Farming is an age-old means of livelihood for millions of Indians. However, there have been few systems in which farmers are assured of a market for their produce, leave alone a remunerative price. Farmers have on occasion had to throw away their produce for want of buyers. While this is one side of the coin, on the other is the agri-based and food industry, which requires timely and adequate input of quality agricultural produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of Contract Farming, which promises to provide a proper linkage between the 'farm and market.'Recognising the need for and merits of such a linkage with the farming community, several corporates involved in agro-commodity trading, processing, exports, etc. have attempted to establish systems and models that ensure timely and consistent supply of raw material of the desired quality at reasonable cost. Contract Farming is defined as a system of production and supply of agricultural/horticultural produce under forward contracts between producers/ suppliers and buyers. The essence of such an arrangement is the commitment of the producer to provide an agricultural commodity of a certain type, at a time and a price, and in a quantity required by a known and committed buyer.Contract farming usually involves the following basic elements-pre-agreed price, quality quantity. According to the contract, the farmer is required to plant the contractor's crop on his land, and to harvest and deliver to the contractor a quantum of produce, based upon anticipated yield. This could be at a pre-agreed price. Towards these ends, the contractor supplies the farmer with selected inputs, including the required technical advice. Thus, the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crop grown, agencies, farmer, and technologies and the context in which they are practised.For example, contract farming in wheat is being practised in Madhya Pradesh by Hindustan Lever Ltd (HLL), Rallis and ICICI Bank. Under the system, Rallis supplies agri-inputs and know-how, and ICICI Bank provides farm credit to the farmers. HLL, the processing company, which requires the farm produce as raw material for its food processing industry, provides the buyback arrangement for the farm output. In this arrangement, farmers benefit through an assured market for their produce in addition to timely, adequate and quality input supply including free technical know-how; benefits through supply-chain efficiency; while Rallis and ICICI Bank benefits through assured clientele for their products and services. The consortium is also planning to rope in other specialist partners including insurance, equipment and storage companies.PepsiCo Foods Ltd. Launching its agro-business in India with special focus on exports of value-added processed foods, Pepsi Foods Ltd. (PepsiCo) entered India in 1989 by installing a Rs. 22 crore state-of-the -art tomato processing plant at Zahura in Hoshiarpur district of Punjab. The company intended to produce aseptically packed pastes and purees for the international market. However, before long, the company realized that investment in agro-processing plants would not be viable unless the yield and quality of agricultural produce to be processed were up to international standards. At that point of time, tomato had never been cultivated in Punjab for its solid content, with a focus on high yields and other desirable processing such as colour, viscosity and water binding properties. There were no logistically efficient procurement models for fruits and vegetables that could be built on by the company. These apart, there was simply not enough quantity of tomato available even if the grown varieties/hybrids were procured from the open market. The total Punjab tomato crop was 28000 tons, available over a 25-28 day period, while PepsiCo required at least 40000 tons of tomato to operate its factory, which had a gigantic capacity of 39 tons fresh fruit per hour. The company required this intake over a minimum 55-day time frame, and in 1989, the season in Punjab did not last beyond 28 days. Skeptics expressed doubts over the feasibility of the Zahura tomato processing plant, and had said that it would remain a museum piece! There were formidable challenges before the company and nothing short of a horticultural revolution was required to solve the problem. There was no choice but to alter the tomato production and logistics situation in Punjab. This led the birth of PepsiCo's backward linkage with farmers of Punjab.PepsiCo follows a contract farming method, where the grower plants the company's crops on his land and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management. The PepsiCo model of contract farming, measured in terms of new options for farmers, productivity increases, and the introduction of modern technology, has been an unparalleled success. The company focused on developing region and desired produce specific research, and extensive extension services. It was thus successful in bringing about a drastic change in the Punjab farmer's production system towards its objective of ensuring supply of right produce at the right time in required quantities to its processing plant. Another important factor in PepsiCo's success is the strategic partnership of the company with local bodies like the Punjab Agricultural University (PAU) and Punjab Agro Industries Corporation Ltd. (PAIC). Right from the beginning, PepsiCo knew that changing the mindset and winning the confidence of farmers would not be an easy task for outsiders. The company's unique partnership with PAU and PAIC fuelled its growth in Punjab.Encouraged by the sweeping success of contract farming in tomato in several districts of Punjab, PepsiCo has been successfully emulating the model in food grains (Basmati rice), spices (chilies) and oilseeds (groundnut) as well as vegetable crops like potato. The company, which had been involved in the export of Basmati rice since 1990, was the first processor in India to invest and strengthen backward linkages for Basmati rice. After extensive multi-locational field trials, PepsiCo ventured into contract farming in Basmati rice. The company invested over Rs.5 crore in a modern processing plant at Sonepat in Punjab. It is involved right from the stage of selecting varieties of Basmati (based on customer preference), seed multiplication and development of a package of practices for farmers. PepsiCo's scientists, who ensure successful transfer of technology from the trial to the commercial field levels, closely monitor the performance of the crop.At the time of harvest, the company procures the entire pre-agreed quantum of the harvested produce at the farm gates, at pre-agreed price. The raw material so procured is transferred to PepsiCo's ISO 9002 and Hazard Analysis Critical Control Point (HACCP) certified Rice Mill located at Sonepat for processing, packing and export, ensuring that the product remains completely traceable from field to consumers. Farmers from Jalandhar, Amritsar, Hoshiarpur and Sangrur districts of Punjab, and parts of Western Uttar Pradesh have been contracted for Basmati rice cultivation. Contracted farmers have reaped yields of 2.5 tons/hectare. The company plans to increase the acreage under Basmati rice to 4000 hectares to meet the complete requirement of its manufacturing plant.Similarly, PepsiCo planned a foray into contract farming in groundnut with the farmers of Punjab with the objective of producing export-quality, value-added groundnut such as roasted and salted peanuts, flavoured and coated peanuts, and peanut butter. Using plastic mulch groundnut (PMG) technology sourced from China, the company has demonstrated yields of 3.0 and 4.0 tons per hectare in field trials, much above the national average of 1.0 ton/ha. The company proposes to extend its contract farming in groundnut to farmers in Rajasthan and Uttar Pradesh, who have shown great interest.A sound R&D programme backed by committed extension personnel to transfer the resulting technologies has been the intrinsic strength of PepsiCo. Its focused research on increasing yield levels, to the advantage of farmers (which in turn brings down the cost of raw material to the company) has resulted in their increased trust and loyalty towards the company. Post PepsiCo entry has seen the tripling of yield levels in chili (from 6.0 tons/ha to 20 tons/ha) and tomato (14-16 tons/ha to 52 tons/ha).With this kind of a backward linkage with farmers of Punjab and Haryana, PepsiCo developed a perfect contract farming model involving an enduring relationship with local agencies including the State Government.Key elements of PepsiCo successCore R&D teamUnique partnership with local agencies including a public sector enterprise Execution of technology transfer through well-trained extension personnel Supply of agricultural implements free of costs to contracted farmers Supply of timely and quality farm inputs on credit Prompt dispatch/delivery/procurement of the mature produce from every individual contracted farmer through the system of 'Quota Slips'Effective use of modern communication technology for communication with field executives Regular and timely payment to contracted farmers through computerized receipts and transparent system Maintenance of perfect logistics system and global marketing standards. Appachi Cotton Company (ACC)the ginning and trading house from Pollachi (Coimbatore district of Tamil Nadu) hit the headlines in May 2002 for the street play it employed to encourage farmers in the Kinathukadavu block of Coimbatore to sow cotton seeds in their fields. The singer in the street play assured cotton framers that, unlike in the past, they would not be disappointed if they cultivated cotton in their fields, as they would be backed by a model called Integrated Cotton Cultivation (ICC), which would guarantee a market supportive mechanism for selling their produce.ACC caters to top-bracket, quality-conscious clients from the textile industry in India and abroad, and their client specific operation has won them laurels. ACC is the only private ginner in the country to have successfully entered backward and forward integration between the 'grower' (farmer) and the 'consumer' (textile units). Well in advance of the 2002 kharif sowing season, ACC undertook the Herculean task of integrating about 600 farmers belonging to various districts of Tamil Nadu on a holistic plank. This was done at a time when failure of monsoon for the third consecutive year was imminent. This led to the farmer's perceiving the ICC programme as a boon, as their traditional source of finance and support had refused further funds due to non-recovery of earlier loans.The Appachi formula ensured that its farmer members never went short of money and material during the crucial 100 days of the crop cycle. The contract assured the farmers easy availability of quality seeds, farm finance at an interest rate of 12% per annum, door delivery of unadulterated fertilizers and pesticides at discounted rates, expert advice and field supervision every alternate week, and a unique selling option through a MoU with the coordinating agency (ACC).The core principle of the formula lies in the formation of farmers' Self-Help Groups (SHGs). Each farmer belonging to a SHG is sanctioned Rs. 8000/per acre as crop loan @ 12% p.a. interest. Disbursement of this amount is strictly need-based. Allocation and disbursement is at the behest of the coordinating agency. Hence all requests are scrutinised, evaluated, authenticated, and only then recommended to the lending bank. All the participating farmers are asked to issue Post Dated Cheques for the loan they avail. Hence, the moral responsibility of fulfilling the bank's obligation squarely lies on the participating farmer. The Appachi formula differs significantly from other existing contract farming models on its 'pricing' front in that no prior price fixing is done in this model. As cotton is a commodity prone to price fluctuations due to domestic and international market forces, ACC did not wish to create a climate of uncertainty due to prefixed prices with the contracting farmers. The unique and transparent MoU of ACC allows the farmer to sell his commodity at the market prices prevailing during the time of negotiating. The Co-ordinating agency has the first right to negotiate, but in the event of disagreement about price during negotiation, the farmer groups can call for a tender/auction to sell the accumulated cotton. The MoU clearly stipulates conditions to be followed in case of open tender/auction, and allows the coordinating agency to participate in the proceedings.The formula has built checks and balances into the system for early identification of trouble making farmers or willful defaulters and their elimination at an early stage to protect the interest of the group, the bank and the coordinating agency. This is the first time ever that a cotton farmer in India has been forwardly integrated to the consumer textile industry. By integrating backward and forward with the producing and the consuming communities, ACC has attempted to address all the existing maladies of the cotton supply chain. According to a leading ginner, who spearheaded the unique supply chain model, such a system is 'the need of the hour' not for the 'growth' of textile industry in India but for its 'very survival' given the imminent hardships and emerging challenges arising out of the perils of WTO (World Trade Organisation). The Appachi formula of contract farming has been so successful that the Tamil Nadu Government is now interested in replicating this formula in various cotton-growing districts of the State. Ugar Sugar's experience with barelyThe story of the Belgaum (Karnataka) based Ugar Sugar Works Ltd., which established a successful backward linkage with farmers of Northern Karnataka for supply of barley for its malt unit is quite interesting and insightful. Farmers surrounding Ugar Sugar in Belgaum, who had been cultivating sugar under intensive irrigation found themselves with the problem of salinity in soils. Ugar Sugar took this opportunity to begin creating awareness among the farming community about alternative crops suitable for saline soils. Of these, barley was known to give economic yields of good quality in saline soils. The company assured the farmers of a market for their produce if they agreed to grow barley, as well as the required technical and input support.All this happened way back in 1997, when the company required 5000 tons of barley annually for its malt unit. At that point of time, barley was cultivated on a commercial scale only in North India, which meant huge transportation cost for the company. Furthermore, such lots carried a mixture of feed and malt grade barley, which meant no surety of consistent quality raw material. The company had no land of its own to start barley production near its malt plant. This led to the birth of Ugar Sugar's unique contract farming system for barley production.After intensive research and field testing of over 800 varieties of barely, the company supplied UBE425 variety of barely to its 470 contracted farmers, who mostly owned between 2-5 acres land, were within a radius of 40 kilometre from the company's malt plant, and had resources enough to irrigate the crop at least twice during the crop cycle. The contract farming system helped Ugar Sugar to get barley with high starch, less protein (<12%) and homogeneity, at the right time, in required quantities, and the most competitive prices.
Key elements of Ugar's contract farming model
Contract Farming , By: E.V.Murray