Linking Small Farmers to Global Markets: Role of...

Linking Small Farmers to Global Markets: Linking Small Farmers to Global Markets: Role of Contracting Farming and Role of Contracting Farming and Cooperatives in Asian CountriesCooperatives in Asian Countries

Purushottam K. MudbharySenior Policy Officer

Policy Assistance Branch

Regional Office for Asia and the Pacific

ContentsContents

IntroductionIntroductionDefinition of contract farmingDefinition of contract farmingAreas covered by contract farmingAreas covered by contract farmingContract farming modelsContract farming modelsPositive lessonsPositive lessonsRisks for farmersRisks for farmersRisks for sponsorsRisks for sponsorsKey preconditions for successKey preconditions for successCooperatives in AsiaCooperatives in AsiaCooperatives in Asia: Selected ExamplesCooperatives in Asia: Selected Examples

INTRODUCTIONINTRODUCTION

“…“…globalization is more than the flow of money globalization is more than the flow of money and commoditiesand commodities——it is the growing it is the growing interdependence of the worldinterdependence of the world’’s people. And s people. And globalization is a process integrating not just the globalization is a process integrating not just the economy but culture, technology and economy but culture, technology and governance. People everywhere are becoming governance. People everywhere are becoming connectedconnected––affected by events in the far corners affected by events in the far corners of the world.of the world.””

UNDP UNDP –– Human Development Report 1999Human Development Report 1999


Major features of the present globalizationMajor features of the present globalizationNew marketsNew markets——foreign exchange and capital markets linked foreign exchange and capital markets linked globally, operating 24 hours a dayglobally, operating 24 hours a dayNew toolsNew tools——Internet links, cellular phones and media networks.Internet links, cellular phones and media networks.New actorsNew actors——WTO, WTO, with authority over national with authority over national governments, the governments, the MNCs with more economic power than many states, the global MNCs with more economic power than many states, the global networks of NGOs and other groups that transcend national networks of NGOs and other groups that transcend national boundaries.boundaries.New rulesNew rules——multilateral agreements on trade, services and multilateral agreements on trade, services and intellectual property, backed by strong enforcement mechanisms intellectual property, backed by strong enforcement mechanisms and more binding for national governments, reducing the scope and more binding for national governments, reducing the scope for national policy.for national policy.


Trade is a key link of globalizationTrade is a key link of globalizationThe farm sector need to be competitive to The farm sector need to be competitive to survive and to contribute to poverty alleviation survive and to contribute to poverty alleviation and economic growth in low income countriesand economic growth in low income countriesAbility to compete will depend on:Ability to compete will depend on:oo the efficiency of production at the farm level,the efficiency of production at the farm level,oo the efficiency of marketing and processing systems,the efficiency of marketing and processing systems,oo the domestic policies and market access conditionsthe domestic policies and market access conditions

INTRODUCTIONINTRODUCTIONMarket access also depends on the ability to Market access also depends on the ability to meet the quality and safety standards of meet the quality and safety standards of importersimportersMost farmers in Asia are small farmers and Most farmers in Asia are small farmers and poverty is highly concentrated among thempoverty is highly concentrated among themDefinition of small farmers differs, both in Definition of small farmers differs, both in terms of size and organizationterms of size and organizationThere is duality in the organization of the There is duality in the organization of the farming sector, but commercialization is farming sector, but commercialization is increasingincreasing

INTRODUCTIONINTRODUCTIONDevelopment of cooperatives and contract farming Development of cooperatives and contract farming schemes are the two key strategies for benefiting from schemes are the two key strategies for benefiting from globalization through vertical coordination of small globalization through vertical coordination of small farms with processors and exportersfarms with processors and exportersThese can enhance the economy of scale and the These can enhance the economy of scale and the quality standards at the production, marketing and quality standards at the production, marketing and processing levelprocessing levelPublic goods Public goods –– policies, infrastructure and support policies, infrastructure and support services including market info., research, testing and services including market info., research, testing and certification certification –– reducing transactions costs, building reducing transactions costs, building human capital and removing credit constraints are human capital and removing credit constraints are crucialcrucialVertical coordination with processors and exporters Vertical coordination with processors and exporters and a proand a pro--active public sector are essentialactive public sector are essential

DEFINITION OF CONTRACT FARMINGDEFINITION OF CONTRACT FARMING

An Agreement between farmers and An Agreement between farmers and processing and/or marketing firms for the processing and/or marketing firms for the production and supply of agricultural production and supply of agricultural products under forward agreements, products under forward agreements, frequently at predetermined pricesfrequently at predetermined prices

FAO; FAO; Contract Farming: Partnerships for GrowthContract Farming: Partnerships for Growth; 2001; 2001

AREAS COVERED BY CONTRACT FARMINGAREAS COVERED BY CONTRACT FARMING

Market provisionMarket provision: The grower and buyer agree to : The grower and buyer agree to terms and condition for the future sale and purchase of terms and condition for the future sale and purchase of a crop or livestock producta crop or livestock productResource provisionResource provision: In conjunction with the : In conjunction with the marketing arrangements, the buyer agrees to supply marketing arrangements, the buyer agrees to supply selected inputs, including on occasions land preparation selected inputs, including on occasions land preparation and technical adviceand technical adviceManagement specificationsManagement specifications: The grower agrees to : The grower agrees to follow recommended production methods, inputs follow recommended production methods, inputs regimes, and cultivation and harvesting specificationsregimes, and cultivation and harvesting specifications

CONTRACT FARMING MODELSCONTRACT FARMING MODELS

The centralized model.The centralized model. The sponsor purchases crops The sponsor purchases crops from farmers for processing, and markets the product. from farmers for processing, and markets the product. Quotas are distributed at the beginning of each growing Quotas are distributed at the beginning of each growing season and quality is tightly controlled. Generally season and quality is tightly controlled. Generally associated with tobacco, cotton, sugar cane, bananas, associated with tobacco, cotton, sugar cane, bananas, coffee, tea, cocoa and rubber. Can also cover poultry, coffee, tea, cocoa and rubber. Can also cover poultry, pork, dairy, fresh vegetables and fruits.pork, dairy, fresh vegetables and fruits.Examples: sugarcane production in Thailand, tomato Examples: sugarcane production in Thailand, tomato processing in Punjab, India, vegetable canning in the processing in Punjab, India, vegetable canning in the Philippines. The extent of the sponsorPhilippines. The extent of the sponsor’’s involvement s involvement varies varies


Nucleus estate model.Nucleus estate model. The sponsor owns and The sponsor owns and manages a plantation, usually close to a processing manages a plantation, usually close to a processing plant, and introduces technology and management plant, and introduces technology and management techniques to farmers (sometimes called "satellite" techniques to farmers (sometimes called "satellite" growers). Mainly used for tree crops, but has also been growers). Mainly used for tree crops, but has also been applied to dairy production.applied to dairy production.Examples: Oil palm (in resettlement areas) and dairy in Examples: Oil palm (in resettlement areas) and dairy in Indonesia, tea estates in India, Nepal and Sri Lanka.Indonesia, tea estates in India, Nepal and Sri Lanka.


Multipartite model.Multipartite model. Usually involves statutory bodies Usually involves statutory bodies and private companies jointly participating with and private companies jointly participating with farmers. Usually, contract commitment to provide farmers. Usually, contract commitment to provide material and management inputs to farmers.material and management inputs to farmers.Example: common in China, where government Example: common in China, where government departments, township committees and foreign departments, township committees and foreign companies have jointly entered into contracts with companies have jointly entered into contracts with villages and individual farmers. villages and individual farmers.

CONTRACT FARMING CONTRACT FARMING MODELSMODELS

Informal model.Informal model. Individual entrepreneurs or small Individual entrepreneurs or small companies make simple, informal production contracts companies make simple, informal production contracts with farmers on a seasonal basis, particularly for fresh with farmers on a seasonal basis, particularly for fresh vegetables and tropical fruits. Supermarkets frequently vegetables and tropical fruits. Supermarkets frequently purchase fresh produce through individual developers. purchase fresh produce through individual developers. Normally, minimal processing and few inputs to Normally, minimal processing and few inputs to farmers; availability of govt. support services crucial.farmers; availability of govt. support services crucial.Examples: Gherkins production in Sri Lanka; bananas, Examples: Gherkins production in Sri Lanka; bananas, squash and papaya production for export in the South squash and papaya production for export in the South Pacific and chrysanthemums and fresh vegetable Pacific and chrysanthemums and fresh vegetable production in northern provinces of Thailand.production in northern provinces of Thailand.


Intermediary model.Intermediary model. Formal subcontracting of crop Formal subcontracting of crop production to intermediaries is common in Southeast production to intermediaries is common in Southeast Asia. Large food processing companies purchase crops Asia. Large food processing companies purchase crops from individual "collectors" or farmer committees, who from individual "collectors" or farmer committees, who make their own informal arrangements with farmers. make their own informal arrangements with farmers. The risk is that the sponsor loses control over The risk is that the sponsor loses control over production and over prices paid to farmers by production and over prices paid to farmers by middlemen.middlemen.Examples: Soybean, green beans and baby corn Examples: Soybean, green beans and baby corn production in Northern Thailand; in Indonesia, this production in Northern Thailand; in Indonesia, this practice is widespread and termed practice is widespread and termed plasmaplasma. .

POSITIVE LESSONSPOSITIVE LESSONS

Can be effective in linking the small farm sector Can be effective in linking the small farm sector to sources of extension advice, mechanization, to sources of extension advice, mechanization, seeds, fertilizer and credit, and to guaranteed seeds, fertilizer and credit, and to guaranteed and profitable markets for produceand profitable markets for producePrivate agribusiness will usually offer technology Private agribusiness will usually offer technology more effectively than government agricultural more effectively than government agricultural extension services, because it has a direct extension services, because it has a direct economic interest in improving farmers' economic interest in improving farmers' productionproduction


Skills transferred can include the efficient use of Skills transferred can include the efficient use of farm resources, carrying out field activities farm resources, carrying out field activities according to a strict timetable, improved according to a strict timetable, improved methods of applying chemicals and fertilizers, methods of applying chemicals and fertilizers, and a knowledge of the importance of quality and a knowledge of the importance of quality and of the demands of export markets and good and of the demands of export markets and good record keepingrecord keepingReduce price uncertainty to farmersReduce price uncertainty to farmers


Companies gain access to crop production on Companies gain access to crop production on land that would otherwise be unavailable, with land that would otherwise be unavailable, with the additional advantage of not having to buy or the additional advantage of not having to buy or lease itlease itEnables them to share risks, find reliable Enables them to share risks, find reliable supplies of raw materials for processing plants, supplies of raw materials for processing plants, and guarantee that their products conform to and guarantee that their products conform to quality standardsquality standardsCan contribute to both increased income for Can contribute to both increased income for farmers and higher profitability for sponsorsfarmers and higher profitability for sponsors

RISKS FOR FARMERSRISKS FOR FARMERS

Uncertainty involved in growing new, unfamiliar crops Uncertainty involved in growing new, unfamiliar crops and producing for markets that might not always live and producing for markets that might not always live up to their expectations up to their expectations -- or their sponsors' forecastsor their sponsors' forecastsLoss of bargaining power visLoss of bargaining power vis--àà--vis a large agrovis a large agro--industry, industry, monopsonistic market power and exploitative terms monopsonistic market power and exploitative terms Manipulation of quality standards by the sponsor in Manipulation of quality standards by the sponsor in order to reduce purchasesorder to reduce purchasesDebt caused by production problems, poor technical Debt caused by production problems, poor technical advice, significant changes in market conditions, or a advice, significant changes in market conditions, or a company's failure to honor contracts company's failure to honor contracts

RISKS FOR SPONSORSRISKS FOR SPONSORS

Insecurity of the access to landInsecurity of the access to landFarmersFarmers’’ inability to meet strict timetables and inability to meet strict timetables and regulations because of social obligations or regulations because of social obligations or religious practicesreligious practices““ExtraExtra--contractual marketing" contractual marketing" -- farmers farmers breaking the contract and selling their produce breaking the contract and selling their produce on alternative markets on alternative markets –– sometimes encouraged sometimes encouraged by rival sponsorsby rival sponsors

KEY PRECONDITIONS FOR SUCCESSKEY PRECONDITIONS FOR SUCCESS

A profitable marketA profitable marketFor the sponsor an identified market for the planned For the sponsor an identified market for the planned production that such market can be supplied production that such market can be supplied profitably on a longprofitably on a long--term basisterm basisThe farmer must find the potential returns attractive The farmer must find the potential returns attractive on the basis of realistic, demonstrated yield and on the basis of realistic, demonstrated yield and acceptable risksacceptable risks


The physical and social environmentsThe physical and social environmentsThe physical environmentThe physical environmentUtilities and communicationsUtilities and communicationsLand availability and tenureLand availability and tenureInputs availabilityInputs availabilitySocial considerationsSocial considerations


Government SupportGovernment SupportSuitable laws of contract and an efficient legal systemSuitable laws of contract and an efficient legal systemAwareness of unintended consequences of Awareness of unintended consequences of regulation and avoid tendency to overregulation and avoid tendency to over--regulateregulateProvision of research and extensionProvision of research and extensionTake steps to bring together agribusiness and Take steps to bring together agribusiness and suitable farmerssuitable farmers

COOPERATIVES IN ASIACOOPERATIVES IN ASIA

Agricultural cooperatives functioning in almost Agricultural cooperatives functioning in almost all countries of the regionall countries of the regionVarious forms: formal and informal farmersVarious forms: formal and informal farmers’’organizations, production groups, producer organizations, production groups, producer cooperatives, collectives, marketing cooperatives, collectives, marketing cooperatives, agricultural credit cooperatives, cooperatives, agricultural credit cooperatives, multipurpose and singlemultipurpose and single--purpose cooperatives purpose cooperatives Started mostly with government assistance and Started mostly with government assistance and initiative or as a result of development projectsinitiative or as a result of development projects

COOPERATIVES IN ASIACOOPERATIVES IN ASIA

The success spectrum varies from country to The success spectrum varies from country to country.country.Many suffer from managerial problem, lack of Many suffer from managerial problem, lack of membership participation, heavy participation membership participation, heavy participation and influence of government, little involvement and influence of government, little involvement of members in decision makingof members in decision makingPrimary cooperatives suffer from weaknesses Primary cooperatives suffer from weaknesses and deficiencies due to small size and low and deficiencies due to small size and low membershipmembership

COOPERATIVES IN ASIA:COOPERATIVES IN ASIA:SELECTED EXAMPLESSELECTED EXAMPLES

IndiaIndiaOne of the oldest in the region and largest in One of the oldest in the region and largest in the world in terms of the number of the world in terms of the number of cooperatives and membership; around cooperatives and membership; around 504,000 cooperatives in 1998 serving 209 504,000 cooperatives in 1998 serving 209 million people of which 65% agricultural million people of which 65% agricultural cooperatives with 137 millioncooperatives with 137 millionVertically integrated through respective Vertically integrated through respective federations at district, state and national levelsfederations at district, state and national levels


IndiaIndiaActive in agroActive in agro--processing processing –– 320 cooperative sugar 320 cooperative sugar factories producing more of 60% of sugar produced factories producing more of 60% of sugar produced in the country; around 90,000 dairy cooperatives in the country; around 90,000 dairy cooperatives making India the largest producer of milk; making India the largest producer of milk; specialized cooperatives for oilseeds, rubber, specialized cooperatives for oilseeds, rubber, horticulture and fertilizerhorticulture and fertilizerStrongly backed by cooperative education and staff Strongly backed by cooperative education and staff training training –– largest in the world training managers and largest in the world training managers and providing member educationproviding member education


BangladeshBangladeshMore than 40,000 traditional cooperatives and more More than 40,000 traditional cooperatives and more than 100,000 farmersthan 100,000 farmers’’ cooperativescooperativesNot very successful due administrative interference Not very successful due administrative interference and control, lack of managerial skills, small size and and control, lack of managerial skills, small size and low membershiplow membership

Republic of KoreaRepublic of KoreaVertically organized into three levels: township level Vertically organized into three levels: township level primary cooperatives, city/county cooperatives and primary cooperatives, city/county cooperatives and national federation (NACF)national federation (NACF)


Republic of KoreaRepublic of KoreaRegional primary cooperatives engaged in grain Regional primary cooperatives engaged in grain production; special primary cooperatives for fruits production; special primary cooperatives for fruits and vegetablesand vegetablesAlmost all farmers affiliated with the cooperatives; 2 Almost all farmers affiliated with the cooperatives; 2 million members at the end of 1997; number of million members at the end of 1997; number of regional cooperatives reduced due to amalgamation regional cooperatives reduced due to amalgamation drive to achieve economy of scaledrive to achieve economy of scale


Republic of KoreaRepublic of KoreaMemberMember--cooperatives perform marketing of cooperatives perform marketing of agricultural products, supply of farm inputs and agricultural products, supply of farm inputs and consumer goods, agricultural extension, banking and consumer goods, agricultural extension, banking and credit and insurancecredit and insuranceNACF has 40% share of local agricultural marketing NACF has 40% share of local agricultural marketing and runs one of the largest deposit banking and runs one of the largest deposit banking operation in the countryoperation in the country

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