MODELS FOR LINKING FARMERS TO

MARKETS IN INDIA: IMPLICATIONS FOR

SMALLHOLDERS

Pratap S Birthal

National Institute of Agricultural Economics and Policy Research, New Delhi

Pallavi Rajkhowa & PK Joshi

IFPRI

IFPRI-IIDS- FNCCI Workshop on Best Practices in Contract Farming:

Challenges and Opportunities in Nepal

February 10-11, 2015, Kathmandu Nepal

WHY DIFFERENT MODELS? Farmers and farm heterogeneity

Farm size

Resource endowments and capabilities

Activity choices

Attitude toward production and price risk

Differential access to markets, financial and non-financial services

The less-endowed farmers require a different treatment

From agribusiness perspective

Dominance of smallholders, Disbursed production

Diseconomies of scale in aggregation of outputs and provision of technology, inputs and services

Higher transaction costs (contracting, monitoring, enforcement etc.)

Organization of production is essential to overcome problems or costs associated with diseconomies of small-scale, poor access to services, finances, technology, inputs; inconsistent volume and quality, lack of traceability and risk management

Business models Model Drivers Rationale

Producer-driven Small scale producers, as

groups such associations

or cooperatives

Large scale farmers

Access to new markets

Obtain higher market prices

Stabilize and secure market

positions

Buyer-driven Processors

Exporters

Traders

Retailers

Assure supply

Increase supply volumes

Serve niche markets

consumer preferences

Facilitator-driven Non-governmental

organizations

National and local

governments

Make markets work for the poor

Regional and local development

Integrated Lead firms

Supermarkets

Multinationals

New. higher value markets

Low prices for good quality

Market monopolies

Business Models in India

Direct marketing models: (Apani mandi; Raythu bazar; farmers’ mall)

Cooperatives—dairy (NDDB) : Fruits: Mahagrapes; Mahamango, Mahapomogranate); fruits and vegetables (HOPCOMS )

Producers’ associations: MDFVL (fruits and vegetables); Agrocell (Basmati rice), Agro-cell cotton

Contract /contact farming: most crops/commodities-Nestle; Dynamix Dairy Industries; Venkateshwara Hatcheries; Suguna Hatcheries; Bharati field fresh; ITC; Frito Lay; Chuapal fresh; Appachi cotton; Aditya Birla; Retail Ltd. Heritage; Reliance fresh; Namdhari fresh; Global green; Mcain

Producer companies: Cooperative spirit with corporate efficiency; FPOs,

Cooperative: Milk

National Dairy

Development Board State Federation

District Milk Union

Village Dairy Co-operatives

Member Dairy Farmers of

Village Co-operatives Bank/Financial

Institutions

Insurance

Investment finance for dairy

machinery, processing and packaging

equipment etc

Loan for investment in

machinery and

Infrastructure

VDC gives

insurance to

loanee farmers

Loan for purchase of

cattle

Retailers

Product Flow

Finance Flow

World Bank

Contract Farming: Milk

Retailers

Nestle India

Direct Contract with large

Dairy Farmers

Contracts with local

Commission

Agents/Collection Centre

Small farmers

Assistance and education regarding animal breeding, health, nutrition and food

safety and quality

Provides cattle feed to farmers

Financial support to farmers and agents who managemilk collection centre

Feed/Input Supplier

Finance to large dairy farms to

purchase milk coolers and milk

machines

Bank

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Ind

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fin

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ank

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Product Flow

Finance/Service Flow

Animal Lease: Samridhi Agro-tech

Product Flow

Service & Finance Flow

Sancheta Financial Services Pvt

Ltd (NBFC-MFI)

Samridhi Agri-

Products Pvt Ltd Retailers

Livestock

Distribution

Centre

Milk

Collection

Centre

Ultra-Poor Women Non-Ultra-Poor

Women

Distribution and Marketing of

Processed Milk

Processing

Units

Supply of Cattle and

extension services,

information

dissemination, Training,

Vaccination

Pro

vid

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serv

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s, in

form

ati

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Tra

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acc

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Contract farming: broilers

Supplies chicks, feed, medicines and provides supervisory, extension and veterinary services

Tripartite Agreement

Contract Farmer Bank/Financial Institutions

Poultry Firm/Integrator

Broiler segment for chicken, meat

market

Wholesaler/ Retailer

Feed Manufacturing

Unit

Sellers of Soy and other raw materials

Credit

Product Flow

Finance Flow

Input/Service Flow

Cooperative: Kesla Poultry Cooperative

Governmnet rural

development and poverty

allevation schemes

Feed and medicine

manufacturer

SHG-Bank Linkage Program

Kesla Poultry

Cooperative 5 Co-operatives

consolidated to form the

Madhya Pradesh

Women’s Poultry

Producers Company Ltd

Retailers

PRADAN

Bank/Financial

Institution

Individual Villagers/

Woman formed SHG

Facilitate SHG formation

Product Flow

Finance Flow

Input/Service Flow Hatcheries

Producer association: Fairtrade-Agrocell

Product Flow

Finance Flow

Input/Service Flow

Fairtrade Certification

Agrocel Pure & Fair Cotton

Growers’ Association

International Market

Inte

rest

Fre

e C

red

it Technical

assistance, quality seeds and inputs

Fair Trade International (FLO)

Fairtrade Minimum Price and social premium and

organic premium

Agrocel Pure

Individual Farmers

Agriculture Universities

Domestic Market

Farmer Producer Organization: GoI

Credit, Savings, Insurance,

Inputs, Extension

Kisan Producer

Co-operative

(1000 farmers from 10-12

villages)

Farmers Integrated into

Groups (FIG)

(15-20 farmers)

Farmers

Bank/Insurance Federation of Kisan

Producer

Co-operative at the state

level

FIG

Kisan Sahyogi/ Village

based Extension Cadre

Agriculture Specialist

Supports 10-15 Sahyogi in field implementation

1000 Farmers in 25 Villages

Business Manager

Chief Executive Officer of the Producer Company,

expands Farm-Business Efficiency Frontiers and builds

linkage with Resource & Research Institutions &

Marketing

Product Flow

Finance Flow

Service/Input/Flow

a. Higher income: 50-100%

Reduction in marketing and transaction cost (60-90%)

Reduction in production cost (lower input prices)

Higher yield (5-10%)

Higher output price (5-10%)

b. Access to credit (broiler)

c. Reduction in risk price and production risk (broiler),

dairying

d. Reduced uncertainty in input, supply and their quality

e. Access to infrastructure and improved technology

(Mahagrapes, Nestle)

f. Scaling up

Transparency in terms and conditions

Pricing, Timely payment

Incentives for efficiency, food safety

Monitoring, Mutual trust

Welfare Impact

Smallholder participation?

• Low volume, small marketable surplus, high transaction costs of participation, high cost of contracting, food safety compliance

Why small farmers are excluded?

• Less dependence on a few large producers; Spread supply risk; Optimal utilization of capacity, manpower; More labor, more efficient

Why small farmers should

not be excluded?

• Cooperatives • Producers’ associations • Intermediate contracts

How to include:

Are the Emerging Models Inclusive?

• Low transaction costs of contracting (negotiation, enforcement and monitoring), Large volume, Quality compliance, Economies of scale in provision of inputs, services and markets

Tend to contract with large producers

Mixed evidence

• Vegetables SAFAL (≤ 2ha) = 37%; Gherkin in Karnataka =51% ; All crops in Punjab (≤ 2ha)=15%

• Dairy: ≤ 5 in-milk animals = 56%; Broilers: ≤5000 chicks = 32% Indian experience

•Kenya’s :exporters of fresh fruits and vegetables source their requirement through contracts with small producers

•Malawi: exporters of paparika depend on small farmers

•Madagascar: exporters of french beans from small-scale producers

•Zimbabwe: exporters of flowers and vegetables from large farmers

•Other studies from China, Thailand, Mexico showed a preference for large farmers

International experience

There are not enough large farmers

• Diversified base is essential to reduce supply risk

• Political acceptance or community good will

Small farmers have comparative advantage in labor; lower implicit wage rate; low cost of production;

They are better motivated to respond to product quality, and better farm management

Small farmers are dependent on firms for inputs, services and technology, hence better compliance with terms and conditions

Why contract with small farmers?

Key lessons • Building efficient and inclusive value chains for agricultural commodities

is a big challenge, but is not insurmountable if firms follow innovative and targeted approaches.

• Collective action is essential to overcome scale limitation of smallholders’ participation in value chains, and to reduce transaction costs and risks

• Collective action may not happen in its own, and may require intermediation from the government or its subsidiaries, the non-governmental organizations or the lead firms driving the value chains.

• Mutual trust and incentives are essential for cementing the relationship between buyers and sellers

• For common commodities the prices must be linked with prevailing market prices to avoid side-selling, and breach of contract

• Financing value chain is largely internal to value chain, and limited to production credit in the form of inputs. Long-term and external financing is limited and mainly to large farmers (dairy, orchard, etc.)

• Microfinance institutions with an agribusiness orientation can act as catalyst in development of efficient and inclusive value chains.

• Risk sharing is important for commodities as contract broilers, (Kesla coop) but are rare for other commodities. While institutional insurance is limited.

Policy Implications Level playing field for private sector participation (regulations, taxes, etc. incentives)

Facilitate growers’ association

Check monopsony and monopoly Reduce transaction costs

Involve smallholders

Provide credit and insurance

Evolve policies for contract farming

Incentives to agro-processing industry

Market fee, taxes on processed foods

Strengthen public infrastructure (road, electricity, communication, etc.)

THANK YOU