Determinants of Long-term Farmer-Firm Relationships in

Contract Farming

N.T. Sudarshan NaiduSchool of Management and Entrepreneurship

Shiv Nadar University

Debiprasad MishraInstitute of Rural Management Anand (IRMA)

Contents •Rationale for contract farming

•Problems in contract farming

•Research questions

•Methodology

•Results

•Conclusion

Rationale for Contract Farming

•Food processing and seed production firms•Requirement

•Strategies for procurement of agricultural produce fall on a continuum (Key & Runsten, 1999)

Spot Market

Contract Farming

Vertical Integration

Contract Farming•“a pre-negotiated agreement between a producer and a buyer that may include

any one or all of the following: market specification, resource provision and production management”

•Agricultural produce under contract farming: • Vegetables, fruits, aromatic crops, poultry, safflower

•Firms involved in contract farming:• Pepsico, ITC, Marico, Monsanto, Safal, HUL, Global Green (Thapar’s), Rallies, Namdharis, Suguna,

Nijjer,

Literature on Contract FarmingAdvantages

• increase in farmers’ income (Minot, 1986; Singh & Asokan, 2004; Tripati et al, 2005; Miyata, 2007)

• Insulate farmers from volatility of market risk • Access to speciliazed inputs (Minot, 1986; Key & Runsten, 1999; Singh & Asokan, 2005;

Begum, 2005)

Limitations• Indirectly secure effective control over farmers’ land and labour leaving them with

only formal title to both

• Impose technological, managerial and marketing direction on farmers (Clapp, 1994)

Limited Studies on Contract Relationships

•Explored the role of transaction specific assets (TSA) and opportunism (Asokan, 2007)

•No studies have explored the role of other perspectives of relationship building

Literature on Contract Farming

In-depth study was required to understand

buyer-seller relationships

in contract farming

Problems in Contract Farming• Mixed experience with contract farming.

• Problems due to price, produce quality, cross-selling, non-procurement (Jaffee,1994; Watts, 1994; Singh, 2004; Asokan, 2007; Imbruce 2008 )

•Problems are also related to practices followed

Main problem for firms: Managing relationship

•Continuity of relationship• Why to continue?

•Opportunism (cross-selling)• Inward & outward

Research Questions

•How do buyers in contract farming build and manage relationships with farmers?

•Why do some relationships sustain over long term?

Methodology •Case study research was used

•Knowledge base on the topic is scarce (Bonoma, 1985; Easton, 2010)

•In-depth understanding of complex phenomenon (Remenyi et al., 2002; Yin, 2009)

•Mostly preferred to address ‘why’ and ‘how’ questions (Brown, 1998; Yin, 2009)

•little or no control over the events and the focus is on contemporary phenomenon within a real-life context (Yin, 2009)

•Pilot study•Study Area

•Karnataka – pioneer in contract farming, accessibility, convenience and language

Multiple case design•Findings from multiple cases were considered as more compelling and the

overall study regarded as robust (Herriott & Forestone, 1983; Yin, 2009)•Short duration and high and low price fluctuating crops•Availability of alternate channels

1. Namdhari Farm Fresh (NFF): Baby corn2. NFF: Tomato3. ABC: Tomato4. Namdhari Seeds (NS): Tomato seeds

•Case study protocol developed

•Data collection •Interviews with farmers and officials •Observation• Records

•Total villages : 24

•Total in-depth interviews: 61(Farmers interviewed:38; officials interviewed: 23)

•Interacted with another 20 farmers

Results

Namdhari Seeds Pvt Ltd. • One of the largest seed companies, started in 1985• One of the largest contract seed producers• Breeding, production and distribution of seeds

Namdhari Farm Fresh Pvt Ltd. • Started in 2000, near Bengaluru• Handle average 17 T/day vegetables (without baby corn)• Handle 50 T/day of baby corn• About 1500 contract farmers in Bidadi area alone

ABC • Subsidiary of the public sector board• Started contract production of tomato in 2008 with about 350 farmers

NFF Baby Corn

NFF Tomato NS Tomato ABC Tomato

Geographical area Bidabi and Ramanagaram (40-60 km from B’ lore)

Ranibennur and Byadagi Taluks (350 km from B’lore

Gauribidanur (70 km from B’lore)

Opportunities for alternate crops Yes Yes Yes

Presence of other contract firms No Many No

Alternate markets Available No spot market for seeds Available

Selection of Farmers NFF NS ABC

Preference Old farmers Old farmers Old farmers

Small farmers -- --

No of members in the family

No of members in the family

Number of animals

Sincere Sincere

Verify Soil type, irrigation Soil type, irrigation Land records, irrigation

History of cropping system

Background check

Yes Yes No

One way of controlling opportunism was to select partners who were less opportunistically inclined or inherently cooperative (Wathne & Heide, 2000)

Reasons for Entering into Contract Farming

•NFF Baby corn: For guaranteed (fixed) price throughout the year

•NFF Tomato: Expectation of high profit. Lucky crop

•ABC Tomato: Dual purpose of receiving guaranteed returns and high profit

•NS Tomato seeds: To earn more profits

•Farmers enter into contract farming mainly to earn more than they were previously earning or to get guaranteed fixed price and avoid market risks

•Other reasons: convenience, input provision

Role of PriceNFF Baby Corn NFF Tomato NS Tomato Seeds ABC Tomato

Unit price Fixed priceChanged the policy. Market linked

Price rangeFixed but changed sometimes

Diversion Very Low Low Very low/ nil High

Overall perceived profit compared to other crops

High (corn, fodder, milk); round the year

High with risk High High

Overall perceived profit compared to supplying to rival firms

No rival firms No rival firms High No rival firms

Profitability by supplying to local markets

Low, risky Low Low High

Farmers will not divert the produce to open market as long as the differential profit that could be earned by selling in open market, rather than supplying to contract firm, is less than marketing costs

Farmers continue production of contract crop as long as the overall profit obtained from contract crop is at least equal to the profit obtained by cultivating other crops with similar resources

Farmers continue the relationship with contract firm as long as the overall profit offered by the firm is at least equal to that offered by rival firms

Additional benefits

NFF Baby Corn NFF Tomato NS Tomato ABC Tomato

Compensation Yes Yes Yes No

Advances Yes Yes Yes No

Advance by other firms -- -- No --

Remarks Jobs

Welfare Activities Social Service Activities Social Service No service

Comparison Level of Alternatives (CLalt )

•CLalt is the overall benefit (social and economic) available from the best possible alternative exchange relationship (Thibaut and Kelley, 1959; Lambe, Wittmann and Spekman 2001)

•Proposition: Farmers continue the relationship with contract firm as long as the overall outcome from the relationship is at least equal to CLalt

•Scope to refine the concept

Comparative Level of Alternate Crops (CLalt-crop)•CLalt-crop helps to determine whether a farmer continues to grow the same

crop under contract or change the crop

•CLalt-crop is defined as the overall outcome available from cultivating best possible alternative crop

•Proposition: Farmers continue cultivating contract crop as long as the overall outcomes from contract crop exceed CLalt-crop

Services Offered•Inputs supply: timing, quality, regularity

•Extension service: timing, quality, frequency

•Inputs quality influence yield and company’s reputation

NFF Baby Corn NFF Tomato NS Tomato Seed ABC Tomato

Seeds / seedling quality

Good quality, subsided.Hub & spoke model

Good, subsided Good

Pesticides No provision Yes, superior quality

Yes Kit provided

Regularity of pesticides

-- Yes Yes During starting

Field staff visit 2-3 days 1-2 Daily; Record the status; Create Pressure

4-5 days

Advances If required If required If required No provision

Quality of extension service

Good Good V. good Not up to expectations

Remarks Satisfied Satisfied Highly satisfied Not up to expectations

•Proposition: Farmers trust the contract firm if they perceive the services provided by the firm as good or superior.

•Positive outcomes from the relationship over a period of time increases trust on its partner (Lambe, Whittmann & Spekman, 2001)

•Proposition: Service quality offered by contract firms has positive influence on continuity of relationship by farmer.

Practices Followed•Payment: Timing & frequency

•Weighing: fairness and transparency

•Quality assessment: fairness and transparency

•Fairness / honesty in practices

NFF Baby Corn

NFF Tomato NS Tomato Seed ABC Tomato

WeighingFair and transparent. Farmers weigh. Procure excess production

Fair and transparent Not transparent

Payment Once on 15 days deposit to bank accounts

After GoT, usually 3 months

Initially no regularity

Quality Assessment In pack house. Fair At headquarters. Fair Not graded

Farmers perception Fair and can be trusted Fair and can be

trusted Do not trust

•Proposition: Farmers trust the firms if they perceive the practices followed by firms as fair

•Proposition: Fairness in practices followed by firms has positive influence on farmers’ relationship continuity

•‘Procedural fairness’ create trust and expectation of continuity (Kumar et al, 1995)

Role of Field StaffNFF NS ABC

Interaction Frequent. Half day in field Frequent. Stayed in villages Not frequent

Formed personal bonds. Attend functions

Formed personal bonds. Attend functions

No personal bond

Respected Respected

Farmers perception

Helpful, honest and trustworthy

Helpful, honest and trustworthy

Biased

Yield increase attributed to field staff

Role of salesperson - informer, persuader, problem solver and value creator (Wotruba, 1991)

Social Service Activities

NS and NFF•Donations for construction or repair of school buildings, temples•Scholarships to poor students•Construction of houses to employees•Help during village festivals, marriages etc

•Have good relationships with the community & leaders•Help in avoiding problems

ABC: Not involved in any welfare activities

Developing Relationships with farmers

•Complex process

•Attend to farmers’ need on time

•Maintain fairness, provide better services & help in improving crop yield and returns

•Safeguard the interests of farmers

•Regular interaction / accessibility

•Do not make false promises

•Show your commitment and farmers will reciprocate

•Farmers should not feel problems in relationships

Conclusion•Both unit price and overall outcome play important role

•Selection was considered as first step

•Monitoring was not very effective

•CLalt determines farmer’s continuation of relationship with the firm

•CLalt-crop helps in determining the continuation of contract crop by farmers

•Relationships can be improved by offering services timely, maintaining fairness in practices, frequent interaction and helping in emergencies

•Boundary level staff can make or break relationships

Thanks