requirements of producing to contract speci
fication, contracting may encourage a socially
undesirable 'dual' agricultural development
(Sachikoyne 1989; Grosh, 1994; Little and Watts,
1994; Dunham, 1995). The agribusiness compa
nies may follow different contract methods for
different types of farmers for the production of
the same crop. The bigger farmers have con
tracts which provide for an advance assessment
of produce, fixing of price and payments, as
against the small/poor farmers from whom the
firm picks up only a selected part of the produce
which meets quality standards (Grosh, 1994;
Morvaridi, 1995).
While a majority of impoverished peasants
become progressively proletarianised, a wealthy
minority develops into commercial producers
The growth of contracting might
also reduce the volume of trading
in the open market such that
prices may no longer reflect overall
market conditions.
Review of Theory and Practice with Special Reference to India
(Clapp, 1988). This process can eventually result
in the disintegration of the peasantry, whereby
poor peasants lose all their links with land while
rich peasants develop into peasant capitalists
(prosperous small farmers who combine family
and wage labour). The differentiation is accen
tuated as contracting offers rich peasants with
an opportunity to incorporate modern technolo
gies, augment their assets and increase the reli
ance on wage labour, at the same time acceler
ating the transformation of poor peasants into
a rural semi-and sub-proletariat (Wilson, 1986;
Kirk, 1987; Korovkin, 1992; Burch, 1996; White,
1997). But, there are others who argue from
their studies of the Kenyan agricultural economy
that contract farming, per se, does not create
a class of rural accumulators as household pro
duction is sustained only at a subsistence level,
and it does not lead to proletarianisation and
food insecurity, though capitalist relations of
production do develop in contracting contexts,
and a rural bourgeoisie emerges. But, other
pressures from the world economy might lead
to the implications of contracting pointed out by
the dependency school (Buch-Hansen and Marcussen, 1982; Currie and Ray, 1986). The socio
economic divide between the contracting and
non-contracting farmers could also deepen due
to contracting (Glover and Kusterer, 1990).
4.6 Effect on Environment and Gender
The contracting firms tend to aggravate the
natural resource crisis as most of the contracts
are short term (one or two crop cycles) and the
firms tend to move on to new growers and lands
after exhausting the natural potential of the local
resources, particularly land and water, or when
productivity declines due to some other reason
(Morvaridi, 1995; Torres, 1997). The over-exploi
tation of groundwater, salination of soils, soil fer
tility decline, and pollution are typical examples
of environmental degradation due to contract
farming (USAID, 1994; Rickson and Burch, 1996;
Siddiqui, 1998). The firms do not care for this as
the costs of such effects are externalised so far
as the firm is concerned.
The gender effects of contract farming is also
an important area of enquiry. Though, in many
cases, women did not express dissatisfaction
with the contract arrangement and in fact,
reported that the employment under contract
production had given them better self-esteem,
self-confidence and influencing power within
the household (Kirk, 1987; Glover and Kusterer,
1990; USAID 1994; Dunham, 1995; Porter and
Phillips-Howard, 1995; Torres, 1997), contract
farming does lead to gender inequalities both in
the quantity as well as quality of work for women
and children. The women not only end up work
ing longer hours in the field, as they are consid
ered better workers and paid less (Collins, 1993),
the burden of off-farm work also falls on them
due to the over-occupation of men with contract
production (Porter and Phillips-Howard, 1997;
White, 1997). Since there is a close connection
between contract system and gender, it affects
gender division of labour and gender relations of
production. There is gendering of tasks in the
field and practice of female child labour (Torres,
1997; Singh, 2003). The gender relations within
the household are affected by way of tension
over contribution by women to contract produc
tion, and negotiation by women for share in the
contract income (Carney, 1988). This, in turn,
affects productivity of the farm as fields tend
to be neglected and these disputes, being pri
vate family matters, are difficult to resolve. But,
it is important to recognise that the impact on
women is class differentiated. There have been
instances of collective action by women's groups
over control of contract production and income
(Buloh and Sorensen, 1993).
4.7 Contracting and Local Organisations
Contract farming may have profound organi
sational implications. Historically, peasants in
Latin American, Asian, and African countries
have relied for their survival on communal
arrangements which spun off various forms of
communal organisations. These organisations
regulated the management of local resources
(natural pastures, woods, and water for irriga
tion) and defended their members' interests
against outsiders. The growth of contract farm
ing leading to commercialised sophisticated
export agriculture undermines the communal
arrangements, giving rise to new forms of mass-
The growing importance of contract
farming has serious implications
for the agribusiness co-operatives,
which have been practising some
form of contract procurement in
the past simply because they are
producer-owned organisations.
based rural organisations: labour unions among
agricultural workers, on the one hand, and asso
ciations defending the commercial interests
of small agricultural producers, on the other
(Clapp, 1988).
The growing importance of contract farming has
serious implications for the agribusiness co-oper
atives, which have been practising some form of
contract procurement in the past simply because
they are producer-owned organisations. They
will have to now compete with the private and/or
multinational firms at the farmer/producer level
in terms of providing competitive price and other
incentives so that producer members do not
turn away from the co-operative organisation.
This will require more efficient functioning of the
co-operatives. In Australia, the lack of financial
support to co-operatives by the state and the
competition from the MNCs and other local agri
business firms, under deregulated environment,
led to the closing of some co-operative process
ing plants and a change in the form of organisa
tion in others (Burch and Pritchard, 1996).
Also, an agribusiness firm generally does not
encourage the co-operative formation and expan
sion in its area of operation as it may become
a competitor in the relatively longer term and
spoil the procurement base of the firm (Wilson,
1986). This happened in the case of a Unilever
subsidiary in Cameroon wherein as farmers tried
to organise a co-operative to strengthen their
bargaining power, the company refused to pro
cure and the crop was wasted. This happened
despite the fact that the co-operative was domi
nated by large farmers. Finally, the co-opera
tive failed. However, it is seen that a parastatal
may encourage co-operatives genuinely and
Contract Farming for Agricultural Development
11
if that happens, then they do succeed as well.
This happened in Kenya in case of tea (Konings,
1998). But, the success of the contract system
per se in Kenya.was the result of the coming
together of the state, donors and transnational
capital, favourable market conditions, access to
capital, and a relatively decentralised manage
ment system (Little and Watts, 1994).
The above review of literature reveals that in
the context of African, Latin American and a
few Asian countries, contract farming has led to
many ill-effects in the spheres of livelihoods of
producers, community organisations and insti
tutions, environment, and gender. These stud
ies point out that though the contract system
leads to better incomes and employment in the
beginning, the relations between firms and farm
ers worsen overtime and the system results in
ecological and economic degradation of local
production systems. Most of the studies, which
are in the context of relatively less developed
regions, find contracts inequitable, short-term,
and ambiguous.
5. The Indian Experience m Contract Farming
The experience of agricultural development in
India has shown that the existing systems of deliv
ery of agricultural inputs and purchase and use
of agricultural output have not been efficient in
reaching the benefits of better linkages between
agriculture and agro-processing industry to the
farmers or the agro-industry. The timely, qual
ity and'cost effective delivery of adequate inputs
still remains a dream despite the marketing
attempts of the corporate sector and the devel
opmental programmes of the state. The farmers
are not able to sell their produce remuneratively.
There is plenty of distress among farmers both in
agriculturally grown as well as backward regions
manifested in farmer suicides. Agricultural markets in India which are found to be inefficient
and imperfect, may not be able to ensure fair
and reasonable returns to all the players. There
are temporal and spatial variations in the mar
kets and the producers' share in the consumers'
rupee has been quite low in general, except a
few commodities. In fact, in some commodities
like potato in some regions in India, producers
end up making net losses at the same time when
traders make substantial profits from the same
crop (Mitra and Sarkar, 2003). In the environ
ment liberalisation and globalisation policies, the
role of the state in ;agricultural marketing and
input supply is being reduced, and an increasing
space is-being provided to the private sector to
bring about better marketing efficiency in input
and Output markets. On the other hand, proces
jl^ Review of Theory and Practice with Special Reference to India
sors and/or marketeers face problems in obtain
ing timely, cost effective, and adequate supply of
quality raw materials.
5.1 Corporate-led Contract Farming
Contract farming in India is currently being prac
tised by multinational firms like Cadbury (cocoa),
Pepsi (potato, chillies, groundnut), Unilever
(tomato, chicory, tea, and milk), ITC Ltd. (tobacco,
wood trees, and oilseeds), Cargill (seeds), domes
tic corporates like Ballarpur Industries Limited
(BILT), JK Paper, and Wimco (in eucalyptus and
poplar trees), Green Agro Pack (GAP) Ltd., VST
Natural Products, Global Green, Interrgarden
India, Kempscity Agro Exports, and Sterling Agro
(all in gherkins), United Breweries (UB) (barley),
Nijjer Agro (tomato), Tarai Foods (vegetables), A
M Todd (mint in Punjab), McCain India (potato in
Gujarat), (Singh, 2000a; Rangi and Sidhu 2000;
Subrahmanyam, 2000; Dileep et al, 2002; Saigal
and Kashyap, 2002; Grewal, 2003), Namdhari
Seeds (seeds), and various government and semi
government agencies, especially in seed produc
tion and perishables like vegetables and fruits,
with varying degrees of success with individual
farmers. There are many banks which provide
finance for contract farming. These include
NABARD, SBI, ICICI Bank and UTI Bank. Con
tract farming in India by the corporate sector has
so far been more of a case of buy back, and input
supply (Figure 1) and/or credit supply or linkage
as depicted in Figure 2.
Figure.1: Bi-partite contract farming model
Supply of inputs on credit
In Tamil Nadu, Appachi Cotton Company (ACC)
has undertaken contract cotton farming with
eight farmer groups from 32 villages in Coim
batore district for bringing 1050 acres under
cotton contract farming. The contract growers
form an Association of Persons (AoP). The major
features of the model adopted by ACC are: one
village - one SHG, one village - one variety of
cotton, cotton crop insurance, door delivery of
agricultural inputs, crop loans at 12 percent rate
of interest, farm service centres, assured buy
back from farmers though farmers are free to
sell elsewhere if they find prices higher than con
tract price, contamination control from farm to
factory and synchronised sowing of crop (ITCOT,
2004). The Cotton Corporation of India (CCI) has
gone in for group contracts in Nagpur district of
Maharashtra wherein an Association of Farmers
(AoF) signs a MoU with the CCI which promises
improved yield and lower cost. It promotes single
crop or a variety for a village, especially in cotton,
to take care of the problem of admixture of differ
ent varieties. It is also popularising concepts like
hand picked cotton to improve quality of produce.
The farmer representatives will monitor cultiva
tion of contracted cotton in the villages. In 2002,
the CCI worked with 3500 cotton farmers in four
states and achieved an average profitability of
Rs. 25000 per hectare in Bharuch district of Gujarat
and Rs. 10000 per hectare in Andhra Pradesh. In
M. R, it was only able to lower the cost by about
Rs. 2000 per hectare (Deshpande, 2003).
Marico Industries has a tie up with oilseed co
operatives in Maharashtra for safflower oilseeds
wherein it provides working capital, infrastruc
tural facilities, managerial inputs, and job work of
crushing the oilseeds to these co-operatives. In
turn, the co-operatives are responsible for getting
contract produced for the company the oilseeds
by their members (Bharadwaj and Palan, n.d.).
In tea, some small companies have undertaken
contract farming under the Tea Board-UPASI
(United Planters Association of South India)
project where they work with Self-Help Groups
(SHGs) of women who supply tea under con
tracts to the companies and the extension sup
port is provided by the UPASI. One such company
procures 90 percent of its total tea leaves for
processing into tea from 30 SHGs (Hayami and
Damodaran, 2004). Ion Exchange Enviro Farms
Ltd., a subsidiary of Ion Exchange India Ltd.
undertakes contract farming with Community
Grower Groups (CGGs) having large acreage, on
a profit-sharing basis. Prime Bio Products (India)
Ltd., Coimbatore has a programme wherein 1015 cotton farmers form a SHG which has office
bearers who work with company under contract
and various other agencies like banks and monitor
the performance of the group as far as contract
is concerned. The National Dairy Development
Board (NDDB, a development agency's) Fruit and
Vegetable project, now under the Mother Dairy
Fruits and Vegetables Limited fSafal' brand),
procures fresh produce directly from 75 Growers1
Associations, with 15000 growers in north Indian
Figure.2: Tri-partite contract farming model
Payment for produce
Company
------------
*
Bank
Farmer/AoF/
Cooperative
Contract Farming for Agricultural Development
13
states and provides all inputs and information
(Chopra, n.d.).
5.2 Practice of Contract Farming
India
in
There have been some studies of the contract
farming system in India recently. But, besides
describing the contract system and operations
of the companies, most of them look at the
economics of the contract farming system in
specific crops, compared with that of the non
contract situation and/or competing traditional
crops of a given region, e.g. in gherkins (hybrid
cucumber) in Tamil Nadu (Chidambaram, 1997),
Karnataka (Subrahmanyam, 2000) and Andhra
Pradesh (Haque, 1999; Dev and Rao, 2004) and
in tomato in Punjab (Bhalla and Singh, 1996;
Haque, 1999; Rangi and Sidhu, 2000), Karnataka
(Subrahmanyam, 2000), and Haryana (Dileep
et. al., 2002). It is found that contract produc
tion gave much higher (almost three times)
gross returns compared with that from the tradi
tional crops of wheat, paddy and potato in case
of tomato (Bhalla and Singh, 1996; Rangi and
Sidhu, 2000), and tomato and onion in the case
of gherkin (Chidambaram, 1997) due to higher
yield and assured price under contracts. The
studies of tomato contract production in Punjab
and Haryana (Haque, 1999; Dileep et. al., 2002)
and of gherkins in Andhra Pradesh (Haque,
1999; Dev and Rao, 2004) also found the net
returns from these crops under contracts being
much higher than those under non-contract situ
ations though production cost was also higher
under contract system (Dileep et. al, 2002).
Contract growers in Punjab and Haryana faced
many problems like undue quality cut on pro
duce by firms, delayed deliveries at the factory,
delayed payments, low price and pest attack on
the crop (Bhalla and Singh, 1996; Singh, 2000a;
Rangi and Sidhu, 2000; and Dileep et. al., 2002;
Satish, 2003). But, more recently, HLL's tomato
processing plant in Punjab (bought from Pepsi in
1995) has been shut down for the last one year.
Also, most of the firms work mostly with large
and medium farmers and contracts are biased
against the farmers (Bhalla and Singh, 1996;
Singh 2000a; Satish, 2003) with the exception
of firms in Andhra Pradesh and Karnataka which
14 Review of Theory and Practice with Special Reference to India
worked with small and marginal farmers due to
the nature of the crop (gherkin) itself (Haque,
1999; Dev and Rao, 2004). Breach of contracts
by farmers as well as firms has been reported
(Bhalla and Singh, 1996; Singh 2000a).
Some of these studies recommend further
expansion and promotion of contract farming
system due to its benefits (Bhalla and Singh,
1996; Chidambaram, 1997; Rangi and Sidhu,
2000; Subrahmanyam, 2000, and Dileep et. al.,
2002; Sidhu, 2002). The contract tree farming
schemes also did not do well for many reasons
which were mainly related to the design of con
tract farming schemes and the management of
the projects by the companies and their partner
institutions (Saigal and Kashyap, 2002). Further,
there are issues of monopsony of the processing/marketing firm and its disinterest in more
backward areas where farmers need such inter
ventions, besides the more crucial question of
sharing of value added surplus in processing and
marketing which are at the centre of whether
contract farming can contribute to more broad
based agricultural development (Gill, 2004).
5.3 Changing Dynamics of Contract Farm
ing in India: The Consortium Approach
Recently, several agribusiness companies have
made forays into the farm service sector, which
is being seen as private sector participation in
agricultural development. They are facilitators of
contract farming systems most of the time. One
such model is that of Mahindra Shubhlabh Ser
vices Limited (MSSL) which has an agreement
with the Government of Punjab to facilitate con
tract farming of maize in one lakh acres for diver
sification for supply to AGS of Indonesia through
PAFC. It plans to capture 16 percent of the agri
input market by 2005 and increase farmer profit
ability by 35-60 percent by better and cost effec
tive input supply and better value realisation from
farm produce by finding better markets. For this,
it will leverage its tractor brand, strong customer
base, dealer network and first mover advantage.
Its product portfolio includes seeds, pesticides,
fertilisers, irrigation systems, equipment rent
als, post harvest services, information provision,
and finance. For this purpose, various partners
i.e. retail chains, NGOs, agri input companies,
logistics companies, farm equipment companies,
food companies, and agri finance corporations
and banks, besides agricultural universities and
research centers are networked into the proj
ect. The company offers extension services to
farmers for a fee but ensures a certain level of
yield. If farmers get lower than the assured
level of yield, then they need not pay the fee.
This experiment of the company in Madurai in
Tamil Nadu, where farmers had to pay Rs. 500
per acre, achieved assured yield in 75 percent of
the cases in the first year, which increased to 80
percent in the second year, despite drought con
ditions. This ensures that the yield risks are low,
and therefore, insurance scheme can be imple
mented (Naik, 2002; Sulaiman et. al. 2004). The
MSSL plays the role of an integrated farming
solutions provider. Other crops planned under
the company's operations in the state are mus
tard, castor, pulses and vegetables.
This is similar to what has already been imple
mented by Rallis India in M.P., Maharashtra, Kar
nataka and Haryana. The company provides all
the inputs, technical support and finance to the
registered growers for a specific crop and facili
tates the sale of produce at reasonable price. The
company follows a consortium approach (Figure
3). It has tied up with banks like ICICI and SBI
and with buyers of produce like HLL, Picric and
Cargill. The system is run through a network of
10 Rallis Kissan Kendras (RKKs) across the coun
try. For example, a farmer can avail of a loan
upto Rs. 6500 per acre for basmati cultivation in
Panipat for a six-month period at a rate of inter
est of 13 percent per annum. In addition, every
member farmer has accident insurance coverage
of Rs. 1 lakh.
The RKK has trained farmers to harvest basmati
when moisture levels are at 16 percent as har
vesting at lower levels can lead to more broken
basmati grains during milling. The farmers are
paid prevailing market prices. The Rallis and the
ICICI bank deduct the cost of inputs and the
loan amount from the proceeds before paying
the farmer on the spot (Karunakaran, 2002).
The bank has been able to get 10 percent loan
guarantee from the buying company in case of
default by the company. Encouraged by this
project, the company has set up new projects
in fruits at Bangalore, and vegetables at Nasik.
The ICICI bank collaborated with the company
as they benefited from the rural penetration of
Rallis, and the HLL gained as it could get good
quality wheat for processing it into wheat flour
(Subrahmaniam, 2002).
Figure 3 : The Quad-partite contract farming model
-Contract Farming for Agricultural Development
15
The ICICI Bank lays down pre-set criteria for
farmer selection and informs input companies.
The input companies/bank officials do the docu
mentation, input companies supply the inputs
and send detailed accounts to the bank, which
debits farmer account and credits input company
account. At the time of harvest, the processing/marketing company collects produce and
pays the bank its dues and rest to the farmer.
The bank credits the farmer's account and the
account is closed. An MoU among the bank,
the input company and the output company is
signed for the above arrangement. An undertak
ing from the farmer to supply produce under this
scheme to the output company is taken by the
bank. The ICICI Bank prefers four sector proj
ects as against tri-partite projects as it consid
ers inputs service very crucial for cost reduction
and quality enhancement leading to better value
realisation for the farmer. The bank provided a
total of Rs. 180 crore as loans for various con
tract farming projects during 2002-2003. The
bank-funded project has a 'credit plus' approach
which involves not only credit and input supply
but also extension service and marketing sup
port. The bank also funded projects in basmati
rice, chillies, potato and cotton besides wheat.
It aims at raising prices of agriculture produce
and lowering cost to make farming viable for
the growers (Sabarinath, 2003). The Rallis' joint
venture project with the Government of Madhya
Pradesh, in which ICICI Bank is involved, started
three years ago with 250 acres of wheat with
50 farmers. Now, there are 15000 acres under
wheat cultivation.
The agribusiness facilitators are 'new players'
with knowledge and resources and strategy for
sustained growth through partnership for sus
tainability. They will make money while helping
The bank-funded project has
a 'credit plus' approach which
involves not only credit and input
supply but also extension service
and marketing support.
Review of Theory and Practice with Special Reference to India
others, including farmers, make money. Their
strategies involve bundling of inputs and linking
up of credit with input supply which is the agri
business of the 21st century (Boehlje et al, 1995).
But what is wrong with it if it can provide what
state and co-operatives have not been able to
provide for so long, i.e., timely and cost effective
supply of quality inputs and finance and even
tractors, and combine harvesters etc. on hire
basis and assured market for produce? Unfortu
nately, what local panchayats and farmer groups
could not do (e.g. custom hiring out of tractors)
is being done by agribusiness companies. They
focus on more efficient use of modern inputs
with a two-pronged strategy, i.e., yield increase
or cost reduction through inputs and value addi
tion (market improvement). This is a must for
competitiveness whether domestic or interna
tional where quality and cost effectiveness are
the driving forces. More recently, the facilitator
model has been modified with the inclusion of a
local art/7/ya/commission agent/input dealer as a
franchisee for the agri facilitator (Figure. 4; also
Sulaiman et al, 2004). It is more of a case of an
inter locking of factor markets coming back in
another form. But, this model also does not seem
to be working well as there are many problems
in this model in Punjab though it has worked well
in some other states like Tamil Nadu.
5.4 State-led Contract Farming
The contract-farming programme launched by
the Punjab Government in October 2002 (for
the rabi season) was aimed at taking away 10
lakh hectares from the wheat-paddy rotation
over the next five years as part of the crop
adjustment programme, as recommended by
the second (2002) Johl Committee. In 2002,
a total of 29,000 acres had been proposed by
the PAFC under the programme, implemented
jointly by the Department of Agriculture, Punjab
Agro Industries Corporation (PAIC through its
subsidiary Punjab Agro Foodgrains Corporation
(PAFC)) and the private companies. The PAFC
not only provided seeds purchased from reputed
seed companies like Adventa India Limited and
Pro-Agro Limited and technical supervision, and
follow up on agronomic practices to the contract
growers, but also promised to buy back the
entire produce at pre-agreed prices through a tri
partite agreement involving PAFC, seed company
through its dealer, and the farmer (Figure 5).
The tri-partite agreement specifies the fixed price
and bonus to be paid by the PAFC to farmer for
the produce (bonus only if the PAFC is able to sell
the produce at a higher price), type and quantity
of seed to be supplied by the seed company at a
given price for given acreage, farmer's responsi
bility of delivering the quality produce (produced
by making use of recommended inputs bought
from outlets prescribed by the PAFC) at a speci
fied place, payment within two days after deliv
ery and PAFC being the sole decider of weight
of produce and the sole and only arbitrator in
case of dishonouring of the contract by any of
the parties. The contract is signed by the three
parties in the presence of two witnesses for
the farmer.
Towards the end of harvesting season for the
contracted crops, the programme had run into
rough weather. The contracted winter maize
and hyola crops failed almost completely due
to inclement weather and poor quality seeds
(Grewal, 2003). In case of green peas, the con
tract growers were forced to dump their produce
in open market, after being rejected by the PAIC
on quality ground as per the contract specifica
tion, as there had been fungus infection due to
inclement weather which was marked by heavy
rains in winter season and then sudden rise in
temperature. An area of 500 acres under contract
production of green peas in Patiala and Fatehgarh
Sahib districts had been affected. Some farmers
found fault with the fungicide supplied by the
contracted company in this regard. The dumping
of contract-produced crop in open market led to
fall in local market prices and it was being sold
at Rs. 3 per kg. now as against a promised price
of Rs. 5 per kg. by the PAIC (Singh, 2003; Rangi
and Sidhu, 2003). In general, across crops and
regions, the contract farming programme could
not achieve the stated area goal. Not only it fell
short in terms of contracted area being less than
Figure 4: The five-partite CF in India
Contract Farming for Agricultural Development
Figure.5: State-led contract farming system in Punjab (Tri-partite
agreement among farmer, seed company/dealer and PAFC)
Input co./
Dealer
that stated by the agency, but also the farm
ers did not plant the entire contracted area with
the contract crops. The gap was much larger in
latter case and even as high as 50 percent in
winter maize in Ludhiana and 20 percent in hyola
in both Ludhiana and Patiala. There was a differ
ent private seed company for each crop and they
only provided seed and no other extension ser
vice. Finally, none of the companies procured the
produce and advised the farmers to sell in open
market, either because open market prices were
higher than contract price, or quality was not as
desired. Except the oilseed crops (hyola and sun
flower), the net returns from contract crops were
found be lower than what farmers would have
got from wheat crop. Most of the problems farm
ers faced related to production and quality (like
quality of seed and extension) and not marketing
of produce (except peas) as open market could
take care of contract produce. Due to this expe
rience, a large majority (60 percent) were not
willing to enter into contract farming arrange
ment again (Dhaliwal et al, 2003).
The Government of Punjab has now resigned
to a role of the facilitator of contract farming in
the state. The Governments of Uttar Pradesh
and Punjab have recently amended the APMC
Act which did not permit farmer level (direct)
Review of Theory and Practice with Special Reference to India
procurement by companies. This legal reform
process is being accelerated by the Indian gov
ernment with the enactment of the amended
State Agricultural Produce Marketing (Devel
opment and Regulation) Act, 2003 which now
permits setting up of private markets, selling of
produce by growers outside the APMCs (regu
lated markets), setting up of direct markets,
specialised commodity specific markets, regu
lation and promotion of contract farming, pro
vision for agencies and measures to promote
quality, standards, and alternative markets, and
public-private partnerships to facilitate more
and better linkage between firms and farmers
(Gol, 2004). The amended APMC Act has both
mandatory and optional provisions in a model
contract farming agreement wherein mandatory
provisions specify who can undertake contract
farming activity, contract specifications, liabili
ties, farmer asset indemnity, and dispute reso
lution. The optional provisions are about farm
practices, insurance, monitoring of crops, role
of farmer bodies, and support to the contract
farmers. It also makes it mandatory to register
contract farming activity with a local authority
and is quite fair contract in terms of sharing
of costs and risks (Gol, 2003). Further, futures
trading has been permitted in 54 commodities
(Landes and Gulati, 2004).
6. Conclusions and Policy Suggestions
Given the nature of modern farming involv
ing tremendous amount of technological input
and market orientation which require capital
resources, it is but inevitable to involve pri
vate corporate business interests in agricultural
development through contract farming system.
The above discussion suggests that it is not the
contract per se which spells hardship or doom
for small growers as a system, but how it is
practised in a given context. In fact, all over the
world, contracting of some kind is a necessity for
many or most forms of modern commercial agri
culture. Though there are some scholars who
caution about the widespread applicability of
contract farming as a development tool (Glover,
1987), if there are enough mechanisms to moni
tor and use the contract for developmental pur
poses, it has the potential to lead to a better
ment of all the parties, especially the small and
marginal farmers (Table 1).
Contracts require frequent and independent
scrutiny so that they remain competitive both
with similar contracts and with open market
transactions. Wide publicity of contract terms
will help to stimulate competition. From the
producers' point of view, specific points to be
considered in negotiating the contract terms
include the method of determining the produc
ers' price, adjustments for quality differentials,
allowance for climatic variations, farm practices,
credit terms, provisions for renewal and termi
nation of contracts and for arbitration (Hill and
Ingersent, 1987). Though the state regulation of
contracts is desirable, but if the firms really want
to sabotage the contract, there is no way they
can be prevented from doing so (Glover, 1987;
Glover and Kusterer, 1990). Therefore, vigorous
bargaining co-operatives or other agricultural
producer organisations are needed to negotiate
equitable contracts. This kind of organisations
have been able to secure the standardisation
of contracts and their scrutiny by a government
agency in the US (Wilson, 1986).
The other tools of mitigating loss of control used
by farmers in the first world have been the peti
tioning of the state for intervention to regulate
the contracts, the formation of producer bargain
ing units, and the formation of farmers' markets
(Welsh, 1997). The difficulty in collective action
arises due to the heterogeneity of farmers and
the conflict between the self-interest and the
collective interest. Each farmer views his rela
tionship with the company as an individualised
one (Glover, 1987; Kirk, 1987; Rickson and
Burch, 1996).
The social divisiveness of contract farming
would be lessened if more of the ' contractors'
were agricultural co-operatives or other pro
ducer-oriented organisations. However, it has
to be recognised that agricultural co-operatives
may be deterred from attempting to integrate
forward into processing and distribution, both
by financial constraints and by the managerial
problem of making a success of unfamiliar activi
ties in the face of strong competition (Hill and
Ingersent, 1987). There have also been experi
ences of complete failure when co-operatives or
state agencies were contractors (White, 1997).
Working with farmer co-operatives for better and
more sustainable contract procurement by pri
vate agribusiness firms seems to work for both
the parties. This is an experiment being tried
out by Marico Industries in Maharashtra state
of India in safflower oilseeds. The company pro
vided working capital, infrastructural facilities,
managerial inputs, and contract job crushing
which helped the crushing unit co-operatives to
become viable (Bharadwaj and Palan, n.d.).
As a solution to the problems of the traditional
co-operatives which performed poorly and were
not member-focused, a new variant called New
Generation Co-operatives (NGCs) have come
up and evolved overtime in various parts of the
world like USA, Canada, and India (Harris et. al.
1996; Singh, 1997). A New Generation Co-oper
ative is one which has restricted or limited mem
bership, links product delivery rights to producer
member equity, raises capital through tradable
Contract Farming for Agricultural Development
19
Table 1: Relative benefits of alternative marketing structures for small farmers
Structure
Sales position of
small farmers (SF)
vis-a-vis large
farmers (LF)
Sales position of
SF vis-a-vis buyer
Input facilities/
Technical
assistance
Government
support required
Private local
firms (Nijjer in
Punjab)
Can be against SFs
due to bargaining
power
Advantage
of access to
alternative outlets
May be available/
based on local
experience
Provision of market
infrastructure, information,
ensuring competition, price
stabilisation
MNCs/large
firms (Pepsi,
HLL)
Equitable prices
through contract
Dependent but
secure if supplies
quality
Direct supply on
credit/ direct and
intensive
Should negotiate prices
and participation for SFs
Co-operatives
(Amul)
Equal if co
operatives are
successful
Favourable if co
operatives are
efficient
May arrange
Financial support
State boards/
bodies
(PAFC/HPMC)
Equal prices if
official buying
position could be
reached
May be exploited
Rare/left to other
govt, agencies
Insist on reaching small
farmers
Development
agency (NDDB)
- do --
Protected if
meets quality
Direct supply on
credit
Financial support required
Source: Adapted from J.C. Abbott (1993).
equity shares among membership, enforces con
tractual delivery of produce by members, distrib
utes returns based on patronage, goes for value
addition through processing or marketing, and
makes use of information efficiently through
out the vertical system. However, it retains one
member-one vote principle for major policy deci
sions. This kind of restructuring helps co-opera
tives to tackle problems; of free riding by mem
bership, of horizon which is at the root of finan
cial constraint, and that of opportunism, both
of the members as well as of the co-operative.
This arrangement by co-operatives has helped
them become economically efficient, financially
viable, and obtain member loyalty wherever it
has been tried (Harris et.al., 1996). Additionally,
non-member procurement and quantity or acre
age contracts have been also used by co-opera
tives to tackle supply side problems (Hinman
and Ricks, 1993). Some of the co-operatives
like those dealing with sapota (chickoo) in south
Gujarat have also attempted quality based grad
ing and pooling system, and contractual rela
tions with members for procurement, along
0 Review of Theory and Practice with Special Reference to India
with market orientation strategies like multiple
outlets, and efficient use of market information
to achieve better business performance (Singh,
1997).
Though the amended APMC Act recognises con
tract farming system now and has some provi
sions to regulate it, a legal protection to contract
growers as a group is a must to protect them
from ill-effects of contracting (Wilson, 1986).
There are cases of legal protection given to sub
contracting firms in Japan in their relations with
large firms. This set of laws specify the duties
(to have a written clear terms contract with the
sub-contractor) and forbidden acts for the large
parent firm. The forbidden acts include refusal to
receive delivery of commissioned goods, delaying
the payment beyond agreed period, discounting
of payment, returning commissioned goods with
out good reason, forced price reduction, com
pulsory purchase by sub-contractors of paren
tal firm's products, and forcing sub-contractors
to pay in advance for materials supplied by the
parent firm. And, these provisions are monitored
by the Fair Trade Commission. Interestingly,
most of the violations by parent firms were on
the written form of contracts and clear terms of
the contracts (Sako, 1992). If contract farming
is nothing but the flexible production systems
prevalent in industry applied to farming, then it
is only logical to extend the legal provisions with
necessary modifications to farming contracts.
In some situations, it is not possible and easy to
build immediate partnerships. Therefore, there
can be a quasi-judicial system at the local level
(panchayat, district administration) to monitor
the contracts and resolve any conflict with appro
priate penalties to any of the defaulting parties.
There has to be a general code of conduct for
both the parties in order to avoid conflicts and
breaking down of contracts. There should also
be incentives for better quality, timing, and care
of the crop (Glover and Kusterer, 1990). But,
contracting as a mechanism is desirable only if
the crop is perishable, non-bulky, perennial in
nature, needs heavy processing and strict quality
adherence (Goldsmith, 1985), credit market is in
a state of failure or there is a need to encour
age new crops. But, still there are other options
which should be tried out i.e. state, NGOs for
credit and other inputs, and if contracting is a
must, then it should be regulated and monitored
(Grosh, 1994).
The important question is that of the division
of value added between the firm and the farm
ers which is based on the relative bargaining
power of the parties involved (White, 1997).
Therefore, it is important to examine carefully
and design the pricing and other aspects of the
contracts. There is a role for the state agen
cies and the NGOs to intervene in contract situ-
Though the amended APMC Act
recognises contract farming system
now and has some provisions to
regulate it, a legal protection to
contract growers as a group is a must
to protect them from ill-effects of
contracting.
ations as intermediaries to protect the farmer
and broader local community interests. The
NGOs can also play a role in information pro
vision, and in monitoring and regulating the
working of contracts. Better co-operation and
co-ordination between companies and co-oper
atives for agricultural development also needs
to be encouraged. Further, both companies and
state should promote group contracts with the
intermediation of local NGOs and other organi
sations and institutions so that contractual rela
tionships are more durable, enforceable, and
fair. An insurance component in farming inter
ventions is a must to protect the farmer inter
est and it is noted that some companies are
already doing it. But, the most important thing
is to ensure market for the farmer produce at
better price under these agribusiness projects.
What is also required is marketing extension in
terms of better product planning at the farmer
level, provision of market information, securing/accessing markets for farmers, provision
of alternative markets and market orientation
in terms of improved marketing practices at
the farmer level (Patnaik, 2003). Government
should also play an enabling role by legal provi
sions and institutional mechanisms, like helping
farmer co-operatives and groups, to facilitate
smooth functioning of contract system.
Contract Farming for Agricultural Development
21
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Contract Farming for Agricultural Development
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