Determinants of Long-term
Farmer-Firm Relationships in
Contract Farming
N.T. Sudarshan Naidu
School of Management and Entrepreneurship
Shiv Nadar University
Debiprasad Mishra
Institute of Rural Management Anand (IRMA)
Contents
• Rationale
for contract farming
• Problems
in contract farming
• Research
questions
• Methodology
• Results
• Conclusion
Rationale for Contract Farming
• Food processing
• Requirement
• Strategies
and seed production firms
for procurement of agricultural produce fall on a continuum
(Key & Runsten, 1999)
Spot Market
Contract
Farming
Vertical
Integration
Contract Farming
• “a
pre-negotiated agreement between a producer and a buyer that may include
any one or all of the following: market specification, resource provision and
production management”
• Agricultural
•
Vegetables, fruits, aromatic crops, poultry, safflower
• Firms
•
produce under contract farming:
involved in contract farming:
Pepsico, ITC, Marico, Monsanto, Safal, HUL, Global Green (Thapar’s), Rallies, Namdharis, Suguna,
Nijjer,
Literature on Contract Farming
Advantages
•
increase in farmers’ income (Minot, 1986; Singh & Asokan, 2004; Tripati et al, 2005; Miyata,
2007)
Insulate farmers from volatility of market risk
• Access to speciliazed inputs (Minot, 1986; Key & Runsten, 1999; Singh & Asokan, 2005;
•
Begum, 2005)
Limitations
•
Indirectly secure effective control over farmers’ land and labour leaving them with
only formal title to both
•
Impose technological, managerial and marketing direction on farmers (Clapp, 1994)
Literature on Contract Farming
Limited Studies on Contract Relationships
• Explored the
role of transaction specific assets (TSA) and opportunism
(Asokan, 2007)
• No
studies have explored the role of other perspectives of relationship
building
In-depth study was required to understand
buyer-seller relationships
in contract farming
Problems in Contract Farming
•
Mixed experience with contract farming.
•
Problems due to price, produce quality, cross-selling, non-procurement
(Jaffee,1994; Watts, 1994; Singh, 2004; Asokan, 2007; Imbruce 2008 )
• Problems
are also related to practices followed
Main problem for firms:
• Continuity of
•
Why to continue?
• Opportunism
•
relationship
(cross-selling)
Inward & outward
Managing relationship
Research Questions
• How
do buyers in contract farming build and manage
relationships with farmers?
• Why
do some relationships sustain over long term?
Methodology
• Case
study research was used
• Knowledge base on the topic is scarce (Bonoma, 1985; Easton, 2010)
• In-depth understanding of complex phenomenon (Remenyi et al., 2002; Yin,
2009)
• Mostly
preferred to address ‘why’ and ‘how’ questions (Brown, 1998; Yin, 2009)
• little or no control over the events and the focus is on contemporary
phenomenon within a real-life context (Yin, 2009)
• Pilot study
• Study Area
• Karnataka – pioneer in contract farming, accessibility, convenience and
language
Multiple case design
• Findings
from multiple cases were considered as more compelling and the
overall study regarded as robust (Herriott & Forestone, 1983; Yin, 2009)
• Short
duration and high and low price fluctuating crops
• Availability of alternate channels
1.
2.
3.
4.
• Case
Namdhari Farm Fresh (NFF):
NFF:
ABC:
Namdhari Seeds (NS):
study protocol developed
Baby corn
Tomato
Tomato
Tomato seeds
• Data collection
• Interviews with
farmers and officials
• Observation
•
Records
• Total
villages : 24
• Total
in-depth interviews: 61(Farmers interviewed:38; officials interviewed: 23)
• Interacted
with another 20 farmers
Results
Namdhari Seeds Pvt Ltd.
• One of the largest seed companies, started in 1985
• One of the largest contract seed producers
• Breeding, production and distribution of seeds
Namdhari Farm Fresh Pvt Ltd.
• Started in 2000, near Bengaluru
• Handle average 17 T/day vegetables (without baby corn)
• Handle 50 T/day of baby corn
• About 1500 contract farmers in Bidadi area alone
ABC
• Subsidiary of the public sector board
• Started contract production of tomato in 2008 with about 350 farmers
NFF Baby
Corn
NFF
Tomato
NS Tomato
Ranibennur and
Bidabi and Ramanagaram
Geographical area
Byadagi Taluks (350
(40-60 km from B’ lore)
km from B’lore
ABC Tomato
Gauribidanur (70
km from B’lore)
Opportunities for
alternate crops
Yes
Yes
Yes
Presence of other
contract firms
No
Many
No
Available
No spot market for
seeds
Available
Alternate markets
Selection of Farmers
Preference
Verify
NFF
NS
ABC
Old farmers
Old farmers
Old farmers
Small farmers
--
--
No of members in the
family
No of members in the
family
Number of animals
Sincere
Sincere
Soil type, irrigation
Soil type, irrigation
Land records, irrigation
Yes
No
History of cropping
system
Background
check
Yes
One way of controlling opportunism was to select partners who were less
opportunistically inclined or inherently cooperative (Wathne & Heide, 2000)
Reasons for Entering into Contract Farming
• NFF
Baby corn: For guaranteed (fixed) price throughout the year
• NFF Tomato:
Expectation of high profit. Lucky crop
• ABC Tomato:
Dual purpose of receiving guaranteed returns and high profit
• NS Tomato
seeds: To earn more profits
• Farmers
enter into contract farming mainly to earn more than they were
previously earning or to get guaranteed fixed price and avoid market risks
• Other
reasons: convenience, input provision
Role of Price
NFF Baby Corn
NFF Tomato
NS Tomato Seeds
ABC Tomato
Unit price
Fixed price
Changed the
policy. Market
linked
Price range
Fixed but changed
sometimes
Diversion
Very Low
Low
Very low/ nil
High
Overall perceived profit
compared to other crops
High (corn, fodder,
milk); round the
year
High with risk
High
High
Overall perceived profit
compared to supplying
to rival firms
No rival firms
No rival firms
High
No rival firms
Profitability by
supplying to local
markets
Low, risky
Low
Low
High
 Farmers will not divert the produce to open market as long as the differential
profit that could be earned by selling in open market, rather than supplying to
contract firm, is less than marketing costs
 Farmers continue production of contract crop as long as the overall profit
obtained from contract crop is at least equal to the profit obtained by cultivating
other crops with similar resources
 Farmers continue the relationship with contract firm as long as the overall profit
offered by the firm is at least equal to that offered by rival firms
Additional benefits
NFF Baby Corn
NFF Tomato
NS Tomato
ABC Tomato
Compensation
Yes
Yes
Yes
No
Advances
Yes
Yes
Yes
No
Advance by other
firms
--
--
No
--
Remarks
Welfare Activities
Jobs
Social Service Activities
Social
Service
No service
Comparison Level of Alternatives (CLalt )
• CLalt
is the overall benefit (social and economic) available from the best
possible alternative exchange relationship (Thibaut and Kelley, 1959; Lambe, Wittmann
and Spekman 2001)
• Proposition:
Farmers continue the relationship with contract firm as long as
the overall outcome from the relationship is at least equal to CLalt
• Scope
to refine the concept
Comparative Level of Alternate Crops (CLaltcrop)
• CLalt-crop helps
to determine whether a farmer continues to grow the same
crop under contract or change the crop
• CLalt-crop is
defined as the overall outcome available from cultivating best
possible alternative crop
• Proposition:
Farmers continue cultivating contract crop as long as the
overall outcomes from contract crop exceed CLalt-crop
Services Offered
• Inputs
supply: timing, quality, regularity
• Extension
• Inputs
service: timing, quality, frequency
quality influence yield and company’s reputation
NFF Baby Corn
NFF Tomato
NS Tomato Seed
ABC Tomato
Seeds / seedling
quality
Good quality, subsided.
Hub & spoke model
Good, subsided
Good
Pesticides
No provision
Yes, superior
quality
Yes
Kit provided
Regularity of
pesticides
--
Yes
Yes
During starting
Field staff visit
2-3 days
1-2
Daily; Record the
status; Create Pressure
4-5 days
Advances
If required
If required
If required
No provision
Quality of extension
service
Good
Good
V. good
Not up to
expectations
Remarks
Satisfied
Satisfied
Highly satisfied
Not up to
expectations
• Proposition:
Farmers trust the contract firm if they perceive the services
provided by the firm as good or superior.
• Positive outcomes
from the relationship over a period of time increases
trust on its partner (Lambe, Whittmann & Spekman, 2001)
• Proposition:
Service quality offered by contract firms has positive
influence on continuity of relationship by farmer.
Practices Followed
• Payment:
Timing & frequency
• Weighing:
fairness and transparency
• Quality
assessment: fairness and transparency
• Fairness
/ honesty in practices
NFF Baby
Corn
NFF
Tomato
NS Tomato Seed
ABC Tomato
Weighing
Fair and transparent.
Farmers weigh. Procure
excess production
Fair and transparent
Not transparent
Payment
Once on 15 days deposit to
bank accounts
After GoT, usually 3
months
Initially no
regularity
Quality
Assessment
In pack house. Fair
At headquarters. Fair
Not graded
Farmers
perception
Fair and can be trusted
Fair and can be trusted Do not trust
• Proposition:
Farmers trust the firms if they perceive the practices
followed by firms as fair
• Proposition:
Fairness in practices followed by firms has positive
influence on farmers’ relationship continuity
• ‘Procedural
et al, 1995)
fairness’ create trust and expectation of continuity (Kumar
Role of Field Staff
NFF
Interaction
Farmers
perception
NS
ABC
Frequent. Half day in field
Frequent. Stayed in villages
Not frequent
Formed personal bonds.
Attend functions
Formed personal bonds.
Attend functions
No personal bond
Respected
Respected
Helpful, honest and
trustworthy
Helpful, honest and
trustworthy
Biased
Yield increase attributed to
field staff
Role of salesperson - informer, persuader, problem solver and value creator (Wotruba,
1991)
Social Service Activities
NS and NFF
• Donations for construction or repair of school buildings, temples
• Scholarships to poor students
• Construction of houses to employees
• Help during village festivals, marriages etc
• Have good relationships with
• Help in avoiding problems
the community & leaders
ABC: Not involved in any welfare activities
Developing Relationships with farmers
• Complex
• Attend
process
to farmers’ need on time
• Maintain
fairness, provide better services & help in improving crop yield
and returns
• Safeguard
• Regular
• Do
the interests of farmers
interaction / accessibility
not make false promises
• Show
your commitment and farmers will reciprocate
• Farmers
should not feel problems in relationships
Conclusion
• Both
unit price and overall outcome play important role
• Selection
was considered as first step
• Monitoring
• CLalt
was not very effective
determines farmer’s continuation of relationship with the firm
• CLalt-crop helps
in determining the continuation of contract crop by farmers
• Relationships can
be improved by offering services timely, maintaining
fairness in practices, frequent interaction and helping in emergencies
• Boundary
level staff can make or break relationships
Thanks