The Hindu Business Line : Advantage, contract farming

“Milk contract farmers, for example, attained double the profit than that of the non-contract milk farmers. The corresponding difference was 78 per cent for vegetable farmers and 13 per cent for broiler farmers,” write Mr P.K. Joshi and Mr P.S. Brithal in an essay included in ‘Institutional Alternatives and Governance of Agriculture’, edited by Vishwa Ballabh ( www.academicfoundation.com).

The advantage that accrued to contract farmers was mainly due to savings in production and marketing costs, the authors state, after studying three cases, viz. Nestle India, Venkateshwara Hatcheries, and Mother Dairy Fruits and Vegetables.

Cost of production of contract farmers was less by approximately 21 per cent in the case of milk, and 26 per cent in vegetable, compared to costs of non-contract farmers. The lower production costs were mainly due to massive fall in transaction costs. The share of transaction cost in the total cost for non-contract farmers was around 20 per cent, while it was only 2 per cent for contract farmers.

The study identifies that the new institutional arrangements benefited contract farmers. “Access to market and information about new technology at negligible costs motivate farmers to participate in such evolving institutional arrangements.”

In the case of broiler, contract farmers hardly incurred any cost on extension, communication and transportation for acquiring inputs. “These costs were as high as 80 per cent of the total transaction cost in broiler production.”

Principal attraction

They note that the principal attraction of contractual arrangement for broiler farmers was the availability of chicks, medicines and feed without any direct financial liability on them. These inputs accounted for about three-fourths of the total cost of broiler production. Also, “the firm bears mortality risk of 5 per cent.”

As perhaps evidence of success among contract farmers, a higher proportion has expanded the scale of operation over the decade from 1990: “76 per cent of vegetable farmers and 56 per cent of broiler farmers”, against 54 per cent and 44 per cent among the non-contract farmers.

Higher prices

The authors check out if the commonly voiced apprehensions about contract farming – such as that the monopolistic situation can lead to exploitation of farmers – are borne out by the market. “We observed that the contract farmers were being offered relatively higher prices than the prevailing market prices,” report Mr Joshi and Mr Brithal.

“In the case of vegetables, contract farmers received 8 per cent higher prices, mainly for a better quality and as an incentive for ensuring a regular supply.”

Reassuringly, the study noticed that “the existence of perfect competition in these markets did not allow any of the firms to trade in exceptionally large volumes and control the market.”

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