| Livestock Research for Rural Development 24 (10) 2012 | Guide for preparation of papers | LRRD Newsletter | Citation of this paper |
The livestock sector has important role in Indian economy, but there is a need to improve the present stage of livestock sector further to fulfil demand of growing population. The process of contract dairy farming in Indian rural economy is a new concept which involves domesticating animals for and on behalf of private or government agencies and forwarding the produce at a pre determined price. Indian dairy is at the crossroads of development, it is said to be the one of the faster growing sectors among various agricultural and allied sectors. In spite of being first in milk production in world, per capita availability of milk in India is low around 269 gm/person/day which is far behind ICMR recommendation of 285 gm/person/day. Moreover, wide disparity exists between the per capita consumption of rural and urban people. So the contract dairy farming can help us to move forward in overcoming both these gaps more holistically.
Key words: constraints, credit, extension, input, output
Agriculture is mainstay of the Indian economy. As per the 2010-11 estimates released by the Central Statistics Office (CSO), the agriculture and allied sector accounted for 14.5 per cent of the gross domestic product (GDP), at constant 2004-05 prices. The livestock & fisheries sector contributed over 4.07 per cent to the total GDP during 2010-11 and about 29.7 per cent to the value of output from total agricultural and allied activities. In 2010-11, this sector produced 121.8 million tones of milk. The livestock sector has important role in Indian economy and also there is a need to improve the present stage of livestock sector further. Livestock production has been steadily growing, faster than any other subsector and it is foreseen by 2020, livestock sector will account for more than half of global agricultural output. Despite India having largest livestock, we could not attain better productivity per animal. According to Department of Animal Husbandry, Dairying and fisheries (Basic Animal Husbandry Statistics, 2008) the milk productivity per lactation is only 987 kg in India as against world average 2038 kg. Thus poor productivity as well as quality of products remains a cause of concern in Indian livestock sector.
To improve per animal productivity and quality of products access to various inputs becomes vital important whenever needed. Moreover, the access to inputs should be relevant, timely, and reliable. In contract dairy farming, the contract offers the guarantee of supply of intermediate inputs, livestock services, and market outlet for the smallholder producers, in exchange for the guarantee of supply of milk to the processor, through its intermediary. The contract farmers received higher profits per unit of output than independent farms (Birthal et al 2006). Although considerable resources have been directed toward disseminating input on basic crops, little attention have been given for disseminating inputs related with livestock. Thus, it is important to explore new ways of input delivery to livestock farmers to boost dairy industry. A recent study by Thirunavukkarasu and Sudeepkumar (2005) reported that the shortcomings of the cooperative system were converted to advantages for the integrated contract system. This facilitated the contract system to retain farmers. The farmers appreciated the payment pattern in the contract system. This was essential to cut out the competition from the cooperatives which owned a higher share of the organized milk market. Birthal et al (2005b) stated that smallholder dominated agrarian economies; exclusion of small farmers from contract farming schemes is politically unacceptable and socially undesirable. Inclusion of small farmers in contract farming increases its political acceptability. Christensen and Scott (1992) stated that contract farming is a case of bringing the market to the farmers, which is navigated by agribusiness firms. The contracts that provide credit, technology, inputs, information, extension services, and risk mitigation help producers improve production efficiency; develop commercial culture; and augment income and employment (Glover and Kusterer 1990; Key and Runsten 1999; Holloway et al 2000; Warning and Key 2002; Patrick 2004; Birthal et al 2005a; and Ramaswami et al 2006). Kolekar et al (2012) revealed that medium to high access to inputs, credit, marketing facility, production reliability and shared risk, guaranteed and fixed pricing structure and skill transfer among the contract farmers were the major dimensions contributed towards adoption of improved dairying practices under contract dairy farming.
Farming is an age-old means of livelihood for millions of Indians. However, there have been few systems/models in which farmers are assured of a market for their produce, leave alone a remunerative price. Farmers have on occasion had to throw their produce away for want of buyers. This is one side of the coin. On the other is the agri-based and dairy industry, which requires timely and adequate inputs of good quality agricultural/dairy produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of Contract Farming, which promises to provide a proper linkage between the ‘farm and market’. Contract farming is emerging as an important institutional arrangement in India that promotes co-ordination between production and marketing activities. Contract farming involves a pre-agreed price between the company and the farmer. The agreement is defined by the commitment of the farmer to provide an agricultural commodity of a certain type at a time and a price and in the quantity required by a committed buyer, mostly a large company. Da Silva (2005) stated that the general term “contract farming” refers to a particular form of supply chain governance adopted by firms to secure access to agricultural products, raw materials and supplies meeting desired quality, quantity, location and timing specifications and in this context, contract farming is seen as one of the alternative forms of vertical coordination in which firms can engage full vertical integration and different form of vertical alliances. Haque (2000) stated that contract farming is a system for production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers. Son et al (2007) and Huong (2007) revealed that unless the agreements specify, the contracts are mainly for certainty of intermediate input provision.
Contract farming is an arrangement between the farmers and firm/contracting agencies where farmers agree to grow crops specified by the firm and supply the produce to the firm at a predetermined price (Smitha and Kumar 2007). Contract farming usually involves following basic elements-pre agreed price, quality, quantity and time (Sunil Phougat 2006). Stephanie and Achim (2009) stated that dairy farmers prefer contracts without controls, i.e. flexibility concerning production volumes. Also reported that relationship between suppliers’ attitudes and their preferences for particular contract attributes, milk processors have the opportunity to design contracts that match their procurement strategies as well as their suppliers’ wishes. Ring and van den Ven (1992) stated that the element of trust and socially embedded relationships between firm and farmers “can produce stable contract conditions between independent parties”.
Contracts that provide credit, technology, inputs, information, extension services, and risk mitigation help producers to improve production efficiency; develop commercial culture and augment income and employment (Patrick 2004). Further contract farming is viewed as a tool to provide technology, extension service, and financial credit and assured market to the farmers. The proponents of contract farming view it is an avenue through which greater private sector participation in agriculture could be encouraged (Wali and Ponnusamy 2007). In our country the farmers face the problems of traditional technology and management practices, little bargaining power with input suppliers and produce markets, inadequate infrastructure and market information, lack of management expertise, poor package of produce and inadequate capital to grow a quality livestock. They are waiting for change for better living standards. Contract farming helps small farmers to purchase milch animals, increase production and benefit from market led growth. Contract farming will maximize the profits to the farmers and minimize risk in farming like production related risks, transfer price risk and produce risk. Fairoze et al (2006) revealed that for informal contracts, there is generally a greater flexibility by market intermediaries in accommodating smallholder producers, as evidenced in dairy contracts in India. Morrison et al (2006) reported that contract agreements have enabled agents in the periphery to exploit their comparative advantage in agricultural export production and carve out markets in higher income markets. Contract farming has several disadvantages like poor extension services, low prices to farmers due to haphazard pricing of the produce, inherent higher risk to cultivators, frequent delays in payment (Glover and Kusterer 1990; Grosh 1994). Asokan (2005) states that the National Agricultural Policy 2000, seeks to promote contract farming by involving the private sector to ‘accelerate technology transfer, capital inflow and assured marketing of crop production’.
Contract Farming can be traced back to colonial period when commodities like Collin Indigo were produced by the Indian farmers for English factories. Seed production has been carried out through contract farming by the seed companies quite successfully for more than four decades in India. The colonial period saw the introduction of cash crops such as tea, coffee, rubber, poppy and indigo in various parts of the country, mostly through a central expatriate-owned estate surrounded by small out growers’ model. Imperial Tobacco Company (ITC) introduced cultivation of Virginia tobacco in Coastal Andhra Pradesh in the 1920’s incorporating most elements of a fair contract farming system and met with good farmer response. This was replaced by auctions in 1984. The Pepsico introduced tomato cultivation in Punjab in the 1990’s under farming to obtain inputs for its paste-manufacturing facility established as a pre-condition to its entry in to India. This was sold to Hindustan Lever in 2000, which had earlier acquired the Kissan Karnataka.
Contract Farming was the strategy of choice for almost all food processing projects contemplated in the 1980’s and 1990’s.Contract farming is again vogue and even tried for bulk production of subsistence crops, such as paddy, maize and wheat. Commodity co-operatives, which emerged in the 1950’s, provided most services envisaged under ideal contract farming to their members and bought back the supplies offered at contracted prices, although these were not strictly contract arrangements. Contract farming is now considered to be a corrective to market imperfections and serving a useful purpose in India in its own limited sphere. Contract farming has been promoted in the recent three decades as an institutional innovation to improve agricultural performance in less developed countries. This system was accepted and used as one of the promising institutional frameworks for the delivery of price incentives, technology and other agricultural inputs. Local Governments, private local firms, Multinational companies, some international aid and lending agencies etc have been involved in these contract farming schemes.
The Union Agriculture Ministry is putting its weight behind contract farming drafting a model law to give legal support to a practice that can give small farmers access to modern technology and resources. The farm ministry detailed an agenda for expansion of agricultural credit to the tune of Rs.7, 36,570 crore during 10th five year Plan and the official note to the finance ministry gave financing of contract farming by banks priority. Agricultural and Processed Food Products Development Authority is developing policy guidelines on contract farming for forwarding to state governments for implementation. The guidelines will focus on regularizing the relation between producers and processors of food materials. During 10th five year plan, 20 Agri-Export zones had set-up in different states that integrated the complete process from production to export stage and contract farming is being encouraged to rope in local farmers to join these export zones as members to pool in their produce.The National Agricultural Policy had highlighted the need for an increase in the private sector participation in farming by leasing private land for agri-business and contract farming to private companies. The Standing Committee on Food Management and Agricultural Exports had recommended suitable amendments to the State Agricultural Produce Marketing Regulation Act to promote development of marketing infrastructure in private and co-operative sectors, direct marketing and contract farming.
Contract farming is not totally new to our country. When the white revolution was born in India, Contract farming also came into being by the introduction of Operation Flood I & II. Milk cooperatives of Gujarat under the banner AMUL are running examples of a type of Contract farming. The Sugar Cooperatives of Maharashtra and also in many states, growing of fruit crops (papaya, passion fruit, pine apple) and seed cotton in Tamil Nadu on similar pattern, cultivation of oil seeds especially Sunflower in North India are examples of the currently practiced systems of contract farming. Contract farming is already undertaken in tea estates by major companies including Pepsi Food, Imperial Tobacco Company, Hindustan Lever and for crop diversification by Mahindra Shubhlab Services with Punjab Agro Food grains Corporation; Escort Limited with Punjab Agro for Basmati rice and durum wheat besides drawing a plan to set up grain handling and storage facilities like conveyor belts and silos and earmarking Rs.1 billion for contract farming and creating post-harvest infrastructure in Punjab and other states in next 3 years.
In livestock sector also contract farming is operating with success especially in poultry farming and dairying. In case of poultry there are some examples of successful contract farming like Saguna from Tamilnadu. The contract poultry farming also carried out in state like Andhra Pradesh, Chhattisgarh, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Uttrakhand, and Uttar Pradesh. In dairying there are some examples of successful contract farming like Nestle India’s company in Punjab. The contract dairy farming also carried out in states like Andhra Pradesh, Chhattisgarh, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Uttrakhand, and Uttar Pradesh. In Maharashtra contract farming mainly operating in case of agriculture production like safflower, tomato, potato etc. But now a days this contract farming system getting a lot of importance in case of livestock sector also especially in poultry farming and dairying in Maharashtra. This growth in contract farming is due involvement of private agencies. The Government of Maharashtra is also providing support for spread of contract farming through foreign investment. The private agencies involved in contract farming in dairying include Gokul from Kolhapur, Govind Dudh from Satara, Rajhans from Sangamner etc.
Contract farming is potentially beneficial especially for small farmers, providing various services, credit facilities etc.(Rehber 2004). The farmer is insured for mortality rates. Beyond that farmer bears the risk of loss. The contract resulted in improved returns to capital and left participants to better off. From development perspective, the contracts contributed to poverty alleviation (Patick 2004). Furthermore, apart from improving efficiency in product transformation, contract farming is a key to greater competitiveness in the reduction of transaction costs at each stage (Kirsten and Sartorius 2002; Pingali et al 2005). Costales et al (2007) and Delgado et al (2008) reported that when production risks are shared, there is incentive for both parties to obtain the maximum activity profit by minimizing production losses from mortalities and activity inefficiencies.
The prime advantage of a contractual agreement for farmers is that the sponsor will normally undertake to purchase all produce grown, within specified quality and quantity parameters. Contracts can also provide farmers with access to a wide range of managerial, technical and extension services that otherwise may be unobtainable. Farmers can use the contract agreement as collateral to arrange credit with a commercial bank in order to fund inputs. Thus, the main potential advantages for farmers are: provision of inputs and production services; access to credit; introduction of appropriate technology; skill transfer; guaranteed and fixed pricing structures; and access to reliable markets. Birthal et al (2008) reported that Contract farming is found to be more profitable than independent production. Its major benefits come from a reduction in marketing and transaction costs, which are otherwise much higher in the open markets. Contract farming also contributes toward improving milk yield and reducing production costs. Kolekar (2011) reported that there was: 42 percent increase in number of milking animals; 55 percent increase in total milk production; 25 percent decrease in total expenditure, therefore, total return increased from Rs 32 to Rs 70 per animal per day and Rs 3.4 to Rs 6.9 per liter under contract farming as compared to before contract farming.
Although the public extension system in India is well developed in terms of infrastructure and manpower, the delivery of services is inefficient (Ahuja et al 2000). By adopting the contract farming many of extension services such as farm management and marketing through exchange of information among farmers, better use of existing technology, transfer of modern technology, building the farmers Knowledge, capacities and skills, improvement in farmers living standards and feedback from field can be met easily. Roling (1995) stated that there is growing uncertainty about what role extension is supposed to play in the development process. There is now a much-reduced emphasis on uniform messages. The need to involve farmers more in the extension process itself has been recognized for some time and a number of participatory and facilitation approaches have been developed. Key and Runsten (1999) stated that the extension advice offered under contract farming may be of good quality, but it is usually confined to the crop in question, and farmers have little choice about the content or nature of information delivery.
Contract farming can act as solution to constraints of extension system such as multiplicity of technology transfer systems because of lack of manpower, lack of farmer focus and feedback, inadequate technical capacity within the extension system, inadequate capacity building of farmers, present weak Research-Extension-Farmer-Market Linkages, inadequate operating resources and financial sustainability etc. Thus, the agricultural extension continues to be in transition and cherished dream Public Private Partnership (PPP) in transfer of technology can be made true easily. Robert Chapman and Robert Tripp (2003) stated that private extension is not a single entity, but includes a wide range of modalities, from the spontaneous emergence of private markets for certain types of advice and service to carefully guided public support for the development of private extension provision. Miyata (2007) indicated that public extension services compared with private extension services have little or no such incentives and regulate their performance in accordance with defined criteria. Ahuja et al (2000) found that the public extension system in India is well developed in terms of infrastructure and manpower, the delivery of services is inefficient. Anim (2010) suggested that participation in contract farming was positively influenced by the quality of extension services provided, follow-up visits and type of enterprise. Stock of farm input supply and frequency of extension visits appeared to have negative influence. The study recommended follow-up visits coupled with quality extension services by extension agents after the introduction and adoption of new technology to farmers.
The detractors of the contract farming believe that far from being a panacea for livestock sector, contract farming is likely to increase the problems. The main criticism is that contract farming is just another form of exploitation with limited equity impact, increasing socio-economic differences and evidence of some unsuccessful schemes and problems for many out growers (Glover 1987). The studies on theoretical benefits revealed that contract farming has been controversial and has been criticized for being exploitative (Little and Watts 1994). Between Giant Corporation and small farmer, bargaining power surely lies with the former. Also in practice, growers have encountered problems with respect to manipulation of quality standards poor technical assistance and sometimes plain cheating. Obaa (2005) conducted a case study in Mukono District of Uganda and stated that needs identification process for the new contract extension system tended to assume a high degree of homogeneity among farmers and overlooked the needs of minority and primary groups. Fulton and Clark (1996) stated that contract farming has several disadvantages like poor extension services, low prices to farmers due to haphazard pricing of the produce, inherent higher risk to cultivators, frequent delays in payment, weak bargaining power of farmers, and sole dependence on companies for inputs as also credit. Increased contract farming may actually promote scaling-up rather than serve to maintain smallholder farming” (Delgado et al 2008).
Kolekar (2011) revealed that under contract farming major constraint perceived by contract farmers were difficulty in meeting quality requirements, followed by pressure for maintaining quality of milk, delayed payment of milk produce while contracting firm were frequent milk price fluctuation in market, followed by input diversion by farmers, farmer’s negligence in maintaining quality. Jongeneel (2011) states that vertical contracts between producer groups and dairies are no remedy for solving demand and supply imbalances or disturbances unless system would end in a ‘contractualized’ supply control system. On one hand farmers face oligopsony or even monopsony situation but also processors might have limited milk procurement alternatives.For farmers, the potential problems associated with contract farming include: increased risk; unsuitable technology and crop incompatibility; manipulation of quotas and quality specifications; corruption; domination by monopolies; and indebtedness and over reliance on advances. The main disadvantages faced by contract farming developers are: land availability constraints; social and cultural constraints; farmers’ discontent; extra-contractual marketing; and input diversion.
The process of contract dairy farming in Indian rural economy is a new concept. It involves domesticating animals for and on behalf of big business establishments or Government agencies and forwarding the produce at a pre-determined price. Indian dairy is at the crossroads of development, it is said to be the one of the faster growing sectors among various agricultural and allied sectors. Today India is first in milk production, still we are far behind recommendation. So the contract dairy farming can help us to move forward in overcoming both these gaps more holistically. The role of contract dairy farming involves government and private participation along with the rural workers. Further, it engages a good number of farmers and other rural workers to discharge other agriculture related activities like poultry. It can help in getting good quality, sufficient, timely and cost effective raw material which is a prerequisite for any successful agri-business enterprise. Thus, contract dairy farming will lead to Public Private Partnership (PPP) in dairy industry which can help in overcoming the major constraints of extension system and dairy production. It increases the cost efficiency and uniformity of products by coordinating and managing each production stage. The contract farming is poised to transform dairy sector in particular and animal-agriculture in general, if regulations, infrastructure facilities, transfer of technology and sectoral cum target oriented policies and programmes are brought in practice with basic thrust towards food security, poverty alleviation and improving the rural livelihoods in total.
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Received 2 August 2012; Accepted 17 September 2012; Published 1 October 2012