1. Best Practices in Contract Farming: Challenges and
Opportunities
Anjani Kumar
International Food Policy Research Institute
IFPRI-South Asia Regional Office, New Delhi

2. International Food Policy Research Institute
Questions
 What are different types of market linkages? What are their strengths
and weaknesses?
 What are the constraints for smallholders to access agricultural
markets?
 Whether the new models of linking farmers with markets are inclusive?
 Whether farmers’ linkage with new marketing models more
remunerative?
 What are the strategies for strengthening smallholders’ access to
markets?

3. International Food Policy Research Institute
 The food marketing system in South Asia is undergoing a transformation.
 Rising per capita income, urbanization, increasing market liberalization and
globalization of the food economy are attributed to spur this transformation.
 Consumption baskets are changing in favour of high value commodities and
integrated food supply chains have emerged as one of the fastest growing and
most visible market phenomenon in India in the recent years.
 The increasing dietary diversification accompanied by growing concern for
food safety and quality are accelerating this transformation in food marketing
system.
 Traditional marketing channels with ad-hoc sales are being replaced albeit
slowly by coordinated links between farmers, processors, retailers and others in
the value chain.
Background

4. International Food Policy Research Institute
 Issues
 predominance of smallholders
 small-scale enterprise,
 low marketable surplus,
 scattered production
 diseconomies of scale in aggregation of outputs and provision of
technology, inputs and services
 higher transaction costs (contracting, monitoring, enforcement etc.)
 weak technical capacity,
 lack of capital,
 high vulnerability to risks and
 challenges to comply with food safety and quality standards,

5. International Food Policy Research Institute
 Different models of LFTM
 Co-operatives,
 Farmers Producers Organizations (FPO),
 Farmer Producer Companies (FPC), and
 Contract Farming etc.
 These models improve efficiency in production and marketing
 Speeding up commercialization of agriculture
 Tremendous opportunities for enhancing social welfare
 Challenges for smallholder and marginal farmers

6. International Food Policy Research Institute
 Challenges to smallholders
 small-scale enterprise,
 low marketable surplus,
 weak technical capacity,
 lack of capital,
 high vulnerability to risks and
 inability to comply with emerging stringent food safety and quality
standards,
 Fight a multi-pronged battle
 capacitating the smallholders,
 creating conditions to standup to the competitive externalities
 ensuring viable business opportunities for all stakeholders along the value
chain.

7. International Food Policy Research Institute
Market linkages: Strengths and weaknesses
 Linking farmers with markets is required to ensure sustainable
and inclusive growth.
 Production-push focus alone is no longer a viable strategy to
ensure remunerative agriculture.
 LFTM have generated intense policy debate worldwide and
more focused on how to make these linkages more inclusive and
efficient
 Integration between small farmers and different types of buyers
 potential benefits
 potential threats
 Heterogeneity in
 Geographical locations,
 Social and Cultural environment,
 Policy and institutional settings
 Leads to evolution of different approaches of LFTM
 Strategies of LFTM also depend on the typology of farmers.

8. International Food Policy Research Institute
Market integration models: Opportunities and
threats
Integration Opportunities Threats
Farmers-
Traders
Long term sustainability
Formalization not needed
Training in production and
handling
Many supplementary services
 Irregularity in payment
Limited access to high value
markets
No hedging against
unforeseen risk
Farmers-
Retailers
Availability of reliable market at
agreed price
Opportunities for improvement in
quality
Diversification towards niche
product
Variety, quality and safety
Conflict with social
obligation
Deferred payment period
High risk in absence of
third party

9. International Food Policy Research Institute
Market integration models: Opportunities and
threats
Type of
integration
Opportunities Threats
Farmers-Exporters High returns
Access to inputs, technical
assistance
Transport and packaging
Improvement in quality
Less post production losses
Increase in risk
Compliance with standards
Exclusion due to economies
of scale
Farmers-Agro-
processors
 Secure market
Additional market
High quality inputs and technical
assistance
Transport
Higher returns
Better post production handling
Sustainability in question
Exclusion
Variety, quality and safety
specifications
Delayed payments
Restriction in access to
open market

10. International Food Policy Research Institute
Market integration models: Opportunities and
threats
Type of
integration
Opportunities Threats
Contract farming Improved inputs
Technical know- how
Marketing by company
Reduction in price risk
Access to credit for subsistence
expenses
Mistrust between
farmers and companies
Breach of contract
Lack of alternate
opportunities
Delayed payments
Difficulty in governance
without State involvement
Promoted by
leading farmers
Input and output marketing
Greater bargaining power
Economies of scale
Withdrawal by the leader
Deferred payment
Excessive dependence
on an individual

11. International Food Policy Research Institute
Market integration models: Opportunities and
threats
Type of
integration
Opportunities Threats
Through Co-
operatives
Improved inputs
Technical know-
how/assistance
Marketing, packaging, grading
storage, processing by co-
operatives
Potential for scaling up
Greater bargaining power
Lower risk
Assured market
Dependence on subsidies
and internal management
assistance
Loss due to inefficient
management
Supply of low quality
inputs
Deferred payment
Static price fixation

12. International Food Policy Research Institute
Smallholders constraints to access agricultural markets
 Resource constraints
 Land, soil fertility, water access, education, working capital
 Technological constraints
 Land & labour productivity, technical efficiency, storage capacity, know-how
 Subsistence needs
 Household dependency structure, off-farm income
 Financial constraints
 Credit, cash flow deficits
 Product constraints
 Volume, variable product quality, seasonality, staple crop cultivation needs
 Locational constraints
 Geography, weather, culture & tradition, legal, infrastructure

13. International Food Policy Research Institute
Whether the models of LFTM are inclusive?
 Most of the studies concluded that the small holders were well represented
in the diverse modes of LFTM.
 These studies do not support any evidence for a systematic or deliberate
bias against the smallholder’s participation in the different models of
market integration

14. International Food Policy Research Institute
Whether new models of LFTM are more remunerative?
 Most of the approaches of LFTM like farmer organizations, cooperatives, and
similar forms of collective action are considered avenues to reduce high
transaction costs
 (Markelova, Meinzen-Dick, Hellin, & Dohrn, 2009; Valentinov, 2007).
 Oriented toward improving production, marketing, or livelihoods in
general, sometimes serving many purposes simultaneously
 (Bernard & Seyoum Taffesse, 2009; Bernard, Seyoum Taffesse, & Gabre-Madhin,
2008; Francesconi & Heerink, 2011).
 Studies have been mostly focused on impacts in terms of access to
output markets, output prices, marketable surplus and farmer profits
 (Birthal et al, 2009; Sharma et al, 2009; Kumar et al, 2013; Bernard et al., 2008;
Holloway et al., 2000).
 Available studies in India indicate that integration between farmers and
formal markets (like, cooperatives, corporate, etc.), has offered higher
profits and lower costs.

15. International Food Policy Research Institute
Key Lessons
 Linking farmers with modern market chains leads to
 Commercialization of agriculture
 Improved access to technology, inputs, credit, markets
 Reduced transaction costs
 Increased efficiency in production & marketing
 Mitigation of risks (production, market)
 Improved food safety & quality
 Enhanced social capital and financial inclusion
 Promotion of entrepreneurship
 Awareness about the new innovations, technologies etc.
 Enhanced social welfare, food and nutrition security
 Better value creation along the chain

16. International Food Policy Research Institute
Key Lessons
• Promoting and up-scaling LFTM models for agricultural commodities is a big
challenge
• Innovative and targeted approaches are critical to trigger replicate best fit
models.
• Collective action is a prerequisite to overcome scale limitation and ensure
smallholders’ participation.
• Collective action 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 the crucial for bolstering the relationship
between contractors and contracted
• Risk sharing is important for promoting contract farmers especially when
institutional insurance is limited.
• Participation of research institutions in integrated approaches promotes faster
adoption of new and appropriate technologies.

17. International Food Policy Research Institute
Challenges
 Ensuring inclusiveness
 Ensuring transparency and accountability among
stakeholders
 Financial Linkage
 Governance
 Infrastructure Development
 Marketing /Price volatility
 Mechanisms for
 Pricing
 Timely payment
 Incentives for efficiency, food safety
 Monitoring, Mutual trust

18. International Food Policy Research Institute
Way forward
 Convergence of policies, institutions, technologies, infrastructure
 Reduce policy gap
 lag between announcement and enactment
 lag between enactment and implementation
 Evolve policies and legal framework for LFTM
 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
 Incentives to agro-processing industry
 Market fee, taxes on processed foods
 Strengthen public infrastructure (road, electricity, communication, etc.)


19. International Food Policy Research Institute
Way forward
 Capacity building and strengthening
 Technology transfer mechanism (TTO)
 Facilitate entrepreneurship, Incubation Centres
 Pilot LFTM models with a few commodities to instill a sense of
confidence among the stakeholders
 One size does not fit all
 Replicate successful models with local adaptation
 Objectives
 Agro-climatic condition
 Target markets/domains
 Commodities

20. International Food Policy Research Institute
Thank you