Contract farming reinforces supply chain
Mar 13 2012, 12:43 | By Infomedia18
Contract farming as a strategy adopted by food processors is gaining prominence in India.
Image: SME Mentor
In the last decade, food processors in the country witnessed considerable growth in terms of production capacities. This has brought along many problems and one of them was related to procurement of quality raw materials for processing. A substantial number of farmers in India belong to the small and marginal category and this has added to the problem.
Processing firms face several challenges pertaining to supply chain such as high cost, lack of adequate availability, poor quality and timeliness, among others. However, with the rise in exports and the entry of many domestic and multinational food processors, after the opening up of the Indian economy, contract farming, which was not so popular earlier, has become one of the preferred modes for raw material production and procurement, thus strengthening the food supply chain.
Devanshu Gandhi, managing director of Vadilal Industries Ltd and co-chairman (West Zone) of the All India Food Producers’ Association, said big orders would immediately shoot prices up. “This was one of the major bottlenecks faced by us, but now contract farming has resolved these problems," he said
Strategising the concept
The basis of the relationship between the parties is a commitment on the part of the farmer to provide a specific commodity in quantity and quality standards determined by the purchaser and an undertaking by the sponsor to support the farmer’s production activities as well as purchase the commodity.
Many companies in India have adopted the contract farming strategy to ensure effective supply chain management. KS Narayanan, managing director of McCain Foods India, observed, “As the Indian subsidiary of McCain Foods Canada, we adhere to the highest benchmarks for producing world-class quality of frozen french fries and speciality potato-based products in India. However, for a perfect product, we need the right kind of potato varieties and sizes that are low in sugar, high on solids, suitable for making commercial quality french fries. Thus, we decided to focus our agronomy programme in the potato growing areas in North Gujarat.”
Narayanan added that McCain often met with farmers to introduce them to the best agronomy practices. So be it modern planting techniques, water-efficient irrigation systems, objective methods of fertiliser and pesticide applications, McCain agronomists would work closely with farmers, which translated into tangible improvements both in terms of crop quality and yield. The results were quite apparent. Potato yields were up from 16 T/ha (national average) to about 25-35 T/ha," he said.
Further, it is seen that companies in India are mainly embracing contract farming to support their export demands where they have to ensure products with certain specifications.
Gandhi stated, “We resorted to contract farming mainly for the exported frozen food products category because the international customers require products that are consistent in colour, size etc. Further, they are concerned about the quantity of fertiliser used. This is because, often, even after washing the vegetables and fruits, some residue is left behind, which is not acceptable in several countries. So, in order to meet export quality requirements and standards, we initiated contract farming for okra and other leafy vegetables. As for the domestic market, we produce only sweet corn through contract farming because consumers demand a particular variety. Therefore, we provide a specific seed variety to the farmers to produce that variety for us."
Overcoming the challenges
Contract farming is not free from certain limitations and challenges. Gandhi noted, “The biggest challenge is pertaining to providing quality seeds to farmers and ensuring that the seeds are used for the production and not sold by the farmers as it happens in many cases. Moreover, it is necessary to enlighten the farmers about proper cultivation, sowing methods, etc.”
He further added, “On the farmer’s side also, there are certain problems. Farmers are highly skeptical about the processors, ie whether the companies will buy their product or not and will they have to bear losses when the price shoots up.
In order to deal with such challenges, companies are taking several measures. “Firstly, we select the land, taking into account the climate and soil. We also monitor the various processes at the farm level. Further, if the prices are increasing beyond certain limits, then we too increase the price offered to farmers. We do take care to provide this kind of flexibility to farmers,” claimed Gandhi.
To this, Narayanan added, “In order to be fair to the farmers and maintain transparency, McCain discusses price aspects of the produce every year before planting. It is a mutually agreed decision between the farmers and McCain, and is also dependent on prevailing market prices. This sustained investment, both in monetary terms as well as the time spent, resulted in a winwin partnership for farmers and the company. Through the efforts taken by McCain, the farmers are finally realising that they are producing more in the same patch of land with appropriate input cost in terms of controlled use of chemicals/ fertilisers and water."
A win-win situation
Contract farming is extremely beneficial for companies involved in it, as they stand to gain by way of stable and steady supplies, doing away with price risk fluctuations, noninvestment in big resources like land, product risk-sharing, etc. Indeed with effective management, contract farming can be a means to develop markets and bring about the transfer of technical skills in a way that is profitable for both the companies and the farmers.
In terms of benefits for the farmers, the contractual agreements can provide them with access to production services and credit as well as knowledge of new skills and technology. Some contract farming ventures give farmers the opportunity to diversify into new crops and new markets. “Further, contract farming increases the yield of the particular farm. Due to the agreement, the farmers are assured that the company will buy the produce and they will get timely supply of quality seeds. As for the processor or buyer, he is also assured that he will get the product at the agreed price even if there are variations in the market. So the export commitments of the company will also be fulfilled on time,” noted Gandhi.
Thus, contract farming as a strategy adopted by food processors is gaining prominence in India due to steady progress in the economy, rising food demand, organised retail boom and an increasing shift towards branded food consumption.
Source: Modern Food Processing
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