Linking Small Farmers to Global Markets:
Role of Contracting Farming and
Cooperatives in Asian Countries
Purushottam K. Mudbhary
Senior Policy Officer
Policy Assistance Branch
Regional Office for Asia and the Pacific
Contents
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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
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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:
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the efficiency of production at the farm level,
the efficiency of marketing and processing systems,
the domestic policies and market access conditions
INTRODUCTION
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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 agroindustry, 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
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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
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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
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The physical and social environments
 The
physical environment
 Utilities and communications
 Land availability and tenure
 Inputs availability
 Social considerations
KEY PRECONDITIONS FOR SUCCESS
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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
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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
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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
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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
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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
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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
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Republic of Korea
 Vertically
organized into three levels: township level
primary cooperatives, city/county cooperatives and
national federation (NACF)
COOPERATIVES IN ASIA:
SELECTED EXAMPLES
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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
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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