CONTRACTING AND AGRICULTURAL

FINANCE FOR SMALL HOLDERS

INDO-US AKI Workshop on Contract Farming: Methods and Experiences

May 6, 2007

Presented by-

Tushar Pandey, Country Head- Strategic Initiatives Government

Scope of the Presentation

Understanding Contract Farming Contract farming: Need Benefits to farmers Contract farming and small holders Indian Experiences Existing role of Financial institutions in contracting and agricultural

financing

Major Issues in Contract Farming

Miles To Go

Way Ahead Changing roles

Banks – Developing bankable projects– Adapted Public Private Partnership (PPP) model for contract

farming

Government - Proper Institutional Mechanism

UNDERSTANDING CONTRACT FARMING

Indian Agriculture

Changing wings from conventional farming to commercial as well as viable agribusiness options

With the increasing demand for value added and niche products

Raising quality issues, SPS measures

Social commercial objective of farmer empowerment

Business and investment opportunities in the sector

So far, successful efforts have been made by few corporates to enter into the sector through contract farming

There is a need to develop a structured approach for increasing bankable agribusiness projects through private sector participation for better quality, increased quantity as well as better price realization for different stakeholders (farmers)

Integration of Food Value Chain

Consumer

Orientation

Farmer

linkages

Action steps

Financial

Services

Market

Linkage

Research &

Extension

Commodity

Trading

Agri Infrastructure

& Logistics

Mar

ket

Dev

elopm

ent

Pri

ce c

om

pet

itiv

enes

sS

trea

mli

ned

supply

chai

n

ProductionHandling

& Mrktg.Processing Wholesaler Retailer

CONTRACT FARMING IS FUNDAMENTAL TO INTEGRATE THE FVC

Major concerns of Indian Farmers

The farmers require intervention at four important points:

Price assurance

Assurance about product marketability

Elimination of intermediaries in the market

Timely availability of production credit

Contract Farming

An arrangement for the production and supply of agricultural/allied produce under advance contracts, with a commitment to provide a

commodity of a particular type, at a time and a price, and in the quantity required by a known buyer

Market Provision

The grower and buyer agree to terms and condition for the future sale and purchase of a crop or livestock product

Resource Provision

The buyer agrees to supply selected inputs, including on occasions land preparation and technical advice

Mgt Specifications

The grower agrees to follow recommended prod. methods, inputs regimes, cultivation and harvesting specifications

CONTRACT FARMING PROVIDES

Still financing issue need to be addressed

Contract Farming: Need

To reduce the load on the central & state level procurement system

To increase private sector investment in agriculture

To bring about a market focus in terms of crop selection by Indianfarmers

To generate a steady source of income at the individual farmer level.

To promote processing & value addition

To generate gainful employment in rural communities, particularlyfor small holders and landless agricultural labour

To promote rural self-reliance in general by pooling locally availableresources & expertise to meet new challenges

Therefore, contract farming is one Option for Creating the Role For Private Sector in Agriculture Development

Benefits to Farmer Vs Company

Benefits to Farmers

Exposure to world class mechanized agro technology

Obtain an assured up front price & market outlet for his produce

No requirement to grade fruit, as mandatory for fresh market sale

Bulk supplies versus small lots as against requirement by the fresh market

Crop monitoring on a regular basis

Technical advice, free of cost at his doorstep

Supplies offers

Healthy disease free nursery

Agricultural implements

Technical bulletins etc

Remunerative returns

Benefits to Private Sector/ Company

Uninterrupted & regular flow of raw material

Protection from fluctuation in market pricing

Long term planning made possible

Builds long term commitment

Dedicated supplier base

Generates goodwill for the organization

Contract Farming and Small holders

Reasons for Working with Small Farmers

•Limited number of large farmers

Indian Agri Landscape dominated by small farmers

• Government directives and incentives

• Nature of crop/commodity

• To spread risk of default

• Special incentives by state to small farmers

• Less organized and easy to „manage‟ (?)

• Corporate Image with Social Appeal to large group

Indian Experience

Different Models across regions, agencies and crops

Role of state government - direct (e.g. Safal, NDDB) and indirect

Exclusion of small holders will remain an issue and their deprivation is likely to increase in the absence of more competitive open market

Major examples-

Existing role of Financial Institutions in

contracting and agricultural financing

Contracting-

Production credit to farmers Conservative approach to meet the PSL targets

Payment Channel for companies

Crop Insurance Products

Agricultural Financing-

Warehouse Receipt Financing

Commodity Based Financing Honey Funding

Assessing and evaluating the project viability (knowledge based approach) SFAC scheme

MAJOR ISSUES IN CONTRACT FARMING

Major Issues

Small size of farmer landholdings

Need to contract with a larger number of farmers, thereby

Increasing risk

High Transaction cost of dealing

Farmer Production risk not shared

Lack of a comprehensive crop insurance scheme to protectagainst natural calamities

Honoring Contracts – Default by companies and farmers There is no credible enforcement mechanism in place

Farmer level performance Undue quality cuts Delayed deliveries and payments Low price as based on open market prices Poor extension and seed/crop failures

MILES TO GO…

Miles to Go

New thinking to boost Indian agriculture Building capabilities Promoting investment

Technology enhancements Need to link up the government R&D system with private sector

initiatives for better dissemination of new technologies to farmers– Linking the locational specific research trials (R&D) by ICAR/ it‟s

associates, central & state Agri Universities to private initiatives

Need for a “public private partnership” approach between Private sector contract farming initiatives & Govt. Research infrastructure

Efforts to link up the extension services provided by the private sectorto public sector efforts together

Building blocks for a sustainable contract farming

•Land preparation & planting,•Crop monitoring during growing period•Harvesting & procurement, transportation logistics•Prompt farmer payment system

•The extension services team - selection and training•Farmer education program•Field trials at farmer fields- multi-locational & crop timing

•Evaluation of promising varieties and hybrids•Multi locational trials and short-listing - selection•Blueprint for agricultural practices after adaptingto local conditions, to suit intellectual & financialmeans of the farmer•Evaluation of farmer economics model•Demonstration farming

Commercialization

Technology Transfer

R & D Activities

Moving to a Value Delivery Sequence…

Choose the Value Provide the Value Communicate the Value

R&D

Activity

Seed

Selection

Contract

Farming

Variety

Evaluation

Mfrs.

Brand

Marketeers

Dist.

RetailConsumerProcessing

SPAN OF INVOLVEMENT

Moving From Food Security to Market Demand…

INVOLVEMENT

The traditional model

Farmer Mandi Buyer

Processor

Consumers

Mfrs.

Brand

Marketeers

Distributors Retailers

WAY AHEAD…

Changing Roles

Banker’s Role

Change in the financing approach and to treat agricultural financing as equivalent to other financing avenues Evolution of knowledge banking

Developing the bankable agribusiness projects Through public private participation (PPP)

Assessing and evaluating project viability Knowledge expertise, risk assessment and provide necessary

guidelines for land use planning

Other than the normal production financing and insurance products offered by the banks

Mechanism for developing bankable projects

M1 (Micro Sector Link)

M2 (Micro Sector Link)

M3 (Micro Sector Link)

SPV for a Project in Micro Sector – SPV1

SPV for a Project in Micro Sector – SPV2

SME Segment

Commercial Banks

Specialized Knowledge Bank

Holding SPV/SPVs

Government (Strategic Equity Partner)

Large Scale Agri Infra/Agri Processing Project (Private/Public/Joint Sector)

M4(Micro Sector Link)

Improved Model for Contract Farming

Hi-tech Agribusiness Farm

Bank

Private playerIntermediaries

Small Holders

•Quality planting material

•R&D support

•Technology transfer

•Technical assistance

•Payment for final produce

•Production credit

Payment

Resources Inputs

Payment

Inputs

Farm produce

YES BANK has already started a Hi-tech Agribusiness Farm Project in the state of Uttarakhand

Government Role

Creation of Proper Institutional Mechanism (framework)

Suitable laws of contract and an efficient legal system Need for transparent, participatory, comprehensive and flexible contract

Awareness of unintended consequences of regulation and avoid tendency to over-regulate

Dispute settlement machinery Single tier regulatory authority for contract farming at the district level- A quasi judicial system for contract enforcement

An institutional arrangement to record/register all contractual arrangements to promote confidence between the parties and also help in solving any dispute, arising out of violation of contract

Developing proper R&D mechanism

A provision for both forward and backward linkages

Availability of adequate credit facility Bank account of all contract farmers

SUGGESTION

Need to develop a vision and implementation framework for PPP in Indian agriculture production

Developing proper PPP institutional mechanism

Defining the commodities and area under contracting to avoid any biological imbalance

Assisting in creating legal framework in place

Database development (Farmers, Crops, Pricing, Land Mapping –w.r.t Contracts)

We have as advisors to the Government of West Bengal successfully completed Vision- 2011 document for the state agricultural marketing

THANK YOU!

Contact us:

Head Office

Nehru Centre, 9th Floor

Discovery of India, Dr A B Road

Worli, Mumbai 400018

Phone:+91-22-66699000

Fax:+91-22-24900314

Northern Regional Office

48, Nyaya Marg, Chanakyapuri,

New- Delhi 110021, India

Phone:+91-11-66569000

Fax:+91-11-41680144

Tushar PandeyCountry Head-Strategic Initiatives, Government

YES BANK LimitedMob: +91 9810706748

Email:tushar.pandey@yesbank.in

BACK UP

Existing Role of Banks in Contract Farming

Company Bank

Farmers

Supply of inputs on

credit

Credit and payment after

deduction of dues

Payment

Payment for inputs

Supply of produce

Agri input Company

Bank

Farmers

Processor/ Marketer

Supply of inputs

Produce Supply under

agreement

Farmer selection and documentation

Payment for produce

Payment of inputs

BACK

A unique educational experience and farmer empowerment

A showcase for hi-tech agriculture in the country

Business opportunities to all agribusiness players

Provide opportunities for employment and revenue generation

Objectives of the Project

The project will include all modern technological and infrastructure facilities for cultivation, multiplication and processing of high value crops

Enhancing production and productivity

Value addition- processing

Quality improvement,

Niche product devt

Strengthening backward and forward linkages for bridging the gap between markets (domestic/export)and producers

Emphasis of the Project

Hi-tech Agribusiness Farm Project in Pantnagar, Uttarakhand

The work has already been started by YES BANK with some of the states

Hi-tech Agribusiness Farm Project…

High technology interventions involve protected cultivation-green house technology, modern agronomic practices, tissue culture, micro irrigation facilities-drip & sprinkler irrigation, cold chain,

modern pack houses and reefers among others

Marketing Center

CULTIVATION CENTER

( includes both protected as well as open

field cultivation)

High value crops such as Vegetables,

Flowers and Fruits

Propagation and Multiplication

Center

(tissue culture & multicrop

nursery)

Demo facility

(training &

extension)

Support Infrastructure

Pack House

(grading, packing

and storage

facility)

Farmers‟

training &

extension

Market integration &

Infrastructure devt

Processing center

Value added

products

Linking local farmers with both the private players and govt. through the projectBACK