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Occasional Paper - 42

CONTRACTING FARMING AS MEANS OF VALUE-ADDED AGRICULTURE

DR. C.S. DESHPANDE

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Munnbai 2005 Occasional Paper - 42

CONTRACTING FARMING AS MEANS OF VALUE-ADDED AGRICULTURE

ST. ?ft.TJ5T. ^§TOT^ DR. C.S. DESHPANDE

Departnnent of Econonnic Analysis and Research ^\^^ ^ Sfrf 4J|CH|U| RicbkH fe National Bank for Agriculture and Rural Developnnent

Mumbai 2005 cbl44ldcj5 Pl^l^|c|7 H^KIt^^ ^cbHlPlcb >^c^d4Ae cbtviP^d, ctFT.^. 'Et^PT ^te?, 3^ irf^, ^f^tTH qj^, gsrf - 400 021. Author Dr. C.S. Deshpande Executive Director, Maharashtra Economic Development Council Y.B. Chavan Centre, 3rd Floor, Nariman Point, Mumbai - 400 021.

The usual disclaimer about the responsibility of the National Bank for Agriculture and Rural Development as to the facts cited and views expressed in the paper is implied.

TV^ ^ 3^7 4l|J^u| Warn ofe, 3#Jcp j^S^qui 3ft7 3?^;5taR i^3TPI, ^^ aifuIoT, "Tft' fcN, tclfe st t^-24, uit' ^tlcfj, qt.^. 5f 8121, ^15SI-^clt chfcHclchH, ^l^sfT (^), ^51^ - 400 051, fiHTTBcprf^lc T Published by the National Bank for Agriculture & Rural Development, Department of Economic Analysis & Research, 4th Floor, 'C Wing, Plot No. C-24, G-Block, PB No. 8121, Bandra Kuria Complex, Bandra (East), Mumbai - 400 051.

cpafecf5 3l1ft^ to, x^, ^4 - 400 001 5RT ^J^ I Printed at Karnatak Orion Press, Fort, Mumbai - 400 001. TABLE OF CONTENTS

Page No.

Preface and Acknowledgements V - vi Executive Summary vii - xvii About This Study 1-7 Why this Study? 1 Terms of Reference 2 How is the Study Designed? 3 What is in this Report? 7

Contract Farming: Past and Present 9-17 A Brief History of Contract Farming in India 9 Forms and Rationale of Contract Farming 14

The Wimco-Poplar Programme 19-42 Origin 19 Strategy 20 Planting and Agronomy 21 Harvesting and Marketing 22 Wimco-NABARD Finance Scheme 23 Extension Programme 28 Overall Implementation of Phases I and II: The Punjab Experience 31 Phase III 33 Bankers' Experience 34 Developments in 1990s 35 Strategic Shift 36 37 Grower Experience 41 General Conclusions The Wimco-Pepsi (HLL)-NiJjer Tomato-Chilli Programme 43-59 Overview 43 Aseptic Tomato Paste Manufacturing Process 43 Background of Organisations 44 Current Tomato Purchase 49 Chillies in Punjab 51 Grower Experience 52 General Conclusions 58

Seeds : J K, Pro Agro, Nath 61-79 Overview 61 Historical Perspective 61 Current Status of the Seed Industry 62 Contract Growing in Seed Industry 65 Agreements 66 Grower Experience 74 General Conclusions 79

ui Co-operative and Private Sugar Factories 81-105 Overview of Indian Sugar Commodity System 81 Emergence of Co-operatives 86 Co-operative Activities and Services 91 Prices Paid and PerformEince of Co-operatives 93 Other Activities of Co-operatives 95 Grower Experience 98 General Conclusions 104 How Has Contract Farming Worked? 107-118 Beginnings of Programmes 107 Current Status 111 Impact of Contract Farming 112 Perceptions of Contract Farming 115

Contract Farming: Potent but Limited Remedy? 119-130 Need for Correct Perspective on Contract Farming 119 What does Contract Farming Do? 120 When does Contract Farming Work? 120 Priorities for Agriculture Development for Decade 125 What Role for Contract Farming? 126 Required: Selective Use of Contract Farming 129 Contract Farming and Institutional Finance 131-136 Basic Appeal of Contract Farming 131 Increasing Involvement of Institutions in Contract Farming 133

Making Contract Farming Confident Farming 137-147 Reforming Agricultural Markets 137 Needed: A Model Framework 139 Clarity on Issues : Sponsors 140 Conflicts and their Resolution - Recourse to Group Mechanism 143 , Enabling Provisions 145 Concluding Remarks 145 Postscript 147

IV PREFACE AND ACKNOWLEDGEMENTS

There has been, in recent years, a sharp re-focussing on India's agriculture in general and on the methods of 'value-added agriculture' in particular. As the Indian economic reforms progress and percolate, the importance of agriculture-related reforms becomes plain and obvious. Agriculture has been and will remain the mainstay of our diversified economy and agricultural products can survive in the fiercely competitive global markets, only if they adopt modern means of farming, backed by financial support, pragmatic policy-framework and efficient infrastructure.

Viewed from this perspective, Contract-Farming (CF) form an effective means of generating supplies for agro-processing industries while simultaneously adding value to agriculture. In recent past, many varieties of CF have been practiced abroad, and to limited extent, in India.

The Maharashtra Economic Development Council (MEDC) deemed it necessary, as a part of its Thrust on Agriculture, to study select contract-farming practices, with a view to suggest changes in the policy-framework to boost CF - which could enhance agricultural as well as agro-processing activities. The present Study aims to contribute to the literature on CF as well as to the policy- recommendations.

The Study has been financially supported by National Bank for Agriculture and Rural Development (NABARD), and the entire research has been carried out ably and efficiently by Management Analytics Pvt. Ltd.

The Council takes this opportunity to place on the record, its most grateful thanks to NABARD for financial assistance and to their research-team for continuous interaction and suggestions.

We are extremely grateful to MAHYCO LTD. for their generous financial support to this endeavour. Mr. Raju Barwale, Managing Director, Mahyco Ltd. took active interest in all the phases to this research-project and we thank him for his guidance, comments and keen interest in the project.

We are extremely thankful to Dr. Shreekant Sambrani, Management Analytics Pvt. Ltd., for timely completion of the Research-Study. We thank Mr. K. Rajan, Advisor (Agriculture), Reliance Industries and former Secretary (Agriculture). Govt, of India, for his constant support, advice and words of experience.

Mr. M.N. Chaini, President, MEDC, desired that such a study be undertaken by the Council and it's his sustained encouragement, active participation and support, that have made this Study, see the light of the day. Mr. Nandkishor Kagliwal, Vice-President, MEDC, and an agriculturist himself, also lent vital support to this endeavour.

I am also thankful to - Mr. T.B. Sinha, Mr. Anil Deshpande, Ms. Vinda Wagh and Mr. Suresh Ghorpade (all from MEDC), for assistance in administration and co-ordination in the final production of the Report.

Dr. C.S. Deshpande Executive Director MEDC November 2004 Mumbai

vi EXECUTIVE SUMMARY

Objectives, Concerns and Methods Used

Contract farming is seen as an efTective means of generating supplies for processing industries and exporters, with a substantial potential of adding value to agriculture in India. In view of this potential and its widespread practice abroad, Maharashtra Economic Develop­ ment Council decided to examine in depth issues connected with contract farming, to facilitate contract farming arrangements to help achieve objectives of agriculture and horticulture development. This study was taken up with financial support from National Bank for Agriculture and Rural Development and assigned to Management Analytics, an Independent research and consulting organisation. This Report documents its findings.

The study was to help define the applicability, equitability and enforceability of contract farming. It would attempt to identify crops and regions suited for contract farming, components of contracts, credit requirements and suitable institutional arrangements for disbursal and recovery, safeguards to ensure contract performance, measures against non-performance and arbitration procedures to resolve disputes.

The study reviewed relevant experiences and remedies. It involved four in-depth case studies of commodities grown under contracts [Poplars under the Wimco programme in the North, mainly Punjab/ Haryana; Tomatoes and chillies under Pepsico/HLL/Nijjer programmes in Punjab and Sun-sip/Cleanfoods (Ex Wimco) in Andhra Pradesh and Kamataka; Seed multiplication under JK Agri- genetics, ProAgro and Nath Seeds in Andhra Pradesh, Maharashtra, Gujarat; Sugarcane cultivation and processing under Prawaranagar and Wamanagar co-operatives in Maharashtra, Modi Sugars in Uttar Pradesh and Sakthi Sugars in Tanul Nadu]. Sample surveys of about 50 contract and other growers for each commodity systems in the areas studied were also conducted as a part of the study. Brief History of Contract Farming in India and Forms of Contracts

The colonial period saw the introduction of cash crops such as tea, coffee, rubber, poppy, and indigo in various parts of the country, mostly through a central, expatriate-owned estate surrounded by small outgrowers model. Most such arrangements exploited small peasantry and resulted in Indenture and alienation in some instances.

vii ITC introduced cultivation of Virginia tobacco in coastal Andhra Pradesh in the 1920s incorporating most elements of a fair contract farming system and met with good farmer response. This was replaced by auctions in 1984. Organised public and private seed companies, which emerged in the 1960s, had to necessarily depend on multiplication of seeds on individual farms under contract to them since they did not own lands. Faced with an acute shortage of soft wood, Wimco, the country's sole mechanized match manufacturer, instituted an innovative farm-forestry scheme for the cultivation of poplars in Punjab, Haryana and Uttar Pradesh. It met with a good farm response and success despite the trees being exotic to the regions.

Wimco also tried to procure tomatoes at the same time for its processing factories in the South through a halting recourse to contract purchase. Pepsico introduced tomato cultivation in Punjab in the 1990s under contract farming to obtain inputs for its paste- manufacturing facility established as a pre-condition to its entry into India. This was sold to Hindustan Lever in 2000, which had earlier acquired the Klssan tomato processing facility In Kamataka. Nijjer In Punjab and Bhilai Engineering in Madhya Pradesh also took up tomato contract cultivation programmes shortly after Pepsico. Contract farming was the strategy of choice for almost all food processing projects contemplated in the 1980s and 1990s, most of which never came up. Unreliable and uneconomic raw material availability has been their major handicap. Smaller projects Involving specialised export crops, aromatics, medicinal plants and herbs, etc still actively use contracts in their own restricted areas. Contract farming is again in vogue, and even tried for bulk production of subsistence crops, such as paddy-rice, maize and wheat. Punjab govemmerit has actively encouraged it as a means of crop diversification. Most such contracts now have specialised contract agencies as Interfaces between farmers and Input suppliers/ crop purchasers. Commodity co-operatives (dairies in Gujarat, sugarcane in Maharashtra), which emerged in the 1950s, provided most services envisaged under ideal contract farming to their members and bought back the supplies offered at contracted prices, although these were not strictly contract arrangements. They succeeded enormously, leading to their replication and compelling private companies also to adopt similar approaches. Contract farming is now considered to be a corrective to market Imperfections and serving a useful purpose in India in its own limited sphere.

viii Contract farming covers loose buying arrangements, simple purchase agreements, supervised production with input provision, with possibly tied loans/advance and risk coverage, and managed production with input provision and tied loans/advance. Introduction of new crops and varieties as well as techniques of production also forms a part of some contracts. Quality parameters may be integral parts of contracts, but are not always understood properly. Defaults occur mainly through availability of alternative channels of disposal to farmers and sources of supply to buyers, which mere mention of exclusivity in contracts cannot overcome. Effective reciprocity of terms and conditions is not always assured. Contract agreements range from oral deals to formal, registered written contracts. Sugar and milk co-operatives provide significant social and community services as well.

Contract Farming Experiences

POPLARS This programme, bom of survival necessity of the sponsor, Wimco, the largest match manufacturer, had several strong features: a thorough, research-based approach, excellent extension approach, involvement of NABARD to provide refinance for farmer loans from lead banks, risk cover, clearly stated prices and purchase procedures, specially recruited and trained extension staff and solid backing from not just the Indian sponsor, but also its foreign parent. It was spread over three phases, between 1984 and 1995. It succeeded in meeting or exceeding targets, and creating great enthusiasm among farmers and demand among users, leading to competitive markets replacing contract purchase from 1995 onward.

TOMATOES Wimco's efforts at about the same time of securing tomato supplies through contracts in traditional growing areas of Andhra Pradesh and Kamatcika were lackluster and sporadic. Only a simple contract for purchase was involved, without input supply, extension or credit components. A decade later, Pepsico introduced tomatoes on a large scale in a non-traditional area, Punjab, with purchase contracts backed by research and extension support. It was closely followed by a similar programme by Nijjer. These met with enthusiastic farmer response and Punjab is now a major tomato-growing area. The companies also introduced chilli cultivation with success among a subset of their contract growers. Pepsico sold its operations to HLL in 2000. Only Nijjer still has contracts.

ix SEEDS

Organised seed trade had to adopt contract growing from its start in the 1960s, as it had no land of its own to multiply seeds. This large business now survives only on contracts, which are formal and explicit, covering all relevant factors. Seed contracts are now with groups, not individuals, which helps not only in ensuring supplies, but even more importantly, meeting quality standards and avoiding disputes.

SUGARCANE Enlightened farmer leaders integrated cane growing and processing in the 1950s through the establishment of sugar co-operatives in Maharashtra. They now provide inputs, extension, advances, and supervise/manage harvesting as well as cane delivery to factory. Farmers believe their prices to be remunerative and bonus and other social services offered as added incentives for loyalty. The larger and more concerned private companies elsewhere in the country, especially in Tamil Nadu and Uttar Pradesh have taken the co­ operatives as models and now offer similar, though not all, services to their growers.

Impact of Contract Farming

NEW CROP ESTABLISHMENT Poplar cultivation is now a stable, widely accepted agro-forestry activity covering over 75,000 ha/year. There is a competitive market, which meets most of farmers' expectations.

Tomatoes are currently cultivated in Punjab on ca 25,000 ha, with a crop size of 5,00,000 t.

INDUSTRY RAW MATERIAL Seeds are the business of over 150 companies, which survive on contracts and have a combined annual turnover of over Rs 2,500 crore. Companies studied have reported healthy volumes and profits and attribute them to contracts;

Sugarcane cultivation is based on long-standing relationships between farmers and processors; near contractual relations have led to assured supply and prosperity for all.

X HIGHER PRODUCTIVITY, INCOMES

Tomato contract farmers' average yield is 25 - 50 per cent higher than the state average, while their per ha income was 40 per cent higher than that for the control group;

Sugarcane growers reported higher than average )delds, recoveries in contract areas, and bonuses have meant higher incomes.

FARMER PERCEPTIONS The sample surveys showed that contracts are not always well understood, with prices, quality stipulations, and respective responsibilities being the main areas of confusion. Overall, however, farmers were distinctly satisfied with contracts and were ready to repeat them in general and with the same parties in particular, if offered. This was also reflected in the reported average length of association, which was as high as 28 years for sugarcane growers. Farmers stated higher incomes and prestige of association with a large organisation to be the main benefits of contracts. Nevertheless, fanners firmly believed that buyers were responsible for disputes, underlying the antagonistic nature of contracts in general.

Contract Farming: Effectiveness, Pre-requisites and Problems Contract farming is one among several possible interfaces between crop cultivation and its processing and consumption. It is a powerful means of introduction of new crops or farm technologies, especially when both marketing and production uncertainties predominate.

Contract farming helps when markets do not exist or are under­ developed; conversely, contracts diminish in importance with development of competitive markets. Contract farming works when specific quality requirements must be met. Contracts are effective when there is no zero-sum game (one party's gain at the expense of the other). They are ideal for a win-win situation, since they represent a natural mutual dependency. Contracts succeed when they contain fair risk transfer or coverage measures and trust relationships built over long periods. They are most effective when they are critical to the continued operations of the buyer organisation. They are deficient when their contribution to the buyer is minor. The effectiveness of contracts depends on the offer of a fair price and adequate risk coverage. Other factors helping adherence to contracts include exclusiveness, provision of proprietcuy planting materials or

xi inputs, and a strong, self-regulatory social systems among growers. Contract farming is an exciting way of marrying small-farm efficiency to scale economies of processing and marketing. It is an acceptable via media for corporate ownership and could be a boon to processing industry, if properly designed and implemented. It would help ensure traceability and trackability for exports, which would be major consideration in 2005.

Many factors also limit the utility of contract farming. Thousands of contracts are needed for securing even modest quantities. The large, quality-indifferent Indian market for fresh commodities acts as a main roadblock, leading to a "Feast-or-Famine" syndrome; shortages cause supply contracts to be flouted, and surpluses cause gluts at the buyer's doorstep.

This also causes problems in meeting stringent SPS requirements, which will become an increasingly important consideration. Legal procedures governing such contracts are seen to be one-sided, with defaults difficult to pin. Little if any recourse to courts or other legal avenues is seen as feasible. These reasons explain the relative absence of international players in this segment of the Indian economy.

Contract Farming in Perspective

It is a step in evolution of competitive marketing and not permanent substitute for it. Developed markets based on adequate infrastruc­ ture, proper information flows, appropriate governance, organised futures are clearly the desired set of institutions. Ideally, contract farming is self-Uquidattng, as in case of poplars, as well as tomatoes in Punjab. The continued presence of quasi-contractual arrangements in sugarcane cultivation is clearly a result of the completely adminis­ tered nature of the commodity subsystem.

Application Areas for Contract Farming

The following are the prime candidates, each of which is marked by an absence or an underdevelopment of competitive domestic mar­ kets:

• Seed multiplication; • Organic foods, vegetables, fruits, and exotic produce/plants; • Export crops;

xii • Aromatics, herbal and medicinal plants; • Other cropping activities with specific requirements of quality/ cultivation practices.

The same consideration rules out commodities for established mass markets, such as cereals, common fruits and vegetables, etc, as can­ didates for contract cultivation.

Interface with Institutional Finance

Increased credit flow to agriculture is constrained by weakness and ineffectiveness of institutions, poor credit absorption capacity of the peasantry given the low resource base and limited risk bearing ability, the relatively high cost of delivery of credit and eventual recovery due to the diffused and dispersed distribution of the end- users. Market and production uncertainties lead to defaults and add to farmers' desperation.

Contract farming in general helps reduce market risk associated with crop cultivation and is thus a possible instrument of credit deepening. The presence of a third party could lead to outsourcing some preliminaries of credit disbursal and help reduce the cost. The buyers' commitment to purchase substantially reduces the risk of default to the lender. Therefore, credit institutions would be interested in using contract farming as a means of improving credit disbursal and meeting the mandatory targets for priority sector lending.

Yet their actual involvement in contract fanning is limited because there are not many well-planned contract farming schemes with adequate safeguards for all concerned, backed by credible sponsors, and previous experience has not been all positive. The cases studied suggest the following desirable steps to expand institutional support to contract farming:

NICHE APPROACH

The target crop activity should be well-defined, with manageable number of growers who preferably share some other common traits to economise the effort required to create awareness and interest among them.

xiu SERIOUSNESS OF SPONSOR pankers need to be particularly careful in selecting the right sponsors. The best candidates should possess persistence, superior knowledge base and back-up, seriousness of intent as demonstrated by the criticalness of the activity to their own survival and sufficient financial, organisational and human resources to see the programme through the long haul. Size and previous reputations of an organisation are no guarantee of their commitment to the specific scheme.

WORKABLE, PARTICIPATIVE PROCEDURES AND PAPERWORK

Desirable sponsors need to participate as equals with bankers in the preliminaries, helping perform some tasks without unduly taxing the bankers' constrained resources.

DEALING WITH GROUPS AS AGAINST INDIVIDUALS

Dealing with groups is the preferred, if not the only, way of obtaining acceptable contract performance, through the positive use of the substantial group synergy. This also highlights the need to work on niches, which would help form groups.

RISK COVERAGE: CRITICAL! 9 A suitable risk coverage mechanism has to be an Integral part of the contract farming scheme. The entry of a large number of private insurance companies in general and agriculture insurance areas opens up numerous possibilities for innovation. Bankers should seek the involvement of an insurance agency to evolve a tailor-made, innovative approach to cover potential risk and create greater comfort for the farmer.

REPAYMENT: ALERTNESS TO CHANGES

Most contract farming schemes run on a tri-partite arrangement between sponsors, farmers and bankers. Smtable strategies to ensure no leakages out of the system (or devising methods to recover funds even in the event of a leakage) are necessary. A continuing monitoring of the market enviroimient throughout the growing season and an arsenal of actions to countervail the impact of such leakages are required.

XIV AVOID LITIGATION

Litigation to recover money on default would be largely fruitless and quite expensive. Bankers need to support measures such as those suggested for conflict resolution to ensure higher and prompt repajrment. Bankers must certainly avoid the temptation to attach the borrowers poor belongings.

Model Contract Farming Schemes New Measures and Regulated Markets The Regulated Markets legislation sought to eliminate numerous marketing malpractices by allowing transactions only in well- identified market yards and under the supervision of a statutory market Committee. Over time, procedures and paper work became focal points of market regulators, rather than facilitation and enlarging of trade and regulated markets became bottlenecks. Limited access to open trade adversely affects production of new and diversified crops. Confining trade to the existing yards and traders to recognised ones may not suit new crops with new spatial patterns and trading entities. Freeing Indian agriculture from such constraints through appropriate reform is an idea whose time has come. The draft legislation under circulation recommends recognition of additional sub-market yards, including those managed by persons or bodies other than meirket committees as markets under the act and the establishment of special markets for specific commodities and special committees to govern them. This does not quite meet the purpose. It would still require the physical movement of a commodity between the place it is produced and a market, instead of an unrestricted direct movement between the points of origin and processing or consumption, to help reduce cost, delays, wastage, and quality deterioration. The thrust of the proposed measures, albeit unintended, is to increase the extent of over-administration of the system, rather than to unshackle it.

A desirable contract-farming approach requires several actions on part of sponsors as well as administrators (financial institutions roles and actions have been listed above):

Sponsor Issues for Action Sponsors need to define unambiguously the type and nature of the contract, as well as areas and periods covered at the outset. They

XV have to list the scope of their own activities as also those of the growers, and their respective performance obligations.

Contracts must clearly specify: • Quantities involved (on volume, area or entire crop basis), delivery schedule, points of delivery and procedures to be followed in the event of shortfalls or excesses; • Modes and responsibilities of grading, packing and transport and costs; • Prices: fixed in advance of season, flexible prices, spot, consignment, split; • Payment modalities: time, form, hold-backs, if any; • Incentives based on quality and/or time performance; • Advances and their recoveries; • Insurance, market fee and other related costs; • Provisions in case of excess or short supply; • Indicative net realisation by farmer.

Sponsors must focus on groups, and not individuals. The agree­ ments should be simple, short and devoid of legal jargon. They must not involve property liens or attachments under any cir­ cumstances.

Development/Support Issues • Processors or sponsors must equip themselves with suitable R&D, efforts, especially concerning agronomy and the required exten­ sion drive; • All successful contract farming is based on appropriate pricing. Given the often cyclical nature of agriculture production, sponsors could consider establishing a price stabilisation fund as a desir­ able step to overcome this problem; • No contract farming scheme would succeed in the short run. Per­ sistence for a reasonable period extending over several years is essential.

XVI Administration • State governments must recognise contract arrangements of all types, and exempt them from the purview of the current or amended APMC acts.

• There should be a simple registration of all contracts with the concerned district agriculture office. This is to be performed by the buyer, to avail of the exemption from the Act. There is no need to ensure formalisation or government registration and su­ pervision of growers' groups.

Conflict Resolution

The best conflict resolution is avoidance of conflicts, as assumed in the logic of the above recommendations. Nevertheless, some conflicts might still arise, which need to be simply, effectively and quickly resolved.

THREE-STAGE PROCESS

• Intra-group discussion and settlement

• Simple arbitration on the lok adalat model, with a local First Class Judicial Magistrate assisted by farmer/sponsor representa­ tives, and one eminent person of area acting as the arbitration forum;

• One appeal to district judge/magistrate

The entire process must be completed in a maximum of three months, and awards under it must have judicial sanction of a decree of a civil court and must be enforceable. Legal practitio­ ners must not be allowed to participate in the process. It should not be subject to Indian Contracts Act or further review.

xvii

ABOUT THIS STUDY...

Why this Study?

Indian potato farmers plough-in their crop as a result of prices crashing almost as often as fruit processors bemoan uneconomic supply of raw material. This feast-or-famine s5aidrome is commonly and correctly considered to be among the major reasons for the basic risk-aversion of farmers, especially the smaller ones, the predominant segment of Indian peasantry. It is thought to be restricting the acceptance of new crops, or varieties, or technologies and to make growers less sensitive to factors such as the quality of the crop or post-harvest practices, their overriding concern being quick disposal of the crop. Each grower by himself has insignificant quantities to offer in the market and is not able to predict prices, leave alone influence them; he must either make the most of what the market offers or if it is entirely uneconomic, destroy his produce.

From the mid-nineteenth century onwards, commercial exploiters of new crops - indigo, poppy, tea and coffee, rubber, tobacco - attracted fanners to cultivate them by offering to buy the harvested crop, often at pre-determined prices. This clear alternative to open markets or own farming was the progenitor of contract farming in India (see next Section for a brief history). In the recent past, a number of variants of contract farming have been in vogue to provide farmers the right signals for adopting innovations, to procure economically raw materials for further processing, and most recently, to diversify agricultural economies of large regions, either to break the existing low-income deadlock or to provide farmers alternatives to their traditional crop-mix. Since corporate farming in India is not economically or politically feasible, coritract cultivation is seen as an effective means of generating supplies for enterprises such as processing or exports, both of which could add substantial value to the raw produce of agriculture.

Contract farming took roots in the West after the Second World War. About 30 per cent of the United States produce came from contracts in the 1980s. Almost all of the poultry, dairy and vegetable production was governed by contracts. Other large scale examples of contract farming include tea in Kenya, rubber and palm oil in Malaysia, and tobacco in Thailand. Maharashtra Economic Development Council (MEDC), an independent research organisation and think tank, felt that issues concerned with contract farming should be examined in depth. Commercial agriculture and horticulture have been key areas of growth and development in Maharashtra over the last decade. MEDC's purpose is to suggest a framework to facilitate contract farming arrangements which could help achieve the objectives of agricultural and horticultural development. National Bank for Agriculture and Rural Development (NABARD) provided financial support for the study. The project was entrusted to Management Analytics Pvt Ltd, an independent consulting and research organisation specialising in agriculture management. This document reports the findings and conclusions of the study.

Terms of Reference

After a detailed discussion, NABARD accorded its sanction to the study, stipulating that:

The broad objectives of the study are:

• To examine the existing arrangements for contract farming and measures required for ensuring compliances by the contracting parties;

• To systematically identify factors and establishing their critically through contract farming system; • To identify various agencies appropriate for contract farming;

• To suggest appropriate statutory framework, implementation of laws and ways of arbitrating disputes.

Besides above, the study may also examine the credit delivery and recovery mechanism with tie-ups among financiers, borrowing farmers and buying firms under contract farming, take up specific case studies (of a specific variety grown in a particular area) to examine the impact of contract farming and develop models for contract farming which ensures equitable gains for farmers, processors and consumers alike and finally come out with a set of recommendations connecting credit recovery with contract pa3rments.

The study will be conducted to identify a general set of desirable parameters for specific key crops and regions, These are:

• Tomatoes and chillies: Punjab, Andhra Pradesh and Kamataka;. • Sugarcane: Maharashtra (under co-operatives), Tamil Nadu;

• Seed multiplication: Maharashtra (Marathwada and Vidarbha regions) and Andhra Pradesh;

• Mango: Andhra Pradesh, Tamil Nadu and Maharashtra; or

• Poplar: Uttar Pradesh, Haryana, Punjab.

The study will be taken up in three segments for the crops and states as indicated in above paragraph. At the first step, a macro analysis will be carried out to identify the estimated share of contract farming sub-sector in the total physical production, value addition, capital employment, labour absorption, land use and input consumption in the relevant commodity for the state or region as a whole. Specific case studies will be taken up. as a second step, to examine the impact of contract farming. An analysis of the case and comparison with its control group would help to test the validity of the hypotheses. As the final step, a sample of about 50 contract farmers would be studied through structured questionnaires as well as open-ended interviews. The perception of risk and importance of security provided by contract farmers as well as the problems and prospects of the system shall be identified; and also legal provisions influencing the system will be examined.

How is the Study Designed?

The study was based on the premise that adherence to farming contracts is not merely matter of appropriate laws and their implementation. It is the result of an interaction among several agricultural and socio-economic factors, such as resource endowments of the region and the fanner, physical and marketing risks in the production and disposal of crops and growers' perceptions of these, nature of contract and assurances, finance and facilities provided and penalties stipulated, track record of contract buyer, previous experience of contracts, length of contract relationship, to name some.

The study was aimed to help define the applicability, equitability and enforceability parameters of contract farming systems. Its output was to be a model or models for contract farming to ensure equitable gains for fanners, processors and consumers alike. It was to help identify crops and regions suited for contract farming, components of contracts, credit requirements and suitable institutional arrangements for disbursal and recovery, safeguards to ensure contract performance, measures against non-performance and arbitration procedures to resolve disputes.

The study was based on four in-depth case studies of selected contract growing schemes, successful as well as failed, which have been in use in India during the last three or four decades. The commodities included plantation as well as field crops, cash crops and perennial as well as seasonal crops, spread over several regions. The crop/region systems selected after detailed discussions were:

• Tomatoes and chillies in Punjab, Andhra Pradesh and Kamataka;

• Sugarcane in Maharashtra under co-operatives and in Tamil Nadu and Uttar Pradesh under private companies;

• Seed multiplication in Marathwada, Vidarbha and Andhra Pradesh;

• Poplars in Uttar Pradesh, Haiyana and Punjab.

For each crop system, studies of individual companies/organisations involved in contract farming were taken up to examine the impact of contract farming. For each area studied, a sample of contract farmers or control group (sample size of about 50) was studied both through structured questionnaires and open-ended interviews about their experiences of contract farming.

The case analyses were compared to control groups to test the validity of the hypothesis regarding benefits of contract farming (e g introduction of new crops, improvement of productivity, assured supply). Further examination of data and impressions collected helped identify factors intrinsic to contract farming and others, such as local area- or custom-specific features (e g local influences and loyalties) which favour or hinder acceptance of contracts.

Legal provisions including formats of existing contracts and procedures currently followed for dispute redressal, other enabling or disabling provisions were also studied as applicable. Finally, measures presently debated for agriculture reform were also studied for their possible impact on contract farming arrangements in the foreseeable future. The actual programmes studied v(^ere

Commodity Organisations Poplars Wimco/Wimco Seedlings Tomatoes Hindustan Lever Ltd Nijjer Agro Foods Ltd Sun-sip Ltd Seeds J K Agri Genetics Pro Agro Seeds Ltd Nath Seeds Ltd Sugarcane Pravara Sugar Co-operative Wamanagar Sugar Co-operative Modi Sugar Ltd Sakthi Sugars Ltd

The fieldwork included collection of all relevant background records of the activity from its inception, wherever possible, and discussions with organisations and concerned officials and other informed personas. In each area studied, a sample of contract farmers (a priori sample size of about 50) was studied both through structured questionnaires and open-ended interviews about their experiences of contract farming. The main concerns of the farmers' survey included their resource base and use, marketing structures available to them and their perceived efficiencies, nature of contracts and assurances, finance and facilities provided and penalties stipulated, and overall performance including defaults on either side.

Responses to these from both contract growers and control group farmers were compared with the actual provisions of the formal contract if proposed, or assurances given by the buyer to determine whether the farmers' understanding and their impressions correspond to paper arrangements or assurances. Discussions with local leading farmers, traders and government officials concerned with agriculture as a whole or the specific crop, helped provide appropriate perspective and co-ordinates for the emerging picture.

Some deviations from the methodology stated on pp 3-4 above became inevitable in view of the ground conditions. Contracts no longer exist in case of poplars, or tomatoes in Karnataka and Andhra Pradesh. Coverage of current contract farmers in the field survey was therefore not possible. All our poplar growers had to be either former contract growers or non-contract growers. We therefore made this substitution. We found it extremely difficult to identify or interview poplar growers in Uttar Pradesh, since Wimco no longer has any offices covering these areas. Similarly, we were advised by the seed companies that we would get far better responses from farmers in Gujarat as compared to Vidarbha, which would to the value of the study.

We hasten to add that these modifications cover only a small part of the study, namely the sample survey. We have covered all the background information for all the regions in the original methodology and hence the treatment of the study conforms to that proposed in the beginning. Locally recruited enumerators, carefully chosen for their familiarity with the activity, language and region conducted the surveys after being trained by the research agency personnel, under their close supervision. Wimco Seedlings and Hindustan Lever suggested candidates for field work in Punjab, as did seed companies and sugar factories in their own regions. The final selection was always that of the research agency.

Sample Survey Details Crop System State Sample Size Poplars 65 former contract and non- contract growers in Punjab and Haryana Punjab, Haiyana Tomatoes 22 former contract growers, 16 current contract growers, 19 non-contract growers; total 57 growers, all in Punjab Seeds Andhra 38 contract growers, 11 former Pradesh contract growers Gujarat 15 contract growers 64 growers in all Sugarcane Maharashtra 45 co-operators Uttar Pradesh 15 growers Tamil Nadu 21 growers 81 growers in all The fieldwork was carried out between June and August 2003 in all areas. 6 What is in this Report?

This Report presents in one volume the overall findings of the study and an action agenda arising from them, as well as the case studies, which are concerned with the detailed findings from each of the four specific situations examined. The immediately following section discusses crops and regions where contract farming has been practised in India over the years and an assessment of the Impact of contract farming on the overall agricultural situation in the country. It also elaborates the basic logic of contract farming as commonly accepted, as well as major issues arising from contracts. The four detailed case studies follow thereafter, each of which presents some conclusions that relate only to the particular sub-system. The next section presents generalised findings of the case studies, regarding efficacy of contract farming as an instrument of achieving objectives of value-added, diversified agriculture. It also discusses other concerns such as size biases, balance of negotiating power, conflicts of interest and building of trust. The fourth section reviews the relevance Etnd place of contract farming in the context of the agenda for agricultural development in the next decade. The specific points of reference are the emphasis on high-technology high-value crops, greater role of processing and exports of both fresh and processed commodities in the post-2005 environment of traceability and enhanced SPS regulations.

Financial institutions and their interest as well as involvement in contract farming is a point of particular interest to this study. These aspects are discussed in the fifth section. The concluding section identifies issues that require policy and support decisions and recommends appropriate actions. These issues are, among others: approaches to participants in contracts (agencies, individuals and groups, regulators), support mechanisms and facilities (technology, inputs, credit), contents of equitable contracts, their enforceability, and tune-bound, cost-effective adjudication mechanisms and appellate procedures.

CONTRACT FARMING: PAST AND PRESENT

A Brief History of Contract Farming in India

Buoyed by the success of Indian cotton exports during the US Civil War, British settlers and East India Company comradores wanted to develop India as an exporter of other commercial crops as well. The settlers took to plantation crops - tea, coffee, rubber - in the more salubrious climate of hills in the South and the North-east, while poppy (for opium exports to China) and indigo found favour with comradores in the Gangetic and Central plains. Tenants and yeomen peasants alike were attracted by ready purchasers who offered what was deemed to be an attractive price for these new crops since no markets existed for them. This was the beginning of contract farming in India, in the second half of the nineteenth century.

Given the prevailing land-tenure systems, these arrangements soon degenerated into near-indenture systems for the cultivators. Farmers were bound to grow the crops, and accept whatever price was offered, after paying for the inputs provided by the buyer, again at a price of his choice. In a sense, these arrangements were variants of long-standing money-lender landlord and rentier dominated cultivation of most crops in India. The facts that the crops grown were of no consumption value to the farmer and that they had no access to any other buyer made them even more exploitative. Mahatma Gandhi's championship of the cause of the indentured indigo growers of Champaran in Bihar immediately following his return to India in 1916 is a major milepost in the history of contract farming.

Other crops and regions did not suffer from such extreme privation, but contract growing had earned a poor reputation. The Assamese population stUl feels that through contract growing of tea, it first lost its land ownership and eventually, it had to compete against "outside" (read Biharl and U P) migrants for unskilled labourers' jobs on these very lands. The Southern plantations, however, did not cause such traumas.

Thus, when the erstwhile Imperial Tobacco Company (present-day ITC) wanted to introduce the cultivation of Virginia tobacco in coastal Andhra Pradesh through contract farming in the 1920s, it received a warm welcome. It had, of course, taken great care to structure what seemed to be a fair contract system, through well- defined roles for the company and the participating farmers. It recruited trained persons to propagate the idea of tobacco cultivation first through mass contact and demonstrations. It targetted the relatively better-off and educated farmers.

When farmers began to sign up, these staff became the nucleus of extension and procurement personnel. It had a large corporate presence in the midst of the growing area, through its warehouses and factories in Guntur. For several decades it was the largest employer in the area and its presence was considered benevolent. Nevertheless, some 50 years later, farmers began to feel that the balance of power was hopelessly tilted in favour of what was among the largest private companies in the country. The contract system was finally abolished by an Act of Parliament in 1984, and replaced by open auctions.

Organised seed trade emerged in the 1950s. Those in the business had no choice but to multiply seeds on growers' lands, since their business could not own land and large enough parcels were hard to come by in the areas best suited for this purpose, anyway. Initial informal arrangements developed into proper contracts, which stipulated various obligations of both sides including supply of basic materials, adherence to prescribed practices, supervision and quality- checking and exclusivity of selling at prescribed prices. The seed business could not possibly have developed at all without contract farming.

At the same time as the leading cigarette company had to give up contracts for tobacco (1984), the leading match company, Wimco, facing an acute shortage of matchwood, introduced poplar in North India as a farm-forestry crop through an elaborately-designed contract farming system. It had roped in major public banks for providing term-finance to participating farmers and insurance companies to cover plant mortality. Its deployment of a large, well- qualified extension staff and novel measures to provide finance and cover risks led to a quick acceptance of the exotic trees in Punjab, Haiyana and Uttar Pradesh. A competitive market emerged within a decade and the corporate arm responsible for this function became a profitable provider of planting material.

As a pioneering processed food exporter, Wimco also experimented with contract cultivation of tomatoes to supply its paste factories in Kamataka and Andhra Pradesh, with far more Umited and temporary success. Its competitor, Kissan Foods, later acquired by Hindustan

10 Lever, also had the same experience. Later entrants, such as the Bhilai Engineering Corporation in Madhya Pradesh and Nijjer Agro Foods in Punjab have had somewhat better experiences and even today continue with contract farming in limited fashion.

The soft drinks giant Pepsico had to commit to exports of processed foods as a pre-condition for its entry into India in the 1990s. It chose to set up a tomato processing facility in Punjab to meet this obligation and launched a major contract farming programme to introduce the crop on a large scale in the state, which was not a tomato-growing area.

Pepsico's foray attracted much attention; nevertheless, it sold the facility to Hindustan Lever in 2000, along with the contract farming programme. While tomato (and eventually chilli) farming caught on in Punjab, the commercial interest of these large companies waned, since Pepsico no longer had to export only tomato paste following economic reforms, and Hindustan Lever found recently that it could not compete with cheap Chinese imports.

The great interest generated in food processing in the 1990s also translated into an equally strong interest in contract farming as possible means of raw material supply. Most of the projects were based on fruits and vegetables, all but a handful of which never got off the drawing boards. The few that did also did not fare too well, either as export-oriented units or in the domestic markets. Most of these cite unreliable and uneconomic supplies of raw material as the principal cause of their misfortune, thereby admitting the inefficacy of contract farming. Most of these projects were, however, very poorly designed, without proper analysis of markets and economic viability, as were their contract schemes. Nevertheless, small pockets of successes do exist: gherkins and flower processor/exporters in Karnataka, oleo-resin and spice extract plants in Kerala, medicinal and herbal supplement processors in the foothills of the North.

The current period has witnessed another flurry of interest in contract farming, this time into subsistence and food crops as well. Hindustan Lever's foray into the wheat flour market was large enough to encourage it to promote contract farming through other agencies. Rallis undertook to provide planting material and other inputs and State Bank of India and ICICI Bank financed wheat farmers in Madhya Pradesh, which Hindustan Lever agreed to buy through its own agents. Exporters of basmati rice found lucrative and booming export markets and structured their own similar

11 contract schemes. The present Punjab government pushed agriculture diversification from the traditional paddy-wheat combination in a big way. It invited processors and contract agencies to participate in the programme in the state in a big way.

These projects differ from the earlier ones substantially. Ultimate buyers now employ contract farming agencies (which are divisions or subsidiaries of major agribusiness firms such as Rallis, Mahindra and Mahindra, Escorts or DCM) to interface with the farmers. These agencies work on a fee from farmers and buyers alike to supply inputs and extension. The state government acts as an honest broker between the buyers and agencies, and allocates areas of exclusive operation to them. These activities got off to major start in kharif 2003 in Punjab, with a coverage of over 1,000,00 ha land under reintroduced maize and basmati paddy. The Punjab initiative is closely watched by various other states, notably Haiyana, Madhya Pradesh and Gujarat, which would want to replicate it should the results from Punjab appear satisfactory.

Throughout this period, several other arrangements incorporating many features of contract farming were also tried. The two most important such enterprises both originated out of a concern for obtaining a better deal for farmers at the mercy of monopsonistic buyers. Both these started in 1948-50, espoused a co-operative form of organisation, were built on a fruitful partnership of enlightened farm leaders and urban educated elite, and are shining examples of synergy between small-scale conventional production units and large- scale modem processing plants. Sugar co-operatives in Maharashtra and milk co-operatives in Gujarat both catered to their members' production needs initially and offered them better prices through the processing plants they owned. Over the next five decades, these projects were replicated many times.

The oldest ones are the most successful ones today, with vastly expanded scope of activities and services for the membership. Not surprisingly, they enjoy unwavering member support. Equally importantly, a number of other, private, successful processors of sugarcane and milk in other states (U P and Punjab) have incorporated most of the co-operative measures benefitting the farmers in their approach and have earned farmer loyalty as well.

Contracts have been extended to non-crop activities as well. Smaller poultry farmers for both eggs and broilers function as contracted franchisees of the larger operators in many parts of the country,

12 most notably in the Namakkal area of Tamil Nadu. Major shrimp farming firms in Kerala and Andhra Pradesh and mushroom growers of Tamil Nadu have also availed of production contracts with smaller individual units, much the same way as large industrial producers of consumer goods or pharmaceuticals routinely use smaller firms under contract to them to manufacture products to be sold by them under their own brand name.

The earlier, colonial-period negative image notwithstanding, contract farming is thus seen to be serving some useful purpose in India in its own limited sphere. Ironically, even though it was earlier held to be an instrument of exploitation of the smaller producer by the infinitely larger and more powerful buyer (as it is even now perceived in some instances), it is considered to be a major corrective to market imperfections. Contracts and similar arrangements evoke very positive responses wherever they have succeeded, even as failures outnumber successes. The fact that contract farming finds an important place in the reforms to agriculture policies presently under discussion is an eloquent testimony to its currency and appeal right now.

Mileposts in Chronology of Contract Farming in India

Period Events

1850s - 1860s Cotton exported to Britain after disruption of US supplies

1860s Plantations for tea and coffee in the hills of the North-east and the South, indigo and poppy cultivation in plains

1910s Distress and unrest among indentured contract farmers

1930s Virginia tobacco contract farming in Andhra Pradesh

1948-50 Sugar co-operatives emerge in Maharashtra and milk co-operatives in Gujarat incorporating many elements of contract farming

1950s Emergence of seed business based on contract farming

13 1980s Poplar introduction through contract farming; also tomato contract farming

1990s Tomato introduced in Punjab through contract farming

1990s Numerous, mostly abortive, efforts at introducing contract farming in horticulture

2000s Variants of contract farming introduced for wheat in MP and crop diversification in Punjab; emergence of specialist contract farming firms

2003-04 Contract farming accepted in new policy framework for agriculture reforms

FoTTns and Rationale of Contract Farming

The brief review suggests that contract farming is a very broad concept, covering almost all arrangements that bypass the open market with numerous buyers and sellers. These arrangements are devised because either there are no markets for the commodity, as in the case of new crops, or the existing markets do not serve certain special purposes, such as output of certain quality or quantity specifications. The usual response to such supply chain bottlenecks is to control the source completely, i.e., integrate backward, as demonstrated by steel manufacturers owning iron mines and collieries, etc. The US fioiit processing pioneer Chiquita owned banana plantations in Central America, while Dole owned pineapple plantations in Hawaii and the Philippines. These arrangements helped control the entire supply chain.

Indian processors, excepting the already long-established tea and coffee plantations could not follow this route, as land tenure laws did not perrnit corporate ownership of land. These laws also imposed a rather low ceiling on individual holdings as well, which effectively prevented emergence of large farming estates in most parts of the country. Whether corporate farming would have been at all feasible in India is a matter of continuing debate, the consensus being that such entities could not have been cost-competitive since labour cost would have to be paid up front by them, unlike family farms. This ground reality pushed the would-be processor or seller to experiment with various forms of contracts.

14 Contracts as practised in India range from relatively loose, one-time, oral arrangemients between the farmer and the buyer to formal, registered contracts which specify the duties and obligations of the parties to the contracts as also deliverables and penalties for defaults. The original Pepsico/HLL contract growing involved formal contracts, while the present management of Sun-sip Ltd, successor to the Wimco tomato plants in the South, claims that it has "verbal understanding" with some leading farmers of the area for supply of tomatoes, while seed companies have fully vetted legal agreements with their growers.

Poplar growers had to enter into separate agreements with the lead banks of the district for the finance which entailed mortgaging their land (which had to have a clear title) and Wimco for the actual farming part. Sugar co-operatives typically impose acreage restrictions on their members in proportion to their share holding in the co-operative. Again, the general consensus among contract farming organisations is that regardless of how the contracts are worded, there is little redress possible in the event of default from a farmer under contract. Legal proceedings are seen as cumbersome and expensive and possibly futile, as most courts would not easily uphold a relatively larger and more resourceful party (the buyer) against a poorer and smaller one (the farmer).

The coverage of contract also varies substantially. Wimco provided not only the planting material and other inputs at pre-specified prices, but also supplied priced extension services, replaced plant mortalities in the first two years (after which an insurance cover was available) and offered advice and support for intercropping between poplar trees, especially when the plantations were more mature. Sugar co-operatives in Maharashtra manage virtually the whole of sugarcane cultivation for their members, starting with supply of inputs and finance and going up to harvesting according to a specified schedule and transporting the cane to the factory. Payments to suppliers are debited at source, with the farmer getting the balance due to him. These co-operatives have also provided numerous social services and benefits to members, such as basic education and health facilities (some of the larger ones now run institutions of tertiary education and speciality hospitals). They have also promoted secondary activities, such as dairying and poultry farming, which provide additional income to the member families. Both Pespsico and Nijjer provided tomato and chilli seedlings in what was then virgin territory for the crop, arranged input supply and closely supervised the cultivation for one or two seasons, until

15 farmers gained confidence. One of the factors ensuring farmer commitment to the Nijjer programme is that the company supplies them newer variety seedlings, which are otherwise not available. In the initial period, both Wimco and Kissan arranged for seed supply for tomatoes in collaboration with leading seed companies to ensure higher 5aelds for farmers. Seed companies control all aspects of seed multiplication, including observation of isolation and other recommended practices, to ensure that they could sell the resulting seed either as certified or truthfully labelled material.

Contracts can thus be simple agreements to buy all or specified quantities of a crop at pre-determined prices, generally agreed upon before the harvest. Middlemen and moneylenders have long bought standing crops from their client population. Even today, most fruit orchard owners sell all their produce to traders long before the fruit is harvested, typically at the fruit bearing stage. The buyer takes over the management of the orchard until harvest and bears both the production and market risk. More modern and elaborate contracts cover the entirety of the growing period and include provision of inputs, if not planting material and extension. Crop finance may be independently arranged or tied to the contract. This is the typical tomato or the current Punjab contract growing situation. The most involved arrangements include buyer assuming responsibility for elements of production management as well, as in the case of seed multiplication, co-operative sugarcane cultivation or poplars. These types of arrangements seem safer to the farmer, as the risk is transferred in part to the contractor. Inclusion of finance and insurance makes these schemes even more comprehensive.

Exclusivity of relationship is a major issue. Its absence could clearly lead to defaults on commitments of leakage of supplies out of the contract system. Merely specifying it in the contract, however, does not ensure its observance, as illustrated by recent instances of contract growers in Gujarat indulging in bootleg production and selling seeds of Bt cotton. Extremely short term economic interests of the growers could prevail over contract commitments when an opportunity to indulge in non-exclusive transactions presents itself. Wimco and Kissan managers in the South observed wide fluctuations in the tomatoes delivered to them and correlated it to the variations in the market prices of table varieties of tomato. One of the principal reasons for the choice of Totapuri as the preferred mango variety for processing was that it was supposed to have a very limited table demand. This situation changed over time and mango processors, too, had to face the problems of supplies being diverted to the direct

16 consumption market. Alternative disposal channels with differential pricing are the main cause for defaults.

Contracts may not specify rigid quality parameters for acceptance of the produce, even as they may link the price to the quality delivered. They often specify the minimum cut-off standard. Wimco specified a girth of 1 m at the height of 1.5 m as the acceptability criterion for the poplars offered to it. Off-grade offerings were accepted at the buyer's discretion at reduced prices. Most contracts are similarly specified. The importance of such criteria of acceptance is not always fully explained to the farmer, or understood by him if explained. Generally, the grower is not averse to price cuts for oflf-grade output. Problems arise, however with outright rejection below a certain level. The grower's fear is that he would not be able to find a buyer if he is to offer only such rejects. They also feel that the buyer may cleverly use quality parameters to manipulate prices. Even under auctions, tobacco growers suspect that buyers delay their purchase to ensure that the crop is somewhat damaged, forcing them to sell it at a lower price. The Punjab tomato growers were openly sceptical about the use of norms such as colour and total soluble solids for grading their produce. They felt that Pepsico merely used them to reduce the price offered, in the wake of bumper crops and did not adhere to any quality norms if he fears a supply shortage.

Reciprocity of terms is sometimes an issue in contracts. Both Pepsico and Nijjer contracts specified the company's right to the totality of produce, without necessarily obligating them to buy it all. The farmer in theory could not sell a single tomato to others without the company's permission, but the company reserved the right to buy as much as it pleased. Farmers were not supposed to enter into similar agreements with any other organisation, but the companies were free to purchase from even those not covered under contracts. They also had a parachute clause freeing them of any obligation to buy in the event their plants failed. The farmers were offered little palliatives in the event of a crop failure.

17

THE WIMCO POPLAR PROGRAMME

Origin

The Swedish Match Company, the global pioneers of the match industry set up a manufacturing base in India, in the form of Wimco Limited, in 1923. The first match factory was set up at Ambamath near Bombay in 1924, Immediately followed by a factory near Calcutta and by 1929 two more at Madras and Bareilly.

The Company was the largest and the only mechanised manufacturer of matches in India. Its business faced two threats: the first, from the government encouragement of small and tiny hand-made match units in South India through excise waiver (and later direct restrictions on Wimco's growth) and the second, a growing shortage of soft woods suited for making match splints. Its splint-making operations in the Andaman islands had to be stopped due to environmental restrictions.

Faced with these threats, the Wimco management decided as early as 1970 to become self-reliant on match wood supply. Poplars were the preferred species of softwood for this purpose the world over; however, Indian and international forestry specialists believed that poplars would not grow in India. Wimco decided to test this inference. It imported poplar clones in 1970 from its sister companies the world over and helped the Uttar Pradesh Forestry Department raise poplar nurseries in the Terai region to test the suitability of the clones and select candidate-plus clones. It took a bold initiative by way of encouraging farmers in the nearby areas also to raise similar nurseries the following year. The intention was to eventually raise captive farm forests of poplars, which would allow Wimco to buy back the trees on maturity.

By the early 1980s, Wimco felt encouraged by the results of its experiments of over a decade, although international experts were still skeptical of poplars in India. It decided to multiply the experiment on a commercial basis in 1984, through a separate subsidiary company, Wimco Seedlings, and expand the area of operation to Western Uttar Pradesh, Haryana and Punjab. The Wimco-NABARD scheme was initiated in 1984 to produce adequate quantity of raw material needed by the match making industry. The production in 1982 was 2.40 million cases of 7,200 match boxes each and the expected growth 6 per cent annually. The

19 requirement in 2000 was expected to be 6.85 million cases. Because of wood shortage as well as the policy of restricted felling, agro-forestiy was considered to be the best alternative to meet the increasing demand for matchwood.

The following is a brief chronology of events concerning the poplar programme:

Year Event

1924 First match factory near Bombay

1929 Another factory near Calcutta

1928-29 Factories near Madras and Bareilly

1960 Severe shortage of matchwood

1970 Poplar clones imported from several sister companies from Australia, United States, Portugal, Italy and Belgium

1971 Extension work to promote poplar plantations with more than 500 farmers

1984 Wimco Seedlings set up as subsidiary of Wimco to promote poplars

1984 Wimco-NABARD Scheme to provide extension-credit support to producers

1990 Disturbed conditions in North India affects match production

Strategy The Wimco poplar programme was based on the conviction that poplars were good for match splints. Wimco Seedlings Limited, established 1984 to develop and market poplar clones, was the strategic instrument. Strong in research and development, it acquired expertise in plant propagation. It provided all the major contributions to promoting poplars with well supported extension services in the identified regions.

20 The poplar varieties used were of imported stock. Clones G-3 and G- 48 were the major ones planted in Uttar Pradesh, Punjab, and Haiyana. Availability of saplings and suitability of species to climatic and agronomic conditions influenced the choice. Many farmers followed what others did, and therefore, there was a tendency for a single species to dominate the scene. In Yamunanagar region, for example, G-3 was adopted by almost 95 per cent of the poplar growers who regarded it as successful.

Planting and Agronomy

Farmers could obtain planting material from three sources: their own nursery, private or departmental nurseries, and Wimco nurseries. These sources differed in terms of their objectives, size, distribution practices, and extension work.

The sole objective of the departmental nurseries was to provide support for to their own poplar plantation programme. Private nurseries had a primary objective of growing saplings to meet their own needs first. They also raised excess saplings to recover the cost of nursery by selling them to others. These nurseries were easily accessible to the poplar growers, but their command area was relatively small.

Wimco's objectives were to sell saplings for profit, and at the same time, to promote poplar to meet its raw material needs. To meet these, it had to be ahead of others in technology generation and transfer and hence invested substantially in resccirch. The objectives of poplar growers and Wimco were mostly compatible and complimentary. Their interests did not clash. Both were looking for fast growing species with more wood. Farmers thus rated Wimco saplings to be the best followed by those of the selected private nurseries.

Department nurseries charged Rs 1 to 3 per sapling, while private nurseries charged between Rs 5 and 10 per sapling, depending upon the size and reputation of the nursery. Wimco, however, had the highest charge of Rs 17 per sapling. It claimed that its higher price was partly because of higher overheads, reputation, and R&D support, and partly because it wanted to treat the nursery activity as a profit centre. Wimco also had a complete distribution system in place, operating on commercial lines. Most nurseries were expanding both in number and size as demand for poplar saplings was increasing. Generally, poplar saplings were in short supply.

21 When poplar cultivation was initiated, even Wimco did not know the ideal spacing. Protracted experiments led to acceptance of spacing plans of 4 m X 4 m, 5 m x 5 m and 4 m x 5 m, resulting in average plant density of 200 poplars per acre. December, January and February were recommended as planting months. Recommended fertiliser dose was 50 kg of urea one year after planting, in March, with irrigation.

Wimco also worked out for the farmers detailed packages suited to each area, comprising advice on interculture and other management practices, including watering, trimming, pruning, plant protection among others. Its extension staff were specially trained and equipped for these tasks during their regular monthly visits, which were rigorously noted and monitored.

The common farm practice was to opt for block plantations with intercropping. In the first three years, poplars had very limited foliage and almost any regular field crop was possible between the trees, leading to the appelation of three-dimensional farming. Farmers were, however, advised to avoid water intensive crops such as sugarcane and paddy. In later years, smadler intercrops of mainly shade-loving nature, such as turmeric were recommended. Other intercrops included potato, gram, mustard pea, soyabean, lentil, sorghum, maize, and vegetables such as tomato, chillies, and radish.

Harvesting and Marketing - Wimco's Buyback Arrangement

The Uttar Pradesh experiments showed that height gain was the fastest between the fifth and the sixth years, while the growth of diameter was the fastest between the fourth and the fifth years. Trees tended to decline after 12 yeats. Farmers also believed that after eight years a standing poplar tree became vulnerable to storm damage. Wimco, therefore, advised harvesting at eight years, when the girth would be 1 m at shoulder height, rather than wait for the maximum size. But most of the farmers harvested their trees at the end of six years.

Wimco had been nurturing over 500 poplar farmers through its rural extension programme in Uttar Pradesh, Punjab, and Haryana since the 1970s. Based on this experience, a Joint scheme involving National Bank for Agriculture and Rural Development (NABARD), Wimco, and participating farmers was Initiated in 1983.

22 Wimco-NABARD Finance Scheme

Genesis and Rationale

The most distinguishing feature of the Wimco poplar programme was the integrated buy-back and finance arrangement. Wimco management had realised that waiting for revenues until the tree matures would be beyond the economic abilities of most participating farmers. They would, therefore, require credit to finance the cost of raising the tree including planting material, other inputs and extension. Early efforts to convince commercial bankers did not succeed, as they were more concerned with short-term crop loans. The eight-year maturity period envisage also meant that bankers would have to necessarily seek refinance. Wimco, therefore, approached the National Bank for Agriculture and Rural Development (NABARD). On its part, NABARD had earlier refinanced medium to long-term schemes for bamboo cultivation.

The proposal was of interest to NABARD because it promoted farm forestry and increased green cover, thus helping achieve one of the objectives of the 20-point programme then in force. The loans would be recognised as agriculture advances under priority sector and would help fulfil commercial banks' obligation of providing stipulated proportion of their credit to these activities. Various reports, including that of the task force set up by the Government of India for development of match industry in 1980, had highlighted the shortage of raw material faced by the industry. The fact that a reputed, multi-national commercial organisation was the sponsor of the programme and was to buy-back the material produced helped increase the appeal of the scheme. Its viability was established, as demonstrated by model calculations (see below).

Under the scheme as originally implemented, lead banks in the concerned districts were to disburse the loan, after receiving reports from Wimco regarding the inclusion of a particular farmer in the scheme. The required documentation leading to the mortgaging of the farmer's land, was to be completed with the help of Wimco. The loan was to be disbursed in instalments to cover the anticipated annual expenses of the,farmer net of his mcirgin. It was to be paid back with accrued interest through a deposit of the sale proceeds of mature trees.

23 Cost Model and Financing

Under the scheme, the financing was on the basis of 85 per cent by way of bank finance and 15 per cent as farmer's margin. The NABARD cost model indued cost of sapling and extension at one- third of the total. Since the cost of planting differed from one state to another, different financing norms were devised. A cost model followed during the first phase of the scheme is shown below:

(Rs/tree)

Item Uttar Pradesh Punjab Haryana Sapling Cost 12.50 12.50 12.50 Other Cost of Planting 96.50 125.50 108.50 Extension Cost 36.00 47.00 40.00 Total Cost 145.00 185.00 161.00 Eligible Bank Finance 123.00 157.00 137.00 Farmer's Margin 22.00 28.00 24.00

Farmers were expected to gain as the scheme promised not only a loan, but also support services including supply of professionally grown saplings, technical guidance, and extension services and guaranteed buy-back or marketing arrangements at the doorstep. The scheme envisaged for the farmers the following surpluses based on a model of 500 trees per ha (spacing of 4 m by 5 m).

Details of Surplus Uttar Pradesh Punjab Haryana Number of Surviving Trees 450 450 450 Minimum Buy-back Price, 500 500 500 (Rs/tree) Amount (Rs) 2,25,000 2,25,000 2,25,000 Bank Loan (Rs) 98,570 1,24,696 1,08,669 Bank Interest (Rs) 12,321 15,587 13,584 Total Repa3mient (Rs) 1,10,891 1,40,283 1,22,253 Net Surplus (Rs) 1,14,109 84,717 1,02,747

24 These calculations did not include other expenses or revenues from intercropping. The expectation was that inclusion of these figures would in fact show the net surpluses to be much higher. Model figures, therefore, were taken as the minimum expected, which worked out to over Rs 10,000/ha per year even in the worst case. Features of the Scheme and Responsibilities The main features of the scheme were • The scheme was to be implemented in two phases, the first between 1984 and 1988, and the second, between 1988 and 1992; • The scheme would be restricted to the Tarai region of Uttar Pradesh and some districts of Punjab and Haiyana which showed favourable conditions to grow poplars; • Wimco would establish nurseries, undertake R&D, organize extension services, and give adequate publicity to the scheme; • Wimco nurseries would produce ETPs (Entire Transplants) and sell them to the farmers; • Farmers would be identified by Wimco and the respective participating banks. • At the end of eight years of growing period, Wimco will buy the trees at a guaranteed price or the prevailing market price, whichever was higher.

Targets The scheme envisaged the following targets. (lakh plants) Punjab Haryana U.P. Total Year (20%) (20%) (60%) Planned Achieved Phase 1 1984 0.40 0.40 1.20 2.00 2.90 1985 0.80 0.80 2.40 4.00 4.12 1986 1.60 1.6 4.8 8.0 7.42 1987 2.40 2.40 7.20 12.00 10.50 Phase 2 1988 3.20 3.20 9.60 16.00 23.00 1989 4.00 4.00 12.00 20.00 21.40 1990 4.00 4.00 12.00 20.00 22.30 1991 4.00 4.00 12.00 20.00 21.30 Total 20.40 20.40 61.20 102.00 112.90

25 Procedures Adopted

An agreement was to be signed between a farmer and Wlmco as a part of this scheme. Under this agreement, Wlmco would sell and supply to the farmer high quality ETPs of poplars for planting and growing under necessary guidctnce of the company In the farm land owned by the farmer. The company also agreed to make available to the farmer at cost price the requisite Inputs like fertilisers and Insecticides as may be necessary during the period of this agreement. The agreement specified the total amount payable by the farmer for the purchase of ETPs. This amount differed from one state to another during Phase I. But on strong objections from the Punjab Government during the second phase, these amounts were made uniform. The total amount from the loan was to be given to Wlmco in eight installments over the life of the tree.

Formal Agreement

The agreement specified that :

• The farmer shall make necessary application to the designated bank to obtain the loan on the basis of this agreement;

• He shall, on the grant of such a loan, direct the lending bank to make the payment directly to the company due to them as per the agreement. • He shall also direct the lending bank to pay the balance amount of loan to him; • Notwithstanding the non-availability of the loan from the bank, the farmer shall be liable to make necessary payment to the company as agreed; • If no pajmient is made by the farmer as stipulated, he shall pay the company interest at the ruling rate charged by the bank for the commercial credit; • To see that ETPs grow properly into 'harvestable' trees, they shall be planted in suitable locations as guided by the company; • The Company will try to obtain insurance cover on the lines of crop insurance at the Company's cost but the policy would be in the name of the farmer [GIC JuiaRy provided cover cifter two years, while Wimco itself covered the fatalities in the first two years);

26 • If the Wimco ETPs are lost before the specified dates due to natural calamities such as storm, earthquake, widespread fire, flood or any act beyond the control of either party, the company will compensate the farmer by free supply of fresh ETPs up to a maximum of 10 per cent of the ETPs sold under this agreement. This replacement will not cover any loss of ETPs on account of theft, willful damage, damage due to negligence, or failure to comply with company instructions. The fresh ETPs shall be planted by the farmer at his cost;

• The company shall offer to buy those poplar trees as have grown from the EXTPs supplied by the company to the farmer under this agreement and which meet the required specification of 'harvestable' trees;

• The company agrees to offer to buy the 'harvestable' trees at the rate of Rs 500 per tree at stump site, i.e., at the rate of Rs 1,250 per cubic meter or at market price prevailing at that time, whichever is higher; and;

• In case of disagreement on the market price, the farmer shall be free to sell the trees to anyone else of his choice.

Although the agreement with farmers stipulated that applying for and obtaining bank loans was the farmer's responsibility, Wimco extension staff, in fact, did the bulk of the job. They conducted a vigorous campaign to inform the farmers of the scheme, identified suitable farmers, prepared their applications for the loan, and collected all the supporting documentation including title deeds to be lodged with banks, conducted revenue record searches and all other related tasks. In effect, therefore, obtaining the loan virtually became a Wimco task, if not a Wimco responsibility.

"Harvestable" Tree

The specification of 'harvestable' tree meant that the tree shall be of good form, green, sound, cylindrical, of straight growth, and with the bark fully intact. The tree shall have good clean bole length with minimum of knots/knobs and free from twisted or spiral growth, cracks, bulges, and hollow, dry decayed, diseased, or damaged portions. The girth at breast height (1.37 m above ground level) shall not be less than 90 cm over bark at the time of its harvesting. To be harvestable, the tree should also yield a minimum of 0.4 cu m hoppus of peelable softwood, measured under bark and down to 50

27 cm. girth over bark at the narrow end of the stem. On these considerations, the company shall decide whether a tree is harvestable or not, and that the company's assessment would be final and binding on the farmer, and the same shall not be contested by him/her.

Extension Programme

Prior to 1980

The match factory of Wimco at Bareilly in Utter Pradesh was raising some nurseries prior to 1980 cind delivering poplars to select farmers with resources adequate for poplar cultivation. The list of such farmers was obtained from various seed companies. This function was carried out by the harvesting division of the factory, which was at best a secondary job for them. As the trucks were going empty to harvesting sites, the plants were transported during those trips and unloaded with the farmers. These saplings were distributed at the doorsteps of the farmers free of charges, and therefore there was nothing at stake for the identified farmers. More often than not, their fields were also not ready for plantations. Supply of saplings also continued sometimes beyond the ideal dates of planting. If farmers were not able to plant the saplings, or even if the saplings did not survive after planting, the farmers used the left over dry sticks for household purposes. The survival rate at that time was just 15 to 20 per cent of the plants planted (not supplied). Some plantation did come up nevertheless. They served as demonstration plots for prospective fanners The Initial extension approach was at best half hearted.

1980-84

Wimco concentrated on the nursery programme. Reducing the costs involved In nursery raising and spending more time with the prospective farmers had the priority. The company still was not sure about specific varieties for localities, planting time and ideal spacing. From 1980 onwards, the company started requesting farmers to collect their saplings from the nurseries. The objective as to make them feel that they owned the saplings. As a result, the survival rate went up to around 55 per cent.

While farmers transported their saplings, the company staff visited them prior to their coming to the nursery to make sure that their plots were ready for plantations. They issued the saplings only when

28 they knew for sure that pits were dug. After a year or two, the company thought of charging a nominal rate of Re 0.25 per plant. The immediate impact of this strategy was that survival rate went up to around 85 per cent, since now farmers started taking care of the plantations in which they had make some investment.

1984-87 (Phase I)

This was the period of intensive extension for Wimco when the tripartite agreement between a banker, a processor company, and the producer farmer was Implemented.

Extension was an integral part of the scheme. Wimco's role was to popularise poplar cultivation in the selected districts. This was supposed to be achieved by Wimco by: a. identifying suitable provenances of poplar; b. undertaking trials through nursery and experimental planting with different densities and cropping patterns; c. identifying clones suitable for specific regions; d. supplying quality planting material to farmers at economic cost; e. providing extension and/or training services; f. giving technical guidance for a period of eight years; and g. purchasing poplars as per buy-back agreement at guaranteed prices.

As a part of this arrangement, extension assumed a high profile. A team of dedicated extension workers was built and made operational. In 1985, 80 to 90 extension workers were in place. Another 40 to 45 were recruited in 1986. These workers visited the farms of prospective farmers prior to the plantations. Extension workers/ supervisors were present during the actual planting. With such on orientation, the extension became quite personalised and effective. Extension workers were involved right from the site selection to arranging loans and final recovery. Since support had also to be provided to get bank formalities completed, the company preferred to have extension workers coming from a mix of disciphnes. Half the

29 recruits had a commerce background and they primarily dealt with the banks. The remaining half were with an agriculture background, who mainly had field duties

During this period the extension • activity was restricted to nine districts of Uttar Pradesh, and six districts each of Punjab and Haryana states.

1988-91 (Phase II)

Phase II of NABAP?D-Wimco scheme covered the whole of Punjab and Haryana and 16 districts of Uttar Pradesh. As the area of operation increased, the extension staff strength had to be increased. Training of new recruits was undertaken by the company. The extension strategy by and large remained the same during this period, except the scale was larger and scattered. Effective control suffered. Problems such as diseases and pests started surfacing; research had to be strengthened to support field extension.

Recovery of dues was a shared responsibility of Wimco. Wimco field personnel gave plants to prospective farmers after ascertaining their records and hoped that banks would finance the plantations. This worked well during the initial two years of this phase. Thereafter numerous non-bankable cases surfaced. This meant problems for the company as it had already supplied the saplings. The general approach all along had been to plant first and process the loan thereafter, since it needed time for procedural compliance and documentary support.

Seriously interested farmers, on the other hand, continued planting poplar with or without bank finance. They developed a good system of intercropping with crops like sugarcane, potato, chillies, wheat, and vegetables. Quality of plants supplied by Wimco nurseries was quite reassuring. Wimco saplings though expensive had an image in the market. Since farmers were paying a higher price for their saplings, they became choosy and selected strong saplings of fast growing clones.

Knowing well that widely accepted clones were likely to become susceptible to local diseases and pests, Wimco also strengthened its research efforts to keep searching newer clones suitable for processing needs as well as for farmer's site and economic returns. Field extension workers were expected to provide extension support to participating farmers for a period of eight years. It was calculated

30 that an extension worker along with his sales functions would not be able to service more than 25,000 plants. Therefore, the target per worker per year was worked out to be around 3,000 plants. An extension worker cum field supervisor had to undertake motivational work.

Overall Implementation of Phases I and II: The Punjab Experience

The pick up in the Phase I was gradual but encouraging. The Punjab programme began with a plantation of about 50,000 plants in 1984. It increased to around 1 lakh in 1985. It further increased to 3 lakh in 1986, and 5 lakh ETPs in the final year of the Phase I. Most of the Punjab plantations in Phase I were confined to five districts of Ludhiana (around 40 per cent), Hoshiarpur, (25 per cent), Ropad (15 per cent), Patiala (10 per cent) and Jallandhar (10 per cent). The reasons for adopting poplar plantations varied, however, Ludhiana farmers were progressive, educated, well-informed, and enterprising. Ludhiana also had an agricultural university. This was a major factor in the early spread of poplars. Hoshiarpur had absentee land owners. Most of the area was also at the foothill of Shivaliks. The soils were fertile and suitable for tree growth. Ropad was nearer to the state capital. Personal contacts with Wimco staff was therefore much better. Land holdings were relatively bigger in Patiala. Tree cultivation was also preferred option among the retired army personnel owning agricultural land. Jallandhar also had many absentee land owners.

The extension approach in the formative years primarily meant personally contacting potential adopters and inducing them with convincing logic. Just a promise of bank loan was not good enough for enlightened and commercially oriented farmers. The following were the most frequently asked questions:

• Would I be able to sell the trees on maturity? • What kind of people would buy them? • Would it not meet the fate of eucalyptus? • Would it not adversely affect the soils and underground water? • Is it true that it is highly susceptible to insects and pests? • Would one be able to obtain the yield as projected? • What would be the earnings?

31 Rudimentary calculations frequently advanced by the field staff were: 'You take the loan of Rs 150 per tree from the bank. Sell the tree to Wimco at around Rs 500 at the end of six years. Pay back Rs 300 to the bank. And you retain Rs 200 per tree for yourself. With 200 trees per acre, you can get Rs 40,000 in six years net of all costs. You also get some of your crops additionally'.

Supplementary arguments used were:

• Trees grow automatically and you need not attend them all the time; • Root systems of poplar are different and therefore they will not affect agricultural crops; and • You can also get fuelwood for two to three years.

Field teams realised that while these arguments had a positive impact, they were not forceful enough to induce the fairmers to act. Arranging their meetings with someone knowledgeable, or showing them other farms where poplars were planted was necessary. Getting at least one person in a village to plant poplars was therefore considered essential. It was found that curiosity driven farmers generally inquired about the trees from initial adopters more. Initial planters therefore became the locally available sources of information and the field staff made a good use of them.

In spite of the availability of credit facility, some farmers preferred to purcbase saplings from Wimco on cash. They did not have either time, patience, or need for the bank loan under the Wlmco-NABARD scheme. Others who opted for loan, later resented upward modification of interest rates. Also those who wanted to repay some principal amount discovered that bankers adjusted interest amount rather than the principal. Response to the loan facility, therefore, differed from one class of farmers to another. As the scheme progressed, it also became apparent that some farmers were more interested in the loan amount than the poplar plantations. This orientation created problems later for the Wimco field teams.

Extension cost to the farmers of Punjab in the first phase were also relatively higher. This was because these costs were determined on the basis of one third of the cost of plantations. Labor cost in Punjab being higher, the cost of raising plantations was also relatively high.

32 The programme in the Second Phase of Wimco-NABARD scheme in Punjab got stabilized to around 5 lakh plants annually. This phase covered all the 14 districts of Punjab along with all the districts of neighbouring State of Haryana. In Haryana, Yamunanagar district topped the plantation programme. Other important districts in Haryana included Karnal, Panipat, Kurukshetra, Sirsa, and Hissar, in that order.

Phase in

As there was a delay in sanctioning the scheme, the third phase was divided into two parts of two years each from 1992 to 1996. Field teams had, however, gone ahead with the distribution of plants in anticipation of these sanctions. These plantations faced difficulties at bank level to get financed because of this delay. Some of the farmers also did not take care of the plants, as funds were not available. It had implications for survival rate. This affected the loan recovery. Prices of poplar logs in the open market were increasing, and farmers who had taken loans were therefore selling their produce in the open market rather than selling to Wimco. Recovery of bank loans through purchase of matured trees was Wlmco's responsibility. Banks reported to NABARD that Wimco was not purchasing the trees from the borrowers, and thus not depositing the sales proceeds with the banks. Farmers who had borrowed from the banks and sold in the open market also became defaulters. Some of these farmers argued that they did not get proper advise from the field teams and therefore the growth was not good. As a result, they had to sell the standing trees in panic at unremunerative prices. Therefore, they could not repay the loans. At some places court litigations took place in which Wimco also got involved. Wimco on the whole had an unsatisfactory experience.

Phase III had another significance. During this phase, the trees planted in Phase I had started harvesting on a sizable scale. Market arrivals were visible. Plywood industry in the meantime had expanded significantly. This favorably influenced the poplar prices. Affected by the riot conditions as well as the shortage of wood material, the plywood units located earlier in Assam shifted their operations to this poplar-growing region in the late eighties. Poplar growers were expecting Rs 500 to 600 per tree in fact started fetching Rs 900 per tree. This made the farmers realise the true value of growing poplars. The situation was that in spite of the increasing price trend, the demand for poplar wood was still increasing. As a result, the demand for poplar saplings also

33 increased considerably. Many agencies entered the nursery business to supply poplar saplings. Farmers by that time also had become quite knowledgeable about poplar growing. Demand for saplings was so high that it resulted in a shortage. Wimco offered a fixed price for poplar wood in advance, but the open market was willing to pay more.

Wimco had estimated to procure only around one-tenth of the total produce, according to certain procedures to follow while purchasing the logs. These included, for example,

• Purchasing wood on volume basis on cubic meters than on tonnage or weight basis which farmers were more comfortable with; • All the pa5rments were made by bank drafts while some farmers preferred cash payments. • Unlike in the open markets, Wimco deducted 10 per cent of total measurements for wood with bark; • Some educated farmers knew that the formula used for calculating the volume, though accepted universally, gave lower estimates of the actual volume and therefore less money to poplar growers; • Harvesting procedures of Wimco were also elaborate, which involved shifting labour, numbering each log, tagging both the ends of the logs, and then transporting with valid transit pass only. Sometimes, it was a rather a long process, which affected the next agricultural crop; and • Wimco also did not harvest trees in certain periods such as the rainy season and scrupulously followed forestry norms.

Banker's Experience

Participating bankers were generally satisfied with the scheme performance, though not always very happy. It helped them meet their statutory obligations of priority sector credit. Another advantage the scheme provided to the bankers was that sizeable advances could be disbursed through it to a relatively smaller number of account holders instead of having to approach a large number of small landholders, which would have been the case otherwise. This was both convenient and economical for bankers.

34 They experienced some problems as well:

• One-sided Agreement: Wimco was obliged to buy all the plants offered at announced prices, but farmers were not bound to sell to it. This caused a problem of leakages of revenues from the scheme to points on which bankers had no control or leverage;

• Faulty Selection: In the absence of relevant experience, loans were sanctioned to some farmers with sites which were not suitable for growing poplars in Phase I. The trees either did not grow properly, fetching low revenues, or died;

• Interests Deferral: Bankers felt that interest could be paid on an on-going basis through the sale proceeds of intercrops, rather than waiting until the final sale of poplars.

There were several instances of litigation, some of which involved Wimco as well. On the whole, however, these instances were considered by the more experienced bankers to be neither unusual nor unexpected.

Developments in 1990s

Wimco had supported a tripartite arrangement involving farmers, the bank, and the company. Wimco supplied saplings and the technical know-how to the farmers. Banks gave loans to the farmers to the extent of Rs 135 per tree, out of which Rs 50 were to be apportioned to Wimco for its inputs. At the end of the expected rotation of eight years, Wimco was to buy back wood from the farmers at agreed price of Rs 1,250 per cu m, which normally meant around Rs 500 per tree. Out of this amount, the bank would recover Rs 260 and farmers would get Rs 240 per tree. In addition, the farmer would have already received Rs 85 per tree (Rs 135 - Fte 50) in the beginning itself to sustain himself for the loss of crops, making a total of Rs 325 per tree.

As a result of tripartite agreement, the plantation activity picked up, and by 1991 the poplar plantations were at their peak

Prices of poplar wood in the open market were increasing as poplar- based plywood manufacturing gained around in Yamunanagar township. Rough calculations showed the following trend.

35 Year Approximate Ruling Price, Rs/q 1992 175 1993 190 - 200 1994 240 1995 275 1996 375

Thus, within a short span of a dozen years, a healthy, competitive market for poplar wood had been established in the growing regions (Yamunanager, Ambala, Amritsar), to the great advantage of the growers. The open market ruling price was twice as high as that assured by the contract. The grower was therefore under no obligation to sell to Wimco.

This is indeed what happened. Market prices have remained consistently high, attesting to the versatility of poplars in use. Farmers continue to grow poplars as before, but now without contracts, and quite often without any finance either.

Strategic Shift

All these factors had sown the seeds of strategic shift in the functioning of Wimco in the third phase itself. After Phase III of Wimco-NABARD scheme drastic changes were made both in the policy as well as in the organisation structure. It was decided to focus only on raising and selling saplings directly to the farmers without any loan or buy-back provisions. The newly formulated objective was to give a better quality sapling to the farmers at a lower cost. Since the farmers were to pay for the saplings, they were given a choice of saplings from any of the Wimco nurseries. To ensure their plants, they could book saplings by paying token advance anytime during October and December, and lift the saplings before 20 February. Farmers would transport their own saplings. Thus, contract farming of poplars had effectively ended.

In 2002-03, Wimco Seedlings earned a net profit of over Rs 1 crore through its nursery operations and allied activities, which is adequate proof of the viability of its present business concept and strategies.

36 Grower Experience

A sample survey of poplar growers was conducted as a part of this study. Its results generally bear out the conclusions and inferences discussed in the above sections. Some salient findings are shown below and briefly discussed.

Sample Composition

In this case, the sample necessarily comprised former contract growers and non-contract growers, since there is no contract growing of poplars any longer. There are no major differences between the contract and non-contract growers as far as their holdings are concerned:

Contract Non- All Growers' Details Growers contract (up to 1996) Growers

No 47 18 65 Average land holding (ha) 5.4 6.1 5.6 Average area devoted to poplars (ha) 4.5 4.6 4.5

Institutional Membership and Borrowing Contract growers reported average borrov^^ng amounting to less than Rs 100 per tree, which is lower than the NABARD norm. Problems of recall and a tendency to underreport are in evidence here.

Contract Non- All Growers' Details Growers contract (up to 1996) Growers

No 48 17 65

Members of co-ops 12 5 17

No availing credit 48 15 63

Average crop credit, 2,00,000 — 2,00,000 Rs/growing period (for borrowers only)

37 History Contract growers generally had a longer history of poplar cultivation. All of them reported written contracts. Only one res'pondent took a one-year break from contract.

Contract Non- All Particulars Growers contract (up to 1996) Growers No 48 17 65 No of years poplars grown (Average) 10.1 8.3 9.5 No of years under contact (Average) 10.0 N A 10.0 No reporting written contract 48 N A 48 No reporting break in contract 1 N A 1 No with contract resumption 1 N A N A

Crop Performance Contract growers reported nearly 25 per cent larger number of harvestable trees per ha, as compared to the free-lance growers. This is a clear indication of the effectiveness of the contracts in improving the physical production.

Contract Non- All Growers contract (up to 1996) Growers No 48 17 65 Average no of harvestable trees/ha 433 350 411

Price Performance All the respondents seem to be underreporting the price they received for the poplars, by a factor of over 20 per cent or more. This is a common feature of field surveys and should not cause much concern.

Contract Non- All Growers contract (up to 1996) Growers

No 48 17 65 Average price received Rs/tree 250 240 247

38 Understanding Contracts The main bones of contention were loans (70 per cent not clear), intercropping (59 per cent), pricing (54 per cent) and sales arrangements (40 per cent). The respondents were quite clear about almost all other matters, which is noteworthy for a new crop with specific technical knowledge requirements. This indicates good extension work. (N=48) Item No reporting No reporting No expressing clarity confusion doubts Buyer's obligations - input supply 22 12 14 - credit/loan 10 34 4 - extension 39 5 4 - intercrops 10 29 9 - risk cover 28 10 10 - harvesting 26 12 10 - sales arrangement 16 20 12 - pajrment • terms 12 27 9 Farmer's obligations - planting 29 12 7 - irrigation 32 11 5 - harvesting 35 10 3 - quality 27 15 6

Facilities under Contract The response was relatively positive regarding the facilities provided under contracts with very few doubters and a somewhat larger number of confused persons. This again indicates good extension work. (N=48) Item No reporting No reporting No expressing clarity confusion doubts Demonstrations 33 12 3 Training 44 2 2 On-the-spot advice 34 11 3 SOS visits 40 3 5

39 Procedures for Contract The response regarding procedural and documentation requirements was excellent, as is to be expected when the farmers had nearly 10 years of experience and had negotiated atleast two contracts successfully. (N=48) Item No reporting No reporting No expressing clarity confusion doubts Land documents 44 3 1 Other documents 42 5 1

Disputes and Contracts Minor disputes seem to have arisen regarding quality (mainly size), quantity and pajnnents. Almost all of them were resolved quickly and amicably. (N=48) No reporting No reporting No not happy Disputes satisfactory resolution Dispute on - quality 4 4 0 - quantity 8 6 2 - other services - pajmients 3 3 0

Responsibility for Disputes A larger proportion of respondents blamed the buyer for disputes rather than the farmer. This is to be expected as a general purpose response, since disputes in any case were very few. (N=48) Particulars No No not Not aware/ agreeing agreeing No response Buyer 18 6 . 24 Farmer 5 12 31

40 Benefits from Contracts

Although less than half the respondents said that they got better prices from contracts, they were nearly unanimous in their view that contracts provided them higher incomes, clearly confirming the superior physical impact of contracts. Almost three-quarters of the respondents were pleased to be associated with a company such as Wimco, which they considered bestowed prestige on them.

(N=48)

Particulars No responding No responding Not aware/ positively negatively No response Higher price 22 15 7 Higher income 44 2 2 Association with good 35 1 12 organisation

Overall View of Contracts As is to be expected, an overwhelming majority expressed their satisfaction with contracts and over 60 per cent were ready to work again with Wimco, although they knew this would not happen. Perhaps this last response should be ignored!

(N=48) Particulars No responding No responding Not aware/ positively negatively No response

Contracts are good 43 5 0 Ready to repeat contracts - same agency 33 1 14

General Conclusions On the whole the Wimco programme succeeded very well by any yardstick. Its major achievements were: • Quick establishment of a new activity by no means easy to manage;

41 • Better than expected results in field; • High level of farmer satisfaction; • Emergence of a competitive and lucrative market, leading to a phase-out of contracts; • Substantial continuation of activity in post-contract period without let-up.

The main reasons for this success were: • Well-designed contract scheme, covering all aspects including risks; • Research and extension support of a high order; • Clear contracts for the most part; • Quick and amicable resolution of disputes.

The prime factor underlying this situation was the Wimco management's total commitment to the programme. This came about because the company's very survival depended on the success of the programme. It was not yet another activity taken up by the promoter, but rather an integral part of the main corporate strategy. It was thus able to forge the right partnerships and work with the farmers to create a win-win situation.

The NABAPiD initiative ranks a close second as a factor responsible for the success of this programme. It responded quickly to the novel scheme and helped bankers take a somewhat different view of what was, after all, a risky venture. The scheme would most likely not have succeeded to the extent it did in the absence the critical finance support.

42 THE WIMCO-PEPSI (HLL)-NIJJER TOMATO-CHILLI PROGRAMME

Overview

India produces a sizeable quantity of tomato'. The prefen'ed mode of its disposal and consumption is the fresh form, as is the case with most Indian vegetables and fruits. A large number of areas within the country produce it, but its consumption is even more uldespread, covering the entire country, thereby necessitating even fairly long distance transport (e.g., from southern Karnataka to central Gujarat), almost entirely by road. It is widely used in all the various regional cuisines of India and it must be rated among the most commonly used and popular vegetables of the country. Its processing to reduce transit and other losses, as well as making it available in a convenient form at economic prices at locations distant from the source of production would make abundant sense. Yet its processing is confined to miniscule quantities, perhaps as little as 100 - 200,000 tpa. While numerous small and tiny units, some no more than a large kitchen, process tomato for local consumption, the market is dominated by four large processing organisations:

• Wimco [Now sold to others - two plants. Sun-sip and Cleanfoods];

• Bhilai Engineering Co (one plant);

• Nijjer Agro Foods (one plant);

• Hindustan Lever [Culinary Products Division] (two plants at present, both idle).

Aseptic Tomato Paste Manufacturing Process

Tomato paste, made by concentrating tomato juice from its original strength (ca 4-5° Brlx under Indian conditions) to 28° Brix, can be

1. Popular estimates place India's annual tomato production at ca 5m tpa, out of a total vegetable production of over 70m tpa. We have always maintained, however, that this is a gross overestimate. The production of onion, a far more commonly found vegetable, is under 5m tpa. We do not believe that the tomato quantity could ever be greater than that of onion. We estimate tomato production to be ca 4m tpa.

43 preserved by a number of means, including freezing. The Indian industry, however, follows the standard international practice of using UHT aseptic packaging under sterile conditions. The relatively simple manufacturing process comprises:

• Fresh tomatoes are received in bins, dumped in a water trough, washed with water and conveyed to a sorting table. Operators Inspect the incoming fruit, remove foreign materials, thin out and discard bad tomatoes. Sorted tomatoes drop into chopper pumps;

• Chopped tomatoes flow to a hot break tank equipped with a rotary coil for uniform heating to ca 100°C. Hot pulp is pumped to a sterilising heater, where it is further heated to ca 112°C to ensure that the enzyme pectinase is rendered inactive. The pulp is then cooled to 100°C in a flash tank and sent by gravity to a rough finisher-pulper for removing peel, sticks and pods (if any) and then to a fine finisher for removing seeds and fibres; • The finished juice flows by gravity to the feed surge tank of the evaporator section (usually multiple-effect). It is then pumped to the evaporator for concentration. The paste is pumped to a holding tank and then to a heat exchanger (usually scraped surface) for pasteurisation by heating to 104°C, held for 10 minutes, cooled, and filled in aseptic bags. The filled bags are placed inside either corrugated cardboard cartons (smaller sizes) or mild steel drums (larger sizes, usually 200 1). These are then ready for storage and/or shipment.

Background of Organisations Wimco Wimco, the country's largest safety match manufacturer, was part of the original Swedish Match group of Sweden up to 1988, which held 40 per cent of its equity and exercised management control. Its sharee were among the most actively traded ones on the Mumbai Stock Exchange. Financial institutions, Indian pension funds and general public were all among its shareholders. The company, under severe restrictions under MRTP, decided to diversify in the i980s. Food processing, especially of mango and tomato, appeared to be a very attractive opportunity. Wimco was the first major Indian organisation to enter into horticulture processing. It did so by acquiring Clean Foods

44 Corporation of Hyderabad and Sun-sip of Madanapalli. Both these were primarily mango-processing plants, producing pulp to be packed in tins. Wimco modernised the two plants after their acquisition, Madanapalli first and Hyderabad thereafter, by adding concentration and aseptic hot packaging equipment. These were the first two major plants in India and at the time of their establishment, were considered state-of-the-arts facilities. These tasks were completed in 1985, making Wimco the first Indian company to offer aseptic bulk packs of 200-1 in drums.

Shortly after its entry into the business, Wimco added tomato to its processing and product line, having correctly identified limited use of the capacity as affecting the viability of the enterprise (see below). Given the pattern of availability of tomato in Andhra Pradesh, two short seasons were identified, September through November and February - March.

Wimco exported all its products, mostly to the then rupee-trade area of the former USSR and East Europe. It showed great deal of imagination, almost as in the case of poplars, by introducing processing of the totapwi variety of mango, which still remains the most widely used one for processing and is well accepted even in Western Europe. In the mid-1980s, the food processing facilities of Wimco were considered crown jewels.

Shortly thereafter, the company's main business of match manufacture suffered substantial reverses. The foreign parent company sold its holding following accumulation of losses to the Jatia group, an NRI business family, which controlled the company up to 1997. At this time, the Swedish Match group (no longer affiliated with the original Swedish Wallenberg family) invested in Wimco once again and acquired the family stake. Wimco's overall performance improved in the last decade, after it started to export its matches to some African countries. Its food processing activities also showed some marginal improvements in profits.

Wimco sold its tomato paste to Nestle in bulk, which used it as the base for its Magi brand of ketchup. From 1987 to 1991, Wimco was the sole source of supply to the leading ketchup brand. After the emergence of Nijjer, its monopoly position ended and the Nestle purchases became marginal. This caused a dramatic drop in the Wimco tomato paste business, to around just 200 t a year.

As part of its strategy to reduce its overall asset base, the Jatia family had spun off the food activities and sold them to

45 entrepreneurs, leasing the facilities back from them or getting raw material processed in them for its own use, mostly for domestic and international trade. Thus, technically, the company no longer owned any food facilities in the late 1990s, but was very much in the business of buying the raw material and selling the finished product. With Swedish Match yet again in control, the leasing arrangements were terminated as the new management wanted to make its focus co-terminus with the parent organisation. At present, the facilities are owned and managed by entrepreneurs who were once purchasing agents for Wimco. In popular parlance, however, the plants are still known as Wimco.

BEC BEC has perhaps had a somewhat distant connection with this business. It is an offshoot of a trading company, specialising in the former rupee trade areas. Its origins are closely linked to the Soviet- assisted Bhilai steel plant. In the mid- and late 1980s, the principal overseas buyers of the processed Indian horticulture products were the USSR and East European countries, buying them under the then prevalent rupee trade arrangements. Being closely involved in trade in mostly engineering or capital goods with these countries, BEC also started to trade in horticultural commodities, sourcing products from various local manufacturers. Since the trade was lucrative, it decided to create its own manufacturing base, in the hope of adding further value. This decision also reflects the substantial interest generated in this industry after the formation of the Ministry of Food Processing in 1987.

Although a public limited company, BEC is closely-held, controlled by the Jain family of Bhilai (whose affairs are under investigation for reasons other than legitimate). Details of equity holders are therefore difficult to obtain and could possibly not serve any useful purpose. Its main activity, trading with East European countries, has suffered a severe setback following the opening up of the trade (albeit not with Russia). This seems to be affecting both its normal activities and the enthusiasm for the expansion and modernisation scheme. The plant is reasonably modern and can handle a variety of fruits. Mango dominates, with tomato following. BEC had hoped to create a

46 large base of captive, contract producers of raw material in the virgin region around Bhilai. This plan, however, appears not to have succeeded, although it claims that a third of its tomato is from "own or captive" sources, the bulk of which is from its own farms. It has not even kept up the earlier (1994) relationship with the neighbouring ACC plant for the supply of tomato from its surplus land.

Nijjer

The family of the present Managing Director of Nijjer Agro Foods, Mr Satbir Singh Nijjer, promoted the company. They have been very active and progressive farmers in Amritsar district and the surroundings. Mr Nijjer Senior enjoys an excellent reputation both as a progressive farmer as well as a supplier of new varieties of seeds and other inputs, often on a no-profit basis. The Nijjer family had some prior experience of transporting small quantities of tomato to Delhi markets. With Nestle's encouragement (it was the largest ketchup seller in the country and bought Wimco paste), Nijjer set up at the same location a tomato processing plant of 300 tpd capacity, with some shared utilities and process equipment in 1998. It entered into formal, written contract with 200 farmers in 1998.

Nestle, who had depended upon Wlmco to supply tomato paste until then, actively encouraged the setting up of this project. This was not only because the new facility challenged the Wimco monopoly, but more importantly, it was located closer to Nestle's own facilities at Moga in Punjab.

The Nijjar family has not had any significant prior experience in business. The company made a public issue in 1991 and also placed equity with financial institutions. The control, however, vests firmly with the Nijjer family. There are lingering suspicions that Nestle may have advanced some funds to the Nijjer family, but there would be no way of confirming this. The main claim to fame of Nijjer is that it is the only facility to have been exclusively designed for tomato. There is also a 250,000- Ipd liquid milk handling and processing plant on site, which supplies the milk to Nestle and sells ghee in the open market. In addition, the plant also makes the final product, ketchup, according to the recipes of Nestle and bottles it under the Nestle brand. This last aspect of business has led to some questions as to whether Nestle also participates in the operational management of the plant.

47 Visits and inspection, however, showed no signs of such participation, nor any attempt at covering up the tracks.

Pepsi-HLL The international cola manufacturer had to agree to a Government of India stipulation of undertaking exports from India as a pre­ condition for its entry into India in 1990. It was persuaded by the Government of Punjab to set up a food processing plant in Punjab, preferably for tomatoes, although Punjab did not grow any significant quantities of tomato at that time. Pepsico decided to accept the challenge and brought in its own experts to establish feasibility of the crop and the plant.

It decided to set up Asia's largest and most modern tomato paste plant in Punjab (650 tpd), even though the state had hardly any crop to offer. Pepsico's scientific advisers and consultants thought that tomato could be grown in the state and would be available for 120 days a year, which was adequate to meet the company's needs of a viable operation. It started a tomato contract farming scheme in 1997 with over 400 farmers, covering more than 2,000 ha under tomato itself. Contracts covered both input supply (seedlings, extension), some credit in the form of advance and loan of special equipment. Contract price offered varied according to regions, to cover the cost of transport. Quality considerations, vaguely specified, included colour, firmness and worm-infection. Most of the Pepsico contracts remained verbal.

Both Pepsico and Nijjer introduced chilli cultivation in Punjab, as chilli sauce was considered complimentary to ketchup. In most instances, the same farmers took up chilli cultivation as well, on similar contracts. The country's largest FMCG manufacturer and seller, Hindustan Lever Ltd, acquired Kissan Products Ltd from the Mallya Group in 1988 with a view to make it a launching pad for its foray into foods business. It had a processing plant on the outskirts of Bangalore, which though small, could handle a variety of raw materials, Including tomato. HLL expanded the Kissan ketchup and tomato paste business and by 1995, was in a position to challenge Nestle for the top position. It sourced additional quantities of tomato paste from numerous small manufacturers scattered over the country.

When Pepsico discovered in 1999 that it no longer needed to operate the tomato paste plant to be able to meet its export

48 commitments (which had anjrway become less stringent), it started looking for buyers. At this time, HLL was actively considering adding two more facilities, preferably in the North. It made sense, therefore, to acquire the Pepsico plant and contract farming business in 2000. Shortly thereafter, the country faced a glut of cheap Chinese paste and HLL shut down all its paste manufacturing in 2003, using instead the imported raw material.

Current Tomato Purchase

Wimco initially depended upon its mango suppliers also to provide tomatoes. When this did not happen in a cost-effective fashion, it entered into supply contracts with the State Farms Corporation, as also other, smaller purchase agreements nearby. Ever since it started this business, Wimco depended on such arrangements, which had a mixed record of success at best.

Its successors largely depended on open market purchase in their areas of operation and surroundings, sometimes going as far as Northern Karnataka. Their own agents procure the supplies. They continue buying as long as the tomato price, worked backwards from the selling price of the paste, is within the affordable range.

BEC claims that it has a contract growing system in place, but this is not evident. It grows some tomato on its own land and about 100 ha taken on lease and depends on market purchase for the rest. Its operation is similar to Wimco's. Neither Wimco nor BEC have been large buyers of late; their purchase is around 1,000 - 1,500 tpa each, at a factory-gate cost of about Rs 1,500 - Rs 2,500/t. About 5 to 10 per cent of the fruit is unusable and has to be thrown away.

Nijjer alone has a contract farming system, somewhat uniquely tailored to the ground reality in the first place. The main features are:

• Contracted quantities are ca 60 to 100 per cent more than its requirements. Therefore, even if deliveries are only 50 to 60 per cent of the contracts, it can still meet its contractual commitments to its buyers; • Secondly, it distributes American hybrid seeds, which are otherwise not available to the local farmers. It claims an average yield of 80 t/ha on the farmers' field. Even if this figure is

49 discounted by a reasonable factor, the performance would be impressive enough for the farmer to adhere to the contract arrangement for ensuring seed availability;

• The most important factor, however, appears to be farmers' selection. "Farmer" is somewhat of a misnomer, since most suppliers to Nijjer are large farming units, rather than yeoman peasantry. Generally, it is not difficult to find individual farms of 50 ha or larger sizes in Punjab. They belong mostly to well-off families, often with equally attractive industrial or professional incomes, who are, nevertheless, not absentee-landlords. Such farms are run as business ventures, where honouring a contract has a stronger commitment than most small farmers do elsewhere in India. Since these farmers are relatively affluent, they are more likely to be motivated by total income over the season than by day-to-day fluctuations in prices. They are also likely to be influenced by the assurance of payment, importance of contractual relations and obligations in the long run, rather than reaping some windfall gains merely for a few days.

These factors make it easier for Nijjer to count its supplies as assured, even if it incurs a somewhat higher factory-gate cost of Rs 1,750/t. The burden is made lighter as it gets about half the money paid out to the farmers as interest-free advance from its own buyer. HLL/Pepsico are no longer active buyers at present.

The Table below shows a comparative picture for these three organisations:

Tomato Procurement Practices

Wimco BEC Nijjer Mainly through agents in 1/3 through own farms, Contract farming. mandis and/or markets; rest through agents in Provides nursery sup­ a mandis/markets within plies, extension servi­ a Some procurement radius 100-km off ces to farmers; around Bhilai; Some u through contract farming; contract farming; o Vc 0 Severe price fluctuations Some price fluctuations; Reasonably firm price; s felt; •M

CO Availability uncertain; Partly firm availability Reasonably firm avail­ from own farms; ability;

50 Wimco BEC Nijjer

a Procurement areas : Agreement with State Agreement with State S Gauribadanur, Nagaman- Horticulture Board to Farms Corporation in gala, Mulbagal, Malur, promote processing va­ 1996-97, to acquire Chintamanl, Siddala rieties, also own exten­ 400 ha on lease, ter­ 0 ghatta, some areas of sion group which act in minated owing to low Hassan, Dharwad, a procurement group. yield;

Fl hybrid red varieties Fl hybrids California-type varie­ >> (Rashmi, Naveen, Mangala, Raw fruit procured with ties with high cellulose Sheetal, Rupali and 4.5° - 5° brix concen­ content and reduced 9 Rohini) tration; placenta liquid used CD {Brigade and APT-403 T3 (from Asgrow), BOS- s>. 8147 (from Orsetti) and 6109 (from Sun- 9 seed)}. Seeds supplied QO to farmers. Quality maintained through seed supply and exten­ sion. Field staff moni­ tor haulage to reduce damage;

Quantity : ca 22,200t (1997-98) ca 28,000t (2002-03)

1997: Rs 1.50/kg raw 1997: Rs 1.75/kg raw 1997-98: Rs 1.75/kg tomato tomato s| 2002: Rs 2.00/kg 2002: Rs 2.00/kg 2002: Rs 2.50/kg s| 2003: Rs 2.50/kg 2003: Rs 2.25/kg 2003: Rs 2.75/kg

Chillies in Punjab

Nijjer introduced chillies in Punjab in 1998, along with garlic and turmeric, among its tomato contract growers. Nestle sells chiUi sauce as well and uses some chillies to flavour its tomato ketchup products. Therefore, it was logical for Nijjer as the major supplier of tomato paste to Nestle to consider adding chillies to the produce its contract growers were cultivating. Nijjer decided to introduce some North American varieties directly in Punjab first on its own farms surrounding the factory and later on, after one season, to some of its select contract growers in a small

51 way. About a dozen farmers were selected in 1998. Presently, some 40 to 45 of the 200 Nijjer contract growers take chillies on their lands as well. The chilli acreage is relatively small, since the requirement of the processor is much smaller than that of tomatoes. Nijjer used only about 300 t of chillies in 2002-03. Almost all of it was from the contract growers. Nijjer followed the same mode of operation for chillies as it did for tomato. It offered seedlings of exotic varieties to the growers it considered reliable and contracted to buy back the entire output, even if it exceeded its own requirements, as it did not want the produce to enter the market at all. It seems to have succeeded in doing so by keeping the number of growers small and exercising care in their selection. Word of chilli cultivation being possible spread rapidly among other garden farmers, who watched the contract activities rather keenly. They seem to have taken the initiative in procuring reasonably good seeds from elsewhere in India, mostly from around Bareilly in Uttar Pradesh, a traditional chilli-growing area, but some reportedly ventured as far away as Haveri in Kamatcika and Guntur in Andhra Pradesh for their seeds. Almost all the chilli grown is sold in local markets. Wholesale prices have ranged between Rs 2,000/t and Rs 3,000/t, considered quite attractive by the farmers. The yields were reportedly upward of 40t/ha. The production of the state as a whole is estimated to be around 60,000 t a year at present.

Pepsico-HLL also made a small foray into chillies in 2000 and 2001.

Grower Experience A sample survey of tomato growers was conducted as a part of this study. Its results generally bear out the conclusions and inferences discussed in the above sections. Some salient findings are shown below and briefly discussed.

Sample Composition In this case also, the sample necessarily comprised some former contract growers and non-contract growers, since there is no contract growing of tomatoes any longer for all but one organisation. The contract experience is, however, of a more recent origin.

The current Nijjer contract growers are considerably larger than the former Pepsico growers or non-contract growers (who have

52 comparable holdings). The Nijjer growers also devote a much larger share of their land, nearly 90 per cent to tomatoes, as compared to the other groups, who are content with only half the land devoted to tomatoes. None of our sample growers took chillies.

Contract Former Non- All Particulars Growers Contract contract Growers Growers No 16 22 19 57 Average land holding (ha) 9.4 5.4 6.3 7.2 Average area ha devoted to 8.1 2.6 3.1 4.7 tomatoes.

Institutional Membership and Borrowing

The Nijjer contract growers reported average borrowings amounting to about Rs 1,500/ha. The other categories reported lower borrowings, with the non-contract growers reporting only about Rs 600/ha. These figures are far too low to be reliable; nevertheless, they establish the trend that the Nijjer contract growers do constitute a larger and better-resource endowed farmers as compared to the others.

Contract Former Non- All Particulars Growers Contract contract Growers Growers No 16 22 19 57 Members of co-ops 5 11 12 28 No availing credit 12 14 15 41 Average crop credit, Rs/ season (for borrowers only) 12,000 3,400 1,800 7,200

History

Contract growers generally have had a somewhat longer history of tomato farming. Only four reported written contracts. None of the former contract growers claimed that they had a written contract. Two respondent took short breaks from contract, while a third claimed that he would not return.

53 Contract Former Non- All Particulars Growers Contract contract Growers Growers No 16 22 19 57 No of years tomatoes grown, 5.6 4.8 3.0 4.4 average No of years under contact, 4.0 2.5 average No reporting written contract 4 — N A N A No reporting break in contract 3 — NA NA No reporting resumption of 2 — N A N A contract

Crop Performance Contract growers reported almost a third higher yield than the former contract growers, whereas the non-contract growers had only slightly better than half the yield of the contract growers. This corroborates the earlier finding of the contract growers using a higher quantum of inputs. It also suggests that contract input supply, such as it may be, does have a major impact on yields. This is also consistent with the yield of alternate crops reported.

Contract Former Non- All Particulars Growers Contract contract Growers Growers No 16 22 19 57 Average yield of tomatoes 28.3 22.2 15.6 23.5 (t/ha) Average jaeld of best alternate 4.0 3.5 2.2 3.7 crop, t/ha (wheat)

Price Performance Both contract and former contract growers reported the same price of Rs 250/q, while the price reported by the non-contract growers was a third higher. This suggests that the last group caters to the table demand mainly and is possibly reporting only the peak price, not the season-long average, which could provide better comparisons.

54 The higher reported price must also be set off against the much poorer yield. Contract Former Non- All Particukirs Growers Contract contract Growers Growers No 16 22 19 57 Average price received (Rs/q) 250 250 330 265 In subsequent Tables, contract and former contract growers are clubbed together.

Understanding Contracts

The main areas of concern were quality (74 per cent not clear), exclusivity (68 per cent), sales arrangements (53 per cent) and cropping practices (24 per cent). The respondents were quite vocal that the buyer raised the quality bogey only when he wanted to drive down the price. They were also quite agitated about the buyers providing their proprietary planting material to non-contract growers as well. (N=38) Item No reporting No reporting No expressing clarity confusion doubts Buyer's obligations - input supply 12 24 2 - advance 22 14 2 - extension 19 15 4 - cultivation 10 29 9 - exclusivity 18 10 10 - sales arrangement 12 4 20 - quality 4 4 28 Farmer's obligations - planting 19 12 7 - Irrigation 22 11 2 - harvesting 15 8 15 - quality 7 3 28

55 Facilities under Contract Demonstrations seem to have carried the day with the growers, who also seemed to be clear about training, although to a far lower extent. The most doubts were expressed about the extension staffs abilities, be it giving advice on the spot or in response to an SOS situation. This suggests that while the organisations did perhaps an acceptable job of iatroducing and creating an interest, their problem- solving abilities were considered well below par.

(N=38) Item No reporting No reporting No expressing clarity confiision doubts

Demonstrations 27 2 9 Training 14 18 4 On-the-spot advice 7 1 30 SOS visits 4 8 26

Procedures for Contract Since the contracts were primarily oral, no views were forthcoming on procedures and documents involved. Disputes and Contracts Disputes arose over quality, quantity and payments; the last was almost entirely among the Nijjer growers. Interestingly, the pajmient disputes were the ones with the maximum satisfactory and quick resolution. Those with quality disputes were equally divided between satisfactory and unsatisfactory resolution. (N=38) No No reporting No not Disputes reporting satisfactory happy resolution Dispute on - quality 24 12 12 - quantity 8 6 2 - other services 7 4 3 - pa)mients 14 12 2

56 Responsibility for Disputes

An overwhelming proportion of respondents blamed the buyer for disputes rather than the farmer. This is both a general purpose response, as well as a situation-specific one, since the bulk of the disputes were about quality. The earlier finding about the growers' perception of the misuse of the quality consideration by the buyer stands further corroborated. (N=38)

Particulars No, No not Not aware/ agreeing agreeing No response Buyer 24 6 8 Farmer 3 32 3

Benefits from Contracts

Only a third of the farmers said that they got better prices from contracts, but nearly four out of five respondent felt that contracts provided them higher incomes, clearly confirming the superior yields achieved under contracts. Almost two-thirds of the respondents were pleased to be associated with a company such as Pepsico, HLL or Nestle/Nij[jer. They were proud be considered pioneers through these contracts. (N=38)

Details No responding No responding Not aware/ positively negatively No response Higher price 12 14 12 Higher income 30 2 6 Association with 24 1 13 good organisation

Overall View of Contracts A large majority was pleased with contracts. Over 85 per cent said that they would work with the same agency again, thus suggesting that the confusions or doubts were not so important as the positive feelings generated. This response shows possibly the true assessment of the farmers.

57 (N=38) Feed back No responding No responding Not aware/ positively negatively No response Contracts are good 30 5 3 Ready to repeat 26 6 6 contracts - same agency 33 4 1

General Conclusions

Tomato contracts in Punjab seem to have worked, while they were virtually non-existent in the South. The major achievements of the Punjab programme were :

• Quick establishment of new crop activities in an area otherwise not considered suitable for them;

• Better than expected results in field; in fact, 5rields comparable to better results from elsewhere in India;

• Reasonable farmer satisfaction; despite some reservations and doubts, even in the absence of a written, formal contract;

• Emergence of a competitive and lucrative market, primarily catering to alternative users (table purpose) along with fading interest in contracts by earlier promoters;

• Substantial continuation of activity in post-contract period without let-up.

The main reasons for this success were:

• Farmer interest and motivation, cutting across classes, including absentee owners; • Attractive land diversification opportunity for farmers, otherwise faced with near monoculture situation in winter.

Tomato succeeded in Punjab because of farmers' Interests and motivation. Unlike poplars, none of the contract promoters showed an abiding interest in tomato, either in Punjab or in the South.

58 This is evident from the fact that tomato products were not significant contributors to corporate revenue or profits in any company involved. This is why the processing activities were wound down when cheaper alternatives became available in the form of Chinese imports. The lingering mistrust between the farmer and the buyer even after the contract period suggests that a win-win situation does not exist. The farmers' concluding positive reaction indicates that he does, nevertheless, appreciate the good work done initially by contracts. Such goodwill is notable by its absence in the more established South.

59

SEEDS: J K, PRO AGRO, NATH

Overview

The role of the seed sector has been substantial in the advances that India made in agriculture in the last four decades. The expansion of seed industry has occurred in parallel with growth in agricultural productivity. Given the fact that sustained growth to cope with increasing demand would depend on the pace of development and adoption of innovative technologies, the seed would continue to be a vital component for decades to come. The organised seed industry of the country is just forty years old. Yet, its growth has been phenomenal. India is one of the few countries where the seed sector is already reasonably advanced. The private seed industry is no more confined to just production and marketing of seed. It has as well acquired technological strength to cater to the varietal needs of tomorrow.

The Indian seed industry is currently valued around Rs 2,500 crore ($ 500 million) cind is expected to be around Rs 3,750 crore ($ 750 million) by 2006. There are about 150 organised seed companies in India today. Several companies have Government of India (DSIR) recognised research and development departments and have produced and released a large number of varieties and hybrids in several crops. The contribution of private research in terms of value is steadily increasing. The share of research hybrids in total turnover of crops like pearl millet, sorghum-sudan grass, sunflower, maize, sorghum and cotton was about 70 per cent in 1997-98 compared to 46 in 1990-91. Private R&D's real investment in research has quadrupled between 1986 and 1998.

Subsidiaries and joint ventures with multinational companies account for 30 per cent of all private seed industry research. A study covering nine private seed companies indicates that the amount spent on R&D ranged from 0.8 per cent (Rs 50 lakh) to 15 per cent (Rs 23 crore) in 1998-99.

Historical Perspective The National Seeds Corporation was established in 1963. The Government of India enacted the Seeds Act in 1966 to regulate the growing seed industry. It stipulated that seeds should conform to minimum levels of physical and genetic purity and an assured percentage germination either by compulsory labelling or voluntary

61 certification. It also provided a system for seed quality control through independent state seed certification agencies placed under the control of the respective state departments of agriculture. This was a most eventful time for Indian agriculture, not only because of introduction of high-yielding cereals, particularly wheat and rice, but also for many other positive developments related to seed such as, constitution of seed review team, enactment of Seeds Act, 1966 and the formation of National Commission on Agriculture. The private sector also made significant entries into seed business in this period. The eighties witnessed two more important policy developments for the seed industry, namely, allowing MRTP/FERA companies to invest in the seed sector (1987) and the introduction of a new policy on seed development in 1988. The 1991 Industrial Policy made a radical departure from the earlier one on foreign investment. It identified seed production as a high priority industry.

The New Policy on Seed Development greatly liberalised import of vegetable and flower seeds in general and seeds of other commodities in a restricted manner and also encouraged multinational seed companies to enter the seed business. Over two dozen companies initiated research and development activities and have made substantial commitments for investment on research and development in response to this policy initiative. The investments are expected to increase with increasing volumes of seeds of proprietary hybrids and preparedness of farmers to pay higher price for quality seed. The Seeds Act 2001 was finalised on the basis of the recommendations of Seed Policy Review Group. It replaced the previous Act of 1966 and Seed (Control) Order of 1983.

Current Status of the Seed Industry India's seed industry has grown in size and level of performance over the past four decades. Both private and public sector companies/ corporations are involved in seed production. Two central corporations, the National Seeds Corporation (NSC) and the State Farm Corporation of India (SFCI) and 13 state seed corporations comprise the public sector. There are around 150 national and multi-national private seed producing and selling companies. The industry has grown impressively from a modest beginning in seed production in 1962-63 to over 5 lakh ha by 1995-96. The quantum of seed produced and sold went up five times from 14 lakh quintals to 70 lakh quintals in this period. The area planted with bought seed was about 10 per cent in 1990-91, with a volume of around 6 lakh t valued at Rs 680 crore. These seeds comprised of proprietary

62 hybrids, public-bred hybrids and open-pollinated varieties (OPV). In terms of quantity and value, OPV seeds were the largest, followed in order by public hybrids and proprietary hybrids. Although proprietary hybrids had only a 32 per cent share of the market, their share in the value was 76 per cent.

The 1998-99 estimates present a different picture, with proprietary hybrids growing at the expense of public hybrids. The area planted under bought seed increased only by 3 per cent over that of 1990- 91; the market size, however, expanded significantly in terms of both quantity and value. The total market for purchased seed was 8.64 lakh t, valued at Rs 2,250 crore. The volume of proprietary hybrid seed was estimated to be around 51,000 t, valued at Rs 600 crore ,in 1998-99 as against 19,300 t and Rs 95 crore respectively in 1990-91. The volume of public hybrids fell to 39,000 t in 1998-99 as against 60,000 t in 1990-91. The OPV volume increased by 51 per cent to 775,000 t.

The present contribution of OPV in the total bought seed market has grown, indicating greater use of bought seed by farmers. The price paid by farmers for all hybrid seeds is higher than that in 1990-91. This trend suggests that farmers do hot consider the seed price to be a constraint to its use, so long as it ensures higher return through higher productivity and other value-added traits.

Major Companies in the Indian Seed Industry Company Turnover, Rs Crore, (est 2003) Mahyco 120 Emergent Genetics 140 Nuziveedu 82 JK Agri Genetics 57 Namdhari 56 Monsanto 50 Ankur 48 Pro Agro 46 Syngenta 43 Pioneer 26 Advanta 25 Total 650 All India Turnover 2,800-3,Q00 Share of Companies 23-26%

63 Compaiison of Major Seed Companies in Private Sector

Total Mahyco Emer­ Nuzi- JKAL Monsanto Ankur ProAgro Syngenta Pioneer Advanta Market gent veedu Year started 1961 1969 1983 1989 1988 1977 1988 1986 1974 1986

Sales Cotton 103.0 2.4 4.7 17.5 6.5 0.43 7.7 2.3 2.2 0.5

Jowar 10,000 618 1841 422 1600 586 265 316

Bajra 15,000 955 766 95 1400 89 794 101 763 307

Maize 30,000 234 617 554 1,000 1677 10 1,258 334 496 526

Sunflower 4,500 89 0.5 5 6 45 25 89 39 114 05 4i. Rice-HY 4,000 161 20 95 132 869 429 33 225 192

Wheat 1,20,000 55,000 300 50,000

Mustard 3,000 300 250 300 350 300 400 Main crops Cotton Cotton Cotton Cotton Cotton Cotton Cotton Cotton Cotton Jowar Jowar Jowar Jowar Jowar Maize Bajra Jowar Bajra Jowar Bajra Bajra Bajra Bajra Bajra Maize Bajra Maize Bajra Maize Maize Maize Maize Maize Rice Maize Rice Maize Rice-HY Rice-HY Rice-HY Rice-HY Rice-HY Rlce-HY Tomato Rice-HY Hyola

Cotton in lakh packet ofc450 g each, vegetables in kg and other in tons Market Size for Various Vegetable Seeds in India (Tons) O P Varieties Hybrids Ladies Finger 3,890 500 Brinjal 250 15 Onion 2,190 Chilli 403 15 Tomato 300 28 Cauliflower 400 10 Cabbage 100 40 French Beans 2,085 Cluster Beans 1,350 Bottle Gourds 500 Sponge gourd 100 Beetroot 40 Lablab 500 Water Melon 800 40 Musk Melon 300 5.5 Cucumber 1000 3 Pumpkin 50 Radish 800 Carrot 800 Capsicum 25 1 Bitter gourd 300 30 Peas 8000 Knolkhol 70 Coriander 8000 5 Total Value Rs 6,000 crore Rs 2,500 crore

Contract Growing in Seed Industry

PubUc seed companies (NSC, SFCI) had large captive farms on which they could multiply seed, but private seed companies could not own land to multiply their own seed. Their search for a suitable solution led to contract farming in select parts of the country. This solution was adopted by both Indian and multinational companies.

65 The first large-scale activity started under the aegis of Mahyco in the early 1970s, mainly in the Marathwada region of Maharashtra. It spread to neighbouring areas of Andhra Pradesh, Vidarbha and Karnataka. These states/areas dominate the seed business even today, save for the hybrids of cold-weather crops. The original selection may have been based on the promoters' familiarity, but it has been proven sound by the agro-climatic factors and relative isolation which make controlling conditions easier, as well as hard­ working and loyal peasantry.

The original contracts were mostly with individuals. At present, almost all companies follow a group approach. The main features of the contract system are:

• On-farm multiplication of seeds requires observance of both a specified package of practices and adequate isolation and other quarantine procedures to maintain the genetic identity of planting material. Hence, multiplication is taken up on contiguous blocks which could be effectively isolated from the remainder of agricultural activity in the vicinity; • Seed producers find it useful to contract all farmers of the area that they want to operate in; • Companies have identified their respective zones of operation and groups of farmers for reproduction; • Companies specify areas, supply parent seeds, provide advance at times, supervise production, and estimate likely crop size; • Company staff ensure that standard contracted practices are followed on farm through well-scheduled supervision visits and tests; • The initial direct contact with farmers is now replaced by organisers, who become effective interfaces between companies and contract farmers. They are responsible for a group of farmers, and meeting the group target. They could be local financiers or suppliers of other inputs. Any revisions are invariably implemented through organisers.

Agreements

The seed contract system has possibly the most thorough agreement executed between the farmer and the company. This agreement

66 could be considered the heart of the entire system. Neither buyer nor grower would today venture into this activity without an agreement.

The agreement is a detailed legal document, which lays down the obligations of both the buyer and seller exhaustively. It lists clearly and explicitly:

• all the inputs to be provided; • activities to be undertaken and their schedule; • schedule of supervision; • mandated cultivation practices; • tests to be performed with responsibilities and charges therefor; • quality standards and acceptance procedures; • pajrment and advance schedules; • conflict resolution mechanism; • legal responsibilities, among others.

The agreement also records the land owning, documentation and banking details of the grower. It has provisions for making group organisers parties to it and also possibly, a guarantor. A typical agreement is reproduced below, to show its thoroughness.

Interestingly, not all companies register these agreements nor pursue them through legal avenues in the event of defaults. They believe these to be exceedingly cumbersome and expensive procedures, which are tilted against a corporate entity to begin with. They believe, instead, that the very fact of signing the agreement gives it sanctity in conjunction with the trust that invariably is the product of long relationships. They also believe that the groups exercise considerable power over their members and help ensure compliance to agreements.

67 AGREEMENT FOR RESEARCH BRED HYBRID SEED PRODUCTION OF CEREALS/VEGETABLES/OIL SEED CROPS

Agreement made this day of between (Hereinafter called the Company which expression unless repugnant to context would mean and include its legal heirs, executors and assigns) of the PART and (Name and address of the Grower/Organiser) (Hereinafter called the Grower which expression unless repugnant to context would mean and include its legal heirs, executors) of the other Part. WHERE the parties have agreed to a scheme of seed production of hybrids as described in Annexure 1 it is agreed by and between the parties as follows: 1. Definitions: 1. "Male Parent", means line seed for use as the polled source in producing the hybrid. 11. "Seed Parent", means Female parent on which crossing shall be done. ill. "Reserved Area", means the land earmarked for seed production. iv. "OFFICIAL", means an oflScer so appointed by the Company or any authorised representative of the company. 2. The grower shall set apart an area of Acres of leveled, fertile and well drained land in his estate located at for the proposed seed production during Kharif/Rabl ..... 3. The grower will bear the entire cost of land preparation, irrigation. Sowing, interculture, fertiliser and manures. Plant protection measures, roguing, emasculation and pollination and all other farm operations connected with the raising of Seed Crop. 4. The reserved area shall have an isolation as specified by the company based on Minimum Seed Certification Standards, on all sides of the filed for the purpose of seed production under this agreement. 5. The foundation seed used for sowing will be seed parent and male pared, the grower shall in no case used any seed other

68 than that supplied by the company for sowing purpose in the reserved area. The foundation is not transferable and shall be planted in the same season for which it has been issued. 6. The grower shall roguing of all the types as instructed and to the satisfaction of official. 7. The grower shall pay to the company at the rate per acre as specified in Annexure 1 towards the cost of foundation seed supplied to him. 8. The sowing of foundation seed must be done before the cutout date as specified in Annexure 1. 9. The grower shall also pay charges for Grow Out Test and Germination Testing to the company as specified in Annexure 1. 10. If after Grow Out Test and Germination test in the manner prescribed by the company, the seed lot does not conform to the standards prescribed by the company, in Annexure 1, it will stand rejected. In the event of failure of the seed lot, the grower shall pay to the company the processing charges incurred for that particular lot before taking back the seed. The company reserves the right to retain the rejected lot and settle the payment at prevailing grain rate. Failed lot of cotton if returned, it will be in the delinted fonn. 11. The company shall be bound to purchase only the seed to the extent as specified in Annexure 1 which complies with the following specifications. The seed production operation, the isolation requirement, roguing and other operations recommended by the company. The lots eligible for procurement shall not be discoloured, insect damaged, rain damaged or damaged in any other way in physical appearance The company will have an option to purchase the produce in excess of quantity mentioned in Annexure 1 at rate stipulated at Annexure 1. 12. The seed which has met the prescribed standards of genetic purity and geminiation shall be purchased by the company at rate prescribed in Annexure 1 for processed and packed seed. 13. The entire produce as estimated on the bases of crop condition indicated in the final inspection report from the reserved area

69 and conforming to the prescribed standards shall be offered to the company by the grower who shall not sell or transfer to any one else the produce eligible for procurement by the company. In case of default, the grower shall be liable to pay to the company damages amounting to the difference between the company's procurement price and sales price for the less quantity offered to the company for procurement than the estimated quantity. 14. The grower shall render all facilities to the seed officer for conducting filed inspection of the seed crop any time and at any stage. A seed crop found by the company as not conforming to the standards referred to clause No. 11 shall be liable for rejection. 15. The company has made known to the grower all the characteristic and patter of behaviour in respect of the parents herein contracted, despite the disclosure by the company and for the reasons beyond company's control, the company stands observed for any liability for such failure of the crop. 16. In the event of any dispute of difference existing under or in connection with the agreement the same shall be referred to the sole arbitration of the Vice President of the Company. It wiU not be open to the parties here to object on the ground that the arbitrator is the Vice President of Company that he had to deal with matters to which the contract relates or that in course of his duties as such Vice President has expressed views on all or any of the matters in dispute or difference. It is a term of contract that in the event of the Vice President vacating his office by resignation or otherwise it shall be lawful for his successor in office to proceed with the reference. 17. The male plants must be uprooted immediately after the pollination work is stopped. 18. Payment to the grower shall be made in the form of demand draft by deducting back commission charges, within 30 days from the date of receipt satisfactory germination and genetic purity test result. 19. The grower has specifically agreed that in case he fails to supply the seeds other than due to natural calamity, he shall be rendered liable for civil as well as criminal action. 20. In respect of contract for hybrid cotton seed production, company has agreed to give Rs .... /acre as advance provided

70 the requisite information in respect of the sown area is furnished by the grower and desired documents for releasing the advance given to the company. This advance will attract interest @ % per annum and the interest would be chargeable from the date of demand draft tiU the sampling work is over and sampled quantity is handedover to the company. In the event the grower fails to give back the advance paid by the company. The company reserves right to recover such advance along with the interest by way of selling immovable property, belonging to the grower. 21. All payments payable of claimable under this Agreement shall be paid and claimed by —. Neither of the parties shall be entitled to pay or claim the pa3mients of the amounts due to any place other than though the same be paid or accepted at any other place with mutual consent of the parties in each case of payment. 22. Notwithstanding the place where this agreement is to be implemented it is mutually understood and agreed by and between the parties here to that this contract shall be deemed to have been entered into the parties concerned at and the courts of law in alone shall have jurisdiction to adjudicate thereon. 23. The grower being principal employer for the labour engaged in seed production operations has agreed to comply with the rules framed under section 3 of Child Labour (P & R) Act 1986. In WITNESS WHEREOF the parties have set their hands on the day, month and year mentioned above.

(Signature of Grower/Organiser) (Signature of the representative of the Company)

Witness : Date :

1) 2) (Signature) (Signature)

(Name and Address) (Name and Address) Before execution the entire agreement has been explained to me and I have signed after full understanding of all the clauses. (Signature of Grower/Organiser)

71 ANNEXURE 1

Name of the Farmer / Organiser: M/s./Sri. S/o

Village: Taluk: Dist:

Area : Crop.: Variety

Land Survey No.. Season: Kharif/Rabi/Summer

Year :

Last date of planting :

Cost of F/Seed and mode of payment: Rs /acre.

BANK ACCOUNT DETAILS

Account No.

Name of the Bank

Place :

Bank Code No. :

Procurement Rate : Basic rate Rs / Service charges:

Max. Quantity/acre : acceptable to the company

Disposal of Remnant/Failed Lots : Company/Farmer

Grow Out Test Charges : Rs /lot

Germination Test Charges : Rs /lot

72 CROP-WISE STIPULATED QUALITY STANDARDS FOR PROCUREMENT OF SEED LOTS

Crop Minimum Minimum Maximum Minimum Isolation Germination moisture Genetic Distance Purity in m % % %

Hy Cotton 30 10

Hy Jowar 200 12

Hy Bajra 200 12

Hy Maize 200 12

Hy Paddy 100 13

Hy Sunflower 400 9

(Signature of the (Signature of the Company's Grower/Organiser) representative)

73 Grower Experience A sample survey of seed multipliers was conducted as a part of this study. Its results generally bear out the conclusions and inferences discussed in the above sections. Some salient findings are shown below and briefly discussed.

Sample Composition The sample mostly comprised contract growers. We also chose some former contract growers for comparison; we could not, however, find reliable non-contract seed growers, since marketing seeds independently is a difficult and risky proposition. The former contract growers are no longer engaged in seed farming. All current contract growers were parts of groups. Three of the former growers said that there were no groups when they were engaged in the activity.

Contract Former All Particulars Growers Contract Growers

No 53 11 64 No in groups 53 8 61 Average land holding, ha 3.4 3.1 3.3 Average area devoted to seeds, ha 1.7 0.0 -

Institutional Membership and Borrowing The greater membership of co-operatives among seed growers is a region-specific feature. The contract growers reported a much larger borrowing, possibly an exaggeration. Former contract growers had far more modest borrowings.

Contract Fonner All Particulars Growers Contract Growers No 53 11 64 Members of co-ops 45 11 56 No availing credit 52 10 62 Average crop credit, Rs/season 16,500 3,600 14,800 (for borrowers only)

74 History

All growers were in the seed activity for very long periods. Most of them were second or third generation seed multipliers. They were under contract for virtually the entire period of the activity, almost invariably with the same company.

Contract Former All Particulars Growers Contract Growers

No 53 11 64 No of years seeds grown, average 22.0 18.6 21.3 No of years under contact, average 19.6 14.7 17.8

No reporting written contract 53 — N A

No reporting break in contract 0 11 N A

Contract Lapses

Most former contract growers (nine out of 11) cited some lapse or the other and owned up the responsibility for it as being the reason for their not being contract seed multipliers any longer. There was both an air of regret and resignation, since it was well-known that most seed companies would not work with such farmers any longer.

In subsequent Tables, only current contract growers are included.

Understanding Contracts

The main areas of concern were cropping practices (44 per cent), group discipline (28 per cent), pricing and advances (21 per cent each). The prevalence of doubts was far less in these cases as compared to tomato growing, showing the maturity and reliability of the contract arrangements.

75 (N=53) Item No No No reporting reporting expressing clarity confusion doubts Buyer's obligations - input supply 32 13 8 - advance 20 14 11 - extension 21 9 23 - supervision 26 19 8 - group discipline 22 16 15 - quality 25 .10 8 - pricing 32 12 11 Farmer's obligations - planting 39 12 2 - irrigation 42 10 1 - harvesting 45 8 0 - quality 46 2 5

Facilities under Contract

The long experience of contracts and relationships is reflected in a sharper and clearer understanding of contracts and facilities available under them. There was a far lower degree of doubts expressed than was the case with tomatoes. The extension mechanism and problem-solving outreach thus seem to be satisfactory. (N=53) Item No No No reporting reporting expressing clarity confiisvon doubts Demonstrations 43 4 6 Training 44 8 1 On-the-spot advice 42 10 1 SOS visits 36 8 9

76 Procedures for Contract

All but one of the sample was clear about the documentation required. This is only to be expected, since seed multiplication invariably requires a written contract, which the fanners have been executing over long periods. (N=53) Item No No No reporting reporting expressing clarity confusion doubts Land documents 52 0 1 Other documents 52 0 1

Disputes and Contracts

Disputes were fewer aind more amicably and quickly settled. (N=53) No No reporting No not Disputes reporting satisfactory happy resolution Dispute on - quality 14 13 1 - quantity 5 5 0 - other services 4 4 0 - payments 1 1 0

Responsibility for Disputes

About half the respondents felt that disputes arose from the buyers, while nearly two-thirds denied that farmers had anything to do with them. {N=53) Particulars No No not Not aware/ agreeing agreeing No response Buyer 32 15 11 Fcirmer 9 34 10

77 This relatively better perception of the origin of disputes and their smooth and efficient disposal possibly stems from long associations and dependency relations, as well as a sense of mutual under­ standing.

Benefits from Contracts

There was near unanimity about the best benefits from contracts: higher income and association considered prestigious. In fact, seed multipliers appear to be among the upper echelon of farmers ia their respective areas and are considered to be technically advanced.

(N=53)

No No Not aware/ Particulars responding responding No response positively negatively

Higher income 48 3 2 Association with good 50 2 1 organisation

Overall View of Contracts

The entire respondent population was ready to accept contracts, with almost everyone ready to work with the same organisation. No one said that they would not work with the same agency. This response shows both the appeal of seed multiplication and contract farming.

(N=53) No No Not aware/ responding responding No response Feed back positively negatively

Contracts are good 49 0 4 Ready to repeat contracts 53 0 0 - same agency 49 0 4

78 General Conclusions

By any standard, the seed multiplication system is the very model of a working, mature contract farming system. Contracts have succeeded due to a combination of factors:

• Seed companies were unable to do own multiplication due to land laws and hence had to depend on contracts. Therefore, their very existence depended on a working, reliable contract system;

• Farmers could not defy seed companies for fear that they would be cut off from the programme and lose a lucrative opportunity. Further, while they could multiply the seed, they could not Individually sell them profitably, nor could claim branding advantages;

• Farmers also understood that without the research and extension support of the company, th3y could not be very successful seed multipliers at all;

• Groups not only helped impose discipline among its members, but also acted as buffers against possible disputes and helped maintain unity and cohesion. They acted very much like the Self- Help Groups (SHGs) of the currently In vogue microflnance;

• Unlike other contract system, a successful contract relationship would not lead to an emergence of open markets. Seed multiplier contracts are Indeed sacrosanct and inviolable.

The seed business is perhaps the best example of a win-win situation. What is more, all concerned seem to understand that a breach of the trust is in no one's interest. This is the reason for its emergence as a mature and stable system.

79

CO-OPERATIVE AND PRIVATE SUGAR FACTORIES

Overview of Indian Sugar Commodity System India has always been among the largest producers of sugar in the world, in keeping with its population base. It is the largest single producer of sugar including traditional cane sugar sweeteners, khandsari and gur, equivalent to 26 million t. Its annual production of white crystal sugar has been close to 20 million t in recent years. It produced some 300 million t of sugarcane on over 4 million ha in 2001-02. Thus, sugarcane is without doubt the most important cash crop of India. The Indian sugar commodity system is unique in many ways. First, India has always had only one source of sugar, namely sugarcane. This is in sharp contrast to major commercial commodity systems of the world, which use diverse sources, depending on agro-climatic conditions. For example, the United States produces sugar from high-fructose corn as well as sugarbeet on the mainland and from sugarcane in Hawaii. The other major cash commodity system of India, edible oUs, uses a large number of oil-bearing materials. This dependence on one source has led to some basic singularities of the system, discussed below.

Second, unlike elsewhere in the world, almost all the sugarcane is grown under irrigation. It is an extremely water-intensive crop. Given its long duration, ranging between 10 to 18 months, it uses 20 or more irrigations during the crop cycle. Yet, the national average yield of sugarcane is relatively low: under 70 t/ha. Yields in the North are lower than the national average, with Bihar producing under 50 t/ha and Uttar Pradesh under 60 t/ha. Tamil Nadu, on the other hand, achieves a yield of 110 t/ha with Maharashtra and Karnataka achieving over 80 t/ha. Sugar recovery percentages also vary likewise, with higher recovery in the South than in the North.

Sources of irrigation also vary considerably. While Western Uttar Pradesh, the largest producing region of the country, depends on surface irrigation through canal water, central and eastern Uttar Pradesh depend on well irrigation. Similarly, lift irrigation is prevalent in Western Maharashtra, but wells are used elsewhere. This obviously results in wide variations in cultivation practices and farm economics of sugarcane across the country. As a consequence, evolving a uniform cane and sugar pricing policy and providing appropriate incentives to farmers and processors cutting across

81 various regions becomes a difficult task. More importantly, given the high dependence on lifting water for irrigating sugarcane, the cost of cultivation becomes high. The cost of producing sugar in India is thus higher than elsewhere in the world, since the high water requirements and costs of energy Eire compounded by relatively low yields and recoveries. This aspect, too, results in certain singularities.

Policies on sugar and sugarcane commodity system are governed by two major considerations: first, sugar must be available to the consumer at affordable prices in the Indian economic context and second, the country must produce almost all the sugar it needs, rather than depend on international trade. This last is consistent with the over all Indian economic policy of pursuing self-sufficiency for all of its requirement followed ever since independence. It has changed considerably in the last 10 years during the phase of economic liberalisation for most other commodities, but not effectively so for sugar. For example, India has been importing substantial quantities of edible oil, amounting to about a third of its requirements, for the last several years. Sugar imports, on the other hand, have been sporadic and much more restricted, amounting to about a million t in a year, and that, too, not on any regular basis. Thus, the Indian sugar economy is circumscribed by seemingly contradictory considerations of maintaining low consumer prices for an essential commodity based on a high-cost raw material, for which there are no other, cheaper alternatives.

The consequence is a very highly administered agribusiness system with open markets virtually non-existent. The government controls the establishment of sugar factories through strict licensing. At the same time, it also offers them various incentives, such as lower excise or import duties on equipment, exemptions for new factories from levy requirements, even when they are under private ownership. They have been allowed, at least in theory, exclusive zones of operation where no other sugar factories may purchase cane. Sugar production has been subjected to levies and dual pricing until very recently. The government also offers a variety of other incentives such as lower interests on borrowings, longer terms for pajmient of loans etc to partly offset the losses suffered by sugar factories on account of controlled marketing of sugar. State and Central governments also stipulate minimum prices for sugarcane to protect the interests of cane growers. All major sugarcane-growing states have elaborate bureaucracies in place to control virtually every aspect of sugarcane cultivation and processing, starting from the

82 area that may be allowed to be cultivated by the various factories, to storage and movement of finished sugar and its distribution. Sugarcane thus stands out as being the most rigidly administered sub-sector of the highly controlled Indian agriculture sector, with practically no semblance of market transactions between growers of sugarcane and makers of sugar.

Sugar factories are either privately owned or co-operatives. The country has nearly 450 sugar mills, of which 250 are co-operatives. Although sugarcane cultivation and sugar production are spread in various major states, two states, namely Maharashtra and Uttar Pradesh, are the critical ones. Maharashtra has 135 sugar factories, 122 of which are co-operatives, while Uttar Pradesh has 101, of which 27 are co-operatives. The two states together account for nearly one-half of the total sugar mills; with a combined sugar capacity of over 10 million t out of the 18 million t for the country as a whole. They produced 160 million t of sugarcane out of the 300 million t for the country in 2001-02 on 2.6 million ha (cf 4.4 million ha for India). Their sugar production was nearly 11 million t out of a total 18.5 million t for the country. Thus, these two states account for the lion's share of sugarcane area, cane production, sugar factories, processing capacity and sugar production.

History of Sugarcane and Sugar Production

Year Area, Cane Cane Facto­ Average Average Cane Sugar Sugar 000 ha Output, Yield, ries Dura­ Capa­ Crus­ Out­ Reco­ ooot t/ha tion, city, hed, put, very, days tpd ooot ooot %

1930-31 1,176 36.354 30.9 29 — — 1,339 120 8.96

1940-41 1,617 51,978 32.1 148 113 750 11,492 1.113 9.70

1950-51 1,707 54,823 32.1 139 101 882 11,348 1,100 9.99

1960-61 2,15 110,001 45.5 174 166 1,172 31.021 3,021 9.74

1970-71 2,615 126,368 48.3 215 139 1,394 38,205 3,740 9.79

1980-81 2,667 154,248 57.8 315 104 1,718 51,584 5,150 9.98

1990-91 3,686 241,045 65.4 385 166 2,088 122,338 12,047 9.84

2000-01 4,316 295,956 68.6 436 138 3,203 176,660 18,511 10.48

2001-02 4,403 300,096 68.2 434 138 3,285 180,346 18,528 10.27

83 Major Sugarcane Producing States

Area in 000 ha (A) Production in OOOt (P)

State/Year 1995- 1996- 1997- 1998- 1999- 2000- 2001- 96 97 98 99 2000 01 02

Andhra Pradesh A 214 199 192 214 231 217 213

P 15,180 15,030 13,955 16,503 18,508 17,690 17,608

Bihar and Jharkhand A 125 130 108 107 97 94 121

P 5,485 5,483 4,960 5,101 4,089 3,988 5,818

Gujarat A 162 166 165 196 201 178 176

P 10,511 11,404 11,836 13,566 14,066 12,695 12,465

Haryana A 144 162 142 125 137 143 162

P 8,090 9,020 7,550 6,880 7,640 8,170 9,330

Kamataka A 313 282 310 339 373 417 409

P 24,918 23,375 28,332 34,771 37,567 42,924 33,754

Maharashtra A 580 516 460 530 590 595 578

P 46,656 41,805 38,174 47,151 53,143 49,589 45,140

Punjab A 132 173 126 103 108 121 143

P 8,620 11,040 7,150 6,130 6,770 7,770 8,818

Tamil Nadu A 326 260 283 306 316 315 326

P 32,994 25,919 30,189 33,765 34,285 33,188 36,336

Uttar Pradesh and A 1974 2110 1985 1975 2011 1938 2004

Uttaranchal P 119,830 125,349 129,267 116,483 115,419 106,068 116,219

All India A 4147 4174 3930 4055 4220 4316 4403

P 281,100 277,560 279,541 288,722 299,324 295,956 300,096

The entire amount of cane produce is not converted into crystal sugar. Only about 50 per cent of the sugarcane produce was crushed for crystal sugar up to the 1990s; it has now inched up to 60 per cent. Some 30 per cent of the sugarcane is converted into gur or khandsari, while the balance is used for seed purposes or fresh consumption.

84 Use of Cane for Sugar and Gur in Major States

(% cane used for) State 1999-2000 2000-01 20001-02 Sugar Gur & Sugar Gur & Sugar Gur & Khand- Khand- Khand- sari sari sari Andhra Pradesh 63.3 29.0 55.8 36.6 49.1 43.2 Haiyana 67.4 20.1 73.2 14.4 55.8 26.7 Kamataka 39.3 27.6 34.8 26.4 35.5 38.3 Punjab 68.3 19.2 65.8 21.7 55.4 32.1 Tamil Nadu 45.5 35.4 55.7 34.2 51.7 38.2 Utter Pradesh 42.3 43.5 43.2 43.0 43.9 42.3 All India 59.6 28.9 59.7 28.9 55.4 33.0

Sugar factories also make molasses-based products, including various forms of alcohol, as by-products. Since converting sugarcane into sugar is a highly controlled activity with limited margins, sugar factories have increasingly resorted to diversification into value-added products for higher incomes and profits. Acetic acid, acetate monomers and polymers and various other chemicals are among such products, but potable alcohol remains by far the most profitable one. Sugar factories, including co-operatives, therefore, look to distilleries as sources of higher revenues and profits.

Almost all factories use bagasse as fuel for their boilers. They have realised that installing co-generation projects frees them from the uncertainty of power supply. Progressive units, both privately-owned and co-operatives have invested in such projects as well. Another area of investment relates of effluent treatment, standards for which have become increasingly tougher. The earlier settling ponds are now being replaced increasingly by biotechnology processes, which are more effective in dealing with the problems of maintaining COD and BOD at acceptable levels in the effluent stream.

The sugar economy is thus more complex than that of other commodity systems. On the one hand, the basic commodity production and disposal is rigidly and entirely governed with little room for interplay of market forces. On the other hand, processors have been seeking ways out of the constraints imposed by taking recourse to products in demand in the market. The farmer, too, is

85 not immune to the attractions of the market djmamics, as indicated by its diversion of the crop to the gur or khandsarl manufacturers whenever he perceives prices offered by sugar mills to be not attractive enough. Yet there is no clamour for free markets to cover the entire sugarcane economy. On the contrary, the demand is for greater control, which, the farmer believes, could lead to better prices. He is often not wrong in this surmise, since political decision­ makers are aware of the value of farmer votes. Sugarcane is thus a highly politicised commodity as well. The emergence of co-operative and private procurement systems discussed below must be seen in this overall context.

Emergence of Co-operatives

Prawaranagar, the Pioneer

Modem sugar processing in India started in 1930 with grant of tariff protection to the Indian sugar industry. The number of sugar mills increased from 30 in 1930 to 135 in 1935, while the production increased from 1.2 lakh t to 9.3 lakh t. All this was under the private sector.

India's first co-operative sugar factory was established in 1948 at Prawaranagar (Loni) in Ahmednagar district of Maharashtra. The founder was the late Viththalrao Vikhe-Patil, a local progressive farmer and leader of the co-operative.

Ahmednagar was a drought-prone area. The provincial government undertook canal irrigation by tapping the local rivers, mainly as famine relief work. The area around Loni received waters from the Prawara left bank canal in the late 1920s. The land and climate were considered suitable for sugarcane cultivation. Yields up to 50- 60 t/ha were achieved. As part of its measures to encourage sugar production in the country, the government invited European companies to invest in sugar factories in the region. The first such, the Belapur Sugar Factory, was established in 1918 and started producing sugar by 1925. It was to promote scientific cultivation of sugarcane using the canal waters in the area and manufacture of crystal sugar. Similar projects were taken up in Pune district as well, near Baramati, by a member of the Belapur syndicate. The price at which farmers could provide sugar to the factory, however, was so high that sugar manufacture was unprofitable and the companies had to go into

86 liquidation. The provincial government was concerned about this state of affairs, which would affect the returns on the investment it has made on the irrigation work. It decided to give further impetus to sugarcane cultivation and offer attractive conditions for sugar factories to be established in the region. It permitted long-term leases of farmers' lands, exclusive areas of operation, reservation of water for sugarcane, etc. Between 1931 and 1940, 13 new private factories came up in Maharashtra, of which three were in Ahmednagar district, besides Belapur.

During this time, however, farmers continued to suffer from variations in income due to vagaries of climate. Co-operative credit societies were established in the 1920s, but they suffered from poor recoveries of loans. Farmers' miseries would worsen if the co­ operatives were to be liquidated, since they would have no option but to borrow from private moneylenders at exorbitant rates of interest and risk of losing their lands on default. Vikhe-Patil understood this clearly and worked hard to convince farmers in his area to improve their repayment record. Consequently, the Loni society was revitalised and undertook a number of other activities, such as, providing seeds and inputs. During the Second World War, it even managed to get an agency for supply of steel.

By this time, there were six factories in Ahmednagar district, all making money because of the prevailing shortage of sugar in the market, and the low prices they were habituated to pay the farmers. Many new private entrepreneurs intended to start new factories, including one which would cover five or six villages from the Loni area. Their preferred mode of operation was to get farmers' land on long leases (40 - 50 years) and use the canal water. The lease rates were very low in the region of Rs 10/acre per year. Effectively, farm owners became landless labourers working on their own lands.

Vikhe-Patil organised farmers not to lease or rent or sell their lands to the factories even under greater lease rents and to boycott who did so. With active support from Vaikunthbhai Mehta, an economist and a Gandhian leader, who was also the Managing Director of the Bombay Provincial Co-operative Bank and the noted economist Professor D R Gadgil, Vikhe-Patil formed the Prawara Left Bank Canal Owners' Cultivation Society, covering 23 villages. He convinced his fellow members of the need to set up their own sugar factory and raised share capital from them at the rate of Rs 300/acre, with the limit of 25 shares per member.

87 The government committee empowered to clear the sugar factories took a long time to clear the Prawara sugar factory application. After considerable effort to convince the committee, with help from Mr Mehta (who was then minister for co-operation) and Professor GadgU, the Society (now renamed Bagaitdar Co-operative Sugar Producers Society) was given the clearance to establish its factory at the end of December 1948.

Addressing the first meeting of the Society, Vikhe-Patil said that "the purpose is not just to make profit, but to see that we local farmers do not merely work as farm labourers for capitalists who come from outside and start factories in our area. The main purpose is to have our own factory so that farming remains with us and we prosper." Exactly two years after registering the new society, on 31 December 1950, its factory with a capacity of crusing 500 tpd of cane started functioning on a 37-acre plot of barren land. The plant, which cost Rs 22 lakh, was from Skoda of Czechoslovakia. It was financed with a loan from the provincial co-operative bank, guaranteed by the pledge of properties of some well-off friends of Vikhe-Patll.

He continued to advise farmers not to divert cane to gur producers simply because gur prices were high. Otherwise, their factory would be affected. On his advice, not only small farmers, but also large landholders (who used to give their crushers on hire to others) stopped crushing cane for gur manufacture. This sense of loyalty and faith in their factory and their responsibility to supply cane to it and not to other factories in spite of temptation of higher price, was inculcated among the members. This difficult task tested the leadership ability of Vlkhe-Patil.

In the first year, the factory worked up to 15 May 1951, i e for 144 days. It crushed 33,055 t of cane and produced 37,501 bags of sugar, which amounted to a recovery of 11.3 per cent. In June 1952, the name of the Society was changed to The Prawara Co­ operative Sugar Factory Ltd and the factory campus was named Prawaranagar.

The factory continued to face problems arising out of policies such as reserving water for future crops of select farmers/areas. Vlkhe- Patil persuaded the government to give priority to standing crops and the society adopted practices of equitable water distribution among its members, regardless of their holding size. This was to be the key to the cohesiveness of membership of the Society.

88 Vikhe-Patil was very keen to increase the productivity by proper seed, manuring and cultivation practices. He also encouraged competition among farmers. Those producing more than 100 t/ha were given prizes. The factory set up its own farm to supply good quality seed. All these efforts increased the supply of cane.

By 1954, four more co-operative factories were registered in Ahmednagar district. Prawara decided to expand its capacity to 1,500 tpd of crushing.

Prawaranagar developed as a modern industrial townships' with housing for workers, restaurants, hospital, schools, post office, bank, playground, running water taps, street lighting etc. In the first seven years of its operation, the society built 150 km of road to help transport of cane from fields to factory.

It promoted Prawara Agriculture and Industrial Development Co­ operative Society in 1959-60 to manufacture sugar factory parts and machinery and agricultural tools, pumps etc. It had to be wound up eight years later due to a shortage of good technicians, labour problems, politics, and indifference of other co-operative sugar factories.

In all this period, Vikhe-Patil ensured that an austere working culture took root in his organisations. Wastage and conspicuous consumption were avoided, bribes not given despite pressure, and savings in the society as well as households were encouraged.

Vikhe-Patil championed the farmers' causes, especially regarding water and sugarcane prices. For example, in 1960-61, private sugar factories complained to the government that they could not afford to pay Rs 38-39/t of cane to the farmers, while Prawara paid Rs 42/t. He bluntly told the government that private factories not only paid lower prices, but also held back Rs 10/t to compel farmers to supply cane the next season. They sometimes paid in kind, which led to farmers having to sell it to get cash, incurring a loss on the transaction. All arguments were well-supported by detailed, factual information. Consequently, the government directed all the factories to pay Rs 45/t. The co-operative withheld a small percentage of the farmers' dues as non refundable deposit, and another sum as current, refundable deposit, to be used for part-funding factory expansion and other developmental schemes. It paid interest on these deposits. Vikhe-

89 Patil was firmly committed to inculcating the savings habit among his farmer-members, as he felt that in its absence, they could be rendered paupers in the event of a drought or other natural calamities. The non-refundable aspect of the deposits did not go down well with a part of the membership, which formed the opposition to Vikhe-Patil's leadership. He gave up his chairmanship in 1964, whereupon his son succeeded him, who later became a central minister in 2001.

Wamanagar: Worthy Follower

The Wamanagar Co-operative was established in 1954 under the leadership of V A Kore in Kolhapur district of Maharashtra. This district in south-western Maharashtra also had a well established river irrigation network and considered far more suitable for sugarcane cultivation than Ahmednanagar. It was a traditional gur- making area Even today, Kolhapur gur is considered to be the market leader. The Kore family was engaged in trade and money- lending. Subsequently, they became major landowners of the area. They were leading brokers for agriculture commodity as well. They also made gfur, like most other large sugarcane growers in the area. Kore visited Prawaranagar at the end of 1951, and was greatly impressed by the new factory, which had just started production. He resolved to set up a co-operative factory in his own area. He collected about Rs 1 lakh as contribution to the share capital in 1952. Unfortunately, there was considerable opposition and scepticism about the factory and he gave up the effort, refunding the contributions.

He did not, however, give up the idea and revived it in 1954, when the state government was actively encouraging establishment of more co-operative sugar factories in all parts of the state. Kolhapur district alone was meant to be the home for five new plants. He managed to get the proposal approved by August 1954. Unfortunately, recession marked the sugarcane and gur market in 1954, which caused difficulties in raising the share capital. By March 1956 through tireless efforts, he had managed to ra;ise Rs. 10 lakh as share capital, which was matched by the state government. The plant of 1,250 tpd capacity was to be set up at Kodoli, later renamed as Wamanagar. Buckau Wolf of Germany was to provide 70 per cent of the plant, with the remaining to be sourced from within the country as per the government stipulations and started functioning in 1959. The factory was dogged by trouble at the very beginning. Within days of its opening, heavy unseasonal rain caused a shut-down of

90 15 days. The main turbine failed in February 1960 and could be repaired only a few days before the close of the season in March 1960. Although the sugar recovery was 12.7 per cent, the highest in India, the production was only 82,000 bags reflecting on the long period of closure. Wamanagar sugar recoveries have been among the best in the country throughout its existence.

The prior establishment of the Prawaranagar Co-operative was a great help to all subsequent sugar factories in Maharashtra. The state and central governments were now convinced of the co­ operative approach. So long as the promoters of new co-operatives met the stipulations regairding area and share capital, administrative clearances were no longer a problem. For example, Kore's meeting the deadline of adequate membership by July 1954 was followed by an approval of the project in August 1954, or within just one month. The Prawranagar approval took nearly three years. Vikhe- Patil had to struggle to get approval for a capacity of 500 tpd of crushing in 1949; Kore got an approval for 1,000 tpd (effectively 1,250 tpd, with permissible balancing) in 1956. This shows that a more conducive climate now encouraged the emerging co-operatives. Their promoters had to concentrate largely on their own membership for share capital; the rather well-established co-operative banking system helped mobilise the required resources. Kore took five years to start the factory after the initial project approval, as compared to the two year period for Vikhe-Patil. It took Kore over one and a half years to raise the share capital of Rs 10 lakh, which the state government matched in just two weeks. Kore and others in the district had also to lobby hard for getting permission for a Buckau- Wolf plant. Thus, the hurdles were now no longer in the policy or approval phases, but more in implementation of the concept. The industrial policy of 1956, which imposed serious constraints on any industrial venture, was partly responsible for this.

Co-operative Activities and Services The Maharashtra co-operative sugar factory leadership realised early on that farmers had various needs besides remunerative prices, such as information about scientific cultivation and use of inputs. Both Vikhe-Patil and Kore were themselves progressive farmers and had hands-on experience of running co-operative credit societies. They also possessed a great deal of analytical ability, which helped them identify the difficulties confronting the less fortunate and progressive farmers. Thus, the Prawaranagar factory started supplying seed and other inputs almost from its inception. Kore had a very good

91 understanding of the optimal usage of inputs, including chemical fertilisers, which he had tried to pass on to his fellow cultivators even before starting the factory. Various competing claims on the critical resources of water also helped emphasise the need for proper irrigation management, as opposed to the rather wasteful practices farmers tended to follow when left to their own devices. Such realisation resulted in the gradual evolution of an effective extension network, under the supervision of qualified personnel. Given their close linkages with co-operative credit institutions, meeting farmers' finance requirements through co-operatives was an obvious choice. The major requirement for higher sugar recovery is that the cane should be crushed as quickly as possible after the harvest. Efficient post-harvest transportation and delivery systems would be required to ensure this. Extending the crushing season would be possible with a staggering of cane maturity. Thus, planning crop cycle and managing harvesting and delivery are critical to the good perfor­ mance of the sugar factory. Co-operatives in Maharashtra, under the enlightened and dynamic leadership of pioneers such as Vikhe-PatU, Kore, Ratnappa Kumbhar (also from Kolhapur) and Vasantdada Patil (from Sangli district) made sure that the factory itself did the planning and co-ordination for these tasks. Thus, farmers today are given plantation and harvest dates. Sugar factories themselves engage specialised harvesting labour, which moves from one farm to another under their own supervision, thus improving the efficiency of operations and reducing the cost. The factory itself transports the cane from the farm to the factory, so as to minimise the delays and subsequent fall in the sugar recovery. The co-operatives now have separate wings for agriculture and cane development, both staffed with qualified agriculture specialists. The former deals with routine extension, supply of inputs and related tasks, while the latter concentrates on developmental aspects, such as experiments on newer varieties and techniques, multiplication of seed stock and so on. In addition, the co-operatives are all contributing members of the Vasantdada Sugar Institute, Pune, which is recognised as the national leader in applied sugarcane research. They also receive research support from the agricultural universities in the state (mainly MPKW at Rahuri in Ahmednagar district) and outside (mainly Tamil Nadu Agriculture University, Coimbatore).

92 All these practices now appear to be dictated by common sense and routine. It did, however, take a long period to evolve them and getting them accepted by the farmers. As of now, sugarcane planting, cultivation, harvesting and managing the Inputs appears highly systematised and requires very limited discretion on the part of the farmers of Maharashtra sugarcane co-operatives. This is seen as a model not only by private factories in the state, but also those in other large sugar producing states, such as Uttar Pradesh and Tamil Nadu.

Prices Paid and Performance of Co-operatives Pricing of Sugarcane The principal rationale for the emergence of co-operatives was to ensure a remunerative price to cane growers, as Vikhe-Patil had clearly stated at the start of the Prawaranagar Co-operative. Since this was a sensitive question, the state government issued directives to all sugar factories regarding the price to be paid from time to time. This practice soon became institutionalised. The directive, however, applies to minimum prices. Individual plants can and do pay higher prices, depending on their performance.

At present, the Central Government announces minimum prices to be paid for sugarcane, linked to sugar recovery. These are applicable for the entire country. In addition, state governments may also notify minimum prices for their states as well. Most large states notify prices according to different zones within them, to account for regional variations in yields and recoveries. The right of states to notify minimum prices as different from those of the central government has been upheld by a Supreme Court judgement recently, but is under appeal at present. Most states also levy a market tax on purchase of sugarcane.

Minimum Sugarcane Prices Notified by Governments Rs/t of sugarcane Year/ Government 1998-99 1999-2000 2000-01 2001-02 2002-03 Central* Basic 527 561 595 621 695 Prem 6.20 6.60 7.00 7.30 8.20 Maharashtra 527-607 561-851 595-966 6'21-1,007 695-1,138 Tamil Nadu 527-663 561-700 595-763 635-818 695-957 Uttar Pradesh 527-670 561-686 595-742 621-818 695-892 Basic price linked to sugar recovery of 8.5%; premium for each additional 0.1% recovery. 93 The government notified cane prices have steadily increased over time, registering a rise of over 30 per cent in five years. Levy sugar prices, which vary according to grades and regions, have also moved more or less in the same direction. Open market prices have, however, either stagnated or declined in this period. This is due to a surplus production of sugar in India and non-competitiveness of Indian sugar in the international market. This price situation has put a squeeze on the sugar industry as a whole. This is true of co-operatives as well as private mills and throughout the country. Increasing losses of sugar mills have led to demands for rehabilitation packages, which would include loans at concessional rates, waiver of some accumulated interest, and so on. Even with such packages, the ability of sugar processors to sustain production at the high levels of the initial years of this decade is considered doubtful. The current year's Maharashtra output is widely expected to be only half of the record production of 6.7 lakh t in 2000-01. The Prawaranagar Co-operative has been more susceptible to these factors. Its gross profit of Rs 7 lakh in 2000-01, which was nominal to begin with, turned to a net loss of Rs 11.7 crore in 2001-02. This was despite its pajrment of Rs 715/t as cane price, corresponding to a sugar recovery of 9.8 per cent according to central norms, as against its actual recovery of 11.7 per cent. While later year annual reports are not available, losses are expected. Warnanagar fared better, thanks to its larger crushing and better recovery, as well as a somewhat more diversified activity mix (see next section). It paid an average price corresponding to a 13.7 per cent recovery (as against the actual 12.6 per cent) in the preceding year.

Performance of Sug ar Co-operatives, 1998-2002

Indicator Prawaranagar Warnanagar (Cap : 4,000 (Cap: 4,000 tpd) tpd, expanded to 7,000 tpd) 1998- 1999- 2000- 2001- 1998- 1999- 2000- 99 2000 01 02 99 2000 01 Members 11,496 11,745 11,745 11,745 19,670 19,670 19,670 Crushing, OOOt 849 945 844 686 1,237 1,027 1,170 Days worked 204 220 182 149 218 182 168 Average crush, tpd 4,181 4,321 4,668 4,629 5,674 5,642 6,964 Average yield, t/ha — — — 60 — — 99 Cane price, Rs/t — — 695 715 — — 960 Sugar, OOOq 959 1,093 1,026 803 1,440 1,285 1,482 Recovery, % 11.18 11.40 12.02 11.67 11.62 12.50 12.64

94 other Activities of Co-operatives

Economic Diversification of Co-operatives, Households

After stabilising their basic activity of sugarcane processing, both the co-operatives took up various other related economic activities for two major purposes: one, to increase their own income through diversification, and two, to increase the members' indirect income through related, preferably land-based, activities. The establishment of distilleries, paper and board projects using bagasse and other agricultural waste generated in the area, co-generation plants etc falls in the former category. Their promotion of farm-based poultry and dairy activities is in the latter categorJ^ The Warnanagar dairy project has assumed major proportions, with over 2 lakh litres of milk being collected by the sister dairy union. The full-fledged processing plant converted the raw milk into ghee, butter, shrikhand, cheese, milk powder etc which were marketed throughout the state. Warnanagar has also a fully equipped fruit and horticulture processing plant, while Prawara has only cooling units. The importance of these diversiflcation activities can be assessed by the fact that while the main sugar factory generates a turnover of a little over Rs 200 crore per year for Warnanagar, the total turnover of all the activities of average complex amounts to Rs 700 crore per year. The factory estimates that these additional activities generate over 6,000 jobs in the area. Most of these require some special abilities and therefore, contribute to the skill upgradation of the local labour force.

Social Development

The leadership of the co-operatives had overall developmental considerations also in mind right from the beginning. Even though their initial objective was to improve sugarcane cultivation practices, both Vikhe-Patil and Kore knew (as did the founding fathers of other co-operatives in Maharashtra) that the standards of education, health care, infrastructure, communication and other factors affecting the quality of life in their respective areas were rather poor. Road network was accorded the top priority since it affected the movement of cane and economics of the sugar factory.

Education was a close second. Literacy rates were relatively low, at around 5-10 per cent in the beginning. Both the areas now boast of complete literacy. Every village has a school. The co-operatives have promoted separate trusts for education, which provide not only

95 secondary and tertiary education, but also career-oriented, recognised, degree-granting medical and engineering colleges.

Sanitation and health also received substantial attention from the co­ operatives. Starting with provision of protected and assured sources of potable water, the health cover now extends to dispensaries and clinics in all villages and major hospitals at a central location. Both the co-operatives have stressed family planning and have claimed success in bringing down the population growth rates in their areas. Other activities encouraged and promoted by the co-operatives include establishment of libraries, women-oriented activities, such as home-based enterprises and special co-operative savings associations. Warnanagar's lead in these has been well recognised. They have thus addressed gender-equality issues as well.

The net impact of all these is seen in a membership base that is aware of its rights, and articulate and active in the affairs of the co­ operative.

Economic and Diversification Activities of Co-operatives

Activity Prawaranagar Wamanagar

Main Plant 500 tpd crush capacity 1,000 tpd crush capacity initially, now 4,000 tpd initially, now 8,000 tpd

Distillery 180 lakh 1 p a capacity 90 lakh 1 p a capacity

Other alcohol based 402 t of acetaldehyde in products 2001-02

Ethanol 20,000 Ipd capacity

Pulp and paper mill Closed due to mounting 6,600 tpa capacity losses

Co-generation plant 35 mW 3.6 mW

Dairy Average collection of 2.25 lakh Ipd

Horticulture processing Cold store, pre-cooling 5 tph capacity for fruit and grading pulp

Poultry 3 co-operative poultry societies

96 Social and Developmental Activities of Co-operatives

Activity Prawaranagar Wamanagar Education Prawara Rural Education Wama Education Society Society (runs 59 schools (runs primary and high and institutions) schools, arts, science and commerce college, enginee­ Prawara Medical Trust ring and technology col­ Medical College lege, ITl)

Prawara Institute of Rese­ MG Trust Dental College arch and Education in Na­ tural and Social Sciences

JCrishi Vigyan Kendra

Health Prawara Medical Trust - Mahatma Gandhi Medical 500 bed hospital, clinic Trust (modem hospital at in factory Wamanagar, OPDs in villages)

Credit Societies Prawara Co-operative Bank Wama Co-operative Bank Employees Co-operative Wama Mahila Credit Credit Union Society

Others Prawara Education Credit Area Development Fund Union (provides loans for (provides assistance to education) needy students, co-opera­ tive members needing Awards for rural literature, costly medical treatment, scholastic and sports building of youth clubs achievements s and sports facilities and schools, offers Re 1/t of Internet centres cane crushed to education society, Rs 3/t to MG Medical Tmst) O Sharada Library

Wama Gruhudyog - Lijjat papad centre

Labour Society (runs press, flour mills, bakery etc

Savitri Women's Industrial Society

97 Grower Experience

A sample survey of sugarcane growers was conducted as a part of this study. Its results generally bear out the conclusions and inferences discussed in the above sections. Some salient findings are shown below and briefly discussed.

Sample Composition

In this case, the sample necessarily comprised of co-operative members in Maharashtra and those supplying to the respective mills in Uttar Pradesh and Tamil Nadu.

Maharashtra U P T N All Particulars P W All No 21 24 45 15 21 81 Average land holding (ha) 4.7 3.9 4.3 3.4 3.6 3.9 Average area devoted to 4.0 3.6 3.7 2.6 3.1 3.4 sugarcane (ha)

While the sample holdings varied somewhat from one cluster to another, almost the entire sample devoted more than 75 per cent of the holding to sugarcane, showing its dominance in the cropping pattern of the farmers. Our informal discussions revealed that farmers would have liked to put all their land under cane, if they had enough water (Uttar Pradesh, Tamil Nadu) or if the co-operative allowed them to do so (Maharashtra). This is direct evidence of their complete satisfaction with the activity.

Institational Membership and Borrowing

All the Maharashtra farmers were members of credit co-operatives as is to be expected. The Tamil Nadu farmers had a lower proportion of co-operatives, while only half the Uttar Pradesh farmers joined co­ operatives. The Tamil Nadu farmers show the highest use of credit per ha, indicating a high degree of awareness of application of inputs. The Maharashtra farmers use only two-thirds of the credit as compared to Tamil Nadu, while Uttar Pradesh using less than one-half of the Tamil Nadu use. This is clearly corroborated by and reflected in their respective yields and incomes.

98 Maharashtra U P T N AU Particulars P W All No 21 24 45 15 21 81 Members of credit co-ops 20 22 42 7 16 65 No availing institutional 21 24 45 8 21 74 credit Average crop credit, Rs/ 23,050 26,340 24,805 16,240 35,760 26,990 ha/season (for borrowers only)

History

The Maharashtra cane growers have the longest association with sugarcane, both as growers and suppliers to the factory. None of them had ever made any break in their supply relationship with the factory either. A third of the U P farmers and two of the Tamil Nadu farmers reported some break in their relationship, but all of them resumed it. This indicates the long and strong attachment of the farmers to sugarcane, the strongest being in Maharashtra and the weakest in U P, as is to be expected.

Sugarcane also ranks as the crop with the longest association with farmers among all the commodity systems studied.

Maharashtra U P T N All Particulars P W All No 21 24 45 15 21 81 No of years cane grown, 43.1 48.6 46.0 25.4 36.3 37.5 average No of years cane supplied 37.0 35.4 36.4 12.6 20.1 27.9 to factory No reporting break in 0 0 0 5 2 7 supply No reporting resumption 0 0 0 5 2 7 of contract

99 Crop Performance

The reported average yields in all areas were higher than those of the respective states, which shows the superior standing of the areas in their own states. The sample jdelds were about 15 per cent higher than the state yields in Maharashtra qnd U P, while the Tamil Nadu sample yield was higher than the state yield by about 7 per cent (the state and the sample yields are the highest in the country; therefore, even this small increase must be seen as significant). The higher yields are to be directly attributed to the superior organisation of the production systems in the areas studied as compared to the respective states, as is to be expected in view of the overall standing of the organisations involved.

Maharashtra UP TN (state avg: 78.1 t/ha) (state avg: (state avg: 57.2 t/ha) 114.4 t/ha) P W No 21 24 15 21 Average yield (t/ha) 95.0 96.3 66.0 122.0

Price Performance All farmers except those in Warnanagar reported receiving state- notified prices for their sugarcane. Warnanagar paid a higher price, reflecting its profitability and commitment to its members.

Maharashtra UP TN P W

No 21 24 15 21 Average price (Rs/t) 715 1,200 735 940

Understanding Obligations On the whole, farmers in UP had the most difficulty in under­ standing the obligations of buyers and sellers. More farmers reported confusion than clarity on each of the aspects they were asked about. Exactly the reverse situation prevailed in Maharashtra. This follows, the long years of association these fanners have had with their co­ operatives and the overall nurturing orientation of the co-operatives. The Tamil Nadu farmers were closer to Maharashtra in their understanding of the obligations but not quite as well aware as them.

100 Pa5TTient procedures and pricing were the two issues on which the greatest confusion prevailed among the sample as a whole. Here, too, the extent of confusion was far lower in Maharashtra as compared to the other areas, showing once again the higher extent of farmer development and awareness in the co-operatives.

Some confusion appears evident regarding farmers' own tasks. This is not surprising, as the line between what farmers have to do and what the buyer is expected do is often blurred even in the best areas.

Item Maharashtra Uttar Pradesh Tamil Nadu (45) (15) (21)

Clear Not clear Clear Not clear Clear Not clear

Buyer's obligations

- input supply 39 2 2 10 12 5 - advance 38 3 5 6 9 12 - extension 42 1 1 12 12 5 - supervision 40 2 3 10 14 4

- harvesting 44 - 2 10 14 3 - transport 44 - 1 12 14 3 pricing 37 5 2 10 6 11

- payment procedures 24 18 2 13 5 13 Farmer's obligations 28 13 5 8 12 8

Satisfaction with Factory Services

Farmers in Maharashtra were nearly unanimous in terms of their satisfaction with and appreciation of all the various services provided by the co-operatives, both for cane production as well as improving quality of life. This is in consonance with the history of the organisations discussed earlier. The extent of satisfaction was low in U P, with a majority not being satisfied with any aspect of service provided. The Tamil Nadu farmers were on the whole satisfied, but the extent of satisfaction and appreciation was not as overwhelming as in Maharashtra.

101 Item Maharashtra Uttar Pradesh Tamil Nadu (45) (15) (21)

Satis­ Not Satis­ Not Satis­ Not fied Satisfied fied Satisfied fied Satisfied Extension and 38 3 5 9 16 2 input supply Demonstrations 39 4 9 4 18 2 Timely advice 41 2 9 • 4 17 3 and actions Help in credit 44 — 3 7 16 3 Arranging harvest 44 — 4 10 17 2 and transport of cane Social services 44 — 2 12 14 7 Representing farmers' 41 1 — 13 5 15 interests

All of these indicators show the vastly more developed and advanced nature of orientation and services provided by the oldest co­ operatives in Maharashtra.

Disputes

Disputes arose in Maharashtra over input supply. This was bound to happen since the organisations took the major responsibility of providing this critical service to a highly experienced and alert membership. Most of them were, however, quickly and satisfactorily resolved, indicating the efficacy of the dispute resolution mechanism in place. A similar situation also prevailed in Tamil Nadu. Such disputes were largely absent in UP, simply because farmers did not expect to be served by the factory in these areas. Payments in UP were the greatest bone of contention and appear to have remained unresolved. This is due to the expectation of the farmers that ultimately the state government will step in to resolve the issue in their favour, as has happened in the past. The on-going legal battle in this connection also contributed to this situation. Similar disputes arose in Maharashtra and Tamil Nadu as well, but to a far lower extent as the farmers were quite aware of the basic issues involved. They were also satisfactorily settled almost in all cases.

102 Dispute on Maharashtra Uttar Pradesh Tamil Nadu (45) (15) (21) Satis­ Not Satis­ Not Satis­ Not fied Satisfied fied Satisfied fied Satisfied Supply of inputs 22/28 6/28 -/3 3/3 5/12 7/12 Harvesting 111 -n — — — — Transport and 3/3 -/3 —• — 6/9 3/9 weighing Payments 12/14 2/14 1/14 13/14 7/12 5/12 Other issues 4/6 1/6 2/8 6/8 11/13 1/13

Responsibility for Disputes

All but a tiny proportion of respondents blamed the buyer for disputes rather than the farmer on all issues. This seems to be a standard, almost reflex-action response, as was the case with other commodity systems.

Benefits fi'om Association

All the respondents in all the areas agreed that their association with the respective organisation brought them the benefits of better prices and higher incomes. Three-quarters of them expressed the view that associating with the organisation brought them prestige as well, with no disagreements at all in Maharashtra. There was a similar unanimity among co-operative members that their organisation provided them beneficial social services as well. A majority of the remaining farmers did not agree with such a statement, since their organisations are not so active in this area.

Benefit from Maharashtra Uttar Pradesh Tamil Nadu Association (45) (15) (21) No No Not No No Not No No Not agreeing agreeing agreeing agreeing agreeing agreeing

Better prices 44 — 10 4 20 —

Higher incomes 45 — 15 — 20 —

Prestige of 44 — 6 8 15 5 association

Social and other 44 — 1 14 7 13 services

103 Overall View of Association

A large majority was pleased with their association and would repeat a similar arrangement as also continue working with the same organisation. We believe that the negative response to this is not to be taken seriously, as none of those who expressed such views had actually followed up their intent by severing their connection with the organisation or the activity.

View on Maharashtra Uttar Pradesh Tamil Nadu Association (45) (15) (21)

No No Not No No Not No No Not agreeing agreeing agreeing agreeing agreeing agreeing

Satisfied 43 1 4 10 14 6

Will repeat 43 — 3 11 13 7 arrangement

Will work with 44 — 4 11 13 8 organisation

General Conclusions The sugarcane commodity system is not a contract growing arrangement in the strictest sense. Yet it possess a number of features similar to contract growing:

• Prior commitment of certain acreage of crop to the designated purchaser; • Purchaser's active involvement in most aspects of cultivation including supply of inputs, extension, supervision of crop and in Maharashtra co-operatives, harvesting and transportation; • Prices determined outside of market parameters and linked to the quality of crop in part;

• In case of co-operatives, formal involvement between grower and purchaser through the farmers' shareholding in the latter.

While sugarcane processors may not have introduced the crop de novo, as was the case of the poplars, they were certainly responsible for its spread manifold in their areas of operaton. This became possible because farmers saw the crop as a remunerative one. Co­ operatives provided a viable and more attractive alternative to private

104 buyers and hence were able not only to retain their membership base but expand it over a period of time.

As in the case of poplars, the sugarcane commodity system, too, anticipates for the most part various production support requirements of the farmers and makes provisions for them. The extension packages have evolved through a clear understanding of farmers' requirement and are structured to serve all their needs. This became possible because the decision-making leadership comprised progressive farmers who had their ears to the ground at all times. Other requirements, such as credit, were also effectively met through sister institutions, which eliminated a number of problems and delays the farmers would have faced otherwise.

The commodity system also displays two unique characteristics. First, unlike other commodity systems, pricing of the main product as well as the principal crop is dictated by government policies. As the present situation shows, sugar factories would find it extremely difficult to make profits under these externally determined prices. They have had to seek, not always successfully, value-addition avenues to remain profitable under such circumstances. These activities had led to indirect benefits for farmers of the area in terms of additional employment opportunities and some amount of skill enhancement.

Secondly, the enlightened leadership of co-operative factories ensured that surpluses generated in the Initial period were used for providing and improving physical and social infrastructure. Involvement of sugar factories in the provision of roads, education, health and other such facilities has created significantly stronger bonds between farmers and processors. The Maharashtra pioneers have played a truly outstanding role and their membership has rewarded them with unflinching loyalty.

The more enlightened private companies, such as Sakthi Sugars, have also realised that they need to build a similar symbiotic relationship with their growers to ensure their continued profitable existence. A similar awareness is now beginning to be seen in Western Uttar Pradesh as well.

It would be no exaggeration to say that sugar co-operatives have acted as a nucleus of all round social and economic development of the area they have served.

105

HOW HAS CONTRACT FARMING WORKED?

Beginnings of Programmes Poplars - Quest for Raw Material Essential for Company Survived Leads to Novel Approach India's largest safety-match manufacturer, Wimco Ltd, faced an acute shortage of matchwood in the 1970s. Imports were not allowed. Therefore, the company decided to investigate whether local production of poplar, the preferred softwood for matches the world over, was possible. It multiplied a large number of clones of different varieties imported from Spain and Australia in government and own nurseries. Based on their success, it mounted an ambitious programme for growing them through farm-forestry in Western Uttar Pradesh, Haryana and Punjab. The programme was launched in 1984. Realising the importance of getting all cultivation practices right at the very beginning, the company arranged to supply planting material from the nurseries of its joint venture, Wimco Seedlings, other required inputs, and most important of all, extension.

The plant would take eight years to mature, which led to three consequences. First, in the initial period, when there was no canopy, large areas between adjacent trees, which were spaced in an 8 x 5 m grid, could be used to cultivate other crops. Shade-loving crops would grow even at later stages. The company offered advice and help for these crops as well. Second, the trees would yield an income only in eighth year, while their cultivation would need expenditure all through the period, as would the sustenance needs of the family. The company worked out a loan scheme, which provided cash inflows over this period adequate to meet these needs; income from the tree left a surplus even after repayment. The scheme was refinanced by NABARD and executed by district lead banks. The Wimco team helped complete all the paperwork and formalities. Third, the long period highlighted the potentially grave risk in premature death of trees. The company offered free replacement of mortalities in the first two years and persuaded GIC to cover the risk thereafter at affordable costs.

Wimco recruited qualified forestry and extension specialists to run the programme. A trained young mobile field staff not only looked after extension but also took care of liaison with banks and government officials for completing procedural formalities for the finance programme. The same staff was to help procure the wood upon maturity.

107 Tomatoes - Diversification Leads to Contracts, Entry CondiUonalities to New Crop Introduction

Wimco also set up subsidiaries in Kamataka and Andhra Pradesh to process mangoes and tomatoes in the 1980s. Mango juice concentrate was exported mainly to the erstwhile USSR and Eastern Europe, while tomato paste was also sold in the domestic market to ketchup manufacturers. These were the first large capacity modem fruit processing plants in India based on aseptic bulk packaging technologies. While Wimco had engaged leading intermediaries for supplying fruit to its factories, it also attempted direct contracts with growers in the vicinity of the plants for supply of tomatoes. Initially, in 1984 to 1988, these were properly executed arrangements for the supply of specific quantities at the factory gate at predetermined prices. They did not include provision of inputs, extension or finance, as the farmers were well-versed with tomato cultivation and used to marketing the crop in nearby markets or to traders. The arrangements never worked satisfactorily, eventually deteriorating into mere understandings with a few select farmers nearby.

Pepsico had to commit to substantial exports from India as a condition for its entry into country in the 1990s. It decided to set up Asia's largest and most modern tomato paste plant in Punjab (650 TPD), even though the state had hardly any crop to offer. Pepsico's scientific advisers and consultants thought that tomato could be grown in the state and would be available for 120 days a year, which was adequate to meet the company's needs of a viable operation. It started a tomato contract farming scheme in 1997 with over 400 farmers, covering more than 2,000 ha under tomato itself. Contracts covered both input supply (seedlings, extension), some credit in the form of advance and loan of special equipment. Contract price offered varied according to regions, to cover the cost of transport. Quality considerations, vaguely specified, included colour, firmness and worm-infection. Most of the Pepsico contracts remained verbal.

The Nijjer family which had some prior experience of transporting small quantities of tomato to Delhi markets, operated a milk processing plant for supply to Nestle near Amritsar. With the latter's encouragement (Nestle was the largest ketchup seller in the country and bought Wimco paste), Nijjer set up at the same location a tomato processing plant of 300 TPD capacity, with some shared utilities and process equipment in 1998. It entered into formal, written contract with 200 farmers in 1999.

108 Both Pepsico and Nijjer introduced chilli cultivation in Punjab, as chilli sauce was considered complimentary to ketchup. In most instances, the same farmers took up chilli cultivation as well, on similar contracts.

Seeds: Emergence of Modern Seed f^irms Wholly Dependent on Contracts

Seed supply as a major business emerged in India in the 1970s in the wake of the Green Revolution. Farmers had now to buy the high-yielding or hybrid seeds from the markets. Some enterprising entrepreneurs tried to multiply seeds on large acreages under their control, but found the task of managing large farms difficult. While the state and Central governments promoted seeds corporations with their own large farms, private firms had to depend on numerous small farmers for multiplication of seeds.

Maharashtra Hybrid Seeds Co (Mahyco) was the first modern company to enter the business, quickly followed by a host of others, including subsidiaries of multinationals such as Pioneer. All of them followed a similar approach, providing the parent material to farmers and collecting the multiplied seed from them at predetermined prices. They exercised strict control (to the extent provided by their limited manpower) over all cropping activities of the participating farmers. The contracts were all written and duly signed and witnessed and have penalties for non-performance.

Organised seed trade emerged in the 1950s. Those in the business had no choice but to multiply the seeds on growers' lands, since their business could not own land and large enough parcels were hard to come by in the areas best suited for this purpose, anyway. Informal arrangements developed into proper contracts, which listed various obligations of both sides including supply of basic materials, adherence to prescribed practices, supervision and quality-checking and exclusivity of selling at prescribed prices. This business could not have developed at all without contract farming.

J K Agro-genetics started as a division to J K Tyres as part of corporate diversification ui 1989. It is now an independent corporate entity, and is the fourth overall. Pro-Agro is the Indian subsidiary of the global giant Dupont, dating back to 1988. Nath is an Independent company, its promoter having split from Mahyco around the mid-1980s. The crop offerings, contracts and performance of the three companies are quite similar.

109 Sugar: Striking Examples of Enlightened Farmer Leadership, Private Companies Following Lead

Sugarcane farmers in the Maharashtra district of Ahmednagar faced fluctuating fortunes due to prices paid by local gur manufacturers, which varied widely. The late Vitthalrao Vikhe-Patil, a modestly educated farmer-leader decided to organise farmers into a co­ operative to process their own cane into sugar. He was guided by the eminent economist, the late Dr D R Gadgil, and the first co­ operative sugar factory in India came into being in 1948, at Prawaranagar. Tatyasaheb Kore, another farmer leader in the south Maharashtra district of Kolhapur, who had suffered the trauma of burning his own standing cane field for want of a remunerative prices, followed suit in 1956 with another co-operative sugar factory at Warnanagar (both townships being named after rivers which supplied the water for irrigating the crops).

These co-operatives, actively encouraged by the state government, set up what were large plants at that time (ca 1,000 TPD of cane crushing) and over a short period of five or six years, developed first delivery systems for inputs and extension, farm supervision, and support activities, such as proper roads for transporting cane in time and water supply arrangements. Realising the critical nature of harvesting and quick delivery of cane to the factory thereafter, they started planning fairm calendars and eventually took over harvesting and transport themselves. In this sense, they exercised beneficial and firm control over crop management. Payments became timely and farmers could finance the purchase of inputs through their expected incomes. Incentive schemes appeared over time, linking bonuses to sugar recoveries.

These activities were funded out of the surpluses of the co-operative, left over after paying members remunerative prices. They also built housing for workers, community schools Eind hospitals subsequently. Modi Sugars in the North and Sakthi in the South, both private companies belonging to groups with diverse economic interests in their respective areas, also came into existence in the late 1950s - early 1960s. By this time, the already-established successful co­ operatives in Maharashtra set the paradigm of practices to be followed by other units, if they wished to retain the loyalty of their supplier farmers. The UP units, however, do not offer harvest and transport facilities, leaving these tasks to be managed by farmers themselves.

110 Current Status

Poplars - Mission Accomplished, No Contracts

The poplar scheme, divided into three phases (1984-87, 1987-91 and 1992-96) had average annual targets of around 5 lakh, 19 lakh and 20 lakh plants. The shortfalls of achievement were small. Wimco managed to achieve its objective of procuring matchwood, but the interest among farmers far exceeded Wimco's needs. The Assam pljrwood industry, forced to move out under a court ruling in the 1990s, relocated to Punjab, Haryana with the promised supply of softwood. A good, weU-developed, competitive market had emerged at Yamunanagar in Haryana. As a result, prices of mature trees expected to fall in the third phase to Rs 600 from the original Rs 800, instead rose to over Rs 900. Farmers had also become quite knowledgeable about poplar cultivation. Wimco, therefore, thought it fit to concentrate on the supply of planting material alone through its joint venture company, Wimco Seedlings, and depend on the market for its wood requirements. Accordingly, there have been no contracts since 1995. Yet WSL increased its supply of plants from 20 lakh annually to 30 lakh in 1997 and is today a modestly profitable operation engaged solely in the sale of planting material.

Tomatoes - Mission Abandoned, Sporadic Contracts

Wimco's tomato contracts never worked satisfactorily, even in its heyday. The attraction of the table market, which often had better prices than those offered by the factory, was too strong for the farmers to resist. Day-to-day fluctuations in the market prices meant either a glut or a complete absence of supplies for the factories. Wimco therefore continued its own market operations and also entered into more formal arrangements with larger entities such as neighbouring farms of State Seeds or Farms Corporation. These mostly were one-time arrangements between two corporate entities and are not to be treated as instances of contract farming. By the 1990s, this diversification venture ceased to be of much interest to the Compciny, resulting in its eventual sale and decline into a rather poorly managed organisation with numerous creditors among its suppliers. Its so-called orad contracts today are simply arrangements for purchase on credit from selected large fairmers.

Pepsico sold its tomato plant and contract farming business to Hindustan Lever in 2000. HLL, also faced with unreliable supply for its southern plants, had plans of outsourcing its requirements to

111 some smaller units in the West and concentrate on the Punjab operations. The contract operations had already declined to around 1,000 ha. By 2003, HLL found that its product was not cost- competitive with Chinese imports and shut down its plants, giving up contracts. Nijjer continues with its core of Eiround 200 farmers, assured of a market by Nestle.

Seeds - Contracts Forever Seed companies large and small now consider contract farming as a life-sustaining device. They cannot possibly manage any volumes without the active support and involvement of their contract growers. A senior decision-maker went so far as to say "This business will die in a day if there were no contract growers." The firms studied have current annual turnovers ranging between Rs 45 crore and Rs 57 crore and are engaged in food, cash and speciality crop seeds business. Each one of them has considerable claim to research and foreign tie-ups, which contribute greatly to new and more remunerative products. This in turn seems to please their contract growers too.

Sugar - Loyalty Pays Sugar industry as a whole has faced uncertainties in the recent past, but the plants included in this study have been successful in coping with this situation. One contributing factor to their success is their diversification - all of them are major alcohol producers, both industrial and potable. They also have co-generation projects, helping them save energy costs. Their main business, however, remains cane crushing and in a period of uncertainty for other units, they have managed to post increasing volumes of cane crushing, however modest such increases may be. Their crushing ranges between 5,000 and 10,000 TPD, and the annual season between 125 and 195 days. Sugar recoveries range from 10 to 12 per cent. All of these are not only above the national or regional averages, but also greater than comparable figures of neighbouring plants. Impact of Contract Fanning Poplars in North, Tomatoes in Pwyab - New Crops Established There were no poplars outside of government and Wimco nurseries in the North prior to 1984. Punjab grew less than 40,000 t of tomato in 1995, the start of Pepsico operations, as compared to the nearly 5 lakh t reported at present.

112 New Crop Acceptance

Crop and Region Achievement Poplars in UP, Punjab, Haiyana 2 lakh plants in 1984 (5,000 ha) 22 lakh annually between 1988-91 (55,000 ha) 30 lakh annually at present (75,000 ha) Tomato In Punjab 38,000 t in 1995 93,000 t in 1993 2,30,000 t in 2000 >5,00,000 t at present

Poplars, Sugarcane, Seeds - Assured Supply

Operations of the match manufacturer, sugar factories and seed companies are critically dependent on assured supplies of the raw material. This is achieved through their arrangements with producers of the raw materials, as also one tomato paste maker.

Peak Performances

Entity Parameter Peak Performance Wimco (Poplars) Plants distributed under 22 lakh in 1998, 1991 contracts and 1993

Pepsico Tomato processed 20,000 t in 1999 (75% under contract)

Nijjer Tomato processed 22,000 t in 1999, 2000 (all contract)

Wimco Tomato processed 6,000 t in 1999

J K Agro-genetics Turnover Rs 57 crore in 2003

Pro-Agro Seeds Turnover Rs 46 crore in 2003

Nath Seeds Turnover Rs 45 crore in 2002

Prawaranagar Sugar Crushing 15 lakh t in 2002 Co-operative

Wamanagar Sugar Crushing 12 lakh t in 2002 Co-operativep

Modi Sugar Crushing 10 lakh t in 2002 Sakthi Sugars Crushing 16 lakh t in 2002

113 Better Cane Yields, Sugar Recovery, Higher Farm Incomes

Sugarcane is an established crop in aU the regions under study. The far greater yields and sugar recoveries in Maharashtra and Tamil Nadu are generally attributed to the dominance of co-operatives or co-operative like private firms in these states and their superior performance. We found that in these states, the organisations studied had an even better performance than the state averages. This indicates that these organisations clearly provided better inputs and/or support services to their suppliers.

Cane Performance

Parameter Region Achievement

Sugarcane yield, t/ha (2001-2002) India 68.2 Bihar 48.2 U P 57.2 Modi Farmers 66.0 Tamil Nadu 114.4 Sakthi Farmers 122.0 Maharashtra 78.1 Prawara Farmers 95.0 Wama Farmers 96.3 Sugar recovery, % (2001-2002) India 10.3 Bihar 8.8 Western U P 9.9 Modi Farmers 10.2 Tamil Nadu 12.1 Sakthi Farmers 12.2 C Maharashtra 11.1 Prawara Farmers 11.5 S Maharashtra 11.1 Wama Farmers 12.8

Since sugarcane pricing is based on the recovery achieved, the farmers of these organisations also received prices higher than the state average. This translates into higher farm incom:es when coupled with the higher yields achieved by these farmers. This is possibly the most significant benefit arising from the relationship between the farmers and the co-operative and the single most important determinant of the farmer loyalty to the co-operative.

114 Better Tomato Yields in Pwyah

The Punjab farmer has taken to tomatoes enthusiastically, as indicated by the rapid growth of the crop. The contract areas show that not only is the spread of the crop rapid and wide, but also more productive as compared to the rest of the state.

Tomato Yield Comparisons

Region Grade Achievement

State 20 t/ha

Pepsico/HLL Average 26 t/ha

Best 56 t/ha

Nijyer Average 30 t/ha

Best 80 t/ha

The study thus shows the positive impact of contract farming on establishing new crops, improving productivities and desirable qualities and resulting in higher incomes to farmers and continuing assured supply of raw material to the organisations, when the programme works well.

The next Section analyses the reasons.

Perceptions of Contract Farming

Contracts Are Not Well Understood

Most contracts are not written down and hence differences of opinion about contractual obligations would be expected. Even when they are written, formal documents, as in case of poplars and seeds, there is significant proportion of farmers who are not clear about provisions of contract, especially their own obligations.

115 Areas of Darkness System. Factor % Doubters Poplars (N=65) Loan Terms 70 Intercropping 59 Pricing 54 Sales Arrangements 40 Tomato (N=38) Quality 74 Exclusivity 68 Sales Arrangements 53 Crop Practices 24 Seeds (N=43) Crop Practices 44 Group Discipline 28 Pricing 21 Advances 21 Sugarcane (N=81) Payment Procedure 54 Own Tasks 31 Pricing 31 Advances 25

Not Many Are Dissatisfied

Despite areas of misunderstanding, most farmers expressed their satisfaction with the contract systems and expressed a desire to repeat contracts in other commodities, as also with the same agency. This suggests a general acceptance of contracts by most users, primarily because of the satisfaction of their economic expectations.

Feel Good About Contracts System Factor % Positive Poplars (N=65) Satisfaction 89 Repeat Contract 37 Work with Company 68 Tomato (N=38] Satisfaction 79 Repeat Contract 63 Work with Company 86 Seeds {N=43) Satisfaction 93 Repeat Contract 100 Work with Company 93 Sugarcane (N=81) Satisfaction 78 Repeat Arrangement 78 Work with Company 80

116 Areas of Greatest Benefits

Most respondents were pleased about higher incomes and company association, in that order. Cane growers also expressed satisfaction about social facilities they enjoyed. These responses conform entirely to prior expectations regarding contracts.

Best Benefits from Contracts System Factor % Positive Poplars (N=65) Higher Income 92 Association 72 Tomato (N=38) Higher Income 79 Association 66 Seeds (N=43) Higher Income 91 Association 95 Sugarcane (N=81) Higher Income 100 Association 74 Social Facilities 67

Reasonable Periods of Association Most respondents were associated for reasonably long periods with the organisations, sugarcane and seeds being longer than the others. This suggests continuity, which is the most concrete indicator of satisfaction with the contract system.

Going Steady with Contracts System Average Length of Association

Poplars 09.5 years Tomatoes 05.6 years Seeds 19.3 years Sugarcane 27.9 years

Buyer Responsible for Defaults Even though farmers felt good about their association with the organisation, they also seemed to blame the buyer squarely for defaults.

117 Buyer Beware about Defaults

System % Blaming Buyer Poplars (N=65) 38 Tomatoes (N=38) 89 Seeds (N=43) 51 Sugarcane (N=81) 30

Thus, there is a high degree of satisfaction with the contract system as practised. The biggest contributors are income and prestige associated with contracts. Yet the antagonistic relationship between the two parties is real and there are clear areas to improve understanding of what the contracts entail.

These aspects are further discussed in the next Section.

118 CONTRACT FARMING: POTENT BUT LIMITED REMEDY?

Need for Correct Perspective on Contract Fanning

Contract farming has b^n much in the news in the last couple of years, not always for the right reasons. Most analysts believe tiiat it would be an important component of agricultural reforms currently on the anvil. There is even a discernible bandwagon effect following various encouraging announcements and measures by both state and central governments. The Punjab experiment not only attracted a large number of agribusiness firms, but also a number of states which would like to emulate it if it succeeds. Some enthusiasts have gone so far as to call it the means to usher in the next green revolution.

There exists also a smaller, but no less vocal, group which demonises it. It links the interest in contract farming to undesirable consequences of globalisation. It believes that there could never be a right balance of power between small growers and large, possibly multinational, buyers. This case often rests on Pepsico and HLL being the proponents of contract farming in the recent past. Some critics have called such enterprises as the modem-day equivalent of India's exploitation by the East India Company. The debate and arguments get invariably linked with the on-going WTO negotiations on access to agricultural markets and the well-publicised difference of opinion between the OECD countries and the developing world led by Brazil and India. The case is that since contract farming would largely benefit MNCs and First World traders, India must shy away from it to strengthen its position.

The preceding review of some major forays into contract farming over the last several decades highlights the need to understand the exact role it plays and under what specific conditions, both when it appears to have succeeded and when it does not. Its consequences for the local, national and global agricultural economy must be seen in that order, along with the time dimension, to see iif it needs to be in place always.

Finally, we need to develop an understanding on the extent of applicability of this intervention so that its place in the overall spectrum of agriculture sector reforms is defined. We would then be able to assess its contribution to on-going agricultural development

119 correctly and use it judiciously as a strategy, rather than see it as a panacea or curse. Such a perspective would also help us identify the areas and measures of support it would require to succeed.

What does Contract Farming Do?

A plain vanilla contract farming arrangement is a commitment by a farmer or a group of farmers to grow and deliver to the buyer agreed quantities of a commodity at a predetermined price. The buyer (trader or a corporate), as always, has the additional options of either buying the commodity from the market or growing it himself on own or leased land. The following is a schematic representation:

Farming Models

and farm-market linking mechanisms

Farmer <' Main Driver of the Chain ^> Corporate

Independent Farmer Farm Captive Farmer Cooperative Management Farming

Farmer <' Main Linking Mechanism ^> Corporate

I Auctions I

Therefore, at its simplest, contract farming is the creation of an additional linking mechanism through another channel of disposal of the crop. It is thus a part of the overall supply chain, which acts parallel to the standard market mechanism.

When does Contract Farming Work?

The poplar programme embodied very many new ideas and concepts, some almost revolutionary:

• Poplar was largely an unknown species of tree In the area where it was to be propagated;

• Trees were supposed to be grown In forests or on bunds, but not in fertile agricultural land;

120 • Taking regular field crops in the field not occupied by trees was a totally new concept;

• The income from trees was due only eight years hence, but the cost stream was steady;

• No buyer other than Wimco was on the scene.

Similarly, large-scale cultivation of tomatoes was unknown in Punjab at the beginning of the 1990s. The accepted wisdom had it that the growing season was too short to be attractive to the farmer. Hardly any markets existed for the farm purchase (since there was no production worth the while of traders) of this otherwise popular constituent of the home kitchen vegetable basket.

Thus, both poplars and tomatoes in Punjab were new crop enterprises for the farmer, with attendant uncertainties of production and meant that the farmer would be subject to risk. Large corporate entities backing the new crop venture through contracts and supplies helped improve the risk perception and persuaded the farmer to accept the new crop.

Contract farming is an effective device for introductng unknown crops or farm technologies.

Both these efforts also entailed considerable market risk (maximum in the case of poplars), since there were no other known buyers. Purchase contracts helped overcome the market risk as well. Conversely, when good, competitive markets developed for both these commodities within a decade of introduction of contracts, farmers and buyers no longer needed the support of contracts. Markets became the effective and key constituents of the supply chain.

Contract farming helps when markets do not exist or are underdeveloped; conversely, contracts diminish in importance with development of competitive markets

Seed multiplication imposes stringent quality restrictions. Seed enterprises need to ofler the farmers attractive incentives to observe them and/or deterrents for flouting them. This is made possible by suitably structured contracts, but not otherwise.

121 Contract farming works when specie quality requirements need to be observed.

Tomato growers in the South had access to markets for table purposes at all times, as did those in Punjab when the markets developed. Processors in the South could source their supplies from markets, and Pepsico from non-contract growers. Under such circumstances, farmers could gain by selling in the open market at the processors' expense when the market price was higher than contract price. If it was lower, the processor could gain at the farmers' expense by buying outside of contracts.

Seed multipliers and traders, on the other hand, have a strong mutual dependence. Seed companies cannot function without their contracts, as they would be bujring unknown and untested material from the market, and individual seed multiplier's access to the market is too limited and of too short term advantage to serve any worthwhile purpose. Besides, straying destroys in one single instance trust relationships built over long periods.

Contracts are effective when there is no zero-sum game (one party's gain at the expense of the other). They are ideal for a win-win situation, since they represent a natural mutual dependency.

Poplar farmers considered both free replacement of dead plants in the first two years and proper insurance thereafter as fair and adequate coverage of their major risk of plant mortality. This was among the most attractive feature of the scheme. In contrast, Punjab tomato farmers felt that while Pepsico covered itself adequately against the risk of plant failure, farmers were left without any such life-savers.

Contracts succeed when they contain demonstrably fair risk transfer or coverage measures and trust relationships built over long periods.

Availability of poplars was crucial to Wimco's survival as a match manufacturer, but its tomato paste plants were parts of diversification and contributed only a small proportion of its revenues. Tomato paste operations were only incidental for both Pepsico and Hindustan, whose main business activities did not depend on them. Seed multiplication is the core of seed companies' activities, as is sugarcane cultivation for sugar factories. Contracting organisations paid far greater attention to the structure of contracts and put in far greater effort to ensure that they work when their

122 own main activity was dependent on the successful performance of the contract. When it did not, contracts, too, became incidental.

Contracts succeed when they are critiihl to the continued operations of the buyer organisation. They are deficient when their contribution to the buyer is minor.

Both Pepsico and Nijjer supplied the planting material initially. Nijjer continued to do so well into the contract period, replacing older varieties of tomato with newer ones, otherwise not available to fanners. Farmers' access to chillies was also solely through Nijjer. Even though UP Forestry Department supplied poplar planting material, their availability was negligible compared to the Wimco programme requirements, which were met almost wholly from the company's own nurseries. Seed multipliers, of course, depend entirely on the seed company for the planting material. Tomato growers in the South, by contrast, were not at all beholden to the buyer for planting material or any other input supply, as were sugarcane growers in the North. Contract performance in such circumstances was, not surprisingly, weak.

Extension is different sort of input. If the farmers feel that they have been in their business long enough, knowing all that there is to know, or that the company is not offering them anything new despite charging for the advice, their adverse reaction could be substantial and damaging to the performance of contract.

Proprietary planting materials and other inputs, as well as genuinely novel advice help improve contract performance by increasing the degree of dependence.

Seed processors discovered that the best defence against possible default is to deal with groups of farmers through their leader, rather than work with individuals. The group, which has usually strong kinship or other social ties, acts as a watchdog against default, since the entire group contract is jeopardised in such an event, much the same way as self-help groups do in case of micro finance. This group also helps in reducing the cost of transactions, as the buyer needs to deliver his contributions - supplies, extension, etc - within a relatively compact area and could reasonably expect group members to learn from each other.

The sugarcane co-operatives are even better examples of the positive influence of group dynamics. They function in compact areas with

123 relatively homogeneous populations with strong internal social coherence. Their elected leadership must go back to the members for their office and are thus accountable to them, at least partially. Their origins and orientations toward social service strengthen the existing bonds greatly. Creation of education and health facilities, infrastructure and other such activities have helped build up the community spirit and add to the social pressure to adhere to contract provisions.

Strong, self-regulatory social systems and pressures help improve contract performance.

The most important factor in determining whether contracts would work or not is the selection of the crops in the first place. They can be classified on the basis of the risks involved, both in production (secondary, in economic parlance) and in marketing (primary). Completely unknown crops are high in both these risks, whereas newer varieties of existing crops or crops with stringent quality specifications have high production risks, even when buyers guarantee prices. Crops with relatively price-sensitive demands, such as vegetables have high market risks, even as the farmer is well familiar with the production technology. Finally, subsistence crops are the least risky on both parameters. The following diagram illustrates this:

High New seeds Poplars

^•3 3 ^ is o "iH ^C ou Low High

Primary uncertainty (marketing)

Cereals Vegetables Low Crop Suitability Classfication for Contract Farming

124 The north-east quadrant, where poplars are located, is the area with the best prospects for contract fanning, while the south-west, where cereals are, is the least suitable for it.

Priorities for Agriculture Development for Decade

Agriculture and rural development in the foreseeable future - say, the next 10 years - would be driven by the objective of enhancing its value-creation potential to help redress the present imbalance between its contribution to GDP and the share of population dependent on agriculture. The per capita GDP of those engaged in agriculture works out to be less than a fourth of those engaged in other activities. Agriculture contributes less than a third of the GDP while providing livelihood to nearly two-thirds of the population. This in turn calls for two priorities. The first would be to maintain food security at the present or higher level and the second would be to adopt increasingly precise technologies to grow high-value crops for processing as well as exports. The nature of strategies to be adopted for the two sets of priorities is significantly different and calls for well-defined and distinct sets of activity.

The first priority will cover a far larger proportion of rural activities. It would include all food crops, as well as oilseeds, sugarcane and most fibre crops. Infrastructure support and reform of policies currently underway are likely to be the engine of growth here. Better roads and storage facilities would help reduce the present value-destruction on account of poor access to markets and help provide farmers additional incentives for productivity increases. Similarly, institutional reforms and better availability of credit could result in the easing of many of the current constraints on productivity. Continuing stress on bio­ technology could provide superior planting material with better productivity. The latter priority is more a niche activity, with pockets of high-value agriculture, based on the best technical inputs available. It will be market-driven, in terms of both nature and quality of crops to be grown. Precision application of all Inputs, including water and micro-nutrients, will help reduce costs, while strict adherence to quality parameters would help improve price realisation from both domestic and export markets.

This is not to say that the two sets of activities are mutually exclusive. It is quite likely that the same farmer may cultivate subsistence as well as high value crops on parts of his land, in which case, spillover effects would help Improve results of both activities. Concerns such as conservation of resources and

125 minimising environmental damage would be common to the entire sector. Similarly, better infrastructure would help improve accessibility of all rural areas in general. All cultivators require cheaper finance on easier and more liberal terms. The one overriding concern for all of Indian agriculture in the immediate future would be to reduce what appear to be enormous gaps in the norms of input use and presence of residuals prevailing in India and abroad, especially the developed countries. Unless this happens, India would become increasingly isolated from the global agricultural mainstream.

What Role for Contract Farnaing'?

The crop suitability classification discussed earlier in this section suggests that cereals and other such crops would be the least suitable for contract farming. The primary reason for this is that these commodities, cultivated for long, have now well-established and inter­ connected markets in India, which minimises market risks. Given their experience of newer varieties over the last three or four decades, farmers are confident of their knowledge base. Progressive farmers have access to agriculture universities and experimental stations in their areas. The secondary risk is also thus mininised. The irony inherent in the present experiment in contract farming is that the remedy is being suggested not because of market failures, but because of an unwillingness to face the markets. The Punjab farmers have long got used to the paddy-wheat cycle cultivated for cash incomes, primarily through the minimum support price operations. The prices were generally calculated on a cost-plus basis and assured the farmers a reasonable return with virtually no risk. When the Food Corporation of India proposed price cuts due to inferior quality (such as paddy blackened by moisture damage), high-powered political lobbjang ensured that farmers got the announced price without cuts. Thus, farmers were long used to assured prices and not face market vicissitudes. As a senior administrator put it pithily, "The Punjab farmer has long been a contract grower for the FCI."

Wider economic concerns, such as continuing and mounting cost of subsidy implicit in the minimum support price operations, and the undesirable consequences for water consumption and soil productivity of the virtual mono-culture system, have now led to a crop diversification campaign. The highly publicised large scale scheme, a variant of contract farming covering other food crops, also aims to shield the farmer from the market. It has some major disquieting features. There is now an intermediary - such as Mahindra ShubhLabh or Escorts or Rallis - which has no direct

126 interest in the crop of its own. It provides inputs, mostly purchased from others, offers extension at a price (which farmers increasingly question) and sells the crop to the eventual buyer after adding on its own commission. The unintended consequence is that there is now an additional link with its own cost in the supply chain, which lengthens it instead of shortening and leads to additional intermediate retentions instead of reducing the difference between consumer expenditure and farmer receipts.

Given the conceptual weaknesses in the many contract farming schemes of this type now underway in Punjab and elsewhere and their somewhat flawed implementation, the results could well fall below the expectations of all concerned, namely the government, firms involved and most of all, participating farmers. The current enthusiasm for contract farming would then wane.

The solution is to help farmers face properly functioning markets and train them to grow market-driven commodities. This can be best achieved through accelerated reforms of agricultural marketing which comprise removing older restrictions, improving information base and access to it, and reducing delays and bottlenecks caused by inadequate and outdated physiccil facilities. In the United States, far larger volumes are effectively and economically handled through institutions and practices such as the Chicago Board of Trade, bulk storage (grain elevator) operators and futures trade, efficient bulk transport and free flow of appropriate information.

Contract farming would be, however, eminently suited for the other set of activities. The high-value, precision-technology segment of agriculture would be characterised by introduction of new crops and hitherto unknown techniques as well as inputs for their production, a situation not unlike that of poplars in the 1980s. Such commodities use relatively higher amounts of capital (both fixed as well as working) and are faced with an attendant higher risk. They require targetted, not general purpose, marketing, which often involves special cirrangements for storage and marketing. These tasks could well be beyond the means of an individual farmer and would need a possible specialised agency as a buyer, preferably a contractual one.

The initiative would have to come from enterprises set up specially for trading, processing or exporting such commodities. These bodies could access technologies and inputs best suited for the selected area and then devise contract schemes appropriate for their purpose. These

127 would be manageable, in the sense that they would be addressed to a specific niche, within a well-defined area and covering a reasonable number of growers, rather than spread over a very large tract with innumerable farmers. Tliey would also be more balanced, in the sense that the promoters and the growers would face a mutual dependence, rather than a potentially exploitative situation.

Contract farming would have to be the preferred strategy for crops which need to meet relatively stringent quality parameters, such as seeds, organic and other crops meant for exports (with very SPS standards and/or cultivation practices), since they would allow the buyer a role in crop production management at all stages.

Contracts could also be means in the short- to medium-term for bringing about some specific changes in crop varieties or techniques. They would essentially provide an insurance coverage to the farmers in the event of deviations from expected yields. Farmers would themselves walk away from contracts on realising the full benefits of the changes sought to be made.

An indicative listing of crops and regions where contract farming could provide desirable results appears below. It would be easy to add to this list fruit and vegetables currently used for processing, such as mango, citrus, tomato, peas and so on. As the tomato processing experience so far suggests, the temptation of the table market is too great and the demand too large to nurse any expectations of diligent performance of such contracts. The Nijjer experience suggests that even for such crops, there is a possibility of contract farming being effective. Two very fortuitous conditions work in favour of Nijjer. First, it haS a long-standing and proven relationship with Nestle which provides it not only technical support but finance to bail out of trouble as well. Periodic delays in Nijjer payments to suppliers ultimately affect the multinational. It, therefore, pays the suppliers (or causes Nijjer to pay them) so as not to affect its own supply chain. Secondly, the buUc of its 200 contract growers are "gentlemen farmers," or absentee owners of lands. This group is not concerned about daily fluctuations in the price and gains or losses at the margin. It much prefers the stability of contract and payments from known sources. Their interest thus lies in honouring the contract and receiving periodic payments. These exceptional factors contribute immensely to the Nijjer success in contract farming. They cannot be realistically expected to prevail in sundry and other situations.

128 Crop Region Sub-region in Maharash tra Seeds Current respective regions Vidarbha, Marathwada Organic Foods, Vegetables, Current respective regions Current respective regions Medicinal Plants, Kashmir, Himachal Konkan, Parts of Narmada Aromatics, etc Pradesh, Uttaranchal, and Tapi valleys, the North-east, Western Chandrapur Ghats, Kerala Speciality Vegetables Current vegetable Pune, Satara, Nasik, (Gherkins, Asparagus, growing regions Aurangabad Divisions Coloured Capsicum, Baby com, etc)

Required: Selective Use of Contract Farming Contract farming offers an exciting way of marrying small-farm efficiencies to scale economies of processing and marketing. An FAO guide, "Contract Farming: Partnerships for Growth" argues that well- managed contract farming has proven effective in linking small farms sector to sources of extension advice, mechanisation, seeds, fertiliser and credit, and to guaranteed and profitable markets for produce. "It is an approach that can contribute to both increased income for farmers and higher profitability for sponsors." When efficiently organised and managed, contract farming reduces risk and uncertainty for both parties and provides producers an opportunity to add value to the production.

In the Indian context of limited land availability and deep-seated antipathy towards corporate ownership of land backed by legislation, contract farming is an acceptable via media for corporate ownership. It would be an excellent boon to the processing industry. A senior policy maker opined^that advantages of corporate farming can be attained by contract farming; it is the latter that has great promise in Indian agriculture and not corporate farming. As Indian farm exports surge, so do the rejections of consignments due to factors such as pesticide residues beyond specified limits. Grapes, psyllium husks, lentil products, black pepper, sesame seed were among such rejections from the lucrative European markets. These warning lights have flashed just before the bar is further raised next year, with traceability and trackability being essential requirements of all agricultural exports. Export product integrity must be established through thorough records, almost in the manner of provenancing an exotic species. Contract farming would be an ideal means to handle such concerns.

129 National Agricultural Policy 2000 envisaged private sector participation through contract farming and land leasing arrangements to facilitate accelerated technology transfer, capital inflow and assured market for crop production, especially for oilseeds, cotton and horticultural crops. The selection of crops could be questioned, but not the basic logic of this potent tool. Some major concerns about contract farming are about contracts being tilted against farmers especially in view of their small size and poor economic power. Farmers would likely end up as price takers and corporates as price makers under such a situation. The legal proeedures could be wholly one-sided. Defaults are usually difficult to pin, and in the patently unequal power balance between the farmer and the buyer, sympathies would always be with the farmer. The survey shows that most farmers blame the buyer for all defaults, anyway! The legal system has no quick or cost-effective means to enforce contract performance. Even if it did, the number of such contract performance litigations would be so enormous as to hopelessly clog the system. Simiilar considerations make corporates want to deal with fewer numbers of larger farmers. Otherwise they would have to deal with thousands of contracts for even modest quantities. High cost of interaction with many small fanners makes corporates tend to work with fewer larger farmers in very few crops. Thus we must view contract farming as well-planned, precisely targetted tool of limited impact, not as a powerful weapon of mass achievement. It is a step in the evolution of competitive marketing, not a permanent substitute for it. As poplar and tomato farmers have shown, emergence of properly functioning, competitive markets has meant the end of contracts. This is not necessarily a bad development. Contract farming has been likened to vertical integration. As more and more corporate entities have discovered to their own chagrin, in-house sources of raw material are not always cost-effective. Backward or forward integration makes sense in underdeveloped or weak markets, not in strong, competitive fields.

Expectations from contract farming must be modest. It must be seen to be based on trust, creating a sense of comfort for participating farmers, as in case of seeds and sugarcane. Ideally, it would be self- liquidating, as in case of poplars and tomatoes.

130 CONTRACT FARMING AND INSTITUTIONAL FINANCE

Basic Appeal of Contract Fanning

Credit and Indian agriculture have been caught up in a vicious cycle relationship. The relatively low profitability of Indian agriculture is directly linked to a poor use of various bought inputs. Consequently, realisation of cash from market disposal of crops is also relatively low. Most subsistence agriculture is thus marked by poor productivity and the attendant low surplus.

It is axiomatic that this logjam could be broken by an injection of credit to facilitate greater purchase and application of inputs. Since agricultural output depends critically upon vagaries of climate, the prospect of additional output and surplus is fraught with substantial risk. Given the dominance of small peasantry Indian agriculture, credit providers have been extremely wary of lending to it.

This defining characteristic of Indian agriculture has been recognised by the many groups and committees whose work spanned the entire twentieth century. Therefore, creation of special institutions such as multi-purpose and credit co-operative societies, radical policy changes such as nationalisation of banks and imposing on them mandatory minimum levels of lending to agriculture, establishing apex bodies for provision of rural credit and refinance have been tried since independence. Yet credit remains a constraining factor to increase agriculture productivity even today. The consensus now is that credit flow to agriculture needs to be doubled within the foreseeable future. Apart from factors such as weakness and ineffectiveness of institutions, increased credit flow to agriculture is constrained by two other major causes: first, given the low resource base and limited risk bearing ability of the peasantry, credit absorption capacity is limited. Second, the cost of delivery credit and eventual recovery is relatively high due to the diffused and dispersed distribution of the intended users of credit, which cannot be offset by higher interest rates, since that would further limit the ability of farmers to avail of credit. This is yet another manifestation of the vicious cycle of credit and agriculture.

At the level of individual farmer, a similar situation prevails. If he fails to generate the expected cash surplus, he risks default, which would otherwise make him ineligible for further institutional finance.

131 If he has borrowed from a private money-lender, this could lead to a possible loss of his land. These considerations inhibit fanners from taking full advantage of the available credit. If they overcome these fears and borrow, there is a fear that natural calamities such as droughts and floods could cause such enormous devastation as to lead them to even suicides, as has been witnessed recently.

Market and production uncertainties lead to defaults and add to the desperation. Vikhe-Patil realised this some 70 years ago. His early campaign to persuade farmers in his area not to default on earlier loans was motivated by a consideration of rescuing them from the debt trap. He did so effectively and his Loni credit co-operative became stronger.

Contract farming in a general sense places the responsibility of provision of inputs and extension on the buyer, who possesses not only an adequate information base but also has the resources to bring the needed inputs and services to the field level. If this aspect is effectively taken care of, production uncertainties inherent in agriculture would be substantially reduced. At the same time, the buyer also makes a cormnitment in advance to purchase the crop on its maturity at mutually agreed prices. This would reduce considerably the market risk associated with crop cultivation, if not eliminate it entirely. In this sense, contract farming is indeed a possible instrument of credit deepening.

Some other factors make contract farming even more attractive for increasing credit flow to agriculture. First, the presence of a third party interested in a greater disbursal of credit could lead to outsourcing many preliminaries such as identification of borrowers, their assessment and related paper work. Second, buyers' commitment of purchasing the offered quantum at predetermined prices to the grower would substantially reduce the risk of default to the lender. In this sense, cost of delivery of credit could be brought down, while improving the prospects of recovery at the same time. Therefore, credit institutions are interested greatly in using contract farming as a means of improving credit disbursal and meeting the mandatory targets for priority sector lending. NABAFiD's involvement in such activities for over two decades and the more recent interest of public sector and private commercial banks are clear indicators of this.

132 Increasing Involvement of Institutions in Contract Farming Despite the strong appeal of contract farming for institutions in principle, their actual involvement has been quite limited even at present. This is because of two reasons: first, there are notrnany well-planned contract farming schemes with adequate safeguards for all concerned, backed by credible sponsors, and second, such experience as does exist has not been all positive. The Wimco- NABARD poplar programme, possibly the largest and the most successful one so far, still evokes some adverse reactions, as discussed in the case study.

Some prior considerations, derived from the experience analysed in this document, would go a long way to help improve the situation. These include:

Niche Approach Both the poplar and sugarcane commodity systems suggest that schemes, which are aimed at reasonably compact, well-defined, homogenous areas are likely to succeed. The target crop activity should also be a similarly well-defined one, which concerns a crop likely to be taken up by a manageable number of growers within the area. These growers should preferably share some other common traits, so that appealing to them in common is both workable and effective. This would considerably economise the effort required to create awareness and interest among the intended participants.

Seriousness of Sponsor Both Wimco and the Maharashtra co-operatives displayed a remarkable persistence with their chosen activities, poplar growing and sugarcane. Wimco was well-armed with research and experimentation, conducted over considerable period, to prove to governments, growers and bankers alike that poplar cultivation was not only physically possible, but also economically very attractive. It was also in a position to find workable remedies to problems encountered along the way. Both Vikhe-Patil and Kore had persuasive powers not only with fellow-farmers but government agencies as well, which converted an originally indifferent, if not hostile, environment to a strongly supportive one. Their persuasion was based not just on words, but their actual performance.

The very same Wimco, however, depended mostly on traders for its horticulture operations and did not structure the programme with

133 anywhere near as much care as it did the poplar one. Consequently, it continued to be dependent largely on middlemen and market operations rather than contract suppliers for tomatoes. HLL also was in the same situation. Pepsico may have been very serious in launching tomatoes on the basis of substantial research inputs, but did not display the same thoroughness in designing and implementing the contract farming scheme. Tomato processing was a marginal activity for HLL, while it was nothing more than meeting a stipulation for entry of its main activity for Pepsico. By contrast, the much smaller and less professional Nijjer has worked its contract scheme much better. Size and'previous reputations of an organisation are thus no guarantee of their commitment to the scheme in question.

Therefore, bankers need to be particularly careful in selecting the right sponsors.

Workable, Participative Procedures and Paperwork

The pioneers of sugar co-operatives had cut their teeth in credit co­ operatives. They not only understood the criticality of credit for their activities, but also the need for all the preliminary work, which would help ensure greater repayment. Similarly, Wimco acquired a thorough knowledge of banking procedures and clearances when it launched the poplar scheme. It recruited commerce graduates and trained them thoroughly in these tasks. They could thus participate as equals with bankers in the preliminaries. On their part, bankers were happy to see a part of their task being performed without unduly taxing their constrained resources and were thus pleased to be of assistance in the further spread of the programme.

Dealing with Groups as against Individuals

The experience of seed companies shows that dealing with groups is the preferred, if not the only, way of obtaining acceptable contract performance. NABAFiD itself is now the sponsor and patron of the largest Self-Help Group programme anywhere in the world. The experience of sugar co-operatives also suggests that there is a substantial group synergy which could be exploited positively. Therefore, there is considerable merit in dealing with groups, rather than individuals, in devising contract schemes. This point further highlights the need to work on niches, which would help form groups.

134 Risk Coverage : Critical!

Wimco had to necessarily seek suitable risk coverage because poplars had a long term maturity and their premature mortality was a real danger and risk. Its offer of free replacement of juvenile plants and involvement of GIC in insuring older ones went a long way to populcirise the programme. Sugarcane has not much of a production risk, since it is an irrigated and old, established crop. Market risks are covered through the regulated price mechanism, isolating farmers from market shocks. Seed companies' offer of meeting market prices covers this risk as an upside and limitation of growers helps avoid the downside.

In sharp contrast, horticulture produce suffers from a complete absence of any risk protection measure. Fcirmers are most concerned about market price variations and the feast-or-famine syndrome arises from it. Processors, too, are quite C5mical, using quality as an excuse to default on purchase commitments in case of market gluts. These experiences emphasise the need for a suitable risk coverage mechanism to be an integral part of the contract farming scheme. Fortunately, the entry of a large number of private insurance companies even in general and agriculture insurance areas opens up numerous possibilities for innovation. NABAPUD itself has promoted the Agriculture Insurance Corporation.

Bankers intending to participate in contract farming would be well- advised to seek the involvement of an insurance agency to evolve a tailor-made, innovative approach to cover potential risk and create greater comfort for the farmer.

Repayment : Alertness to Changes

Most contract farming schemes run on a tri-partite arrangement between sponsors, farmers and bankers. On purchase, the sponsor deposits the payment in the account of the farmer in designated bank, which then deducts the repayment at the source. On paper, this arrangement should work well and ensure near-total and timely repayment. This is how the Wimco poplar programme was envisaged to work.

In reality, however, the rapidly developing shortage of soft wood caused a heavy appreciation of poplars, to as much as 150 per cent of the price promised by Wimco. This led to the wood being leaked out of the system to other users, in a cash transaction. Farmers

135 happily pocketed the cash and did not repay their loans. They did so later on, rather reluctantly, when they discovered that old outsandings would preclude their participation in fresh poplar cultivation. This situation led to some litigation and considerable mutual suspicion and acrimony between Wimco and bankers.

It is not as if this was a totally unforeseen occurrence. Wimco had itself planned on using only 10 per cent of the wood available through the programme. The balance was always meant to be sold outside. Therefore, suitable strategies to ensure no leakages out of the system or devising methods to recover funds even in the event of a leakage are necessary. When it happens, it must come as no surprise, unlike in the Wimco situation. One possible way is to identify in advance avenues in which potential leakages would occur and tie up with lead actors there to recover repayments even under these circumstances. This calls for a continuing monitoring of the market environment throughout the growing season and an arsenal of actions to countervail the impact of such leakages.

Avoid Litigation

As in case of contract default, litigation to recover money on default would be largely fruitless and quite expensive. Adoption of desperate measures by farmers would worsen the situation. Therefore, bankers need to support measures such as those suggested for conflict resolution to ensure higher and prompt repayment. Bankers must certainly avoid the temptation to attach the borrowers poor belongings.

136 MAKING CONTRACT FARMING CONFIDENT FARMING

Reforming Agricultural Markets

Indian agriculture policy until recently was based on the premise that the government must regulate agricultural commodity markets to protect the farmers' interests. They were supposed to be exploited by traders as a class through such means as collusive price fixing and further short-changed through manipulation of weighment and quality standards. Delayed and short pajnnents were also suspected to be instruments of abuse by traders. The regulated markets legislation sought to eliminate such malpractices by allowing transactions only in well-identified market yards and under the supervision of a statutory market Committee. These yards were gradually provided infrastructure such as roads and other modes communication linking hinterland to markets, auction yards and platforms, godowns, branches of banks, amenities to users, among others. The market committees levied a small market cess on the volume of trade to finance these facilities.

The regulation act is now considered to have outlived its utility, the obvious merit of the actions it provides being more than offset by its negative effects, albeit unintended. Over time, procedures and paper work became the focal points of market regulators and inspectors, rather than facilitation and enlarging of trade. Regulated markets gradually became bottlenecks. For example, licensing of traders and restricting transactions only to licensed traders became an opportunity to create cartels, thus defeating the very purpose of open and competitive trade. The proportion of cess to be charged also went up, and at least in some states, became an instrument of generating resources for governments for purposes not related to agriculture marketing. At the same, the addition of even a few percentage points affected the existing low trade margin, effectively making regulated markets less attractive as trading venues.

Limited access to open trade adversely affects overall production of new and diversified crops. This is highly relevant now, when India needs to move into competitive enterprises in the context of reduced dependence on subsistence crops and greater recourse to global trade. Confining trade to the existing yards and traders to recognised ones may not suit new crops with new spatial patterns and trading entities.

137 Processing and value-addition undertaken by corporate bodies may not be able to afford the cost of a chain of intermediaries and their retention. Similarly, the present practices of unbagging and bagging of produce for physical examination of the commodity prior to auctions and its manual handling could cause not only avoidable losses and deterioration of produce quality, but also add to costs, further worsening the already narrow margin involved in this trade. Such considerations prevail at present and there is a general consensus freeing agriculture from such constraints through appropriate reform is an idea whose time has come. A draft model law has been circulating for about a year now. The draft recognises some of the shortcomings of the existing system and acknowledges the need to reduce the chain of intermediaries, allowing greater corporate presence and reducing the wastage, cost and time involved in marketing.

The draft recommends that state governments and its designated agencies may recognise additional sub-market yards, including those managed by persons or bodies other than market committees as markets under the act, to provide greater participation of those who are presently not in the market. It also provides for the establish­ ment of special markets for specific commodities and special committees to govern them.

The draft also discusses contract farming. It proposes a regulatory framework, which is quite formidable, with provisions for registration and superintendence of activities.

The proposed draft suffers from a number of weaknesses:

• First, it seeks to present some of the practices already followed by many state governments as innovations. For example, recognition of designated places outside of market yards as sub- markets for specific purposes is already accepted by a large number of states. Soyabean and wheat in Madhya Pradesh, spices in Kerala, vegetables and flowers in Andhra Pradesh and Kamataka are a instances where the respective state governments have granted such recognition to specific organisations. Such concessions notwithstanding, problems associated with regulated markets continue to be felt; • Second, it appears that the draft bill would still require the physical movement of a commodity between the place it is produced and a market, either an existing one or a facility to be

138 recognised under the new procedures. A free and unrestricted direct movement between the point of origin and processing (which would include grading and packaging centres as well in case of fresh produce) or consumption could still be a distant dream, thus not permitting reduction of cost, delays and wastage, not to speak of produce quality deterioration; • Third, it is not entirely clear that the role of state administration in the control and direction of trade would diminish under the new provisions. On the contrary, vesting them with additional powers of recognising and licensing new entities would seem to add to their already substantial powers. Most of our legislation suffers from the bane of exception-making, which provides enormous discretion to those empowered to do so. Reform and freer trade require removal of such discretion, which could and has acted as a hindrance;

• Finally, the procedures laid down for the governance of contract farming enjoining states to make appropriate legislation also suffers from a similcir weakness of over-administration, instead of facilitating its greater espousal.

Our experience of reform and liberalisation for over a decade suggests that replacing one set of regulatory processes with another, seemingly more benign ones, does not solve the problem caused by unnecessary controls. The initial experiments of hesitant loosening of control governing most industrial activities are now replaced by removal of controls in almost all areas, with salutary results. Reform of agriculture does not have to go through a prolonged and possibly painful rediscovery of this phenomenon. It could be built on the experience already with us and trade eind contract farming, wherever applicable, could be freed of unnecessary control, even as farmers' interests are adequately safeguarded.

Our recommendations below are guided by this consideration. Needed : A Model Framework Our case studies lead to the unequivocal conclusion that although well-designed contract farming schemes generally work, they do not guarantee performance. Farmers face a great deal of ambiguity in most instances and responsibilities and duties of the contract are not clearly understood. Conflicts are hard to resolve and legal remedies are both cumbersome to come by and virtually impossible to implement.

139 Therefore, it is evident that we need a model framework, which would help clarify most of these issues. It would further suggest innovative measures for ensuring performance of contracts, avoiding conflicts and resolving them efficaciously and economically should they nevertheless arise. Some of these measures may require modifications or amendments to the legal framework, which would also need to be elaborated.

The task, therefore is to bring clarity to the basic issues, suggest workable approaches to effective implementation of contracts and conflict resolution, and a mix of policy and legislative measures, to promote contract farming. The aim is to take the pain out of contracts by providing comfort arrangements for all the parties.

The remaining paragraphs contain an attempt in this direction. Clarity on Issues: Sponsors Type and Content of Contract The first issue that needs to be clearly spelt out is the type of contract. We have seen contracts to be simple purchase arrangements, resource provision and purchase, and finally, production management. Much of the later confusion is avoided by stipulating the type of contract unambiguously at the outset. This leads directly to duties and privileges under the contract, possibly the most contentious area otherwise. The simple marketing contracts would need to specify prices, volumes and timings of purchase as well payment. Resource provision contracts would need to spell out the type, extent and quality of inputs/services to be provided, their costs and modes of their recovery, in addition to the output purchase parameters as in the first type. If the contracting agency is to take active part in some or all of the operations, they need to be specified, along with a schedule and cost concerns. For example, the co-operative sugar factories have to specify the time of harvest as well as the harvesting and transport arrangements they would make, for which they would be wholly answerable. Inspections and agencies would also need to be mentioned.

Mechanisms of Pricing and Payments This is possibly the principal cause of dispute, besides actual defaults. Therefore, the greater the clarity about it, the less would be the likelihood of disputes. The issues involved are:

140 • Quantities (on volume, area or entire crop basis) and scheduling of deliveries, if applicable, and points of delivery;

•' Modes of grading for quality, responsibilities for grading, packing and transport and its cost implications;

• Price mephanism: fixed in advance of season, flexible prices {usually local market-plus), spot, consignment (to be determined after further sales to ultimate user), split (minimum plus final, after sale to ultimate user);

• Payment modalities: time, form (cash/bank deposits), hold-backs, if any;

• Incentives based on quality and/or time performance;

• Advances and their recoveries;

• Insurance, market fee and other related costs;

• Indicative net realisation by farmer, to help him make up his mind.

The arrangements need to stipulate provisions applicable in case of excess or short supply, which causes farmers considerable problems. The situation in case short supplies is relatively simple: the buyer has virtually no choice but to match market prices. The agreement itself could specify a mechanism of linking the purchase price to the prevailing market price in the event of the stipulated price falling short of the market price beyond a specified level.

Generally, buyers could offer to buy at the specified price excess supplies up to a specified limit, say 10 to 20 per cent. Further supplies could also be bought at the buyer's option, at a reduced price, which would also be stipulated in advance. The buyer would, of course, be entirely in his right to refuse to buy additional supplies if he has to fulfill back-to-back commitments of his own, or the excess is more than, say, 40 per cent of the contracted level.

Quality This is the next most likely cause of dispute, especially since the Indian fanner has been relatively insensitive to the parameter. The specification of quality arises from the ultimate purpose of the

141 contract. If it is to obtain assured supplies for a processing unit, quality may be measured by one or more indicators of the composition: juice content, total soluble solids, protein contents and so on. Similarly, purchase for table purposes would be governed by parameters such size, shape, colour, firmness etc.

Some other aspects to be clarified are:

• Procedures and agencies for quality testing and agency to approach in case of dispute;

• Consequences of quality defaults - cut in price (to stipulate formula for price cut, as well as minimum limit for acceptance), outright rejection, third party transactions;

The farmer generally pleads for acceptance of his entire crop, because he finds marketing a most difficult task. Therefore, mechanisms to market/dispose off such final rejections should also be preferably included. Farmers would readily accept lower prices for off-grade produce since they would be spared the problem of finding markets for them. • Insurance and nature of its coverage linked to quality.

Group Approach

The success of this is abundantly clear and has been discussed at various points above. Sponsors should encourage formation of groups wherever possible and work through them for both contract performance as well as dispute resolution. They could also act as arbiters of some contentious issues such as flexible prices and acceptable quality, when subjective criteria are involved.

Some No Nos

Provisions such as indemnifying the farmer against his loss of property would go down very well. The buyer must have no rights whatsoever to any of the meagre possessions of the farmer no matter what infringement of the contract is involved.

Dispute Resolution

Legal actions being cumbersome and expensive, other mechanisms, such as arbitration, etc are more important and need to stated

142 explicitly, including the nature of such arbitration (preferably binding, to set limits on such activities).

Conflicts and their Resolution - Recourse to Group Mechanism

The best means of conflict resolution is their avoidance in the first place. Clarity in understanding the various aspects of contracts as discussed above would be of great help. In addition, the sponsor's staff must ensure considerable interaction before the contract is executed, to explain the broad points as well as the nuances of the contracts.

The best planned contracts cannot, however, guarantee an absence of conflicts. Their resolution becomes an essential ingredient. This resolution must be based on the identity of farmers' and buyers' Interests.

The temptation to default is the greatest when the contract is seen as being between an individual farmer and a, large buyer. A single supplier would naturally assume that his default on some parameter or the other is not going to affect the entire lot purchased significantly and therefore, he could ln4ulge in such acts with impunity. On the other hand, if the parties to the contract are a group of farmers and the buyer, the situation changes dramatically. The group would recognise the potential damage its default could do to the entire consignment and not give in to such temptation. In turn, it would also exercise similar Influence on its own members. Peer group pressure is very effective under such circumstances. The Self-Help Group approach to micro credit shows that even the borrowers were among the poorest, their default rate was low. The group realised that if it could not recover the borrowed money from all borrowers within the stated time, its borrowing ability suffers in the next period.

Seed companies were among the first to realise this and now routinely deal with groups alone. Not surprisingly, they face little by way of defaults. The consequence of one member's default is the blacklisting of the entire group subsequently.

The group approach has other merits to it. First, the tilt in favour of the larger buyer (as compared to the farmer) inherent in all contracts becomes a lot less pronounced restoring a little of the balance. Farmers' negotiating ability dramatically improves when they are united, as is shown by the sugar co-operatives. They also learn

143 to handle their own administrative details effectively and efficiently. The important point is that these groups must remain simple, flexible, entities, not tied down by registration, supervision and monitoring requirements. They could regroup for another contract, without necessarily having to dissolve the first group. They would be thus quite amorphous, which would leave them immune to trappings of power.

Groups of farmers, rather than individual farmers, operating within a well-defined, preferably contiguous area, should be the preferred parties to contracts. Members of groups could be actual land owners or lease holders, provided the lease is for a period longer than the contract and is properly executed. Both categories of members would have the same rights within the group.

The first step to conflict resolution is internal. The buyer and the group try to resolve their differences in the spirit of the contract (which is why its clarity becomes so crucial an issue). Unless the Intention of either party is malqfide, most disputes would end here. If any disputes remain, they must never get into the realm of legal professionals and established courts. An alternative approach, based again on tried rural practice and its modem manifestation could well be tried.

A first-class judicial magistrate of the area should be designated an ombudsman for resolving such disputes and should sit as a lok adalat with a panel of three lay assessors. The case must be referred to the adalat within one month of the dispute arising. The adalat would hear the matter In its next monthly sitting. Legal briefs and lawyers should be barred from these. The lok adalat generally delivers its judgement the same day and offers no continuation or delays. This practice should apply here as well.

The adalats verdict would be subject to one and only one appeal, within two weeks of the adalat's verdict. A district judge In the area would be the appellate authority. It would take up all complaints it has received in its next meeting. Once again, the system would function without lawyers, deferments, and dispose off the matter the same day. The appellate authority decision would be binding. The decisions would have the sanctity of law, in the sense of those not obeying it would be subject to a specific penalty. The entire process must take no more than three months to resolve itself. Older disputes will not be entertained.

144 Enabling Provisions

Most writers on the subject of contract farming have recommended registration of contracts and contracting bodies, by modifying the APMC act accordingly. The main point, however, is to keep the entire process as simple as possible and as far removed from legal and administrative processes as possible. Therefore, groups of farmers or individual farmers entering into contracts need not be registered or required to fill out forms and returns and pay a filing fee.

The following measures are necessary:

1. Contract farming must not be subject to Indian Contracts Act and no remedy should be available to either party under its provisions;

2. Contract farm transactions would be exempt from APMC cess;

3. All buyers wanting to enter into a contract arrangement would have to register their plans with the department of agriculture. For this purpose, the District Agriculture Officer of the district in which the activity is to be conducted (or the largest of the districts if the activity covers more than one district) will act as the registering authority;

4. A First Class Judicial Magistrate will be designated as lok adalat for contract farming purposes. The district judge/magistrate would be the appellate authority;

5. Decisions of the appellate authority would not be subject to further appeal, but would have the full force of the law behind them.

The first, second and fifth measure would need enabling legislation and/or amendments to existing laws, while the other two would be subjects of appropriate government resolutions.

Concluding Remarks

Contract farming is an important means of achieving crop diversification, promoting new crops, especially the high-value, precision technology activities, promoting processing and exports of niche products. Wherever it has worked, farmers and buyers have

145 benefitted alike from it. Opportunistic behaviour wrecks contracts. It works best in non-zero sum game situations and leads to win-win positions. It does, nevertheless, have some inherent imbalances and conflict situations, which makes its working uneven. Thus, there is concern arising out of failed experiments regarding defaults, enforceability of contracts and their equitability.

Contract farming has grown due to various reasons. Recent advances in technology have made it feasible for agricultural produce to be grown to specification and preserved in a fresh condition. Scale economies have been increasing, especially in processing and distribution. Consumers are becoming increasingly discriminating in their tastes and the quality of produce. This increased sophistication in consumer demand leads to improved o-ordination between production, processing, quality control and distribution.

Both farmers and processors may prefer contracts to complete vertical integration. Farmers would prefer contracts, which are not open-ended by definition. Contracts allow greater price assurance and transfer of risk. Processors need not tax their own resources totally to produce their raw material requirements. They have access to farmers lands and institutional funds for this purpose.

Contracts could thus be win-win situations if properly executed.

This study has suggested that contracts should be seen as specific, targetted, strategies, aimed at well-defined, compact areas and activities, instead of mass activities. It suggests that contracts would be more suitable for new crops, those with stringent quality parameters or aimed at export markets with high SPS requirements.

Activities marked by high production and marketing risks are best suited for contracts, rather than established old activities such as subsistence crops. It concludes that the most successful contract farming experiments would result in the emergence competitive, efficient markets, which would remove the need for contracts. Therefore, well-designed contracts are self-dissolving activities. The study recommends focussing on groups as parties to contracts and using peer group pressure to obtain compliance to contracts, much the same way as done in Self-Help Groups and micro credit. This would also lead to minimisation of defaults and non­ performance, as witnessed in seed industry contracts. Local bodies acting expeditiously and with binding powers would be the best

146 means to settle disputes, rather than a recourse to courts, which would be long, cumbersome, expensive and ultimately futile.

Postscript

The main recommendations of this Report were drafted in April 2004 and further refined in view of the feedback received in June - July 2004.

In early August 2004, the Government of Haryana formulated a new contract farming scheme with supporting measures and legal provisions which are almost identical to those discussed here. The research team had not interacted with Haryana Government except to discuss contract farming in a general manner at a Seminar in 2003.

The timing of the drafting of the Haryana Scheme and this Report may be purely a coincidence. The very great similarity of approach does indicate its basic soundness, both in theoretical and practical terms.

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