Describe the various types of Contract Farming.

Different Types of Contract Farming:

  • Direct-procurement model.
  • Open-source intermediation model.
  • Public private partnership model.
  • Bi-Partite and Tri-Partite model.

Direct Procurement Model:

Simple marketing agreements, risk sharing agreements , forward marketing and futures contracting, these are different models of farm-firm linkage. In order to maintain their supply chain continuously, processors and retailers buy raw materials either from the government regulated market yards, small traders, or directly from farmers. They prefer to procure it directly because the transaction costs and quality problems which arise while procuring from government regulated markets (mandis) is high.

In this arrangement, there is no contractual tie-up with the farmers and the producers are free to sell their produce after sorting it according to quality. This procurement model is used by Indian retailers such as Reliance, Spencer’s and Food Bazaar who currently use Direct procurement from farmers. It can be done only in states that have changed their Agricultural Produce Marketing Committee (APMC) Act in which buyers can purchase directly from producers, farmers, according to the Model Act 2003 proposed by the Central Government.

There is apparently a large unfulfilled demand for agricultural services and creation of rural service platforms. In states that have not amended their APMC Act, the buyer has to buy through government regulated mandis, for which they have to pay the commissions and marketing fees prevalent in those markets.

Some retailers and processors, such as Field Fresh, Pepsico, and Nijjer, have contractual buyback arrangements with the farmers in which quantity, quality, and a pagreed price are specified beforehand. The farmers get a lot of support from the firms which may be anything from extension services, provision of seed and
other inputs, to credit facilities the firms charge for these costs when the final payments are made to farmers.

The determinants of these backward linkages are the size and quality requirements of the market and the demand in the market fora smooth and regular supply of a product of certain quality.

Open-Source Intermediation Model:

Another variant of farm-firm linkage is open-source intermediation, in which information about market prices, crop and good cultivation practices are made known to farmers without any buy back guarantee. The idea is not to create a backend supply line of a particular company, but to fill the knowledge and information gap in agriculture, and also supply inputs to farmers without any lock in agreement.

However, in due course, the model of open-source intermediation can be adapted for specific supply lines, as and when an opportunity arises. This is well observed in the case of the Choupal Sagar and Choupal Fresh models adopted by ITC following the success of e-choupal.

There appears to be a large unmet demand for agricultural services and creation of rural service platforms that has given rise to another option for forging effective firm-farm linkages. In order to make Research and development activities effective they have to leave the laboratories and reach the farmers  fields, which can happen only if there is an effective service network.

PPP Models:

Rural business or “agri-hubs” led by public-private partnerships between panchayats and the private sector (CII in partnership with the Ministry of Panchayati Raj) provide input services for farmers and provide markets for their produce. This a type of the open-source model, where the companies and the farmers enter into a contract in which the companies provide a market for the produce as well as the inputs at the time of production.

The private companies are getting involved in this concept to tie up with farmers are DSCL, Hariyali Kisan Bazar, TATA Kisan Kendras, Godrej Aadhar, ITC e-choupal, Choupal Sagar, etc. These agri-hubs have the benefit of a single source where they can procure all inputs like seeds, technology, credit, extension and insurance services to the farmers.

Bi-Partite and Tri-Partite Models:

This model paves way for a two-way contract between the company and the farmers. It works two ways the company provides inputs such as seeds, fertilizers, pesticides, etc. on credit and in turn procures the final product at a fixed price. In India Field Fresh, Pepsico and Nijjier have this kind of arrangement. This model becomes a tri-Partite model when a facilitator or middlemen is present between the farmer and the private firm, and plays a major role in the transaction. An example of such an agreement is FLI (Pepsi) Potato in Maharashtra.

Tags: Ba Economics

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