Contract farming in ensuring inputs for the farmer, modernising agriculture sector
Tuesday, 4 May 2010
Asif Mahfuz
The government of Bangladesh has taken initiatives to reach finance to the poor farmers in the rural areas. Farmer's access to finance is one of the major problems in the rural areas. This is a major drawback to achieve the stated goals of the government, self sufficiency in food and alleviating poverty. Since the main earning sources of the rural communities are agriculture and cattle rearing and the majority of the farmers are poor, ensuring these farmers' access to finance is of great importance for the rural economy and the government.
For this, the government has taken various steps from allocating special agro loans to opening accounts for the farmers for a nominal 10 taka fee. The governor of Bangladesh Bank has even declared that the banks will try to make the farmers aware through campaign. Even Jatra and canvassing through mike in the rural hats/markets will take place to achieve this goal.
There is no doubt that the government is earnestly trying to give the farmers access to finance. But in reality the effectiveness of the programme is under question. There are several reasons.
The main reasons are difficulty in finding the right farmer, high operating cost of reaching individual farmer for small amount of loan, securing a guarantee for the loan by availing of proper collateral for the loan, reluctance of the managers to take the risk of disbursing loan to farmers and reducing the cost of realisation and management to a minimum. For these reasons most of the bankers give the loan to large farmers or to the input traders, with enough transaction with the bank and collateral for the loan. Also most of the farmers are not aware of better techniques and inputs, which create unwillingness among the managers in giving loan to the farmers. Also the managers are shy of taking risk as they are directly responsible for the loans they disburse no matter how strongly advocates the private banks
In reality, some banks are giving the allotted farm loan to MFIs, which will redistribute the loan at their own rate. Also some other banks have taken strategy to give loan to the input retailers, who in turn will give the input to the farmer on credit. Some other private banks have made consortium to give loan through selected MFIs. In most of the cases, the member of these MFIs will get the benefit.
Contract farming can be a good solution to address these problems. In theory, contract farming is a system where agricultural production is carried out according to an agreement between a buyer and farmers, which is based on certain conditions for the production and marketing of farm products. Typically, the farmer agrees to provide the predetermined quantity of a specific agricultural product, meeting the quality standards and delivery schedule set by the purchaser. In turn, the buyer commits to purchase the product, often at a pre-determined price or the market rate. In some cases, the buyer also commits to support production through, for example, supplying farm inputs and land preparation facilities, providing technical advice and arranging transportation of produce to the buyer's premises. Another term often used to refer to contract farming operations is 'out-grower schemes", whereby farmers are linked with a large farm or processing plant which supports production planning, input supply, extension advice and transportation.
In this system the contractor can be guarantor for the loan, which will be given to the farmer. Also if the contractor himself is an input dealer then the credit can be given in kind. The contractor in this case will supply the input on credit and when paying the farmers for the crop after harvesting, the contractor will deduct the due amount. Moreover, cultivation technology and other necessary inputs can be delivered to the farmer through the contractor. If the contractor has link with seed companies, they also can be involved to provide technical support. Thus all the needed inputs and technologies can be delivered through one point.
In a pilot project, Uttara Bank and National Bank of Gaibandha branches have disbursed crop loans worth Tk 12, 60,000 and Tk 40, 40,000 respectively, in this Rabi season to a total of 135 farmers under the contact farming model. In this case, the contractor acted as a guarantor. Most of the farmers in this scheme are char dweller and landless farmers, who does not have any kind of asset for collateral. CP Bangladesh is providing the seed in partial credit to the contractor and also providing training to the farmers in this project. CP Feeds and Aftab Feeds will buy the harvest, maize in this case, from the contractor at market rate. The farmers will also sell the product to the contractor at market rate. The contractor will get a commission from the feed companies.
Contract farming is used for a wide variety of agricultural products in developed and as well as underdeveloped countries. In Bangladesh, large companies like Pran, Bombay sweets are doing contract farming in limited scale. Now the multinationals like CP Feeds of Thailand is planning to do contract farming in Bangladesh to ensure supply of quality maize for its feed mills. CP is even setting up processing plants in their purchase centers around the country so that farmers can dry or sell their product according to the quality requirement.
India, Thailand, and China are doing contract farming either with government support or with private company's support. In India, around 11 states' agricultural boards are directly involved in contract farming. Contract farming is also practiced in India by multinational companies like Cadbury in cocoa, PepsiCo in potato, chilies and groundnut, Unilever in tomato, chicory, tea and milk.
Like the agriculture sector of Bangladesh, the agricultural sector of India is dominated by small farmers practicing primitive agricultural methods for cultivation and harvesting crops. But, with the growth of India's economy, there has been a sudden spurt in contract farming. More and more established business houses are taking interest in contract farming as a result of rapid growth of retail industry. The growth of retail industry has propelled the growth of farm retail in India, which caters fresh vegetables and fruits from the farms to the Indian masses. In Bangladesh, the retail chain stores are also growing and in some cases high end mega stores like Nandan and Agora are doing limited contract farming to ensure constant supply of high quality fresh vegetables for their customers.
It is clear why the business sector is inclined to contract farming. They seek to integrate the supply chain to ensure timely availability of quality and quantity of raw material. Significantly, it also reduces the cost of the product by doing away with the middlemen. Not only do they get the raw material as per their specific demands but also at a lower cost. It is also believed that the participation of the corporate sector in the farming segment will play a crucial role in technology transfer, capital inflow and ensuring markets for crops.
For the farmers the main benefits are improved access to local markets, assured markets and prices, especially for non traditional crops, farmers' enhanced access to production inputs, mechanisation and transport services, and technical advice.
Just like any other form of contractual relationship, if not operated properly there can be some problems with contract farming as well. If the terms of the contract are not respected by one of the contracting parties, then the affected party stands to lose. Common contractual problems include farmer selling to a different buyer (side selling or extra-contractual marketing), company's refusal to buy products at the agreed prices, or downgrading product quality to give lower price. Side selling by farmers to competing buyers is perhaps the greatest problem constraining the growth of contract farming. Contractors also may default by failing to pay agreed prices or by buying less than pre-agreed quantities. Moreover, buying firms, which are invariably more powerful than farmers, may use their bargaining clout to their financial advantage.
Buying the crop at market price might be one solution; also pre-determined criteria for grading the product can solve part of the problem. Strengthening farmer organisations' to better access appropriate services such as credit, extension services and market information, and improving their contract negotiating skills can redress the issue of exploitation of farmers and poorly formulated contracts and their enforcement.
Despite limitations contract farming is gaining popularity as it is being used to ensure timely supply of quality products for the retail chains. On the other hand, for the farmers it is a major way to get access to technology, seeds and finance through one or two major channels. For Bangladesh it might mean the solution to the problem of reaching finance and ensuring market linkage for the farmers.
The writer works with Winrock International, an NGO. He can be reached at e-mail :
amahfuz@winrockbd.org
The government of Bangladesh has taken initiatives to reach finance to the poor farmers in the rural areas. Farmer's access to finance is one of the major problems in the rural areas. This is a major drawback to achieve the stated goals of the government, self sufficiency in food and alleviating poverty. Since the main earning sources of the rural communities are agriculture and cattle rearing and the majority of the farmers are poor, ensuring these farmers' access to finance is of great importance for the rural economy and the government.
For this, the government has taken various steps from allocating special agro loans to opening accounts for the farmers for a nominal 10 taka fee. The governor of Bangladesh Bank has even declared that the banks will try to make the farmers aware through campaign. Even Jatra and canvassing through mike in the rural hats/markets will take place to achieve this goal.
There is no doubt that the government is earnestly trying to give the farmers access to finance. But in reality the effectiveness of the programme is under question. There are several reasons.
The main reasons are difficulty in finding the right farmer, high operating cost of reaching individual farmer for small amount of loan, securing a guarantee for the loan by availing of proper collateral for the loan, reluctance of the managers to take the risk of disbursing loan to farmers and reducing the cost of realisation and management to a minimum. For these reasons most of the bankers give the loan to large farmers or to the input traders, with enough transaction with the bank and collateral for the loan. Also most of the farmers are not aware of better techniques and inputs, which create unwillingness among the managers in giving loan to the farmers. Also the managers are shy of taking risk as they are directly responsible for the loans they disburse no matter how strongly advocates the private banks
In reality, some banks are giving the allotted farm loan to MFIs, which will redistribute the loan at their own rate. Also some other banks have taken strategy to give loan to the input retailers, who in turn will give the input to the farmer on credit. Some other private banks have made consortium to give loan through selected MFIs. In most of the cases, the member of these MFIs will get the benefit.
Contract farming can be a good solution to address these problems. In theory, contract farming is a system where agricultural production is carried out according to an agreement between a buyer and farmers, which is based on certain conditions for the production and marketing of farm products. Typically, the farmer agrees to provide the predetermined quantity of a specific agricultural product, meeting the quality standards and delivery schedule set by the purchaser. In turn, the buyer commits to purchase the product, often at a pre-determined price or the market rate. In some cases, the buyer also commits to support production through, for example, supplying farm inputs and land preparation facilities, providing technical advice and arranging transportation of produce to the buyer's premises. Another term often used to refer to contract farming operations is 'out-grower schemes", whereby farmers are linked with a large farm or processing plant which supports production planning, input supply, extension advice and transportation.
In this system the contractor can be guarantor for the loan, which will be given to the farmer. Also if the contractor himself is an input dealer then the credit can be given in kind. The contractor in this case will supply the input on credit and when paying the farmers for the crop after harvesting, the contractor will deduct the due amount. Moreover, cultivation technology and other necessary inputs can be delivered to the farmer through the contractor. If the contractor has link with seed companies, they also can be involved to provide technical support. Thus all the needed inputs and technologies can be delivered through one point.
In a pilot project, Uttara Bank and National Bank of Gaibandha branches have disbursed crop loans worth Tk 12, 60,000 and Tk 40, 40,000 respectively, in this Rabi season to a total of 135 farmers under the contact farming model. In this case, the contractor acted as a guarantor. Most of the farmers in this scheme are char dweller and landless farmers, who does not have any kind of asset for collateral. CP Bangladesh is providing the seed in partial credit to the contractor and also providing training to the farmers in this project. CP Feeds and Aftab Feeds will buy the harvest, maize in this case, from the contractor at market rate. The farmers will also sell the product to the contractor at market rate. The contractor will get a commission from the feed companies.
Contract farming is used for a wide variety of agricultural products in developed and as well as underdeveloped countries. In Bangladesh, large companies like Pran, Bombay sweets are doing contract farming in limited scale. Now the multinationals like CP Feeds of Thailand is planning to do contract farming in Bangladesh to ensure supply of quality maize for its feed mills. CP is even setting up processing plants in their purchase centers around the country so that farmers can dry or sell their product according to the quality requirement.
India, Thailand, and China are doing contract farming either with government support or with private company's support. In India, around 11 states' agricultural boards are directly involved in contract farming. Contract farming is also practiced in India by multinational companies like Cadbury in cocoa, PepsiCo in potato, chilies and groundnut, Unilever in tomato, chicory, tea and milk.
Like the agriculture sector of Bangladesh, the agricultural sector of India is dominated by small farmers practicing primitive agricultural methods for cultivation and harvesting crops. But, with the growth of India's economy, there has been a sudden spurt in contract farming. More and more established business houses are taking interest in contract farming as a result of rapid growth of retail industry. The growth of retail industry has propelled the growth of farm retail in India, which caters fresh vegetables and fruits from the farms to the Indian masses. In Bangladesh, the retail chain stores are also growing and in some cases high end mega stores like Nandan and Agora are doing limited contract farming to ensure constant supply of high quality fresh vegetables for their customers.
It is clear why the business sector is inclined to contract farming. They seek to integrate the supply chain to ensure timely availability of quality and quantity of raw material. Significantly, it also reduces the cost of the product by doing away with the middlemen. Not only do they get the raw material as per their specific demands but also at a lower cost. It is also believed that the participation of the corporate sector in the farming segment will play a crucial role in technology transfer, capital inflow and ensuring markets for crops.
For the farmers the main benefits are improved access to local markets, assured markets and prices, especially for non traditional crops, farmers' enhanced access to production inputs, mechanisation and transport services, and technical advice.
Just like any other form of contractual relationship, if not operated properly there can be some problems with contract farming as well. If the terms of the contract are not respected by one of the contracting parties, then the affected party stands to lose. Common contractual problems include farmer selling to a different buyer (side selling or extra-contractual marketing), company's refusal to buy products at the agreed prices, or downgrading product quality to give lower price. Side selling by farmers to competing buyers is perhaps the greatest problem constraining the growth of contract farming. Contractors also may default by failing to pay agreed prices or by buying less than pre-agreed quantities. Moreover, buying firms, which are invariably more powerful than farmers, may use their bargaining clout to their financial advantage.
Buying the crop at market price might be one solution; also pre-determined criteria for grading the product can solve part of the problem. Strengthening farmer organisations' to better access appropriate services such as credit, extension services and market information, and improving their contract negotiating skills can redress the issue of exploitation of farmers and poorly formulated contracts and their enforcement.
Despite limitations contract farming is gaining popularity as it is being used to ensure timely supply of quality products for the retail chains. On the other hand, for the farmers it is a major way to get access to technology, seeds and finance through one or two major channels. For Bangladesh it might mean the solution to the problem of reaching finance and ensuring market linkage for the farmers.
The writer works with Winrock International, an NGO. He can be reached at e-mail :
amahfuz@winrockbd.org