CONTRACT FARMING LURES GLOBAL CORPORATE GIANTS
In the age of globalization, well-organized contract farming appear to offer an important way in which smaller producers can farm in a commercial manner. In Pakistan agro-industries by following contract farming and offering small farmer a technology package and price package can become competitive in the global market.
DR. AMAN ULLAH CHAUDHRY
July 24 - 30, 2006
According to FAO in the age of market liberalization, globalization and expanding agribusiness, there is a danger that small-scale farmers will find difficulty in fully participating in the markets economy. In many countries such farmers could become marginalized as larger farms become increasingly necessary for profitable operation. A consequence of this will be a continuation of the drift of populations to urban areas that is being witnessed almost everywhere.
Attempts by governments and development agencies to arrest the drift have tended to emphasize the identification of 'income generation' activities for rural people. Unfortunately there is relatively little evidence that such attempts have borne fruit. This is largely because the necessary backward and forward market linkages are rarely in place that is rural farmers and small scale entrepreneurs lack both reliable and cost-efficient inputs such as extension advice, mechanization services, seeds, fertilizers and credit, and guaranteed and profitable markets for their output. Well-organized contract farming does, however provide such linkages, and would appear to offer an important way in which smaller producers can farm in a commercial manner. Similarly, it also provides investors with the opportunity to guarantee a reliable source of supply, from the perspective of both quantity and quality.
Contract farming can be defined as an agreement between farmers and processing and /or marketing firms for the production and supply of agriculture products under forward agreements, frequently at predetermined prices. The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advices. The basis of such arrangements is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the company to support the farmer's production and to purchase the commodity.
With effective management, contract farming can be means to develop markets and to bring about the transfer of technical skills in a way that is profitable for both the sponsors and farmers. The approach is widely used, not only for tree and other cash crops, but increasingly for fruits and vegetables, poultry, dairy produce and even prawns and fish. Indeed contract farming is characterized by its " enormous diversity " not only with regard to the products contracted but also in relation to the many different ways in which it can be carried out.
The contract farming systems should be seen as a partnership between agribusiness and farmers. To be successful it requires a long-term commitment from both parties. Exploitive arrangements by manager are likely to have only limited duration and can jeopardize agribusiness investment. Similarly, farmers need to consider that honoring contracted arrangement is likely to be to their long-term benefit. Contract farming is becoming an increasingly important aspect of agribusiness, whether the product are produced by multinationals, smaller companies, government agencies or individual entrepreneurs.
As noted above, the approach would appears to have considerable potential in countries where small-scale agriculture continues to be widespread, as in many cases small-scale farmers can no longer be competitive without access to the services provided by contract farming companies. It must be stressed, however, that the decision to use the contract farming modality must be a commercial one. It is not a development model to be tried by aid donors; government or non-government organizations because other rural development approached have failed. Projects that are primarily motivated by political and social concerns rather than economic and technical realities will invariably fail.
From the point of view of farmers, contractual arrangements can provide them with access to production services and credit as well as knowledge of new technology. Pricing arrangements can reduce risk and uncertainty. Some contract farming venture give farmers the opportunity to diversify into new crops, which would not be possible without the processing and/or marketing facilities provided by the company
PRECONDITION FOR SUCCESSFUL CONTRACT FARMING.
The essential precondition is that there must be a market for the product that will ensure profitability of the venture. To justify investments it must be clear that market will be profitable in the long as well short run. The potential profitability for the sponsor must be calculated on the basis of assumptions about payments to farmers that will assure them consistent and attractive financial benefits. There is range of other factors that affect the success of contract farming ventures. These include the physical, social and cultural environments; the suitability of utilities and communications: the availability of land, and the availability of needed inputs.
An essential precondition is that management must have the necessity competence and structures to handle a project involving many small-scale farmers. Without this no investment can succeed.
Another important requirement is government support. Contracts need to be backed up by laws and efficient legal system. Existing laws may have to be reviewed to ensure that they do not constrain agribusiness and contract farming development and minimize red tape.
There is a wide range of organizational structure that is embraced by the term "Contract farming". The choice of the most appropriate one to use depends on the products, the resources of the company, the social and physical environments, the needs of the farmers and the local farming system. There are four basic models, which are defined as the centralized model, the nucleus estate model, the multipartite model, the informal or individual developer model and the intermediary model. Any crop or livestock product can theoretically be contacted out using any of the models, though certain products can be used to favor certain approaches.
FRAMING OF CONTRACTS
Although it is rare that legal action is taken in the case of breach of contract, it is nevertheless usually important the terms of the agreement are fully spelled out in the form of actual or other legal agreement. The other specifications of contract can vary from the relatively simple, where the sponsor may only specify the quality standards and pricing and payment arrangements. Hitherto, many companies have failed to give sufficient importance to both the drafting of suitable contracts and explaining those contents in a manner that farmers can understand.
There are steps necessary to plan, organize, coordinate and manage production, including the identification of suitable land and farmers, the organization of farmers into working groups, the supply of inputs, the transfer of technology and program of extension services. Emphasizes should be on the importance of developing harmonious management farmer relationship. Contract management if managed badly, can often be a catalyst for antagonism between men and women, with men receiving the benefits while women do the major share of the work
MONITORING OF PRODUCTION
Quality short falls, through the failures of farmers to meet their quotas, can reduce processing efficiency and jeopardize markets, as can the failure of farmers to produce the required qualities. Excessive production can lead to unpopular quota reduction. Companies should also monitor the performance of their employees, particularly those in close contact with the farmers. Finally they should also address the impact of their activities on the physical environment.
CONTRACT FARMING IN DIFFERENT COUNTRIES
INDIA: From the 1980s onwards, Indian agriculture embarked in integration with the global market. Corporate agribusiness entered the scene in a big way, especiously from the 1990s onwards. A combination of agriculture reforms and huge business opportunity has generated a huge buzz in contract farming. The amendment of agricultural Producer Marketing committee Act in 14 stated and the introduction of an integrated good bill have made corporate India take a look at the agriculture sector. The transition towards contract farming began when Pepsi Foods Ltd., entered contract farming in India by installing a Rs. 22 crore state of art tomato processing plant in Punjab. To meet its demand of tomatoes, it entered contract farming. Soon PepsiCo entered the cultivation of Basmati rice, spices (chilies), oil seeds (ground nut) and potato. In state of Madha Pradesh, Hindustan Lever, a subsidiary of the Anglo-Dutch MNC Unilever, Tata groups Rallies ICICI have joined hands in carrying out contract farming of wheat. Under the arrangement Rallies supplies agricultural inputs and know-how and ICICI provides credit and Hindustan Lever buy up the produce for its food processing units. Field fresh, the contract-farming venture of Bharte Tele, has invested nearly Rs. 230 crore in contract farming and has about 600 acres under cultivation.
Other Corporate present are HLL, DCM Shriram and McDonalds. Joining them will be retail chain like big bazaar, Cash and Carry, outfit Metro and perhaps even Reliance Industries.
The national agricultural policy of the government of India visualizes that private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oil seeds, cotton and horticulture crops.
THAILAND: Contract farming under the centralized processing and marketing model is common throughout the Thai sugar industry. Forty-six individually owned sugar mills are in the country. Over 200, 000 farmers grow sugar cane for these mills. In theory, the Thai government closely regulates prices, issues quotas and monitors the operations of the private sugar milling companies. The government has introduced a net revenue sharing system under which growers receive 70 percent and the millers 30 percent of total net revenue. The government also promotes and manages technical research centers and encourages growers associations.
In the northern provinces of Thailand farmer's grows chrysanthemums and fresh vegetables for the Chiangmai and Bangkok markets, under verbal agreements with individual developer. No technical inputs are provided but in most cases the developers advance credit for seed, fertilizer and plastic sheeting. All agronomic advise to farmers is given by government agencies that also organize training courses for the growers. Farmers expressed a preference for growing Chrysanthemums, as this was more profitable.
In the snap-frozen vegetable industry in Northern Thailand, two companied directly contract out to middlemen, or collector, who organizes over 30, 000 farmers to grow soybeans, green beans and baby corn, primarily for the Japanese market. Each collector normally contract and supervises from 200 to 250 farmers.
Collectors are responsible for all field activities from sowing to harvesting. They are paid a commission on the total production of the farmers they supervise. The sponsor agronomist decides the varieties and fertilizer to be used as well as the sowing programmes and crop husbandry methods. The companies also employ field officer to provide technical support to the collectors and their subcontracted farmers.
KENYA: The south Nyamza Sugar company (SONY) in Kenya places strong emphasis on field extension services to its 1800 contracted farmers, at a ratio of one field officer to 65 sugar cane growers. The extension staff's prime responsibilities are focused on the management skills requires when new techniques are introduced to Sony's farmers. These include transplanting, spacing, fertilizer application, cultivation and harvesting practices. Also SONY promotes farmers training programmes and organizes field days to demonstrate the latest sugar cane production methods to farmers.
A multipartite project in Kenya, the Mumias Sugar Company (MSC) that was formed by a multinational, the Commonwealth Development Corporation (CDC) and Kenyan government, actively promoted a growers' association, which eventually took over the normal administrative responsibilities of a sponsor. The association's board of directors comprised for growers representatives, three government representatives and one each from the multinational corporation and CDC. Following the formation of the Mumias out Grower Company, the association took over the administration of the project's accounting and farmer-sponsor negotiations and became a forum for complaints, while MSC retained responsibilities for crop agronomy, transportation and processing.
The author is Consultant, Pakistan Export Promotion Bureau