Basics of Contract Farming


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Overview Presentation about Contract Farming

What, Who, Where, When, Why and How

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Basics of Contract Farming

  1. 1. Basics of Contract Farming Jayaram S June 2010 Bangalore Page 0/7
  2. 2. What Definitions Co ac a Contract farming is a unique bus ess p ac ce followed by ag bus ess firms to g s u que business practice o o ed agribusiness s o procure quality raw materials Little and Watts ( 1994 ) Contract Farming as a form of vertical coordination between growers and buyer processors that directly shape production decisions through contractually specifying market obligations like value, volume, quality and at times price, provides certain inputs and exercise some control at the point of production. Key and Runsten ( 1999 ) Contract farming is explained as an institutional response to imperfections in the market for credit, insurance, information, factors of production and raw product. Gurudev and Asokan ( 2005) Contract farming is a system in which agricultural commodities are produced and supplied to particular buyers, mostly processors under pre-negotiated arrangement about price, quality and quantity It brings producers and processors closer on price quantity. mutually beneficial terms. In simple words, Contract farming is a purchasing mechanism used by Agribusiness firms to purchase raw material by getting into contracts with farmers. Firms resort to farmers this practice when required raw materials cannot be procured from the free market. Page 1/7
  3. 3. Who Agribusiness Firm g Firms which gives commitment to customer community to deliver specific products and fulfills the same by procuring quality raw materials and by doing special value additions to increase the value Farm Entity which owns or leases the land and which is in the business of producing agricultural commodities. The objective of the farm is to maximize the asset ( land ) utilization (i ) t grow quality products with minimum i tili ti (ie) to lit d t ith i i input cost and which will f t h t t d hi h ill fetch maximum price in the market in the shortest possible time Page 2/7
  4. 4. Where Free Market for the output product is imperfect (ie) where the farm output cannot be purchased in required quality, quantity at the right price and right time Market is willing to pay premium for specific products and where the Farm is operating in an sub optimal level Productivity of the farms can be increased significantly with quality inputs ( seeds, saplings, fertliser ), additional capital ( for labour, water, power and other inputs), knowledge ( good agricultural practices ) Farmer who is ambitious and who is looking for opportunities to increase the productivity of the farm and who is willing to take additional risks Environment where required quantity can be produced from a geographical area and where farms and farmers are living in similar socio-economic conditions Environment where farmers have basic literacy ( to read the contract and write few words – to accept etc ) and where farmers are willing to enter into a formal long term agreement and operate like a small business Legal, Legal political and social conditions around the farm facilitate contract farming Page 3/7
  5. 5. When When there is a stable and predictable demand for the farm products When Agri Businesses has the ability to find the right market linkages for the output products Suppliers ie ( Farms ) have been identified and are educated about the basic operating procedures When Farms consider growing the required output as the best p g g q p possible option after p considering other potential alternatives When the Agri Business has the sufficient knowledge, capital, time and access to required input materials to de e op supp e base equ ed put ate a s develop supplier When the free market does not have the ability to scale up and deliver required products at the right time, right quality, quantity and price When the output products can fetch enough premium to Agri Business to cover the investments incurred in educating and developing the Farms and when Agri Businesses are satisfied with the profit margin. Page 4/7
  6. 6. Why Government does not allow Firms to hold large parcel of Agricultural lands in order to protect the rights of farmers who hold small farms Farmers does not have required knowledge about what kind of output products are in demand Lack of Cooperatives - Farmers cannot come together on their own to decide what to produce, how to produce at what cost and at what time – to satisfy the requirements in terms of quantity and quality for the Agri Business Firms Farmers lack knowledge to produce special products that demand premium in the market Agri Business firms have access to right technology to process, preserve, pack and transport the products from the point of production to the point of consumption Competing companies try to enter into long term agreement with farms to produce products in order to develop a stable predictable supplier base Page 5/7
  7. 7. How Process Steps followed by Agribusiness 2 1. Find Customer 6. Receive product 2. Issue Farm Contracts 7. Process product 6 7 8 9 3. Arrange Funds 8. Pack product 4. Provide knowhow 9. Ship product 5. Provide inputs 5 4 3 1 Page 6/7
  8. 8. Basics of Contract Farming Jayaram S j y @y June 2010 Bangalore Page 7/7