Here is an essay on ‘Contract Farming in India’ for class 8, 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Contract Farming in India’ especially written for school and college students.
Essay on Contract Farming in India
- Essay on Introduction to Contract Farming
- Essay on the History of Contract Farming
- Essay on the Basic Elements of Contract Farming
- Essay on the Basic Rules of Contract Design
- Essay on the Types of Contract Farming
- Essay on the Need for Contract Farming
- Essay on the Role of Contract Farming
- Essay on the Present Stage of Contract Farming in India
- Essay on Sponsors and Contractors
- Essay on the Advantages of Contract Farming
- Essay on the Disadvantages of Contract Farming
- Essay on Potential Problems Associated with Contract Farming
Essay # 1. Introduction to Contract Farming:
Contract farming is a joint venture between a farmer and a firm for producing and marketing farm products. The contracting firm vertically integrates the food chain to capture the benefits of two or more stages in the production and marketing process of agricultural products.
Contract farming facilitates farmers in getting inputs and technical advice in time, as also the assured price for the output. It is an emerging phenomenon in India, where farmers cannot compete in the international market in terms of quality. So, agro-processing firms help them with the necessary inputs and technical knowledge.
Contract farming is defined as a system for the production and supply of agricultural/ horticultural produce under forward contracts between producers/suppliers and buyers. The essence of such an agreement is the commitment of the producer/seller to provide an agricultural commodity of a certain type, at a time and price, and in the quantity required by a known and committed buyer.
Contract farming is basically an agreement between farmers and processors and/or marketing firms for the scientific production and supply of a specified agricultural product at a frequently and mutually predetermined price. Technical guidance on cultivation practices, harvesting, storage etc. and quality inputs at wholesale rate are assured by the tripartite contract.
The main objective is to increase crop production, improve quality farm produce and possibly minimize cultivation cost. The farmer is therefore, compelled to provide the produce in a specific quantity and quality determined by the processor.
Although, legal protection is possible to both parties, the success depends upon physical social and cultural conditions because all terms and conditions prescribed in the agreement are to be fully respected by concerned parties, so that, projects gives an impetus to scientific planning and implementation of integrated crop cultivation.
Contract farming is an organizational agreement that allows firms to participate in and exert control over the production process without owing or operating the farms. Independent growers perform the cultivation.
Contract Farming has been in existence for many years as a means of organizing the commercial agricultural production of both large – scale and small -scale farmers. In an age of market liberalization, globalization and expanding agri business, there is a danger that small- scale farmers will find difficulty in fully participating in the market economy.
The era of globalization, the concept of ‘Contract Farming’ is an effective way to co-ordinate and promotes production and marketing in agriculture. “Contract Farming can be defined as an agreement between farmers and processing or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.”
Contract Farming is essentially an agreement between unequal parties, companies, Government bodies or individual entrepreneurs on the one hand and economically weaker farmers on the other. The main feature of Contract Farming is that the buyer/contractor supplies all the material inputs and technical advice required for cultivation to the cultivator.
This approach is widely used, not only for tree and cash crops but also, increasingly for fruits and vegetables, poultry, pigs, dairy products and even prawn and fish. Indeed, Contract Farming is characterized by its “enormous diversity” not only with regard to the products contracted but also in relation to many different ways in which it can carry out.
The advantages, disadvantages and problems arising from contract farming will vary according to the physical, social and market environments. More specifically, the distribution of risks will depend on such factors as the nature of the markets for both the raw material and the processed product, the availability of alternative earning opportunities for farmers, and the extent to which relevant technical information is provided to the contracted farmers. These factors are likely to change over time, as will the distribution of risks.
Contract Farming can be traced back to colonial period when commodities like Collin Indigo were produced by the Indian farmers for English factories. Seed production has been carried out through contract farming by the seed companies quite successfully for more than four decades in the country.
The new agricultural policy of 2000 sought to promote growth of private sector participation in agribusiness through contract farming and land bearing arrangements to accelerate technology transfers, capital inflows and assured market for crops.
The colonial period saw the introduction of cash crops such as tea, coffee, and rubber, poppy and indigo in various parts of the country, mostly through a central expatriate-owned estate surrounded by small out grower’s model. ITC introduced cultivation of Virginia tobacco in Coastal Andhra Pradesh in the 1920’s incorporating most elements of a fair contract farming system and met with good farmer response.
This was replaced by auctions in 1984. Organized public and private seed companies were emerged in the 1960’s. The Pepsico introduced tomato cultivation in Punjab in the 1990’s under farming to obtain inputs for its paste-manufacturing facility established as a pre-condition to its entry in to India.
This was sold to Hindustan Lever in 2000, which had earlier acquired the kissan Karnataka. Contract Farming was the strategy of choice for almost all food processing projects contemplated in the 1980’s and 1990’s. Contract Farming is again vogue, and even tried for bulk production of subsistence crops, such as rice, maize and wheat.
Commodity co-operatives, which emerged in the 1950s, provided most services envisaged under ideal contract farming to their members and bought back the supplies offered at contracted prices, although these were not strictly contract arrangements.
The succeeded enormously, leading to their replication and compelling private companies also to adopt similar approaches. Contract Farming is now considered to be a corrective to market imperfections and serving a useful purpose in India in its own limited sphere.
Contract Farming has been promoted in the recent three decades as an institutional innovation to improve agricultural performance in less developed countries. This system was accepted and used as one of the promising institutional frameworks for the delivery of price incentives, technology and other agricultural inputs. Local Governments, private local firms, Multinational companies, some international aid and lending agencies etc. have been involved in these contract farming schemes.
i. Pre-agreed price
iii. Quantity or acreage (minimum/maximum)
Essay # 4. Basic Rules of Contract Design:
Coordination, motivation and transaction costs are three pillars of a contract arrangement. Therefore, it is important to consider contract design as a multi-criterion decision problem.
i. Coordinating to minimize production costs which mean using price signals or instructions or both
ii. Balancing decentralization and centralization in farm decisions which impacts problems like moral hazard and hold up
iii. Minimizing or sharing risk & uncertainty
iv. Reducing the cost of pre- and post-contractual opportunism (adverse selection and moral hazard) by various mechanisms of allocating contracts and monitoring them
v. Encouraging group or cooperative action among producers to lower costs and ensure better compliance
vi. Motivating long-term contracts to reduce hold up problem
vii. Balancing pros and cons of renegotiation of contracts over time
viii. Reducing direct costs of contracting
ix. Using transparent contracts
Essay # 5. Types of Contract Farming:
Primarily, contract farming can 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
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. Whereas, the first type is generally referred to as marketing contract; the other two are types of production contract. But, there is a systematic link between product and factor markets under the contract arrangements as contracts require definite quality of produce, and therefore, specific inputs.
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 grower’s fixed price, residual (profit/loss) sharing by sponsor and grower, open market based 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.
The contracts can be classified into three, not mutually exclusive categories viz., market specification, resource providing and production management.
i. Market specification contracts are pre-harvest agreements that bind the firm and grower to a particular set of conditions governing the sale of the crop. The conditions specify price, quality and pricing.
ii. Resource providing contracts oblige the processor to supply crop inputs, extension or credit, in exchange for a marketing agreement.
iii. Production management contracts bind the farmer to follow a particular production method or input management, usually in exchange for a marketing agreement or resource provision.
In various combinations these contract forms permit the firms to influence the production technology and respond to the markets without having to operate their own plantations.
Contract farming is not totally new to our country. When the white revolution was born in India, contract farming also came into being by the introduction of Operation Flood I & II. Milk cooperatives of Gujarat under the banner Amul are running examples of a type of Contract farming.
The Sugar Cooperatives of Maharashtra and also in many states, growing of fruit crops (papaya, passion fruit, pine apple) and seed cotton in Tamil Nadu on similar pattern, cultivation of oil seeds especially Sunflower in North are examples of the currently practiced systems of Contract farming.
Considering the present socio-economic status of Indian farmers, contract farming seems to be an ideal option, because this system would have certain advantage over the present crop production and marketing system, such as-
i. Profit in produce sale is possible by capitalizing the scientific research in post-harvest technologies.
ii. Indian agriculture per se is becoming commercial due to global demand for a variety of foods, fiber and food products.
iii. Any crop can be cultivated on a large area to obtain produce of uniform quality by adopting appropriate technology. Crop production is also possible on small land- holdings through cooperative/corporate farming to enhance productivity and avoid admixtures or inferior quality produce.
iv. Technology transfer becomes easier due to large-scale adoption.
v. Risk involved due to fluctuation in market price is minimized. This point is relevant to the present strategy of farm economics as the Minimum Support Price (MSP) is generally declared at the end of crop season and it often remains uncertain.
vi. Commercial and nationalized banks are coming forward to finance contract farming through soft loans and are revising prime lending rates.
vii. Additional income from intercrops is certain due to crop diversification. Consolidation of small and marginal lands can make farming economically viable, resulting in higher (> 30%) net returns than traditional/conventional farming systems.
i. In our country the farmers face the problems of traditional technology and management practices, little bargaining power with input suppliers and produce markets, inadequate infrastructure and market information, lack of post-harvest management expertise, poor package of produce and inadequate capital to grow a quality crop. They are waiting for change for better living standards.
ii. Contract farming helps small farmers to participate in the production of high value crops like vegetables, flowers, fruits etc. and benefit from market led growth.
iii. Extensive areas are required by the Agro processors for an intensive cultivation to build a uniform method of cultivation that would reduce their production and transaction costs with the growers.
iv. Effective & efficient monitoring of production operations, extension activities and credit delivery in a conjugal area is easy in Contract farming.
v. Contract farming will maximize tine profits to the farmers and minimize risk in farming like production related risks, transfer price risk and produce risk.
vi. There is a tendency amongst the users to go in for environmental friendly, value added quality agro products in their daily life.
vii. The farmers find it easy to get under one roof inputs, technological & extension services, post-harvest processing facilities and more importantly, the marketing of their produce with assured cash returns.
viii. Contract farming facilitates more and more private Companies to develop backward linkages with the farmers.
ix. Access to crop loans at attractive terms through tie-ups with Banks is facilitated through contract farming.
x. There is a tendency amongst farmers to go in for alternate cropping systems for better monetary returns.
i. The Union Agriculture Ministry is putting its weight behind contract farming – drafting a model law to give legal support to a practice that can give small farmers access to modern technology and resources. An institutional mechanism is being contemplated to record contractual arrangements and help resolve possible disputes.
ii. The farm ministry detailed an agenda for expansion of agricultural credit to the tune of Rs.7, 36,570 cr. during 10th Plan and the official note to the finance ministry gave financing of contract farming by banks priority.
iii. Agricultural and Processed Food Products Development Authority is developing policy guidelines on contract farming for forwarding to state governments for implementation. The guidelines will focus on regularizing the relation between producers and processors of food materials. During this year, 20 Agri-Export zones will be set-up in different states that would integrate the complete process from production to export stage and contract farming is being encouraged to rope in local farmers to join these export zones as members to pool in their produce.
iv. The national agricultural policy, announced last year, had highlighted the need for an increase in the private sector participation in farming by leasing private land for agribusiness and contract farming to private companies.
v. The Standing Committee on Food Management and Agricultural Exports had recommended suitable amendments to the State Agricultural Produce Marketing Regulation Act to promote development of marketing infrastructure in private and co-operative sectors, direct marketing and contract farming.
vi. Contract farming is already undertaken in tea estates by major companies including Pepsi Food, ITC, Hindustan Lever and for crop diversification by Mahindra Shubhlabh Services with Punjab Agro Food grains Corporation; Escort Limited with Punjab Agro for Basmati rice and durum wheat besides drawing a plan to set up grain handling and storage facilities like conveyor belts and silos and earmarking Rs. 1 billion for contract farming and creating post-harvest infrastructure in Punjab and other states in next 3 years.
vii. Punjab plans to diversify crops in 1.5 million acres in next 4 years through contract farming. Already 3 lacs acres under contract farming have been diversified from paddy and wheat to commercial crops like maize, barley, white mustard, Basmati rice and oil seeds.
viii. In Karnataka, wide varieties of vegetables, gherkins, lime, and pomegranate, grapes for resins, pearl onions, asparagus and mangoes for pulp are already covered under contract farming.
ix. Our Bank financed under contract farming to the tune of Rs. 14.86 lacs in Villupuram, Chiitoor and Salem districts for gherkins, cotton, maize etc. Financing for medicinal plants has been taken up under contract farming.
Companies and government agencies have a number of options to obtain raw materials for their processing and marketing activities. The benefits of contract farming are best examined in the light of the other alternatives, namely spot market purchases and large-scale estates.
The main potential advantages for sponsors can be seen as:
1. Political acceptability;
2. Overcoming land constraints;
3. Production reliability and shared risk;
4. Quality consistency; and
5. Promotion of farm inputs.
It can be more politically expedient for a sponsor to involve smallholder farmers in production rather than to operate plantations. Many governments are reluctant to have large plantations and some are actively involved in closing down such estates and redistributing their land. Contract farming, particularly when the farmer is not a tenant of the sponsor, is less likely to be subject to political criticism.
As a result of the restructuring of their economies, many African governments have promoted contract farming as an alternative to private, corporate and state-owned plantations. In recent years many countries have seen a move away from the plantation system of production to one where smaller-scale farmers grow crops under contract for processing and/or marketing.
The decision to choose contract farming does not make a company totally immune from criticism. For example, the considerable opposition to the role of multinational corporations in India in the late 1990s had a negative effect on investment in contract farming by foreign agribusiness corporations.
Most of the world’s plantations were established in the colonial era when land was relatively plentiful and the colonial powers had few scruples about either simply annexing it or paying landowners minimal compensation. That is, fortunately, no longer the situation. Most large tracts of suitable land are now either traditionally owned, costly to purchase or unavailable for commercial development.
Moreover, even if it were possible for companies to purchase land at an affordable price, it would rarely be possible to purchase large enough parcels of land to offer the necessary economies of scale achieved by estate agriculture. Contract farming, therefore, offers access to crop production farmland that would not otherwise be available to a company, with the additional advantage that it does not have to purchase it.
The failure to supply agreed contracts could seriously jeopardize future sales. Plantation agriculture and contract farming both offer reasonable supply reliability. Sponsors of contract farming, even with the best management, always run the risk that farmers will fail to honor agreements. On the other hand, plantation agriculture always runs the risk of labour disputes.
In the case of horticultural production some companies do prefer estate rather than contracted production. In Gambia and Ghana, for example, a number of crops are grown under the estate model, as are strawberries and flowers in Kenya. Working with contracted farmers enables sponsors to share the risk of production failure due to poor weather, disease, etc.
The farmer takes the risk of loss of production while the company absorbs losses associated with reduced or nonexistent throughput for the processing facility. Where production problems are widespread and no fault of the farmers, sponsors will often defer repayment of production advances to the following season.
Both estate and contract farming methods of obtaining raw materials are considerably more reliable than making purchases on the open market. The open market is rarely an acceptable option for organizations that have significant assets tied up in processing facilities and need to have guaranteed quantities of raw material to justify their investment.
For example, it is hardly ever an acceptable option for companies who make regular shipments of horticultural produce to supermarkets and for export. Companies must ensure that crops are harvested and sold on a carefully scheduled and consistent basis: a factor that is normally assured under a well-directed contract farming scheme.
Markets for fresh and processed agricultural produce require consistent quality standards. Moreover, these markets are moving increasingly to a situation where the supplier must also conform to regulatory controls regarding production techniques, particularly the use of pesticides.
For fresh produce there is a growing requirement for “traceability”, i.e. suppliers to major markets increasingly need to be confident of identifying the source of production if problems related to food safety arise. Both estate and contracted crop production require close supervision to control and maintain product quality, especially when farmers are unfamiliar with new harvesting and grading methods.
Often, large numbers of crops within a single project have to be transplanted, harvested and purchased in a uniform manner so as to achieve product consistency. Agribusiness producing for markets demanding high quality standards, such as fruits and vegetables for export, often finds that small-scale farmers and their families are more likely to produce high-quality products than farmers who must supervise hired labour.
Also contract farming makes quarantine controls more manageable. It is easier for quarantine authorities to inspect a limited number of exporters of a single commodity, who closely supervise farmers, than to inspect hundreds, or sometimes thousands, of individual producers selling through open markets.
Much of the production of “organic” foods is being done on contract, as an integrated operation facilitates a clear crop identity from farmer to retailer. In some highly sophisticated operations, containers are now being loaded on the farm for direct delivery to the supermarket.
An example of an unusual but, nevertheless, interesting benefit for sponsors comes from the Philippines. A feed milling company experienced difficulties in marketing its feed, which was more expensive than that produced by competing companies. To solve this problem it developed rearing schemes for pigs and poultry under contract in order to provide a market outlet for its feeds and to demonstrate their performance to other farmers living near the contracted farmers.
Contract Farming is not a panacea to solve all related problems of agricultural production and marketing systems. But contract farming could be evaluated as a way of providing earlier access to credit, input, information and technology and product markets for the small scale farming structure. Contract farming might also be seen as a way or as a part of rural development and promoted to improve agricultural performance especially in Third World Countries.
Besides farming to both sides, there are some problems. For successful implementation of contract farming, having co-ordination and collaboration consciousness and acting in an organized manner are advisable for both sides. On the Other hand, Government attitudes and incentives are also important aspects.
Essay # 10. Advantages of Contract Farming:
The prime advantage of a contractual agreement for farmers is that the sponsor will normally undertake to purchase all produce grown, within specified quality and quantity parameters. Contracts can also provide farmers with access to a wide range of managerial, technical and extension services that otherwise may be unobtainable. Farmers can use the contract agreement as collateral to arrange credit with a commercial bank in order to fund inputs.
Thus, the main potential advantages for farmers are:
1. Provision of inputs and production services;
2. Access to credit;
3. Introduction of appropriate technology;
4. Skill transfer;
5. Guaranteed and fixed pricing structures; and
6. Access to reliable markets.
1. Provision of Inputs and Production Services:
Many contractual arrangements involve considerable production support in addition to the supply of basic inputs such as seed and fertilizer. Sponsors may also provide land preparation, field cultivation and harvesting as well as free training and extension. This is primarily to ensure that proper crop husbandry practices are followed in order to achieve projected yields and required qualities.
There is, however, a danger that such arrangements may lead to the farmer being little more than a laborer on his or her own land. It is often difficult for small- scale farmers outside the contract-farming context to gain access to inputs.
In Africa, in particular, fertilizer distribution arrangements have been disrupted by structural adjustment measures, with the private sector having yet to fill adequately the void created by the closure of parasitical agencies.
In many countries a vicious circle has developed whereby the low demand for inputs provides no incentive for the development of commercial distribution networks and this, in turn, further adversely affects input availability and use. Contract farming can help to overcome many of these problems through bulk ordering by management.
The majority of smallholder producers experience difficulties in obtaining credit for production inputs. With the collapse or restructuring of many agricultural development banks and the closure of many export crop marketing boards (particularly in Africa), which in the past supplied farmers with inputs on credit, difficulties have increased rather than decreased. Contract farming usually allows farmers access to some form of credit to finance production inputs.
In most cases it is the sponsors who advance credit through their managers. However, arrangements can be made with commercial banks or government agencies through crop liens that are guaranteed by the sponsor, i.e. the contract serves as collateral. When substantial investments are required of farmers, such as packing or grading sheds, tobacco barns or heavy machinery, banks will not normally advance credit without guarantees from the sponsor.
The tendency of certain farmers to abuse credit arrangements by selling crops to buyers other than the sponsor (extra-contractual marketing), or by diverting inputs supplied by management to other purposes, has caused some sponsors to reconsider supplying most inputs, opting instead to provide only seeds and essential agrochemicals. The policies and conditions that control advances are normally described in attachments to contract.
3. Introduction of Appropriate Technology:
New techniques are often required to upgrade agricultural commodities for markets that demand high quality standards. New production techniques are often necessary to increase productivity as well as to ensure that the commodity meets market demands. However, small scale farmers are frequently reluctant to adopt new technologies because of the possible risks and costs involved.
They are more likely to accept new practices when they can rely on external resources for material and technological inputs. Nevertheless, the introduction of new technology will not be successful unless it is initiated within a well-managed and structured farming operation.
Private agribusiness will usually offer technology more diligently than government agricultural extension services because it has a direct economic interest in improving farmers’ production. Most of the larger sponsors prefer to provide their own extension rather than rely on government services.
The skills the farmer learns through contract farming may include record keeping, the efficient use of farm resources, improved methods of applying chemicals and fertilizers, knowledge of the importance of quality and the characteristics and demands of export markets. Farmers can gain experience in carrying out field activities following a strict timetable imposed by the extension service.
In addition, spillover effects from contract farming activities could lead to investment in market infrastructure and human capital, thus improving the productivity of other farm activities. Farmers often apply techniques introduced by management (ridging, fertilizing, transplanting, pest control, etc.) to other cash and subsistence crops.
The returns farmers receive for their crops on the open market depend on the prevailing market prices as well as on their ability to negotiate with buyers. This can create considerable uncertainty which, to a certain extent, contract farming can overcome. Frequently, sponsors indicate in advance the price(s) to be paid and these are specified in the agreement. On the other hand, some contracts are not based on fixed prices but are related to the market prices at the time of delivery.
Small-scale farmers are often constrained in what they can produce by limited marketing opportunities, which often makes diversification into new crops very difficult. Farmers will not cultivate unless they know they can sell their crop, and traders or processors will not invest in ventures unless they are assured that the required commodities can be consistently produced.
Contract farming offers a potential solution to this situation by providing market guarantees to the farmers and assuring supply to the purchasers. Even where there are existing outlets for the same crops, contract farming can offer significant advantages to farmers. They do not have to search for and negotiate with local and international buyers, and project sponsors usually organize transport for their crops, normally from the farm gate.
Essay # 11. Disadvantages of Contract Farming:
The main disadvantages faced by contract farming developers are:
1. Land availability constraints;
2. Social and cultural constraints;
3. Farmer discontent;
4. Extra-contractual marketing; and
5. Input diversion.
1. Land Availability Constraints:
Farmers must have suitable land on which to cultivate their contracted crops. Problems can arise when farmers have minimal or no security of tenure as there is a danger of the sponsor’s investment being wasted as a result of farmer landlord disputes. Difficulties are also common when sponsors lease land to farmers. Such arrangements normally have eviction clauses included as part of the conditions.
Some contract farming ventures are dominated by customary land usage arrangements negotiated by landless farmers with traditional landowners. While such a situation allows the poorest cultivator to take part in contract farming ventures, discrete management measures need to be applied to ensure that landless farmers are not exploited by their landlords. Before entering into contracts, the sponsor must ensure that access to land is secured, at least for the term of the agreement.
Problems can arise when management chooses farmers who are unable to comply with strict timetables and regulations because of social obligations. Promoting agriculture through contracts is also a cultural issue. In communities where custom and tradition play an important role, difficulties may arise when farming innovations are introduced.
Before introducing new cropping schedules, sponsors must consider the social attitudes and the traditional farming practices of the community and assess how a new crop could be introduced. Customary and religious issues are also important factors.
For example, Easter for some Christians is an inappropriate time for sowing vegetable crops. Harvesting activities should not be programmed to take place during festivals, and failure to accommodate such traditions will result in negative farmer reaction. It must also be recognized that farmers require time to adjust to new practices.
A number of situations can lead to farmer dissatisfaction. Discriminatory buying, late payments, inefficient extension services, poor agronomic advice, unreliable transportation for crops, a mid-season change in pricing or management’s rudeness to farmers will all normally generate dissent. If not readily addressed, such circumstances will cause hostility towards the sponsors that may result in farmers withdrawing from projects.
The sale of produce by farmers to a third party, outside the conditions of a contract, can be a major problem. Extra-contractual sales are always possible and are not easily controlled when an alternative market exists. For example, a farmer cooperative in Croatia bought cucumbers, red peppers and aborigines on contract.
The cooperative’s advances to the farmers included all necessary production inputs. Unfortunately members often sold their vegetables to traders at higher prices than the cooperative had contracted. The outside buyers offered cash to farmers as opposed to the prolonged and difficult collection of payments negotiated through the cooperative.
Sponsors themselves can sometimes be a cause of extra-contractual practices. There are several companies working with the same crop (e.g. cotton in some southern African countries), they could collaborate by establishing a register of contracted farmers.
Managers must be aware of produce being sold outside the project and also be aware of produce from outside being channeled into the buying system. This occurs when non- contracted farmers take advantage of higher prices paid by an established sponsor.
Non-contracted crops are filtered into the buying system by outside farmers through friends and family who have crop contracts. Such practices make it difficult for the sponsor to regulate production targets, chemical residues and other quality aspects.
A frequent problem is that farmers are tempted to use inputs supplied under contract for purposes other than those for which they were intended. They may choose to use the inputs on their other cash and subsistence crops or even to sell them. Clearly this is not acceptable to the sponsor, as the contracted crop’s yields will be reduced and the quality affected.
Steps to overcome such problems include improved monitoring by extension staff, farmer training and the issuing of realistic quantities of inputs. However, the knowledge that a contract has the advantages of technical inputs, cash advances and a guaranteed market usually makes the majority of farmers conform to the agreement. Unless a project is very poorly managed, input diversion is usually an annoyance rather a serious problem.
Essay # 12. Potential Problems Associated with Contract Farming:
For farmers, the potential problems associated with contract farming include:
1. Increased risk;
2. Unsuitable technology and crop incompatibility;
3. Manipulation of quotas and quality specifications;
5. Domination by monopolies; and
6. Indebtedness and over reliance on advances.
Farmers entering new contract farming ventures should be prepared to balance the prospect of higher returns with the possibility of greater risk. Such risk is more likely when the agribusiness venture is introducing a new crop to the area. There may be production risks, particularly where prior field tests are inadequate, resulting in lower-than-expected yields for the farmers. Market risks may occur when the company’s forecasts of market size or price levels are not accurate.
Considerable problems can result if farmed perceive that the company is unwilling to share any of the risk, even if partly responsible for the losses. In Thailand, for example, a company that contracted farmers to rear chickens charged a levy on farmers’ incomes in order to offset the possibility of a high chicken mortality rate. This was much resented by the farmers, as they believed that the poor quality of the day-old chicks supplied by the company was one reason for the problem.
2. Unsuitable Technology and Crop Incompatibility:
The introduction of a new crop to be grown under conditions rigorously controlled by the sponsor can cause disruption to the existing farming system. For example, the managers may identify land traditionally reserved for food crops as the most suitable for the contracted crop.
Harvesting of the contracted crop may fall at the same time as the harvesting of food crops, thus causing competition for scarce labour resources. Particular problems may be experienced when contract farming is related to resettlement programmers.
In Papua New Guinea, for example, people from the Highlands were resettled in coastal areas to grow oil palm and rubber. This required the farmers, who were traditionally sweet potato eaters, to learn cultivation techniques for new food crops and to adapt their dietary practices accordingly. Two factors should be considered before innovations are introduced to any agricultural environment. The first is the possible adverse effect on the social life of the community.
When tobacco growers in Fiji were encouraged to cure tobacco themselves rather than sell it in the fresh green form, it was found that they were unable to handle the highly technical curing operation with any degree of continuity. This was attributed to intermittent social commitments and customary obligations that overrode contractual responsibilities and eventually resulted in the cancellation of their contracts.
The second factor is the practicality of introducing innovations or adaptations. The introduction of sophisticated machines (e.g. for transplanting) may result in a loss of local employment and overcapitalization of the contracted farmer.
Furthermore, in field activities such as transplanting and weed control, mechanical methods often produce less effective results than do traditional cultivation methods. Field extension services must always ensure that the contracted crop fits in with the farmer’s total cropping regime, particularly in the areas of pest control and field rotation practices.
Inefficient management can lead to production exceeding original targets. For example, failures of field staff to measure fields following transplanting can result in gross over planting. Sponsors may have unrealistic expectations of the market for their product or the market may collapse unexpectedly owing to transport problems, civil unrest, change in government policy or the arrival of a competitor.
Such occurrences can lead managers to reduce farmers’ quotas. Few contracts specify penalties in such circumstances. In some situations management may be tempted to manipulate quality standards in order to reduce purchases while appearing to honor the contract. Such practices will cause sponsor-farmer confrontation, especially if farmers have no method to dispute grading irregularities. All contract farming ventures should have forums where farmers can raise concerns and grievances relating to such issues.
Problems occur when staff responsible for issuing contracts and buying crops exploits their position. Such practices result in a collapse of trust and communication between the contracted parties and soon undermine any contract. Management needs to ensure that corruption in any form does not occur. On a larger scale, the sponsors can themselves be dishonest or corrupt.
Governments have sometimes fallen victim to dubious or “fly-by-night” companies who have seen the opportunity for a quick profit. Techniques could include charging excessive fees to manage a government-owned venture or persuading the government and other investors to set up a new contract farming company and then sell that company overpriced and poor quality processing equipment. In such cases farmers who make investments in production and primary processing facilities run the risk of losing everything.
The monopoly of a single crop by a sponsor can have a negative effect. Allowing only one purchaser encourages monopolistic tendencies, particularly where farmers are locked into a fairly sizeable investment, such as with tree crops, and cannot easily change to other crops.
On the other hand, large-scale investments, such as for nucleus estates, often require a monopoly in order to be viable. In order to protect farmers when there is only a single buyer for one commodity, the government should have some role in determining the prices paid.
Drucker suggests that privately managed monopolies under public regulation are preferable to non-regulated private or public monopolies. The greatest abuses do tend to occur when there are public monopolies, where buying prices are set by the government, or where farmers have made long-term investments in perennial crops.
In 1999 the Kenya Tea Development Authority experienced serious unrest amongst its growers, reportedly because of the Authority’s inefficient extension services and alleged “manipulation” of farmers. There was also discontent in Kenya among sugar farmers because the price set by the government did not change between 1997 and 1999.
6. Indebtedness and Over Reliance on Advances:
Indebtedness and over reliance on advances were high, as they thought contract farming did not pay. One of the major attractions of contract farming for farmers is the availability of credit provided either directly by the company or through a third party. However, farmers can face considerable indebtedness if they are confronted with production problems, if the company provides poor technical advice, if there are significant changes in market conditions, or if the company fails to honour the contract.
This is of particular concern with long-term investments, either for tree crops or for on-farm processing facilities. If advances are uncontrolled, the indebtedness of farmers can increase to uneconomic levels. In one venture “compassionate” advances for school fees, weddings and even alimony resulted in many- farmers receiving no payments at the end of the season. Dropout rates for farmers in that particular project.