Impact of contract farming for basmati rice upon small sized farmers in the Punjab state of India

Veena Goel*

Abstract

This case study relating to contract farming of basmati paddy in the Punjab State

has been carried out for Pepsico that has been engaged in it since 1998-99. Study

indicated that over time its contract farming area has expanded while the number of

contract farmers has increased. Introduction of hybrid basmati variety during the mid

2000s has given an impetus to its cultivation in the entire state. Thereupon the emergence

of new markets for this crop has attracted farmers for its cultivation also on their own.

Thereafter, Pepsico has shifted its focus upon those pockets that do not yet have well

developed markets for this crop and those farmers who find it difficult to shift to its

cultivation on their own. The company provides to its contract farmers seeds, technical

know how and training, guarantee to buy back the crop and makes prompt payment

within the stipulated time. It has aligned with LT Foods Ltd for the basmati paddy

disposal and commission agents (CA) in the wholesale food grain markets for its

purchase. Contract farming is mutually beneficial for both the partners. This has helped

the contracting farmers enhance their incomes while Pepsico for sourcing the desired

varieties and qualities of the crop for its partner company. However, it is of utmost

importance to provide farmers competitive prices and make timely payments to win their

loyalty in the growing competitive environment to source the supplies and discourage for

shifting to the alternative crops.

Introduction

Basmati rice, a high value crop, has distinctive quality characteristics such as

superfine grains, aroma and extreme elongation. It is cultivated primarily in India and

Pakistan, however, India accounts for about 70 percent of its production (about two-third

of it is exported). Consequently, share of basmati rice in total agricultural exports from

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* Sr Economist (Marketing), Dept of Economics & Sociology, PAU, Ludhiana, India

the country jumped from 5.80% during 2001/02 to 2007/08 to 11.03% during 2008/09

and further to 12.11% during 2009/10. Its production stood at 6.40 million tonnes during

2009/10 that according to the Agricultural Products Export Development Authority

(APEDA) crop survey was estimated at 7.00 million tonnes i.e. 9.38% higher during

2010/11 (The Hindu, 7 February 2011). It is cultivated on the Himalayan foothills while

the states of Haryana and Punjab account for 70% of its production (APEDA website).

Inclusion of hybrid varieties such as PUSA-1121 (it is relatively cheaper to the traditional

varieties) in basmati rice category has gained fast acceptability in the major export

markets that has tremendously expanded its market size. Share of basmati rice exports

(both in volume and value) has declined to Asia and Africa whereas it has increased to

Europe, North America and Oceana but Asia continues to remain its major destination.

Gulf region in Asia and in this region Saudi Arabia3, UAE and Kuwait have remained

consistently the major export destinations whereas Iran has recently joined this category.

Asia is followed by Europe and UK is the major export destination in Europe. Combined

shares of the Asia and Europe are above 90% in total basmati rice exports from the

country. Thus even though the export markets for basmati rice are highly concentrated

but these are undergoing transformation. Such developments have been caused by the

shifts in global food consumption patterns towards high value crops. On the other hand,

signing up of WTO treaty has opened up global markets. Annual variations in exports to

individual countries have introduced fluctuations in its average export prices. For

example, export price of PUSA-1121 that acts as a benchmark for export price of basmati

rice stood at about $1 050 per tonne during 2010/11 but is presently fetching $1 115 per

tonne (Khanna 2011). On the domestic front emergence of organized retailing has

introduced a structural change in the market. This is because the corporate sector has

linked the rice industry to the middle and upper income consumers through the various

store formats and has introduced own store brands. In addition, globalization of the

markets and the ongoing changes in life styles has thrown open opportunities for the

companies to introduce new products.

In the beginning of such market developments exporters had built up quick

alliances with rice processors in the major basmati rice growing states. This is because

this sub sector had hitherto remained fragmented wherein market players at each level in

the supply chain had established alliances through mutual trusts with their immediate

upstream and downstream chain partners (Goel and Bhaskaran, 2007). The existence of

Land Ceilings Act also does not allow the agribusiness firms to own and cultivate land

for raw materials. With liberalization of the economy several state governments have

gradually made amendments in the Agricultural Produce Marketing Committee (APMC)

Acts to pave a way for contract farming. This has gradually led to the entry of corporate

groups, MNCs, and other organizations for vertical coordination that has facilitated the

development of modern supply chains for traceability to build up sustainable competitive

edge through product development and market penetration. Its models have however

varied over the sponsoring organizations. For example, several companies have set up

own plants, diversified its product portfolios for the basic products such as brown rice,

white rice, parboiled rice, etc as well as value added ready-to-eat convenience products;

introduced brands and sub brands to match the budgets of target consumers in the various

market segments. However, for compliance to exports particularly EU requires an

adherence to the stringent quality parameters of these markets i.e. standards related to

Good Agricultural Practices (globalGAP) using the Hazard Analysis and Critical Control

Points (HACCP) applied to production and all processes, Good Manufacturing Practices

(GMP) or protocols developed by British Consortium (Vermeulen et al 2006) or recently

norms such as organic or fair trade. Industry has also witnessed horizontal growth that

has driven the existing basmati rice processing firms to scale up operations. According to

CRISIL (CRISIL website) over the past two years small sized players (with annual

turnovers less than Rs one billion) have scaled up operations to become medium-sized

players (with annual turnovers Rs two billion to Rs five billion) while some medium-

sized players have become large sized players (with annual turnover more than Rs five

billion). And, exporters prefer to deal with large sized exporters for the stability in

supplies (Ibid). However, most of the existing firms have not yet been fully modernized

to reduce the percentage of broken rice so the conventional rice mills increase the cost of

head rice.

Thus under the emerging market scenario it becomes a formidable task for

farmers at the bottom end of supply chains to understand its intricacies in terms of taste

preferences of consumers as well as make the necessary investments for an alignment

direct with the export markets and organized retailers in the domestic markets. However,

availability of markets for the disposal of basic crop provides them an incentive to shift

their cropping patterns towards high value crops. So contract farming can provide mutual

benefits to both the partners. While farmers can have an access to the scarce inputs and

markets for crop disposal contracting firms can introduce new seed varieties as well as

practices at the farm level to build up brand image that facilitated entry to the new

markets and introduce new products.

Basmati paddy- rice supply chain

Basmati paddy –rice supply chain map illustrated in Figure1 indicates that

farmers (both contract and independent) sell basmati paddy (unhusked rice) through their

preferred CA (licensees of the market committees) in the wholesale food grain markets

that are regulated under the APMC Acts. It is sold to rice processors who may be small to

medium sized family based independent firms or companies. In certain states such as

(Jammu & Kashmir) some companies also collect basmati paddy direct from farms.

Some CA or their extended families have their own firms so CA also act as traders in

these markets.

Figure 1 Basmati paddy-rice supply chain map

Farmers

Wholesale Markets

Firms/Companies

Export Markets

Traditional Wholesalers

Organized Retailing

Retailers

Domestic Market

Various rice processing firms/companies can be clubbed broadly into three groups.

Group I has introduced own brands and sub brands, established alliances direct with

importers or the leading retail chains in export markets and also pack rice for these which

is sold as a store brand. These firms adhere strictly to its specified quality parameters for

basmati paddy purchase for the establishment of good brand image. So these firms enter

either into contract farming direct with farmers such as organic basmati paddy or

establish alliances with other firms for paddy procurement or adopt both the practices. In

such cases, partner firm also has to comply with its stringent quality parameters. Group II

has not yet introduced own brand rather these firms have adopted a flexible approach for

quality specifications in its target market segments. And to do so, different varieties of

rice are mixed up depending upon the prevailing market prices. Group III firms enter into

direct exports particularly when the markets are buoyant. Otherwise, these firms establish

alliances with firms/companies from the groups I and II or organized retailers in domestic

markets. Within each group individual firms/companies vie with each other to obtain the

desired lot size that has introduced competition. However, entry of these firms in a

particular market depends upon its plant capacity, sizes of delivery orders from the

potential markets, price competitiveness, purchase taxes, volume of market arrivals and

the availability of crop selection choices. In the wholesale food grain markets CA provide

services (on payment basis) to farmers for the unloading and cleaning of paddy while to

buyers for crop weighment, filling and stitching jute sacks, loading and its regular lifting

from the markets. Punjab State Marketing Board (PSMB) fixes charges for the various

services both to farmers and buyers. Processors sell rice in the export markets but the

export orders vary each year. In the domestic markets it is sold both through the

organized and traditional markets (these comprise of the wholesale and retail market

segments). However, group I firms sell branded basmati rice in consumer packs of one

and five kg while group II and III firms sell rice as a bulk product both to the organized

retailers (that may or may not be sold as a store brand) and traditional wholesale markets.

Punjab state - basmati paddy cultivation

The Punjab State (with 1.54% of the total land area) in India had been crippled with

wheat-paddy rotation since the post-green revolution period i.e. mid 1960s due to the

availability of assured markets for these two crops. This is because the Food Corporation

of India, central agency, along with the state level agencies purchases these crops at the

government fixed minimum support prices for running the public distribution system

(PDS) in the country. State government encouraged contract farming for crop

diversification particularly paddy because it is non-traditional and water intensive

commercial crop that has led to a rapid depletion in the groundwater level. Later, setting

up of the Punjab Agro Food Corporation (PAFC) during 2002 as a nodal agency for

contract farming, reduction in the market and rural development fees (each from 2% to

0.25%) by the PSMB and assurance given to farmers for the buy back of crop at the pre-

fixed prices had gradually provided an impetus to contract farming. As a result, basmati

paddy has emerged a leading crop under contact farming during the kharif (summer)

season. It occupied an area of 36.64 thousand hectares during 2003/04 that has kept

fluctuating but declined to 24.28 thousand hectares during 2010/11. Total area of basmati

paddy under contract farming during 2009/ 10 had been shared by the three agencies,

namely, Pepsico (MNC), Markfed1 (Punjab State Cooperative Marketing Federation) and

Gee Gee Agro Tech2 that stood at 26.72%, 64.98% and 8.30% respectively.

At the state level total cultivated area under basmati paddy comprises of two

components i.e. the area under contract farming and the area sown by farmers

independently without entering into a contract with any agency. Total area has moved up

in a fluctuating manner during the last decade i.e. 2000/01 to 2010/11 (Table1). However

its cultivation received a boost during 2008/09 when the cultivated area jumped from 144

thousand hectares during the preceding year to 340 thousand hectares i.e. 136.11% higher

that increased further to 513 thousand hectares in the following year. Such a larger

increase in the area under basmati paddy has come forth due to a shift in area from its

competing crop i.e. non-basmati paddy. Share of the cultivated area under basmati paddy

remained below 10% till 2007/08 but it touched 12.44% during 2008/09 and increased

further to 18.31% during 2009/10. Correspondingly the share of basmati rice in total rice

has also increased rapidly during these years. However, its share has remained

comparatively lower to that of area because the yield of basmati paddy is lower compared

with non-basmati paddy

Table1: Basmati paddy (thousand hectares) area in Punjab state

Year Area under Area Prod Contract farming area

basmatipaddy

under basmati paddy

  Abs Change Shares of basmati

Total* Pepsico**

(%) in total rice Abs (%) Abs

(%)

1998/99

--- --- --- --- --- --- 0.13

---

1999/00

--- --- --- --- --- --- 0.05

---

2000/01

104 --- 3.98 1.76 --- --- 0.33

---

2001/02

102 -1.92 4.1 1.85 --- --- 3.06

---

2002/03

157 53.92 6.21 2.94 --- --- 1.18

---

2003/04

212 35.03 8.11 3.98 36.64

17.28

3.68

10.04

2004/05

130 -38.68 4.91 1.95 40.47

31.13

2.96

7.32

2005/06

97 -25.38 3.66 1.69 17.10

17.63

3.24

18.97

2006/07

122 25.77 4.65 2.43 14.16

11.61

3.60

25.40

2007/08

144 18.03 5.52 3.02 34.01

23.62

5.61

16.51

2008/09

340 136.11 12.44 8.41 34.00

10.00

7.37

21.69

2009/10

513 50.88 18.31 12.14 30.32

5.91 7.09

23.39

2010/11

600 16.96 21.82 NA NA NA NA NA

* Shares in total basmati area, ** Shares in total area under contract farming

In the Punjab State all the six leading districts, namely, Ferozepur, Amritsar, Tarn

Taran, Patiala, Gurdaspur and Sangrur have also witnessed an increase in area,

production and yield of basmati paddy during the years 2006/07 and 2009/10. With the

emergence of contract farming in the state during 2003/04 its share in total cultivated area

under basmati stood at 17.28%. It jumped to 31.13% in the following year but declined

for the next two years and touched 11.61% during 2006/07, increased again to 23.62%

during 2007/08 that declined and reached merely 5.91% during 2009/10.

Case study of Pepsico - basmati paddy

Contract farming background

This study focuses upon contract farming of basmati paddy carried out by

Pepsico and examines how has it succeeded in linking contract farmers to the

medium/higher income consumers in the global and domestic markets and how has it

benefited the contracting partners. Pepsico had entered into contract farming during

1997/98 because earlier also the company had been engaged in it for tomatoes and

chillies. Thereafter, its area under contract farming has rapidly expanded (Table 1) from

0.13 thousand hectares during 1998/99 to 7.92 thousand hectares i.e. 59.28 times during

2010/11. Compared with the preceding years it had declined during 1999/00 (65.23%),

2002/03 (61.59%), 2004/05 (19.41%) and 2009/10 (3.84%). Company’s share in the total

area under contract farming stood 10.04% during 2003/04 that declined to 7.32% in the

following year, increased for the next two years and reached 25.40% during 2006/07. In

the following year it declined again but increased for the next two years and touched

23.39% during 2009/10. Number of farmers as well as villages under contract farming

had also declined for the years in which contracted area had declined except 2009/10 for

which the number of contract farmers had increased.

Increased area under basmati paddy cultivation has led to an increase in its

production (Table 2). Production has also moved up cyclically and followed a pattern

closer to that of its area. It has increased from 161 thousand metric tonnes during 2000/01

to 317 thousand metric tonnes during 2007/08 but jumped to 925 thousand metric tonnes

during 2008/09 and further to 1364 thousand metric tonnes in the following year. In

contrast, yield has increased from 1552 kg/ha to 2659 kg/ha during 2009/10 except for a

brief respite for two years i.e. during 2005/06 and 2009/10 when it compared with the

preceding years declined by 13.26% and 2.28% respectively. This has led to a

tremendous jump in the volume of its market arrivals in the wholesale food grain

markets. Market arrivals increased from 214.55 thousand metric tonnes during 2005/06 to

1146.14 thousand metric tones during 2008/09 and further to 1947.90 thousand metric

tonnes during 2009/10 thereby showing an increase of 8.08 times. These declined to

1839.73 thousand tonnes i.e. 5.55% during 2010/11 because of decline in the average

export price (it had touched Rs. 3387 per quintal during 2008/09). Volume of market

arrivals stood higher than total basmati paddy production since 2005/06 except during

2006/07. This may be because the prevailing market prices in the Punjab markets

prevailed higher that might have attracted farmers from the state of Haryana for selling

paddy. Market arrivals of basmati during 1990s had ranged from about 30%-63% of its

production because millers, traders, etc. made purchases direct from farmers to evade

market fee and cesses (Rangi et al 2001). Pepsico’s basmati paddy purchases from the

wholesale markets have not followed any single pattern. These had increased from 5.95

thousand metric tonnes during 2005/06 to 12.95 thousand metric tonnes during 2008/09

but declined to 5.88 thousand metric tonnes during 2010/11. As a result, company’s share

in the total market arrivals has been reduced from merely 2.77% during 2005/06 further

to 0.32% during 2010/11.

Table2: Production, market arrivals and Pepsico purchases of basmati paddy from Punjab state

Quantity: Thousand metric tonnes; Yield: kg/haYear Production Yield Market arrivals Pepsico purchase

Abs Change (%)

Total

(%) share

Total Share*(%)

Total

(%) Share**

2000/01

161 --- 1552 --- --- --- --- ---

2001/02

163 1.24 1601 3.16 --- --- --- ---

2002/03

261 60.12 1662 3.81 --- --- --- ---

2003/04

384 47.13 1810 8.9 --- --- --- ---

2004/05

204 -46.88 1570 -13.26 --- --- --- ---

2005/06

172 -15.69 1766 12.48 214.55 124.74 5.95 2.77

2006/07

246 43.02 2019 14.33 190.25 77.34 3.32 1.75

2007/08

317 28.86 2199 8.92 403.11 127.16 6.56 1.63

2008/09

925 191.8 2721 23.74 1146.14

123.91 12.95

1.13

2009/10

1364

47.46 2659 -2.28 1947.9 142.81 10.47

0.54

2010/11

N.A --- --- --- 1839.73

--- 5.88 0.32

* Share in total production; ** share in market arrivals

Pepsico has its own seed production farm in the Punjab State located at village

Jallowal near Jalandhar city. Besides this, the company has also established alliances with

farmers for seed production.

Company provides to its contract farmers several seed varieties. Among the older

varieties, 115, 106, 101 and 112 occupied 30.39%, 30.23%, 29.16% and 10.22% of the

company’s total cultivated area under contract farming during 2000/01. Thereafter, 106

alone was supplied and gradually its area was reduced only to 1.19% during 2010/11.

Presently, the company has started supplying new varieties such as 160 (Pusa 1121),

134/135, 170, 101, 162, 1460, 303. Of these, 134/135 and 160 have emerged as the major

varieties (Table 3) since 2004/05 that occupied about 90% of the total area.Table3: Total cultivated area under the major basmati seed varieties provided by Pepsico to contract

farmers in Punjab StateVariety 2006-07  2007-08  2008-09  2009-2010 2010-11   Total Share Total Share Total Share Total Share Total Share

160 2856 32.12 6001 43.26 5715 31.36 8892 50.74 8057 41.13134 3139 35.31 4518 32.57 7135 39.15 5615 32.04 7593 38.76135 1036 11.65 2511 18.10 3129 17.17 1239 7.07 2044 10.43

 Others* 1860 20.93 841 6.07 2247 12.34 1779 10.15 1895 9.68

Combined 8891100.0

0 13871100.0

0 18226100.0

0 17525100.0

0 19589100.0

0* These include 106, 170, 101, 162, 1460 and 303

Pusa 1121 has a higher yield i.e. 37-42/45qtls/ha that initially stood at 49-54qtls/ha

and its grain is long, thick and hairless. Its plant is sturdy but if it catches fungal infection

this can lead to a crop damage of about 20%. In contrast, 134/135 has a lower yield i.e.

about 25qtls/ha and its grain is short, thin and hairy. Its plant is also sturdy that can grow

on a comparatively infertile soil and is also disease resistant. Company has also

introduced direct seed sowing machines5 and extends its services free to its contract

farmers as well as bears all the expenses incurred on account of its movement.

Earlier, the company had its rice processing plant located at Sonepat in the adjoining

state of Haryana and used to export basmati rice to the Middle East. But later during

2003/04 the plant had been sold to the LT Foods Ltd presently the company is not

engaged in direct exports of basmati rice. As the company was not interested in

dismantling its network with contract farmers so it had established an alliance with the

LT Foods Ltd for the disposal of farmers’ basmati paddy. To this end, Pepsico has

entered into contractual agreements with CA (usually one and shifts from him if it is not

satisfied with his service). Since all its contract farmers do not always have personal

relationships with its designated CA so the Area Supervisors act as liaison between the

two for crop disposal.

LT Foods Ltd (earlier LT Overseas) had extended its operations during 1977 from a

CA to a partnership trading firm that entered into exports during 1980 thereafter set up its

plant during 1984 in the Haryana state at Sonepat. Presently, the company exports to

about fifty countries and has also developed a strong distribution network within the

country in major cities. Gradually the company has diversified its product portfolio that

caters to the taste preferences and purchase capacities of consumers in the various market

segments. Its product portfolio includes several categories of basic rice such as brown,

white, parboiled and organic as well as the value added convenience products and has

introduced several sub-brands under its flagship brand DAAWAT. For vertical

coordination the company has aligned with farmers both directly and indirectly to source

the desired lot sizes of the requisite qualities and varieties of basmati paddy. Company

also recommends to its contract farmers and the partner companies specific seeds

varieties to be sown and advises them not to use unrecompensed pesticides (ltoverseas

website). Company sends its own technicians to the wholesale markets for basmati paddy

purchase to ensure its strict conferment to the prescribed quality specifications (it is also

rechecked at its plant). It also supplies jute sacks to Pepsico for packaging paddy and

arranges for its shipment directly to the plant premises.

Study location

PepsiCo had entered into contract farming in the Punjab State with farmers from

nineteen districts during the Kharif season 2010/11. However, its major thrust remained

upon two, namely, Hoshiarpur and Jalandhar districts that occupied 70.95% of the

company’s total area under contract farming i.e. 7927.37 hectares. One block from each

district that occupied the highest area under contract farming had been selected that

included Bhogpur block (1398.19 hectares) from the Jalandhar district and Dasuya block

(764.85 hectares) from the Hoshiarpur district. From the surrounding villages of

wholesale food grain markets of each block a random sample of about fifteen contract

farmers registered with Pepsico was taken. Company’s Field Supervisors based upon

their personal visits select farmers for contract farming from several villages in each

block.

A random sample of about twenty independent basmati paddy growers was also

taken for comparison. This included ten farmers each from the traditional basmati

growing belt of Amritsar and the surrounding villages of Rayya wholesale food grain

market that has emerged a major market for basmati paddy for the about last four to five

years. Latter group of farmers has recently shifted to the cultivation of PUSA 1121

Personal interviews were held with the sample farmers, General Manager and

Field Supervisors of Pepsico and CA from the sample wholesale food grain markets. CAs

included both the Pepsico designated as well as those who deal with other

firms/companies that enter either as independent buyers or establish alliances with them

in the Bhogpur, Amritsar and Rayya markets. Telephonic interviews were held with the

General Manager of LT Foods Ltd. Information obtained from the various market players

related to the kharif marketing season 2010/11.

Contract farming characteristics

Pepsico enters into formal written agreements with its contract farmers. These

contracts spell out the basmati paddy area (variety wise) to be sown, basic contract prices

for selling basmati paddy to the company, purchase policies, payment terms,

responsibilities of each party, conditions for non-compliances to contracts and its

termination. Under these contracts if the company offered prices are not up to farmers’

expectations or lie below the market price they have the right and are free to sell the crop

to other firms/companies.

Company supplies different seeds varieties to its contract farmers that are booked

each year during the months of April/May prior to the commencement of crop sowing.

These are booked either on a telephone or through the company’s designated CA or the

Field Supervisors in the village. In Dasuya block those villages in which the company has

entered only recently into contract farming earlier innovative farmers alone had entered

into it. They had to go to the Bhogpur market located at a distance of about 30kms for

seed purchase. Presently, Area Field Supervisor visits these villages thereby the ease in

accessibility has drawn several farmers to contract farming. Company issues booking

slips to the contract farmers that contain farmers’ codes4, block and village names and

variety wise acreages to be sown. Company opens up seasonal stores (from about third

week of May to mid June) for seeds distribution in the sample wholesale food grain

markets. Since the company supplies only a small quantity of seeds to the farmers so they

are required to make full payments by a cheque or demand draft one to two days in

advance to seed supplied.

Field Supervisors provide to the contract farmers requisite technical training for

basmati paddy cultivation particularly seed treatment for reduction in fungal

infection/other diseases, nursery raising, field preparation, transplantation, top dressing,

pest control, drainage, harvesting and threshing. Farmers are required to adopt the

company supplied packages and practices as well as adhere to its quality parameters.

Field Supervisors maintain farmers’ diaries to keep complete records from crop sowing to

its harvesting for the various field level practices, quantities as well as the application

timings of various inputs. They also visit them regularly even though can not always

provide a solution to theirs’ field level problems. Under such situations farmers

themselves generally from their long personal learning farm experiences and mutual

cooperation try for a solution through hit and trial methods.

Company provides to its contract farmers specifications sheets of the stipulated

quality parameters for paddy purchase (Table 4). Specifications for the moisture content,

grain damage and broken grain are one per cent higher for the basmati paddy harvested

with combine. Company advises farmers to go for manual harvesting and the purchase

price of basmati paddy harvested manually compared with combine is also higher by

about Rs 150-200 per quintal while earlier this difference was of Rs 50 per quintal

because its relatively higher moisture increases rice breakage during milling.

Table 4: Specified quality parameters (in %age) for basmati paddy purchase

Paddy harvested

Moisture Admixture Damage/discolouration

Red grain Broken

Manually 17 6 5 1 --- Combine 18 6 6 1 1

Farmers are required to ship the crop to the sample wholesale food grain markets.

During the post harvest season with the onset of market arrivals to the wholesale markets

company links its actual purchase price of basmati paddy to the market prices in the

major wholesale markets in the state and these are announced daily each evening.

Company’s basic price stood at Rs 1200-1300 per quintal while its purchase price varied

from Rs 1600/1700-2400 per quintal. Market price of 370 had ranged from Rs 4 000-5

000 per quintal while of PUSA-1121 it was Rs 2 500 per quintal (it ranged from Rs

2000/2100 -3000/3100 per quintal in Amritsar wholesale market). CA reported that

earlier the market prices fluctuated from about Rs 50-100 per quintal but presently

fluctuations have widened that ranged from Rs 400-500 per quintal). And, Pepsico

purchases all lots of basmati paddy (its rejection rate is only about 5%-8%) at market

related prices from the contract farmers who ship it from villages located within a radius

of about 15-20 kms from the sample markets. An incentive @ Rs 10 per quintal is

provided to those farmers who ship it from a distance of 25-30 kms while @ Rs 20 per

quintal for a distance of 30-40 kms. The number of such farmers in Dasuya market was

700, 30 and 10 respectively while the shares of manually and combine harvested paddy

procured from farmers stood about 88% and 12%.

Among the independent growers, farmers in the traditional basmati paddy growing

area of Amritsar prefer to sow basmati 370 (an aromatic traditional variety was released

in 1933 with characteristics similar to Pepsico’s 134/135 and its yield is 30 qtls/ha). This

is because earlier it used to fetch a higher market price. They had also around 2000

started growing ‘Sharbati’ variety which is used for mixing with basmati. But presently

these farmers and also those from the adjoining villages of Rayya market have shifted to

PUSA-1121. A larger majority of these farmers retains good quality crop as seeds for the

next crop sowing season. Other farmers who do not retain their own seeds purchase these

either from the open market or fellow farmers or the State Agricultural University (for

about an acre and multiply at own farms because they get these only in a limited

quantity). For the various technical services as well as the field level problems all these

farmers depend either upon mutual cooperation or their personal learning experiences

because they have long learning farm level experiences for non-basmati paddy

cultivation.

Contract farming assessment

Several farmers from the adjoining villages of Bhogpur wholesale market reported

that they had entered into contract farming for basmati paddy with Pepsico since 1998-

99. This is because earlier also they had been associated with the company for other

crops. Some of these farmers have also gradually extended the area under basmati paddy

cultivation after watching the buoyancy of its markets and understanding its dynamics.

All the sample growers had their own land while some of them also took land on

lease from their close associates such as extended family members, neighbors. They were

not engaged in farming either because they were Non-Resident Indians (NRIs) or were

engaged in the services sector. Farm business enterprises were hereditary in character as

well as self started so, by and large, farmers owned farm machinery and equipment

besides having long learning farm level experiences. As these farmers have come to rely

heavily upon non-basmati paddy cultivation that provides assured market returns so they

focus primarily upon its cultivation. Hence they do not have much incentive to go for the

cultivation of new crops that expose them to market risks. Farm enterprises are run

individually or with family support while labour is hired (both permanent and

contractual) for the various farm level manual operations. Sample farmers belonged to a

wider age group i.e. 30-65 years but a larger majority of them was from the higher age

group of about 40-60 years. Schooling ranged from illiteracy to Masters but for a

majority of them it remained only up to Matriculation. So the lack of proper formal

education and higher age inhibits them to shift to the cropping patterns based upon

scientifically conducted market research.

All contract and independent farmers reported that basmati paddy cultivation

compared with non-basmati paddy cultivation provides several benefits. These include

fewer numbers of irrigations due to late sowing and lower fertilizer consumption but

pesticides consumption increases because of the shift of parasites from non-basmati

paddy after its harvesting. So this reduces its total cost of cultivation by about Rs 5 000

per hectare. However, farmers’ lack of proper farm level supervision can lead to a

deterioration in its quality due to the mixing up of seedlings of basmati with non-basmati

paddy by labour because of ignorance, crop lying down during excessive rain, etc.

Crop arrives to the wholesale food grain markets during the post harvest period for

about two months i.e. from mid October to mid December. Farmers ship it either

themselves or through hired labour in their own tractor trolleys. As the crop is shipped to

market direct from field so after unloading it is sieved but the CA do not always

intentionally provide good sieves. This is because of theirs’ inherent intention to retain

the crop in connivance with labour. Farmers hold back crop supplies to the market when

they feel that the Pepsico’s offered market prices stand lower to the expected future

prices. For example, several farmers in Dasuya block had stored the crop even though

they failed to sell it at higher prices due to discolouration during storage.

Pepsico is the only company that purchases basmati paddy in the Dasuya wholesale

food grain market. This is because of its small market size that does not attract other

companies and evades competition thereby provides a captive market to Pepsico.

Contract farmers felt that this does not provide them a fair competitive price. In contrast,

market arrivals of basmati paddy have rapidly increased recently in the Bhogpur

wholesale market. This has occurred because of an increase both in the number of

growers selling in this market and an expansion in the cultivated area under this crop.

Besides this, independent growers from several distant growing areas such as Dasuya,

Tanda, Balowal, Mukerian have also started shipping the crop to this market. Earlier,

they used to take it to the wholesale foodgrain markets of Phagwara and Rayya due to

higher prices in these markets. Increase in the volume of market arrivals to the Bhogpur

wholesale market has attracted several regional and national level firms/companies

thereby increased market demand that has pushed up market prices. In this market the

volume of market arrivals of basmati paddy increased (Table 5) from 80 673 quintals

during 2008/09 to 100 832 quintals during 2009/10 thereby showing an increase of

2.50%. Six major and several small firms had entered the market during 2009/10, of

which three, namely, BLV, DCNK and BP Agro were new entrants. Of the older three

companies, shares in the market purchases of Pepsico and KRBL had declined by 9.47%

and 69.70% while of Sunstar had increased by 23.65%. In this market each company has

its own specifications for the quality parameters and these companies purchase all lots of

basmati paddy that range from the rejected lots of Pepsico and the superfine quality.

Table 5: Firm wise basmati paddy purchases (quintals) in Bhogpur wholesale market

Firm 2008-09 2009-10Absolut

eShare

s%

Absolute

Shares

%1 PepsiCo 40813 50.59 36946 36.64

2 Sunstar Overseas 18482 22.91 22853 22.663 Bhagwati Lacto Vegetables (BLV) --- --- 10849 10.764 Duli Chand Narinder Kumar (DCNK)

exporters --- --- 10043 9.965 BP Agro Pvt Ltd --- --- 9414 9.346 KRBL 20952 25.97 6349 6.307 Others 426 0.53 4378 4.34

Total 80 673 100.00 100 832 100.00

To cope up with growing competition in Bhogpur market Pepsico has also established

an alliance with a CA in the Ladhra wholesale food grain market which is relatively

closer to its contract farmers’ villages. As its small size does not attract either farmers

from distant places or other firms for purchases so Pepsico acts as a sole buyer for its

client farmers. This helps both the chain partners to maintain theirs’ long term business

interests because if farmers do not sell crop to the company it does not issue them seeds

next season. CA from this wholesale market usually pool the company’s rejected lots of

all farmers and ship these either to Bhogpur wholesale market or mill’s premises.

Those contract farmers who have comparatively larger lot sizes of the marketable

surpluses usually prefer to ship the crop to the Bhogpur wholesale market for its quick

disposal. In this market some of these farmers sell the crop both to Pepsico (about 70%-

80%) and other companies (about 20% -30%) particularly when seed germination is good

and market prices prevail higher. This is because those CA with whom the contract

farmers have long business relationships persuade their client farmers to sell the crop

through them to generate their own business also for this crop. Contract farmers reported

that earlier they used to get only the company fixed basic price from basmati paddy sale

both in the Dasuya as well as Bhogpur markets whereas the market prices used to prevail

higher in the state’s other wholesale markets.

Farmers prefer prompt payments from the crop sales because they have to make

payments to the hired labour and repay bank loans raised for the purchase of operational

inputs because otherwise they are declared as banks’ defaulters and have to pay interests.

Pepsico makes prompt payments to its contract farmers i.e. within eight days (stipulated

time is ten to twelve days) and these are transferred electronically to the farmers’

accounts. However some farmers from the adjoining villages of Dasuya market reported

that sometimes payments also get delayed for about one to two months. In the Bhogpur

market several companies such as KRBL, DRRK and Naranjan exporters purchased

basmati paddy at prices higher to that paid by the Pepsico while KRBL, Sunstar and BLV

also generally make prompt payments. On the other hand, companies such as BP Agro

and Dulina delayed the payments to farmers for about three to six months. Thereupon,

CA have to raise either bank loans or personal loans from friends, relatives, etc or divert

their client farmers’ funds (they keep it as security) or sell family assets such as

ornaments, etc. But CA usually make timely payments to their client farmers though on a

piece meal basis.

Independent basmati paddy growers from the surrounding villages of Rayya

market reported that before the development of this market they used to ship the crop to

the distant wholesale markets of Amritsar, Tarn Taran and Kapurthala. But later, farmers

at their trusted CA initiatives from the Rayya wholesale food grain market started selling

it in this market. Thereafter, its market arrivals increased that started attracting several

firms/companies and hence the increased demand pushed up its market prices. This

provided an incentive to farmers existing as well as new growers in the vicinity of this

market to extend the cultivated area under this crop. Thus the increased volume of market

arrivals during each successive round for about the last five to six years has rapidly

expanded the market size of basmati paddy in this market from merely 300-400 quintals

to about 40 000-50 000 quintals. Thus while earlier firms primarily from Amritsar used to

enter this market but presently firms from several other districts as well as the Haryana

and Delhi States also enter this market. However, farmers reported that in the wholesale

food grain market they had to wait for crop disposal sometimes even for two to three days

because of labour shortage since manual harvesting requires more cleaning. This problem

emerges in the market because non-basmati paddy arrives to the market prior to basmati

paddy and a larger majority of the CA does not generally make full payments to labour

till the completion of their work. In the wholesale markets sometimes shipment problems

also emerge particularly when shippers are engaged in loading cereals from warehouses

to railway wagons for its movement under the PDS to other states.

Amritsar wholesale market, in contrast, is a mature market for basmati paddy that

has since 1977 gradually expanded in its size and remains operational throughout the

year. This is because several basmati rice processing firms have been located in this city

that export rice either on its own or have aligned with exporters based in Delhi and

Mumbai. And, the prices of basmati paddy move closer to the export prices of rice that

provides an incentive to growers for the building up of stocks and release these gradually.

In this market some CA dealing with the companies also hire purchase agents who visit

the market, identify the lots that confirm to its client company’s specifications, participate

in the auctions and make purchases. CA also act as traders and buy paddy in their own

account particularly when there is lack of market demand and sell it later when prices

firm up. CA from this market also go to the seasonal wholesale market (operates during

the Post harvest period) of Attari which is located closer to the basmati paddy producing

belt. In this market CA provide convenience to their client farmers for the disposal of

basmati paddy thereby and save the shipment costs

All farmers contract as well as independent tend to shift back to non-basmati paddy

cultivation when they fail to get timely payments. This is because non-basmati paddy is

harvested with combine and farmers’ preferred CA also make prompt payments i.e.

usually within three days of its sales. This is so because it has emerged a commercial

crop in the Punjab State which is purchased primarily by the government. Farmers

reported that during the crop marketing season 2010/11 per hectare net returns from

basmati paddy cultivation i.e. about Rs 74 000-86 000 stood higher to that from non-

basmati paddy i.e. Rs 64 000-74 000. However, returns are not fixed due to volatilities in

market prices that vary depending upon the prevailing demand conditions, for instance,

returns had jumped to Rs 148 000 to 173 000 per hectare during 2008/09 due to the

buoyancy in its market demand.

Contract farming and external factors

Several external factors can affect this sub sector. Basmati rice, being an

agriculture commodity, is sensitive to the government policies and regulations and

adverse changes, if any, can impact its exports thereby contract farmers through its

backward linkages. With the liberalization of economy during early 1990s government

initiated several measures to boost exports of basmati rice. These included financial

assistance to exporters for quality improvement, packaging and brand promotion,

encouragement for participation in international fairs, organizing buyer-seller meets, etc.

These measures contributed to an expansion in its market size as well as vertical

coordination in the industry. Imposition of ban on exports led to a dramatic decline in the

cultivation of ‘sharbati’ variety in the Amritsar basmati rice producing belt. Later, the

government imposed minimum export price (MEP) (it did not exist earlier) and export

duty on basmati rice exports to curb inflation (The Hindu, 7 March, 2008). MEP was

fixed at $ 900 per tonne i.e. Rs 48, 000 during 2008 that affected exports adversely

because exporters had been confronted with the problem of cancellation of orders.

Thereafter, export duty was withdrawn during 2009 while the MEP was reduced. In the

Punjab State according to the policy of government buyers of basmati paddy have to pay

several taxes in the wholesale food grain market that are fixed by the PSMB. These

include purchase tax @ 4%, market fees and rural development charges @2% each, CA

commission @2.5% and administrative charges etc. Incentives on the market fee and

rural development charges provided by the PSMB had been withdrawn during the crop

marketing year 2010/11. This increased the purchase price of basic raw material for the

industry that impacted its competitiveness in the export markets compared with Pakistan

for which duties are either very low or non-existent on branded rice (CRISIL website).

For example, Gee Gee Agro Tech had withdrawn itself from contract farming.

Pepsico receives payments from paddy sales to LT Foods quite late. But it has

earmarked a separate fund of about Rs 300-400 million from which it makes payments to

the farmers. As the increased supplies of basmati rice to the export markets have led to

stiff market competition this has resulted in extended credit period from 15-30 to 90 days.

Thereupon this has contributed to the delays in payments to CA from several companies

and hence independent growers. According to CRISIL its rated basmati players continue

to rely upon debt (it is short term and is extinguished once inventories are liquidated) and

also the credit available in wholesale markets for paddy procurement. This increases

interest cost that squeezes profitability thereby restricts their ability to face business

exigencies.

There is no legal binding on farmers to sell the crop to Pepsico. They are free to

sell it anyone in the market. On the other hand, it is legally obligatory for the company

that if the market price falls below the company fixed basic price it has to purchase the

crop from its contract farmers, otherwise they can go to the court.

Conclusions

Study indicated that with the liberalization of Indian economy several external

factors have contributed for the expansion in market size and the emergence of new

markets for basmati rice. Besides, its market has come to comprise of several segments

both for the basic and value added products. Accompanied by these market developments

Punjab State government had also provided sops for the shift in area from wheat- paddy

to alternative crops to cope up with the problem of depleting ground water level. This had

provided an incentive to Pepsico shift its focus under contract farming from other crops

to basmati paddy and expand its area. Pepsico provides to its contract farmers requisite

seeds varieties, technical know-how and training, guarantees to buy back the crop at its

pre announced basic prices and makes them prompt payments. As the introduction of

new hybrid basmati variety i.e. PUSA-1121 has led to a tremendous expansion in its

cultivated area particularly since the mid 2000s because several independent farmers

have also shifted to its cultivation. It was because basmati paddy cultivation became more

profitable compared with its competing crop i.e. non-basmati paddy. Thereafter Pepsico

has shifted its focus to those areas in the state that do not yet have developed markets for

basmati paddy. And, the company also prefers those farmers for contract farming who

cannot shift to its cultivation on their own. Company purchases all the lots of basmati

paddy from its contract farmers that meet its partner company’s quality specifications.

Thus contract farming has succeeded in removing the initial hurdles for shifting to this

new crop in the non- traditional areas in Punjab State. This has helped farmers in reaping

the benefits of emerging market opportunities for this crop thereby enhance incomes both

through increased productivity and higher prices. Even though independent basmati

paddy growers also enjoy such benefits but the delayed payments from sales proceeds do

not always safeguard theirs’ interests.

This indicates that the impact of ongoing market developments for basmati rice

has percolated down at the farm level through contract farming in the comparatively

disadvantaged areas to resource constrained farmers in the basmati paddy growing major

state of Punjab. In contrast, resourceful farmers in the vicinity of developed markets have

succeeded in taking its benefits also on their own. As a result, market developments have

succeeded in helping the State in shifting at least some area from non-basmati to basmati

paddy cultivation to reduce the stress upon groundwater consumption.

Recommendations

Study recommends that in a growing competitive market environment for basmati

rice it is necessary for a contracting company for the basic raw material to pay a

competitive price to farmers as well as make them timely payments. Otherwise, contract

farmers shift to other companies for crop disposal while the cultivation of competing

crops in the following year. As a result, it becomes difficult for the contracting company

to procure the desired lot sizes of the different varieties. Besides this, such instances are

also extensively quoted among the growers through word of mouth that bring bad

reputation for the company. So in a traditional economy besides the supply of crucial

inputs compliances to the farmers’ monetary interests shall safeguard the interests of both

the partners engaged in contract farming.

Notes

1. It has 3069 member cooperative societies that represent the interests of about one million farmers. Being a State government procuring agency it has been engaged in paddy procurement under price support operations of the Central government and the distribution of fertilizers and agrochemicals to farmers

2. This is a private firm in partnership that had set up its plant during 2006-07 and its owners also act as CAs from the Moga wholesale food grain market .

3. Saudi Arabia is a tough bargainer and had controlled the market for about a decade but presently more companies have shifted the business to Iran

4. These are issued each year because new farmers enter into contracts while contracts of all the older farmers are not renewed

5. Presently only about 20% of company’s area under contract farming is under direct seeding.

References

Goel, V. & Bhaskaran, S. 2007. Marketing practices and distribution system of rice in Punjab, India.International Journal of Food and Agribusiness Marketing, 19(1):103-35.

Jagannathan, P. 2011. Call for minimum farmgate price for Pusa 1121 rice, ET Bureau, 24 February

Khanna, R.M. 2011. High returns lure rice growers to PUSA 1121, The Tribune, 5 September, p.11

Rangi, P.S, Sidhu, M.S. Nagi, H.P.S. & Bharaj, T.S. 2001. Basmati rice in Punjab, production, market arrivals and exports, Monograph, PAU Ludhiana and Punjab Agri Export Corporation, Chandigarh.

Vermeulen H., Jordaan, D., Korsten, L. & Kirsten J. 2006. Private standards, handling and hygiene in fruit export supply chains: A preliminary evaluation of the economic impact of parallel standards. Contributed paper presentation at the International Association of Agricultural Economists Conference, 12-18 August, Gold Coast, Australia

Websites

Agricultural and Processed Food Products Export Development Authority (APEDA) www.apeda.gov.in (assessed on 28.4.11)

Financial Express: www.financialexpress.com (assessed on 4.03.11)

LT Overseas: www.ltoverseas.com (assessed on 30.3.11).

Articles.economictimes.indiatimes.com/2011-02-24/news/28627863_1_support-price-export-market-average-exports

www.articlesbase.com/business-opportunities-articles/a-market-study-of-indian-basmati-rice-import-and-opportunities-1233358.html

www.rice-trade.com/basmati-rice-india.html

www.business-standard.com/india/news/india%5Cs-basmati-rice-exports-to-jump-9-in-2010-11-season/108108/on 10.4.11

www.thehindu.com/sci-tech/agriculture/article1164682.ece, New Delhi, 7 February 2011

www.crisil.com/Ratings/Commentary/CommentaryDocs/CRISIL-ratings_demand-basmati-players_nov10.pdf

Concluding Book chapter

Role of Government in improving institutional environment

Enlarged global market size for basmati rice has paved a way for the entry of

several categories of firms/companies to this sub sector for paddy purchase from the

wholesale food grain markets. However, several firms do not have a sound financial

health position that delays payments to the CA and thereby farmers; all of whom do not

always get full payments in time. So it becomes imperative for government to strengthen

the institutional set up to sustain farmers’ interests in new crops in the midst of existing

public procurement system whereby they receive timely payments from non-basmati

paddy.

Suggestions for further research

Study suggests that contract farming can act as an instrument by encouraging

farmers shift from traditional crops (grown since the post green revolution period due to

the existence of public procurement system that provided assured markets) to the high

value crops by providing them market access. This can help farmers enhance their

earning as well as reduce stress upon natural resources. Understanding the catalytic role

played by contract farming necessitates such studies to be conducted pertaining to the

various environmental situations.