VERTICAL INTEGRATION IN AGRICULTURE AND CONTRACT FARMING

It has been widely argued recently that agriculture is undergoing a process of vertical integration with allied industries. One of the worldwide ways of vertical integration in agriculture is contract farming. Contract farming is a continually evolving process. Worldwide applications of contract farming have shown that the terms of contracts are shaped by their own conditions and varied from product to product. Also, each country has its own experiences. Contract farming has many advantages for both producers/growers and integrators, besides some inherent disadvantages and failures regarding its implementation. Some measures, however, could be taken to outweigh these advantages for both sides. In this study, first of all, a brief history is presented along with an explanation of contract farming concepts. Secondly, the reasons behind contract farming are discussed. And, successes and failures of contract farming are analyzed based on several research works and articles. Finally a simplified model is presented for the success of private contractual arrangements in the light of evidence taken from the experiences on the world.Vertical integration, contract farming, out-grower schemes, Agribusiness,

India’s Agrarian Crisis and Corporate-Led Contract Farming: Socio-economic Implications for Smallholder Producers

The paper discusses India’s agrarian crisis and the role of corporate-led contract farming in addressing these crisis. A two-stage Heckman model was used to explain determinants of participation in contract farming, and whether participation in contract farming affects farm income. The results indicate that contract farming has a positive impact on crop productivity and farm income. The socio-economic factors that influenced participation in contract farming were education, age, farm size, access to institutional credit, source of off-farm income and membership to an organization. Factors related to the likelihood of participation in contract farming slightly differed from the factors affecting farm income.Agrarian crisis, Smallholder producer, Corporate-led contract farming, Agricultural Produce Marketing (APMC) Act, Heckman model, Institutional and Behavioral Economics, Marketing, Research Methods/ Statistical Methods, Q10, Q13,

Contract farming and its implications for input-supply, linkages between markets and farmers in Karnataka

This study is focused on the economic analysis of contract farming with a comparison of income, access to technology and credit of contract and non-contract farmers. The advantages of contract farming for smallholders have also been evaluated. In contract farming, quality inputs such as seeds, fertilizers and plant protection chemicals are provided to the farmers at their farm gate, coupled with the technical advice on production aspects. This not only reduces the working capital needs of farmers but also substantially reduces their transaction cost per unit of output. Borrowing of crop loans has been found 33 per cent higher by non-contract farmers than contract farmers, as the former have to buy material inputs. The net returns have been found higher for contract than non-contract farmers. Within contract farming, net returns have been recorded higher under domestic than foreign contracts for both baby corn and chilli. In the case of non-contract farmers, the net returns (Rs 3,035) have been found less than one-third of domestic contract farmers (Rs 10,610) and slightly more than one-third of foreign contract farmers (Rs 8,050). In the case of chilli also, the net returns realized per acre have been recorded maximum under domestic contract farmers, followed by foreign contract farmers and non-contract farmers. The returns per rupee invested have been noted higher in farming of baby corn in all the three categories than those of chilli farming. The constraints identified in the study include delay in payment and delivery of inputs, delay in lifting the produce, access to seeds, manupulation of grades by the buyers, and high cost of inputs in contract farming. Factors inducing farmers into contract are: low initial investment, better price for the produce, access to market, technical support on package of practices, access to inputs and easy transportation facilities.Farm Management,

Improving farm-to-market linkages through contract farming: A case study of smallholder dairying in India

"Contract farming is emerging as an important form of vertical coordination in the agrifood supply chain in India, and its socioeconomic consequences are attracting considerable attention in public policy debates. This study is an empirical assessment of the costs and benefits of contract farming in milk using information generated through field surveys in the western state of Rajasthan. 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, albeit not significantly. Dairy producers also benefit from provision of services and technical advice by integrators/firms who secure milk supplies from farmers through contract. The benefits of contract farming vary by scale of operation. Economies of scale are also important determinants of competitiveness, in which large farms (both contract and independent) have lower per unit cost due to buying of inputs in bulk and greater access to markets. Smallholders, on the other hand, derive significant benefits from a reduction in marketing and transaction costs due to their participation in contract farming." from authors' abstractContract farming, smallholder dairying in India, marketing and transaction costs, milk supply chain, treatment effects model, mass balance approach,

The role of contract farming in agricultural development in globalise world: an institutional economics analysis.

In the wake up ubiquitous agrarian crisis reflected in decelerating growth and increasing farmer suicides this paper examines the institutional constraints faced by agricultural sector. This paper interprets institutions in the very general sense of rules of structure in agricultural production and market interaction. Considering contract farming as a new institutional arrangement evolved in Indian agriculture to minimize risk and maximize profit, the paper assesses its strength in addressing the above problems. The basic question examined is how can contract farming help farmers especially smaller ones in the presence of imperfection of agrarian market (input, output, credit, etc)? Insights from theoretical literature and evidence from empirical studies show that contract farming would be able to address (at least partially) the market imperfections and have significant positive impact on farm households’ income and employment. Nonetheless the impact of contract farming is specific to regions, crops and farmer.Agrarian Crisis; Institutional Constraints; and Contract Farming

Profitability of Organic Agriculture in a Transition Economy: the Case of Organic Contract Rice Farming in Lao PDR

Poverty is prevalent among smallholder farmers in transition economies where market failures prevail and where the capacity of the public sector is limited. This study assesses the potential of organic contract farming as a private sector institutional arrangement to reduce rural poverty. Contract farming appears to facilitate market linkages for smallholder farmers to produce organic rice for export markets while providing necessary technical supports. Using an endogenous switching regression model to assess the profitability of organic contract farms and conventional farms in Lao PDR, it was found that organic farmers under contract earn significantly higher profit than conventional farms. The findings also showed that organic contract farming tends to provide the greatest increase in income to farmers with below average performance. These findings suggest that contract farming can be an effective mechanism to facilitate the development of organic agriculture and an effective tool to improve the profitability and raise incomes of small farmers, thereby reducing poverty in rural areas with limited market development

Efficiency and distribution in contract farming: the case of Indian poultry growers

"This paper is an empirical analysis of the gains from contract farming in the case of poultry production in the state of Andhra Pradesh in India. The paper finds that contract production is more efficient than noncontract production. The efficiency surplus is largely appropriated by the processor. Despite this, contract growers still gain appreciably from contracting in terms of lower risk and higher expected returns. Improved technology and production practices as well as the way in which the processor selects growers are what make these outcomes possible. In terms of observed and unobserved characteristics, contract growers have relatively poor prospects as independent growers. With contract production, these growers achieve incomes comparable to that of independent growers." Authors' AbstractContract farming, Poultry, Vertical integration,

Contract Farming in Potato Production: An Alternative for Managing Risk and Uncertainty

The cost of potato cultivation has been found 17 to 24 per cent higher under contract farming over various costs than under non-contract system, mainly due to high investments on seeds, fertilizers and machine power. Yield has been found 255.78 quintals per ha in the contract farms, which is 8.84 per cent higher over the potato yield obtained from the non-contract farms. Gross income has been Rs 99753 per ha in the contract farms as against Rs 41572 per ha in non-contract system. The sale price of potato has been found much higher (Rs 390/q) for contract than non-contract farms (Rs 177 /q). The net return over operational cost (cost ‘A1’) has been found as Rs 11882 per ha in non-contract farms, which increased more than five-times under contract farming system, it being Rs 62982 per ha. Similarly, the net return has been found five-and-a-half times more in contract than non-contract system over cost C1 (without rental value of the land). The net return over cost C2 has been observed as Rs 51866 per ha for contract farms and only Rs 800 per ha under non-contract system. Benefit-cost ratio on various costs has been found to vary from 1.40 to 1.02 for without contract and from 2.71 and 2.08 for contract farming. The impact of contract farming has been quite visible and remarkably favourable on yield and profitability of potato production at the existing pattern of resource-use and production technology prevalent in the Haryana farming system. The regression analysis has indicated significant influence of manure and fertilizers and human labour on the return of potatoes grown under contract farming situation. MVP-MFC ratios of plant protection, manure-fertilizers and human labour have been found much higher, indicating tremendous scope to increase the profitability in potato production under contract farming situation whereas in the case of non-contract system, irrigation and plant protection have shown sufficient scope to raise the crop income. The yield uncertainty has been less in contract than non-contract potato production. There has been no price uncertainty in the contract farming of potato whereas in the non-contract system, it exits to a large extent due variations in the price of potatoes sold in the market. These findings have clearly underlined the superiority of contract farming over non-contract farming system in potato production.Agricultural and Food Policy,

Rich consumers and poor producers: Quality and rent distribution in global value chains

Contract farming, Enforcement, Development, Rent distribution, High-value agriculture, Globalization, Markets,

Organizational Innovation in Russian Agriculture: The Emergence of "New Agricultural Operators" and Its Consequences

After almost a decade of downsizing, Russian agriculture has been steadily growing since the end of 90's against the background of deep organizational changes and innovations. The traditional collective farming segment is the key target and subject of innovations. Outside investors and operators have acquired control over farm assets from the primary nominal owners and possessors. As a result, exceptionally large commercial farm operations - "agroholdings" - are being created. Both inside and outside innovators are introducing organizational changes such as vertical integration, custom and contract farming, land leasing, machinery sharing and others. The paper discusses size, scope and character of the ongoing innovations and their short and long-term consequences.agroholdings, contract and custom farming, new agricultural operators, integration, Industrial Organization,