Lessons from Contract Farming

Experiences to date

CII Conference on Contract Farming

Agrotech 2004, Chandigarh, 6 Dec 2004

S Sivakumar, ITC Limited

Theoretically, conditions in India are very
appropriate for contract farming…

• From supply driven production systems to

Markets are demand driven value chains
transforming • There is a need for market alignment in terms of
cost & quality

60% of India’s • Majority of the farmers are small with limited

resources
workforce is still • Corporate farming is a socially inappropriate
in agriculture option for India

Food processing • Good scope for value addition through

processing
industry is • The industry also needs quality raw material in
underdeveloped sufficient volumes

S Sivakumar, ITC Limited

 …with ideal complementary strengths to
integrate production & consumption thru contracts

Agri
Farmer
Business
Inputs &
Land & Labour
Technology

Traditional
Market Linkages
Knowledge

Quantity, quality & price being

the variable terms of the contract
S Sivakumar, ITC Limited
 The Experience Todate

☺ Some good examples of successful contract farming

(Seed Industry, Poultry Industry, WIMCO, Pepsico)

☺ Good examples of collaboration without contract

(Sugarcane Industry, Amul, ITC eChoupal)

 And, a large number of reneged written contracts

(Farmers and corporates blaming each other, and
looking to Government for help in contract execution)

S Sivakumar, ITC Limited

 The Key Lesson

Contract farming is not

a solution for all problems

S Sivakumar, ITC Limited

Multiple farming models co-exist around the world
and multiple farm-market linking mechanisms

Farmer Main Driver of the Chain Corporate

Independent Farmer Farm Captive

Farmer Cooperatives Management Farming

Farmer Main Linking Mechanism Corporate

Contract
Auctions eChoupal
Farming

S Sivakumar, ITC Limited

 When will contract farming work? (1)

When there is natural reciprocal dependency

between the two contracting parties
i.e. the game is not “zero-sum”

produced to special specs highly perishable,

(e.g. seeds, processing where economic vicinity
oriented horticulture crops, becomes critical
organic, produce traceable to (e.g. sugar cane, milk,
farms) horticulture)

early stages of technology early stages of market

adoption evolution (e.g. medicinal &
(e.g. Poplar, when it was aromatic plants, traditional
introduced) crops in new geographies)

S Sivakumar, ITC Limited

When will contract farming work? (2)

When the market institutions provide risk

transfer mechanisms
(again, to ensure that the game is not “zero-sum”)

Price Risk Yield Risk

through Derivative
Markets (price at which
the seller sells need not
be the price at which the
buyer buys!)
through Crop / Weather
Insurance (reducing the
risk of the contracting
parties, by spreading the
same on to market)

S Sivakumar, ITC Limited

When will contract farming work? (3)

When the environment does not give opportunity

to one party to exploit the disadvantaged
counterparty

Vibrant Competition Conducive Social

(offering choices) Infrastructure (farmer
awareness levels i.e.
Strong Regulatory informed, superior
Framework (swift dispute bargaining power i.e.
resolution) empowered)

S Sivakumar, ITC Limited

 Three Roles Government must Play

Facilitator • Model Rules, Awareness Communication

Regulator • Screening Companies, Registering contracts

Player • Party to contracts, Arbitrator, Safety net for pricing

S Sivakumar, ITC Limited

 Conclusion

Write the contracts

• With knowledge (where they will work & won’t)
• Choosing right terms (prefixed or determinant
formula for price, quantity and quality)
• Fairly (use simple language & equitable terms)

So that both parties gain by honouring the contracts

than by reneging!

S Sivakumar, ITC Limited

Thank You

S Sivakumar, ITC Limited