Linking Small Farmers to Global Markets:

Role of Contracting Farming and

Cooperatives in Asian Countries

Aarti sharma
University college of engineering
Rajasthan technical university
KOTA
 Contents

 Introduction
 Definition of contract farming
 Areas covered by contract farming
 Contract farming models
 Positive lessons
 Risks for farmers
 Risks for sponsors
 Key preconditions for success
 Cooperatives in Asia
 Cooperatives in Asia: Selected Examples
 INTRODUCTION
“…globalization is more than the flow of money
and commodities—it is the growing
interdependence of the world’s people. And
globalization is a process integrating not just
the economy but culture, technology and
governance. People everywhere are becoming
connected–affected by events in the far
corners of the world.”
UNDP – Human Development Report 1999
 INTRODUCTION
Major features of the present globalization
 New markets—foreign exchange and capital markets linked
globally, operating 24 hours a day
 New tools—Internet links, cellular phones and media networks.
 New actors—WTO, with authority over national governments,
the MNCs with more economic power than many states, the
global networks of NGOs and other groups that transcend
national boundaries.
 New rules—multilateral agreements on trade, services and
intellectual property, backed by strong enforcement mechanisms
and more binding for national governments, reducing the scope
for national policy.
 INTRODUCTION
 Trade is a key link of globalization
 The farm sector need to be competitive to
survive and to contribute to poverty alleviation
and economic growth in low income countries
 Ability to compete will depend on:
o the efficiency of production at the farm level,
o the efficiency of marketing and processing systems,
o the domestic policies and market access conditions
 INTRODUCTION
 Market access also depends on the ability to
meet the quality and safety standards of
importers
 Most farmers in Asia are small farmers and
poverty is highly concentrated among them
 Definition of small farmers differs, both in
terms of size and organization
 There is duality in the organization of the
farming sector, but commercialization is
increasing
 INTRODUCTION
 Development of cooperatives and contract farming
schemes are the two key strategies for benefiting from
globalization through vertical coordination of small
farms with processors and exporters
 These can enhance the economy of scale and the quality
standards at the production, marketing and processing
level
 Public goods – policies, infrastructure and support
services including market info., research, testing and
certification – reducing transactions costs, building
human capital and removing credit constraints are crucial
 Vertical coordination with processors and exporters and a
pro-active public sector are essential
 DEFINITION OF CONTRACT FARMING

An Agreement between farmers and processing

and/or marketing firms for the production and
supply of agricultural products under forward
agreements, frequently at predetermined
prices

FAO; Contract Farming: Partnerships for Growth;

2001
AREAS COVERED BY CONTRACT FARMING
 Market provision: The grower and buyer agree to
terms and condition for the future sale and purchase
of a crop or livestock product
 Resource provision: In conjunction with the
marketing arrangements, the buyer agrees to supply
selected inputs, including on occasions land
preparation and technical advice
 Management specifications: The grower agrees to
follow recommended production methods, inputs
regimes, and cultivation and harvesting specifications
 CONTRACT FARMING MODELS

 The centralized model. The sponsor purchases crops

from farmers for processing, and markets the product.
Quotas are distributed at the beginning of each
growing season and quality is tightly controlled.
Generally associated with tobacco, cotton, sugar cane,
bananas, coffee, tea, cocoa and rubber. Can also
cover poultry, pork, dairy, fresh vegetables and fruits.
Examples: sugarcane production in Thailand, tomato
processing in Punjab, India, vegetable canning in the
Philippines. The extent of the sponsor’s involvement
varies
 CONTRACT FARMING MODELS

 Nucleus estate model. The sponsor owns and

manages a plantation, usually close to a processing
plant, and introduces technology and management
techniques to farmers (sometimes called "satellite"
growers). Mainly used for tree crops, but has also
been applied to dairy production.
Examples: Oil palm (in resettlement areas) and dairy
in Indonesia, tea estates in India, Nepal and Sri
Lanka.
 CONTRACT FARMING MODELS

 Multipartite model. Usually involves statutory

bodies and private companies jointly participating
with farmers. Usually, contract commitment to
provide material and management inputs to farmers.
Example: common in China, where government
departments, township committees and foreign
companies have jointly entered into contracts with
villages and individual farmers.
 CONTRACT FARMING MODELS

 Informal model. Individual entrepreneurs or small

companies make simple, informal production contracts
with farmers on a seasonal basis, particularly for fresh
vegetables and tropical fruits. Supermarkets frequently
purchase fresh produce through individual developers.
Normally, minimal processing and few inputs to
farmers; availability of govt. support services crucial.
Examples: Gherkins production in Sri Lanka; bananas,
squash and papaya production for export in the South
Pacific and chrysanthemums and fresh vegetable
production in northern provinces of Thailand.
 CONTRACT FARMING MODELS

 Intermediary model. Formal subcontracting of crop

production to intermediaries is common in Southeast
Asia. Large food processing companies purchase
crops from individual "collectors" or farmer
committees, who make their own informal
arrangements with farmers. The risk is that the
sponsor loses control over production and over prices
paid to farmers by middlemen.
Examples: Soybean, green beans and baby corn
production in Northern Thailand; in Indonesia, this
practice is widespread and termed plasma.
 POSITIVE LESSONS

 Can be effective in linking the small farm sector

to sources of extension advice, mechanization,
seeds, fertilizer and credit, and to guaranteed
and profitable markets for produce
 Private agribusiness will usually offer
technology more effectively than government
agricultural extension services, because it has a
direct economic interest in improving farmers'
production
 POSITIVE LESSONS

 Skills transferred can include the efficient use

of farm resources, carrying out field activities
according to a strict timetable, improved
methods of applying chemicals and fertilizers,
and a knowledge of the importance of quality
and of the demands of export markets and
good record keeping
 Reduce price uncertainty to farmers
 POSITIVE LESSONS

 Companies gain access to crop production on

land that would otherwise be unavailable, with
the additional advantage of not having to buy
or lease it
 Enables them to share risks, find reliable
supplies of raw materials for processing plants,
and guarantee that their products conform to
quality standards
 Can contribute to both increased income for
farmers and higher profitability for sponsors
 RISKS FOR FARMERS

 Uncertainty involved in growing new, unfamiliar crops

and producing for markets that might not always live
up to their expectations - or their sponsors' forecasts
 Loss of bargaining power vis-à-vis a large agro-
industry, monopsonistic market power and exploitative
terms
 Manipulation of quality standards by the sponsor in
order to reduce purchases
 Debt caused by production problems, poor technical
advice, significant changes in market conditions, or a
company's failure to honor contracts
 RISKS FOR SPONSORS

 Insecurity of the access to land

 Farmers’ inability to meet strict timetables and
regulations because of social obligations or
religious practices
 “Extra-contractual marketing" - farmers
breaking the contract and selling their produce
on alternative markets – sometimes
encouraged by rival sponsors
 KEY PRECONDITIONS FOR SUCCESS

 A profitable market
 For the sponsor an identified market for the
planned production that such market can be
supplied profitably on a long-term basis
 The farmer must find the potential returns
attractive on the basis of realistic, demonstrated
yield and acceptable risks
 KEY PRECONDITIONS FOR SUCCESS

 The physical and social environments

 The physical environment
 Utilities and communications
 Land availability and tenure
 Inputs availability
 Social considerations
 KEY PRECONDITIONS FOR SUCCESS

 Government Support
 Suitable laws of contract and an efficient legal
system
 Awareness of unintended consequences of
regulation and avoid tendency to over-regulate
 Provision of research and extension

 Take steps to bring together agribusiness and

suitable farmers
 COOPERATIVES IN ASIA
 Agricultural cooperatives functioning in
almost all countries of the region
 Various forms: formal and informal farmers’
organizations, production groups, producer
cooperatives, collectives, marketing
cooperatives, agricultural credit cooperatives,
multipurpose and single-purpose cooperatives
 Started mostly with government assistance and
initiative or as a result of development projects
 COOPERATIVES IN ASIA
 The success spectrum varies from country to
country.
 Many suffer from managerial problem, lack of
membership participation, heavy participation
and influence of government, little
involvement of members in decision making
 Primary cooperatives suffer from weaknesses
and deficiencies due to small size and low
membership
 COOPERATIVES IN ASIA:
SELECTED EXAMPLES
 India
 One of the oldest in the region and largest in
the world in terms of the number of
cooperatives and membership; around
504,000 cooperatives in 1998 serving 209
million people of which 65% agricultural
cooperatives with 137 million
 Vertically integrated through respective
federations at district, state and national levels
 COOPERATIVES IN ASIA:
SELECTED EXAMPLES
 India
 Active in agro-processing – 320 cooperative sugar
factories producing more of 60% of sugar
produced in the country; around 90,000 dairy
cooperatives making India the largest producer of
milk; specialized cooperatives for oilseeds, rubber,
horticulture and fertilizer
 Strongly backed by cooperative education and
staff training – largest in the world training
managers and providing member education
 COOPERATIVES IN ASIA:
SELECTED EXAMPLES
 Bangladesh
 More than 40,000 traditional cooperatives and
more than 100,000 farmers’ cooperatives
 Not very successful due administrative
interference and control, lack of managerial skills,
small size and low membership
 Republic of Korea
 Vertically organized into three levels: township
level primary cooperatives, city/county
cooperatives and national federation (NACF)
 COOPERATIVES IN ASIA:
SELECTED EXAMPLES
 Republic of Korea
 Regional primary cooperatives engaged in grain
production; special primary cooperatives for fruits
and vegetables
 Almost all farmers affiliated with the cooperatives;
2 million members at the end of 1997; number of
regional cooperatives reduced due to
amalgamation drive to achieve economy of scale
 COOPERATIVES IN ASIA:
SELECTED EXAMPLES
 Republic of Korea
 Member-cooperatives perform marketing of
agricultural products, supply of farm inputs and
consumer goods, agricultural extension, banking
and credit and insurance
 NACF has 40% share of local agricultural
marketing and runs one of the largest deposit
banking operation in the country