Contract Farming for Agricultural Development in India: A Small Holders Perspective

1. IGIDR Proceedings/Projects Series PP-069-10b
Contract Farming for Agricultural Development in India:
A Small Holders Perspective
Sukhpal Singh
Workshop on
POLICY OPTIONS AND INVESTMENT PRIORITIES
FOR ACCELERATING AGRICULTURAL PRODUCTIVITY
AND DEVELOPMENT IN INDIA
NOVEMBER 10-11, 2011
India International Centre, New Delhi
Organised by
Indira Gandhi Institute of
Development Research, Mumbai
Institute for Human Development,
New Delhi
Supported by
Planning Commission Food and Agriculture
Organization
The World Bank

2. 1
Revised
Contract farming for sustainable agricultural development in India: A
smallholder perspective
Sukhpal Singh*
1. Introduction
With the liberalisation and globalisation of food and fibre markets in the developing
world including India, there is renewed corporate business interest in agriculture in
the form of corporate involvement in food processing, agro-exports and retailing as it
is seen as an unattended sector by those with capital and technological and managerial
resources. With the gradual withdrawal of the state from agricultural markets (due to
the Amendment of the Agricultural Produce Marketing Committee (APMC) Act in
2003 in India under which now private markets can be set up, and contract farming
(henceforth CF) with and direct purchase from farmers are legal) and emphasis on the
role of private sector for bringing efficiency and growth to the sector, space is being
provided to corporate and multinational agencies in the form of opening up of
procurement, wholesale trade, and retailing. The mechanisms being allowed and
promoted are CF, public private partnerships, retailing and wholesaling. It is argued
that the sources of trouble in farm sector are in the supply chains of the sector which
can be improved by corporate involvement and investments. In this policy
environment and in the context of low growth of the farm sector and prevalence of
farmer distress in large parts of India, domestic corporates have made forays into the
retail sector and in perishable produce CF in the last decade and many foreign
supermarket retailers (Metro, Wal-Mart, Tesco, Carrefour) have entered wholesale
cash & carry sector (permitted since 1997) as Foreign Direct Investment (FDI) in
retail is still restricted to 51% of the total equity and, that too, in single brand retail
only (permitted only since 2010). This restriction has kept the foreign supermarkets at
bay though most of them are present in wholesale and are setting up systems of
procurement in the hope that retail will be opened sooner than later. In this context,
this paper examines the role of CF and domestic supermarket retail chain linkage in
sustainable agricultural improvement in terms of risk (production and market)
reduction from a smallholder perspective so that policy issues and implications could
be deciphered. It reviews the state of the art in CF in India and examines the degree of
smallholder involvement in CF. The next section (2) profiles the concept and context
of Indian agriculture and major problems of smallholders in India followed by
practice and performance of CF and retail linkages from smallholder perspective
including evidence of their exclusion (section 3). The paper then examines
mechanism of inclusion of smallholders and leveraging of new arrangements of CF
and food supermarkets (section 4) and concludes in section 5.
2. Context and Issues
Small farmers with holdings of less than 2 hectares (hereafter ha) accounted for
85.9% of all operational holdings in 2002/03, and 42% of the total cultivated area in
India (table 1). Large holdings (>4 ha) declined to only 6.4% by 2000/01 and
accounted for 37% of the area. The average holding size came down to 1.32 ha in
2000/01, with the average size of marginal holdings being only 0.4 ha and that of
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*IEG Delhi

3. 2
small holdings 1.41 ha (Sharma, 2007). By 2003, the average size of the holding
further came down to 1.06 hectares (EPW, 2008). Of the total, 64% are marginal (i.e.
below one ha each) and 18% small holders (i.e.1-2 ha each). The small and the
marginal farmers are also a bulk (more than half) of the rural poor and the under
nourished (Agrawal, 2000; Singh, et al, 2002; Muller and Patel, 2004). In so far as a
typical farmer‟s access to land ownership, especially of small/ marginal, is concerned,
the land base of the marginal landholders and the near-landless households has not
improved much over time; at best, the percolation of gains from land re-distribution
have stopped at the middle level of peasantry (Singh, et al, 2002). In this situation, if
any mechanism has to help agricultural development, it has to involve and work with
this overwhelming majority of farmers and workers.
In 2000-01, small farmers contributed 57% of total vegetable production, and 47% of
total fruit production, which is higher than their share in the gross cropped area. As
compared to others, small farmers allocate a larger proportion of their area to
horticultural crops. Even diversification option in terms of change of crop sequence
was exercised more by small holders than that by large holders both in irrigated and
non-irrigated areas (Singh, et al, 2002). In 2000-01 they allocated 5.7 % of their gross
cropped area to horticultural crops, compared to 3.9 % by the large farmers (Birthal et
al, 2008). Vegetables crops are the most favored crops on small farms, while fruits,
condiments and spices are favoured on large farms. Reasons of this are availability of
surplus labour and liquidity constraint, and a good market price of vegetables (Shroff
and Kajale, 2008).
Table 1: Distributions of operational holdings and area by category in India
Year
Category
1953-54 1961-62 1971-72 1981-82 1991-92 2002-03
Number of operational holdings by farmer category (%)
Marginal 39.1 45.8 55.5 62.8 69.7 70.0
Small 22.6 22.4 19.5 17.8 16.3 15.9
Med/Large 33.3 31.9 25.0 19.5 14.0 14.1
Operational holdings area by farmer category (%)
Marginal 6.9 9.2 11.5 15.6 22.6 21.7
Small 12.3 14.8 16.6 18.7 20.9 20.3
Med/Large 80.8 76.0 71.9 65.7 56.5 57.9
Note: Marginal (< 1 ha), Small (1.01-2ha) Medium and Large (>2 ha)
Source: Datta and Sharma (2008).
1.2. Issues in small producer context in India
Major problems of small and marginal farmers in India include spurious input supply,
inadequate and costly institutional credit, lack of irrigation water and costly access to
it, lack of extension services for commercial crops, exploitation in marketing of their
produce, high health expenditures, and lack of alternative (non-farm) sources of
income (Dev, 2005). Employment which is the only way to raise farmers‟ and
workers‟ incomes, is low on these farms because of the low employment elasticity of
output due to increasing mechanisation and the kind of crops grown (Muller and
Patel, 2004). The problem is not that small farms are inherently unviable in today‟s
marketplace as recent studies show that per hectare net returns are the highest on
marginal and small holdings than that on any other holding category (Chand, et al,
2011; Gaurav and Mishra 2011), but that they face an increasingly tilted playing field

4. 3
For example, prices smallholders receive for their output are lower than those
obtained by larger farmers due to their weak bargaining power and holding capacity
(Agrawal, 2000). In wheat, marginal holders had the highest yield per hectare
compared with all other categories in India but, they realized the lowest prices per
quintal (Gandhi and Koshy, 2006).
The arguments in favour of small farms in a situation of large disguised unemployment
are many. Small farms in such situations will maximise labour use and value added, not
profit and will have higher yields per unit of land, both of which are socially optimal
given land scarcity and labour surplus. They also distribute income more evenly, thus
increasing purchasing power of the population which is must for industrialisation. Small
farms, when free of incentive incompatible systems like share cropping, or insecurity of
tenure, can greatly expand output even when they are not profitable in a capitalist
business sense. It was due to small farms that rapid agricultural growth occurred in
Korea, China, Japan and Taiwan, and even in West Bengal in India (Morris, 2007).
The social and economic benefits from smallholder focused interventions can be
enormous (Hazel, 2005). Further, small producers have certain competitive
advantages like lower cost due to labour abundance, higher flexibility in their working
capability, work as family and thus, are lower cost, and have plenty of traditional
knowledge which can be harnessed for many sectors. The only threats they face are:
standardisation of products in global and national markets, and large volume
requirements of modern markets. But, there are opportunities in organic, fair and
ethical trade markets which are particularly suited for small producers and offer high
prices (Harper, 2009).
But, small producers face production and marketing risk which make them vulnerable
to poverty. Commercial farming means risks, additional to the natural phenomena
which are intrinsic risks of farming everywhere: the risk of output prices that
fluctuate, of input prices that may not be commensurate with increased output, of
increased vulnerability to pests and so forth (Payer, 1980). In the absence of any
support, the coping costs of commercial modern farming are too high for marginal
and small farmers. For example, motor burnout costs for marginal farmers were 10%
of their gross farm income in Haryana and 7.7% in A.P. This figure for large farmers
was only 1.6% and 2.3% in the two states respectively (WB, 2004). Further, since
marginal farm households are net buyers of food, the increasing and fluctuating prices
can hit them hard (Singh, et al, 2002).
There are many policy and market instruments of risk reduction in India including
crop/weather insurance against yield/production risk; state-sponsored tools e.g.
Minimum Support Price (MSP) for 24 crops, Market Intervention Scheme (MIS) for
other crops, and Farmer Income Insurance Scheme (FIIS); market based institutions
i.e. Futures markets and Warehouse receipt system, besides other mechanisms like
diversification of crops and use of risk reducing inputs (Acharya, 2006). But,
implementation of MSP which includes procurement has been weak except for a few
crops in a few regions and has often failed when farmers were most in need of it. The
lack of access to insurance and credit markets makes small producers vulnerable and
they reduce their risk by choosing low risk activities or technologies which have low
average return. For example, in semi-arid regions of India, such self-insurance
produces 35% lower returns for the poor than if they did not need to self-insure (WB,
2007).

5. 4
But, high value perishable crops (read fruits and vegetables) which are being targeted
by corporate interventions are riskier as they have uncertain yields, higher costs due to
higher use of high cost inputs, quality standards, and their profitability is dependent
on market access as there is no price or market protection unlike cereals or cotton.
For example, in high value cut flower production for Delhi market by growers in an
Uttar Pradesh village, the net returns from flower cultivation were many times higher
than those from traditional crops of sugarcane or wheat. Further, flower-cultivating
households had much higher gross and net returns than the others. However, small
farmers received lower prices and incurred higher costs due to smaller volumes. The
variability in prices received by small farmers was also above average and higher than
those for other categories of farmers for all categories of flowers. As for the risk, the
proportion of households making losses was very high in flower cultivation (12-38%)
and almost negligible (1-2%) in wheat and sugarcane, mainly because of yield
fluctuations and, to some extent, price fluctuations. This risk dimension makes it
difficult for small and resource-constrained farmers to take up diversification to high-
value crops like flowers (Sen and Raju, 2006).
The above discussion is suggestive of the complex socio-economic reality and
relationships in which smallholders operate. Therefore, any intervention in the farm
sector has to take this into account. In this light, the following section examines the
role of corporate agribusiness in helping smallholders reduce their production and
market risks while at the same time promoting sustainability, through the mechanism
of CF.
2. Contract („contact‟) farming-the concept and the logic
Corporate agribusinesses, both domestic and multinational, interface with
smallholders through seed production and supply, other input supply, procurement of
produce, and more directly, facilitation of production through CF. CF has also been
used in many situations as a policy step by the state to bring about crop diversification
for improving farm incomes and employment (Benziger 1996; Singh, 2002). CF is
also seen as a way to reduce costs of cultivation as it can provide access to better
inputs and more efficient production methods. The increasing cost of cultivation was
the reason for the emergence of CF in Japan and Spain in the 1950s (Asano-Tamanoi,
1988) and in the Indian Punjab in the early 1990s (Singh, 2002).
CF can be defined as a system for the production and supply of agricultural and
horticultural produce by farmers/primary producers under advance contracts, the essence
of such arrangements being a commitment to provide an agricultural commodity of a
type (quality/variety), at a specified time, price, and in specified quantity to a known
buyer. In fact, CF can be described as a halfway house between independent farm
production and corporate/captive farming and can be a case of a step towards complete
vertical integration or disintegration depending on the given context. Due to the
efficiency (co-ordination and quality control in a vertical system) and equity
(smallholder inclusion) benefits of this hybrid system, it has been promoted
aggressively in the developing world by various agencies (Glover, 1987). It basically
involves four things - pre-agreed price, quality, quantity or acreage
(minimum/maximum) and time (Singh, 2002). It is generally undertaken when there is
market failure expressed in perishability of produce, quality of produce and technicalities
of producing a new/different product (Bijman, 2008).

6. 5
On the other hand, „contact farming‟ is the practice adopted by most retail chains in
India which refers to just having registered farmers without any commitment to buy
or sell or a pre-agreed price or quantity specified.
CF is known by different variants like centralised model which is company farmer
arrangement, outgrower scheme which is run by government/public sector/joint venture,
nucleus-outgrower scheme involving both captive farming and CF by the contracting
agency, multi-partite arrangement involving many types of agencies, intermediary model
where middlemen are involved between the company and the farmer, and satellite
farming referring to any of the above models (Eaton and Shepherd, 2001; GoI, 2003;
Bijman, 2008). In fact, CF varies depending on the nature and type of contracting
agency, technology, nature of crop/produce, and the local and national context (Swain,
2011).
The contracts could be of three types; (i) procurement contracts under which only sale
and purchase conditions are specified; (ii) partial contracts wherein only some of the
inputs are supplied by the contracting firm and produce is bought at pre-agreed prices;
and (iii) total contracts under which the contracting firm supplies and manages all the
inputs on the farm and the farmer becomes just a supplier of land and labour. The
relevance and importance of each type varies from product to product and over time and
these types are not mutually exclusive (Hill and Ingersent, 1987; Key and Runsten,
1999; Bijman, 2008). Whereas the first type is generally referred to as marketing
contracts, the other two are types of production contracts (Scott, 1984; Welsh, 1997).
But, there is a systematic link between product and factor markets under the contract
arrangement as contracts require definite quality of produce and, therefore, specific
inputs (Scott, 1984; Little, 1994). Also, different types of production contracts allocate
production and market risks between the producer and the processor in different ways.
The price of the contracted produce can be growers‟ fixed price, residual (profit/loss)
sharing by sponsor and grower, open market based price, spot market price, consignment
based, two part split price, tournament price (fixed plus variable based on relative
performance), base price plus quality based incentive price, or administered price.
For different reasons, both farmers and farm product processors/distributors may prefer
contracts to complete vertical integration. A farmer may prefer a contract which can be
terminated at reasonably short notice. Also, contracting gives access to additional
sources of capital, and a more certain price by shifting part of the risk of adverse price
movement to the buyer (Hill and Ingersent, 1987). Farmers also get an access to new
technology and inputs, including credit, through contracts which otherwise may be
outside their reach (Glover, 1987; Eaton and Shepherd, 2001). For a processor or
distributor, contracts are more flexible in the face of market uncertainty, make smaller
demands on scarce capital resources, and impose less of an additional burden of labour
relations, ownership of land, and production activities, on management (Kirk, 1987). The
firm even gets an access to unpaid family labour (White, 1997) and can make use of
state funds indirectly through agricultural production sector which are directed at farmers
by development agencies (Clapp, 1988). Also, food processors can minimise their
overhead costs per unit of production by operating their plants at or near fully capacity as
contracting gives assured and stable raw material supplies from farms. The firm can also
project an image of working with local producers as a partner when it undertakes CF and
may even obtain statal and international agency incentives for its activities as
developmental projects, instead of corporate farming (Kirk, 1987). Contracts also help

7. 6
improve product quality by directly introducing incentives and penalties as there are
problems of adverse selection and moral hazard in any contractual arrangement resulting
in underinvestment or shirking by any of the parties (Wolf et al, 2001).
At more macro economic level, contracting can help to remove market imperfections in
produce, capital (credit), land, labor, information and insurance markets; facilitate better
co-ordination of local production activities which often involve initial investment in
processing, extension etc.; and can help in reducing transaction costs, including for the
farmer (Grosh, 1994; Key and Runsten, 1999; IFPRI, 2005; Bijman, 2008).). From an
institutional economics perspective, the logic for CF could also come from the creation
of positive externalities like employment, market development or infrastructure, if
agribusiness firms create them better than the open market or the state (Key and
Runsten, 1999). In other words, can CF help people other than those who have direct
stakes and pay for it?. CF figures as an institutional arrangement/innovation for
agricultural development (Glover, 1987).
Some others recommend CF as the only way to make small scale farming competitive
as the services provided by contracting agencies can not be provided by any other
agencies (Eaton and Shepherd, 2001). CF is also an alternative to corporate farming
which may be costly, risky, and difficult to manage and still not viable (Payer, 1980).
Further, in India, supermarket chain growth including likely Foreign Direct
Investment (FDI) in retail, international trade and quality issues like Sanitary and
Phyto-Sanitary measures, organic trade, fair trade, and ethical trade, promotion of CF
by the central and state agencies, banking and input industry push for CF, farming
crisis and reverse tenancy, and failure of traditional cooperatives, will help spread of
CF across crops and regions as they provide new space to this arrangement in the
context of withdrawal of state from agricultural space. Even new Intellectual Property
Regime (IPR) which encourages protection and exploitation of proprietary genetics is
likely to accelerate CF practice (Wolf et al, 2001). Further, under the new agricultural
policy regime, public-private partnership is the main route being taken to bring about
transformation in agriculture and the state is providing incentives to corporates to
enter agribusiness sector, including through CF.
2.1 CF and natural resource sustainability
Though it is known that CF has resulted in a transfer of responsibility for many
production decisions from the individual farmer to the contracting company (Opondo,
2000), it is not yet understood that responsibility for environment impacts has also
shifted (Rickson et al, 1993 in Eaton, 1998). If that is the case, then there is a clear
case for ecological considerations in designing and monitoring CF. But, there is
hardly any rigorous evidence on the environmental impacts of CF as the focus, most
of the time, has been on its impact on small producer livelihoods in terms of removing
poverty or risk in their activities (Minten et al, 2006).
CF influences the direction of ecological change through two actors. One, the
contracting agency lays down the production schedule for the farmers at the farm
level. By determining the crop to be grown and the husbandry practices the farmer has
to follow, the contracting agency influences the impact CF will have on the
environment. The government is the second actor as the main source of conservation
measures i.e. advisory, financial and material. The farmer‟s access to these measures

8. 7
is, to a large extent, is determined by the government policy. Thus, the contracting
agency and the government have a larger role to play in environmental/ecological
change than the farmer, since they occupy a „privileged‟ position in the realm of
decision making (Opondo, 2000).
Contracts tend to be concerned with land management measures which ensure crop
growth and quality and production levels only in the short-term agricultural cycle.
Land management measures geared to maintaining resource quality over the long
term are not specified. The grower is responsible for decisions about investment in the
longterm maintenance of land quality and productive capacity in conditions where
contracting companies influence the land use practices through contracts which tie
growers to larger markets and encourage production growth (Morvaridi, 1995).
Environment is also impacted through rejection of some produce of the grower by the
contracting agency as the cost of not harvesting results in soil loss through tillage and
excessive use and wastage of chemicals causing nutrient depletion (Lawrence, 1999).
The environmental implications of CF include monocultures leading to depletion of
soil quality, and effect of fertilizers and pesticides on natural resources, environment,
humans and animals (Opondo, 2000; Requier-Desjardins and Borray, 2004). The
contracting firms tend to aggravate the environmental crisis as most of the contracts are
short term (one or two crop cycles) and the firms tend to move on to new growers and
lands after exhausting the natural potential of the local resources, particularly land and
water, or when productivity declines due to some other reason (Morvaridi, 1995;
Raynolds, 2000). The over-exploitation of groundwater, salination of soils, decline in
soil fertility, and pollution are examples of environmental degradation due to CF
(Siddiqui, 1998; Rickson and Burch, 1996). The firms do not pay heed as the costs of
such effects are externalised so far as the firm is concerned. It is also argued that CF as
part of the globalisation process might lead to increasing investments in developing
countries which have low environmental standards and, thus, the natural resource base
might end up irreversibly depleted or damaged (Minten et al, 2006).
There are many studies of impact of CF on natural resource base in local areas. In
Tasmania region of Australia, local environmental problems were not on the agenda
of the vegetable processing firms, despite individual interest by their managers. There
was no evidence of any policy about land or water conservation. Since farmers
generally contracted with more than one company, no single firm wanted to take
responsibility of soil conservation. There were only „information days‟ and
workshops on soil conservation offered to growers, but it was more of tools to signal
legitimacy and to convey that companies were concerned about local soil erosion
problems (Rickson and Burch, 1996). Soil management was an issue in which
contracting agencies influenced the decision making process but left it largely to
growers (Fulton and Clark, 1996). In Fiji, 30% of the sugarcane crop was grown on
unsuitable lands despite adequate land use legislation and CF being done under the
Fiji Sugar Corporation. In fact, the farmers did not even recognize the problem of soil
erosion like their counterparts in Tasmania in Australia (Eaton, 1998). In Kenya,
tobacco CF resulted in land degradation due to the felling of trees by contract farmers
despite the fact that the BAT stipulated that farmers could only become contract
growers if they agreed to plant 1000 eucalyptus trees a year on their lands. But,
enforcement of this policy was not effective (Madeley, 1999).

9. 8
Similarly, in fruit and vegetable production in Kenya, 2/3 of the farmers started using
fertilizers and pesticides when they became contracts farmers. But, the contractor did
not provide any information on the side effects of fertilizer use. The farmers learnt
only from experience. In fact, the contractors, especially fresh produce exporters and
agents, did not show much concern about the possible relationship between soil
erosion and CF. They thought it to be the responsibility of the government to control
soil erosion. In fact, most of them did not even recognize that CF had led to soil
erosion due to monoculture and cultivation on steep slopes. Only food industries
contracting with growers offered material assistance to them for curbing soil erosion.
On the other hand, farmers were of the view that the contractor generally did not
provide all the information about the contract crops and the tendency was to
emphasise only the rosy side of the picture. But, due to the market implications, the
contractors were more anxious to keep the required Maximum Residue Limits
(MRLs), lest their products were rejected in the European markets. Thus, farmers
were strictly asked to adhere to type and amount of prescribed agrochemicals
(pesticides) and in fact, the contracts preferred to supply such agrochemicals to the
farmers (Opondo, 2000).
In Thailand, which has been the pioneer in CF in Asia, “Contract production of cash
crops – usually tacit in the local fashion rather than formalized – (has) led small
farmers to use increasing quantities of inputs in a system dictated by the demands and
advice of village intermediaries who work for commercial companies. Thus, a typical
input „kit‟ composed with total disregard for the environment or any serious technical
reference, supplied to illiterate (in Thai) Mon and Karen cotton farmers in
Kanchanaburi province in 1991, included seeds from high potential varieties, but
susceptible to the main insects/pests; a product for dry dusting treatment (half of
which does not adhere to the seeds and is lost to the environment); smart bottles for
insecticides in small half litre packs (consumption of 10-20 litres per hectare), with
active ingredients that are usually highly toxic yet of doubtful effectiveness, given the
resistance that pests have acquired over recent years; expensive compound fertilizers
in granule form, even for leaf applications (beneficial effects not proven); and
herbicides. Some packs also included hormones and growth regulators” (Tribul, 1995;
79-80). In north Thailand also, CF had led to higher levels of chemical and pesticide
use in contract crops as “Potato growers in San Sai are not only facing competition
from farmers in other areas, soil degradation has also made it harder and more
expensive to grow high quality potatoes in this district. In the long run, it will be
necessary to use more organic fertiliser (instead of chemical), to maintain and
improve the structure of the soil” (Ornberg, 1996, p. 12). Burch (1996) and Christian
Aid (1996) also report many social and environmental consequences which have been
particularly serious in prawn aquaculture CF.
In Cyprus, fruit production contracting by a Multi-National Corporation (MNC) led to
problems of ground water depletion and salination of irrigation water due to intrusion
of seas water, leading to drying up of fruit trees and rendering large area of land
unproductive. The MNC was fully aware of the problems of salination but since the
costs were externalized, it could afford to ignore it (Morvaridi, 1995). In eastern
Turkey, sugar beet production expansion in Igdir province encouraged by the
government policy aimed at increasing crop yields without any resource based
conservation policies, led to overexploitation of land and water, amounting to the

10. 9
depletion of landesque capital. The intensive commercial production under the Sugar
Corporation (a state agency) led to considerable reduction in and even elimination of
fallow periods and the degraded land went up to 2% of the total land area of the
village by 1995 from nil in 1992. This environmental degradation in terms of land and
water quality, including water logging and salinity, was largely due to mistrust
between farmers and the corporation wherein the corporation supplied only chemical
inputs and tried to monitor inputs and yields of sugar beet, but the farmers often
deliberately ignored the corporation‟s advice in order to secure increase in beet weight
on the basis of which they were compensated. The corporation externalised the
environmental costs from production contracts as it was only interested in one crop
cycle production and thus avoided any long term responsibility for resource
conservation (Morvaridi, 1998).
But, there is also evidence that CF can contribute to environmental sustainability. In
Africa, CF programs which evolved from corporate farming inherited all the
ecological concerns of the previous management and continued to meet ecological
responsibilities (Eaton, 1998). Similarly, as an exception, in Tasmania in Australia,
there were companies contracting growers for pyrethrum- a natural pesticide and
poppies for opium which had integrated soil conservation into its structures and
programs as it was must for the crops grown and the company owned the biological
material. Even the crop (pyrethrum) was planted by the company. These companies
also insisted on crop rotation and weeding (Rickson and Burch, 1996). Another
recent study in Madagascar (Minten et al, 2006) found that CF had important positive
environmental effects, resulting from spillover effects on land use and land
intensification, reducing pressure on valuable forest land. In the export oriented
vegetable supply chain locally managed by a local company, the strict standards
practiced by the company ensured this. The pesticide application was either monitored
by the company or in several cases applied by the representatives of the company to
ensure correct dosage and timing. Similarly, compost application was supervised. It
even taught farmers how to make compost. Compost use for contract crops had
spillover effects for many years. The growers were not using compost earlier and as
part of the contracting arrangement, all of them were using it and had even started
using it on their non-contract plots as well. They even reported that even if CF stops,
they would continue making and using compost. Though compost making training
was a small contribution, it was a clear case of technology improvement in a local
area where extension never happened.
In Australia and New Zealand, two corporate entities (Uncle Tobys and Heinz Wattie)
proactively promoted organic production systems and greening of agriculture which
contributed to environmental sustainability (Lyons et al, 2004). On the other hand, in
California, the entry of corporate entities into organic agriculture led to damage to the
organic agriculture rooted in ecological principles as these entities further
mainstreamed the organic agriculture through conventional agriculture-like practices
(Guthman, 2004).
2. 2 Practice of CF in India
There is a growing rationale for CF in India due to the entry of wholesale cash „n‟
carry players as well as domestic food retail chains besides international food quality
and cost competitiveness issues and new market segments which need tailor made

11. 10
food products. Besides, in India, the banking and agricultural input industry is also
eyeing CF for leveraging it for better rural market penetration. The amendment of the
APMC Act has given a policy boost to CF and this is increasingly accompanied by
declining role of statal and co-operative agencies in agricultural markets.
Though CF is receiving a push from many stakeholders, there are many factors like
the APMC regulation in Gujarat and Haryana, improving open market efficiency,
Minimum Support Price (MSP) policy, corporate farming including leasing of
wastelands, and an overwhelming presence and interest of NGOs in farming sector,
which will act as dampeners to the growth and spread of CF. However, corporate
farming can also work favourably if corporate agencies resort to leasing of these lands
to contract growers or provide contractual access to these lands to small and marginal
farmers and landless labour, as corporate farming is unlikely to be viable. In fact,
corporate farming is a double-edged weapon. It can help small farmers in better
access to technology, but can also weaken their bargaining power with the company
(Glover, 1987).
CF is spread across crops, regions and agencies (public, private and multinational) in
India (table 1 in Appendix). There are different models being practiced by different
players in the sector which range from bi-partite to multi-partite and intermediary
based. It is interesting to note that given the diversity of rural and agricultural
landscape in India, a single contracting agency (Frito Lay) practices five different
models in different states of India for the same crop (chip potatoes). The table shows
that most of the crops covered under CF are those with some market failure either in
terms of farmer involvement or the market signals. Most of these are high value crops
which require new and higher investments for producing for the market. Therefore,
they need risk coverage- both production risk and market risk and, more of the latter.
Benefits of CF
Most studies of the CF system in India examine the economics of the CF system in
specific crops, compared with that of the non-contract situation and/or competing
traditional crops of a given region, e.g. in gherkins (hybrid cucumber) in Tamilnadu
(Chidambaram, 1997) and Andhra Pradesh (Haque, 2000; Dev and Rao, 2005; Swain,
2011), tomato and other vegetables in Punjab (Bhalla and Singh, 1996; Haque, 2000;
Rangi and Sidhu, 2000; Singh, 2002; Dhaliwal et al, 2003) and Haryana (Dileep et. al.,
2002), potato in Punjab, Gujarat and Haryana (Singh, 2008; Tripathi et al, 2005) and
cotton in Tamilnadu (Agarwal et al, 2005). It is found that contract production gave
much higher gross and net returns compared with that from the traditional crops of
wheat, paddy, and potato in case of tomato, with some exceptions like peas in Punjab
(Bhalla and Singh, 1996; Rangi and Sidhu, 2000; Dhaliwal et al, 2003), and tomato, and
onion in the case of gherkin in Tamilandu (Chidambaram, 1997), and with those under
non-contract situations (Haque, 2000; Dileep et. al, 2002; Agarwal et al, 2005; Tripathi
et al, 2005; Swain, 2011). This was due to higher yield and assured price under contracts.
But, in Punjab, except oilseed crops (hyola and sunflower), the net returns from
contract crops were found to be lower than what farmers would have got from the
wheat crop (Dhaliwal et al, 2003). However, production cost was also higher (Dileep et.
al, 2002; Kumar, 2006; Singh, 2008). But, in the case of cotton in Tamilnadu, the

12. 11
contract growers had lower input cost, lower interest loans, faster payment for produce
than in non-contract situation, and had the crop insurance facility (Agarwal et al, 2005).
Breach of contracts and farmer problems
Defaults by farmers as well as firms has been reported (Bhalla and Singh, 1996; Singh
2002; Haque, 2003; Singh, 2004). Though CF in gherkin and iceberg lettuce crop was
smooth as there was no local market or very thin market for the crop, there was
flexibility in contracts due to the short duration of the crops, and farmers maintained
alternative sources of income (Singh and Asokan, 2005; Khairnar and Yeleti, 2005). But,
still, there was partial breach of contracts in gherkins as the firm did not procure as per
contract in case of 63% of contract farmers in Andhra Pradesh (Swain, 2011). This was
so only in 30% cases in case of paddy seed.
The studies in the states of Punjab, Haryana and Andhra Pradesh reveal that contract
growers faced many problems like undue quality cut on produce by firms or on-
procurement of produce, delayed deliveries at the factory, delayed payments, low
price, poor quality inputs, and pest attack on the contract crop which led to crop
failure or raised the cost of production (Bhalla and Singh, 1996; Singh, 2002; Rangi
and Sidhu, 2000; and Dileep et. al., 2002; Satish, 2003; Swain, 2011). The firms also
manipulated provisions of the contracts in practice, e.g. in case of broiler chickens in
Tamilnadu, they picked up birds before due date or delayed it depending on the
demand which meant losses for contract growers. They also delayed payments upto
60 days. But, growers were locked into these contracts due to the firm specific fixed
investments they had made (Singh and Asokan, 2005). Infact, broiler CF can not
really be representative of the CF in agriculture as it is more of a case of „putting out
work‟ or „wage labour contracting‟ as the contracting agency provides all the inputs
ranging from day old chicks to feed and vaccination, and the contract grower just
provides labour for feeding the birds and supervision where land requirement is not a
big factor.
Even state sponsored programme of CF did not deliver in Punjab. The contracted
winter maize and hyola crops failed almost completely due to inclement weather and
poor quality seeds. In case of green peas, the contract growers were forced to dump
their produce in open market, after being rejected by the Punjab Agro Industries
Corporation (PAIC) on quality ground as per the contract specification, as there had
been fungus infection due to inclement weather. Some farmers found fault with the
fungicide supplied by the contracting company in this regard. The dumping of
contract-produced crop in open market led to fall in local market prices and it was
being sold at Rs. 3 per kg. as against a promised price of Rs. 5 per kg. by the PAIC
(Singh, 2003; Rangi and Sidhu, 2003). In general, across crops and regions, the CF
program could not achieve the stated area goal. Not only it fell short in terms of
contracted area being less than that stated by the agency, but also the farmers did not
plant the entire contracted area with the contract crops. The gap was much larger in
latter case and even as high as 50% in winter maize in Ludhiana and 20% in hyola in
both Ludhiana and Patiala. There was a different private seed company for each crop
and they only provided seed and no other extension service. Finally, none of the
companies procured the produce and advised the farmers to sell in open market either
because open market prices were higher than contract price or quality was not as
desired. Most of the problems farmers faced related to production and quality (like
quality of seed and extension) and not marketing of produce (except peas) as open

13. 12
market could take care of contract produce. Due to this experience, a large majority
(60%) were not willing to enter into CF arrangement again (Dhaliwal et al, 2003).
There have also been instances of corruption and malpractice in the PAFC run CF
program due to conflicts of interest among implementing agencies and lack of
monitoring (Ramachandran and Dogra, 2006; Singh, 2006). Since most of the CF
agencies do not provide crop insurance or other protection, production risk is no
covered most of the time.
The World Bank reports also point to the deficiencies in the CF program launched by
the state Government of Punjab. It states that for the programme of CF to be
successful, it should take into account the aspects of selection of crops for contracting,
development of quick and effective contract enforcement and dispute resolution
system, limiting fiscal risks to the state government, limiting the number of parties in
a contractual arrangement, and developing farmers‟ organizations capable of
contracting with sponsors, with a view to reduce transaction costs, increasing
information flow, and improving farmers‟ negotiation position (WB, 2003; WB,
2004).
Pricing
The contracting agencies, including those contracting organic produce, and the fresh
food retail chains give market price based prices to their contract or „contact‟ farmers
(Singh, 2009; Singh and Singla, 2011). The question which should be asked is: Is it a
fair practice, as in India, market prices fluctuate so widely? If market prices were
efficient, why did the chains have to go to growers? Most of the liberalization in the
farm sector including abolition of the APMC Act in Bihar has been on the basis of the
assumption that APMC markets have behaved monoposonistically and, therefore,
need to be done away with or made to compete with other channels. If that was true,
why should a buyer go back to the same mandi to discover procurement price? This is
a serious issue as even a significant premium over market price may not help a farmer
if open market prices go down significantly which is not uncommon in perishable
produce markets in India. Thus, the issue of what is fair price for the primary grower
in a chain remains as there is little transparency in pricing and costing of operations.
This kind of practice also compromises the market risk reduction role of CF.
2.3 CF and natural resources/environment
In India, irrigation intensity of contract crops, i.e. tomato, potato and chilly, was more
than that of wheat in Punjab during the late 1990s under Pepsi Foods (a Pepsico
subsidiary) CF. For example, potato required 8-12 irrigations compared with only 5-6
for wheat and other crops. Pesticides and fertilisers were also used at much higher
levels than in the traditional crops. Potato cultivation required 108 kg. of NPK
(inorganic fertiliser) per acre as against only 78 kg. for wheat and 60 kg. each of
phosphorus and potassium per acre. Tomato crop required 60-90 kgs. of nitrogen, 60-
100 kgs. of phosphorus, and 60-120 kgs. of potash per acre depending on the quality
of soil. Similarly, the chip potato crop required 4-5 pesticide sprays and the seed
potato crop 6-7 sprays (Singh, 2002). This, despite the fact that the company
(Pepsico) website states that it follows a policy of “application of environmentally
sound agricultural practices with its suppliers of agro-materials (Aragon-Correa and
Rubio-Lopez, 2007). Tomato crop under CF required as many as 14 sprays, which
was even higher than that in cotton (Singh, 2002). This, in a situation where farmer
awareness of the negative effects of pesticides on the environment, other than human

14. 13
and animal lives, especially food-related aspects, was very low (Gandhi and Patel,
1997). Recently, the use of fertilizers in contract farmed gherkins and paddy seed has
been found to be very high compared with that in non-contract crops (Swain, 2011).
More recently, in Punjab, it was found that CF promoted by the provincial
government to encourage diversification of cropping pattern away from wheat and
paddy led to less water consumption on contract farms as against non-contract farms.
The water consumption for paddy was 265.71 hours per acre compared with only
183.86 hours for Basmati paddy promoted and grown under the CF arrangement.
Similarly, maize under CF led to water use of the order of only 18.35 hours per acre.
This meant that crops being grown under CF arrangement were water saving. That
was so due to the provincial government plan to promote those crops. Overall,
contract growers‟ weighted water consumption per acre was 120.49 hours compared
with 129.58 hours in case of non-contract growers. But, reduced water consumption
on contract farms was due to greater area devoted to the new crops (Basmati and
Maize) and not due to any new agricultural practices promoted by the contracting
agencies. In fact, the contract farmers were practicing more intensive agriculture than
the non-contract farmers and were devoting significantly higher number of water
hours to basmati and maize than that by non-contract farmers across all crops. Thus,
increased commercialisation of the various crops under CF propelled these contract
farmers to use various inputs more intensively. Further, crop combination of potato
and sunflower promoted under CF was more water intensive, though more
remunerative than wheat (the alternative traditional crop) and therefore, defeated the
very purpose of CF in the state (Singh, 2007). More recently, a study of gherkin and
paddy seed CF has found higher irrigation intensity of the contract crop compared
with non-contract crops (Swain, 2011).
McCain Foods, a subsidiary of the Canadian MNC-McCain which has entered India
recently with a processing plant for French fries and practices CF with growers in
Gujarat, had made it compulsory for the contract growers to go in for micro
irrigation given the low groundwater table in the area which can have larger
implications for both the farmer and the society if not attended to. Banaskantha
district where the company undertakes CF of potato, had the seventh highest level of
exploitation of ground water in the state. This condition about micro-irrigation is not
even mentioned in the contract of the company, but all the contract farmers had
sprinkler systems, and mostly without any subsidy as the imported equipment
adopted by growers was not recognized for subsidy at that time. This and other input
supply support led to low farmer defaults and reflected high level of involvement of
the firm with growers (Singh, 2008). Earlier, Pepsi in Punjab advised farmers to
apply insecticide just after the white-borer larvae had broken out of their eggs and not
when they matured as farmers used to do earlier. This way, lesser insecticide was used
more effectively. Also, the company promoted the use of locally relevant traditional
techniques like use of a local grass called “Sarkanda” for protection of plants from
winter, and black ash for covering the soil to prevent crust formation and to give
warmth to seeds (Singh, 2001).
Gherkin contract production started in India in the early 1990s in the southern
Indian states. In 1993, Unilever started sourcing for the Amora and Maille brands.
However by 1998, it was clear that yields were poor and quality was not good
enough. Now, Unilever works with 7 suppliers who have contracts with 6000-7000

15. 14
small farmers across 3 states- Karnataka, Tamil Nadu and Andhra Pradesh. It started
focusing on package of agricultural practices to help farmers to improve their yields
in 1999. Gherkins suffered from 3 major pest/disease problems:
• Gherkin fruit borer
• Melon fruit fly
• Downy Mildew
The first step was pest/disease identification wherein a straightforward guide to the
main pests, with clear photos and cultural control options in the local language was
provided to the contract growers. Pesticides could only be applied after
recommendation from a field officer of the buyer. The Integrated Pest Management
(IPM) products were distributed through field visits. It also used a „Bollywood‟
style film at village meetings to overcome literacy issues. Equally important were
field meetings and demonstration days.
The Downy Mildew was tackled by:
• Introduction of rotation
• Closed growing period in Monsoon season
• Introduction of tolerant varieties and variety trials
• Improved irrigation leading to reduced humidity and reduced need for
fungicides.
The Melon Fly was controlled through:
• Introduction of sticky traps and pheromone traps
• Banana/Gherkin fruit bait traps for Melon fly
Similarly, for Fruit borer, pheromone traps were introduced and natural pests for
fruit borer control were identified. Besides, training was provided to growers in the
basic use of pesticides in which Unilever sponsored demonstrations in good
practice including use of pesticides, storage and protective clothing, and explained
the pesticide application link to chemical residues in gherkin resulting in export
issues. Consequently, yields doubled and the reduction in fungicide use on Gherkins
was dramatic. Besides, there was reduction in insecticide usage which was a result
of the total agricultural improvement package (Ramesh, 2007). Most of the organic
production takes place under CF arrangements and the contracting agencies provide
various bio-inputs to the contract growers as was in the case in organic cotton and
organic basmati which had helped resource conservation and improvement (Singh,
2009).
What comes out from the above analysis of the CF situations is that increasingly
environmental concerns are dictated by the market demand e.g. the case of chemical
residues or organic practices. In Kenya, most of the environmental management
efforts were influenced by consumer preferences in the industrialised countries. This
led to drastic reduction in misuse and abuse of the pesticides (Opondo, 2000). But,
markets may not signal the importance of ecological concerns in all situations and all
times due to various imperfections in the market and externalities in the presence of
weak monitoring. For example, in Kenya, soil erosion was not attended to by the
contracting agencies as that was not reflected in the product quality and was an
externality of the contract production. It continued to be seen as the responsibility of
the farmer and the government (Opondo, 2000). Similarly, price premiums for
environmentally friendly food may not encourage genuineness due to incentive to

16. 15
cheat and mislabel due to information asymmetry (Hobbs, 2003). Therefore, it is
important to proactively provide mechanisms to ensure environmental compliance
and concerns.
But, it is not that CF per se leads to environmental degradation in agriculture. It only
contributes to it as it also adopts the existing production processes prevalent in the
sector. But, it can come handy to rectify the situation as export oriented firms which
need chemical free raw materials due to international market pressure, can make
contract growers switch to less environmentally harmful/more environmental friendly
production processes as they have the resources, including technologies and markets,
to promote this kind of farming. It makes both business as well as development sense.
These firms can also help farmers adopt Good Agricultural/Farm Practice (GAP/GFP)
similar to the concept of Good Manufacturing Practice (GMP) in industry as the
international market is increasingly demanding this kind of system in agro products.
3. Small Producer Exclusion
Given the dominance of smallholders in developing country farming, the crucial
question about CF is whether it is inclusive or smallholders. Globally, there is
evidence to show that contracting agencies in general exclude smallholders and prefer
larger holders for various reasons like transaction costs, extent of default, though there
is some evidence that for the same reasons, sometimes smallholders are preferred or
agencies keep moving from large to small or other way round overtime (Bijman,
2008). But, generally, contracting agencies, especially private, tend to prefer large
farmers for CF because of their capacity to produce better quality crops due to the
efficient and business-oriented farming methods, large volumes of produce which
reduces the cost of collection for the firm, their capacity to bear risk in case of crop
failure, and various services provided by these large producers like transport, storage,
etc (Wilson, 1986; Winson, 1990; Burch and Pritchard, 1996; Fulton and Clark, 1996;
Key and Runsten, 1999).On the other hand, small farmers are picked up by firms for
contracts only when the area is dominated by them, there is government directive to do
so or they are found to be low cost producers in certain areas and crops (CDC, 1989).
Further, firms may work with small farmers to make use of the state support (financial
and technical) to these producers under various development programmes (Glover and
Kusterer, 1990) and to benefit from lower cost production on these farms as these
farmers have access to cheaper family labour, and being residual claimants of their
labour, work more conscientiously than hired labour (Key and Runsten, 1999). In fact,
some of them even use large growers, rural elite, and local small processors as sub-
contractors to procure from the small growers for the company (Kirk, 1987). The seed
companies in India use small companies as subcontractors to procure seeds produced
under contracts (Shiva and Crompton, 1998). In Canada, small tomato growers were
preferred as the crop required hand-picking which only small farmers do as the large
ones do mechanical harvesting, especially when weather limits the use of mechanical
harvesters (Winson, 1990). Similarly, in India, gherkin CF is carried out by small and
marginal farmers as the crop requires plenty of labour inputs which these faming
families can provide from within (Dev and Rao, 2005). Also, working with many small
farmers in the case of small processors gives the required flexibility in procurement
schedule helping to extend the processing season and use the equipment efficiently; and
helps spread risk of supply failure as compared to working with a few large farmers.

17. 16
It has been found by many studies in India that most of the contracting firms work
mostly with large and medium farmers (Bhalla and Singh, 1996; Singh 2002; Haque,
2003; Dev and Rao, 2005; Singh and Asokan, 2005; Kumar, 2006; Khairnar and Yeleti,
2005; Singh, 2008; Swain, 2011) with the exception of firms in Karnataka, Tamilnadu,
and Andhra Pradesh which worked with small and marginal farmers due the nature of
the crop/produce (cucumber/gherkin, and broiler chicken). But, even in gherkins, a
recent study shows that the land holdings of contract growers were much larger (7.4
acres) and more irrigated compared with those of non-contract growers (4.9 acres)
(Swain, 2011). This bias in favour of large/medium farmers is perpetuating the practice
of reverse tenancy in regions like Punjab where these farmers lease in land from
marginal and small farmers for contract production (Singh, 2002; Haque, 2003). Table 1
also shows that except NGO, organic and gherkin contracts, all other contracts have area
under contract crop which is much larger than the average size of holding in India. In
fact, this is only the area under contract crop which means the total land holdings of
these contract growers are much larger.
Though average size of contract growers‟ holdings compared with that of the
area/state is not an exact indicator of exclusion of small, micro studies point to the
exclusion of small holders. For example, in Gujarat, among the sample farmers, only
one contract grower with McCain had operational land holdings of less than five acres
(although McCain did buy from some small growers without contracts) with average
land holing of contract farmers being 19 acres compared with only 5 and 9 acres for
farm gate and APMC sellers respectively. Similarly, contract growers for Frito-Lay
(Pepsi) in Punjab had average operational holdings of 63 acres, with only 22 acres
owned and the rest leased. None of the sample contract grower with Frito-Lay had
less than 10 acres of land, in spite of the fact that the average size of holdings in the
state was 9 acres and 70% holdings were below 10 acres each (Singh, 2008). Another
study of CF in Punjab showed that the average size of the operational holding of
contract growers was more than one and a half times that of the non-contract growers.
It found „no marginal farmer (in the size group of below one hectare) [...] operating
under CF. A handful of small farmers (in the size group of one to two hectares) were
operating‟ (Kumar, 2006; p. 5369). Another study noted „the majority of the acreage
registered in the project (CF by Punjab Agro Foodgrains Corporation (PAFC)) is held
by larger farmers, who tended to receive greater benefits from participation (in CF)‟
(Witsoe, 2006; p. 16). Table 2 gives a detailed account of the average profile of
contract growers across crops and regions based on empirical studies.
Infact, one of the para statal agencies in Punjab (Punjab State Co-operative Marketing
Federation (Markfed)) placed advertisements in local newspapers a few years ago
publicising its basmati paddy CF program where it asked potential contract growers to
contact its district managers if they were willing to grow at least three acres of
basmati paddy under CF with Markfed. The questions which arise from this kind of
offer are: first, how many small farmers can spare three acres for basmati paddy?
How many can spare it for CF? and how many would like to spare it for CF with
Markfed?

18. 17
Table 2:Crop and agency wise average size of holding of contract growers (acres)
Study and
year
Contracting
agency and
place
Crop
under
contract
Average size
of contract
grower
holding
Average
size of op.
holding in
the state
Average %
area under
contract
crop
Singh, 2002 Frito Lay
(Pepsi), Punjab
Potato 53 9.5 8
-do- Nijjer Agro,
Punjab
Tomato 22 9.5 23
-do- HLL, Punjab Tomato 78 9.5 33
-do- Frito Lay
(Pepsi), Punjab
Chilly 90 9.5 4.5
Dev and
Rao, 2005
AP Govt. and
various
processors
Oil palm 10 3 40
-do- BHC Agro
India, AP
Gherkins 7 3 15
Asokan and
Singh, 2006
A M Todd,
Punjab
Mint 57 9.5
Kumar,
2006
Many MNCs
and local firms
in Punjab
Many
crops
together
37 9.5 12
Singh, 2008 McCain Foods,
Gujarat
Potato 19 6.45 21
-do- Frito Lay
(Pepsi) Punjab
Potato 63 9.5 53
-do- A M Todd,
Punjab
Mint 40 9.5 27
R Singh,
2008
Frito Lay,
(Pepsi) Punjab
Potato 75 9.5 -
Pritchard &
Connell,
2011
Karnataka and
Andhra (AVT
McCormick)
Chilly 35 (Karnataka)
22.5; 42; 22.5
(AP-3
locations)
60 and
70;25;70
respectively
Source: various studies.
It is not incidental that most of the CF projects are in the states of Punjab, Haryana,
Gujarat, Maharashtra, Karnataka and Tamilnadu which are agriculturally developed
states. On the other hand, vast areas of India such as Bihar, Jharkhand, Chhatisgarh,
Orissa, West Bengal, the entire north-east India and areas of Uttarakhand, Himachal
Pradesh, Kerala and Jammu and Kashmir have been bypassed by CF projects. Does it
mean that these areas and farmers would not benefit from commercialization and
vertical co-ordination of agriculture? These are areas with highest concentration of
small and marginal farmers (Gill, 2004). This essentially means that contracting
companies do not encourage participation of those who need to be helped to
participate as risk preference and innovativeness require not just attitude but also
resources and risk taking capability to undertake risky crops and ventures (Glover,
1987).
Similarly, as part of the more recent retail chain penetration in the Indian farm sector,
the Food Chain Partnership (FCP) program of Bayer Crop Science (BCS)- an
agricultural input MNC, in India was found to be highly selective in terms of regions

19. 18
which are included, the farmers who can participate, the crops that are covered, and
the information passed on to the farmers. The potential of such market-driven
structures which concentrate only on those regions and products that promise the
highest profits is, therefore, questionable. BCS launched its FCP program in those
areas where retail and processing industries are most active in procuring from farmers
and where private centralized procurement infrastructure, such as collection and
distribution centers, has already been set up. Those areas are located within five
`nodes' in (1) Punjab and Haryana, (2) Maharashtra, (3) Gujarat, (4) Karnataka and
Tamil Nadu, and (5) Andhra Pradesh. Within these states, there are clusters of
intensified production of a certain vegetable crop. This focus on selected regions
excludes permanently the majority of the Indian farmers from the program. The FCP
program, in its initial phase, targets exclusively vegetable crops. The focus of the
program on specific crops excludes a big majority of farmers (Trebbin and Franz,
2010).
In the emerging fresh fruit and vegetable retail chain led procurement of vegetables, it is
medium and large growers who are the „contact‟ (not contract) growers for these chains
with only a few exceptions like Namdhari Fresh which involved small holders and
practised CF with the vegetable growers (table 3). Though it is argued that vegetable
crops are more suitable for small holders due to their labour intensity and regular
income, but the market/buyer does not seem to favour small holders. This is also
corroborated by another recent study of a retail chain in Karnataka (Reliance Fresh)
where the average size of a retail supplier varied from 2.5 hacs (6.25 acres) to as much as
8.2 hacs (20.5 acres) and 9.3 hacs (23.25 acres) across locations within the state and this
was many times the average size of holding in the state or even the study areas (Kolar
and Belgaum) which were 4 acres (state) and 2.9 acres (Kolar) and 5 acres (Belgaum)
respectively (Pritchard et al, 2010). Another study (Mangala and Chengappa, 2008) on
the impact of a food retail chain (FRC) in the same state (Karnataka) also reports data
which shows that land holding size as well as the size of irrigated and dry lands was
higher for food chain farmers (6 acres; 4.5 acres and 1.5 acres respectively) than
traditional market farmers (2 acres; 1.5 acres and 0.5 acres respectively).
Thus, retail chain linkage is selective not only in terms of regions reached by the
program, but also in terms of the crops covered which are only those that are of
corporate interest. Further, it is selective in terms of farmers that are selected (size of
farms, literacy, access to mobile phones, and irrigation facilities). Thus, those whose
needs are most urgent i.e. the marginal and the small farmers, farmers lacking
irrigation facilities and basic education, or farmers in more remote regions, are
excluded.
The organic produce contracting agencies also tend to exclude small producers due to
reasons of high certification costs, smaller volumes produced, and tighter control by
the chain leaders in the absence of any local market outlets for the organic producers
(Raynolds, 2004; Singh, 2009). In Madhya Pradesh, in case of an organic cotton
project organized by a private corporate textile chain, out of a total of 44 farmers
interviewed 5% were marginal (less than one hectare of land), and 22% small (1-2
hectares of land) given 40% and 24% of the holdings in the state are marginal and
small respectively. Average land holding was found to be is 15.3 acres with 50%
holding as high as 25 acres (10 hectares) which was much larger than the average size
of operational holding in the state (2.28 hectares or 5.6 acres) and in the Nimar valley

20. 19
(study area; 2.83 hectares (7 acres) (Shankar, 2005). This shows that the organic
cotton contracting company largely worked with large and medium farmers as 50% its
growers were really large growers with more than 10 hectares of land each. Further,
the average land under contract was 12.8 acres which reconfirms the large farmer bias
of the company‟s organic project. The correlation coefficient between ownership
holding and organic acreage was 0.84 which again showed that larger farmers put
larger acreage under the organic project. Similar was the case of organic Basmati CF
in Haryana where average size of operated land of the contract grower was 32 acres
compared with the average size of operated land in the state which was 5.26 acres
(Singh, 2009).
Table 3: Crop and agency wise average size of holding of retail chain
contact/contract vegetable growers
F&V chain Location Crop under
contract
/purchased
Average size (in
acres) of
contract/contact
grower holding
(operational)*
Average size
of
operational
holding in
the state
Average
% area
under
vegetabl
es
ITC‟s
Choupal Fresh
Chandigarh
region (
Punjab/Har
yana)
Cauliflower,
bottlegourd
9.91 9.36 (Punjab)
and 5.26
(Haryana)
37
Reliance
Fresh (RF)
Ahmedabad
region
Cauliflower,
cabbage
15.9 6.45 47
ABRL‟s More Ahmedabad
region
Cauliflower,
tomato
15.43 6.45 71
ABRL‟s More Bangalore
region
Cauliflower,
tomato
7.52 4(2.9)** 65
RF/ABRL‟s
More (thru
supplier)
Belgaum
region
Cauliflower,
tomato
16.97 4(5)** 33
Namdhari –
Fresh
Bangalore
region
Okra, baby
corn
4.56 4(2.9)** 64
*- there was no major difference between owned and operated land as leasing in/out was
not significant.
**- figures in brackets are average land holding size in the study district/region.
Source: Singh and Singla, 2011.
3.1 Reasons for Exclusion
The aspects of CF which contribute to exclusion of small producers are: enforcement
of contracts, high transaction costs, quality standards, business attitudes and ethics
like non/delayed/reduced payment and high rate of product rejection, and weak
bargaining power of the small growers (Kirsten and Sartorius, 2002). The organisers
of CF also find it costly to work with small producers due to their scattered location
and smaller volumes though there are also many advantages of working with them
like easy availability of family labour, better commitment levels, helping spread risk
of default, giving corporate agency a social face, and lower cost of production due to
lower mechanisation of smaller farms (Boselie et al, 2003). The eligibility criteria for
participation in CF projects/schemes like irrigated land, suitable land, land near main
road, literacy level of the farmer are themselves discriminatory in terms of who can be

21. 20
a contract grower. In fact, in CF everywhere, private agribusiness firms have less
interest and ability to deal with small scale farmers on an individual basis (Hazell,
2005).
Even in modern retail driven arrangements with farmers like that of BCS‟ FCP
program, there are several preconditions as to who can become a partner farmer in the
program, including: minimum land holding size of one acre (0.4 hectare), irrigation
facilities, literacy, and a certain `business sense', as well as access to a mobile phone
to enable the flow of information. Although there are differences between and within
states and regions, such criteria are generally hard to fulfill. This, and the focus on
certain core areas of vegetable production, results in the exclusion of many farmers
(Trebbin and Franz, 2010).
4. Mechanisms for Inclusion
The crops which are suitable for smallholder participation should also be chosen
carefully e.g. they should be short duration. It is seen that voluminous crops like
potato are not fit for smallholders as they can be produced on large scale and are
amenable to mechanised cultivation. On the other hand, crops which are more labour
intensive like gherkins or tomatoes and are not amenable to mechanical handling, are
more suitable for smallholders as they require constant and regular crop care. Many of
these crops are also those which would not be grown without a contract e.g. organic
cotton or gherkins as they have no open markets which are attractive.
If CF is going to be the way for participation in most high value produce chains, then
it is important to make a place for smallholders. One way to do that is to encourage
and promote group CF. The state should make it attractive for agencies to work with
groups rather than individuals which will lower transaction costs for agencies as well.
All incentives given for CF should be for those working for smallholders or their
groups as was the case in Thailand which promoted group CF thru national plans
(Singh, 2005). More recently, the government of Maharshtra has started organising
potential contract farmers into groups of 10-15 farmers each and facilitating their
contract linkage with buying agencies like Tata Chemicals. But, interestingly, here
too, the average size of holding of such farmers ranges from 7 hectares to as much as
30 hectares (The Financial Express, Ahmedabad, Oct 15, 2011).
The CF agencies should proactively involve NGOs into their CF operations and even
organise farmer co-operatives or groups for more sustainable CF programs (Mayers
and Vermeulen, 2002; Pingali and Khwaja, 2004). In contract arrangements with
small producers in west African countries, the cotton companies started transferring
some of the operational or functional responsibilities like distribution of inputs,
equipment orders, and credit repayment management, to the village associations
during the 1970s itself. They provided these associations with management skills for
these tasks. The companies relied on traditional village authority structures for
organising the associations but limited the associations to one per village to simplify
company purchasing, delivery and marketing procedures. This arrangement accounted
for a significant part of each cotton company‟s success (Bingen et al, 2003).
Major conditions for successful interlocking between agribusiness firms and small
producers include increased competition for procurement instead of monopsony,
guaranteed market for farmer produce, effective repayment mechanism, market

22. 21
information for farmers to effectively bargain with companies, large volumes of
transactions through groups of farmers, for lowering transaction costs, co-operation
among genuine agribusiness firms in the area, and no alternative source of raw
material for firms (Kirsten and Sartorius, 2002; Bijman, 2008). Further, for the
sustainability of company-farmer partnership schemes, it is important that the
company is able to successfully market its products so that farmers do not suffer from
lack of market (Baumann, 2000; Haque, 2000). Building of relationships of trust with
farmers through company reputation rather than marketing gimmicks is crucial. This
requires mutual respect, fair and transparent negotiation process, realistic assessment
of benefits, long term commitment, equitable sharing of risk, and sound business
plans (Mayers and Vermeulen, 2002). Innovative pricing mechanisms like bonus at
the end of the processing cycle, shares in company equity, dividends, producer‟s fixed
price, and quality based pricing, which reward performance can help contract
performance.
The state and development agencies can also make it attractive for agencies to work
with smallholders by way of extending lower interest credit and free training and
extension to such growers as was done in Thailand where state bank (Bank for
Agriculture and Agricultural Co-operatives (BAAC)) provided such loans and
Department of Agricultural Extension (DOAE) provided extension support to contract
growers and their groups (Singh, 2005). There are many cases of such support by state
agencies in Malaysia and South Africa to facilitate inclusion of specific types of
smallholders into CF arrangements (Bijman, 2008; Morrison etal, 2006). This can be
achieved thru public-private partnerships which is being encouraged anyway. Specific
tax and other incentives like market fee waiver could be offered to those proactively
involving small holders or their groups/agencies in their operations.
The state should also provide inclusion incentives which are specific to smallholders
instead of being neutral. For example, the Government of Punjab through its Punjab
Agro Foodgrains Corporation (PAFC) was reimbursing extension cost to the CF
agencies/facilitators at the rate of Rs. 100 per acre for three years as part of its
diversification plan. But, doing it irrespective of the size of holding of the contract
growers defeats the purpose as it does not ensure that small and marginal farmers who
can not afford to pay for extension and need to be brought into the contract system are
included. Similarly, the Ministry of Food Processing industries had been providing an
incentive during the 9th
and the 10th
5-year Plans in the form of a reimbursement of
five per cent of the value of raw materials procured through CF with farmers with a
maximum ceiling of Rs. 10 lakh per year for a maximum of three years with the
condition that any organization (private/public/co-operative/Non-Government
organization (NGO)/joint venture/assisted) should work with at least 25 farmers under
contract for at least three years irrespective of the size of the contract grower.
Contracting agencies can also be permitted to do limited corporate farming alongside
CF to reduce their procurement risk and undertake innovative production and research
activities on such leased farms. This is called nucleus-outgrower model of CF or more
recently „partial vertical integration‟ and has been used by contracting agencies in
India and elsewhere (Suzuki et al, 2011; Singh and Singla, 2011).
Finally, in India, the practice of „contact farming‟ should be discouraged as it does not
reduce the market risk of the grower as procurement quantity and price are not pre-
agreed.

23. 22
4.1 Beyond Inclusion
Legal protection to contract growers as a group must be considered to protect their
interest. There are cases of legal protection given to subcontracting industries in Japan
in their relations with large firms. These laws specify the duties (to have a written and
clear terms contract with the subcontractor) and forbidden acts for the large parent
firm. The latter include refusal to receive delivery of commissioned goods, delaying
the payment beyond agreed period, discounting of payment, returning commissioned
goods without good reason, forced price reduction, compulsory purchase by
subcontractors of parental firm's products, and forcing subcontractors to pay in
advance for materials supplied by the parent firm. These provisions are monitored by
the Fair Trade Commission. Interestingly, most of the violations by parent firms were
on the written form and clear terms of the contracts (Sako, 1992). If CF is only the
flexible production systems prevalent in industry applied to farm production, then it is
only logical to extend such legal provisions with necessary modifications to farming
contracts. In farming sector per se, there is the Model Producer Protection Act, 2000
of Iowa State in the USA which requires contracts to be in plain language and
disclose material risks. It provides a three days‟ cancellation period for the producer
to review and discuss production contracts with their advisors. It also provides for
producers to be first priority lien for payments due under a contract in case of
contracting company bankruptcy. Besides, it protects against undue cancellation of
contracts by companies and prohibits „tournaments‟ (contracts where compensation to
grower is determined by his performance relative to others)
(www.flaginc.org/pubs/poultry/poultrypts.)
The model contract agreement (under APMC Act) is quite fair in terms of sharing of
costs and risks between the sponsor and the grower (GoI, 2003). But, it leaves out
many aspects of farmer interest protection like delayed payments and deliveries,
contract cancellation damages if producer made firm specific heavy investments,
inducement/force/intimidation to enter a contract, disclosure of material risks,
competitive performance based payments, and sharing of production risks. Also, there
are state level variations in the amended Acts as agriculture is a state subject in India.
For example, in Gujarat, the amended Act makes the APMC as a party in the tripartite
contract (earlier mandatory, but now optional) stating the logic that APMCs have a
useful role as facilitator as they have long standing relationship with farmers and can
disseminate the CF concept and practice besides monitoring its practice. Though the
union model Act exempts contract procurement from market fee, the Gujarat Act
makes it mandatory to pay the prescribed cess to the concerned APMC or in case of
multi-location operations, to the GSAMB which will apportion it to the concerned
APMCs. Haryana and Gujarat also prescribe bank guarantees for preventing defaults
by contracting agencies. On the other hand, Bihar has abolished the APMC Act
instead of amending it and that makes the agricultural market in the state totally
unregulated. Table 4 provides a status of the progress in amending the state APMCs.

24. 23
Table 4: Status of reforms in APMC Acts as on 30.09.2011
Source: Working Group, 2011.
Contracts need to be transparent and require frequent and independent scrutiny so that
they remain competitive both with similar contracts and with open market
transactions. Wide publicity of contract terms can help to stimulate competition.
The functioning of traditional markets (APMC) needs to be improved to enhance their
cost efficiency so that producers can realize better prices and see APMCs as
alternative to CF. The amended APMC Act allows for the setting up of private
markets; it is also necessary to require an open auction system, improve buyer
competition in markets, provide better facilities such as cold storage and improve
farmers‟ access to market information. These markets are important to small farmers
and even a significant proportion of medium and large farmers, who still depend on
them; they also serve as the main competitors to CF and can improve the terms
offered to contract growers (Singh, 2008).
4.11 Producers' organizations
Collective action to deal with scale requirements needs to be designed to satisfy new
product and process standards or to avoid exclusion from the value chain. Collective
action through cooperatives or associations is important not only to be able to buy and
sell at a better price but also to help small farmers adapt to new patterns and much
greater levels of competition (Farina, 2002). There is also a need to strengthen small
farmer organizations and provide technical assistance to increase productivity for the
cost competitive market, provide help in improving quality of produce, and to
encourage them to participate more actively in the marketing of their produce in order
to capture value added in the chain (Schwentesius and Gomez, 2002).
Producers‟ organizations amplify the political voice of smallholder producers, reduce
the costs of marketing of inputs and outputs, and provide a forum for members to
Sl.
No.
Type of Reforms Name of States/ Union Territories
1. Direct Marketing;
Contract Farming and
private (non-APMC)
markets
Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa,
Gujarat, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra,
Mizoram, Nagaland, Odisha, Rajasthan, Sikkim, Uttarakhand
and Tripura.
2. Partial amendments a) Direct Marketing:
NCT of Delhi, Madhya Pradesh
b) Contract Farming:
Madhya Pradesh, Haryana, Punjab and Chandigarh
c) Private market
Punjab and Chandigarh
3. No Act and hence does
not require reforms
Bihar* (repealed on Sept. 1, 2006), Kerala, Manipur, Andaman &
Nicobar Islands, Dadra & Nagar Haveli, Daman & Diu, and
Lakshadweep.
4. Act already provides
for the reforms
Tamil Nadu
5. Further action is
required for reforms
Meghalaya, Haryana, J&K, West Bengal, Puducherry, NCT of
Delhi and Uttar Pradesh.

25. 24
share information, co-ordinate activities and make collective decisions. Producers‟
organizations create opportunities for producers to get more involved in value adding
activities such as input supply, credit, processing, marketing and distribution. On the
other hand, they also lower the transaction costs for the processing/marketing
agencies working with growers under contracts. Vigorous bargaining co-operatives or
other agricultural producer organisations are needed to negotiate equitable contracts
(Goldsmith, 1985; Key and Runsten, 1999). These types of organisations have been
able to secure the standardisation of contracts and their scrutiny by a government
agency in the USA (Wilson, 1986) and the bargaining groups have negotiated input
purchase and output sale collectively (Welsh, 1990). In Japan as well, farmers have
managed their relationships with companies well through co-operatives (Asano-
Tamanoi, 1988). The groups or farmers‟ organisations like co-operatives not only
lower transaction costs of the firms but also lower input costs for the farmers and give
them better bargaining power as was the case of a potato growers‟ co-operative in
north Thailand which acted as a link between the growers and the company (Ornberg,
2003).
Producer companies
A producer company can be registered under the provisions of Part IX-A, Chapter one
of the Companies Act 1956. (for details see Singh, 2008a). Already, there is good
progress, though a bit late, on the use of this Act under which there are 130 such
companies in India now. A large proportion of these are in the south and west regions
of India. Major states with sizeable numbers of producer companies include
Tamilnadu, Orissa, Maharashtra, Rajasthan, Gujarat and M.P. Besides these, 17 such
companies have been organised in MP under the District Poverty Initiative Project
(DPIP) in sectors of seed, grain, rice and tomato, chilli, poultry, potato, coriander,
turmeric, ginger, milk, and biofertiliser production. Earlier, in Sri Lanka, such
producer or farmer companies have been able to engage in CF with food processing
and food retail companies (Esham and Usmi, 2007).
Though the concept of producer companies is noble, the companies organized under
the Act face many problems which are stumbling blocks in their teething years.
Firstly, the producer companies are not yet recognized by the union or state
government for any incentive or support. Secondly, banks refuse to lend to these
companies due to lack of state or government guarantees. They also face difficulties
in getting APMC licenses due to traditional co-operatives already having licenses in
some places. Finally, and most importantly, these companies are not allowed to
mobilize capital from the market. This capital constraint, like their traditional
counterparts, makes it difficult for producer companies to set up facilities to do value
addition and marketing. It is sad that even after six years of existence of the law on
producer companies, neither the state nor the development agencies have tried to
create awareness of the concept and its practice. Most importantly, the JJ Irani
Committee has now recommended that the producer company clause should be taken
out of the purview of the Companies Act. It is of the view that the producer company
does not fit the definition of a company. If need be, there could be separate legislation
for producer companies. This recommendation of the Committee has come at a time
when the concept was just picking pace in terms of its practice at the producer level
and many development agencies seemed to have found a way to organize producers in
a market oriented economy. Any tinkering with the law at this juncture will certainly
create trouble for the existing and the new producer companies. The government, both

26. 25
the union and the state, should recognize producer companies as producer co-
operatives and extend all the support as extended to traditional co-operatives (Singh,
2008a).
5. Conclusions
Though there are concerns about the ability of the small farms to survive in the
changing environment of agribusiness, still there are opportunities for them to exploit
like in product differentiation with origin of product or organic products and other
niche markets. But, the major route has to be through exploitation of other factors like
external economies of scale through networking or clustering and alliances like CF
(Kirsten and Sartorius, 2002). For this, intermediation is required for small farmers to
link them up with global or national markets in processing and marketing (Lipton,
2002). This intermediation could be by a local private enterprise, domestic or
multinational, a statal or para-statal organization, or a co-operative or farmer
association, all of which could use CF as a mechanism to work with small growers.
Marketing extension which includes better product planning at farmer/group level,
provision of market information, securing markets and alternative markets for farmers
and improving marketing practice at farmer level in terms of grading, sorting,
packaging and primary processing is much needed and could come from CF linkage.
There is also need to communicate effectively with producers about the various
benefits of the CF linkage, not just price. It could be lower cost of production, lower
transaction cost or better quality of produce or other benefits like resource
conservation or brand building in the market.
The experience of CF across the globe suggests that it is not the contract per se which is
harmful as a system but how it is practised in a given context. If there are enough
mechanisms like group contracts, producer companies/associations, NGOs, and
regulation of contracts, to monitor and use the contracts for facilitating development of
smallholders, it can certainly lead to a betterment of all the parties involved, especially
small and marginal farmers. In the emerging environment of „triple bottom line‟ of
people, planet and profits, corporate agencies need to incorporate the „people‟ and
„planet‟ concerns into their strategies and actions so that sustainability of both
business as well as smallholders is achieved and sustained.
It is also important to recognize that there is so much diversity in the type of firms,
farmers, crops, and nature of contracts besides the local socio-economic environment
that it is better to focus on a specific situation of CF than the generic institution of CF.
The context of CF is very important to understand to examine its usefulness as many
actors and factors influence the working and outcomes of CF. Therefore, there is no
single blueprint of CF suitable for all situations but a series of alternatives. Any
assessment of CF should be done in terms of how it reduces contract growers‟
production and market risks and how it impacts on their resource base, compared with
the alternatives.
CF agencies can bring better environmental compliance by adopting procedural
justice perspective instead of higher levels of monitoring which may be
counterproductive and damage buyer-supplier relationships due to their being
autonomy reducing for the supplier and conflict generating between the two parties.

27. 26
The procedural justice includes using unbiased, transparent and correctable criteria
and procedures for making and executing decisions which can improve levels of trust
and commitment between the buyer and the suppler. The basic principles include
consistency in applying criteria, suppressing bias, using accurate information,
affording opportunity for correcting errors, providing adequate representation in the
decision making process, and ensuring ethical treatment (Boyd et al, 2007). It is also
known that pro-active environmental strategies can be profitable and sustainable ways
to deal with natural environment (Aragon-Correa and Rubio-Lopez, 2007) and
environmental management improves market related and image related drivers of
economic performance if integrated with other managerial functions (Wagner, 2007).
There is a need to provide for ecological concerns into CF programs and policies.
This can be done by way of land use planning based on soil depth, soil quality, land
slope and suitable water availability. It is also important to understand previous land
use and make it mandatory to follow crop rotation, if necessary.
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