Contract farming and joint
venture
Submitted by-Shikha Mehta
H.(B.Tech)2010-02-09
INTRODUCTION
More specifically, farmers' groups can perform the
following beneficial functions to facilitate and
improve contract farming ventures:
Facilitate communication between firm and farmer
Provide technical transfer and farmer training
Facilitate credit provision and group guarantee
Achieve economies of scale
Aid quality control and assurance
Improve bargaining power and upgrade processes
DEFINITION
Joint ventures :Working with others to
save time and money.
By sharing resources with other farming
businesses whether land or machinery or
expertise to minimise the level of capital
investment and also benefit significantly
from economies of scale.
PURPOSE
Management of existing contract farming
companies for improving their operations.
Necessary for success.
To promote new contract farming
operations or monitor existing operations.
Advantages for farmers
Inputs and production services are often supplied by
the sponsor.
This is usually done on credit through advances from
the sponsor.
Contract farming often introduces new technology
and also enables farmers to learn new skills.
Farmers' price risk is often reduced as many
contracts specify prices in advance.
Contract farming can open up new markets which
would otherwise be unavailable.
Problems faced by farmers
Particularlywhen growing new crops,
farmers face the risks of both market
failure and production problems.
Inefficient management or marketing
problems.
Sponsoring companies may be unreliable
or exploit a monopoly position.
The staff of sponsoring organizations may
be corrupt.
Advantages for sponsors
Contract farming with small farmers is more
politically acceptable than production on estates.
Working with small farmers overcomes land
constraints.
Production is more reliable than open-market
purchases and the sponsoring company faces
less risk by not being responsible for production.
More consistent quality can be obtained than if
purchases were made on the open market.
Problems faced by sponsors
Social and cultural constraints may affect farmers’
ability to produce to managers’ specifications.
Poor management and lack of consultation with
farmers may lead to farmer discontent.
Farmers may sell outside the contract (extra-
contractual marketing) thereby reducing
processing factory throughput.
Farmers may divert inputs supplied on credit to
other purposes, thereby reducing yields.
TYPES
1. The centralized model.
2. The nucleus estate model.
3. The multipartite model.
4. The informal model.
5. The intermediary model.
The centralized model
Involves a centralized processor and/or packer
buying from a large number of small farmers.
It is used for tree crops, annual crops, poultry,
dairy products.
Often require a high degree of processing, such
as tea or vegetables for canning or freezing.
Sponsors’ involvement in production varies.
The nucleus estate model
It is a variation of the centralized model where
the sponsor also manages a central estate or
plantation.
The central estate is usually used to guarantee
throughput for the processing plant but is
sometimes used only for research or breeding
purposes.
It is often used with resettlement or
transmigration schemes.
The multipartite model
Itmay involve a variety of organizations,
frequently including statutory bodies.
Develop from the centralized or nucleus
estate models, e.g. through the
organization of farmers into cooperatives
or the involvement of a financial institution.
The informal model
It is characterized by individual
entrepreneurs or small companies.
It Involves informal production contracts,
usually on a seasonal basis.
It Often requires government support
services such as research and extension.
It Involves greater risk of extra-contractual
marketing
The intermediary model
There is a danger that the sponsor loses
control of production.
And quality as well as prices received by
farmers.
It Involves sponsor in subcontracting
linkages with farmers to intermediaries.
ADVANTAGES OF CF & JV
Access to capital and land
Access to skilled labour
More efficient use of machinery
Greater marketing and input buying strength
Taxation benefits
SPECIFICATIONS
Contracts will need to specify some or all of the following
aspects of the sponsor-farmer agreement:
Contract duration
Quality standards
Production quotas
Cultivation practices
Crop delivery arrangements
Pricing arrangements
Payment procedures
Insurance arrangements
KEYS FOR A SUCCESFULL CF &
JV
Utilities and communications must be suitable for
both: farming, e.g. feeder roads, and for agro-
processing, and electricity.
Land availability and tenure – contracted farmers
require unrestricted access to the land they farm.
Input availability – sources of inputs need to be
assured.
Social considerations – cultural attitudes and
practices should not conflict with farmers’ obligations
under the contract .
And managers must develop a full understanding of local
practices.
