Business Today

Firm on the farm

More than legal contracts, it's companies' contact with farmers that's the name of the game.

Shamni Pande        Print Edition: August 8, 2010

Narayanappa Maranna, 40, owns five acres of farm land in Mallenamadagu village on the Andhra Pradesh-Karnataka border, about 155 km away from Bangalore. Till 2006, Maranna was cultivating groundnut, paddy and ragi (finger millets). Then, he heard about a new way of farming from his friends in the village, one that promised higher prices, returns and margins.

A year-and-a-half ago, Maranna signed a deal with The Global Green Company, a foods company that's part of Gautam Thapar's Avantha Group, to grow gherkins. In quick time, Maranna raised two crops on an acre of land that he had set aside for gherkins and earned Rs 1.30 lakh after expenses, which was three times more than what he would have pocketed when he was growing groundnut, paddy and ragi. This year, Maranna brought another half acre under the gherkins - the maximum permissible by the company.

Maranna is today a mascot in Mallenamadagu for the newfangled way of farming. Emboldened by his success, his neighbour, Muddanna, 35, followed suit and switched from conventional crops to gherkins. "It gives us a great sense of satisfaction that we have been able to transform the lives of these people," says Vineet Chhabra, MD & Group CEO of Global Green, which works with 31,000 farmers in Karnataka, Tamil Nadu and Andhra Pradesh.

Such collaborations between hitherto solitary reapers and corporations - multinational and Indian - are what constitutes contract farming (CF), although CF isn't exactly a new concept. After all, the colonial rulers introduced it for cash crops such as rubber, coffee and tea centuries ago. More recently, the cooperative-led growth in dairy and sugarcane has been largely courtesy the contract farming system.

Today, however, contract farming has evolved into a precise agreement that ensures quality for the buyer and a good deal for the farmer. CF essentially involves a forward contract between the producer (the farmer) and the buyer (the firm engaged in processing the produce or trading it). Under the contract, companies get into a formal agreement to procure at a specified, pre-agreed price from the farmer. This price is decided based on the farmer's commitment to quality, quantity, yield and delivery.

A number of companies have been on a contract signing spree with farmers in virtually every Indian state (see The Big Boys On The Ranch). For instance, Global Green, which ranks third globally in gherkin production and is the largest outside America, pays farmers between Rs 4 and Rs 16 a kg depending on the grade of the gherkin. Bharti Del Monte India, a joint venture between Bharti Enterprises and Del Monte Pacific 's subsidiary DMPL India, has become the largest exporter of fresh baby corn in India.

PepsiCo India, which works with 12,000 potato farmers involving 16,000 acres, is today the largest procurer of the vegetable, buying 1.5 lakh tonnes through CF. "The Indian agri-food system is undergoing rapid transformation and there is growing evidence that contract farming will have an important role in this transformation," adds Ashok Gulati, Director, International Food Policy Research Institute.

Driven by Contact
Ashok Khosla, an independent agri-business consultant, says India is evolving its own style of CF, one that is more driven by "contact" with farmers than legal contracts that drive the more organised farm-to-market relationships elsewhere in the world. For instance, Mukesh Ambani's Reliance Retail, which is by far the country's largest fruit and vegetable procurer, buying up to 800 tonnes on a daily basis, does so by simply calling up known farmers or setting up buying booths close to the big mandis (wholesale transaction hubs).

This helps the company crunch delivery time as it eliminates intermediaries, even as it gets a grip on freshness and quality. Similarly, Tata Group companies such as Rallis India and Tata Chemicals do not have any written agreements, although the latter deals with nearly 45,000 acres under CF for Basmati rice, pulses and fruits and vegetables. Such bouts of informality are not restricted to just Indian promoters.

International hypermarket giant Carrefour, for instance, does not refer to its Indian subsidiary's linkages with farmers as CF. "We are not involved in contract farming, our focus is to build mutual understanding and collaboration with the Indian farming community. And we do this as part of our Corporate Social Responsibility (CSR) initiative," says Mohan Shukla, CSR Head, Carrefour India. The CSR activity is doubtless laudable, but Carrefour also gets an opportunity to ensure quality and timely delivery of food items.

Can it Beat Inflation?
Having said all that, companies like PepsiCo, ITC, Global Green and Bharti Del Monte often do get into formal written contracts with farmers. Yet, the bustle notwithstanding, the reality is that CF is yet to take root as a core strategy for food companies to beat inflation. Even fast-moving consumer goods giant Hindustan Unilever Ltd. (HUL) says it has taken up CF as a CSR mission. "The truth is that many traditional players such as Dabur, Marico and even the likes of HUL, continue to source the bulk of their core requirements directly from the open market or through their trusted supply chain," observes Girish Aivalli, EVP & Country Head, Food & Agribusiness Strategic Advisory & Research, YES Bank.

If anything, CF only adds to the cost of the company,given that it takes on the onus of transporting the goods, packing them and storing them, amongst other activities. "Many companies realise that their vendors have perfected an efficient system over time and are able to supply the produce at a pre-agreed/efficient rate," adds Aivalli.

Consider Dabur. It buys fruits and vegetables for its foods from the open market, but CF is a part of its activities. "Contract farming is taken up as a service to plough back what we consume and also in situations when we notice that it would aid in cost-cutting," explains Jude Magima, Exe c u t ive Director, Operations, Dabur India. The company sources nearly 290 varieties of herbs from across the country and from overseas.

"We used to import Akarkara from Morocco and this is an important ingredient for our Chyawanprash. But as its price was escalating, we took up production through the contract route five years ago; our costs have since dropped by almost 90 per cent," adds Magima. Clearly, CF is helpful when it comes to meeting specific requirements that otherwise would have remained unmet, or unsecured, through open market agreements. "PepsiCo requires a specific variety of potato for its chips; similarly gherkins require manual labour while processing and, here, India plays a critical role," says Khosla, who has advised a number of food companies.

Thorny Issues
CF is today a mere drop in the ocean. "Despite India being an agrarian economy (with over 180 million hectares of cultivable land), merely two per cent is under contract farming," says Khosla. An attempt to bring more farmers under the ambit of CF could be a tricky matter. That's because nearly 88 per cent of farmers in India have less than two hectares of land. Gulati points out that these small farmers are more efficient than larger farmers in terms of land productivity, presumably because such farms are run by family members.

"In India, given the small farm holdings and millions of livelihoods, corporate farming is neither feasible nor desirable on a large scale," says S. Sivakumar, Chief Executive for agri businesses at ITC. Therefore, several other farmer-to-market linkages are established. Contract farming between farmers and agri-businesses is one such linkage. Other options, according to him, are mandi auctions, trader buying, direct buying via ITC e-Choupals and contracts with producer cooperatives.

Against such a backdrop, concerns have been expressed about whether the interests of the small farmer are being protected as companies go about procuring for their benefit. A study conducted by Sukhpal Singh, a professor at the Centre for Management in Agriculture, Indian Institute of Management, Ahmedabad, suggests that CF is one more way of further marginalising the small farmer: "Though this is a good system, there are several instances where companies have not addressed the real concern of the farmer, which is risk-sharing," he says.

The involvement of companies, often, opens up one more option for the farmer to sell his produce, "But is that option really a boon? Often, companies pick up the best produce and leave the farmer to take the rest to the mandi; this hardly helps him get the economies of scale. He still has to deal with the cost of leftovers," adds Singh. Companies counter that they are left holding the wrong end of the stick - or stalk, as in this case.

However, companies that have been hit are those that rushed in without proper knowledge of how the system works. "A large Indian retailer learnt its lesson when it bought litchies and ended up with lots of leaves and stalks of the plant, instead of the actual fruit," says Anand Ramanathan, Manager of Consumer Market Practice at KPMG Advisory Services. "A key component of contract farming is fixing the quality measures. There is little standardisation in India," he adds.

Clearly, for the proverbial win-win situation to emerge, farmers have to come to terms with issues like quality and deadlines; and companies have to appreciate that the man in the fields is signing a contract because he wants to improve his quality of life.

- Additional reporting by K.R. Balasubramanyam and Suman Layak

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