The contract farming system should be seen as a partnership between agribusiness and farmers’. To be successful it requires a long-term commitment from both parties.

2. Introduction
• Contract farming can be defined as an agreement between farmers and
processing and/or marketing firms for the production and supply of agricultural
products under forward agreements, frequently at predetermined prices. The
arrangement also invariably involves the purchaser in providing a degree of
production support through, for example, the supply of inputs and the provision
of technical advice. The basis of such arrangements is a commitment on the part
of the farmer to provide a specific commodity in quantities and at quality
standards determined by the purchaser and a commitment on the part of the
company to support the farmer’s production and to purchase the commodity.
• The contract farming system should be seen as a partnership between
agribusiness and farmers’. To be successful it requires a long-term commitment
from both parties.
2

3. Contd.
• The intensity of the contractual arrangement varies according to the depth and
complexity of the provisions in each of the following three areas:
1. Market provision: The grower and buyer agree to terms and conditions for the future
sale and purchase of a crop or livestock product
2. Resource provision: In conjunction with the marketing arrangements the buyer
agrees to supply selected inputs, including on occasions land preparation and
technical advice
3. Management specifications: The grower agrees to follow recommended production
methods, inputs regimes, and cultivation and harvesting specifications
• With effective management, contract farming can be a means to develop markets
and to bring about the transfer of technical skills in a way that is profitable for
both the sponsors and farmers. The approach is widely used, not only for tree
and other cash crops but, increasingly, for fruits and vegetables, poultry, pigs,
dairy produce and even prawns and fish.
3

4. • From the point of view of farmers’, contractual
arrangements can provide them with access to production
services and credit as well as knowledge of new
technology. Pricing arrangements can reduce risk and
uncertainty. Some contract farming ventures give farmers
the opportunity to diversify into new crops, which would
not be possible without the processing and/or marketing
facilities provided by the company. Offsetting these
benefits, however, are the risks associated with the
cultivation of a new crop, the fact that the company may
fail to honor its commitments and the danger of
indebtedness if problems arise.
• From the point of view of sponsoring companies, contract
farming may in many cases can be more efficient than
plantation production, and will certainly be more
politically acceptable. It can give them access to land that
would not otherwise be available and the opportunity to
organize a reliable supply of products of the desired
quality, which probably could not be obtained on the open
market. On the other hand, from the companies’
perspective contract farming is not without difficulties.
On occasion farmers may sell their outputs to outsiders,
even though they were produced using company-supplied
inputs. Conflicts can also arise because the rigid farming
calendar required under the contract often interferes with
social and cultural obligations.
A Contract Farming Framework
4

5. Contract Farming Model: Govt. of India & Farmers
• The “Green Revolution” was an unquestionable success with following merits.
• Improved varieties & hybrids
• Assured availability of inputs
• Administered/Controlled pricing for fertilizer
• Guaranteed procurement
• Attractive & ever increasing output minimum support prices
• Food security was assured
• Farm incomes boomed
• Safeguarding Public Distribution System (PDS)
• Employment for rural landless
5

6. Contd.
• The disadvantages it had are as follows:
• Agriculture today is not diversified.
• Overemphasis on cereals & sugarcane.
• Low or no focus on pulses & oilseeds.
• Marginal role for the Pvt. Sector.
• Essential Commodities Act became a means of ensuring Govt. procurement.
• MSP became a benchmark reference pricing, rather than a farmers’ safety net.
• Productivity decay-paucity of incentive
• Mono-culture, overfertilization & excessive water usage
• Soil degradation
• Singular focus on supported crops discourages diversification.
• Subsidized exports to liquidate stock creates a further distance between the
international market & domestic reality 6

7. Why Contract Farming?
• The advantages, disadvantages and problems arising from contract farming will
vary according to the physical, social and market environments. More
specifically, the distribution of risks will depend on such factors as the nature of
the markets for both the raw material and the processed product, the availability
of alternative earning opportunities for farmers, and the extent to which relevant
technical information is provided to the contracted farmers. These factors are
likely to change over time, as will the distribution of risks.
•
1. Provision of inputs and production services
Many contractual arrangements involve considerable production support in
addition to the supply of basic inputs such as seed and fertilizer. Sponsors may
also provide land preparation, field cultivation and harvesting as well as free
training and extension. This is primarily to ensure that proper crop husbandry
practices are followed in order to achieve projected yields and required qualities.
There is, however, a danger that such arrangements may lead to the farmer being
little more than a laborer on his or her own land. It is often difficult for small-
scale farmers outside the contract-farming context to gain access to inputs.
7

8. Contd.
2. Access to credit
The majority of smallholder producers experience difficulties in obtaining credit for
production inputs. Contract farming usually allows farmers access to some form of
credit to finance production inputs. In most cases it is the sponsors who advance
credit through their managers. However, arrangements can be made with
commercial banks or government agencies through crop liens that are guaranteed by
the sponsor, i.e. the contract serves as collateral. When substantial investments are
required of farmers, such as packing or grading sheds, tobacco barns or heavy
machinery, banks will not normally advance credit without guarantees from the
sponsor.
3.Introduction of appropriate technology
New production techniques are often necessary to increase productivity as well as to
ensure that the commodity meets market demands. However, small-scale farmers
are frequently reluctant to adopt new technologies because of the possible risks and
costs involved. They are more likely to accept new practices when they can rely on
external resources for material and technological inputs. Nevertheless, the
introduction of new technology will not be successful unless it is initiated within a
well managed and structured farming operation. Private agribusiness will usually
offer technology more diligently than government agricultural extension services
because it has a direct economic interest in improving farmers’ production.
8

9. Contd.
4. Skill Transfer
The skills the farmer learns through contract farming may include record keeping, the
efficient use of farm resources, improved methods of applying chemicals and fertilizers,
a knowledge of the importance of quality and the characteristics and demands of export
markets. Farmers often apply techniques introduced by management (ridging, fertilizing,
transplanting, pest control, etc.) to other cash and subsistence crops.
5. Guaranteed and fixed pricing structures
The returns farmers receive for their crops on the open market depend on the prevailing
market prices as well as on their ability to negotiate with buyers. This can create
considerable uncertainty which, to a certain extent, contract farming can overcome.
Frequently, sponsors indicate in advance the price(s) to be paid and these are specified in
the agreement. On the other hand, some contracts are not based on fixed prices but are
related to the market prices at the time of delivery. In these instances, the contracted
farmer is clearly dependent on market volatility.
6. Access to reliable markets
Small-scale farmers are often constrained in what they can produce by limited marketing
opportunities, which often makes diversification into new crops very difficult. Farmers
will not cultivate unless they know they can sell their crop, and traders or processors
will not invest in ventures unless they are assured that the required commodities can be
consistently produced. Contract farming offers a potential solution to this situation by
providing market guarantees to the farmers and assuring supply to the purchasers.
9

10. •
1. Political acceptability
It can be more politically expedient for a sponsor to involve smallholder farmers in
production rather than to operate plantations. Many governments are reluctant to have
large plantations and some are actively involved in closing down such estates and
redistributing their land. Contract farming, particularly when the farmer is not a tenant
of the sponsor, is less likely to be subject to political criticism.
2. Overcoming land constraints
Most large tracts of suitable land are now either traditionally owned, costly to purchase
or unavailable for commercial development. Moreover, even if it were possible for
companies to purchase land at an affordable price, it would rarely be possible to
purchase large enough parcels of land to offer the necessary economies of scale
achieved by estate agriculture. Contract farming, therefore, offers access to crop
production from land that would not otherwise be available to a company, with the
additional advantage that it does not have to purchase it.
Contd.
10

11. 3. Production reliability and shared risk
The failure to supply agreed contracts could seriously jeopardize future sales. Plantation
agriculture and contract farming both offer reasonable supply reliability. Sponsors of
contract farming, even with the best management, always run the risk that farmers will
fail to honor agreements. On the other hand, plantation agriculture always runs the risk
of labor disputes. Working with contracted farmers enables sponsors to share the risk of
production failure due to poor weather, disease, etc. The farmer takes the risk of loss of
production while the company absorbs losses associated with reduced or non-existent
throughput for the processing facility. Where production problems are widespread and
no fault of the farmers, sponsors will often defer repayment of production advances to
the following season. The use of crop insurance may be possible.
4. Quality consistency
Markets for fresh and processed agricultural produce require consistent quality
standards. Both estate and contracted crop production require close supervision to
control and maintain product quality, especially when farmers are unfamiliar with new
harvesting and grading methods. Often, large numbers of crops within a single project
have to be transplanted, harvested and purchased in a uniform manner so as to achieve
product consistency.
5. Promotion of farm inputs
Contd.
11

12. • Problems on Farmers’ front
1. Increased risk
Farmers entering new contract farming ventures should be prepared to balance the
prospect of higher returns with the possibility of greater risk. Such risk is more likely
when the agribusiness venture is introducing a new crop to the area. There may be
production risks, particularly where prior field tests are inadequate, resulting in lower-
than-expected yields for the farmers. Market risks may occur when the company’s
forecasts of market size or price levels are not accurate. Considerable problems can
result if farmers perceive that the company is unwilling to share any of the risk, even if
partly responsible for the losses.
2. Unsuitable technology and crop incompatibility
The introduction of a new crop to be grown under conditions rigorously controlled by
the sponsor can cause disruption to the existing farming system. For example, the
managers may identify land traditionally reserved for food crops as the most suitable for
the contracted crop. Harvesting of the contracted crop may fall at the same time as the
harvesting of food crops, thus causing competition for scarce labor resources. Two
factors should be considered before innovations are introduced to any agricultural
environment. The first is the possible adverse effect on the social life of the community.
The second factor is the practicality of introducing innovations or adaptations.
Why not Contract Farming?
12

13. 3. Manipulation of quotas and quality specifications
Inefficient management can lead to production exceeding original targets. For example,
failures of field staff to measure fields following transplanting can result in gross
overplanting. Sponsors may have unrealistic expectations of the market for their product
or the market may collapse unexpectedly owing to transport problems, civil unrest,
change in government policy or the arrival of a competitor. Such occurrences can lead
managers to reduce farmers’ quotas. Few contracts specify penalties in such
circumstances. In some situations management may be tempted to manipulate quality
standards in order to reduce purchases while appearing to honor the contract. Such
practices will cause sponsor-farmer confrontation, especially if farmers have no method
to dispute grading irregularities.
4. Corruption
Problems occur when staff responsible for issuing contracts and buying crops exploit
their position. Such practices result in a collapse of trust and communication between
the contracted parties and soon undermine any contract. Management needs to ensure
that corruption in any form does not occur. On a larger scale, the sponsors can
themselves be dishonest or corrupt.
5. Domination by monopolies
The monopoly of a single crop by a sponsor can have a negative effect. Allowing only
one purchaser encourages monopolistic tendencies, particularly where farmers are
locked into a fairly sizeable investment, such as with tree crops, and cannot easily
change to other crops.
Contd.
13

14. 6. Indebtedness and overreliance on advances
One of the major attractions of contract farming for farmers is the availability of credit
provided either directly by the company or through a third party. However, farmers can
face considerable indebtedness if they are confronted with production problems, if the
company provides poor technical advice, if there are significant changes in market
conditions, or if the company fails to honor the contract. This is of particular concern
with long-term investments, either for tree crops or for on-farm processing facilities. If
advances are uncontrolled, the indebtedness of farmers can increase to uneconomic
levels.
• Problems on Sponsors’ front
1. Land availability constraints
Farmers must have suitable land on which to cultivate their contracted crops. Problems
can arise when farmers have minimal or no security of tenure as there is a danger of the
sponsor’s investment being wasted as a result of farmer-landlord disputes. Difficulties
are also common when sponsors lease land to farmers. Such arrangements normally
have eviction clauses included as part of the conditions.
Contd.
14

15. 2. Social and cultural constraints
Problems can arise when management chooses farmers who are unable to comply with strict timetables
and regulations because of social obligations. Promoting agriculture through contracts is also a cultural
issue. In communities where custom and tradition play an important role, difficulties may arise when
farming innovations are introduced. Before introducing new cropping schedules, sponsors must consider
the social attitudes and the traditional farming practices of the community and assess how a new crop
could be introduced. Customary beliefs and religious issues are also important factors.
3. Farmer discontent
A number of situations can lead to farmer dissatisfaction. Discriminatory buying, late payments,
inefficient extension services, poor agronomic advice, unreliable transportation for crops, a mid-season
change in pricing or management’s rudeness to farmers will all normally generate dissent. If not readily
addressed, such circumstances will cause hostility towards the sponsors that may result in farmers
withdrawing from projects.
4. Extra-contractual marketing
The sale of produce by farmers to a third party, outside the conditions of a contract, can be a major
problem. Extra-contractual sales are always possible and are not easily controlled when an alternative
market exists.
5. Input diversion
A frequent problem is that farmers are tempted to use inputs supplied under contract for purposes other
than those for which they were intended. They may choose to use the inputs on their other cash and
subsistence crops or even to sell them. Clearly this is not acceptable to the sponsor, as the contracted
crop’s yields will be reduced and the quality affected.
Contd.
15

16. • Contract farming usually follows one of five broad models, depending on the
product, the resources of the sponsor and the intensity of the relationship
between farmer and sponsor that is necessary.
1. Centralized model
2. Nucleus Estate Model
3. Multipartite model
4. Informal Model
5. Intermediary Model
Types of Contract Farming
16

17. • The centralized model
1. Involves a centralized processor and/or packer buying from a large number of small
farmers
2. Is used for tree crops, annual crops, poultry, dairy. Products often require a high
degree of processing, such as tea or vegetables for canning or freezing
3. Is vertically coordinated, with quota allocation and tight quality control
4. Sponsors’ involvement in production varies from minimal input provision to the
opposite extreme where the sponsor takes control of most production aspects
• The nucleus estate model
1. Is a variation of the centralized model where the sponsor also manages a central
estate or plantation
2. The central estate is usually used to guarantee throughput for the processing plant
but is sometimes used only for research or breeding purposes
3. Is often used with resettlement or transmigration schemes
4. Involves a significant provision of material and management inputs
Contd.
17

18. • The multipartite model
1. May involve a variety of organizations, frequently including statutory bodies
2. Can develop from the centralized or nucleus estate models, e.g. through the
organization of farmers into cooperatives or the involvement of a financial
institution
• The informal model
1. Is characterized by individual entrepreneurs or small companies
2. Involves informal production contracts, usually on a seasonal basis
3. Often requires government support services such as research and extension
4. Involves greater risk of extra-contractual marketing
• The intermediary model
1. Involves sponsor in subcontracting linkages with farmers to intermediaries
2. There is a danger that the sponsor loses control of production and quality as well as
prices received by farmers
Contd.
18

19. Centralized Model Multipartite Model 19

20. 20

21. Contracts and their specifications
• Agreements, in the form of a written contract or a verbal understanding, usually
cover the responsibilities and obligations of each party, the manner in which the
agreement can be enforced and the remedies to be taken if the contract breaks
down. In most cases, agreements are made between the sponsor and the farmer,
although in the case of multipartite arrangements and some others, the contracts
are often between the sponsor and farmer associations or cooperatives. In the
case of arrangements through intermediaries, the sponsor contracts directly with
the intermediaries who make their own arrangements with farmers. Four aspects
need to be considered when drafting contracts:
1. Legal framework: The formal law of contract in a particular country, as well as the
manner in which that law is used and applied in common practice.
2. The formula: The clarification of the managerial responsibilities, the pricing
structures and the set of technical specifications that directly regulate production.
3. The format: The manner in which the contract is presented.
4. The specifications: The details of the implementation of the contract. 21

22. • The legal framework
1. The contract should comply with the minimum legal requirements of the country
2. Local practice must be taken into account
3. Arrangements for arbitration must be addressed
• The formula of contracts can be based on
1. Market specifications, where only quality standards are specified and input provision is often minimal
2. Resource specifications, where details of production, e.g. varieties, are specified. Input provision is often limited
and income guarantees are minimal
3. Management and income specifications, which are the most intensive and may involve predetermined pricing
structures, farm input advances, technical support and managerial control
4. Land ownership and land tenure specifications, which are a variation of the management and income model with
additional clauses relating to land tenure. This formula is usually used when the sponsor leases land to the farmers
• The format
1. Formal agreements are legally endorsed contracts which closely detail obligations of each party
2. Simple registrations are the most common format which the farmer signs to indicate that he/she has understood
the terms of the agreement and wishes a contract to be reserved for him/her
3. Verbal agreements are frequently used under the informal model and sometimes by corporate sponsors
Contd.
22

23. • The specifications may include
1. The duration of the contract
2. The quality standards required by the buyer
3. The farmer’s production quota
4. The cultivation practices required by the sponsor
5. The arrangements for delivery of the crop
6. The way in which the price is to be calculated using
1. Prices fixed at the beginning of each season
2. Flexible prices based on world or local market prices
3. Spot-market prices
4. Consignment prices, when payment to the farmer is not known until the raw or processed
product has been sold, or
5. Split pricing, when the farmer receives an agreed base price together with a final price when
the sponsor has sold the product
7. Procedures for paying farmers and reclaiming credit advances
8. Arrangements covering insurance
Contd.
23

24. 24

25. Farm Laws, 2020
• In September 2020, President Ram Nath Kovind gave his assent to the three 'Agriculture Bills'
that were earlier passed by the Indian Parliament. These Farm Acts are as follows:
1. Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services
Act, 2020
3. Essential Commodities (Amendment) Act, 2020
• Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
This proposed legislation seeks to give freedom to farmers to sell their produce outside the
notified APMC market yards (mandis). It permits intra and inter-state trade of farmers’ produce
beyond the physical premises of Agricultural Produce Market Committee (APMC) markets and
other markets notified under the state APMC Acts.
Provisions:
• Trade of Farmers' Produce: The Act allows the farmers to trade in outside trade area such as farm
gates, factory premises, cold storages, and so on. Previously, it could only be done in the APMC
yards or Mandis.
• Alternative Trading Channels: It facilitates lucrative prices for the farmers via alternative trading
channels to promote barrier-free intra-state and inter-state trade of agriculture produce.
25

26. • Electronic Trading: Additionally, it allows the electronic trading of scheduled farmers’
produce (agricultural produce regulated under any state APMC Act) in the specified trade
area. It will also facilitate direct and online buying and selling of the agricultural produce
via electronic devices and the internet.
• Market Fee Abolished: As per the Act, the State Governments are prohibited from
levying any market fee or cess on farmers, traders and electronic trading platforms for
trading farmers’ produce in an 'outside trade area’.
It will open more choices for farmers, reduce marketing costs, and help them get
better prices. It will also help farmers of regions with surplus produce to get better prices
and consumers in areas with shortages at lower prices.
States will lose revenue as they will not be able to collect ‘mandi fees’ if farmers
sell their produce outside registered Agricultural Produce Market Committee (APMC)
markets. Also, commission agents stand to lose if the entire farm trade moves out of
mandis. But, more importantly, farmers and opposition parties fear it may eventually lead to
the end of the minimum support price (MSP) -based procurement system and may lead to
exploitation by private companies.
26
Contd.

27. • Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm
Services Act, 2020
This proposed legislation seeks to give farmers the right to enter into a contract with
agribusiness firms, processors, wholesalers, exporters, or large retailers for the sale of future
farming produce at a pre-agreed price.
Provisions:
• Farming Agreement: The Act provides for a farming agreement between a farmer
and a buyer prior to the production or rearing of any farm produce.
• Minimum Period of Farming Agreement: The minimum period of the farming
agreement shall be for one crop season or one production cycle of livestock.
• Maximum Period of Farming Agreement: The maximum period of the farming
agreement shall be five years. It also states that if the production cycle of any
farming produce is longer and may go beyond five years, the maximum period of
farming agreement may be mutually decided by the farmer and the buyer and
explicitly mentioned in the farming agreement.
27
Contd.

28. • Pricing of Farming Produce: The pricing of farming produce and the process
of price determination should be mentioned in the agreement. For prices
subjected to variation, a guaranteed price for the produce and a clear reference
for any additional amount above the guaranteed price must be specified in the
agreement.
• Settlement of Dispute: The Act provides for a three-level dispute settlement
mechanism-- Conciliation Board, Sub-Divisional Magistrate and Appellate
Authority.
It seeks to transfer the risk of market unpredictability from farmers to
sponsors. Besides giving them access to modern tech and better inputs, it also
seeks to boost farmer income by reducing the cost of marketing.
Farmer bodies and opposition parties say the law is framed to suit “big
corporates who seek to dominate the Indian food and agriculture business”. It will
weaken the negotiating power of farmers. Also, big private companies, exporters,
wholesalers, and processors may get an edge.
28
Contd.

29. • Essential Commodities (Amendment) Act, 2020
This proposed legislation seeks to remove commodities like cereals, pulses,
oilseeds, onion, and potatoes from the list of essential commodities and will do
away with the imposition of stock holding limits on such items except under
‘extraordinary circumstances’ like war, famine, extraordinary price rise and natural
calamity. As per the amendment, the imposition of any stock limit on agricultural
produce will be based on price rise and can only be imposed if there's- a 100%
increase in the retail price of horticultural produce and 50% increase in the retail
price of non-perishable agricultural food items.
It is aimed at attracting private investment/FDI into the farm sector as well
as bringing price stability.
Big companies will have the freedom to stock commodities, helping them
dictate terms to farmers.
29
Contd.

30. • Central Government proposed that the respective State Governments can
levy cess on the private mandis.
The proposal was rejected by the farmers as they believe that the creation of
private mandis along with APMC will drive agriculture business towards private
mandis, ending government markets, intermediary systems and APMCs. As a
result, big corporate houses will overtake markets, thereby procuring farm produce
at incidental rates. The farmers believe that the Government may delay the
procurement (as in the case of paddy), turning the public markets inefficient and
redundant.
• Central Government proposed that they will give written assurance for the
continuation of the existing MSP system.
The proposal was rejected by the farmers as they believe that the new Farm Laws
2020 are brought to dismantle APMCs. Thus, they are demanding a comprehensive
Act on MSP pan India and for all crops. They are of the view that a written
assurance from the Union Government is not a legal document and holds no
guarantee.
30
Why the Indian farmers rejected the Central Government's proposal?

31. • Central Government proposed that they will direct the State Governments
to register traders in order to regulate them.
The proposal was rejected by the farmers as the new Farm Laws 2020 have no
provision to regulate the traders. As per new Laws, any PAN cardholder can
procure grains from the markets at wishful prices and hoard the farm produce. The
farmers believe that the Central Government is not ready to take responsibility for
the ongoing issue as they want the State Governments to regulate the traders.
• Central Government proposed that under the contract farming law,
farmers will have the alternative to approach the court and their land will
be safe as no loan will be given on farmers’ land and their buildings by
mortgaging it.
The proposal was rejected by the farmers as the history of contract farming has
many examples of non-payment by the companies making various excuses like
substandard produce. For example, in Sugarcane produce, payments were held for
years; many cases of non-procurement have been witnessed citing 'poor quality',
driving the farmers into a debt trap. Thus, farmers do not have money to repay the
loans and have no option to sell/lose their lands.
31
Contd.

32. Contract Farming: A few Successful Cases
1. The Classic Case of Pepsi Foods Ltd.
Launching its agro-business in India with special focus on exports of value-
added processed foods, Pepsi Foods Ltd. (‘PepsiCo’ hereafter) entered India in 1989 by
installing a Rs 22 crore state-of-the-art tomato processing plant at Zahura in Hoshiarpur
district of Punjab. The company intended to produce aseptically packed pastes and
purees for the international market.
However, before long, the company recognized that investment in agro-
processing plants would not be viable unless the yields and quality of agricultural
produce to be processed were up to international standards. At that point of time,
tomato had never been cultivated in Punjab for its solid content, with a focus on high
yields and other desirable processing characteristics such as color, viscosity and water
binding properties.
Furthermore, little effort had been made to create a database on the
performance of various varieties and hybrids, or to introduce modern farming practices.
There were no logistically efficient procurement models for fruits and vegetables that
could be built on by the company.
32

33. Contd.
PepsiCo follows the contract farming method described earlier, where the grower
plants the company’s crops on his land, and the company provides selected inputs like
seeds/saplings, agricultural practices, and regular inspection of the crop and advisory
services on crop management. The PepsiCo model of contract farming, measured in terms
of new options for farmers, productivity increases, and the introduction of modern
technology, has been an unparalleled success. The company focused on developing region-
and desired produce-specific research, and extensive extension services.
It was thus successful in bringing about a drastic change in the Punjab farmers’
production system towards its objective of ensuring supply of right produce at the right
time in required quantities to its processing plant. Another important factor in PepsiCo’s
success is the strategic partnership of the company with local bodies like the Punjab
Agricultural University (PAU) and Punjab Agro Industries Corporation Ltd. (PAIC). Right
from the beginning, PepsiCo knew that changing the mindset and winning the confidence
of farmers would not be an easy task for outsiders. The company’s unique partnership with
PAU and PAIC fueled its growth in Punjab.
At the time of harvest, the company procures the entire pre-agreed quantum of the
harvested produce at the farm gates, at the pre-agreed price. The raw material so procured
is transferred to PepsiCo’s ISO 9002 and Hazard Analysis Critical Control Point (HACCP)
certified Rice Mill located at Sonipat for processing, packing and export, ensuring that the
product remains completely traceable from field to consumers.
33

34. Contd.
• Key elements of PepsiCo’s success
1. Core R&D team
2. Unique partnership with local agencies including a public sector enterprise
3. Execution of technology transfer through well-trained extension personnel remains
completely traceable from field to consumers.
4. Supply of all kinds of agricultural implements free of cost to contracted farmers
5. Supply of timely and quality farm inputs on credit
6. Prompt dispatch/delivery/procurement of the mature produce from every individual
contracted farmer through the system of ‘Quota Slips’
7. Effective adoption/use of modern communication technology like pagers for
communication with field executives
8. Regular and timely payment to contracted farmers through computerized receipts and
transparent system
9. Maintenance of perfect logistics system and global marketing standards. 34

35. Contd.
• Appachi’s Integrated Cotton Cultivation: Innovative Model
Appachi Cotton Company (ACC), the ginning and trading house from Pollachi
(Coimbatore district of Tamil Nadu, India) hit the headlines in May 2002 for the street
play it employed to encourage farmers in the Nachipalayam village in Kinathukadavu
block of Coimbatore to sow cotton seeds in their fields. The singer in the street play
assured cotton farmers that, unlike in the past, they would not be disappointed if they
cultivated cotton on their fields, as they would be backed by a model called the Integrated
Cotton Cultivation (ICC), which would guarantee a market-supportive mechanism for
selling their produce. ACC caters to top-bracket, quality-conscious clients from the textile
industry in India and abroad, and their client specific operation has won them laurels.
ACC is the only private ginner in the country to have successfully entered
backward and forward integration between the ‘grower’ (farmer) and the ‘consumer’
(textile units). Well in advance of the 2002 kharif sowing season, ACC undertook the
Herculean task of integrating about 600 farmers belonging to various districts of Tamil
Nadu on a holistic plank. This was done at a time when failure of monsoon for the third
consecutive year was imminent. This led to the farmers’ perceiving the ICC programme
as a boon, as their traditional sources of finance and support had refused further funds
due to non-recovery of earlier loans.
The Appachi formula ensured that its farmer members never went short of
money and materials during the crucial 100 days of the crop cycle. The contract assured
the farmers easy availability of quality seeds, farm finance at an interest rate of 12% per
annum, door delivery of unadulterated fertilizers and pesticides at discounted rates, expert
advice and field supervision every alternate week, and a unique selling option through a
MoU with the coordinating agency (ACC). The core principle of the formula lies in the
formation of farmers’ Self-Help Groups (SHGs).
35

36. • Key principles of the ACC model
1. One village, one group (SHG)
2. One village, one variety/hybrid of cottonseed
3. Crop loan at 12% per annum on Group’s guarantee
4. Door delivery of quality inputs at discounted rates
5. Cotton crop insurance
6. Synchronized sowing
7. Integrated crop management through competent Farm Service Centres
8. Contamination control measures from farm to factory
9. Assured buyback of final produce from farmers’ doorsteps
10. The sponsor (ACC) plays the role of a perfect coordinator/ facilitator between the
producer and the consumer.
Contd.
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37. • Contract Farming for Potato by Pepsico
In the year 1987, FritoLay, a PepsiCo group company set up its first potato
chips plant in Channo, district Sangrur, Punjab. Later two more plants were started
one at Ranjangaon, Pune (MH) and the other at Howrah in West Bengal. For the
operations in these plants, PepsiCo Company required processed grade potato per
annum. Though India is the third largest producer after China and Russia, meeting
the requirement of process grade potato is still uncertain. Potato is widely available
but the challenge is in getting a year round supply of the processed quality of
potatoes that are required for producing chips. The major factor behind this gap is
non-availability of processing grade varieties.
Immediately after the unveiling of K. Chipsona-1, K. Chipsona-2 and K.
Chipsona-3 process grade varieties by the Central Potato Research Institute,
Shimla this difference is being diminished. Seasonality, is the other vital limiting
factor to meet the demand of process grade potato.
In India, around 90% of potatoes are produced in Indo-Gangetic plains,
north-western plains, central and north eastern regions during short winter days,
and this contributes to the bulk of fresh harvested potatoes. Although, potatoes
harvested in cooler north-western and west central plains are not fit for processing
because low temperatures at the time of crop maturity results in build-up of low
dry material and high reducing sugars in the potato tuber
Contd.
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38. The PepsiCo Company procures the production as per the price, quantity
and quality which are pre-agreed. Pay for Performance system is followed by
PepsiCo where farmers get incentives on their production meeting high quality
standards, this is carried on by PepsiCo company to drive quality and a continuous
generous supply. Advanced generation standard seed tubers are distributed to the
farmers.
• Profile Of Pepsico Potato Contract
Procurement and input based contracts are proposed by PepsiCo in which
the firm agrees to procure the produce under contract at a pre-agreed price as well
as at a fixed time and also provides with inputs such as seeds to farmers. In return
the farmers do pay some amount to the company in advance in proportion to the
acreage under contract. The firm supplies two types of varieties to the farmer as
the input. One among the two is LR type and other is CH1 type. Time period of the
LR variety is 60 days, and time period of CH 1 is 120 days. The process of
harvesting of crop is started only when the crop attains its maturity stage.
Contd.
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39. Usually, after a period of 90 to 120 days of sowing, the crops can be
harvested. Classification and grading of the production is very crucial in nature. It
ensures higher income to the farmers. After the process of grading by the farmers the
potatoes are further graded and classified by the firm under different categories. But,
the firm only acquires those potatoes that are of 45 mm, which is the recommended
size of the potato. In the arrangement of contract farming of potatoes, the PepsiCo also
supplies the producers with a kit which comprises of chemical fertilizers and
pesticides that are to be used as liquid spray on the crop. In addition to this, the firm
also delivers certain facilities and technical advices to the farmers such as an
observation by the field officer at a regular interval of fifteen days, organizing of
meetings and lectures through seminars by the technical staff members in the villages,
to encourage contract farming
Other example is of McCain’s Pvt. Ltd. Which has developed contract farming with
the farmers of Lahaul and Spiti for procuring Potato and True Potato Seeds.
Contd.
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40. • Nestle India Ltd. Model
Contracting with a large number of small-scale producers raises
transaction costs to any firm. To reduce the cost of contracting Nestle follows an
intermediate model of contract farming where the agreement is done with a local
villager, called as an “agent”. The agent collects milk from small-scale producers,
and also facilitates distribution of inputs and delivery of services. As a result, the
firm has also started direct contracting with large producers. The intermediate
contracting however remains the dominant form. In fact, majority dairy processors
in India use intermediate contracts to procure milk supplies. The contract farming
scheme of the Nestle now covers about 100 thousand dairy farmers in over 1500
villages in several districts of Punjab. Most of the milk collected by Nestle Firm is
processed into value-added products like baby food, butter, ghee, curd, etc. The
firm observes strict food safety and quality standards right from the milk
production stage. It has a well-developed traceability and milk chilling systems,
and for milk supplies it encourages farmers to use milking machines and quality
inputs.
Contd.
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41. References
• Dutta A, Sengupta S and Dutta A. 2016. A Case study of Pepsico Contract
Farming for Potatoes. Journal of Business and Management Issue: Special pp
75-85 p-ISSN: 2319-7668
• Eaton C and Shepherd AW. 2001. Contract Farming: Partnerships for Growth.
Food and Agriculture Organisation, Rome pp. 1-68
• Singh V. 2003. Contract Farming Ventures in India: A Few Successful Cases.
Spice (MANAGE) 1(4): 1-5
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