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Vol. XXIX No. 1, April 16-30, 2019

Contract Farming — to make farm sector profitable

by A Special Correspondent

The passing of the Bill by the Tamil Nadu Government to promote contract farming is welcome news. Although the concept is not new there has not been enough serious effort to promote it especially for horticulture and cash crops that languish under conditions of price volatility and market uncertainty. The government web-site cites just eight projects under contract farming, indicative of the unexplored potential.

Predominance of small holdings, susceptibility to climatic vagaries, tendency of produce prices to collapse in the wake of harvest, high price sensitivity to bumper yields, in effect punishing productivity, and absence of effort at value addition are characteristics of the farming sector. Contract farming system has the potential to address some of these problems and integrate the farm with domestic and world markets.

Nutrition for the population based on 370 g/day of rice and 70 g/day of pulses shows that 93 lakh tonnes of rice and 10.01 lakh tonnes of pulses are needed for the State’s population against production of 57 lakh tonnes and 3.2 lakh tonnes respectively, as of 2013-14, according to data from the Department of Economics and Statistics. It underlines the importance of nutrition security as distinct from food security and of closer proximity to self-sufficiency through higher realisation of yield potential.

There is scope to raise productivity as the yield gap between actual yield and potential yield is as large as 30-40 per cent for many crops; an example is rice with a potential of 6,000 kg/ha based on on-farm trials compared to actual yield of about 4,000 kg/ha.

As much as sixty per cent of the 50 lakh ha under cultivation is under irrigation indicative of high dependance on water availability compared to rainfed conditions. Tamil Nadu has about 8.5 lakh ha under fruits, vegetables, spices and aromatics, total production increasing by about 30 per cent between 2011-12 and 2013-14. Integrating the farm with the market is the role of, what is loosely referred to as contract farming. Farmers undertake to produce and deliver the crop to a contracting organisation and the latter underwrites the production at a price, agreed mutually prior to planting. As there is both the need and the scope to increase productivity moving up the value ladder, contract farming has a well cut out role to play. It should be given a fair opportunity to succeed.

Agricultural produce market in the State and elsewhere is dominated by private wholesalers and commission agents. They buy from the farms and sell to other wholesalers or processors. There is no prior binding contract nor the assurance of off-take or idea of price before planting. Storage and preservation facilities are inadequate resulting in sizeable losses with barely 60 per cent of the produced quantity reaching the consumer. Agricultural produce marketing centres under local bodies are functional but have not been able to curb the predatory practices of private intermediaries. Private operators provide service at the farmer’s door and pay promptly, which farmers find meet their pressures. Traders can exploit farmers’ desperation for cash and are able to force them to sell – at times, even before harvest, based on an estimated output – at low prices. Weighment irregularities, over-provision for moisture and similar factors affect the net price the farmer realises. All these combine to explain the anomaly of low farm gate prices and high consumer prices – a spread, larger than what is reasonable. As a sizeable segment of the farming sector is made of small holders of less than 2 ha – 74 lakh out of 81 lakh holdings – their bargaining power is too weak to be able to deal with an oligarchic wholesale structure.

Contract farming can address these weaknesses in the supply chain and enable the farmer to get a larger slice of the cake. Without being known by that name, this system has been successfully in practice in the sugar industry for several decades. Fertilisers, pesticides and material for biological control of pests are supplied as also are treated disease-free cane “setts” for planting of high sucrose-yielding varieties. Technical support is extended at every stage of crop life till harvest. The company collaborates with a bank that extends loans to growers to meet their production and capital improvement costs. The loans are serviced out of sums withheld from caneproceeds and paid directly to the bank. This model has been replicated, with adaptations, in several other agro-processing private sector-farmer joint ventures.

There are examples of successful ventures based on contract farming for other crops. The ginning and trading operation in Pollachi formed linkages between the cotton grower and the user textile units. This example is unique also for another reason. Its constituents are not individual growers but grower self-help groups. Gherkin export is another case of a mutually beneficial, lasting contract with growers.The milk projects in several states including Tamil Nadu, following the famous Amul, are contract farming models. In all these cases, relationship is based on features that address the needs and interests of all the parties.
The contract system is flexible to accommodate different needs. In some cases, the farmer is given inputs and technical guidance and the output is bought out at a price agreed before planting. In other cases, the farmer is absolved of variations in output and of varying produce prices, by the promoter taking the land on lease; in addition to lease the farmer gets production costs and sometimes a share of the additional profit arising out of higher quality and yields. In this range there are several variants.

Absorbing the risk of a sub-optimal yield due to external factors and assurance of purchase price made known before planting are the biggest take-aways for farmers from a contract system. The promoter is, in turn, able to hedge against these risks by provisions in his cost structure and through crop insurance cover.

For long term durability and sustainability of the contract venture, the end-product processed from the crop should have a stable domestic market base that does not fluctuate unduly over time and wherever feasible, there should be more than one end-product addressing different market segments so as to cope with demand uncertainties.
(To be concluded next fortnight)

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