Falling rate of growth in agricultural output is a serious concern for Indian policy
makers as agriculture sector employs around 60% of total workforce in India. It
contributes around 17% of GDP and is mainly responsible for less than desirable growth
rate in national GDP in spite of high growth rate in non agriculture sector. Most optimistic
official estimate for agricultural growth is 4% during 11th Five Year Plan (2007-12). Mid
Term review of 11th Five Year Plan, under the chairmanship of PM, held in March' 2010
has lowered India's targeted growth of 9 percent per annum.

There are many reasons for such poor health of Indian agriculture - over dependence
on monsoon, lack pf progress in irrigation, insufficient finance, inadequate marketing
of agricultural products etc.

Though many of these ills can be addressed through proper policy formulation, good
governance and investment - there's one systemic weakness that will continue to
stand between Indian agriculture and healthy growth rate - poor return from farm
investment because of lack of economy of scale.

Given land holding pattern of India where average farm size has been getting
smaller and smaller (from 2.27 Hectare in 1970-71 to 1.27 Hectare in 1995-96) -
realizing healthy return from farm investment is getting increasingly difficult,
forcing farmers to adopt new business (e.g. poultry, fishing etc.) or commit
suicide.

While long term govt initiatives (not loan write-offs) can address many of these
issues - it will take long time to fructify, that is - if at fructifies at all.

Collective farming through co-operatives or contract farming can address many
of these issues immediately and put farm income at much better level besides
injecting production growth arising from economy of scale and better crop management.

UPA government’s Approach Paper to the 11th Plan gave priority to development
of contract  farming. A Working Group set up by the National Development Council,
under the then Chief Minister of Punjab Mr. Amarinder Singh, made several
proposals in this respect. The proposals include liberalising laws for crop
contracts, tax rebates for food processing, duty-free import of farm machinery,
exemption of market fees, etc., and liberalized imports of seed varieties for
contract farming programs.

Contract Farming

Contract farming is an agreement between farmer and buyers (mainly corporates)
for production and supply of agricultural or horticultural products under forward
contracts. Core of the agreement is a commitment of the farmer to supply an
agricultural commodity of a certain type, at a time and a price, and in the
quantity required by a known and committed buyer, typically a large company.
The buyer commits to buy the whole produce at agreed price, freeing the farmer
from vagaries of market.


The typical contract is one in which the contractor supplies all the material
inputs and technical advice required for cultivation, while the farmer supplies
land and labour.

Success Stories

Perhaps the most successful story of corporate India's foray in agriculture
has been scripted by Pepsico. Way back in 1989, Pepsi Foods Ltd (Pepsico)
installed a tomato processing plant in Hoshiarpur, Punjab. PepsiCo followed
a method whereby the cultivator plants the company’s crops on his land, and
the company provides selected inputs like seeds/saplings, agricultural
practices, and regular inspection of the crop and advisory services on crop
management.

Success of Pepsico model inspired other corporates, notably Cadbury in cocoa,
Unilever in tomato, chicory, tea and milk, ITC in tobacco, wood trees and
oilseeds, Cargill in seeds etc. Among domestic corporates are Ballarpur
Industries, JK Papers and Wimco in eucalyptus and poplar trees, Green Agro Pack,
VST Natural Products, Global Green, Intergarden India, Kempscity Agro Exports
and Sterling Agro in gherkins, United Breweries in barley, Nijjer Agro in
tomato, Tarai Foods in vegetables, M Todd in mint etc.

Potato Farmers of West Bengal

West Bengal is the largest producer of potato in the country. Lack of cold storage
and food processing has always been the bane of Bengal potato farmers where bumper
production brings down potato price to fraction of actual cost incurring huge
loss.

Pepsico, the market leader in potato chips, require regular supply of quality potato
for its three manufacturing units – one each in Punjab, Pune and Bengal.


Pepsico entered into a contract farming agreement with about 6,500 farmers in West Bengal, covering a total acreage of 2,250 acres. Today, West Bengal is the largest supplier of potatoes for the chips manufacturer, enabling the company to procure 22,000 tonne of potatoes during 2010 by way of its contract farming agreement with farmers in the State. Pepsico is targeting 37,000 tonne in 2010-11 by increasing the productivity of the crop and bringing more number of farmers into a similar arrangement with the company.

According to company sources, Pepsico plans to rope in additional 5,000 farmers in
2010-11 and take the total number to about 11,500 and bring about 3,700 acres of
land under the agreement

For the farmers it is a win-win situation, particularly during periods such as this
year when potato prices have crashed following a bumper crop. “We are being offered
Rs 6 a kg for these special quality potatoes by the company against Rs 1-1.5 a kg for
the normal varieties such as Chandramukhi, Pokhraj and Jyoti. We stand to gain about
Rs 20,000 an acre,” said Mr Madhusudan Mondal, a farmer who has entered into an
agreement with the company.

PepsiCo currently procures potato from Punjab, Pune, Uttar Pradesh, Gujarat, Mahrashtra, Karnataka and Bihar for its various manufacturing facilities in the country. It is now in talks with farmers in Chhattisgarh for procurement of potatoes.