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 farmers 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 todays 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 farmers 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 corporations 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 non-contract situations (Haque, 2000; Dileep et. al, 2002; Agarwal et al, 2005; Tripathi et al, 2005; Swain, 2011). This was due to higher yield and assured price under contracts. But, in Punjab, except oilseed crops (hyola and sunflower), the net returns from contract crops were found to be lower than what farmers would have got from the wheat crop (Dhaliwal et al, 2003). However, production cost was also higher (Dileep et. al, 2002; Kumar, 2006; Singh, 2008). But, in the case of cotton in Tamilnadu, the 11 contract growers had lower input cost, lower interest loans, faster payment for produce than in non-contract situation, and had the crop insurance facility (Agarwal et al, 2005). Breach of contracts and farmer problems Defaults by farmers as well as firms has been reported (Bhalla and Singh, 1996; Singh 2002; Haque, 2003; Singh, 2004). Though CF in gherkin and iceberg lettuce crop was smooth as there was no local market or very thin market for the crop, there was flexibility in contracts due to the short duration of the crops, and farmers maintained alternative sources of income (Singh and Asokan, 2005; Khairnar and Yeleti, 2005). But, still, there was partial breach of contracts in gherkins as the firm did not procure as per contract in case of 63% of contract farmers in Andhra Pradesh (Swain, 2011). This was so only in 30% cases in case of paddy seed.
The studies in the states of Punjab, Haryana and Andhra Pradesh reveal that contract growers faced many problems like undue quality cut on produce by firms or on- procurement of produce, delayed deliveries at the factory, delayed payments, low price, poor quality inputs, and pest attack on the contract crop which led to crop failure or raised the cost of production (Bhalla and Singh, 1996; Singh, 2002; Rangi and Sidhu, 2000; and Dileep et. al., 2002; Satish, 2003; Swain, 2011). The firms also manipulated provisions of the contracts in practice, e.g. in case of broiler chickens in Tamilnadu, they picked up birds before due date or delayed it depending on the demand which meant losses for contract growers. They also delayed payments upto 60 days. But, growers were locked into these contracts due to the firm specific fixed investments they had made (Singh and Asokan, 2005). Infact, broiler CF can not really be representative of the CF in agriculture as it is more of a case of putting out work or wage labour contracting as the contracting agency provides all the inputs ranging from day old chicks to feed and vaccination, and the contract grower just provides labour for feeding the birds and supervision where land requirement is not a big factor. Even state sponsored programme of CF did not deliver in Punjab. The contracted winter maize and hyola crops failed almost completely due to inclement weather and poor quality seeds. In case of green peas, the contract growers were forced to dump their produce in open market, after being rejected by the Punjab Agro Industries Corporation (PAIC) on quality ground as per the contract specification, as there had been fungus infection due to inclement weather. Some farmers found fault with the fungicide supplied by the contracting company in this regard. The dumping of contract-produced crop in open market led to fall in local market prices and it was being sold at Rs. 3 per kg. as against a promised price of Rs. 5 per kg. by the PAIC (Singh, 2003; Rangi and Sidhu, 2003). In general, across crops and regions, the CF program could not achieve the stated area goal. Not only it fell short in terms of contracted area being less than that stated by the agency, but also the farmers did not plant the entire contracted area with the contract crops. The gap was much larger in latter case and even as high as 50% in winter maize in Ludhiana and 20% in hyola in both Ludhiana and Patiala. There was a different private seed company for each crop and they only provided seed and no other extension service. Finally, none of the companies procured the produce and advised the farmers to sell in open market either because open market prices were higher than contract price or quality was not as desired. Most of the problems farmers faced related to production and quality (like quality of seed and extension) and not marketing of produce (except peas) as open 12 market could take care of contract produce. Due to this experience, a large majority (60%) were not willing to enter into CF arrangement again (Dhaliwal et al, 2003). There have also been instances of corruption and malpractice in the PAFC run CF program due to conflicts of interest among implementing agencies and lack of monitoring (Ramachandran and Dogra, 2006; Singh, 2006). Since most of the CF agencies do not provide crop insurance or other protection, production risk is no covered most of the time. The World Bank reports also point to the deficiencies in the CF program launched by the state Government of Punjab. It states that for the programme of CF to be successful, it should take into account the aspects of selection of crops for contracting, development of quick and effective contract enforcement and dispute resolution system, limiting fiscal risks to the state government, limiting the number of parties in a contractual arrangement, and developing farmers organizations capable of contracting with sponsors, with a view to reduce transaction costs, increasing information flow, and improving farmers negotiation position (WB, 2003; WB, 2004).
Pricing The contracting agencies, including those contracting organic produce, and the fresh food retail chains give market price based prices to their contract or contact farmers (Singh, 2009; Singh and Singla, 2011). The question which should be asked is: Is it a fair practice, as in India, market prices fluctuate so widely? If market prices were efficient, why did the chains have to go to growers? Most of the liberalization in the farm sector including abolition of the APMC Act in Bihar has been on the basis of the assumption that APMC markets have behaved monoposonistically and, therefore, need to be done away with or made to compete with other channels. If that was true, why should a buyer go back to the same mandi to discover procurement price? This is a serious issue as even a significant premium over market price may not help a farmer if open market prices go down significantly which is not uncommon in perishable produce markets in India. Thus, the issue of what is fair price for the primary grower in a chain remains as there is little transparency in pricing and costing of operations. This kind of practice also compromises the market risk reduction role of CF.
2.3 CF and natural resources/environment In India, irrigation intensity of contract crops, i.e. tomato, potato and chilly, was more than that of wheat in Punjab during the late 1990s under Pepsi Foods (a Pepsico subsidiary) CF. For example, potato required 8-12 irrigations compared with only 5-6 for wheat and other crops. Pesticides and fertilisers were also used at much higher levels than in the traditional crops. Potato cultivation required 108 kg. of NPK (inorganic fertiliser) per acre as against only 78 kg. for wheat and 60 kg. each of phosphorus and potassium per acre. Tomato crop required 60-90 kgs. of nitrogen, 60- 100 kgs. of phosphorus, and 60-120 kgs. of potash per acre depending on the quality of soil. Similarly, the chip potato crop required 4-5 pesticide sprays and the seed potato crop 6-7 sprays (Singh, 2002). This, despite the fact that the company (Pepsico) website states that it follows a policy of application of environmentally sound agricultural practices with its suppliers of agro-materials (Aragon-Correa and Rubio-Lopez, 2007). Tomato crop under CF required as many as 14 sprays, which was even higher than that in cotton (Singh, 2002). This, in a situation where farmer awareness of the negative effects of pesticides on the environment, other than human 13 and animal lives, especially food-related aspects, was very low (Gandhi and Patel, 1997). Recently, the use of fertilizers in contract farmed gherkins and paddy seed has been found to be very high compared with that in non-contract crops (Swain, 2011).
More recently, in Punjab, it was found that CF promoted by the provincial government to encourage diversification of cropping pattern away from wheat and paddy led to less water consumption on contract farms as against non-contract farms. The water consumption for paddy was 265.71 hours per acre compared with only 183.86 hours for Basmati paddy promoted and grown under the CF arrangement. Similarly, maize under CF led to water use of the order of only 18.35 hours per acre. This meant that crops being grown under CF arrangement were water saving. That was so due to the provincial government plan to promote those crops. Overall, contract growers weighted water consumption per acre was 120.49 hours compared with 129.58 hours in case of non-contract growers. But, reduced water consumption on contract farms was due to greater area devoted to the new crops (Basmati and Maize) and not due to any new agricultural practices promoted by the contracting agencies. In fact, the contract farmers were practicing more intensive agriculture than the non-contract farmers and were devoting significantly higher number of water hours to basmati and maize than that by non-contract farmers across all crops. Thus, increased commercialisation of the various crops under CF propelled these contract farmers to use various inputs more intensively. Further, crop combination of potato and sunflower promoted under CF was more water intensive, though more remunerative than wheat (the alternative traditional crop) and therefore, defeated the very purpose of CF in the state (Singh, 2007). More recently, a study of gherkin and paddy seed CF has found higher irrigation intensity of the contract crop compared with non-contract crops (Swain, 2011).
McCain Foods, a subsidiary of the Canadian MNC-McCain which has entered India recently with a processing plant for French fries and practices CF with growers in Gujarat, had made it compulsory for the contract growers to go in for micro irrigation given the low groundwater table in the area which can have larger implications for both the farmer and the society if not attended to. Banaskantha district where the company undertakes CF of potato, had the seventh highest level of exploitation of ground water in the state. This condition about micro-irrigation is not even mentioned in the contract of the company, but all the contract farmers had sprinkler systems, and mostly without any subsidy as the imported equipment adopted by growers was not recognized for subsidy at that time. This and other input supply support led to low farmer defaults and reflected high level of involvement of the firm with growers (Singh, 2008). Earlier, Pepsi in Punjab advised farmers to apply insecticide just after the white-borer larvae had broken out of their eggs and not when they matured as farmers used to do earlier. This way, lesser insecticide was used more effectively. Also, the company promoted the use of locally relevant traditional techniques like use of a local grass called Sarkanda for protection of plants from winter, and black ash for covering the soil to prevent crust formation and to give warmth to seeds (Singh, 2001).
Gherkin contract production started in India in the early 1990s in the southern Indian states. In 1993, Unilever started sourcing for the Amora and Maille brands. However by 1998, it was clear that yields were poor and quality was not good enough. Now, Unilever works with 7 suppliers who have contracts with 6000-7000 14 small farmers across 3 states- Karnataka, Tamil Nadu and Andhra Pradesh. It started focusing on package of agricultural practices to help farmers to improve their yields in 1999. Gherkins suffered from 3 major pest/disease problems:
Gherkin fruit borer Melon fruit fly Downy Mildew The first step was pest/disease identification wherein a straightforward guide to the main pests, with clear photos and cultural control options in the local language was provided to the contract growers. Pesticides could only be applied after recommendation from a field officer of the buyer. The Integrated Pest Management (IPM) products were distributed through field visits. It also used a Bollywood style film at village meetings to overcome literacy issues. Equally important were field meetings and demonstration days.
The Downy Mildew was tackled by: Introduction of rotation Closed growing period in Monsoon season Introduction of tolerant varieties and variety trials Improved irrigation leading to reduced humidity and reduced need for fungicides. The Melon Fly was controlled through: Introduction of sticky traps and pheromone traps Banana/Gherkin fruit bait traps for Melon fly
Similarly, for Fruit borer, pheromone traps were introduced and natural pests for fruit borer control were identified. Besides, training was provided to growers in the basic use of pesticides in which Unilever sponsored demonstrations in good practice including use of pesticides, storage and protective clothing, and explained the pesticide application link to chemical residues in gherkin resulting in export issues. Consequently, yields doubled and the reduction in fungicide use on Gherkins was dramatic. Besides, there was reduction in insecticide usage which was a result of the total agricultural improvement package (Ramesh, 2007). Most of the organic production takes place under CF arrangements and the contracting agencies provide various bio-inputs to the contract growers as was in the case in organic cotton and organic basmati which had helped resource conservation and improvement (Singh, 2009).
What comes out from the above analysis of the CF situations is that increasingly environmental concerns are dictated by the market demand e.g. the case of chemical residues or organic practices. In Kenya, most of the environmental management efforts were influenced by consumer preferences in the industrialised countries. This led to drastic reduction in misuse and abuse of the pesticides (Opondo, 2000). But, markets may not signal the importance of ecological concerns in all situations and all times due to various imperfections in the market and externalities in the presence of weak monitoring. For example, in Kenya, soil erosion was not attended to by the contracting agencies as that was not reflected in the product quality and was an externality of the contract production. It continued to be seen as the responsibility of the farmer and the government (Opondo, 2000). Similarly, price premiums for environmentally friendly food may not encourage genuineness due to incentive to 15 cheat and mislabel due to information asymmetry (Hobbs, 2003). Therefore, it is important to proactively provide mechanisms to ensure environmental compliance and concerns.
But, it is not that CF per se leads to environmental degradation in agriculture. It only contributes to it as it also adopts the existing production processes prevalent in the sector. But, it can come handy to rectify the situation as export oriented firms which need chemical free raw materials due to international market pressure, can make contract growers switch to less environmentally harmful/more environmental friendly production processes as they have the resources, including technologies and markets, to promote this kind of farming. It makes both business as well as development sense. These firms can also help farmers adopt Good Agricultural/Farm Practice (GAP/GFP) similar to the concept of Good Manufacturing Practice (GMP) in industry as the international market is increasingly demanding this kind of system in agro products.
3. Small Producer Exclusion Given the dominance of smallholders in developing country farming, the crucial question about CF is whether it is inclusive or smallholders. Globally, there is evidence to show that contracting agencies in general exclude smallholders and prefer larger holders for various reasons like transaction costs, extent of default, though there is some evidence that for the same reasons, sometimes smallholders are preferred or agencies keep moving from large to small or other way round overtime (Bijman, 2008). But, generally, contracting agencies, especially private, tend to prefer large farmers for CF because of their capacity to produce better quality crops due to the efficient and business-oriented farming methods, large volumes of produce which reduces the cost of collection for the firm, their capacity to bear risk in case of crop failure, and various services provided by these large producers like transport, storage, etc (Wilson, 1986; Winson, 1990; Burch and Pritchard, 1996; Fulton and Clark, 1996; Key and Runsten, 1999).On the other hand, small farmers are picked up by firms for contracts only when the area is dominated by them, there is government directive to do so or they are found to be low cost producers in certain areas and crops (CDC, 1989). Further, firms may work with small farmers to make use of the state support (financial and technical) to these producers under various development programmes (Glover and Kusterer, 1990) and to benefit from lower cost production on these farms as these farmers have access to cheaper family labour, and being residual claimants of their labour, work more conscientiously than hired labour (Key and Runsten, 1999). In fact, some of them even use large growers, rural elite, and local small processors as sub- contractors to procure from the small growers for the company (Kirk, 1987). The seed companies in India use small companies as subcontractors to procure seeds produced under contracts (Shiva and Crompton, 1998). In Canada, small tomato growers were preferred as the crop required hand-picking which only small farmers do as the large ones do mechanical harvesting, especially when weather limits the use of mechanical harvesters (Winson, 1990). Similarly, in India, gherkin CF is carried out by small and marginal farmers as the crop requires plenty of labour inputs which these faming families can provide from within (Dev and Rao, 2005). Also, working with many small farmers in the case of small processors gives the required flexibility in procurement schedule helping to extend the processing season and use the equipment efficiently; and helps spread risk of supply failure as compared to working with a few large farmers.
16 It has been found by many studies in India that most of the contracting firms work mostly with large and medium farmers (Bhalla and Singh, 1996; Singh 2002; Haque, 2003; Dev and Rao, 2005; Singh and Asokan, 2005; Kumar, 2006; Khairnar and Yeleti, 2005; Singh, 2008; Swain, 2011) with the exception of firms in Karnataka, Tamilnadu, and Andhra Pradesh which worked with small and marginal farmers due the nature of the crop/produce (cucumber/gherkin, and broiler chicken). But, even in gherkins, a recent study shows that the land holdings of contract growers were much larger (7.4 acres) and more irrigated compared with those of non-contract growers (4.9 acres) (Swain, 2011). This bias in favour of large/medium farmers is perpetuating the practice of reverse tenancy in regions like Punjab where these farmers lease in land from marginal and small farmers for contract production (Singh, 2002; Haque, 2003). Table 1 also shows that except NGO, organic and gherkin contracts, all other contracts have area under contract crop which is much larger than the average size of holding in India. In fact, this is only the area under contract crop which means the total land holdings of these contract growers are much larger.
Though average size of contract growers holdings compared with that of the area/state is not an exact indicator of exclusion of small, micro studies point to the exclusion of small holders. For example, in Gujarat, among the sample farmers, only one contract grower with McCain had operational land holdings of less than five acres (although McCain did buy from some small growers without contracts) with average land holing of contract farmers being 19 acres compared with only 5 and 9 acres for farm gate and APMC sellers respectively. Similarly, contract growers for Frito-Lay (Pepsi) in Punjab had average operational holdings of 63 acres, with only 22 acres owned and the rest leased. None of the sample contract grower with Frito-Lay had less than 10 acres of land, in spite of the fact that the average size of holdings in the state was 9 acres and 70% holdings were below 10 acres each (Singh, 2008). Another study of CF in Punjab showed that the average size of the operational holding of contract growers was more than one and a half times that of the non-contract growers. It found no marginal farmer (in the size group of below one hectare) [...] operating under CF. A handful of small farmers (in the size group of one to two hectares) were operating (Kumar, 2006; p. 5369). Another study noted the majority of the acreage registered in the project (CF by Punjab Agro Foodgrains Corporation (PAFC)) is held by larger farmers, who tended to receive greater benefits from participation (in CF) (Witsoe, 2006; p. 16). Table 2 gives a detailed account of the average profile of contract growers across crops and regions based on empirical studies.
Infact, one of the para statal agencies in Punjab (Punjab State Co-operative Marketing Federation (Markfed)) placed advertisements in local newspapers a few years ago publicising its basmati paddy CF program where it asked potential contract growers to contact its district managers if they were willing to grow at least three acres of basmati paddy under CF with Markfed. The questions which arise from this kind of offer are: first, how many small farmers can spare three acres for basmati paddy? How many can spare it for CF? and how many would like to spare it for CF with Markfed?
17 Table 2:Crop and agency wise average size of holding of contract growers (acres) Study and year Contracting agency and place Crop under contract Average size of contract grower holding Average size of op. holding in the state Average % area under contract crop Singh, 2002 Frito Lay (Pepsi), Punjab Potato 53 9.5 8 -do- Nijjer Agro, Punjab Tomato 22 9.5 23 -do- HLL, Punjab Tomato 78 9.5 33 -do- Frito Lay (Pepsi), Punjab Chilly 90 9.5 4.5 Dev and Rao, 2005 AP Govt. and various processors Oil palm 10 3 40 -do- BHC Agro India, AP Gherkins 7 3 15 Asokan and Singh, 2006 A M Todd, Punjab Mint 57 9.5 Kumar, 2006 Many MNCs and local firms in Punjab Many crops together 37 9.5 12 Singh, 2008 McCain Foods, Gujarat Potato 19 6.45 21 -do- Frito Lay (Pepsi) Punjab Potato 63 9.5 53 -do- A M Todd, Punjab Mint 40 9.5 27 R Singh, 2008 Frito Lay, (Pepsi) Punjab Potato 75 9.5 - Pritchard & Connell, 2011 Karnataka and Andhra (AVT McCormick) Chilly 35 (Karnataka) 22.5; 42; 22.5 (AP-3 locations) 60 and 70;25;70 respectively Source: various studies.
It is not incidental that most of the CF projects are in the states of Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Tamilnadu which are agriculturally developed states. On the other hand, vast areas of India such as Bihar, Jharkhand, Chhatisgarh, Orissa, West Bengal, the entire north-east India and areas of Uttarakhand, Himachal Pradesh, Kerala and Jammu and Kashmir have been bypassed by CF projects. Does it mean that these areas and farmers would not benefit from commercialization and vertical co-ordination of agriculture? These are areas with highest concentration of small and marginal farmers (Gill, 2004). This essentially means that contracting companies do not encourage participation of those who need to be helped to participate as risk preference and innovativeness require not just attitude but also resources and risk taking capability to undertake risky crops and ventures (Glover, 1987).
Similarly, as part of the more recent retail chain penetration in the Indian farm sector, the Food Chain Partnership (FCP) program of Bayer Crop Science (BCS)- an agricultural input MNC, in India was found to be highly selective in terms of regions 18 which are included, the farmers who can participate, the crops that are covered, and the information passed on to the farmers. The potential of such market-driven structures which concentrate only on those regions and products that promise the highest profits is, therefore, questionable. BCS launched its FCP program in those areas where retail and processing industries are most active in procuring from farmers and where private centralized procurement infrastructure, such as collection and distribution centers, has already been set up. Those areas are located within five `nodes' in (1) Punjab and Haryana, (2) Maharashtra, (3) Gujarat, (4) Karnataka and Tamil Nadu, and (5) Andhra Pradesh. Within these states, there are clusters of intensified production of a certain vegetable crop. This focus on selected regions excludes permanently the majority of the Indian farmers from the program. The FCP program, in its initial phase, targets exclusively vegetable crops. The focus of the program on specific crops excludes a big majority of farmers (Trebbin and Franz, 2010).
In the emerging fresh fruit and vegetable retail chain led procurement of vegetables, it is medium and large growers who are the contact (not contract) growers for these chains with only a few exceptions like Namdhari Fresh which involved small holders and practised CF with the vegetable growers (table 3). Though it is argued that vegetable crops are more suitable for small holders due to their labour intensity and regular income, but the market/buyer does not seem to favour small holders. This is also corroborated by another recent study of a retail chain in Karnataka (Reliance Fresh) where the average size of a retail supplier varied from 2.5 hacs (6.25 acres) to as much as 8.2 hacs (20.5 acres) and 9.3 hacs (23.25 acres) across locations within the state and this was many times the average size of holding in the state or even the study areas (Kolar and Belgaum) which were 4 acres (state) and 2.9 acres (Kolar) and 5 acres (Belgaum) respectively (Pritchard et al, 2010). Another study (Mangala and Chengappa, 2008) on the impact of a food retail chain (FRC) in the same state (Karnataka) also reports data which shows that land holding size as well as the size of irrigated and dry lands was higher for food chain farmers (6 acres; 4.5 acres and 1.5 acres respectively) than traditional market farmers (2 acres; 1.5 acres and 0.5 acres respectively).
Thus, retail chain linkage is selective not only in terms of regions reached by the program, but also in terms of the crops covered which are only those that are of corporate interest. Further, it is selective in terms of farmers that are selected (size of farms, literacy, access to mobile phones, and irrigation facilities). Thus, those whose needs are most urgent i.e. the marginal and the small farmers, farmers lacking irrigation facilities and basic education, or farmers in more remote regions, are excluded.
The organic produce contracting agencies also tend to exclude small producers due to reasons of high certification costs, smaller volumes produced, and tighter control by the chain leaders in the absence of any local market outlets for the organic producers (Raynolds, 2004; Singh, 2009). In Madhya Pradesh, in case of an organic cotton project organized by a private corporate textile chain, out of a total of 44 farmers interviewed 5% were marginal (less than one hectare of land), and 22% small (1-2 hectares of land) given 40% and 24% of the holdings in the state are marginal and small respectively. Average land holding was found to be is 15.3 acres with 50% holding as high as 25 acres (10 hectares) which was much larger than the average size of operational holding in the state (2.28 hectares or 5.6 acres) and in the Nimar valley 19 (study area; 2.83 hectares (7 acres) (Shankar, 2005). This shows that the organic cotton contracting company largely worked with large and medium farmers as 50% its growers were really large growers with more than 10 hectares of land each. Further, the average land under contract was 12.8 acres which reconfirms the large farmer bias of the companys organic project. The correlation coefficient between ownership holding and organic acreage was 0.84 which again showed that larger farmers put larger acreage under the organic project. Similar was the case of organic Basmati CF in Haryana where average size of operated land of the contract grower was 32 acres compared with the average size of operated land in the state which was 5.26 acres (Singh, 2009).
Table 3: Crop and agency wise average size of holding of retail chain contact/contract vegetable growers F&V chain Location Crop under contract /purchased Average size (in acres) of contract/contact grower holding (operational)* Average size of operational holding in the state Average % area under vegetabl es ITCs Choupal Fresh Chandigarh region ( Punjab/Har yana) Cauliflower, bottlegourd 9.91 9.36 (Punjab) and 5.26 (Haryana) 37 Reliance Fresh (RF) Ahmedabad region Cauliflower, cabbage 15.9 6.45 47 ABRLs More Ahmedabad region Cauliflower, tomato 15.43 6.45 71 ABRLs More Bangalore region Cauliflower, tomato 7.52 4(2.9)** 65 RF/ABRLs More (thru supplier) Belgaum region Cauliflower, tomato 16.97 4(5)** 33 Namdhari Fresh Bangalore region Okra, baby corn 4.56 4(2.9)** 64 *- there was no major difference between owned and operated land as leasing in/out was not significant. **- figures in brackets are average land holding size in the study district/region. Source: Singh and Singla, 2011.
3.1 Reasons for Exclusion The aspects of CF which contribute to exclusion of small producers are: enforcement of contracts, high transaction costs, quality standards, business attitudes and ethics like non/delayed/reduced payment and high rate of product rejection, and weak bargaining power of the small growers (Kirsten and Sartorius, 2002). The organisers of CF also find it costly to work with small producers due to their scattered location and smaller volumes though there are also many advantages of working with them like easy availability of family labour, better commitment levels, helping spread risk of default, giving corporate agency a social face, and lower cost of production due to lower mechanisation of smaller farms (Boselie et al, 2003). The eligibility criteria for participation in CF projects/schemes like irrigated land, suitable land, land near main road, literacy level of the farmer are themselves discriminatory in terms of who can be 20 a contract grower. In fact, in CF everywhere, private agribusiness firms have less interest and ability to deal with small scale farmers on an individual basis (Hazell, 2005).
Even in modern retail driven arrangements with farmers like that of BCS FCP program, there are several preconditions as to who can become a partner farmer in the program, including: minimum land holding size of one acre (0.4 hectare), irrigation facilities, literacy, and a certain `business sense', as well as access to a mobile phone to enable the flow of information. Although there are differences between and within states and regions, such criteria are generally hard to fulfill. This, and the focus on certain core areas of vegetable production, results in the exclusion of many farmers (Trebbin and Franz, 2010).
4. Mechanisms for Inclusion The crops which are suitable for smallholder participation should also be chosen carefully e.g. they should be short duration. It is seen that voluminous crops like potato are not fit for smallholders as they can be produced on large scale and are amenable to mechanised cultivation. On the other hand, crops which are more labour intensive like gherkins or tomatoes and are not amenable to mechanical handling, are more suitable for smallholders as they require constant and regular crop care. Many of these crops are also those which would not be grown without a contract e.g. organic cotton or gherkins as they have no open markets which are attractive.
If CF is going to be the way for participation in most high value produce chains, then it is important to make a place for smallholders. One way to do that is to encourage and promote group CF. The state should make it attractive for agencies to work with groups rather than individuals which will lower transaction costs for agencies as well. All incentives given for CF should be for those working for smallholders or their groups as was the case in Thailand which promoted group CF thru national plans (Singh, 2005). More recently, the government of Maharshtra has started organising potential contract farmers into groups of 10-15 farmers each and facilitating their contract linkage with buying agencies like Tata Chemicals. But, interestingly, here too, the average size of holding of such farmers ranges from 7 hectares to as much as 30 hectares (The Financial Express, Ahmedabad, Oct 15, 2011).
The CF agencies should proactively involve NGOs into their CF operations and even organise farmer co-operatives or groups for more sustainable CF programs (Mayers and Vermeulen, 2002; Pingali and Khwaja, 2004). In contract arrangements with small producers in west African countries, the cotton companies started transferring some of the operational or functional responsibilities like distribution of inputs, equipment orders, and credit repayment management, to the village associations during the 1970s itself. They provided these associations with management skills for these tasks. The companies relied on traditional village authority structures for organising the associations but limited the associations to one per village to simplify company purchasing, delivery and marketing procedures. This arrangement accounted for a significant part of each cotton companys success (Bingen et al, 2003).
Major conditions for successful interlocking between agribusiness firms and small producers include increased competition for procurement instead of monopsony, guaranteed market for farmer produce, effective repayment mechanism, market 21 information for farmers to effectively bargain with companies, large volumes of transactions through groups of farmers, for lowering transaction costs, co-operation among genuine agribusiness firms in the area, and no alternative source of raw material for firms (Kirsten and Sartorius, 2002; Bijman, 2008). Further, for the sustainability of company-farmer partnership schemes, it is important that the company is able to successfully market its products so that farmers do not suffer from lack of market (Baumann, 2000; Haque, 2000). Building of relationships of trust with farmers through company reputation rather than marketing gimmicks is crucial. This requires mutual respect, fair and transparent negotiation process, realistic assessment of benefits, long term commitment, equitable sharing of risk, and sound business plans (Mayers and Vermeulen, 2002). Innovative pricing mechanisms like bonus at the end of the processing cycle, shares in company equity, dividends, producers fixed price, and quality based pricing, which reward performance can help contract performance.
The state and development agencies can also make it attractive for agencies to work with smallholders by way of extending lower interest credit and free training and extension to such growers as was done in Thailand where state bank (Bank for Agriculture and Agricultural Co-operatives (BAAC)) provided such loans and Department of Agricultural Extension (DOAE) provided extension support to contract growers and their groups (Singh, 2005). There are many cases of such support by state agencies in Malaysia and South Africa to facilitate inclusion of specific types of smallholders into CF arrangements (Bijman, 2008; Morrison etal, 2006). This can be achieved thru public-private partnerships which is being encouraged anyway. Specific tax and other incentives like market fee waiver could be offered to those proactively involving small holders or their groups/agencies in their operations. The state should also provide inclusion incentives which are specific to smallholders instead of being neutral. For example, the Government of Punjab through its Punjab Agro Foodgrains Corporation (PAFC) was reimbursing extension cost to the CF agencies/facilitators at the rate of Rs. 100 per acre for three years as part of its diversification plan. But, doing it irrespective of the size of holding of the contract growers defeats the purpose as it does not ensure that small and marginal farmers who can not afford to pay for extension and need to be brought into the contract system are included. Similarly, the Ministry of Food Processing industries had been providing an incentive during the 9 th and the 10 th 5-year Plans in the form of a reimbursement of five per cent of the value of raw materials procured through CF with farmers with a maximum ceiling of Rs. 10 lakh per year for a maximum of three years with the condition that any organization (private/public/co-operative/Non-Government organization (NGO)/joint venture/assisted) should work with at least 25 farmers under contract for at least three years irrespective of the size of the contract grower.
Contracting agencies can also be permitted to do limited corporate farming alongside CF to reduce their procurement risk and undertake innovative production and research activities on such leased farms. This is called nucleus-outgrower model of CF or more recently partial vertical integration and has been used by contracting agencies in India and elsewhere (Suzuki et al, 2011; Singh and Singla, 2011).
Finally, in India, the practice of contact farming should be discouraged as it does not reduce the market risk of the grower as procurement quantity and price are not pre- agreed. 22 4.1 Beyond I nclusion Legal protection to contract growers as a group must be considered to protect their interest. There are cases of legal protection given to subcontracting industries in Japan in their relations with large firms. These laws specify the duties (to have a written and clear terms contract with the subcontractor) and forbidden acts for the large parent firm. The latter include refusal to receive delivery of commissioned goods, delaying the payment beyond agreed period, discounting of payment, returning commissioned goods without good reason, forced price reduction, compulsory purchase by subcontractors of parental firm's products, and forcing subcontractors to pay in advance for materials supplied by the parent firm. These provisions are monitored by the Fair Trade Commission. Interestingly, most of the violations by parent firms were on the written form and clear terms of the contracts (Sako, 1992). If CF is only the flexible production systems prevalent in industry applied to farm production, then it is only logical to extend such legal provisions with necessary modifications to farming contracts. In farming sector per se, there is the Model Producer Protection Act, 2000 of Iowa State in the USA which requires contracts to be in plain language and disclose material risks. It provides a three days cancellation period for the producer to review and discuss production contracts with their advisors. It also provides for producers to be first priority lien for payments due under a contract in case of contracting company bankruptcy. Besides, it protects against undue cancellation of contracts by companies and prohibits tournaments (contracts where compensation to grower is determined by his performance relative to others) (www.flaginc.org/pubs/poultry/poultrypts.)
The model contract agreement (under APMC Act) is quite fair in terms of sharing of costs and risks between the sponsor and the grower (GoI, 2003). But, it leaves out many aspects of farmer interest protection like delayed payments and deliveries, contract cancellation damages if producer made firm specific heavy investments, inducement/force/intimidation to enter a contract, disclosure of material risks, competitive performance based payments, and sharing of production risks. Also, there are state level variations in the amended Acts as agriculture is a state subject in India. For example, in Gujarat, the amended Act makes the APMC as a party in the tripartite contract (earlier mandatory, but now optional) stating the logic that APMCs have a useful role as facilitator as they have long standing relationship with farmers and can disseminate the CF concept and practice besides monitoring its practice. Though the union model Act exempts contract procurement from market fee, the Gujarat Act makes it mandatory to pay the prescribed cess to the concerned APMC or in case of multi-location operations, to the GSAMB which will apportion it to the concerned APMCs. Haryana and Gujarat also prescribe bank guarantees for preventing defaults by contracting agencies. On the other hand, Bihar has abolished the APMC Act instead of amending it and that makes the agricultural market in the state totally unregulated. Table 4 provides a status of the progress in amending the state APMCs.
23 Table 4: Status of reforms in APMC Acts as on 30.09.2011 Source: Working Group, 2011.
Contracts need to be transparent and require frequent and independent scrutiny so that they remain competitive both with similar contracts and with open market transactions. Wide publicity of contract terms can help to stimulate competition.
The functioning of traditional markets (APMC) needs to be improved to enhance their cost efficiency so that producers can realize better prices and see APMCs as alternative to CF. The amended APMC Act allows for the setting up of private markets; it is also necessary to require an open auction system, improve buyer competition in markets, provide better facilities such as cold storage and improve farmers access to market information. These markets are important to small farmers and even a significant proportion of medium and large farmers, who still depend on them; they also serve as the main competitors to CF and can improve the terms offered to contract growers (Singh, 2008). 4.11 Producers' organizations Collective action to deal with scale requirements needs to be designed to satisfy new product and process standards or to avoid exclusion from the value chain. Collective action through cooperatives or associations is important not only to be able to buy and sell at a better price but also to help small farmers adapt to new patterns and much greater levels of competition (Farina, 2002). There is also a need to strengthen small farmer organizations and provide technical assistance to increase productivity for the cost competitive market, provide help in improving quality of produce, and to encourage them to participate more actively in the marketing of their produce in order to capture value added in the chain (Schwentesius and Gomez, 2002).
Producers organizations amplify the political voice of smallholder producers, reduce the costs of marketing of inputs and outputs, and provide a forum for members to Sl. No. Type of Reforms Name of States/ Union Territories 1. Direct Marketing; Contract Farming and private (non-APMC) markets Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Mizoram, Nagaland, Odisha, Rajasthan, Sikkim, Uttarakhand and Tripura. 2. Partial amendments a) Direct Marketing: NCT of Delhi, Madhya Pradesh b) Contract Farming: Madhya Pradesh, Haryana, Punjab and Chandigarh c) Private market Punjab and Chandigarh 3. No Act and hence does not require reforms Bihar* (repealed on Sept. 1, 2006), Kerala, Manipur, Andaman & Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu, and Lakshadweep. 4. Act already provides for the reforms Tamil Nadu 5. Further action is required for reforms Meghalaya, Haryana, J&K, West Bengal, Puducherry, NCT of Delhi and Uttar Pradesh. 24 share information, co-ordinate activities and make collective decisions. Producers organizations create opportunities for producers to get more involved in value adding activities such as input supply, credit, processing, marketing and distribution. On the other hand, they also lower the transaction costs for the processing/marketing agencies working with growers under contracts. Vigorous bargaining co-operatives or other agricultural producer organisations are needed to negotiate equitable contracts (Goldsmith, 1985; Key and Runsten, 1999). These types of organisations have been able to secure the standardisation of contracts and their scrutiny by a government agency in the USA (Wilson, 1986) and the bargaining groups have negotiated input purchase and output sale collectively (Welsh, 1990). In Japan as well, farmers have managed their relationships with companies well through co-operatives (Asano- Tamanoi, 1988). The groups or farmers organisations like co-operatives not only lower transaction costs of the firms but also lower input costs for the farmers and give them better bargaining power as was the case of a potato growers co-operative in north Thailand which acted as a link between the growers and the company (Ornberg, 2003).
Producer companies A producer company can be registered under the provisions of Part IX-A, Chapter one of the Companies Act 1956. (for details see Singh, 2008a). Already, there is good progress, though a bit late, on the use of this Act under which there are 130 such companies in India now. A large proportion of these are in the south and west regions of India. Major states with sizeable numbers of producer companies include Tamilnadu, Orissa, Maharashtra, Rajasthan, Gujarat and M.P. Besides these, 17 such companies have been organised in MP under the District Poverty Initiative Project (DPIP) in sectors of seed, grain, rice and tomato, chilli, poultry, potato, coriander, turmeric, ginger, milk, and biofertiliser production. Earlier, in Sri Lanka, such producer or farmer companies have been able to engage in CF with food processing and food retail companies (Esham and Usmi, 2007).
Though the concept of producer companies is noble, the companies organized under the Act face many problems which are stumbling blocks in their teething years. Firstly, the producer companies are not yet recognized by the union or state government for any incentive or support. Secondly, banks refuse to lend to these companies due to lack of state or government guarantees. They also face difficulties in getting APMC licenses due to traditional co-operatives already having licenses in some places. Finally, and most importantly, these companies are not allowed to mobilize capital from the market. This capital constraint, like their traditional counterparts, makes it difficult for producer companies to set up facilities to do value addition and marketing. It is sad that even after six years of existence of the law on producer companies, neither the state nor the development agencies have tried to create awareness of the concept and its practice. Most importantly, the JJ Irani Committee has now recommended that the producer company clause should be taken out of the purview of the Companies Act. It is of the view that the producer company does not fit the definition of a company. If need be, there could be separate legislation for producer companies. This recommendation of the Committee has come at a time when the concept was just picking pace in terms of its practice at the producer level and many development agencies seemed to have found a way to organize producers in a market oriented economy. Any tinkering with the law at this juncture will certainly create trouble for the existing and the new producer companies. The government, both 25 the union and the state, should recognize producer companies as producer co- operatives and extend all the support as extended to traditional co-operatives (Singh, 2008a).
5. Conclusions
Though there are concerns about the ability of the small farms to survive in the changing environment of agribusiness, still there are opportunities for them to exploit like in product differentiation with origin of product or organic products and other niche markets. But, the major route has to be through exploitation of other factors like external economies of scale through networking or clustering and alliances like CF (Kirsten and Sartorius, 2002). For this, intermediation is required for small farmers to link them up with global or national markets in processing and marketing (Lipton, 2002). This intermediation could be by a local private enterprise, domestic or multinational, a statal or para-statal organization, or a co-operative or farmer association, all of which could use CF as a mechanism to work with small growers.
Marketing extension which includes better product planning at farmer/group level, provision of market information, securing markets and alternative markets for farmers and improving marketing practice at farmer level in terms of grading, sorting, packaging and primary processing is much needed and could come from CF linkage. There is also need to communicate effectively with producers about the various benefits of the CF linkage, not just price. It could be lower cost of production, lower transaction cost or better quality of produce or other benefits like resource conservation or brand building in the market.
The experience of CF across the globe suggests that it is not the contract per se which is harmful as a system but how it is practised in a given context. If there are enough mechanisms like group contracts, producer companies/associations, NGOs, and regulation of contracts, to monitor and use the contracts for facilitating development of smallholders, it can certainly lead to a betterment of all the parties involved, especially small and marginal farmers. In the emerging environment of triple bottom line of people, planet and profits, corporate agencies need to incorporate the people and planet concerns into their strategies and actions so that sustainability of both business as well as smallholders is achieved and sustained.
It is also important to recognize that there is so much diversity in the type of firms, farmers, crops, and nature of contracts besides the local socio-economic environment that it is better to focus on a specific situation of CF than the generic institution of CF. The context of CF is very important to understand to examine its usefulness as many actors and factors influence the working and outcomes of CF. Therefore, there is no single blueprint of CF suitable for all situations but a series of alternatives. Any assessment of CF should be done in terms of how it reduces contract growers production and market risks and how it impacts on their resource base, compared with the alternatives.
CF agencies can bring better environmental compliance by adopting procedural justice perspective instead of higher levels of monitoring which may be counterproductive and damage buyer-supplier relationships due to their being autonomy reducing for the supplier and conflict generating between the two parties. 26 The procedural justice includes using unbiased, transparent and correctable criteria and procedures for making and executing decisions which can improve levels of trust and commitment between the buyer and the suppler. The basic principles include consistency in applying criteria, suppressing bias, using accurate information, affording opportunity for correcting errors, providing adequate representation in the decision making process, and ensuring ethical treatment (Boyd et al, 2007). It is also known that pro-active environmental strategies can be profitable and sustainable ways to deal with natural environment (Aragon-Correa and Rubio-Lopez, 2007) and environmental management improves market related and image related drivers of economic performance if integrated with other managerial functions (Wagner, 2007). There is a need to provide for ecological concerns into CF programs and policies. This can be done by way of land use planning based on soil depth, soil quality, land slope and suitable water availability. It is also important to understand previous land use and make it mandatory to follow crop rotation, if necessary.
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36 Appendix Table 1: Crop, and Company wise spread of contract farming in India Company Location Type of linkage Crop/Product Farmers (no.) and acreage (acres) Average area under contract (acres) UB group Punjab, Rajasthan Thru Pepsi Barley 1300, 10000 8 SAB Miller Rajasthan CF Barley 8150 farmers
Field Fresh Foods Punjab, Maharashtra Direct CF and Thru franchisee Baby corn and sweet corn 1000 4000 acres
4 Global Green Karnataka, A,P,, and Tamil Nadu CF
Gherkin
25,000 (31000 in 2008) (10,00+4000+11000) 15,857 acres 0.64 Intergarden
Punjab/Hary ana CF thru pepsi Basmati 4000 10,000 2.5 Pepsi Punjab CF Basmati 300 farmers 2000 acres 6.67 Satluj agri Punjab./Hary ana/Uttar Pradesh CF Organic basmati 50 2200 44 Rallis U.P. CF Wheat 19000 acres (2003) TCL North India F-informal Basmati 45000 aces Adat Farmers Co-op. Bank Trissur CF for Nest Group, Cochin Paddy rice 2300 farmers, 250 acres 0.1 Suminter India Organics Across north India CF Organic produce 13,000 71000 acres
5.5 Sresta natural products (24 letter mantra) Across India, mainly AP, Maharashtra CF direct and thru NGOs Organic produce 5000 farmers 10000 acres 2 Ion exchange farms Maharashtra CF Organic fruits- cashew, mango
Maikal BioRe MP CF Organic cotton 1700 12885 acres 7.6 Amit Green Acres Gujarat CF Organic cotton and sesame 500 3200 6.4 Eco farms Maharshtra CF Organic cotton 7000 50000 7.1 Mahima MP CF Organic produce 600 10000 16.7 Pratibha MP CF Organic cotton 2700 8.1 38 syntax 22000 NCC shri cotton, AKOLA Maharashtra CF Cotton 1684; 16818 acres 10 Virchand narsingh cotton Maharashtra CF Cotton 1551; 4632 acres 3 Mohta spinning Maharashtra CF Cotton 1294; 3717 acres 30 Shri NCC Santosh fibres Maharashtra CF Cotton 3720; 18785 acres 5 Super spinning Tamil Nadu CF Cotton Apachi cotton Tamil Nadu CF Cotton INHERE Uttarakhand CF Organic produce 2269 (350 SHGs) 1000 acres 0.44 Morarka foundation All India CF Organic produce
Himalaya health care Karnataka CF Ashwagandha 07 1750 acres Dhawan intl Uttarakhand Direct Med. Plants Dabur India AP CF Amla (Indian gooseberry) 1042 acres HUL Gujarat CF Chicory Seed companies (35-40) All over India including NSC/SSCs CF-Direct and thru organisers Seed Each one with a few hundred farmers for each crop and a few hundred acres
Palm oil (Godrej, Palm Tech, SICAL, Radhika) AP CF-direct Palm 95000 acres Cauvery oil palm Tamil Nadu CF-direct Palm 209; 4375 acres 21 Suguna poultry and hatcheries Tamil Nadu CF Chicken 15000 across 8000 villages and 11 states
Venkateshw ara hatcheries Mah/AP/TN CF Chicken Swathi hatcheries Tamil Nadu Chicken Of the total broiler production 37% is under contract farming and 78% of it is from south India
Arambagh hatcheries West Bengal Chicken Patel farms
Source: Corporate Interventions in Indian Agriculture: FICCI, 2010; Singh, 2009; Singh and Singla, 2011; Vaswani et al, 2003; Gurdev Singh and Asokan, 2005; Pritchard, 2011; Pande, 2008, Kalamkar, 2011; company websites and field studies of the author.