Best Practices in Contract Farming: Challenges and
Opportunities
Anjani Kumar
International Food Policy Research Institute
IFPRI-South Asia Regional Office, New Delhi
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Questions
What are different types of market linkages? What are their strengths
and weaknesses?
What are the constraints for smallholders to access agricultural
markets?
Whether the new models of linking farmers with markets are inclusive?
Whether farmers’ linkage with new marketing models more
remunerative?
What are the strategies for strengthening smallholders’ access to
markets?
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The food marketing system in South Asia is undergoing a transformation.
Rising per capita income, urbanization, increasing market liberalization and
globalization of the food economy are attributed to spur this transformation.
Consumption baskets are changing in favour of high value commodities and
integrated food supply chains have emerged as one of the fastest growing and
most visible market phenomenon in India in the recent years.
The increasing dietary diversification accompanied by growing concern for
food safety and quality are accelerating this transformation in food marketing
system.
Traditional marketing channels with ad-hoc sales are being replaced albeitslowly by coordinated links between farmers, processors, retailers and others in
the value chain.
Background
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Issues
predominance of smallholders
small-scale enterprise,
low marketable surplus,
scattered production
diseconomies of scale in aggregation of outputs and provision of technology, inputs and services
higher transaction costs (contracting, monitoring, enforcement etc.)
weak technical capacity,
lack of capital,
high vulnerability to risks and
challenges to comply with food safety and quality standards,
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Different models of LFTM
Co-operatives,
Farmers Producers Organizations (FPO),
Farmer Producer Companies (FPC), and
Contract Farming etc.
These models improve efficiency in production and marketing
Speeding up commercialization of agriculture
Tremendous opportunities for enhancing social welfare
Challenges for smallholder and marginal farmers
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Challenges to smallholders
small-scale enterprise,
low marketable surplus,
weak technical capacity,
lack of capital,
high vulnerability to risks and
inability to comply with emerging stringent food safety and qualitystandards,
Fight a multi-pronged battle
capacitating the smallholders,
creating conditions to standup to the competitive externalities
ensuring viable business opportunities for all stakeholders along the value chain.
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Market linkages: Strengths and weaknesses
Linking farmers with markets is required to ensure sustainable and inclusive growth.
Production-push focus alone is no longer a viable strategy to ensure remunerative agriculture.
LFTM have generated intense policy debate worldwide and more focused on how to make these linkages more inclusive and efficient
Integration between small farmers and different types of buyers potential benefits potential threats
Heterogeneity in Geographical locations, Social and Cultural environment, Policy and institutional settings
Leads to evolution of different approaches of LFTM
Strategies of LFTM also depend on the typology of farmers.
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Market integration models: Opportunities and
threats
Integration Opportunities Threats
Farmers-
Traders
Long term sustainability
Formalization not needed
Training in production and
handling
Many supplementary services
Irregularity in payment
Limited access to high value
markets
No hedging against
unforeseen risk
Farmers-
Retailers
Availability of reliable market at
agreed price
Opportunities for improvement in
quality
Diversification towards niche
product
Variety, quality and safety
Conflict with social
obligation
Deferred payment period
High risk in absence of
third party
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Market integration models: Opportunities and
threats
Type of
integration
Opportunities Threats
Farmers-Exporters High returns
Access to inputs, technical
assistance
Transport and packaging
Improvement in quality
Less post production losses
Increase in risk
Compliance with standards
Exclusion due to economies
of scale
Farmers-Agro-
processors
Secure market
Additional market
High quality inputs and technical
assistance
Transport
Higher returns
Better post production handling
Sustainability in question
Exclusion
Variety, quality and safety
specifications
Delayed payments
Restriction in access to
open market
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Market integration models: Opportunities and
threats
Type of
integration
Opportunities Threats
Contract farming Improved inputs
Technical know- how
Marketing by company
Reduction in price risk
Access to credit for subsistence
expenses
Mistrust between
farmers and companies
Breach of contract
Lack of alternate
opportunities
Delayed payments
Difficulty in governance
without State involvement
Promoted by
leading farmers
Input and output marketing
Greater bargaining power
Economies of scale
Withdrawal by the leader
Deferred payment
Excessive dependence
on an individual
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Market integration models: Opportunities and
threats
Type of integration
Opportunities Threats
Through Co-operatives
Improved inputs
Technical know-how/assistance
Marketing, packaging, grading storage, processing by co-operatives
Potential for scaling up
Greater bargaining power
Lower risk
Assured market
Dependence on subsidies and internal management assistance
Loss due to inefficient management
Supply of low quality inputs
Deferred payment
Static price fixation
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Smallholders constraints to access agricultural markets
Resource constraints
Land, soil fertility, water access, education, working capital
Technological constraints
Land & labour productivity, technical efficiency, storage capacity, know-how
Subsistence needs
Household dependency structure, off-farm income
Financial constraints
Credit, cash flow deficits
Product constraints
Volume, variable product quality, seasonality, staple crop cultivation needs
Locational constraints
Geography, weather, culture & tradition, legal, infrastructure
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Whether the models of LFTM are inclusive?
Most of the studies concluded that the small holders were well represented
in the diverse modes of LFTM.
These studies do not support any evidence for a systematic or deliberate
bias against the smallholder’s participation in the different models of
market integration
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Whether new models of LFTM are more remunerative?
Most of the approaches of LFTM like farmer organizations, cooperatives, and
similar forms of collective action are considered avenues to reduce high
transaction costs
(Markelova, Meinzen-Dick, Hellin, & Dohrn, 2009; Valentinov, 2007).
Oriented toward improving production, marketing, or livelihoods in
general, sometimes serving many purposes simultaneously
(Bernard & Seyoum Taffesse, 2009; Bernard, Seyoum Taffesse, & Gabre-Madhin, 2008; Francesconi & Heerink, 2011).
Studies have been mostly focused on impacts in terms of access to
output markets, output prices, marketable surplus and farmer profits
(Birthal et al, 2009; Sharma et al, 2009; Kumar et al, 2013; Bernard et al., 2008; Holloway et al., 2000).
Available studies in India indicate that integration between farmers and
formal markets (like, cooperatives, corporate, etc.), has offered higher
profits and lower costs.
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Key Lessons
Linking farmers with modern market chains leads to
Commercialization of agriculture
Improved access to technology, inputs, credit, markets
Reduced transaction costs
Increased efficiency in production & marketing
Mitigation of risks (production, market)
Improved food safety & quality
Enhanced social capital and financial inclusion
Promotion of entrepreneurship
Awareness about the new innovations, technologies etc.
Enhanced social welfare, food and nutrition security
Better value creation along the chain
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Key Lessons
• Promoting and up-scaling LFTM models for agricultural commodities is a bigchallenge
• Innovative and targeted approaches are critical to trigger replicate best fitmodels.
• Collective action is a prerequisite to overcome scale limitation and ensuresmallholders’ participation.
• Collective action may require intermediation from the government or itssubsidiaries, the non-governmental organizations or the lead firms driving thevalue chains.
• Mutual trust and incentives are the crucial for bolstering the relationshipbetween contractors and contracted
• Risk sharing is important for promoting contract farmers especially wheninstitutional insurance is limited.
• Participation of research institutions in integrated approaches promotes fasteradoption of new and appropriate technologies.
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Challenges
Ensuring inclusiveness
Ensuring transparency and accountability among
stakeholders
Financial Linkage
Governance
Infrastructure Development
Marketing /Price volatility
Mechanisms for Pricing
Timely payment
Incentives for efficiency, food safety
Monitoring, Mutual trust
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Way forward
Convergence of policies, institutions, technologies, infrastructure
Reduce policy gap lag between announcement and enactment
lag between enactment and implementation
Evolve policies and legal framework for LFTM
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
Incentives to agro-processing industry
Market fee, taxes on processed foods
Strengthen public infrastructure (road, electricity, communication, etc.)
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Way forward
Capacity building and strengthening
Technology transfer mechanism (TTO)
Facilitate entrepreneurship, Incubation Centres
Pilot LFTM models with a few commodities to instill a sense of
confidence among the stakeholders
One size does not fit all
Replicate successful models with local adaptation
Objectives
Agro-climatic condition
Target markets/domains
Commodities