Lesson 10. Contract Farming and Joint Ventures
Contract farming can be considered as an agreement between farmers and processing and/or marketing firms which aims at production and supply of agricultural products. The arrangement also involves the customer. Under such arrangements farmers are supposed to provide a specific product in good qualities. Thus, the risk gets distributed between the processor and farmer. Contract farming when efficiently organized and managed, reduces risk for both parties. Contract farming can develop markets and proves to be profitable for both the sponsors and farmers. The approach of contract faming is widely used now-a-days, not only for tree and other cash crops but for fruits and vegetables, poultry, pigs, dairy produce and even prawns and fish. The contract farming system should be seen as a joint venture between agribusiness and farmers.
10.2. MERITS AND PROBLEMS OF CONTRACT FARMING:
Advantages for farmers
• The sponsor supplies production services through advances at his credit
• Contract farming promotes new technology and also enables farmers to learn new skills
• Farmers’ price risk is often reduced
• Contract farming opens up new markets for small farmers
Problems faced by farmers
• Farmers face the risks of both market failure and production problems
• Sometimes all contracted production is purchased
• Sponsoring companies may exploit a monopoly position
• The staff of sponsoring organizations may be indifferent in allocating exact quota
• Farmers may become indebted when their calculation regarding production and excessive advances get wrong
Advantages for sponsors
• Contract farming with small farmers is politically acceptable
• Working with small farmers solves the problem of land constraints
• Production is more reliable as farmers are responsible for production
• As the farmers are involved, the quality is much more consistent
Problems faced by sponsors
• Contracted farmers constraints turn out to be the problems of sponsor at later stage
• Communication constraints may affect farmers’ capability to produce to managers’ specifications
• Poor administration and poor consultation with farmers may lead to farmer’s dissatisfaction
• Farmers may sell outside the contract
• Farmers may divert inputs supplied on credit to other purposes
10.3. TYPES OF CONTRACT FARMING IN ASIA :
Contract farming initiatives in Asia can be classified into two broad categories:
a) based on motivations and goals of contractors
b) based on structure and scale of operation.
A. Based on Motivation and Goals of Contractors
It includes following types of contract farming.
1. Socially Motivated Contract Farming
Because of modernization, agriculture sector has been affected in rural areas. As a result, many of the grassroots organizations and NGOs turned towards contract farming to promote alternative agriculture systems, such Japan's teikei system which is capable of protecting the environment and improving the welfare of farmers.
2. NGOs' Use of Contract Farming to Promote Alternative or Community Supported Agriculture
These alternative agriculture schemes are mainly small-scale and target the domestic market. Products are distributed through consumer cooperatives or through farmers' markets. In some instances, however, the schemes have been initiated by foreign NGOs acting as sponsors for contract farming in poor areas of developing nations. For example, the Japanese International Volunteer Center has been involved in promoting contract farming of organic crops as part of its sustainable rural community in Thailand (Furusawa, 2005).
3. Contract Farming Promoted by Local Government
Contract farming involves a multipartite arrangement initiated by government, usually in aiming for broader development. The arrangement characteristically involves a government organization, such as that of the Lao PDR, and a private company mutually participating with farmers.
4. Purely Commercial Contract Farming
Contract farming in Asia is recognized by its purely commercial orientation. This type of contract farming is becoming more and more important for the agriculture sector in Asia. In countries such as the People's Republic of China (PRC) and Thailand, private-sector-led contract farming is comprehensively used for the production of non-traditional, high-value agricultural products for sale to other countries.
Interest to promote private-sector-sponsored contract farming has gained momentum in other Asian countries such as Viet Nam, the Lao PDR, and Cambodia. In the case of such transitional economies, government has played a very important role by facilitating agribusiness firms' access to land and financing. This type of contract farming can potentially help improve farmers' incomes.
5. Contract Farming for Socially Responsible International Trade
In this regard, agribusiness firms in developed countries like Japan are opting for contract farming of safe food in developing countries at lower production costs and thereby to show corporate social responsibility. Of all the types of contract farming, this type of contract farming seems to be the most convincing in terms of its potential involvement to comprehensive poverty diminution in developing countries.
B. Based on Structure and Scale of Operation
Based on Structure and Scale of Operation, contract farming ventures can opt to follow the large-scale, centralized model or the small-scale, decentralized model.
1. Large-Scale, Centralized Model
Generally, large-scale, centralized model is ideal for crops that are subject to inflexible processing standards that require an advanced practice from farmers, that entail numerous changes in farm machinery, and that involve momentous long-term investment (Eaton and Shepherd, 2001). This model is preferred for crops that require more capital than labor input.
2. Small-Scale, Decentralized Model
The small-scale, decentralized model is favoured for crops that do not require that much processing, but only need to be graded and packaged for resale. Production typically involves negligible interim investment (Eaton and Shepherd, 2001). This model is preferred for products that require labour much more than capital-intensive.
In Asia, small-scale and decentralized contract farming is mainly characterized by the subcontracting of crop production through mediators. Such brokers are emerging as the preferred arrangement for contract farming in developing areas. In this type of arrangement, agribusiness firms acquire crops from mediators who in turn make their individual arrangements with farmers
10.4. SUCCESSFUL VENTURES IN INDIA:
1. Pepsi Foods Ltd. In Punjab having contract with farmers for Tomato crop, Basmati rice, groundnuts
2. Appachi’s Integrated Cotton Cultivation
3. Ugar Sugar’s experience with Barley
4. Kerala Ayurveda Pharmacy
10.5. JOINT VENTURE
A joint venture is a kind of enterprise owned by two or more participants. It is a combination of subsets of assets contributed by two (or more) business entities for a definite business function. It is basically a long-term contract which is specific and flexible. A joint venture can be a partnership of firm, a corporation or any other form of business organization which the participating firms choose to select. It is a type of development stratagem adopted by business firms. A joint venture is a unit formed between two or more parties to take on profitable activity collectively. The parties agree to create a new entity jointly and then they share in the revenues, expenses, and control of the enterprise. The venture can be for short time or a continuing business relationship. A joint venture may be a corporation, limited Company, partnership or other legal structure. In short, business structure formed by two or more parties for a specific purpose is known as Joint ventures.
10.6. CHARACTERISTICS OF JOINT VENTURE:
Contribution of money, property, effort, knowledge, skill by partners
Joint property interest in the subject matter of the venture.
Right of mutual management of the enterprise.
Right to share in the property.
Thus, joint ventures are having limited scope and time. Each partner must have something distinctive and significant to offer to the venture and at the same time provide a source of gain to the other participants. However, the participants' competitive relationship does not get affected by the joint venture agreement.
10.7. REASONS FOR FORMING A JOINT VENTURE:
• Build on company's name and fame
• Spreading expenditure and risks
• Improving financial resources
• Access to innovative technologies and clientele
• Access to modern administrative practices
Few examples of joint ventures in agriculture:
Avesthagen forms global Joint Venture with Limagrain in Atash Seeds Private Limited.
NAFED joint venture with cooperative federations/marketing societies
KRIBHCO Reliance Kisan Limited Joint Venture
10.8. BENEFITS OF JOINT VENTURE:
Joint ventures perform a valuable function in assisting companies in the process of restructuring.
It can facilitate a firm to attain market penetration into new areas overtime and can develop new product markets.
It can also be used by minor firms as a component of long-term strategic plan.
Reference: Anil Kumar, S., Poornima, S.C., Mini, K., Abraham and Jayashree, K. 2003. Entrepreneurship Development, New Age International Publishers, New Delhi.