A case in Contract Farming

Contract farming has been a contentious issue in India. There are views that it leads to farmer exploitation and there are counterviews. We have done a few studies on this, and I would like to describe a particular case in West Bengal, which we analyzed in detail.

Frito-Lay in association with local farmers, has initiated moves to grow chip-grade potato in the State. Agricultural programs have commenced in Midnapur, Hooghly, Burdwan, Bankura and Purulia districts through 34 co-operatives and 850 farmers covering 1,000 hectares of land.
The company has actually signed contracts with the 34 Village cooperatives and not with farmers directly.

One of the cooperatives, Gopganter UCACS in Burdawan district was visited by us to understand the system. A cold storage located in Alimpur (Howrah District), which is about 15 kms from the processing plant was also visited. The Gopganter cooperative also runs a cooperative bank. During the last season (November to February), they had involved 60 farmers (who are its members) in the Frito-Lay project. The average farmer had 1-2 acres of land holding, and almost all could be categorized as small or marginal farmers.

The society purchased seeds from Frito-Lay and in turn sold it to the farmer members. Each farmer was given a handbook, which specified the cultivation details – field preparation, spacing of crops, fertilizer schedules, irrigation schedules, etc. In addition a printed log book was handed to the farmers to record the activities at each stage. All the printed material was provided in Bangla language.

The society members were trained to inspect the farming techniques and also the output. Equipments were provided on which the various parameters of the produce could be tested. The sampling technique for testing was also explained. In addition a person from the plant team would visit the area every week to take stock of the progress. Farmer groups had also been taken in batches to the plant for training programs.

At the cold storage also, the company had an elaborate set of procedures to make sure that the right potato was sent to the plant. The temperature was measured every hour to make sure that the conditions were right. Every week samples were drawn and tested for various parameters (the CS personnel were equipped and trained for this). Rejected lots were sold in the open market at prevailing prices.


The agreed rate for purchase was Rs 175 per bag of 50 kgs. These rates were fixed during the year when potato prices had crashed to Rs 70-80 per bag. During the buyback period market prices had been in the region of 120 to 140 per bag. Thus, the farmers were satisfied.
The average productivity was 35-37 quintals per acre which was in line with normal potato and fetched an average revenue of Rs 12,500 per acre. The costs were of the order of Rs 7,500 per acre (of which nearly 60% was seed). This was higher than normal potato cultivated by about Rs 2,500. This was compensated, in the farmers’ opinion because of higher price realization (by about Rs 40 per bag). The society also confirmed that payments from the company were prompt.

Results

More than 95% of the products grown by the farmers were accepted. The society and the farmers were both satisfied with the system. The satisfaction level was mainly because of the following:
· The prices and the profitability were at par or superior to what other potato farmers were getting, by selling in the market
· The downside of low prices was eliminated. The price risk was completely removed
· The extension in farming technique was far superior to anything that the beneficiary had ever received. Many were experiencing planned and methodical cultivation for the first time and had never been exposed to such training before.
· Transparent systems and dealings

In future, Frito Lay India plans to set up a producer company that will act as a liaison between farmers and the company. These producer companies will take over the present role of the company staff and will be trained rigorously for the purpose. The geographies targeted for the expanded procurement includes the potato growing areas of West Bengal and its neighboring states – Jharkand and Bihar. The scale (20,000 tons) can potentially employ about 4,000 small and marginal farmers.

Based on literature surveys and other case studies by us, we have drawn the following conclusions :

Conditions under which contracts work well
Investment by buyer in the chain
Transparent systems and processes
Continuous support and training
Clarity in contract specifications
Fair pricing and adherence to contract
Careful selection of growers (preconditions such as soil suitability, etc.)
Tie ups with support service providers (credit, etc.)

Examples of successful contract farming –
Fritolay in MP and WB (potato), Suguna in TN and now in WB (poultry), Arambag in WB (poultry), Godrej in Karnataka (poultry, maize)Such systems benefit producers directly by eliminating price risks and mitigating growing risks

Conditions under which contracts fail

Buyer does not invest in the chain
Processes for growing are not defined, only end product is specified
No support or training
Support services ignored
No method of selection of growers
Buyer does not add significant value, nor does he have sufficient scale
Lack of transparency and legal redress mechanism
Buyers may form local cartels/ monopolies which works against producers’ interests

Many processors do not make the effort and investment in chain development. They tend to buy from large farmers or traders. Such systems have no impact on small farmers.Typically they are involved in low level processing and low value addition

The above case provides an example of how a value added products company can provide assured markets to a large number of small farmers. The value that the company brings to the table has several dimensions:
1) Assured prices and volumes
2) Enhanced skills
3) Improved cropping practices
4) Investment in the chain itself (improved storage and testing practices)

Possible risks
There doesn’t appear to be significant risks for the farming community except the usual risks associated with growing. The price risk is taken out and the farmers also get authentic seeds (which is a great service in rural India plagued by poor quality pirated input material).The company can have some risks in the event of market prices going up beyond the agreed price (and inducing the farmers to sell outside). Although this is possible, it is unlikely. Also companies involved in value added products manufacture should be able to respond to market price movements. However, in the long run, it is necessary that both the contracting parties are provided safeguards against breaking of contracts.