1

Indian Institute of Plantation Management, Bangalore

CERTIFICATE

This is to certify that the Synthesis Paper titled “Smallholders

participation in contract farming and comparison with global

experiences” by Devesh Shukla submitted for the partial fulfillment of

PGDMABPM 2016-18 is an original work and no part has been submitted or

published for the award of any degree or diploma.

Comments by the Examiner :

Name of the faculty/guide

Mr. K. NARENDRAN

___________________________

Signature of the Examiner

Date: ______________

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INDEX

Sr. No. Particulars Page no

1. List of tables

02

2. Executive summary

05

3. Introduction

06

4. Advantages of contract farming

07

5. Problems of contract farming

09

6. Suggestion for contract farming model of agriculture in india

11

7. Reasons why smallholders participate in contracts

13

8. Comparison with global experiences

18

9. Conclusion

25

10. Reference

27

SUB INDEX 1. Introduction 06

2. Advantages and problems of contract farming 07

2.1 Advantages of contract farming 07

2.1.1 Advantages for farmers 07

i. Provision for better inputs and production services 07

ii. Easy access to credit 07

iii. Application of better technology 07

iv. Improvement in skills of the farmers 07

v. Guaranteed pricing system 08

vi. Easy access to reliable market 08

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2.1.2. Advantages for the sponsors

08

i. Political acceptability 08

ii. Overcoming barriers on land restrictions 08

iii. Production consistency and shared risk 08

iv. Quality assurance 09

2.2 Problems of contract farming 09

2.2.1. Problems faced by the farmers 09

i. Possibility of greater risk 09

ii. Outdated technology and crop incongruity 09

iii. Manoeuvring in quotas and quality specifications 09

iv. Corruption 10

2.2.2. Problems faced by the sponsors 10

i. Limitation on land availability 10

ii. Social and Cultural constraints 10

iii. Farmers disgruntlement 10

iv. Below quality agro-inputs 11

v. Sale of crops by the farmers beyond contractual agreement

11

3. Suggestion for contract farming model of agriculture in India

11

4. Reasons why smallholders participate in contract farming

13

4.1 Adoption of new enterprises 13

4.2 Reasons smallholders enter contracts 15

4.2.1 Access to markets 15

4.2.2 Access to credit 16

4.2.3 Managing risk 17

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4.2.4 Provision of information 18

5. Comparison with global experiences 18

5.1 National policies 19

5.2 Kenyan tea development authority (KTDA) 19

5.3 Ghana and Ivory Coast 20

5.4 Thailand 21

5.5 Malaysia 22

5.6 India 23

5.7 Mozambique 24

6. Conclusion 25

7. Reference 27

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EXECUTIVE SUMMARY

An agribusiness firm‟s choice to expand activities through contract

farming rather than plantations, buying directly from open markets or other

means reflects differences in transaction costs found in different types of

procurement systems. Smallholders may enter contracts to reduce

transaction costs of accessing new markets, borrowing, managing risk,

acquiring information or increasing employment opportunities. The success

of contracts reflects both the contracting environment and management

practices. The contracting environment includes the strength of markets for

contracted output, government macro policies, technical sophistication in

production and attenuation of land ownership while important management

elements are farm groups, selection of participants for contracts, managing

contract default and conflict resolution. Direct benefits from contracting

accrue to smallholders from improved access to markets, improved

technology, better management of risk and opportunities for employment of

family members. Indirect benefits occur from empowerment of women and

increased commercial acumen on the part of smallholders. Contract farming

has the potential to improve the welfare of smallholders however it is not a

sufficient condition for such improvement. Smaller farmers can be excluded

from contracts because of selection bias by agribusiness firms awarding

contracts to larger farms, be adversely affected by the second-round effects

of contracts on incomes and prices and suffer from narrowing of markets

that lie outside of contracts. Institutional developments that might

ameliorate this type of exclusion are anti-trust legislation, policies to directly

improve the contracting environment, policies to address specific problems

smallholders face in entering contracts and participation by NGOs in

contract facilitation.

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1-INTRODUCTION

“Contract farming is defined as an agreement between farmers and

processing and/or marketing firms for the production and supply of

agricultural products under forward agreements, frequently at predetermined

prices”.

The arrangement often involves the purchaser in providing a degree of

production support through, for example, the supply of inputs and the

provision of technical advice. For this arrangement to work the farmer commits

himself to provide a specific commodity in quantities and at quality standards

determined by the purchaser. The company on the other hand agrees to

support the farmer‟s production and to purchase the commodity.

A fundamental feature of contract farming is the shifting of risk from

producers to processors since it is a form of futures market. Production and

price risks are important features of poultry farming. Risk sharing is one of the

widely cited reasons for contracting. Numerous studies of contract farming

emphasize risk reduction as a principal incentive for producers to enter in to

contracts. Much of the price risk is reduced, in contract farming, by the use of

a predetermined price rather than the market price.

The modernization of agricultural value chains – the systems of agreements, arrangements, and contracts that link farmers to consumers of food, typically through one or more intermediaries – is both a consequence and

cause of economic development. Commercial demand increases due to income and population growth, urbanization, and trade liberalization.

Marketed supply rises simultaneously as a result of productivity improvements in production, post-harvest processing, and distribution systems.

The combination of increased commercial demand and supply has led to the emergence of modern marketing channels employing sophisticated

management methods, such as costly grades and standards or vertical coordination or integration of activities that profitably add value to raw

commodities through transport, storage and/or processing. Participant farmers – whose comparative advantage allows them to tap the latent demand of better-off or more distant markets made accessible by emergent

agricultural value chains - typically improve their productivity and profitability, thereby further stimulating commercial demand and supply.

The emergence and modernization of agricultural value chains (AVCs) thus result from and contribute to economic development.

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2-ADVANTAGES AND PROBLEMS OF CONTRACT FARMING

2.1ADVANTAGES OF CONTRACT FARMING

2.1.1. ADVANTAGES FOR FARMERS

The main benefit of a contractual agreement for farmers is that the sponsor

will normally undertake to purchase all produce grown, within specified quality and quantity parameters. Contracts can also provide farmers an

opportunity to access a wide range of managerial, technical and extension services that otherwise may be unattainable. Farmers can use the contract agreement as collateral to arrange credit with a commercial bank in order to

fund inputs. Thus, possible advantages of Contract Farming for farmers are given below –

i. Provision for better inputs and production services: For ensuring a proper crop husbandry practices in order to achieve projected yields in

required qualities many contractual arrangements involve considerable production support in addition to the supply of basic inputs such as seed and fertilizer. Sponsors may also provide land preparation, field cultivation

and harvesting as well as free training and extension.

ii. Easy access to Credit: With the collapse or restructuring of many agricultural development banks, the majority of small holder producers experience difficulties in obtaining credit for production inputs. Contract

farming usually allows farmers access to some form of credit to finance production inputs. Arrangements can also be made with commercial banks

or government agencies through crop liens that are guaranteed by the sponsor, i.e. where the contract serves as collateral. iii. Application of better technology: New production techniques are often

necessary to increase productivity as well as to ensure that the commodity meets market demands. However, small scale farmers are frequently reluctant to adopt new technologies because of the possible risks and costs

involved. Private agribusiness will usually offer technology more diligently than government agricultural extension services because it has a direct

economic interest in improving farmers production. iv. Improvement in skills of the farmers: The skills the farmer learns

through contract farming may include record keeping, the efficient use of farm resources, improved methods of applying chemicals and fertilizers, knowledge of the importance of quality and the characteristics and demands

of export markets. Farmers can gain experience in carrying out field activities following a strict timetable imposed by the extension service. In

addition, spill over effects from contract farming activities could lead to investment in market infrastructure and human capital, thus improving the productivity of other farm activities. Farmers often apply techniques

introduced by management (ridging, fertilizing, transplanting, pest control, etc.) to other cash and subsistence crops.

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v. Guaranteed Pricing System: The returns farmers receive for their crops

on the open market depend on the prevailing market prices as well as on their ability to negotiate with buyers. This can create considerable

uncertainty which, to a certain extent, contract farming can overcome. Frequently, sponsors indicate in advance the prices to be paid and these are specified in the agreement. Thus Contract Farming ensures guaranteed and

fixed pricing structures. vi. Easy access to reliable market: Farmers will not cultivate unless they

know they can sell their crop, and traders or processors will not invest in ventures unless they are assured that the required commodities can be

consistently produced. Contract farming offers a potential solution to this situation by providing market guarantees to the farmers and assuring supply to the purchasers. Even where there are existing outlets for the same

crops, contract farming can offer significant advantages to farmers. They do not have to search for and negotiate with local and international buyers, and

project sponsors usually organize transport for their crops, normally from the farm gate.

2.1.2. ADVANTAGES FOR THE SPONSORS The possible advantages for the sponsors are as follows –

i. Political Acceptability: Contract farming, particularly when the farmer is

not a tenant of the sponsor, is less likely to be subject to political criticism. It can be more politically expedient for a sponsor to involve smallholder farmers in production rather than to operate plantations. In recent years,

many African governments have promoted contract farming as an alternative to private, corporate and state owned plantations.

ii. Overcoming barriers on land restrictions: The majority of the world plantations were established in the colonial era when land was relatively

abundant and the colonial powers had little conscience about either simply annexing it or paying landowners least compensation. However, in present days most large tracts of suitable land are either traditionally owned, costly

to purchase or unavailable for commercial development. Contract farming, therefore, offers access to crop production farm land that would not

otherwise be available to a company, with the additional advantage that it does not have to purchase it.

iii. Production consistency and shared risk: Working with contracted farmers facilitates sponsors to share the risk of production failure due to poor weather, disease, etc. The farmer takes the risk of loss of production

while the company absorbs losses associated with reduced or throughput non existent for the processing facility. Where production problems are

widespread and no fault of the farmers, sponsors will often defer repayment of production advances to the following season. Both estate and contract

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farming methods of obtaining raw materials are considerably more reliable than making purchases on the open market.

iv. Quality assurance: A steady markets for fresh and processed

agricultural produce require reliable quality standards. Moreover, these markets are moving increasingly to a situation where the supplier must also conform to regulatory controls regarding production techniques, particularly

the use of pesticides. Both estate and contracted crop production require close supervision to control and maintain product quality, especially when farmers are new with innovative harvesting and grading methods.

2.2 PROBLEMS OF CONTRACT FARMING 2.2.1. PROBLEMS FACED BY THE FARMERS

The potential problems as confronted by the farmers due to Contract

Farming are given below- i. Possibility of greater risk: Farmers who were entering into a new

contract farming venture should be prepare themselves to assess the prospect of higher returns against the possibility of greater risk. Such risk is more expected when the agribusiness venture is introducing a new crop to

the area. There may be production risks, particularly where prior field tests are inadequate, resulting in lower-than-expected yields for the farmers.

Market risks may occur when the company forecasts of market size or price levels are not accurate.

ii. Outdated technology and crop incongruity: The introduction of a new crop to be grown under conditions meticulously controlled by the sponsor can cause disruption to the existing farming system. Again, the introduction

of sophisticated machines (e.g. for transplanting) may result in a loss of local employment and overcapitalization of the contracted farmer.

Furthermore, in field activities such as transplanting and weed control, mechanical methods may produce less effective results than do traditional cultivation methods. Therefore, Field extension services must always ensure

that the contracted crop fits in with the farmers total cropping regime, particularly in the areas of pest control and field rotation practices.

iii. Manoeuvring in quotas and quality specifications: Incompetent management can lead towards production exceeding original targets. For

example, failures of field staff to determine fields following transplanting can result in gross over planting. Sponsors may also have unrealistic expectations of the market for their product or the market may crumple

unexpectedly owing to transport problems, civil unrest, change in government policy or the arrival of competitors. In some situations

management may be tempted to manipulate quality standards in order to reduce purchases for honouring the contract. Such practices may cause sponsor-farmer confrontation, especially if farmers have no method to

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dispute grading irregularities. Therefore, all contract farming ventures should have forums where farmers can raise concerns and grievances

relating to such issues.

iv. Corruption: Problems occurs when staff responsible for issuing contracts and buying crops taking undue advantages of their position. Such practices result in a collapse of trust and communication between the

contracted parties and soon undermine any contract. In a large contract, the sponsors can themselves be dishonest or corrupt. Governments have sometimes fallen victim to dubious or “fly-by-night” companies who have

seen the opportunity for a quick profit. Therefore, in every case farmers who make investments in production and primary processing facilities run

the risk of losing everything. 2.2.2. PROBLEMS FACED BY THE SPONSORS

The possible problems as confronted by the Contract Farming Developers

are outlined below – i. Limitation on land availability: Farmers should have a suitable

cultivable land on which they are to cultivate contracted crops. But problems can arise when farmers have minimal or no security of tenure as there is a possibility of drainage in sponsorship investment as a result of

farmer - landlord disputes. Difficulties may also arise when sponsors lease land to farmers. Some contract farming ventures are dominated by

customary land usage arrangements negotiated by landless farmers with traditional landowners. While such a situation allows the poorest cultivator to take part in contract farming ventures, discrete management measures

need to be applied to ensure that landless farmers are not exploited by their landlords. Before signing a contract, the sponsor must ensure that access to land is secured, at least for the term of the agreement.

ii. Social and Cultural constraints: Promoting Contract Farming is a

cultural, customary beliefs and religious issues. In communities where custom and tradition play an important role, difficulties may arise when innovative farming is introduced. Therefore, before introducing new cropping

practices, sponsors must consider the social attitudes and the traditional farming procedures of the community and decide how a new crop can be

introduced.

iii. Farmers disgruntlement: Sometimes, situations may crop up which may leads towards farmer discontent; e.g. biased buying, late payments, incompetent extension services, poor agronomic counsel, undependable

transportation for crops, a mid-season change in pricing or managements impoliteness to farmers will all normally aggravate the relationship between

sponsors and the farmers. If not readily addressed, such circumstances will cause antagonism towards the sponsors that may result in farmers withdrawing from projects.

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iv. Below quality agro-inputs: Sometimes farmers are forced to use inputs

supplied under contract for the purposes other than those they were intended for. They may choose to utilise the inputs on their other cash and

subsistence crops or even to sell them. As a result contracted crops yields were reduced and the quality are affected. Improved monitoring by extension staff, farmer training and the issuing of realistic quantities of inputs can

resolve the matter successfully. Majority of farmers conform to the agreement when they have information that the contract has the advantages of technical inputs, cash advances and a guaranteed market. However, until

a project is very poorly managed, input diversion is usually an infuriation rather a serious problem.

v. Sale of crops by the farmers beyond contractual agreement: The sale of produce by farmers to a third party, outside the terms of a contract, can

cause major problem to the sponsors. However, extra-contractual sales are always possible when there is an alternative market. The outside buyers

offered cash to farmers as opposed to the prolonged and difficult collection of payments negotiated through the cooperative. Sometimes the Sponsors may encourage extra-contractual practices as there are several companies

working with the same crop (e.g. cotton in some southern African countries) and they could collaborate by establishing a register of contracted farmers. Managers must be aware of the situation when produce were sold outside

the project and also when produce from outside being forced into the buying system. This happens when non-contracted farmers take advantage of

higher prices paid by a well-known sponsor. Non-contracted crops are filtered into the buying system by outside farmers through friends and family who have crop contracts. Such practices make it difficult for the

sponsor to regulate production targets, chemical residues and other quality aspects.

3-SUGGESTION FOR CONTRACT FARMING MODEL OF AGRICULTURE IN INDIA Based on the above study, the following recommendations are made for an

improved Contract Farming Model of agriculture in India –

i. Present provisions of institutional arrangement to record all contractual arrangements should be made effective. The Panchayat or Gram sabha,

particularly in PESA areas or in case of Forest Right Holder communities, may be connected with this process. This will promote and strengthen confidence building between the parties and also help to solve any dispute

arising out of violation of contract.

ii. There should be a contract farmers association or cooperatives at the plant level which will improve bargaining power of the farmers and the sponsors and promote equality of partnership. It will also minimise the role

of middlemen or commission agents who are involved in marketing of the contract commodities on behalf of the company.

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iii. The selection of appropriate plant genotype is one of the crucial factors

for Contract Farming. Unless the plant material is of good quality and high yielding and also less prone to pests and diseases, the contract farmers may

lose their confidence and discontinue the cultivation of contracted crop. iv. Every contract farming agreement should have a provision for both

forward and backward linkages. Unless both input supply and market for the produce are assured, small farmers are not encouraged to participate in contract farming.

v. Bank finance to small and marginal farmers should be on easy terms.

vi. A sustainable contract farming requires adequate infrastructure facilities e.g. roads, public transport, telephones, postal services, stable power and

water supplies, cold storage facilities, etc. Therefore, it is the responsibility of the governments to provide the minimum necessary infrastructure

facilities like roads, electricity, cold storage, and market yards. vii. The contracts should be managed in clear and participatory manner so

that there is greater social consensus in handling contract violation from either side without getting involved in costly and lengthy process of litigation. Also the terms of contract need to be more comprehensive and

flexible.

viii. In many parts of the country, agricultural tenancy is legally banned, although concealed tenancy exists. Tenants who do not enjoy security of tenure are unable to participate in contract farming. Hence, legalisation of

tenancy is a prerequisite for the tenant farmers who will enter into contract farming. Although different forms of land tenants including share-croppers can be adopted to maintain the contract farming but security of tenure is a

must.

ix. As assured market of the farm motivates a farmer to enter into contract with a company, similarly market prospect for the processed products of the company should exist. Ultimately, it is the success of the company's product

in national or international market, which decides whether contract farming for any particular crop or commodity would sustain.

x. The government must ensure that contract farming, which is generally a commodity specific and tends to promote monoculture, does not grow

beyond certain limit which will destroy biodiversity and agricultural ecology. xi. The Central Warehousing Corporation and the State Warehousing

Corporations should develop commercially acceptable quality standards in respect of various commodities in order to ensure quality maintenance of

the stored goods over a sufficiently longer period of time.

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xii. Updated database of contract farmers along with other relevant details such as the area & crops under contract, contracting agency, etc. should be

maintained at various state levels and should be available to the public through an website.

xiii. Agreements written in vernacular language should be given priority so that the local farmers can understand the terms of contract. To suite the

other party, it can be made bilingual. Standard formats for farmer-friendly agreement should be designed and mandated by the governments.

xiv. Contract Farming in lands recognized under Forest Rights Act is a virtual control of a person or agency other than the right-holder

himself/herself and this lead towards violation of the spirit & mandate of the Act; therefore governments should take protective measures in this context.

xv. Liability of the contractor for any environmental losses should be fixed by the government, and in case such losses occur, the penalty realized in a

proportionately appropriate amount should be spent for restoring the concerned area, preferably through the local Palli sabha/Gram sabha.

4-REASONS WHY SMALLHOLDERS PARTICIPATE IN CONTRACT FARMING Contracts are initiated by those who write them and, as discussed above,

agribusiness firms write contracts to either increase profits by expanding operations or reduce profit variability by diversifying supplies. However, if

contracts are to work, they must be attractive to potential contractors. Hence, contracts struck with smallholders need to increase farm profits or reduce risk exposure.

4.1 ADOPTION OF NEW ENTERPRISES

A farmer considers three factors prior to undertaking a new enterprise or substantially changing the way an existing enterprise is pursued. These are

revenue implications, cost implications and any additional exposure to risk that might arise from the new activity. In principle, a contract does not need to improve revenues to be attractive if revenue losses are more than fully

offset by cost savings. However, researchers have yet to report examples of contract farming involving expected reductions in revenue and increasing

revenue is likely to be important. Two types of farm costs are relevant to adoption opportunity costs and input

costs. Opportunity costs occur with a new activity because other on-farm or off-farm activities may need to be curtailed. In essence, new enterprises

„crowd out‟ existing activities resulting in lost income (or its equivalent in utility) from these sources. Hence opportunity costs reflect how resources such as labour, land, buildings and machinery are used in existing on-farm

and off-farm enterprise or in leisure or community activities. Labour may be used to generate income or diverted to leisure or community activities. Land

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is likely to be used for other cropping or livestock purposes or rented out, sheds may be used for on-farm activities such as grading, processing and

storage or for industrial piece-work and machinery can be used either on the farm or rented out.

Two considerations are relevant to evaluating opportunity costs. First, it is important whether the input is constrained in the sense that more of it

cannot be purchased or obtained through negotiation with third parties. For example, if land can be rented in then the opportunity cost of land used in a new contractual enterprise equals its rental value. In contrast, if extra land

is not available and the smallholder is „land constrained‟, then the opportunity cost of land in a new contract equals the gross margin of the

existing on-farm activity that is curtailed to accommodate the contract. Smallholders may be constrained with other inputs. Hiring in of additional labour may be impossible because it is unavailable and credit may be

unavailable because the smallholder has no collateral.

The second consideration in evaluating opportunity costs concerns farm inputs that have zero or very low value for the smallholder. De Janvry , Fafchamps and Sadoulet (1991) extend the theory of „shadow pricing‟ to

farm input markets where inputs such as land and labour cannot be used because of high transaction costs. An example is where a farm family has surplus labour because it cannot rent in more land to provide employment

for family members and things like travel costs, availability of work, social factors or cultural beliefs prevent off-farm work. In this situation, even

though the village day rate for labour may be Rs.100,000 the shadow price for the family‟s labour is zero or very low reflecting only subjective valuation of leisure time or participation in village activities. In this sense, the family

has a reservation price for its labour, say Rs.50,000 per day, that is never met by the market after transaction costs are The second type of cost is expenses incurred in purchasing farm inputs. Such expenses include hired

labour, machinery, seed, chemicals, storage, marketing and rented land. A new enterprise must increase total farm income if it is to be a candidate for

adoption by the smallholder .subtracted and hence family labour is under-utilised. Relatively low shadow prices can occur in more subtle ways with land where social factors prevent certain types of activities. An example of

social transaction costs in land use is wealthy land owners in Pakistan producing livestock, never crops. Clearly, if a farm contract can provide

employment for resources that have very low shadow prices then it will be attractive to the smallholder.

Increasing total farm income requires expected revenues to be greater than purchased input costs plus opportunity costs. Adoption also requires farm risk remain at acceptable levels hence the effect of the new enterprise on

stability of income is important. How farmers respond to uncertainty is contentious however elements of the problem are captured in safety-first

theory, where smallholders will not expose themselves to the risk of their income falling below some minimum threshold level. Farm bankruptcy is relatively common in developed countries where its consequences are

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serious though not necessarily dire. In developing countries losing land can be dire and empirical evidence shows developing country farmers generally

take more conservative account of uncertainty than developed country farmers.

4.2 REASONS SMALLHOLDERS ENTER CONTRACT FARMING

Agribusiness firms are likely to have four areas of strategic advantage that allow cost savings to be conferred on smallholders through contracting :

They may provide services for managing on-farm risk.

They may have access to product markets where high transactions costs effectively prevent smallholder access.

They may have access to relatively inexpensive credit where, for a range of reasons, smallholders face high interest rates or have no

access.

They may provide information on extension, logistics and marketing at

relatively low cost. 4.2.1 Access to Markets

Recent expansion of contract farming is often viewed as part of the broader

globalisation phenomenon whereby removal of trade restrictions has led to increased flows of agricultural products, especially from developing to developed countries . Runsten (1992) documents a range of contracts since

1989 for HVF crops including strawberries, melons and frozen vegetables processed in Mexico then exported to the United States by both domestic and multi-national agribusiness firms. Goodman and Watts (1997)

document the development of contracts, alongside other multi-national activity, for pineapples and bananas from Central American countries for

export to the United States and Europe. Glover and Kusterer (1990) document similar activity in Central American countries and Porter and Phillips-Howard (1997) examine a range of new types of contractual

arrangements involving international trade from Africa.

Agribusiness firms are instrumental in „opening‟ markets for smallholders in all of these studies. These firms have advantages over smallholders in market knowledge and experience, information links, legal expertise,

economies to size in processing and transport and have the financial muscle necessary for sustaining international trade relationships. From a smallholder perspective, in the absence of contracts these markets are

„missing‟ in the sense that transaction costs of accessing them on a small scale are effectively infinity.

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4.2.2 Access to Credit

Non-traditional crops are more costly to produce than traditional crops and cash requirements for farm inputs are usually relatively high. This is

because HVF crops often require specialty inputs and have more exacting quality requirements requiring sophisticated technology and flexible use of labour and chemicals. Hence, smallholders need access to credit to

undertake production. Many smallholders are credit constrained in the sense they have no access

to credit at all. Alternatively, if access is available they face high interest rates, often three to four times the bank rate, from local moneylenders or

excessive transaction costs if they use bank credit. High interest rates reflect relatively high costs faced by local moneylenders in sourcing funds and servicing borrowers who do not have collateral. Titles to land may be

traditional rather than legal and court processes slow, expensive or ineffective so that small loans are not worth pursuing legally. In this

situation, a moneylender is limited to collateralising the smallholder‟s desire for future loans and, since they are often part of the same community, may face social pressure to be benevolent when repayments are delayed by bad

seasons or exigencies such weddings and funerals. These high costs are passed on to borrowers by moneylenders in the form of high interest rates. When smallholders seek credit from agricultural banks or micro-lenders,

transaction costs are high. On even small loans they may face forced purchases, loan delay costs, travel costs, application fees, legal service costs

and collateral titling costs .There are several areas of potential savings for agribusiness firms in providing credit. If the firm is large and well established it is likely to obtain funds at normal business rates. A large firm

may also have advantages over moneylenders in management of risk because of the size and diversity of its loan portfolio. That is, investing in a large number of small cash advances allows diversification of lending risk

either across participants in a particular contract or across participants in a number of different commodity contracts or activities. The agribusiness firm

also has lending advantages by virtue of its contract. A contract allows monitoring of input use, a degree of control over crop management decisions that might jeopardise repayment and can specify how cash advances are to

be repaid. Also, contracts require delivery to the firm hence cash advances can be deducted from post-harvest cash settlements. Other loan protection

devices include making future contracts depend on meeting repayment clauses in current contracts and making loans in the form of specialised agricultural inputs rather than cash. Finally, there may be no other local

market for the contracted commodity than the agribusiness firm thus ensuring diversion of collateralised farm output cannot occur. These factors reduce the need for collateral and mean that agribusiness firms are likely to

incur lower costs than moneylenders which can be passed on to smallholders through contracting.

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4.2.3 Managing Risk

Farmers in developed countries have three basic approaches to the management of risk. First, they can diversify over both on-farm and off-farm

enterprises offsetting losses in one activity against gains from other activities. Second, they can smooth income over time by adjusting savings and borrowings to offset low and high income years. Third, they can use

futures or forward markets or crop insurance policies covering price and yield variability to reduce risk.

In contrast, developing country smallholders have limited strategies for managing risk. Diversification on the farm offers prospects for income

smoothing however yield risk may be correlated across enterprises if seasonal conditions are the major determinant of crop yield.

There may be scope for scattering plots across a district to diversify yield risk or finding off-farm work or entrepreneurial activity when farm returns are down. Restrictions facing smallholders in credit markets associated with

high interest rates and lack of access, discussed above, limit the scope for using borrowings to supplement income in bad years and smoothing income

over time. Finally, sophisticated markets for insurance, such as crop insurance and forward and futures markets, usually do not exist in developing countries and remain the province of wealthy farmers who can

access international hedge markets. Hence, given the difficulties smallholders face in shifting risk, it is not surprising risk aversion is central

in smallholder decision making and particularly so in adoption of new crops and technologies.

Entering a contract may mitigate or exacerbate smallholder risk. If upfront investment is required then failure of either the crop or the contract results in loss. Alternatively, if the contract works and becomes integral in the farm

plan then it constitutes a form of diversification and may reduce risk providing it does not dominate the farm plan.

Agribusiness firms could hedge some price risk for HVF products in options and futures markets to protect their own forward commitments and provide

upstream protection to smallholders. However, there is not convincing evidence firms actually do this by putting price guarantees in contracts. We

found from interviews with Indonesian smallholders that contracts for seed corn, Mangosteens and ginger stipulated prices based on market prices at time of delivery.

Thus, opportunities for reducing smallholder risk through contracting include diversification into a new crop with price movements largely

independent of those for traditional products, reduced risk associated with start-up costs and seasonal operating costs met be the firm through

subsidies at start-up and forward payments and reduced yield risk from the firm‟s extension activities.

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4.2.4 Provision of Information

Information can be expensive to gather and is not depleted by use. Hence an

agribusiness firm spreading information over many contracts has advantages in providing crop specific information over smallholders gathering their own information. Most contracts described in Glover and

Kusterer (1990) included visits by firm extension officers to either individual farmers or farm groups several times during the first year of the contract but often less in later years. These visits combined dissemination of

information with suggestions about management as well as providing firms with feedback on issues between themselves and growers. Most developing

countries have government extension services to disseminate information about traditional crops however, given the limited nature of developing country government resources, these agencies are unlikely to provide

specialised information about new crops. Such specialised information may concern chemical restrictions related to food safety requirements in specific

markets, timing of planting and harvest to meet markets, management of product quality and other market and technical information.

5-COMPARISION WITH GLOBAL EXPERIENCE

This section will examine some national policies on outgrower schemes

(their possible contradictions) and some case study evidence on successful schemes. Most contract farming and outgrower schemes have both private and public sector involvement, although the public sector tends to be more

involved in the latter. It is likely that public sector involvement, whether in direct management or in supportive policy, will be necessary if outgrower

and/or contract farming schemes are extended to tree farming. For example, transnationals, as well as „development‟ organisations like CDC are reluctant to invest in projects that have a slow maturation period or to

finance contract growers themselves. State development banks have taken on part of this role but for this they need to formulate means of enforcing loan repayments; appropriate interest rates and compensation for assuming

financial risk. The role the government will play is of course dependent on the specific configuration of power within the country. Insofar as most

contracts in African agriculture are mediated by state sponsorship – through actual state investment in processing plants, expropriation of land for use by transnational corporations, setting of prices, enforcement of contracts,

and recruitment of labour and smallholders or simply by the state‟s agreeing to provide such basic needs as roads, schools, clinics, and housing in order to make contracting more attractive – the state becomes enmeshed in the

social relations of production. In so doing, the state becomes more than an impartial mediator: „it becomes an important battleground for competing

interests in the contracting arrangements‟. It is probable that agribusiness companies will have greater political influence than growers, and that governments may not even have much choice in how they deal with the

problem of smallholder welfare. However, there is evidence that some governments have intervened on behalf of smallholders through for example,

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price stabilisation, guaranteeing debts or trying to obtain better contract conditions and services for smallholders.

5.1 NATIONAL POLICIES

Smallholder schemes are attractive to many governments because it appears to provide an avenue whereby small farmers can enter commodity

production on favourable financial terms. It also provides a useful mechanism for a variety of explicit and implicit political objectives such as earning foreign exchange, moving populations to new settlements,

redistributing land and gaining the political support of the middle peasantry. Most national governments became involved in smallholder

schemes and/or in taking over plantations after Independence. In almost all countries where there had been plantations, governments are using tax incentives and credit facilities to influence the plantation sector in line with

development objectives. The most common form of public sector support for contract farming manifests itself in a „nucleus estate‟ which encourages the

expansion of smallholders around it. In some cases, the plantation itself provides finance training and technology. For example, the United Planters Association of India has a joint program with the Tea Board of India to assist

smallholders. In Indonesia, the Nucleus Estates Smallholders Program has made the market for palm oil and tea accessible to smallholders. In the Ivory Coast, smallholdings – called „Plantations Villageoises‟ – are expanding

around the large industrial complexes created by government for the exploitation of rubber and palm oil. National policies have also tried to

diversify, at a national level, in order to break monocrop dependence and to make contract crops less risk intensive for smallholders. The Philippines, for example, introduced more crops such as coffee, banana, and pineapple to

break dependence on sugar. In Malaysia during the 1960–70s there was a shift from rubber towards palm-oil, although rubber recovered its leading role in the 1980s when it was decided the competitive position of synthetic

rubber would not decline. Most smallholder programs have government support the case studies below will examine different policy approaches and

the reasons for their success and failure. 5.2 THE KENYAN TEA DEVELOPMENT AUTHORITY (KTDA)

Kenya has a large plantation sector co-existing with the largest and most

effective smallholder sector in Africa. The Kenyan example is interesting to consider for this reason. It has an extremely high rate of population growth (over 4% a year) and is fast approaching a land frontier with alarming levels

of poverty, underemployment and malnutrition. Labour is in surplus and will continue to increase with population growth in the absence of alternative sources of non-agricultural employment. By the mid-1980s more

than 230,000 households were involved in the contract production of tea, sugar, oilseeds, tobacco and horticulture. About 15.5% of all Kenyan

smallholders produce under contract accounting for 40% of tea, 50% of sugarcane, and 80% of tobacco production. The centre of the contract system, and the most renowned part of it is the sugar and tea sectors, both

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dominated by large parastatals. Tea was first planted in the 1920s on plantations. Since then the tea output has increased by 700% with a large

part of it smallholder contribution. For the last three decades this growth has been steered by KTDA which was established in 1964.

The development of contract farming, and the implications for the replication of this development have to be understood in the political history

of Kenya. The white settler class which ruled the Kenyan colony, had secured the legislative right to ban peasant production of export crops and to confine Kenyan peasants to crown reserves. The imposition of regulations

on production and the expulsion of tenants led to the Mau rebellion in the early 1950s. This was in effect a political emergency and the colonial state

targeted tea and pineapple as peasant crops, and after Independence in 1963, the expansion of peasant commodity production. The expansion of tea, coffee, sugar and tobacco was overseen by the state, and later CDC and

the World Bank. Watts (1990) argues that the expansion of smallholder tea production is best understood by examining the political motives that

underscored it. „In this sense, it is no surprise that in the case of tea, the contract crop par excellence, more than half of smallholder production was located in the Central Province, the overcrowded reserve that both spawned

the nationalist revolt against the British and provided the political bedrock of the Kenyatta regime in the postcolonial era‟.

More serious than the above is the claim that KTDA has concentrated resources in one area and concentrated on relatively prosperous

smallholders. The income effects for the Kenyan tea smallholder are positive with above average standards of living in a normal year. The KTDA has drawn heavily on government resources and imposes direct costs on the

government for salaries, which are not recovered from the tea growers. They are also able to draw on the best extension staff. Further, smallholder cash crop production may not be the best option for the rural poor. First, they

cannot join if they do not have enough resources of land and secondly, the wages paid by smallholders are amongst the lowest in Kenya. Some

commentators have pointed out that plantations are actually better for the rural poor because they are more productive and therefore more labour intensive.

5.3 GHANA AND IVORY COAST

Contract farming of oil palm in the Ivory Coast and Ghana provides an interesting comparative study. Both the Ivory Coast and Ghana had a

tradition of oil palm production and a growing gap between internal demand and supply at the time of Independence. The two countries both had an interest in the potential contribution of the projects to their post-

Independence import-substitution. Both states have a political agenda with smallholders and both brokered the relationship between agribusiness and

smallholders. In both states, the organisational model chosen was the nucleus-estate smallholder combination. However, the comparison reveals

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the extent to which the terms of the contract and smallholder collective action are dependent on the political space given by the state.

The development of the modern oil palm industry in the Ivory Coast started

in 1963. The Plan Palmier outlined a program for the establishment of state owned nucleus estates (plantations agroindustrielles) and land belonging to contracted smallholders (plantations villageoises). Funds provided by the

World Bank and the European Development Fund played an important role in enabling the implementation of the plan. The state released forest reserves established by the colonial estate for the new plantations and

created a land tenure system whereby anyone working the land could have title to it. This land tenure system was enforced by traditional elites and

government institutions. By 1984 the estates, operated by the parastatal Palm industrie, constituted 60.3% of the area devoted to oil palm production and 39.7% was constituted by contracted smallholders. Intercropping was

prohibited. Peasant producers were offered government subsidies, cash advances and good prices, which reflected the high prices for palm oil in the

world market during the 1960s and 1970s. Contracted smallholders were also given a six-year grace period before they had to begin repayment of their debts so participation in the scheme did not require a cash outlay. The

average size of smallholding is 4.41 hectares and smallholders must be able to show that the land is commensurate with their labour power and management skills. Security against smallholder default and continuity in

oil palm production, are secured through a provision which ties heirs to the loan obligations of the contracted farmer. This was made possible for many

by the government policy on immigration that ensured a flow of cheap labour from the Sahel in particular.

The development of the contract and the reaction of the contracted smallholders in both countries to deteriorating terms of trade. In the Ivory Coast, peasant resistance took highly individual forms, the diversion of palm

nuts to the open market, neglecting trees and not replanting which has led to the under utilisation of plant capacity. These individual responses have

not been effective in changing the producer price structure. In Ghana, the smallholders have formed an association known as SHAK which has emerged as a voice for the smallholders dealing with a number of issues

including production related matters such as the need for seedlings, timely collection and proper weighing. The issue of food availability and services

such as methods of transporting food has also been successfully taken up by SHAK.

5.4 THAILAND Thailand has extensive experience of contract farming with the highest

degree of private sector involvement and foreign direct investment. Contract farming has been a central component of the government development plan

and its strategy of integrated agricultural development generated through the private sector. The contract farming model used, is one in which private firms supply farmers with inputs, credit and technical assistance and

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purchase the farmers outputs. The major role played by private firms in contract farming, is largely due to a credit extension policy that requires

commercial banks to extend 20% of their total deposits in rural credits. Commercial banks have preferred to do this through contract farming as

opposed to direct loans to smallholders as this reduces the credit risk. The proliferation of contract farming is part of a larger national agrarian

restructuring which has shifted Thai agriculture from its traditional dependence upon primary commodities to an integrated agro-food system. However, contract farming has not done very well in Thailand. Public

outgrower schemes have never been attempted which reflects Thai agricultural policy of introducing policies that affect the agricultural sector

(such as the rule on credit) without intervening directly. Most private contract farming schemes have failed. In some cases early successes in contract forestry were not sustained as firms switched from artificially

supported terms designed to attract growers to more realistic terms. But the failure of contract farming in Thailand is better explained by the competitive

market. The growers and contractors both have multiple potential business partners, products and non agricultural income sources. These do not meet the condition of quasi-monopsony which appears crucial for contract

farming. Contractors fear that growers will apply inputs supplied for contract crops to non-contract crops and contract defaults are the rule rather than the exception. Growers can survive in fluctuating markets by

shifting to new buyers or products and capitalising on short term export opportunities. Farmers invest revenue from boom periods in new crops or

non-agricultural activities, including real estate, and are able to survive in this way. The preferred mechanism for both Thai contractors and growers to cope in this fast market is the quotaman. This is an intermediary who is

able, through personal contacts, to provide access to small producers when necessary without the formality of a contract. Companies can diversify their sources of supply and rely on several quotamen to spread their risks.

Quotamen are also better able to judge a growers creditworthiness and their margins are not cut by tax. Contract farming in Thailand has failed because

the success of the agricultural sector in Thailand. 5.5 MALAYSIA

The Malaysian experience of contract farming is characterised by heavy

public sector involvement in land settlement-outgrower schemes and reliance on traditional tree crop exports like rubber and palm oil. The responsible public sector body is the Malaysian Federal Land Development

Authority (FELDA), established in 1956. The Malaysian case is interesting because it has had a long experience with outgrower schemes; many schemes are now in the second crop cycle and second generation of farmers.

FELDA has set up 442 schemes, covering 714,945 hectares and involving more than 100,000 families. The schemes were designed to settle new lands

and to produce a prosperous export-oriented Malay peasantry. Ghee and Dorral (1992) have evaluated the schemes as successful, with a notable success in increasing farmer incomes, long waiting lists of applicants, and

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an annual economic return of 20%. The yields which have been achieved on FELDA schemes are impressive, they match those of plantations for rubber

and in the case of oil palm exceed those of outgrowers by 30–300% . The contract system itself is very complex and still in a state of development. The

settlers are allocated 4 hectares of land to manage which are situated in a larger management block. The system in the 1960s was that settlers were given title to land but a minimum of institutional support and inputs. This

system led to poor husbandry and was changed a decade later to a system whereby settlers were assigned to blocks for cooperative work. The settlers arrive 18 months after planting and are allocated 4 hectares each, arranged

in blocks of 100 for cooperative work. These plots are managed under the supervision of a field assistant and are worked in a regimented way under

his control. On maturity, the holdings become the responsibility of individuals and the field assistant becomes an extension worker. The growers receive title to the land once they have repaid their debt. It was

thought that peer pressure would induce the settlers to work, but absenteeism and subcontracting to illegal Indonesian workers became a

problem. The latest system under consideration is one of share ownership instead of land ownership.

5.6 INDIA The Indian data come from a survey of 825 farmers covering five commodity

sectors: cotton, gherkins, marigold, papaya, and broiler chickens. The study area – nine administrative districts in the southern state of Tamil Nadu – is

heterogeneous in its agro-ecological conditions, physical features, and levels of socioeconomic development, spanning districts that are among the richest as well as the poorest in India. The survey was conducted in two phases

between 2007 and 2010. The list of contracting farmers for the year of the survey was obtained from one contracting firm in each of the commodities studied. Based on this list, all the villages in the sample area were divided

into contracting villages or non-contracting villages. A similar exercise was carried out for the larger administrative units, blocks and districts. Starting

from the largest administrative unit for the study area, contracting districts were sampled, within which contract and non-contract blocks were randomly sampled and then further on, within sampled blocks, contract and

non-contract villages were sampled. In the villages sampled, a census house listing identified four key types of farmers: those currently contracting; those

who grew the contract crop but for the open market or for other firms; those who had given up contracting and those who had never contracted. The sample respondents were randomly selected from each type. Gherkins are a

nontraditional export crop with no domestic markets. The crop is procured from farmers and processed at small-scale plants by washing, rinsing, and preserving in brine, acetic acid, or vinegar. Gherkins are then either bottled

and labeled for international clients or shipped in barrels for bottling. Cotton is a traditional cash crop in parts of the study area, with established local

markets and networks. Recent years have seen mills integrating along the garment chain and extending backward to contract with farmers for good quality, long staple cotton for milling. Papaya was introduced in the region

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in the 1990s for extracting papain, an enzyme whose industrial uses range from making meat tenderizer to treating insect bites and other wounds. The

variety is not ideal for table consumption, and the fruit is used to make candied fruit or puree. Marigold contracting was initiated by firms for

oleoresin extraction for export, mainly as colouring agent for poultry feed. Marigold, however, has a thriving local market as a flower used for a number of ceremonial occasions, religious and otherwise. The broiler

chicken industry is almost completely vertically integrated in the study region, a process that began in the mid-1990s. In this case, day-old chicks are provided by the firm and bought back. The firm acts as an aggregator

but also has its own brand of chicken in various processed forms.

5.7 MOZAMBIQUE The Mozambican data come from the official agricultural household survey

produced by the Mozambican Ministry of Agriculture with the assistance of Michigan State University . The balanced panel for 2002 and 2005 consists

of 3480 households. The sample is based on the Agricultural and Livestock Census from 2000, using the standards of the National Statistics Institute. The sampling design aimed at evaluating rural production and incomes

representative of rural small- and medium-holders at the provincial and national level. The survey collected detailed information on household characteristics welfare indicators landholdings, employment types, and

remittances as well as detailed information regarding farming practices, crops grown, harvested and sold, and livestock, assets, and incomes. In

addition, a community level survey for both years collected information on marketing, prices, and infrastructure. The focus of on which this paper draws, is on the impact of farmer groups on smallholder marketing

behaviour and welfare, although only a limited share of agricultural marketing in Mozambique during this period was through CFAs. Because of the perceived importance of farmer groups for connecting smallholders to

CFAs, the insights of this study contribute directly to the broader meta-narrative.

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6-CONCLUSION

The rapid transformation of agricultural value chains and spread of CFAs with the rapid rise of Super markets, fast-food chains, and other retailers with downstream market power, along with a more prominent role for global

agro-exporters, is one of the more important and fascinating agricultural development phenomena of the past few decades. The relatively high upfront

investment required to participate in modern markets is a challenge to participation of smallholders, however. In the same way that much of the early Green Revolution literature focused on limited small farmer uptake of

improved seeds, fertilizer and other components of “modern” production systems, a large share of the emerging literature on modern value chains has been concerned with smallholder participation in CFAs and with

whether these same value chains might be leaving many poorer farmers behind.

This is perhaps unsurprising given that, historically, market sales of food have been heavily concentrated in the hands of a small number of

producers, even in regions and countries with broad-based market participation. Although most of the evidence comes from staple grain

markets, a relatively small group (i.e. less than 10 percent) of relatively well-capitalized farmers located in more favorable agroecological zones accounts for a significant majority of market sales throughout the world (Barrett

2008). This suggests that gains from agrifood value chain transformation accruing to net sellers in the form of higher profits will likely concentrate in the hands of a relatively modest share of the farm population in the

developing world, although there is presently scant hard evidence on this important point.

Most empirical studies of the welfare effects of CFA transformation and participation have struggled to establish causality, i.e. to ensure that the

estimated impacts on welfare can truly be ascribed to CFAs rather than to unobserved factors. To be sure, most such studies suggest that participating farm households enjoy higher levels of welfare. Few studies, however, have

credible controls for the nonrandom pattern of geographic placement of firm contracting and of firm selection of individual suppliers into specific

commodity value chains, raising serious questions as to whether the observed associations between farmer income and participation, for example, reflect the welfare effects actually caused by the value chain

transformation or merely placement and selection effects.

The good news is that some progress is being made in this area as researchers have begun exploiting panel data designs, credible instrumental variables for participation in CFAs, and randomization of interventions to

properly control for exogenous drivers of both welfare changes and CFA participation.

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Yet much more remains to be explored. In particular, we know little about the effects of participation on potentially more durable and transformative

gains associated with improved nutritional status and educational attainment by smallholders children and smallholder households

accumulation of productive assets. Likewise, more needs to be done to determine whether the emergence of modern value chains shifts power within the household, for example whether men take over crops traditionally

cultivated by women once they become profitable, or grab wives land as it becomes more valuable for cash cropping, although Raynolds (2002) shows that in the Dominican Republic, CFAs for tomatoes increase the demand for

women‟s paid labor.

This paper has synthesized the findings from some countries – Ghana, India, Malaysia, Thailand and Mozambique – to inform a conceptual work of the determinants and dynamics of smallholder participation in CFAs and to

begin to tease out a meta-narrative describing and explaining patterns of participation and effects that are too often elusive in a literature heavily

dependent on smallscale, one-off case study evidence. I hope that this synthesis paper helps spur further integrative modeling and analysis of the distributional implications of accelerating structural transformation in the

agricultural marketing channels of the low-income world.

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reference to India”, Indian Journal of Agricultural Marketing.

3.Kumar J. and Kumar P.K. (2008), “Contract Farming: Problems, Prospects and its Effect on Income and Employment”, Agricultural Economics Research Review.

4. Nakhat,A.N. (2004), “Contract faming: Towards low risk and high gain agriculture”, Agriculture Today. 5. Swain P.K., Kumar C. and Raj Kumar C.P. (2012), “ Corporate Farming

vis-a-vis Contract farming in India: A critical perspective”, International Journal of Management and Social Science Research,

6. Fold, N. and K. V. Gough (2008). From Smallholders to Transnationals: The Impact of Changing Consumer Preferences in the EU on Ghana‟s

Pineapple Sector. 7. Bijman, J. (2008). “Contract Farming in Developing Countries: An

Overview.” Working Paper, Wageningen University.

8. Kirk, C. (1987), Contracting out: plantations, smallholders and transnational enterprise, IDS Bulletin .

9. Shojarani B.N. (2007 ), “Globalization and Contract Farming in India-Advantages and Problems” at dspace . iimk . ac . in bitstream

/2259/520/1/637-647+.pdf accessed on 14th December, 2014

10. Dr. Manas Chakrabarti “ An empirical study of contract farming” international Journal of Informative & Futuristic Research (IJIFR)On Contract Farming In India

11. http://www.icar.org.in

12. https://en.wikipedia.org/wiki/contract farming

Prospects of Contract Farming in India

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5.2. Problems of Contract Farming5.2. Problems of Contract Farming

5.2. Problems of Contract Farming

5.2. Problems of Contract