1. MODELS FOR LINKING FARMERS TO
MARKETS IN INDIA: IMPLICATIONS FOR
SMALLHOLDERS
Pratap S Birthal
National Institute of Agricultural Economics and Policy Research, New Delhi
Pallavi Rajkhowa & PK Joshi
IFPRI
IFPRI-IIDS- FNCCI Workshop on Best Practices in Contract Farming:
Challenges and Opportunities in Nepal
February 10-11, 2015, Kathmandu Nepal

3. WHY DIFFERENT MODELS?
 Farmers and farm heterogeneity
 Farm size
 Resource endowments and capabilities
 Activity choices
 Attitude toward production and price risk
 Differential access to markets, financial and non-financial services
The less-endowed farmers require a different treatment
 From agribusiness perspective
 Dominance of smallholders, Disbursed production
 Diseconomies of scale in aggregation of outputs and provision of
technology, inputs and services
 Higher transaction costs (contracting, monitoring, enforcement etc.)
Organization of production is essential to overcome problems or costs
associated with diseconomies of small-scale, poor access to services,
finances, technology, inputs; inconsistent volume and quality, lack of
traceability and risk management

4. Business models
Model Drivers Rationale
Producer-driven  Small scale producers, as
groups such associations
or cooperatives
 Large scale farmers
 Access to new markets
 Obtain higher market prices
 Stabilize and secure market
positions
Buyer-driven  Processors
 Exporters
 Traders
 Retailers
 Assure supply
 Increase supply volumes
 Serve niche markets
 consumer preferences
Facilitator-driven  Non-governmental
organizations
 National and local
governments
 Make markets work for the poor
 Regional and local development
Integrated  Lead firms
 Supermarkets
 Multinationals
 New. higher value markets
 Low prices for good quality
 Market monopolies

5. Business Models in India
 Direct marketing models: (Apani mandi; Raythu
bazar; farmers’ mall)
 Cooperatives—dairy (NDDB) : Fruits: Mahagrapes;
Mahamango, Mahapomogranate); fruits and
vegetables (HOPCOMS )
 Producers’ associations: MDFVL (fruits and
vegetables); Agrocell (Basmati rice), Agro-cell
cotton
 Contract /contact farming: most crops/commodities-
Nestle; Dynamix Dairy Industries; Venkateshwara
Hatcheries; Suguna Hatcheries; Bharati field fresh; ITC; Frito
Lay; Chuapal fresh; Appachi cotton; Aditya Birla; Retail Ltd.
Heritage; Reliance fresh; Namdhari fresh; Global green;
Mcain
 Producer companies: Cooperative spirit with corporate
efficiency; FPOs,

6. Cooperative: Milk
National Dairy
Development Board State Federation
District Milk Union
Village Dairy Co-operatives
Member Dairy Farmers of
Village Co-operatives
Bank/Financial
Institutions
Insurance
Investment finance for dairy
machinery, processing and packaging
equipment etc
Loan for investment in
machinery and
Infrastructure
VDC gives
insurance to
loanee farmers
Loan for purchase of
cattle
Retailers
Product Flow
Finance Flow
World Bank

7. Contract Farming: Milk
Retailers
Nestle India
Direct Contract with large
Dairy Farmers
Contracts with local
Commission
Agents/Collection Centre
Small farmers
Assistance and education regarding animal breeding, health, nutrition and food
safety and quality
Provides cattle feed to farmers
Financial support to farmers and agents who managemilk collection centre
Feed/Input Supplier
Finance to large dairy farms to
purchase milk coolers and milk
machines
Bank
NestleIndiafacilitates
financingofdairy
enterprisesfrom
commercialbanks
Product Flow
Finance/Service Flow

8. Animal Lease: Samridhi Agro-tech
Product Flow
Service & Finance Flow
Sancheta Financial Services Pvt
Ltd (NBFC-MFI)
Samridhi Agri-
Products Pvt Ltd
Retailers
Livestock
Distribution
Centre
Milk
Collection
Centre
Ultra-Poor Women Non-Ultra-Poor
Women
Distribution and Marketing of
Processed Milk
Processing
Units
Supply of Cattle and
extension services,
information
dissemination, Training,
Vaccination
Providesextension
services,information
dissemination,
Training,Vaccination

9. Contract farming: broilers
Supplies chicks, feed,
medicines and provides
supervisory, extension and
veterinary services
Tripartite Agreement
Contract Farmer Bank/Financial
Institutions
Poultry
Firm/Integrator
Broiler segment
for chicken, meat
market
Wholesaler/
Retailer
Feed
Manufacturing
Unit
Sellers of Soy and
other raw
materials
Credit
Product Flow
Finance Flow
Input/Service Flow

10. Cooperative: Kesla Poultry Cooperative
Governmnet rural
development and poverty
allevation schemes
Feed and medicine
manufacturer
SHG-Bank Linkage Program
Kesla Poultry
Cooperative
5 Co-operatives
consolidated to form the
Madhya Pradesh
Women’s Poultry
Producers Company Ltd
Retailers
PRADAN
Bank/Financial
Institution
Individual Villagers/
Woman formed SHG
Facilitate SHG formation
Product Flow
Finance Flow
Input/Service FlowHatcheries

11. Producer association: Fairtrade-Agrocell
Product Flow
Finance Flow
Input/Service
Flow
Fairtrade
Certification
Agrocel Pure &
Fair Cotton
Growers’
Association
International
Market
InterestFree
Credit
Technical
assistance, quality
seeds and inputs
Fair Trade
International (FLO)
Fairtrade Minimum
Price and social
premium and
organic premium
Agrocel Pure
Individual
Farmers
Agriculture
Universities
Domestic Market

12. Farmer Producer Organization: GoI
Credit, Savings, Insurance,
Inputs, Extension
Kisan Producer
Co-operative
(1000 farmers from 10-12
villages)
Farmers Integrated into
Groups (FIG)
(15-20 farmers)
Farmers
Bank/Insurance Federation of Kisan
Producer
Co-operative at the state
level
FIG
Kisan Sahyogi/ Village
based Extension Cadre
Agriculture Specialist
Supports 10-15 Sahyogi in field implementation
1000 Farmers in 25 Villages
Business Manager
Chief Executive Officer of the Producer Company,
expands Farm-Business Efficiency Frontiers and builds
linkage with Resource & Research Institutions &
Marketing
Product Flow
Finance Flow
Service/Input/Flow

13. a. Higher income: 50-100%
 Reduction in marketing and transaction cost (60-90%)
 Reduction in production cost (lower input prices)
 Higher yield (5-10%)
 Higher output price (5-10%)
b. Access to credit (broiler)
c. Reduction in risk price and production risk (broiler),
dairying
d. Reduced uncertainty in input, supply and their quality
e. Access to infrastructure and improved technology
(Mahagrapes, Nestle)
f. Scaling up
Transparency in terms and conditions
Pricing, Timely payment
Incentives for efficiency, food safety
Monitoring, Mutual trust
Welfare Impact

14. Smallholder participation?
• Low volume, small marketable surplus,
high transaction costs of participation,
high cost of contracting, food safety
compliance
Why small
farmers are
excluded?
• Less dependence on a few large producers;
Spread supply risk; Optimal utilization of
capacity, manpower; More labor, more
efficient
Why small
farmers should
not be excluded?
• Cooperatives
• Producers’ associations
• Intermediate contracts
How to include:

15. Are the Emerging Models Inclusive?
• Low transaction costs of contracting (negotiation,
enforcement and monitoring), Large volume,
Quality compliance, Economies of scale in
provision of inputs, services and markets
Tend to contract
with large
producers
Mixed evidence
• Vegetables SAFAL (≤ 2ha) = 37%; Gherkin in Karnataka =51% ; All
crops in Punjab (≤ 2ha)=15%
• Dairy: ≤ 5 in-milk animals = 56%; Broilers: ≤5000 chicks = 32%
Indian experience
•Kenya’s :exporters of fresh fruits and vegetables source their
requirement through contracts with small producers
•Malawi: exporters of paparika depend on small farmers
•Madagascar: exporters of french beans from small-scale producers
•Zimbabwe: exporters of flowers and vegetables from large farmers
•Other studies from China, Thailand, Mexico showed a preference for
large farmers
International
experience

16. There are not enough large farmers
• Diversified base is essential to reduce supply risk
• Political acceptance or community good will
Small farmers have comparative advantage in labor; lower
implicit wage rate; low cost of production;
They are better motivated to respond to product quality, and
better farm management
Small farmers are dependent on firms for inputs, services and
technology, hence better compliance with terms and conditions
Why contract with small farmers?

17. Key lessons
• Building efficient and inclusive value chains for agricultural commodities
is a big challenge, but is not insurmountable if firms follow innovative
and targeted approaches.
• Collective action is essential to overcome scale limitation of
smallholders’ participation in value chains, and to reduce transaction
costs and risks
• Collective action may not happen in its own, and may require
intermediation from the government or its subsidiaries, the non-
governmental organizations or the lead firms driving the value chains.
• Mutual trust and incentives are essential for cementing the relationship
between buyers and sellers
• For common commodities the prices must be linked with prevailing
market prices to avoid side-selling, and breach of contract
• Financing value chain is largely internal to value chain, and limited to
production credit in the form of inputs. Long-term and external financing
is limited and mainly to large farmers (dairy, orchard, etc.)
• Microfinance institutions with an agribusiness orientation can act as
catalyst in development of efficient and inclusive value chains.
• Risk sharing is important for commodities as contract broilers, (Kesla
coop) but are rare for other commodities. While institutional insurance is
limited.

18. Policy Implications
Level playing field for private sector participation
(regulations, taxes, etc. incentives)
Facilitate growers’
association
Check monopsony and monopoly
Reduce transaction costs
Involve smallholders
Provide credit and insurance
Evolve policies for contract farming
Incentives to agro-
processing industry
Market fee, taxes on processed
foods
Strengthen public infrastructure (road, electricity,
communication, etc.)

19. THANK YOU