IGIDR Proceedings/Projects Series PP-069-10b Contract Farming for Agricultural Development in India: A Small Holders Perspective Sukhpal Singh Workshop on POLICY OPTIONS AND INVESTMENT PRIORITIES FOR ACCELERATING AGRICULTURAL PRODUCTIVITY AND DEVELOPMENT IN INDIA NOVEMBER 10-11, 2011 India International Centre, New Delhi Organised by Indira Gandhi Institute of Development Research, Mumbai Institute for Human Development, New Delhi Supported by Planning Commission Food and Agriculture Organization The World Bank
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Contract Farming for Agricultural Development in India: A Small Holders Perspective
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IGIDR Proceedings/Projects Series PP-069-10b
Contract Farming for Agricultural Development in India:
A Small Holders Perspective
Sukhpal Singh
Workshop on
POLICY OPTIONS AND INVESTMENT PRIORITIES FOR ACCELERATING AGRICULTURAL PRODUCTIVITY
AND DEVELOPMENT IN INDIA
NOVEMBER 10-11, 2011
India International Centre, New Delhi
Organised by
Indira Gandhi Institute of
Development Research, Mumbai
Institute for Human Development,
New Delhi
Supported by
Planning Commission
Food and Agriculture
Organization
The World Bank
1
Revised
Contract farming for sustainable agricultural development in India: A
smallholder perspective
Sukhpal Singh*
1. Introduction
With the liberalisation and globalisation of food and fibre markets in the developing
world including India, there is renewed corporate business interest in agriculture in
the form of corporate involvement in food processing, agro-exports and retailing as it
is seen as an unattended sector by those with capital and technological and managerial
resources. With the gradual withdrawal of the state from agricultural markets (due to
the Amendment of the Agricultural Produce Marketing Committee (APMC) Act in
2003 in India under which now private markets can be set up, and contract farming
(henceforth CF) with and direct purchase from farmers are legal) and emphasis on the
role of private sector for bringing efficiency and growth to the sector, space is being
provided to corporate and multinational agencies in the form of opening up of
procurement, wholesale trade, and retailing. The mechanisms being allowed and
promoted are CF, public private partnerships, retailing and wholesaling. It is argued
that the sources of trouble in farm sector are in the supply chains of the sector which
can be improved by corporate involvement and investments. In this policy
environment and in the context of low growth of the farm sector and prevalence of
farmer distress in large parts of India, domestic corporates have made forays into the
retail sector and in perishable produce CF in the last decade and many foreign
supermarket retailers (Metro, Wal-Mart, Tesco, Carrefour) have entered wholesale
cash & carry sector (permitted since 1997) as Foreign Direct Investment (FDI) in
retail is still restricted to 51% of the total equity and, that too, in single brand retail
only (permitted only since 2010). This restriction has kept the foreign supermarkets at
bay though most of them are present in wholesale and are setting up systems of
procurement in the hope that retail will be opened sooner than later. In this context,
this paper examines the role of CF and domestic supermarket retail chain linkage in
sustainable agricultural improvement in terms of risk (production and market)
reduction from a smallholder perspective so that policy issues and implications could
be deciphered. It reviews the state of the art in CF in India and examines the degree of
smallholder involvement in CF. The next section (2) profiles the concept and context
of Indian agriculture and major problems of smallholders in India followed by
practice and performance of CF and retail linkages from smallholder perspective
including evidence of their exclusion (section 3). The paper then examines
mechanism of inclusion of smallholders and leveraging of new arrangements of CF
and food supermarkets (section 4) and concludes in section 5.
2. Context and Issues
Small farmers with holdings of less than 2 hectares (hereafter ha) accounted for
85.9% of all operational holdings in 2002/03, and 42% of the total cultivated area in
India (table 1). Large holdings (>4 ha) declined to only 6.4% by 2000/01 and
accounted for 37% of the area. The average holding size came down to 1.32 ha in
2000/01, with the average size of marginal holdings being only 0.4 ha and that of
------------
*IEG Delhi
2
small holdings 1.41 ha (Sharma, 2007). By 2003, the average size of the holding
further came down to 1.06 hectares (EPW, 2008). Of the total, 64% are marginal (i.e.
below one ha each) and 18% small holders (i.e.1-2 ha each). The small and the
marginal farmers are also a bulk (more than half) of the rural poor and the under
nourished (Agrawal, 2000; Singh, et al, 2002; Muller and Patel, 2004). In so far as a
typical farmer‟s access to land ownership, especially of small/ marginal, is concerned,
the land base of the marginal landholders and the near-landless households has not
improved much over time; at best, the percolation of gains from land re-distribution
have stopped at the middle level of peasantry (Singh, et al, 2002). In this situation, if
any mechanism has to help agricultural development, it has to involve and work with
this overwhelming majority of farmers and workers.
In 2000-01, small farmers contributed 57% of total vegetable production, and 47% of
total fruit production, which is higher than their share in the gross cropped area. As
compared to others, small farmers allocate a larger proportion of their area to
horticultural crops. Even diversification option in terms of change of crop sequence
was exercised more by small holders than that by large holders both in irrigated and
non-irrigated areas (Singh, et al, 2002). In 2000-01 they allocated 5.7 % of their gross
cropped area to horticultural crops, compared to 3.9 % by the large farmers (Birthal et
al, 2008). Vegetables crops are the most favored crops on small farms, while fruits,
condiments and spices are favoured on large farms. Reasons of this are availability of
surplus labour and liquidity constraint, and a good market price of vegetables (Shroff
and Kajale, 2008).
Table 1: Distributions of operational holdings and area by category in India
Year
Category
1953-54 1961-62 1971-72 1981-82 1991-92 2002-03
Number of operational holdings by farmer category (%)
Marginal 39.1 45.8 55.5 62.8 69.7 70.0
Small 22.6 22.4 19.5 17.8 16.3 15.9
Med/Large 33.3 31.9 25.0 19.5 14.0 14.1
Operational holdings area by farmer category (%)
Marginal 6.9 9.2 11.5 15.6 22.6 21.7
Small 12.3 14.8 16.6 18.7 20.9 20.3
Med/Large 80.8 76.0 71.9 65.7 56.5 57.9 Note: Marginal (< 1 ha), Small (1.01-2ha) Medium and Large (>2 ha)
Source: Datta and Sharma (2008).
1.2. Issues in small producer context in India
Major problems of small and marginal farmers in India include spurious input supply,
inadequate and costly institutional credit, lack of irrigation water and costly access to
it, lack of extension services for commercial crops, exploitation in marketing of their
produce, high health expenditures, and lack of alternative (non-farm) sources of
income (Dev, 2005). Employment which is the only way to raise farmers‟ and
workers‟ incomes, is low on these farms because of the low employment elasticity of
output due to increasing mechanisation and the kind of crops grown (Muller and
Patel, 2004). The problem is not that small farms are inherently unviable in today‟s
marketplace as recent studies show that per hectare net returns are the highest on
marginal and small holdings than that on any other holding category (Chand, et al,
2011; Gaurav and Mishra 2011), but that they face an increasingly tilted playing field
3
For example, prices smallholders receive for their output are lower than those
obtained by larger farmers due to their weak bargaining power and holding capacity
(Agrawal, 2000). In wheat, marginal holders had the highest yield per hectare
compared with all other categories in India but, they realized the lowest prices per
quintal (Gandhi and Koshy, 2006).
The arguments in favour of small farms in a situation of large disguised unemployment
are many. Small farms in such situations will maximise labour use and value added, not
profit and will have higher yields per unit of land, both of which are socially optimal
given land scarcity and labour surplus. They also distribute income more evenly, thus
increasing purchasing power of the population which is must for industrialisation. Small
farms, when free of incentive incompatible systems like share cropping, or insecurity of
tenure, can greatly expand output even when they are not profitable in a capitalist
business sense. It was due to small farms that rapid agricultural growth occurred in
Korea, China, Japan and Taiwan, and even in West Bengal in India (Morris, 2007).
The social and economic benefits from smallholder focused interventions can be
enormous (Hazel, 2005). Further, small producers have certain competitive
advantages like lower cost due to labour abundance, higher flexibility in their working
capability, work as family and thus, are lower cost, and have plenty of traditional
knowledge which can be harnessed for many sectors. The only threats they face are:
standardisation of products in global and national markets, and large volume
requirements of modern markets. But, there are opportunities in organic, fair and
ethical trade markets which are particularly suited for small producers and offer high
prices (Harper, 2009).
But, small producers face production and marketing risk which make them vulnerable
to poverty. Commercial farming means risks, additional to the natural phenomena
which are intrinsic risks of farming everywhere: the risk of output prices that
fluctuate, of input prices that may not be commensurate with increased output, of
increased vulnerability to pests and so forth (Payer, 1980). In the absence of any
support, the coping costs of commercial modern farming are too high for marginal
and small farmers. For example, motor burnout costs for marginal farmers were 10%
of their gross farm income in Haryana and 7.7% in A.P. This figure for large farmers
was only 1.6% and 2.3% in the two states respectively (WB, 2004). Further, since
marginal farm households are net buyers of food, the increasing and fluctuating prices
can hit them hard (Singh, et al, 2002).
There are many policy and market instruments of risk reduction in India including
crop/weather insurance against yield/production risk; state-sponsored tools e.g.
Minimum Support Price (MSP) for 24 crops, Market Intervention Scheme (MIS) for
other crops, and Farmer Income Insurance Scheme (FIIS); market based institutions
i.e. Futures markets and Warehouse receipt system, besides other mechanisms like
diversification of crops and use of risk reducing inputs (Acharya, 2006). But,
implementation of MSP which includes procurement has been weak except for a few
crops in a few regions and has often failed when farmers were most in need of it. The
lack of access to insurance and credit markets makes small producers vulnerable and
they reduce their risk by choosing low risk activities or technologies which have low
average return. For example, in semi-arid regions of India, such self-insurance
produces 35% lower returns for the poor than if they did not need to self-insure (WB,
2007).
4
But, high value perishable crops (read fruits and vegetables) which are being targeted
by corporate interventions are riskier as they have uncertain yields, higher costs due to
higher use of high cost inputs, quality standards, and their profitability is dependent
on market access as there is no price or market protection unlike cereals or cotton.
For example, in high value cut flower production for Delhi market by growers in an
Uttar Pradesh village, the net returns from flower cultivation were many times higher
than those from traditional crops of sugarcane or wheat. Further, flower-cultivating
households had much higher gross and net returns than the others. However, small
farmers received lower prices and incurred higher costs due to smaller volumes. The
variability in prices received by small farmers was also above average and higher than
those for other categories of farmers for all categories of flowers. As for the risk, the
proportion of households making losses was very high in flower cultivation (12-38%)
and almost negligible (1-2%) in wheat and sugarcane, mainly because of yield
fluctuations and, to some extent, price fluctuations. This risk dimension makes it
difficult for small and resource-constrained farmers to take up diversification to high-
value crops like flowers (Sen and Raju, 2006).
The above discussion is suggestive of the complex socio-economic reality and
relationships in which smallholders operate. Therefore, any intervention in the farm
sector has to take this into account. In this light, the following section examines the
role of corporate agribusiness in helping smallholders reduce their production and
market risks while at the same time promoting sustainability, through the mechanism
of CF.
2. Contract („contact‟) farming-the concept and the logic Corporate agribusinesses, both domestic and multinational, interface with
smallholders through seed production and supply, other input supply, procurement of
produce, and more directly, facilitation of production through CF. CF has also been
used in many situations as a policy step by the state to bring about crop diversification
for improving farm incomes and employment (Benziger 1996; Singh, 2002). CF 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 CF in Japan and Spain in the 1950s (Asano-Tamanoi,
1988) and in the Indian Punjab in the early 1990s (Singh, 2002).
CF can be defined as a system for the production and supply of agricultural and
horticultural produce by farmers/primary producers under advance contracts, the essence
of such arrangements being a commitment to provide an agricultural commodity of a
type (quality/variety), at a specified time, price, and in specified quantity to a known
buyer. In fact, CF 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
vertical integration or disintegration depending on the given context. Due to the
efficiency (co-ordination and quality control in a vertical system) and equity
(smallholder inclusion) benefits of this hybrid system, it has been promoted
aggressively in the developing world by various agencies (Glover, 1987). It basically
involves four things - pre-agreed price, quality, quantity or acreage
(minimum/maximum) and time (Singh, 2002). It is generally undertaken when there is
market failure expressed in perishability of produce, quality of produce and technicalities
of producing a new/different product (Bijman, 2008).
5
On the other hand, „contact farming‟ is the practice adopted by most retail chains in
India which refers to just having registered farmers without any commitment to buy
or sell or a pre-agreed price or quantity specified.
CF is known by different variants like centralised model which is company farmer
arrangement, outgrower scheme which is run by government/public sector/joint venture,
nucleus-outgrower scheme involving both captive farming and CF by the contracting
agency, multi-partite arrangement involving many types of agencies, intermediary model
where middlemen are involved between the company and the farmer, and satellite
farming referring to any of the above models (Eaton and Shepherd, 2001; GoI, 2003;
Bijman, 2008). In fact, CF varies depending on the nature and type of contracting
agency, technology, nature of crop/produce, and the local and national context (Swain,
2011).
The contracts could be of three types; (i) procurement 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 contracts 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 and
these types are not mutually exclusive (Hill and Ingersent, 1987; Key and Runsten,
1999; Bijman, 2008). 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
arrangement as contracts require definite quality of produce and, therefore, specific
inputs (Scott, 1984; Little, 1994). Also, different types of production contracts allocate
production and market risks between the producer and the processor in different ways.
The price of the contracted produce can be growers‟ fixed price, residual (profit/loss)
sharing by sponsor and grower, open market based price, spot market price, consignment
based, two part split price, tournament price (fixed plus variable based on relative
performance), base price plus quality based incentive price, or administered price.
For different reasons, both farmers and farm product processors/distributors may prefer
contracts 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 of adverse price
movement to the buyer (Hill and Ingersent, 1987). Farmers also get an access to new
technology and inputs, including credit, through contracts which otherwise may be
outside their reach (Glover, 1987; Eaton and Shepherd, 2001). 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 production activities, on management (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 fully 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 CF and
may even obtain statal and international agency incentives for its activities as
developmental projects, instead of corporate farming (Kirk, 1987). Contracts also help
6
improve product quality by directly introducing incentives and penalties as there are
problems of adverse selection and moral hazard in any contractual arrangement resulting
in underinvestment or shirking by any of the parties (Wolf et al, 2001).
At more macro economic level, contracting can help to remove market imperfections in
produce, capital (credit), land, labor, information and insurance markets; facilitate better
co-ordination of local production activities which often involve initial investment in
processing, extension etc.; and can help in reducing transaction costs, including for the
farmer (Grosh, 1994; Key and Runsten, 1999; IFPRI, 2005; Bijman, 2008).). From an
institutional economics perspective, the logic for CF could also come from the creation
of positive externalities like employment, market development or infrastructure, if
agribusiness firms create them better than the open market or the state (Key and
Runsten, 1999). In other words, can CF help people other than those who have direct
stakes and pay for it?. CF figures as an institutional arrangement/innovation for
agricultural development (Glover, 1987).
Some others recommend CF as the only way to make small scale farming competitive
as the services provided by contracting agencies can not be provided by any other
agencies (Eaton and Shepherd, 2001). CF is also an alternative to corporate farming
which may be costly, risky, and difficult to manage and still not viable (Payer, 1980).
Further, in India, supermarket chain growth including likely Foreign Direct
Investment (FDI) in retail, international trade and quality issues like Sanitary and
Phyto-Sanitary measures, organic trade, fair trade, and ethical trade, promotion of CF
by the central and state agencies, banking and input industry push for CF, farming
crisis and reverse tenancy, and failure of traditional cooperatives, will help spread of
CF across crops and regions as they provide new space to this arrangement in the
context of withdrawal of state from agricultural space. Even new Intellectual Property
Regime (IPR) which encourages protection and exploitation of proprietary genetics is
likely to accelerate CF practice (Wolf et al, 2001). Further, under the new agricultural
policy regime, public-private partnership is the main route being taken to bring about
transformation in agriculture and the state is providing incentives to corporates to
enter agribusiness sector, including through CF.
2.1 CF and natural resource sustainability
Though it is known that CF has resulted in a transfer of responsibility for many
production decisions from the individual farmer to the contracting company (Opondo,
2000), it is not yet understood that responsibility for environment impacts has also
shifted (Rickson et al, 1993 in Eaton, 1998). If that is the case, then there is a clear
case for ecological considerations in designing and monitoring CF. But, there is
hardly any rigorous evidence on the environmental impacts of CF as the focus, most
of the time, has been on its impact on small producer livelihoods in terms of removing
poverty or risk in their activities (Minten et al, 2006).
CF influences the direction of ecological change through two actors. One, the
contracting agency lays down the production schedule for the farmers at the farm
level. By determining the crop to be grown and the husbandry practices the farmer has
to follow, the contracting agency influences the impact CF will have on the
environment. The government is the second actor as the main source of conservation
measures i.e. advisory, financial and material. The farmer‟s access to these measures
7
is, to a large extent, is determined by the government policy. Thus, the contracting
agency and the government have a larger role to play in environmental/ecological
change than the farmer, since they occupy a „privileged‟ position in the realm of
decision making (Opondo, 2000).
Contracts tend to be concerned with land management measures which ensure crop
growth and quality and production levels only in the short-term agricultural cycle.
Land management measures geared to maintaining resource quality over the long
term are not specified. The grower is responsible for decisions about investment in the
longterm maintenance of land quality and productive capacity in conditions where
contracting companies influence the land use practices through contracts which tie
growers to larger markets and encourage production growth (Morvaridi, 1995).
Environment is also impacted through rejection of some produce of the grower by the
contracting agency as the cost of not harvesting results in soil loss through tillage and
excessive use and wastage of chemicals causing nutrient depletion (Lawrence, 1999).
The environmental implications of CF include monocultures leading to depletion of
soil quality, and effect of fertilizers and pesticides on natural resources, environment,
humans and animals (Opondo, 2000; Requier-Desjardins and Borray, 2004). The
contracting firms tend to aggravate the environmental 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;
Raynolds, 2000). The over-exploitation of groundwater, salination of soils, decline in
soil fertility, and pollution are examples of environmental degradation due to CF
(Siddiqui, 1998; Rickson and Burch, 1996). The firms do not pay heed as the costs of
such effects are externalised so far as the firm is concerned. It is also argued that CF as
part of the globalisation process might lead to increasing investments in developing
countries which have low environmental standards and, thus, the natural resource base
might end up irreversibly depleted or damaged (Minten et al, 2006).
There are many studies of impact of CF on natural resource base in local areas. In
Tasmania region of Australia, local environmental problems were not on the agenda
of the vegetable processing firms, despite individual interest by their managers. There
was no evidence of any policy about land or water conservation. Since farmers
generally contracted with more than one company, no single firm wanted to take
responsibility of soil conservation. There were only „information days‟ and
workshops on soil conservation offered to growers, but it was more of tools to signal
legitimacy and to convey that companies were concerned about local soil erosion
problems (Rickson and Burch, 1996). Soil management was an issue in which
contracting agencies influenced the decision making process but left it largely to
growers (Fulton and Clark, 1996). In Fiji, 30% of the sugarcane crop was grown on
unsuitable lands despite adequate land use legislation and CF being done under the
Fiji Sugar Corporation. In fact, the farmers did not even recognize the problem of soil
erosion like their counterparts in Tasmania in Australia (Eaton, 1998). In Kenya,
tobacco CF resulted in land degradation due to the felling of trees by contract farmers
despite the fact that the BAT stipulated that farmers could only become contract
growers if they agreed to plant 1000 eucalyptus trees a year on their lands. But,
enforcement of this policy was not effective (Madeley, 1999).
8
Similarly, in fruit and vegetable production in Kenya, 2/3 of the farmers started using
fertilizers and pesticides when they became contracts farmers. But, the contractor did
not provide any information on the side effects of fertilizer use. The farmers learnt
only from experience. In fact, the contractors, especially fresh produce exporters and
agents, did not show much concern about the possible relationship between soil
erosion and CF. They thought it to be the responsibility of the government to control
soil erosion. In fact, most of them did not even recognize that CF had led to soil
erosion due to monoculture and cultivation on steep slopes. Only food industries
contracting with growers offered material assistance to them for curbing soil erosion.
On the other hand, farmers were of the view that the contractor generally did not
provide all the information about the contract crops and the tendency was to
emphasise only the rosy side of the picture. But, due to the market implications, the
contractors were more anxious to keep the required Maximum Residue Limits
(MRLs), lest their products were rejected in the European markets. Thus, farmers
were strictly asked to adhere to type and amount of prescribed agrochemicals
(pesticides) and in fact, the contracts preferred to supply such agrochemicals to the
farmers (Opondo, 2000).
In Thailand, which has been the pioneer in CF in Asia, “Contract production of cash
crops – usually tacit in the local fashion rather than formalized – (has) led small
farmers to use increasing quantities of inputs in a system dictated by the demands and
advice of village intermediaries who work for commercial companies. Thus, a typical
input „kit‟ composed with total disregard for the environment or any serious technical
reference, supplied to illiterate (in Thai) Mon and Karen cotton farmers in
Kanchanaburi province in 1991, included seeds from high potential varieties, but
susceptible to the main insects/pests; a product for dry dusting treatment (half of
which does not adhere to the seeds and is lost to the environment); smart bottles for
insecticides in small half litre packs (consumption of 10-20 litres per hectare), with
active ingredients that are usually highly toxic yet of doubtful effectiveness, given the
resistance that pests have acquired over recent years; expensive compound fertilizers
in granule form, even for leaf applications (beneficial effects not proven); and
herbicides. Some packs also included hormones and growth regulators” (Tribul, 1995;
79-80). In north Thailand also, CF had led to higher levels of chemical and pesticide
use in contract crops as “Potato growers in San Sai are not only facing competition
from farmers in other areas, soil degradation has also made it harder and more
expensive to grow high quality potatoes in this district. In the long run, it will be
necessary to use more organic fertiliser (instead of chemical), to maintain and
improve the structure of the soil” (Ornberg, 1996, p. 12). Burch (1996) and Christian
Aid (1996) also report many social and environmental consequences which have been
particularly serious in prawn aquaculture CF.
In Cyprus, fruit production contracting by a Multi-National Corporation (MNC) led to
problems of ground water depletion and salination of irrigation water due to intrusion
of seas water, leading to drying up of fruit trees and rendering large area of land
unproductive. The MNC was fully aware of the problems of salination but since the
costs were externalized, it could afford to ignore it (Morvaridi, 1995). In eastern
Turkey, sugar beet production expansion in Igdir province encouraged by the
government policy aimed at increasing crop yields without any resource based
conservation policies, led to overexploitation of land and water, amounting to the
9
depletion of landesque capital. The intensive commercial production under the Sugar
Corporation (a state agency) led to considerable reduction in and even elimination of
fallow periods and the degraded land went up to 2% of the total land area of the
village by 1995 from nil in 1992. This environmental degradation in terms of land and
water quality, including water logging and salinity, was largely due to mistrust
between farmers and the corporation wherein the corporation supplied only chemical
inputs and tried to monitor inputs and yields of sugar beet, but the farmers often
deliberately ignored the corporation‟s advice in order to secure increase in beet weight
on the basis of which they were compensated. The corporation externalised the
environmental costs from production contracts as it was only interested in one crop
cycle production and thus avoided any long term responsibility for resource
conservation (Morvaridi, 1998).
But, there is also evidence that CF can contribute to environmental sustainability. In
Africa, CF programs which evolved from corporate farming inherited all the
ecological concerns of the previous management and continued to meet ecological
responsibilities (Eaton, 1998). Similarly, as an exception, in Tasmania in Australia,
there were companies contracting growers for pyrethrum- a natural pesticide and
poppies for opium which had integrated soil conservation into its structures and
programs as it was must for the crops grown and the company owned the biological
material. Even the crop (pyrethrum) was planted by the company. These companies
also insisted on crop rotation and weeding (Rickson and Burch, 1996). Another
recent study in Madagascar (Minten et al, 2006) found that CF had important positive
environmental effects, resulting from spillover effects on land use and land
intensification, reducing pressure on valuable forest land. In the export oriented
vegetable supply chain locally managed by a local company, the strict standards
practiced by the company ensured this. The pesticide application was either monitored
by the company or in several cases applied by the representatives of the company to
ensure correct dosage and timing. Similarly, compost application was supervised. It
even taught farmers how to make compost. Compost use for contract crops had
spillover effects for many years. The growers were not using compost earlier and as
part of the contracting arrangement, all of them were using it and had even started
using it on their non-contract plots as well. They even reported that even if CF stops,
they would continue making and using compost. Though compost making training
was a small contribution, it was a clear case of technology improvement in a local
area where extension never happened.
In Australia and New Zealand, two corporate entities (Uncle Tobys and Heinz Wattie)
proactively promoted organic production systems and greening of agriculture which
contributed to environmental sustainability (Lyons et al, 2004). On the other hand, in
California, the entry of corporate entities into organic agriculture led to damage to the
organic agriculture rooted in ecological principles as these entities further
mainstreamed the organic agriculture through conventional agriculture-like practices
(Guthman, 2004).
2. 2 Practice of CF in India
There is a growing rationale for CF in India due to the entry of wholesale cash „n‟
carry players as well as domestic food retail chains besides international food quality
and cost competitiveness issues and new market segments which need tailor made
10
food products. Besides, in India, the banking and agricultural input industry is also
eyeing CF for leveraging it for better rural market penetration. The amendment of the
APMC Act has given a policy boost to CF and this is increasingly accompanied by
declining role of statal and co-operative agencies in agricultural markets.
Though CF is receiving a push from many stakeholders, there are many factors like
the APMC regulation in Gujarat and Haryana, improving open market efficiency,
Minimum Support Price (MSP) policy, corporate farming including leasing of
wastelands, and an overwhelming presence and interest of NGOs in farming sector,
which will act as dampeners to the growth and spread of CF. However, corporate
farming can also work favourably if corporate agencies resort to leasing of these lands
to contract growers or provide contractual access to these lands to small and marginal
farmers and landless labour, as corporate farming is unlikely to be viable. In fact,
corporate farming is a double-edged weapon. It can help small farmers in better
access to technology, but can also weaken their bargaining power with the company
(Glover, 1987).
CF is spread across crops, regions and agencies (public, private and multinational) in
India (table 1 in Appendix). There are different models being practiced by different
players in the sector which range from bi-partite to multi-partite and intermediary
based. It is interesting to note that given the diversity of rural and agricultural
landscape in India, a single contracting agency (Frito Lay) practices five different
models in different states of India for the same crop (chip potatoes). The table shows
that most of the crops covered under CF are those with some market failure either in
terms of farmer involvement or the market signals. Most of these are high value crops
which require new and higher investments for producing for the market. Therefore,
they need risk coverage- both production risk and market risk and, more of the latter.
Benefits of CF
Most studies of the CF system in India examine the economics of the CF 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 Tamilnadu
(Chidambaram, 1997) and Andhra Pradesh (Haque, 2000; Dev and Rao, 2005; Swain,
2011), tomato and other vegetables in Punjab (Bhalla and Singh, 1996; Haque, 2000;
Rangi and Sidhu, 2000; Singh, 2002; Dhaliwal et al, 2003) and Haryana (Dileep et. al.,
2002), potato in Punjab, Gujarat and Haryana (Singh, 2008; Tripathi et al, 2005) and
cotton in Tamilnadu (Agarwal et al, 2005). It is found that contract production gave
much higher gross and net returns compared with that from the traditional crops of
wheat, paddy, and potato in case of tomato, with some exceptions like peas in Punjab
(Bhalla and Singh, 1996; Rangi and Sidhu, 2000; Dhaliwal et al, 2003), and tomato, and
onion in the case of gherkin in Tamilandu (Chidambaram, 1997), and with those under