ifpri - naes conference on sustainable & resilient agriculture - anjani kumar - best practices...

Best Practices in Contract Farming: Challenges and

Opportunities

Anjani Kumar

International Food Policy Research Institute

IFPRI-South Asia Regional Office, New Delhi


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?


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


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,


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


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.


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.


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



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



threats

Type of

integration


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



threats

Type of integration


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


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


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


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.


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


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.


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


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.)


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


Thank you

ifpri - naes conference on sustainable & resilient agriculture - anjani kumar - best practices...

Education

food economy

food marketingsystem

food marketing system

emerging stringent food

new marketing models

small farmers

new models

smallholders access