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Occasional Paper - 42
CONTRACTING FARMING AS
MEANS OF VALUE-ADDED AGRICULTURE
DR. C.S. DESHPANDE
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Departnnent of Economic Analysis and Research
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National Bank for Agriculture and Rural Development
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2005
Occasional Paper - 42
CONTRACTING FARMING AS
MEANS OF VALUE-ADDED AGRICULTURE
ST. ?ft.TJ5T. ^§TOT^

DR. C.S. DESHPANDE
Departnnent of Econonnic Analysis and Research

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National Bank for Agriculture and Rural Developnnent
Mumbai
2005
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Author
Dr. C.S. Deshpande
Executive Director,
Maharashtra Economic Development Council
Y.B. Chavan Centre, 3rd Floor,
Nariman Point, Mumbai - 400 0 2 1 .
The usual disclaimer about the responsibility of the National Bank for Agriculture
and Rural Development as to the facts cited and views expressed in the paper is
implied.
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Published by the National Bank for Agriculture & Rural Development, Department of
Economic Analysis & Research, 4th Floor, ' C Wing, Plot No. C-24, G-Block,
PB No. 8121, Bandra Kuria Complex, Bandra (East), Mumbai - 400 051.
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Printed at Karnatak Orion Press, Fort, Mumbai - 400 001.
TABLE OF CONTENTS
Page No.
Preface and Acknowledgements V - vi

Executive Summary vii - xvii
About This Study 1-7
Why this Study? 1

Terms of Reference 2
How is the Study Designed? 3
What is in this Report? 7
Contract Farming: Past and Present 9-17
A Brief History of Contract Farming in India 9
Forms and Rationale of Contract Farming 14
The Wimco-Poplar Programme 19-42

Origin 19
Strategy 20
Planting and Agronomy 21
Harvesting and Marketing 22
Wimco-NABARD Finance Scheme 23
Extension Programme 28
Overall Implementation of Phases I and II: The Punjab Experience 31
Phase III 33
Bankers' Experience 34
Developments in 1990s 35
Strategic Shift 36
Grower Experience 37
41
General Conclusions
The Wimco-Pepsi (HLL)-NiJjer Tomato-Chilli Programme 43-59
Overview 43
Aseptic Tomato Paste Manufacturing Process 43
Background of Organisations 44
Current Tomato Purchase 49
Chillies in Punjab 51
General Conclusions 58
Seeds : J K, Pro Agro, Nath 61-79

Overview 61
Historical Perspective 61
Current Status of the Seed Industry 62
Contract Growing in Seed Industry 65
Agreements 66
ui
Co-operative and Private Sugar Factories 81-105
Overview of Indian Sugar Commodity System 81
Emergence of Co-operatives 86
Co-operative Activities and Services 91
Prices Paid and PerformEince of Co-operatives 93
Other Activities of Co-operatives 95
How Has Contract Farming Worked? 107-118
Beginnings of Programmes 107
Current Status 111
Impact of Contract Farming 112
Perceptions of Contract Farming 115
Contract Farming: Potent but Limited Remedy? 119-130

Need for Correct Perspective on Contract Farming 119
What does Contract Farming Do? 120
When does Contract Farming Work? 120
Priorities for Agriculture Development for Decade 125
What Role for Contract Farming? 126
Required: Selective Use of Contract Farming 129
Contract Farming and Institutional Finance 131-136
Basic Appeal of Contract Farming 131
Increasing Involvement of Institutions in Contract Farming 133
Making Contract Farming Confident Farming 137-147

Reforming Agricultural Markets 137
Needed: A Model Framework 139
Clarity on Issues : Sponsors 140
Conflicts and their Resolution - Recourse to Group Mechanism 143
, Enabling Provisions 145
Concluding Remarks 145
Postscript 147
IV
PREFACE AND ACKNOWLEDGEMENTS
There h a s been, in recent years, a sharp re-focussing on India's
a g r i c u l t u r e in g e n e r a l a n d on t h e m e t h o d s of ' v a l u e - a d d e d
agriculture' in particular. As the Indian economic reforms progress
and percolate, the importance of agriculture-related reforms becomes
plain a n d obvious. Agriculture h a s been and will r e m a i n t h e
mainstay of our diversified economy and agricultural products can
survive in the fiercely competitive global markets, only if they adopt
modern means of farming, backed by financial support, pragmatic
policy-framework and efficient infrastructure.
Viewed from this perspective, Contract-Farming (CF) form a n

effective means of generating supplies for agro-processing industries
while simultaneously adding value to agriculture. In recent past,
many varieties of CF have been practiced abroad, and to limited
extent, in India.
The Maharashtra Economic Development Council (MEDC) deemed it

necessary, as a part of its Thrust on Agriculture, to study select
contract-farming practices, with a view to suggest changes in the
policy-framework to boost CF - which could enhance agricultural as
well a s agro-processing activities. The p r e s e n t S t u d y a i m s to
c o n t r i b u t e to t h e l i t e r a t u r e on CF a s well a s to t h e policy-
recommendations.
The Study h a s been financially supported by National Bank for

Agriculture and Rural Development (NABARD), a n d t h e entire
research has been carried out ably and efficiently by Management
Analytics Pvt. Ltd.
The Council takes this opportunity to place on the record, its most
grateful t h a n k s to NABARD for financial assistance and to their
research-team for continuous interaction and suggestions.
We are extremely grateful to MAHYCO LTD. for their generous

financial support to this endeavour. Mr. Raju Barwale, Managing
Director, Mahyco Ltd. took active interest in all the phases to this
research-project and we thank him for his guidance, comments and
keen interest in the project.
We are extremely thankful to Dr. Shreekant Sambrani, Management

Analytics Pvt. Ltd., for timely completion of the Research-Study.
We thank Mr. K. Rajan, Advisor (Agriculture), Reliance Industries
and former Secretary (Agriculture). Govt, of India, for his constant
support, advice and words of experience.
Mr. M.N. Chaini, President, MEDC, desired that such a study be

undertaken by the Council and it's his sustained encouragement,
active participation and support, that have made this Study, see the
light of the day. Mr. Nandkishor Kagliwal, Vice-President, MEDC,
a n d a n a g r i c u l t u r i s t himself, also lent vital s u p p o r t to t h i s
endeavour.
I a m also thankful to - Mr. T.B. Sinha, Mr. Anil D e s h p a n d e ,

Ms. Vinda Wagh and Mr. Suresh Ghorpade (all from MEDC), for
a s s i s t a n c e in a d m i n i s t r a t i o n a n d c o - o r d i n a t i o n in t h e final
production of the Report.
Dr. C.S. Deshpande

Executive Director
MEDC
November 2004
Mumbai
vi
EXECUTIVE SUMMARY
Objectives, Concerns and Methods Used
Contract farming is seen as an efTective means of generating supplies

for processing industries and exporters, with a substantial potential
of adding value to agriculture in India. In view of this potential and
its widespread practice abroad, Maharashtra Economic Develop-
ment Council decided to examine in depth issues connected with
contract farming, to facilitate contract farming arrangements to help
achieve objectives of agriculture and horticulture development. This
study was taken up with financial support from National Bank for
Agriculture and Rural Development and assigned to Management
Analytics, an Independent research and consulting organisation. This
Report documents its findings.
The study was to help define the applicability, equitability a n d

enforceability of contract farming. It would attempt to identify crops
and regions suited for contract farming, components of contracts,
credit requirements and suitable institutional a r r a n g e m e n t s for
disbursal and recovery, safeguards to ensure contract performance,
measures against non-performance and arbitration procedures to
resolve disputes.
The study reviewed relevant experiences and remedies. It involved

four in-depth case studies of commodities grown under contracts
[Poplars under the Wimco programme in the North, mainly Punjab/
H a r y a n a ; T o m a t o e s a n d chillies u n d e r P e p s i c o / H L L / N i j j e r
programmes in Punjab a n d S u n - s i p / C l e a n f o o d s (Ex Wimco) in
Andhra Pradesh and Kamataka; Seed multiplication under JK Agri-
genetics, ProAgro and Nath Seeds in Andhra Pradesh, Maharashtra,
Gujarat; Sugarcane cultivation and processing under Prawaranagar
and Wamanagar co-operatives in Maharashtra, Modi Sugars in Uttar
Pradesh and Sakthi Sugars in Tanul Nadu]. Sample surveys of about
50 contract and other growers for each commodity systems in the
areas studied were also conducted as a part of the study.
Brief History of Contract Farming in India and Forms of Contracts
The colonial period saw the introduction of cash crops such as tea,
coffee, rubber, poppy, and indigo in various parts of the country,
mostly through a central, expatriate-owned estate surrounded by
small outgrowers model. Most such arrangements exploited small
peasantry and resulted in Indenture and alienation in some instances.
vii
ITC introduced cultivation of Virginia tobacco in coastal Andhra
Pradesh in the 1920s incorporating most elements of a fair contract
farming system a n d met with good farmer response. This was
replaced by auctions in 1984. Organised public and private seed
companies, which emerged in the 1960s, had to necessarily depend
on multiplication of seeds on individual farms under contract to
them since they did not own lands. Faced with an acute shortage of
soft wood, Wimco, t h e c o u n t r y ' s sole m e c h a n i z e d m a t c h
manufacturer, instituted an innovative farm-forestry scheme for the
cultivation of poplars in Punjab, Haryana and Uttar Pradesh. It met
with a good farm response and success despite the trees being exotic
to the regions.
Wimco also tried to procure tomatoes at the same time for its
processing factories in the South through a halting recourse to
contract purchase. Pepsico introduced tomato cultivation in Punjab
in the 1990s under contract farming to obtain inputs for its paste-
manufacturing facility established as a pre-condition to its entry into
India. This was sold to Hindustan Lever in 2000, which had earlier
acquired the Klssan tomato processing facility In Kamataka. Nijjer In
Punjab and Bhilai Engineering in Madhya Pradesh also took up
tomato contract cultivation programmes shortly after Pepsico.
Contract farming was the strategy of choice for almost all food
processing projects contemplated in the 1980s and 1990s, most of
which never came u p . Unreliable and uneconomic raw material
availability has been their major handicap. Smaller projects Involving
specialised export crops, aromatics, medicinal plants and herbs, etc
still actively use contracts in their own restricted areas.
C o n t r a c t farming is again in vogue, a n d even tried for b u l k
production of subsistence crops, s u c h as paddy-rice, maize and
wheat. Punjab govemmerit has actively encouraged it as a means of
crop diversification. Most s u c h contracts now have specialised
contract agencies as Interfaces between farmers and Input suppliers/
crop purchasers.
C o m m o d i t y c o - o p e r a t i v e s (dairies in G u j a r a t , s u g a r c a n e in
Maharashtra), which emerged in the 1950s, provided most services
envisaged under ideal contract farming to their members and bought
back the supplies offered at contracted prices, although these were
not strictly contract arrangements. They succeeded enormously,
leading to their replication and compelling private companies also to
adopt similar approaches. Contract farming is now considered to be
a corrective to market Imperfections and serving a useful purpose in
India in its own limited sphere.
viii
Contract farming covers loose buying arrangements, simple purchase
a g r e e m e n t s , supervised production with i n p u t provision, with
possibly tied l o a n s / a d v a n c e a n d risk coverage, a n d m a n a g e d
production with input provision and tied loans/advance. Introduction
of new crops and varieties as well as techniques of production also
forms a part of some contracts. Quality parameters may be integral
parts of contracts, but are not always understood properly. Defaults
occur mainly through availability of alternative channels of disposal
to farmers and sources of supply to buyers, which mere mention of
exclusivity in contracts cannot overcome. Effective reciprocity of
terms and conditions is not always assured. Contract agreements
range from oral deals to formal, registered written contracts. Sugar
and milk co-operatives provide significant social and community
services as well.
Contract Farming Experiences

POPLARS
This programme, b o m of survival necessity of the sponsor, Wimco,

the largest m a t c h manufacturer, had several strong features: a
thorough, research-based approach, excellent extension approach,
involvement of NABARD to provide refinance for farmer loans from
lead banks, risk cover, clearly stated prices and purchase procedures,
specially recruited and trained extension staff and solid backing from
not j u s t the Indian sponsor, b u t also its foreign parent. It was
spread over three phases, between 1984 and 1995. It succeeded in
meeting or exceeding targets, and creating great enthusiasm among
farmers and demand among users, leading to competitive markets
replacing contract purchase from 1995 onward.
TOMATOES
Wimco's efforts at about the same time of securing tomato supplies

through contracts in traditional growing areas of Andhra Pradesh
and Kamatcika were lackluster and sporadic. Only a simple contract
for purchase was involved, without input supply, extension or credit
components. A decade later, Pepsico introduced tomatoes on a large
scale in a non-traditional area, Punjab, with p u r c h a s e contracts
backed by research and extension support. It was closely followed by
a similar programme by Nijjer. These met with enthusiastic farmer
response and Punjab is now a major tomato-growing area. The
companies also introduced chilli cultivation with success among a
subset of their contract growers. Pepsico sold its operations to HLL
in 2000. Only Nijjer still has contracts.
ix
SEEDS
Organised seed trade had to adopt contract growing from its start in
the 1960s, as it had no land of its own to multiply seeds. This large
b u s i n e s s now survives only on contracts, which are formal and
explicit, covering all relevant factors. Seed contracts are now with
groups, not individuals, which helps not only in ensuring supplies,
but even more importantly, meeting quality standards and avoiding
disputes.
SUGARCANE
Enlightened farmer leaders integrated cane growing and processing

in the 1950s through the establishment of sugar co-operatives in
Maharashtra. They now provide inputs, extension, advances, and
supervise/manage harvesting as well as cane delivery to factory.
Farmers believe their prices to be remunerative and bonus and other
social services offered as added incentives for loyalty. The larger and
more concerned private companies elsewhere in the country,
especially in Tamil Nadu and Uttar Pradesh have taken the co-
operatives as models and now offer similar, though not all, services
to their growers.
Impact of Contract Farming

NEW CROP ESTABLISHMENT
Poplar cultivation is now a stable, widely accepted agro-forestry

activity covering over 75,000 ha/year. There is a competitive market,
which meets most of farmers' expectations.
Tomatoes are currently cultivated in Punjab on ca 25,000 ha, with a

crop size of 5,00,000 t.
INDUSTRY RAW MATERIAL
Seeds are the business of over 150 companies, which survive on

contracts and have a combined annual turnover of over Rs 2,500
crore. Companies studied have reported healthy volumes and profits
and attribute them to contracts;
Sugarcane cultivation is based on long-standing relationships between

farmers and processors; near contractual relations have led to
assured supply and prosperity for all.
X
HIGHER PRODUCTIVITY, INCOMES
Tomato contract farmers' average yield is 25 - 50 per cent higher

than the state average, while their per ha income was 40 per cent
higher than that for the control group;
Sugarcane growers reported higher than average )delds, recoveries in

contract areas, and bonuses have meant higher incomes.
FARMER PERCEPTIONS
The sample surveys showed t h a t contracts are not always well

u n d e r s t o o d , with prices, quality s t i p u l a t i o n s , a n d r e s p e c t i v e
responsibilities being the main areas of confusion. Overall, however,
farmers were distinctly satisfied with contracts and were ready to
repeat them in general and with the same parties in particular, if
offered. This was also reflected in the reported average length of
association, which was as high as 28 years for sugarcane growers.
Farmers stated higher incomes and prestige of association with a
large organisation to be the main benefits of contracts. Nevertheless,
fanners firmly believed that buyers were responsible for disputes,
underlying the antagonistic nature of contracts in general.
Contract Farming: Effectiveness, Pre-requisites and Problems

Contract farming is one among several possible interfaces between
crop cultivation and its processing and consumption. It is a powerful
means of introduction of new crops or farm technologies, especially
when both marketing and production uncertainties predominate.
Contract farming helps when markets do not exist or are under-

developed; conversely, c o n t r a c t s diminish in i m p o r t a n c e with
development of competitive markets. Contract farming works when
specific quality requirements m u s t be met. Contracts are effective
when there is no zero-sum game (one party's gain at the expense of
the other). They are ideal for a win-win situation, since they represent
a natural mutual dependency. Contracts succeed when they contain
fair risk transfer or coverage measures and trust relationships built
over long periods. They are most effective when they are critical to
the c o n t i n u e d operations of t h e b u y e r organisation. They a r e
deficient when their contribution to the buyer is minor.
The effectiveness of contracts depends on the offer of a fair price and
adequate risk coverage. Other factors helping adherence to contracts
include exclusiveness, provision of proprietcuy planting materials or
xi
inputs, and a strong, self-regulatory social systems among growers.
Contract farming is an exciting way of marrying small-farm efficiency
to scale economies of processing and marketing. It is an acceptable
via media for corporate ownership and could be a boon to processing
industry, if properly designed and implemented. It would help ensure
traceability and trackability for exports, which would be major
consideration in 2005.
Many factors also limit the utility of contract farming. Thousands of

contracts are needed for securing even modest quantities. The large,
quality-indifferent Indian market for fresh commodities acts as a
main roadblock, leading to a "Feast-or-Famine" syndrome; shortages
cause supply contracts to be flouted, and surpluses cause gluts at
the buyer's doorstep.
This also causes problems in meeting stringent SPS requirements,

which will become an increasingly important consideration. Legal
procedures governing such contracts are seen to be one-sided, with
defaults difficult to pin. Little if any recourse to courts or other legal
avenues is seen as feasible. These reasons explain the relative
absence of international players in this segment of the Indian
economy.
Contract Farming in Perspective
It is a step in evolution of competitive marketing and not permanent

substitute for it. Developed markets based on adequate infrastruc-
ture, proper information flows, appropriate governance, organised
futures are clearly the desired set of institutions. Ideally, contract
farming is self-Uquidattng, as in case of poplars, as well as tomatoes
in Punjab. The continued presence of quasi-contractual arrangements
in sugarcane cultivation is clearly a result of the completely adminis-
tered nature of the commodity subsystem.
Application Areas for Contract Farming
The following are the prime candidates, each of which is marked by

an absence or an underdevelopment of competitive domestic mar-
kets:
• Seed multiplication;
• Organic foods, vegetables, fruits, and exotic produce/plants;
• Export crops;
xii
• Aromatics, herbal and medicinal plants;
• Other cropping activities with specific requirements of quality/
cultivation practices.
The same consideration rules out commodities for established mass

markets, such as cereals, common fruits and vegetables, etc, as can-
didates for contract cultivation.
Interface with Institutional Finance
Increased credit flow to agriculture is constrained by weakness and

ineffectiveness of institutions, poor credit absorption capacity of the
peasantry given the low resource base and limited risk bearing
ability, the relatively high cost of delivery of credit and eventual
recovery due to the diffused and dispersed distribution of the end-
users. Market and production uncertainties lead to defaults and add
to farmers' desperation.
Contract farming in general helps reduce market risk associated with

crop cultivation and is t h u s a possible i n s t r u m e n t of credit
deepening. The presence of a third party could lead to outsourcing
some preliminaries of credit disbursal and help reduce the cost. The
buyers' commitment to purchase substantially reduces the risk of
default to t h e lender. Therefore, credit i n s t i t u t i o n s would be
interested in using contract farming as a means of improving credit
disbursal and meeting the mandatory targets for priority sector
lending.
Yet their actual involvement in contract fanning is limited because

there are not many well-planned contract farming schemes with
adequate safeguards for all concerned, backed by credible sponsors,
and previous experience has not been all positive. The cases studied
suggest the following desirable steps to expand institutional support
to contract farming:
NICHE APPROACH
The target crop activity should be well-defined, with manageable

number of growers who preferably share some other common traits
to economise the effort required to create awareness and interest
among them.
xiu
SERIOUSNESS OF SPONSOR
p a n k e r s need to be particularly careful in selecting t h e right

sponsors. The best candidates should possess persistence, superior
knowledge base and back-up, seriousness of intent as demonstrated
by the criticalness of the activity to their own survival and sufficient
financial, organisational and human resources to see the programme
t h r o u g h t h e long h a u l . Size a n d p r e v i o u s r e p u t a t i o n s of a n
organisation are no guarantee of their commitment to the specific
scheme.
WORKABLE, PARTICIPATIVE PROCEDURES AND PAPERWORK
Desirable sponsors need to participate as equals with bankers in the

preliminaries, helping perform some tasks without unduly taxing the
bankers' constrained resources.
DEALING WITH GROUPS AS AGAINST INDIVIDUALS
Dealing with g r o u p s is t h e preferred, if not t h e only, way of

obtaining acceptable contract performance, through the positive use
of the substantial group synergy. This also highlights the need to
work on niches, which would help form groups.
RISK COVERAGE: CRITICAL!

9
A suitable risk coverage mechanism has to be an Integral part of the

contract farming scheme. The entry of a large number of private
insurance companies in general and agriculture insurance areas
opens up numerous possibilities for innovation. Bankers should seek
the involvement of an insurance agency to evolve a tailor-made,
innovative a p p r o a c h to cover potential risk a n d create greater
comfort for the farmer.
REPAYMENT: ALERTNESS TO CHANGES
Most contract farming schemes r u n on a tri-partite arrangement

between sponsors, farmers and bankers. Smtable strategies to ensure
no leakages out of the system (or devising methods to recover funds
even in t h e event of a leakage) are n e c e s s a r y . A c o n t i n u i n g
monitoring of the market enviroimient throughout the growing season
and an arsenal of actions to countervail the impact of such leakages
are required.
XIV
AVOID LITIGATION
Litigation to recover money on default would be largely fruitless and

quite expensive. Bankers need to support measures such as those
suggested for conflict resolution to e n s u r e higher and p r o m p t
repajrment. Bankers must certainly avoid the temptation to attach
the borrowers poor belongings.
Model Contract Farming Schemes

New Measures and Regulated Markets
The Regulated Markets legislation sought to eliminate n u m e r o u s
m a r k e t i n g malpractices by allowing t r a n s a c t i o n s only in well-
identified market yards and under the supervision of a statutory
market Committee. Over time, procedures and paper work became
focal p o i n t s of m a r k e t regulators, r a t h e r t h a n facilitation a n d
enlarging of t r a d e and regulated m a r k e t s became bottlenecks.
Limited access to open trade adversely affects production of new and
diversified crops. Confining trade to the existing yards and traders to
recognised ones may not suit new crops with new spatial patterns
and trading entities. Freeing Indian agriculture from such constraints
through appropriate reform is an idea whose time has come.
The draft legislation under circulation recommends recognition of
additional sub-market yards, including those managed by persons or
bodies other than meirket committees as markets under the act and
the establishment of special markets for specific commodities and
special committees to govern them. This does not quite meet the
purpose. It would still require the physical movement of a commodity
between the place it is produced and a market, instead of an
unrestricted direct movement between the points of origin a n d
processing or consumption, to help reduce cost, delays, wastage, and
quality deterioration. The thrust of the proposed measures, albeit
unintended, is to increase the extent of over-administration of the
system, rather than to unshackle it.
A desirable contract-farming approach requires several actions on

part of sponsors as well as administrators (financial institutions roles
and actions have been listed above):
Sponsor Issues for Action

Sponsors need to define unambiguously the type and nature of the
contract, as well as areas and periods covered at the outset. They
XV
have to list the scope of their own activities as also those of the
growers, and their respective performance obligations.
Contracts must clearly specify:

• Quantities involved (on volume, area or entire crop basis), delivery
schedule, points of delivery and procedures to be followed in the
event of shortfalls or excesses;
• Modes and responsibilities of grading, packing and transport and
costs;
• P r i c e s : fixed in a d v a n c e of s e a s o n , flexible p r i c e s , spot,
consignment, split;
• Payment modalities: time, form, hold-backs, if any;
• Incentives based on quality and/or time performance;
• Advances and their recoveries;
• Insurance, market fee and other related costs;
• Provisions in case of excess or short supply;
• Indicative net realisation by farmer.
Sponsors m u s t focus on groups, and not individuals. The agree-

m e n t s should be simple, short and devoid of legal jargon. They
must not involve property liens or attachments under any cir-
cumstances.
Development/Support Issues
• Processors or sponsors must equip themselves with suitable R&D,
efforts, especially concerning agronomy and the required exten-
sion drive;
• All successful contract farming is based on appropriate pricing.
Given the often cyclical nature of agriculture production, sponsors
could consider establishing a price stabilisation fund as a desir-
able step to overcome this problem;
• No contract farming scheme would succeed in the short run. Per-
sistence for a reasonable period extending over several years is
essential.
XVI
Administration
• State governments must recognise contract arrangements of all
types, and exempt them from the purview of the c u r r e n t or
amended APMC acts.
• There should be a simple registration of all contracts with the

concerned district agriculture office. This is to be performed by
the buyer, to avail of the exemption from the Act. There is no
need to ensure formalisation or government registration and su-
pervision of growers' groups.
Conflict Resolution
The best conflict resolution is avoidance of conflicts, as assumed in

the logic of the above recommendations. Nevertheless, some conflicts
might still arise, which need to be simply, effectively and quickly
resolved.
THREE-STAGE PROCESS
• Intra-group discussion and settlement
• Simple arbitration on the lok adalat model, with a local First

Class Judicial Magistrate assisted by farmer/sponsor representa-
tives, and one eminent person of area acting as the arbitration
forum;
• One appeal to district judge/magistrate
The entire process must be completed in a maximum of three

months, and awards under it must have judicial sanction of a
decree of a civil court and must be enforceable. Legal practitio-
ners must not be allowed to participate in the process. It should
not be subject to Indian Contracts Act or further review.
xvii
ABOUT THIS STUDY...
Why this Study?
Indian potato farmers plough-in their crop as a result of prices

crashing almost as often as fruit processors bemoan uneconomic
supply of raw material. This feast-or-famine s5aidrome is commonly
and correctly considered to be among the major reasons for the
basic risk-aversion of farmers, especially the smaller ones, the
p r e d o m i n a n t segment of Indian p e a s a n t r y . It is t h o u g h t to be
restricting the acceptance of new crops, or varieties, or technologies
and to make growers less sensitive to factors such as the quality of
the crop or post-harvest practices, their overriding concern being
quick disposal of the crop. Each grower by himself has insignificant
quantities to offer in the market and is not able to predict prices,
leave alone influence them; he must either make the most of what
the market offers or if it is entirely uneconomic, destroy his produce.
From the mid-nineteenth century onwards, commercial exploiters of

new crops - indigo, poppy, tea a n d coffee, r u b b e r , tobacco -
attracted fanners to cultivate them by offering to buy the harvested
crop, often at pre-determined prices. This clear alternative to open
markets or own farming was the progenitor of contract farming in
India (see next Section for a brief history). In the recent past, a
n u m b e r of v a r i a n t s of contract farming have been in vogue to
provide farmers the right signals for adopting innovations, to procure
economically raw materials for further processing, and most recently,
to diversify agricultural economies of large regions, either to break
the existing low-income deadlock or to provide farmers alternatives to
their traditional crop-mix. Since corporate farming in India is not
economically or politically feasible, coritract cultivation is seen as an
effective m e a n s of generating supplies for enterprises s u c h a s
processing or exports, both of which could add substantial value to
the raw produce of agriculture.
Contract farming took roots in the West after the Second World War.
About 30 per cent of the United States produce came from contracts
in t h e 1 9 8 0 s . Almost all of t h e poultry, dairy a n d v e g e t a b l e
production was governed by contracts. Other large scale examples of
contract farming include tea in Kenya, r u b b e r and palm oil in
Malaysia, and tobacco in Thailand.
Maharashtra E c o n o m i c D e v e l o p m e n t C o u n c i l (MEDC), a n
independent research organisation and think tank, felt that issues
concerned with contract farming should be examined in depth.
Commercial agriculture and horticulture have been key areas of
growth and development in M a h a r a s h t r a over the last decade.
MEDC's purpose is to suggest a framework to facilitate contract
farming arrangements which could help achieve the objectives of
agricultural and horticultural development. National Bank for
Agriculture and Rural Development (NABARD) provided financial
support for the study. The project was entrusted to Management
A n a l y t i c s Pvt Ltd, a n i n d e p e n d e n t c o n s u l t i n g a n d r e s e a r c h
organisation specialising in agriculture management. This document
reports the findings and conclusions of the study.
Terms of Reference
After a detailed discussion, NABARD accorded its sanction to the

study, stipulating that:
The broad objectives of the study are:
• To examine the existing arrangements for contract farming and

measures required for ensuring compliances by the contracting
parties;
• To systematically identify factors and establishing their critically

through contract farming system;
• To identify various agencies appropriate for contract farming;
• To suggest appropriate statutory framework, implementation of

laws and ways of arbitrating disputes.
Besides above, the study m a y also examine the credit delivery and
recovery m e c h a n i s m with tie-ups among financiers, borrowing
farmers and buying firms under contract farming, take up specific
case studies (of a specific variety grown in a particular area) to
examine the impact of contract farming and develop models for
c o n t r a c t farming which e n s u r e s equitable g a i n s for farmers,
processors and consumers alike and finally come out with a set of
recommendations connecting credit recovery with contract pa3rments.
The study will be conducted to identify a general set of desirable

parameters for specific key crops and regions, These are:
• Tomatoes and chillies: Punjab, Andhra Pradesh and Kamataka;.

• Sugarcane: Maharashtra (under co-operatives), Tamil Nadu;
• Seed multiplication: Maharashtra (Marathwada and Vidarbha

regions) and Andhra Pradesh;
• Mango: Andhra Pradesh, Tamil Nadu and Maharashtra;
or
• Poplar: Uttar Pradesh, Haryana, Punjab.
The study will be taken up in three segments for the crops and
states as indicated in above paragraph. At the first step, a macro
analysis will be carried out to identify the estimated s h a r e of
contract farming sub-sector in the total physical production, value
addition, capital employment, labour absorption, land use and input
consumption in the relevant commodity for the state or region as a
whole. Specific case studies will be taken up. as a second step, to
examine the impact of contract farming. An analysis of the case and
comparison with its control group would help to test the validity of
the hypotheses. As the final step, a sample of about 50 contract
farmers would be studied through structured questionnaires as well
as open-ended interviews. The perception of risk and importance of
security provided by contract farmers as well as the problems and
prospects of the system shall be identified; and also legal provisions
influencing the system will be examined.
How is the Study Designed?
The study was based on the premise t h a t adherence to farming

c o n t r a c t s is not merely m a t t e r of a p p r o p r i a t e laws a n d t h e i r
implementation. It is the result of an interaction among several
a g r i c u l t u r a l a n d socio-economic f a c t o r s , s u c h a s r e s o u r c e
endowments of the region and the fanner, physical and marketing
r i s k s in t h e p r o d u c t i o n a n d d i s p o s a l of c r o p s a n d g r o w e r s '
perceptions of these, nature of contract and assurances, finance and
facilities provided and penalties stipulated, track record of contract
b u y e r , p r e v i o u s e x p e r i e n c e of c o n t r a c t s , l e n g t h of c o n t r a c t
relationship, to name some.
The study was aimed to help define the applicability, equitability

and enforceability parameters of contract farming systems. Its
output was to be a model or models for contract farming to ensure
equitable gains for fanners, processors and consumers alike. It was
to help identify crops and regions suited for contract farming,
c o m p o n e n t s of c o n t r a c t s , credit r e q u i r e m e n t s a n d s u i t a b l e
institutional arrangements for disbursal and recovery, safeguards to
ensure contract performance, measures against non-performance and
arbitration procedures to resolve disputes.
The study was based on four in-depth case studies of selected

contract growing schemes, successful as well as failed, which have
been in use in India during the last three or four decades. The
commodities included plantation as well as field crops, cash crops
and perennial as well as seasonal crops, spread over several regions.
The crop/region systems selected after detailed discussions were:
• Tomatoes and chillies in Punjab, Andhra Pradesh and Kamataka;
• Sugarcane in Maharashtra under co-operatives and in Tamil

Nadu and Uttar Pradesh under private companies;
• Seed multiplication in M a r a t h w a d a , Vidarbha a n d A n d h r a

Pradesh;
• Poplars in Uttar Pradesh, Haiyana and Punjab.
For each crop system, studies of individual companies/organisations

involved in contract farming were taken up to examine the impact of
contract farming. For each area studied, a sample of contract
farmers or control group (sample size of about 50) was studied both
through structured questionnaires and open-ended interviews about
their experiences of contract farming.
The case analyses were compared to control groups to test the

validity of the hypothesis regarding benefits of contract farming (e g
introduction of new crops, improvement of productivity, assured
supply). Further examination of data and impressions collected
helped identify factors intrinsic to contract farming and others, such
as local area- or custom-specific features (e g local influences and
loyalties) which favour or hinder acceptance of contracts.
Legal provisions including formats of existing c o n t r a c t s and

procedures currently followed for dispute redressal, other enabling or
disabling provisions were also studied as applicable. Finally,
measures presently debated for agriculture reform were also studied
for their possible impact on contract farming arrangements in the
foreseeable future.
The actual programmes studied v(êre
Commodity Organisations
Poplars Wimco/Wimco Seedlings
Tomatoes Hindustan Lever Ltd
Nijjer Agro Foods Ltd
Sun-sip Ltd
Seeds J K Agri Genetics
Pro Agro Seeds Ltd
Nath Seeds Ltd
Sugarcane Pravara Sugar Co-operative
Wamanagar Sugar Co-operative
Modi Sugar Ltd
Sakthi Sugars Ltd
The fieldwork included collection of all relevant background records

of the activity from its inception, wherever possible, and discussions
with organisations and concerned officials and other informed
personas. In each area studied, a sample of contract farmers (a priori
sample size of about 50) was studied both through s t r u c t u r e d
questionnaires and open-ended interviews about their experiences of
contract farming. The main concerns of the farmers' survey included
their resource base and use, marketing structures available to them
and their perceived efficiencies, nature of contracts and assurances,
finance and facilities provided and penalties stipulated, and overall
performance including defaults on either side.
Responses to these from both contract growers and control group

farmers were compared with the actual provisions of the formal
contract if proposed, or assurances given by the buyer to determine
whether the farmers' understanding and their impressions
correspond to paper arrangements or assurances. Discussions with
local leading farmers, traders and government officials concerned
with agriculture as a whole or the specific crop, helped provide
appropriate perspective and co-ordinates for the emerging picture.
Some deviations from the methodology stated on pp 3-4 above

became inevitable in view of the ground conditions. Contracts no
longer exist in case of poplars, or tomatoes in K a r n a t a k a a n d
Andhra Pradesh. Coverage of current contract farmers in the field
survey was therefore not possible. All our poplar growers had to be
either former contract growers or non-contract growers. We therefore
made this substitution. We found it extremely difficult to identify or
interview poplar growers in Uttar Pradesh, since Wimco no longer
has any offices covering these areas. Similarly, we were advised by
the seed companies that we would get far better responses from
farmers in Gujarat as compared to Vidarbha, which would to the
value of the study.
We hasten to add that these modifications cover only a small part of

t h e study, namely the sample survey. We have covered all the
b a c k g r o u n d i n f o r m a t i o n for all t h e regions in t h e original
methodology and hence the treatment of the study conforms to that
proposed in the beginning.
Locally recruited enumerators, carefully chosen for their familiarity
with the activity, language and region conducted the surveys after
being trained by the research agency personnel, under their close
supervision. Wimco Seedlings a n d H i n d u s t a n Lever suggested
candidates for field work in Punjab, as did seed companies and
sugar factories in their own regions. The final selection was always
that of the research agency.
Sample Survey Details
Crop System State Sample Size

Poplars 65 former contract and non-
contract growers in Punjab and
Haryana
Punjab, Haiyana
Tomatoes 22 former contract growers,
16 current contract growers,
19 non-contract growers; total
57 growers, all in Punjab
Seeds Andhra 38 contract growers, 11 former
Pradesh contract growers
Gujarat 15 contract growers
64 growers in all
Sugarcane Maharashtra 45 co-operators
Uttar Pradesh 15 growers
Tamil Nadu 21 growers
81 growers in all
The fieldwork was carried out between J u n e and August 2003 in all
areas.
6
What is in this Report?
This Report presents in one volume the overall findings of the study
and an action agenda arising from them, as well as t h e case
studies, which are concerned with the detailed findings from each of
the four specific situations examined. The immediately following
section discusses crops and regions where contract farming has been
practised in India over the years and an assessment of the Impact of
contract farming on the overall agricultural situation in the country.
It also elaborates the basic logic of contract farming as commonly
accepted, as well as major issues arising from contracts. The four
detailed case studies follow thereafter, each of which presents some
conclusions that relate only to the particular sub-system. The next
section presents generalised findings of the case studies, regarding
efficacy of contract farming as an instrument of achieving objectives
of value-added, diversified agriculture. It also d i s c u s s e s other
concerns such as size biases, balance of negotiating power, conflicts
of interest and building of trust. The fourth section reviews the
relevance Etnd place of contract farming in the context of the agenda
for agricultural development in the next decade. The specific points
of reference are the emphasis on high-technology high-value crops,
greater role of processing and exports of both fresh and processed
commodities in the p o s t - 2 0 0 5 environment of traceability a n d
enhanced SPS regulations.
Financial institutions and their interest as well as involvement in

contract farming is a point of particular interest to this study. These
aspects are discussed in the fifth section. The concluding section
identifies issues that require policy and s u p p o r t decisions a n d
recommends appropriate actions. These issues are, among others:
approaches to participants in contracts (agencies, individuals and
groups, regulators), support mechanisms and facilities (technology,
inputs, credit), contents of equitable contracts, their enforceability,
and tune-bound, cost-effective adjudication mechanisms and appellate
procedures.
CONTRACT FARMING: PAST AND PRESENT
A Brief History of Contract Farming in India
Buoyed by the success of Indian cotton exports during the US Civil

War, British settlers and East India Company comradores wanted to
develop India as an exporter of other commercial crops as well. The
settlers took to plantation crops - tea, coffee, rubber - in the more
salubrious climate of hills in the South and the North-east, while
poppy (for opium exports to China) and indigo found favour with
comradores in the Gangetic and Central plains. Tenants and yeomen
peasants alike were attracted by ready purchasers who offered what
was deemed to be an attractive price for these new crops since no
markets existed for them. This was the beginning of contract farming
in India, in the second half of the nineteenth century.
Given the prevailing land-tenure systems, these arrangements soon

degenerated into near-indenture systems for the cultivators. Farmers
were b o u n d to grow the crops, and accept whatever price w a s
offered, after paying for the inputs provided by the buyer, again at a
price of his choice. In a sense, these arrangements were variants of
l o n g - s t a n d i n g m o n e y - l e n d e r l a n d l o r d a n d rentier d o m i n a t e d
cultivation of most crops in India. The facts that the crops grown
were of no consumption value to the farmer and that they had no
access to any other buyer made t h e m even more exploitative.
Mahatma Gandhi's championship of the cause of the indentured
indigo growers of Champaran in Bihar immediately following his
return to India in 1916 is a major milepost in the history of contract
farming.
Other crops and regions did not suffer from such extreme privation,
but contract growing had earned a poor reputation. The Assamese
population stUl feels that through contract growing of tea, it first lost
its land ownership a n d eventually, it h a d to compete a g a i n s t
"outside" (read Biharl and U P) migrants for unskilled labourers' jobs
on these very lands. The Southern plantations, however, did not
cause such traumas.
Thus, when the erstwhile Imperial Tobacco Company (present-day

ITC) wanted to introduce the cultivation of Virginia tobacco in
coastal Andhra Pradesh through contract farming in the 1920s, it
received a warm welcome. It had, of course, taken great care to
structure what seemed to be a fair contract system, through well-
defined roles for the company and the participating farmers. It
recruited trained persons to propagate the idea of tobacco cultivation
first through m a s s contact and demonstrations. It targetted the
relatively better-off and educated farmers.
When farmers began to sign up, these staff became the nucleus of
extension and procurement personnel. It had a large corporate
presence in the midst of the growing area, through its warehouses
and factories in Guntur. For several decades it was the largest
employer in the area and its presence was considered benevolent.
Nevertheless, some 50 years later, farmers began to feel that the
balance of power was hopelessly tilted in favour of what was among
the largest private companies in the country. The contract system
was finally abolished by an Act of Parliament in 1984, and replaced
by open auctions.
Organised seed trade emerged in the 1950s. Those in the business

had no choice but to multiply seeds on growers' lands, since their
business could not own land and large enough parcels were hard to
come by in the areas best suited for this purpose, anyway. Initial
informal a r r a n g e m e n t s developed into proper contracts, which
stipulated various obligations of both sides including supply of basic
materials, adherence to prescribed practices, supervision and quality-
checking and exclusivity of selling at prescribed prices. The seed
business could not possibly have developed at all without contract
farming.
At the same time as the leading cigarette company had to give up

contracts for tobacco (1984), the leading match company, Wimco,
facing an acute shortage of matchwood, introduced poplar in North
India as a farm-forestry crop through an elaborately-designed
contract farming system. It had roped in major public banks for
providing term-finance to participating farmers and i n s u r a n c e
companies to cover plant mortality. Its deployment of a large, well-
qualified extension staff and novel measures to provide finance and
cover risks led to a quick acceptance of the exotic trees in Punjab,
Haiyana and Uttar Pradesh. A competitive market emerged within a
decade and the corporate arm responsible for this function became a
profitable provider of planting material.
As a pioneering processed food exporter, Wimco also experimented

with contract cultivation of tomatoes to supply its paste factories in
Kamataka and Andhra Pradesh, with far more Umited and temporary
success. Its competitor, Kissan Foods, later acquired by Hindustan
10
Lever, also had the same experience. Later entrants, such as the
Bhilai Engineering Corporation in Madhya Pradesh and Nijjer Agro
Foods in Punjab have had somewhat better experiences and even
today continue with contract farming in limited fashion.
The soft drinks giant Pepsico had to commit to exports of processed

foods as a pre-condition for its entry into India in the 1990s. It
chose to set up a tomato processing facility in Punjab to meet this
obligation and launched a major contract farming programme to
introduce the crop on a large scale in the state, which was not a
tomato-growing area.
Pepsico's foray attracted much attention; nevertheless, it sold the

facility to Hindustan Lever in 2000, along with the contract farming
programme. While tomato (and eventually chilli) farming caught on
in Punjab, the commercial interest of these large companies waned,
since Pepsico no longer had to export only tomato paste following
economic reforms, and Hindustan Lever found recently that it could
not compete with cheap Chinese imports.
The great interest generated in food processing in the 1990s also

translated into an equally strong interest in contract farming as
possible means of raw material supply. Most of the projects were
based on fruits and vegetables, all but a handful of which never got
off the drawing boards. The few that did also did not fare too well,
either as export-oriented units or in the domestic markets. Most of
these cite unreliable and uneconomic supplies of raw material as the
principal cause of their misfortune, thereby admitting the inefficacy
of contract farming. Most of these projects were, however, very poorly
designed, without proper analysis of markets and economic viability,
as were their contract schemes. Nevertheless, small pockets of
successes do exist: gherkins and flower p r o c e s s o r / e x p o r t e r s in
Karnataka, oleo-resin and spice extract plants in Kerala, medicinal
and herbal supplement processors in the foothills of the North.
The c u r r e n t period h a s witnessed a n o t h e r flurry of i n t e r e s t in

contract farming, this time into subsistence and food crops as well.
H i n d u s t a n Lever's foray into the wheat flour m a r k e t was large
enough to encourage it to promote contract farming through other
agencies. Rallis undertook to provide planting material and other
i n p u t s and State Bank of India and ICICI Bank financed wheat
farmers in Madhya Pradesh, which Hindustan Lever agreed to buy
through its own agents. Exporters of basmati rice found lucrative
and booming export m a r k e t s and s t r u c t u r e d their own similar
11
c o n t r a c t s c h e m e s . The p r e s e n t Punjab government pushed
a g r i c u l t u r e diversification from the traditional paddy-wheat
combination in a big way. It invited processors and contract agencies
to participate in the programme in the state in a big way.
These projects differ from the earlier ones substantially. Ultimate

buyers now employ contract farming agencies (which are divisions or
subsidiaries of major agribusiness firms such as Rallis, Mahindra
and Mahindra, Escorts or DCM) to interface with the farmers. These
agencies work on a fee from farmers and buyers alike to supply
i n p u t s and extension. The state government acts as an honest
broker between the buyers and agencies, and allocates areas of
exclusive operation to them. These activities got off to major start in
kharif 2003 in Punjab, with a coverage of over 1,000,00 ha land
under reintroduced maize and basmati paddy. The Punjab initiative
is closely watched by various other states, notably Haiyana, Madhya
Pradesh and Gujarat, which would want to replicate it should the
results from Punjab appear satisfactory.
Throughout this period, several other arrangements incorporating

many features of contract farming were also tried. The two most
important such enterprises both originated out of a concern for
obtaining a better deal for farmers at the mercy of monopsonistic
buyers. Both these started in 1948-50, espoused a co-operative form
of organisation, were built on a fruitful partnership of enlightened
farm leaders and urban educated elite, and are shining examples of
synergy between small-scale conventional production units and large-
scale modem processing plants. Sugar co-operatives in Maharashtra
and milk co-operatives in Gujarat both catered to their members'
production needs initially and offered them better prices through the
processing plants they owned. Over the next five decades, these
projects were replicated many times.
The oldest ones are the most successful ones today, with vastly
expanded scope of activities and services for the membership. Not
surprisingly, they enjoy unwavering member s u p p o r t . Equally
importantly, a number of other, private, successful processors of
s u g a r c a n e a n d milk in o t h e r s t a t e s (U P a n d Punjab) have
incorporated most of the co-operative m e a s u r e s benefitting the
farmers in their approach and have earned farmer loyalty as well.
Contracts have been extended to non-crop activities as well. Smaller

poultry farmers for both eggs and broilers function as contracted
franchisees of the larger operators in many parts of the country,
12
most notably in the Namakkal area of Tamil Nadu. Major shrimp
farming firms in Kerala and Andhra Pradesh and mushroom growers
of Tamil Nadu have also availed of production contracts with smaller
individual units, much the same way as large industrial producers of
consumer goods or pharmaceuticals routinely use smaller firms
under contract to them to manufacture products to be sold by them
under their own brand name.
The earlier, colonial-period negative image notwithstanding, contract

farming is thus seen to be serving some useful purpose in India in
its own limited sphere. Ironically, even though it was earlier held to
be an instrument of exploitation of the smaller producer by the
infinitely larger and more powerful buyer (as it is even now perceived
in some instances), it is considered to be a major corrective to
market imperfections. Contracts and similar arrangements evoke very
positive responses wherever they have succeeded, even as failures
o u t n u m b e r successes. The fact t h a t contract farming finds a n
important place in the reforms to agriculture policies presently under
discussion is an eloquent testimony to its currency and appeal right
now.
Mileposts in Chronology of Contract Farming in India
Period Events
1850s - 1860s Cotton exported to Britain after disruption of US

supplies
1860s Plantations for tea and coffee in the hills of t h e

N o r t h - e a s t a n d t h e S o u t h , indigo a n d p o p p y
cultivation in plains
1910s Distress and u n r e s t among i n d e n t u r e d c o n t r a c t

farmers
1930s Virginia tobacco contract farming in Andhra Pradesh
1948-50 Sugar co-operatives emerge in M a h a r a s h t r a a n d

milk co-operatives in Gujarat incorporating m a n y
elements of contract farming
1950s Emergence of seed b u s i n e s s b a s e d on c o n t r a c t

farming
13
1980s Poplar introduction through contract farming; also
tomato contract farming
1990s Tomato introduced in Punjab t h r o u g h contract

farming
1990s Numerous, mostly abortive, efforts at introducing

contract farming in horticulture
2000s Variants of contract farming introduced for wheat in

MP and crop diversification in Punjab; emergence of
specialist contract farming firms
2003-04 Contract farming accepted in new policy framework

for agriculture reforms
FoTTns and Rationale of Contract Farming
The brief review suggests t h a t contract farming is a very broad

concept, covering almost all arrangements that bypass the open
market with numerous buyers and sellers. These arrangements are
devised because either there are no markets for the commodity, as
in the case of new crops, or the existing m a r k e t s do not serve
certain special p u r p o s e s , s u c h as o u t p u t of certain quality or
quantity specifications. The usual response to such supply chain
bottlenecks is to control the source completely, i.e., integrate
backward, as demonstrated by steel manufacturers owning iron
mines and collieries, etc. The US fioiit processing pioneer Chiquita
owned b a n a n a plantations in Central America, while Dole owned
p i n e a p p l e p l a n t a t i o n s in Hawaii a n d t h e P h i l i p p i n e s . T h e s e
arrangements helped control the entire supply chain.
Indian processors, excepting the already long-established tea and

coffee plantations could not follow this route, as land tenure laws
did not perrnit corporate ownership of land. These laws also imposed
a rather low ceiling on individual holdings as well, which effectively
prevented emergence of large farming estates in most parts of the
country. Whether corporate farming would have been at all feasible
in India is a matter of continuing debate, the consensus being that
such entities could not have been cost-competitive since labour cost
would have to be paid up front by them, unlike family farms. This
ground reality pushed the would-be processor or seller to experiment
with various forms of contracts.
14
Contracts as practised in India range from relatively loose, one-time,
oral arrangemients between the farmer and the buyer to formal,
registered contracts which specify the duties and obligations of the
parties to t h e contracts as also deliverables and penalties for
defaults. The original Pepsico/HLL contract growing involved formal
contracts, while the present management of Sun-sip Ltd, successor
to the Wimco tomato plants in the South, claims that it has "verbal
understanding" with some leading farmers of the area for supply of
tomatoes, while seed companies have fully vetted legal agreements
with their growers.
Poplar growers had to enter into separate agreements with the lead
banks of the district for the finance which entailed mortgaging their
land (which had to have a clear title) and Wimco for the actual
farming p a r t . S u g a r co-operatives typically i m p o s e a c r e a g e
restrictions on their members in proportion to their share holding in
the co-operative. Again, the general c o n s e n s u s among contract
farming organisations is that regardless of how the contracts are
worded, there is little redress possible in the event of default from a
farmer under contract. Legal proceedings are seen as cumbersome
and expensive and possibly futile, as most courts would not easily
uphold a relatively larger and more resourceful party (the buyer)
against a poorer and smaller one (the farmer).
The coverage of contract also varies substantially. Wimco provided

not only the planting material and other inputs at pre-specified
prices, but also supplied priced extension services, replaced plant
mortalities in the first two years (after which an insurance cover was
available) and offered advice and support for intercropping between
poplar trees, especially when the plantations were more m a t u r e .
Sugar co-operatives in Maharashtra manage virtually the whole of
sugarcane cultivation for their members, starting with supply of
i n p u t s and finance and going u p to harvesting according to a
specified s c h e d u l e a n d t r a n s p o r t i n g t h e c a n e to t h e factory.
Payments to suppliers are debited at source, with the farmer getting
the balance due to him. These co-operatives have also provided
numerous social services and benefits to members, such as basic
education and health facilities (some of the larger ones now r u n
institutions of tertiary education and speciality hospitals). They have
also promoted secondary activities, such as dairying and poultry
farming, which provide additional income to the member families.
Both Pespsico and Nijjer provided tomato and chilli seedlings in
what was then virgin territory for the crop, arranged input supply
and closely supervised the cultivation for one or two seasons, until
15
farmers gained confidence. One of the factors ensuring farmer
commitment to the Nijjer programme is that the company supplies
them newer variety seedlings, which are otherwise not available. In
the initial period, both Wimco and Kissan arranged for seed supply
for tomatoes in collaboration with leading seed companies to ensure
higher 5aelds for farmers. Seed companies control all aspects of seed
m u l t i p l i c a t i o n , i n c l u d i n g o b s e r v a t i o n of isolation a n d o t h e r
recommended practices, to ensure that they could sell the resulting
seed either as certified or truthfully labelled material.
Contracts can t h u s be simple agreements to buy all or specified

quantities of a crop at pre-determined prices, generally agreed upon
before the harvest. Middlemen and moneylenders have long bought
standing crops from their client population. Even today, most fruit
orchard owners sell all their produce to traders long before the fruit
is harvested, typically at the fruit bearing stage. The buyer takes
over the management of the orchard until harvest and bears both
t h e p r o d u c t i o n a n d m a r k e t risk. More m o d e r n a n d elaborate
contracts cover the entirety of the growing period and include
provision of inputs, if not planting material and extension. Crop
finance may be independently arranged or tied to the contract. This
is t h e typical tomato or t h e c u r r e n t Punjab c o n t r a c t growing
situation. The most involved arrangements include buyer assuming
responsibility for elements of production management as well, as in
the case of seed multiplication, co-operative sugarcane cultivation or
poplars. These types of arrangements seem safer to the farmer, as
the risk is transferred in part to the contractor. Inclusion of finance
and insurance makes these schemes even more comprehensive.
Exclusivity of relationship is a major issue. Its absence could clearly

lead to defaults on commitments of leakage of supplies out of the
contract system. Merely specifying it in the contract, however, does
not ensure its observance, as illustrated by recent instances of
contract growers in Gujarat indulging in bootleg production and
selling seeds of Bt cotton. Extremely short term economic interests of
the growers could prevail over contract commitments when an
opportunity to indulge in non-exclusive transactions presents itself.
Wimco and Kissan managers in the South observed wide fluctuations
in the tomatoes delivered to them and correlated it to the variations
in the market prices of table varieties of tomato. One of the principal
reasons for the choice of Totapuri as the preferred mango variety for
processing was that it was supposed to have a very limited table
demand. This situation changed over time and mango processors,
too, had to face the problems of supplies being diverted to the direct
16
consumption market. Alternative disposal channels with differential
pricing are the main cause for defaults.
Contracts may not specify rigid quality parameters for acceptance of

the produce, even as they may link the price to the quality delivered.
They often specify the minimum cut-off standard. Wimco specified a
girth of 1 m at the height of 1.5 m as the acceptability criterion for
the poplars offered to it. Off-grade offerings were accepted at the
buyer's discretion at reduced prices. Most contracts are similarly
specified. The importance of such criteria of acceptance is not always
fully explained to the farmer, or understood by him if explained.
Generally, the grower is not averse to price cuts for oflf-grade output.
Problems arise, however with outright rejection below a certain level.
The grower's fear is that he would not be able to find a buyer if he
is to offer only s u c h rejects. They also feel t h a t the buyer may
cleverly use quality parameters to manipulate prices. Even under
auctions, tobacco growers suspect that buyers delay their purchase
to ensure that the crop is somewhat damaged, forcing them to sell it
at a lower price. The Punjab tomato growers were openly sceptical
about the use of norms such as colour and total soluble solids for
grading their produce. They felt that Pepsico merely used them to
reduce the price offered, in the wake of bumper crops and did not
adhere to any quality norms if he fears a supply shortage.
Reciprocity of terms is sometimes an i s s u e in c o n t r a c t s . Both

Pepsico and Nijjer contracts specified t h e company's right to t h e
totality of produce, without necessarily obligating them to buy it all.
The farmer in theory could not sell a single tomato to others without
the company's permission, but the company reserved the right to
buy as much as it pleased. Farmers were not supposed to enter into
similar agreements with any other organisation, but the companies
were free to purchase from even those not covered under contracts.
They also had a parachute clause freeing them of any obligation to
buy in the event their plants failed. The farmers were offered little
palliatives in the event of a crop failure.
17
THE WIMCO POPLAR PROGRAMME
Origin
The Swedish Match Company, the global pioneers of the m a t c h

industry set u p a manufacturing base in India, in the form of
Wimco Limited, in 1923. The first match factory was set u p at
Ambamath near Bombay in 1924, Immediately followed by a factory
near Calcutta and by 1929 two more at Madras and Bareilly.
The C o m p a n y w a s t h e l a r g e s t a n d t h e only m e c h a n i s e d
manufacturer of matches in India. Its business faced two threats:
the first, from the government encouragement of small and tiny
hand-made match units in South India through excise waiver (and
later direct restrictions on Wimco's growth) a n d the second, a
growing shortage of soft woods suited for making match splints. Its
splint-making operations in the Andaman islands had to be stopped
due to environmental restrictions.
Faced with these threats, the Wimco management decided as early

as 1970 to become self-reliant on match wood supply. Poplars were
the preferred species of softwood for this purpose the world over;
however, Indian and international forestry specialists believed that
p o p l a r s would not grow in India. Wimco decided to t e s t t h i s
inference. It i m p o r t e d p o p l a r clones in 1970 from its s i s t e r
companies the world over and helped the Uttar Pradesh Forestry
Department raise poplar nurseries in the Terai region to test the
suitability of the clones and select candidate-plus clones. It took a
bold initiative by way of encouraging farmers in the nearby areas
also to raise similar nurseries the following year. The intention was
to eventually raise captive farm forests of poplars, which would allow
Wimco to buy back the trees on maturity.
By the early 1980s, Wimco felt encouraged by the results of its

experiments of over a decade, although international experts were
still skeptical of p o p l a r s in India. It decided to multiply t h e
experiment on a commercial basis in 1984, through a separate
subsidiary company, Wimco Seedlings, and expand the a r e a of
operation to Western Uttar Pradesh, Haryana and Punjab.
The Wimco-NABARD scheme was initiated in 1984 to p r o d u c e
adequate quantity of raw material needed by the match making
industry. The production in 1982 was 2.40 million cases of 7,200
match boxes each and the expected growth 6 per cent annually. The
19
r e q u i r e m e n t in 2 0 0 0 was expected to be 6.85 million c a s e s .
Because of wood shortage as well as the policy of restricted felling,
agro-forestiy was considered to be the best alternative to meet the
increasing demand for matchwood.
The following is a brief chronology of events concerning the poplar

programme:
Year Event
1924 First match factory near Bombay
1929 Another factory near Calcutta
1928-29 Factories near Madras and Bareilly
1960 Severe shortage of matchwood
1970 Poplar clones imported from several sister companies

from Australia, United States, Portugal, Italy and
Belgium
1971 Extension work to promote poplar plantations with

more than 500 farmers
1984 Wimco Seedlings set up as subsidiary of Wimco to

promote poplars
1984 Wimco-NABARD Scheme to provide extension-credit

support to producers
1990 Disturbed conditions in North India affects match

production
Strategy
The Wimco poplar programme was based on the conviction that
poplars were good for match splints. Wimco Seedlings Limited,
established 1984 to develop and market poplar clones, was the
strategic i n s t r u m e n t . Strong in r e s e a r c h a n d development, it
acquired expertise in plant propagation. It provided all the major
contributions to promoting poplars with well supported extension
services in the identified regions.
20
The poplar varieties used were of imported stock. Clones G-3 and G-
48 were the major ones planted in Uttar Pradesh, Punjab, a n d
Haiyana. Availability of saplings and suitability of species to climatic
and agronomic conditions influenced the choice. Many farmers
followed what others did, and therefore, there was a tendency for a
single species to dominate the scene. In Yamunanagar region, for
example, G-3 was adopted by almost 95 per cent of the poplar
growers who regarded it as successful.
Planting and Agronomy
Farmers could obtain planting material from three sources: their own
nursery, private or departmental nurseries, and Wimco nurseries.
These sources differed in terms of their objectives, size, distribution
practices, and extension work.
The sole objective of the departmental nurseries was to provide

support for to their own poplar plantation programme. Private
nurseries had a primary objective of growing saplings to meet their
own needs first. They also raised excess saplings to recover the cost
of nursery by selling them to others. These nurseries were easily
accessible to the poplar growers, b u t their command area was
relatively small.
Wimco's objectives were to sell saplings for profit, and at the same
time, to promote poplar to meet its raw material needs. To meet
these, it had to be ahead of others in technology generation and
transfer and hence invested substantially in resccirch. The objectives
of p o p l a r growers a n d Wimco were m o s t l y c o m p a t i b l e a n d
complimentary. Their interests did not clash. Both were looking for
fast growing species with more wood. Farmers t h u s rated Wimco
saplings to be the best followed by those of the selected private
nurseries.
Department nurseries charged Rs 1 to 3 per sapling, while private

nurseries charged between Rs 5 and 10 per sapling, depending upon
the size and reputation of the nursery. Wimco, however, had the
highest charge of Rs 17 per sapling. It claimed that its higher price
was partly because of higher overheads, reputation, a n d R & D
support, and partly because it wanted to treat the nursery activity
as a profit centre. Wimco also had a complete distribution system in
place, operating on commercial lines. Most nurseries were expanding
b o t h in n u m b e r a n d size as d e m a n d for poplar s a p l i n g s w a s
increasing. Generally, poplar saplings were in short supply.
21
When poplar cultivation was initiated, even Wimco did not know the
ideal spacing. Protracted experiments led to acceptance of spacing
p l a n s of 4 m X 4 m, 5 m x 5 m and 4 m x 5 m, resulting in
average plant density of 200 poplars per acre. December, January
and February were recommended as planting months. Recommended
fertiliser dose was 50 kg of urea one year after planting, in March,
with irrigation.
Wimco also worked out for the farmers detailed packages suited to
each area, comprising advice on interculture and other management
practices, including watering, trimming, pruning, plant protection
among others. Its extension staff were specially trained and equipped
for these t a s k s during their regular monthly visits, which were
rigorously noted and monitored.
The common farm practice was to opt for block plantations with
intercropping. In the first three years, poplars had very limited
foliage and almost any regular field crop was possible between the
trees, leading to the appelation of three-dimensional farming.
Farmers were, however, advised to avoid water intensive crops such
as sugarcane and paddy. In later years, smadler intercrops of mainly
shade-loving nature, such as turmeric were recommended. Other
intercrops included potato, gram, mustard pea, soyabean, lentil,
sorghum, maize, and vegetables such as tomato, chillies, and radish.
Harvesting and Marketing - Wimco's Buyback Arrangement
The Uttar Pradesh experiments showed that height gain was the
fastest between the fifth and the sixth years, while the growth of
diameter was the fastest between the fourth and the fifth years.
Trees tended to decline after 12 yeats. Farmers also believed that
after eight years a standing poplar tree became vulnerable to storm
damage. Wimco, therefore, advised harvesting at eight years, when
the girth would be 1 m at shoulder height, rather than wait for the
maximum size. But most of the farmers harvested their trees at the
end of six years.
Wimco had been nurturing over 500 poplar farmers through its rural
extension programme in Uttar Pradesh, Punjab, and Haryana since
the 1970s. Based on this experience, a Joint scheme involving
National Bank for Agriculture and Rural Development (NABARD),
Wimco, and participating farmers was Initiated in 1983.
22
Wimco-NABARD Finance Scheme
Genesis and Rationale
The most distinguishing feature of the Wimco poplar programme was

t h e i n t e g r a t e d b u y - b a c k a n d finance a r r a n g e m e n t . Wimco
management had realised that waiting for revenues until the tree
matures would be beyond the economic abilities of most participating
farmers. They would, therefore, require credit to finance the cost of
raising the tree including planting material, other i n p u t s a n d
extension. Early efforts to convince commercial b a n k e r s did not
succeed, as they were more concerned with short-term crop loans.
The eight-year maturity period envisage also meant that bankers
would have to n e c e s s a r i l y seek refinance. Wimco, therefore,
a p p r o a c h e d t h e National B a n k for A g r i c u l t u r e a n d R u r a l
Development (NABARD). On its part, NABARD had earlier refinanced
medium to long-term schemes for bamboo cultivation.
The proposal was of interest to NABARD because it promoted farm

forestry and increased green cover, thus helping achieve one of the
objectives of the 20-point programme then in force. The loans would
be recognised as agriculture advances under priority sector and
would help fulfil commercial banks' obligation of providing stipulated
proportion of their credit to t h e s e activities. Various r e p o r t s ,
including that of the task force set up by the Government of India
for development of match industry in 1980, had highlighted the
shortage of raw material faced by the industry. The fact t h a t a
reputed, multi-national commercial organisation was the sponsor of
the programme and was to buy-back the material produced helped
increase the appeal of the scheme. Its viability was established, as
demonstrated by model calculations (see below).
Under the scheme as originally implemented, lead b a n k s in the

concerned districts were to disburse the loan, after receiving reports
from Wimco regarding the inclusion of a particular farmer in the
scheme. The required documentation leading to the mortgaging of
the farmer's land, was to be completed with the help of Wimco. The
loan was to be disbursed in instalments to cover the anticipated
annual expenses of the,farmer net of his mcirgin. It was to be paid
back with accrued interest through a deposit of the sale proceeds of
mature trees.
23
Cost Model and Financing
Under the scheme, the financing was on the basis of 85 per cent by
way of b a n k finance and 15 per cent as farmer's margin. The
NABARD cost model indued cost of sapling and extension at one-
third of the total. Since the cost of planting differed from one state
to another, different financing norms were devised. A cost model
followed during the first phase of the scheme is shown below:
(Rs/tree)
Item Uttar Pradesh Punjab Haryana

Sapling Cost 12.50 12.50 12.50
Other Cost of Planting 96.50 125.50 108.50
Extension Cost 36.00 47.00 40.00
Total Cost 145.00 185.00 161.00
Eligible Bank Finance 123.00 157.00 137.00
Farmer's Margin 22.00 28.00 24.00
Farmers were expected to gain as the scheme promised not only a

loan, but also support services including supply of professionally
grown saplings, technical guidance, and extension services and
guaranteed buy-back or marketing arrangements at the doorstep.
The scheme envisaged for the farmers the following surpluses based
on a model of 500 trees per ha (spacing of 4 m by 5 m).
Details of Surplus Uttar Pradesh Punjab Haryana

Number of Surviving Trees 450 450 450
Minimum Buy-back Price, 500 500 500
(Rs/tree)
Amount (Rs) 2,25,000 2,25,000 2,25,000
Bank Loan (Rs) 98,570 1,24,696 1,08,669
Bank Interest (Rs) 12,321 15,587 13,584
Total Repa3mient (Rs) 1,10,891 1,40,283 1,22,253
Net Surplus (Rs) 1,14,109 84,717 1,02,747
24
These calculations did not include other expenses or revenues from
intercropping. The expectation was that inclusion of these figures
would in fact show the net surpluses to be much higher. Model
figures, therefore, were taken as the minimum expected, which
worked out to over Rs 10,000/ha per year even in the worst case.
Features of the Scheme and Responsibilities
The main features of the scheme were
• The scheme was to be implemented in two p h a s e s , t h e first
between 1984 and 1988, and the second, between 1988 and 1992;
• The scheme would be restricted to the Tarai region of Uttar
Pradesh and some districts of Punjab and Haiyana which showed
favourable conditions to grow poplars;
• Wimco would establish nurseries, undertake R & D , organize
extension services, and give adequate publicity to the scheme;
• Wimco nurseries would produce ETPs (Entire Transplants) and
sell them to the farmers;
• F a r m e r s would be identified by Wimco and t h e respective
participating banks.
• At the end of eight years of growing period, Wimco will buy the
trees at a g u a r a n t e e d price or the prevailing m a r k e t price,
whichever was higher.
Targets
The scheme envisaged the following targets.
(lakh plants)
Punjab Haryana U.P. Total
Year (20%) (20%) (60%) Planned Achieved
Phase 1
1984 0.40 0.40 1.20 2.00 2.90
1985 0.80 0.80 2.40 4.00 4.12
1986 1.60 1.6 4.8 8.0 7.42
1987 2.40 2.40 7.20 12.00 10.50
Phase 2
1988 3.20 3.20 9.60 16.00 23.00
1989 4.00 4.00 12.00 20.00 21.40
1990 4.00 4.00 12.00 20.00 22.30
1991 4.00 4.00 12.00 20.00 21.30
Total 20.40 20.40 61.20 102.00 112.90
25
Procedures Adopted
An agreement was to be signed between a farmer and Wlmco as a

part of this scheme. Under this agreement, Wlmco would sell and
supply to the farmer high quality ETPs of poplars for planting and
growing under necessary guidctnce of the company In the farm land
owned by the farmer. The company also agreed to make available to
the farmer at cost price the requisite Inputs like fertilisers and
I n s e c t i c i d e s a s m a y be n e c e s s a r y d u r i n g t h e period of t h i s
agreement. The agreement specified the total amount payable by the
farmer for the purchase of ETPs. This amount differed from one
state to another during Phase I. But on strong objections from the
Punjab Government during the second phase, these amounts were
made uniform. The total amount from the loan was to be given to
Wlmco in eight installments over the life of the tree.
Formal Agreement
The agreement specified that :
• The farmer shall make necessary application to the designated

bank to obtain the loan on the basis of this agreement;
• He shall, on the grant of such a loan, direct the lending bank to

make the payment directly to the company due to them as per
the agreement.
• He shall also direct the lending bank to pay the balance amount
of loan to him;
• Notwithstanding the non-availability of the loan from the bank,
the farmer shall be liable to make necessary payment to the
company as agreed;
• If no pajmient is made by the farmer as stipulated, he shall pay
the company interest at the ruling rate charged by the bank for
the commercial credit;
• To see that ETPs grow properly into 'harvestable' trees, they shall
be planted in suitable locations as guided by the company;
• The Company will try to obtain insurance cover on the lines of
crop insurance at the Company's cost but the policy would be in
the name of the farmer [GIC JuiaRy provided cover cifter two years,
while Wimco itself covered the fatalities in the first two years);
26
• If the Wimco ETPs are lost before the specified dates due to
natural calamities such as storm, earthquake, widespread fire,
flood or any act beyond the control of either party, the company
will compensate the farmer by free supply of fresh ETPs up to a
maximum of 10 per cent of the ETPs sold under this agreement.
This replacement will not cover any loss of ETPs on account of
theft, willful damage, damage due to negligence, or failure to
comply with company instructions. The fresh ETPs shall be
planted by the farmer at his cost;
• The company shall offer to buy those poplar trees as have grown
from the EXTPs supplied by the company to the farmer under this
a g r e e m e n t a n d which m e e t t h e r e q u i r e d specification of
'harvestable' trees;
• The company agrees to offer to buy the 'harvestable' trees at the

rate of Rs 500 per tree at stump site, i.e., at the rate of Rs 1,250
per cubic meter or at market price prevailing at t h a t time,
whichever is higher; and;
• In case of disagreement on the market price, the farmer shall be

free to sell the trees to anyone else of his choice.
Although the agreement with farmers stipulated that applying for

and obtaining bank loans was the farmer's responsibility, Wimco
extension staff, in fact, did the bulk of the job. They conducted a
vigorous campaign to inform the farmers of the scheme, identified
suitable farmers, prepared their applications for the loan, and
collected all the supporting documentation including title deeds to be
lodged with banks, conducted revenue record searches and all other
related tasks. In effect, therefore, obtaining the loan virtually became
a Wimco task, if not a Wimco responsibility.
"Harvestable" Tree
The specification of 'harvestable' tree meant that the tree shall be of

good form, green, sound, cylindrical, of straight growth, and with the
bark fully intact. The tree shall have good clean bole length with
minimum of k n o t s / k n o b s and free from twisted or spiral growth,
cracks, bulges, and hollow, dry decayed, diseased, or damaged
portions. The girth at breast height (1.37 m above ground level) shall
not be less than 90 cm over bark at the time of its harvesting. To
be harvestable, the tree should also yield a minimum of 0.4 cu m
hoppus of peelable softwood, measured under bark and down to 50
27
cm. girth over b a r k at the narrow end of the stem. On these
c o n s i d e r a t i o n s , t h e c o m p a n y s h a l l decide w h e t h e r a tree is
harvestable or not, and that the company's assessment would be
final a n d b i n d i n g on t h e farmer, and t h e s a m e s h a l l not be
contested by him/her.
Extension Programme
Prior to 1980
The match factory of Wimco at Bareilly in Utter Pradesh was raising

some nurseries prior to 1980 cind delivering poplars to select farmers
with resources adequate for poplar cultivation. The list of such
farmers was obtained from various seed companies. This function
was carried out by the harvesting division of the factory, which was
at best a secondary job for them. As the trucks were going empty to
harvesting sites, the plants were transported during those trips and
unloaded with the farmers. These saplings were distributed at the
doorsteps of the farmers free of charges, and therefore there was
nothing at stake for the identified farmers. More often than not,
their fields were also not ready for plantations. Supply of saplings
also continued sometimes beyond the ideal dates of planting. If
farmers were not able to plant the saplings, or even if the saplings
did not survive after planting, the farmers used the left over dry
sticks for household purposes. The survival rate at that time was
j u s t 15 to 20 per cent of the plants planted (not supplied). Some
plantation did come up nevertheless. They served as demonstration
plots for prospective fanners The Initial extension approach was at
best half hearted.
1980-84
Wimco concentrated on the nursery programme. Reducing the costs

involved In n u r s e r y raising and spending more time with the
prospective farmers had the priority. The company still was not sure
about specific varieties for localities, planting time and ideal spacing.
From 1980 onwards, the company started requesting farmers to
collect their saplings from the nurseries. The objective as to make
them feel that they owned the saplings. As a result, the survival rate
went up to around 55 per cent.
While farmers transported their saplings, the company staff visited

them prior to their coming to the nursery to make sure that their
plots were ready for plantations. They issued the saplings only when
28
they knew for sure that pits were dug. After a year or two, the
company thought of charging a nominal rate of Re 0.25 per plant.
The immediate impact of this strategy was that survival rate went
up to around 85 per cent, since now farmers started taking care of
the plantations in which they had make some investment.
1984-87 (Phase I)
This was the period of intensive extension for Wimco when the
tripartite agreement between a banker, a processor company, and
the producer farmer was Implemented.
Extension was an integral part of the scheme. Wimco's role was to

popularise poplar cultivation in the selected districts. This was
supposed to be achieved by Wimco by:
a. identifying suitable provenances of poplar;
b. undertaking trials through nursery and experimental planting

with different densities and cropping patterns;
c. identifying clones suitable for specific regions;
d. supplying quality planting material to farmers at economic cost;
e. providing extension and/or training services;
f. giving technical guidance for a period of eight years; and
g. purchasing poplars as per buy-back agreement at guaranteed

prices.
As a part of this arrangement, extension assumed a high profile. A

team of dedicated extension workers was built and made operational.
In 1985, 80 to 90 extension workers were in place. Another 40 to 45
were r e c r u i t e d in 1 9 8 6 . T h e s e w o r k e r s visited t h e f a r m s of
prospective farmers prior to the plantations. Extension workers/
supervisors were present during the actual planting. With such on
orientation, the extension became quite personalised and effective.
Extension workers were involved right from the site selection to
arranging loans and final recovery. Since support had also to be
provided to get bank formalities completed, the company preferred to
have extension workers coming from a mix of disciphnes. Half the
29
recruits had a commerce background and they primarily dealt with
the banks. The remaining half were with an agriculture background,
who mainly had field duties
During this period the extension • activity was restricted to nine

districts of Uttar Pradesh, and six districts each of Punjab and
Haryana states.
1988-91 (Phase II)
Phase II of NABAP?D-Wimco scheme covered the whole of Punjab and

Haryana and 16 districts of Uttar Pradesh. As the area of operation
increased, the extension staff strength had to be increased. Training
of new recruits was undertaken by the company. The extension
strategy by and large remained the same during this period, except
the scale was larger and scattered. Effective control suffered.
Problems such as diseases and pests started surfacing; research had
to be strengthened to support field extension.
Recovery of dues was a shared responsibility of Wimco. Wimco field

personnel gave plants to prospective farmers after ascertaining their
records and hoped that banks would finance the plantations. This
worked well during the initial two years of this phase. Thereafter
numerous non-bankable cases surfaced. This meant problems for the
company as it h a d already supplied the saplings. The general
approach all along had been to plant first and process the loan
thereafter, since it needed time for procedural compliance and
documentary support.
Seriously interested farmers, on the other hand, continued planting

poplar with or without bank finance. They developed a good system
of intercropping with crops like sugarcane, potato, chillies, wheat,
and vegetables. Quality of plants supplied by Wimco nurseries was
quite reassuring. Wimco saplings though expensive had an image in
the market. Since farmers were paying a higher price for their
saplings, they became choosy and selected strong saplings of fast
growing clones.
Knowing well that widely accepted clones were likely to become

susceptible to local diseases and pests, Wimco also strengthened its
r e s e a r c h efforts to keep s e a r c h i n g newer clones s u i t a b l e for
processing needs as well as for farmer's site and economic returns.
Field extension workers were expected to provide extension support
to participating farmers for a period of eight years. It was calculated
30
that an extension worker along with his sales functions would not
be able to service more than 25,000 plants. Therefore, the target per
worker per year was worked out to be around 3,000 plants. An
extension worker cum field supervisor had to undertake motivational
work.
Overall I m p l e m e n t a t i o n of P h a s e s I and II: The Punjab

Experience
The pick u p in the Phase I was gradual b u t encouraging. The

Punjab programme began with a plantation of about 50,000 plants
in 1984. It increased to around 1 lakh in 1985. It further increased
to 3 lakh in 1986, and 5 lakh ETPs in the final year of the Phase I.
Most of the Punjab plantations in Phase I were confined to five
districts of Ludhiana (around 40 per cent), Hoshiarpur, (25 per cent),
Ropad (15 per cent), Patiala (10 per cent) and Jallandhar (10 per
cent). The reasons for adopting poplar plantations varied, however,
Ludhiana farmers were progressive, educated, well-informed, and
enterprising. Ludhiana also had an agricultural university. This was
a major factor in the early spread of poplars. H o s h i a r p u r h a d
absentee land owners. Most of the area was also at the foothill of
Shivaliks. The soils were fertile and suitable for tree growth. Ropad
was nearer to the state capital. Personal contacts with Wimco staff
was therefore much better. Land holdings were relatively bigger in
Patiala. Tree cultivation was also preferred option among the retired
army personnel owning agricultural land. Jallandhar also had many
absentee land owners.
The extension approach in the formative years primarily m e a n t

personally contacting potential adopters and inducing them with
convincing logic. J u s t a promise of bank loan was not good enough
for enlightened and commercially oriented farmers. The following
were the most frequently asked questions:
• Would I be able to sell the trees on maturity?

• What kind of people would buy them?
• Would it not meet the fate of eucalyptus?
• Would it not adversely affect the soils and underground water?
• Is it true that it is highly susceptible to insects and pests?
• Would one be able to obtain the yield as projected?
• What would be the earnings?
31
Rudimentary calculations frequently advanced by the field staff were:
'You take the loan of Rs 150 per tree from the bank. Sell the tree to
Wimco at around Rs 500 at the end of six years. Pay back Rs 300
to the bank. And you retain Rs 200 per tree for yourself. With 200
trees per acre, you can get Rs 40,000 in six years net of all costs.
You also get some of your crops additionally'.
Supplementary arguments used were:
• Trees grow automatically and you need not attend them all the
time;
• Root systems of poplar are different and therefore they will not
affect agricultural crops; and
• You can also get fuelwood for two to three years.
Field teams realised t h a t while these arguments had a positive

impact, they were not forceful enough to induce the fairmers to act.
Arranging their meetings with someone knowledgeable, or showing
t h e m other farms where poplars were planted was necessary.
Getting at least one person in a village to p l a n t p o p l a r s was
therefore considered essential. It was found that curiosity driven
farmers generally inquired about the trees from initial adopters more.
Initial planters therefore became the locally available sources of
information and the field staff made a good use of them.
In spite of the availability of credit facility, some farmers preferred to

purcbase saplings from Wimco on cash. They did not have either
time, patience, or need for the bank loan under the Wlmco-NABARD
s c h e m e . O t h e r s who opted for loan, l a t e r r e s e n t e d u p w a r d
modification of interest rates. Also those who wanted to repay some
principal amount discovered that bankers adjusted interest amount
rather than the principal. Response to the loan facility, therefore,
differed from one class of farmers to a n o t h e r . As t h e s c h e m e
progressed, it also became apparent that some farmers were more
interested in the loan amount than the poplar plantations. This
orientation created problems later for the Wimco field teams.
Extension cost to the farmers of Punjab in the first phase were also
relatively higher. This was because these costs were determined on
the b a s i s of one third of the cost of plantations. Labor cost in
Punjab being higher, the cost of raising p l a n t a t i o n s was also
relatively high.
32
The programme in the Second Phase of Wimco-NABARD scheme in
Punjab got stabilized to around 5 lakh plants annually. This phase
covered all the 14 districts of Punjab along with all the districts of
neighbouring State of Haryana. In Haryana, Yamunanagar district
topped the plantation programme. Other important districts in
Haryana included Karnal, Panipat, Kurukshetra, Sirsa, and Hissar,
in that order.
Phase in
As there was a delay in sanctioning the scheme, the third phase

was divided into two parts of two years each from 1992 to 1996.
Field teams had, however, gone ahead with the distribution of plants
in anticipation of these sanctions. These plantations faced difficulties
at b a n k level to get financed because of this delay. Some of the
farmers also did not take care of the plants, as funds were not
available. It had implications for survival rate. This affected the loan
recovery. Prices of poplar logs in the open market were increasing,
and farmers who h a d t a k e n loans were therefore selling their
produce in the open market rather than selling to Wimco. Recovery
of b a n k loans through p u r c h a s e of matured trees was Wlmco's
responsibility. Banks reported to NABARD t h a t Wimco was not
purchasing the trees from the borrowers, and t h u s not depositing
the sales proceeds with the banks. Farmers who had borrowed from
the b a n k s and sold in the open market also became defaulters.
Some of these farmers argued that they did not get proper advise
from the field teams and therefore the growth was not good. As a
r e s u l t , t h e y h a d to sell t h e s t a n d i n g t r e e s in p a n i c a t
unremunerative prices. Therefore, they could not repay the loans. At
some places court litigations took place in which Wimco also got
involved. Wimco on the whole had an unsatisfactory experience.
Phase III had another significance. During this phase, the trees
planted in Phase I had started harvesting on a sizable scale. Market
arrivals were visible. Plywood i n d u s t r y in t h e m e a n t i m e h a d
expanded significantly. This favorably influenced the poplar prices.
Affected by the riot conditions as well as the shortage of wood
material, the plywood units located earlier in Assam shifted their
operations to this poplar-growing region in the late eighties. Poplar
growers were expecting Rs 500 to 600 per tree in fact s t a r t e d
fetching Rs 900 per tree. This made the farmers realise the true
value of growing poplars. The situation was t h a t in spite of the
increasing price trend, t h e d e m a n d for poplar wood was still
i n c r e a s i n g . As a result, t h e d e m a n d for poplar s a p l i n g s also
33
increased considerably. Many agencies entered the nursery business
to supply poplar saplings. Farmers by that time also had become
quite knowledgeable about poplar growing. Demand for saplings was
so high that it resulted in a shortage. Wimco offered a fixed price for
poplar wood in advance, but the open market was willing to pay
more.
Wimco had estimated to procure only around one-tenth of the total

produce, according to certain procedures to follow while purchasing
the logs. These included, for example,
• Purchasing wood on volume basis on cubic meters t h a n on

tonnage or weight basis which farmers were more comfortable
with;
• All the pa5rments were made by bank drafts while some farmers
preferred cash payments.
• Unlike in the open markets, Wimco deducted 10 per cent of total
measurements for wood with bark;
• Some e d u c a t e d f a r m e r s knew t h a t t h e formula u s e d for
calculating the volume, though accepted universally, gave lower
estimates of the actual volume and therefore less money to
poplar growers;
• Harvesting procedures of Wimco were also elaborate, which
involved shifting labour, numbering each log, tagging both the
ends of the logs, and then transporting with valid transit pass
only. Sometimes, it was a rather a long process, which affected
the next agricultural crop; and
• Wimco also did not harvest trees in certain periods such as the
rainy season and scrupulously followed forestry norms.
Banker's Experience
Participating b a n k e r s were generally satisfied with the scheme

performance, though not always very happy. It helped them meet
their statutory obligations of priority sector credit. Another advantage
the scheme provided to the bankers was that sizeable advances
could be disbursed through it to a relatively smaller number of
account holders instead of having to approach a large number of
small landholders, which would have been the case otherwise. This
was both convenient and economical for bankers.
34
They experienced some problems as well:
• One-sided Agreement: Wimco was obliged to buy all the plants

offered at announced prices, but farmers were not bound to sell
to it. This caused a problem of leakages of revenues from the
scheme to points on which bankers had no control or leverage;
• Faulty Selection: In the absence of relevant experience, loans were

sanctioned to some farmers with sites which were not suitable for
growing p o p l a r s in P h a s e I. The trees either did not grow
properly, fetching low revenues, or died;
• Interests Deferral: Bankers felt that interest could be paid on an

on-going basis through the sale proceeds of intercrops, rather
than waiting until the final sale of poplars.
There were several instances of litigation, some of which involved

Wimco as well. On the whole, however, t h e s e i n s t a n c e s were
considered by the more experienced bankers to be neither u n u s u a l
nor unexpected.
Developments in 1990s
Wimco had supported a tripartite arrangement involving farmers, the

bank, and the company. Wimco supplied saplings and the technical
know-how to the farmers. Banks gave loans to the farmers to the
e x t e n t of Rs 135 per t r e e , out of w h i c h Rs 50 were to be
apportioned to Wimco for its inputs. At the end of the expected
rotation of eight years, Wimco was to buy back wood from the
farmers at agreed price of Rs 1,250 per cu m, which normally meant
around Rs 500 per tree. Out of this amount, the bank would recover
Rs 260 and farmers would get Rs 240 per tree. In addition, the
farmer would have already received Rs 85 per tree (Rs 135 - Fte 50)
in the beginning itself to s u s t a i n himself for the loss of crops,
making a total of Rs 325 per tree.
As a result of tripartite agreement, the plantation activity picked up,

and by 1991 the poplar plantations were at their peak
Prices of poplar wood in the open market were increasing as poplar-

based plywood manufacturing gained a r o u n d in Y a m u n a n a g a r
township. Rough calculations showed the following trend.
35
Year Approximate Ruling Price, Rs/q
1992 175
1993 190 - 200
1994 240
1995 275
1996 375
Thus, within a short span of a dozen years, a healthy, competitive

market for poplar wood had been established in the growing regions
(Yamunanager, Ambala, Amritsar), to the great advantage of the
growers. The open market ruling price was twice as high as that
a s s u r e d by the c o n t r a c t . The grower was therefore u n d e r no
obligation to sell to Wimco.
This is indeed w h a t h a p p e n e d . Market prices have r e m a i n e d

consistently high, attesting to the versatility of poplars in u s e .
F a r m e r s continue to grow poplars as before, b u t now without
contracts, and quite often without any finance either.
Strategic Shift
All t h e s e factors h a d sown t h e seeds of strategic shift in t h e

functioning of Wimco in the third phase itself. After Phase III of
Wimco-NABARD scheme drastic changes were made both in the
policy as well as in the organisation structure. It was decided to
focus only on raising and selling saplings directly to the farmers
without any loan or buy-back provisions. The newly formulated
objective was to give a better quality sapling to the farmers at a
lower cost. Since the farmers were to pay for the saplings, they were
given a choice of saplings from any of the Wimco nurseries. To
e n s u r e their plants, they could book saplings by paying token
advance anytime during October and December, and lift the saplings
before 20 February. Farmers would transport their own saplings.
Thus, contract farming of poplars had effectively ended.
In 2002-03, Wimco Seedlings earned a net profit of over Rs 1 crore

t h r o u g h its n u r s e r y operations and allied activities, which is
adequate proof of the viability of its present business concept and
strategies.
36
Grower Experience
A sample survey of poplar growers was conducted as a part of this

study. Its results generally bear out the conclusions and inferences
discussed in the above sections. Some salient findings are shown
below and briefly discussed.
Sample Composition
In this case, the sample necessarily comprised former contract

growers and non-contract growers, since there is no contract growing
of poplars any longer. There are no major differences between the
contract a n d non-contract growers as far as their holdings are
concerned:
Contract Non- All

Growers' Details Growers contract
(up to 1996) Growers
No 47 18 65
Average l a n d holding (ha) 5.4 6.1 5.6
Average a r e a devoted to poplars (ha) 4.5 4.6 4.5
Institutional Membership and Borrowing

Contract growers reported average borrov^^ng amounting to less than
Rs 100 per tree, which is lower than the NABARD norm. Problems
of recall and a tendency to underreport are in evidence here.
Contract Non- All

Growers' Details Growers contract
No 48 17 65
Members of co-ops 12 5 17
No availing credit 48 15 63
Average crop credit, 2,00,000 — 2,00,000

Rs/growing period
(for borrowers only)
37
History
Contract growers generally had a longer history of poplar cultivation.
All of them reported written contracts. Only one res'pondent took a
one-year break from contract.
Contract Non- All
Particulars Growers contract
No 48 17 65
No of years poplars grown (Average) 10.1 8.3 9.5
No of years u n d e r contact (Average) 10.0 N A 10.0
No reporting written contract 48 N A 48
No reporting b r e a k in contract 1 N A 1
No with contract r e s u m p t i o n 1 N A N A
Crop Performance
Contract growers reported nearly 25 per cent larger n u m b e r of
harvestable trees per ha, as compared to the free-lance growers. This
is a clear indication of the effectiveness of the contracts in improving
the physical production.
Contract Non- All
Growers contract
No 48 17 65
Average no of harvestable t r e e s / h a 433 350 411
Price Performance
All t h e r e s p o n d e n t s seem to be u n d e r r e p o r t i n g t h e price they
received for the poplars, by a factor of over 20 per cent or more.
This is a common feature of field surveys and should not cause
much concern.
Contract Non- All
Growers contract
No 48 17 65
Average price received R s / t r e e 250 240 247
38
Understanding Contracts
The main bones of contention were loans (70 per cent not clear),
i n t e r c r o p p i n g (59 per cent), pricing (54 p e r cent) a n d s a l e s
arrangements (40 per cent). The respondents were quite clear about
almost all other matters, which is noteworthy for a new crop with
specific technical knowledge requirements. This indicates good
extension work.
(N=48)
Item No reporting No reporting No expressing
clarity confusion doubts
Buyer's obligations
- input supply 22 12 14
- credit/loan 10 34 4
- extension 39 5 4
- intercrops 10 29 9
- risk cover 28 10 10
- harvesting 26 12 10
- sales a r r a n g e m e n t 16 20 12
- pajrment • t e r m s 12 27 9
Farmer's obligations
- planting 29 12 7
- irrigation 32 11 5
- quality 27 15 6
Facilities under Contract

The response was relatively positive regarding the facilities provided
u n d e r contracts with very few doubters and a somewhat larger
number of confused persons. This again indicates good extension
work.
(N=48)
Demonstrations 33 12 3
Training 44 2 2
On-the-spot advice 34 11 3
SOS visits 40 3 5
39
Procedures for Contract
The response regarding procedural and documentation requirements
was excellent, as is to be expected when the farmers had nearly 10
y e a r s of experience a n d had negotiated atleast two c o n t r a c t s
successfully.
(N=48)
Land d o c u m e n t s 44 3 1
Other d o c u m e n t s 42 5 1
Disputes and Contracts

Minor disputes seem to have arisen regarding quality (mainly size),
quantity and pajnnents. Almost all of them were resolved quickly and
amicably.
(N=48)
No reporting No reporting No not happy
Disputes satisfactory
resolution
Dispute on
- quality 4 4 0
- quantity 8 6 2
- other services
- pajmients 3 3 0
Responsibility for Disputes

A larger proportion of respondents blamed the buyer for disputes
rather than the farmer. This is to be expected as a general purpose
response, since disputes in any case were very few.
(N=48)
Particulars No No not Not aware/
agreeing agreeing No response
Buyer 18 6 . 24
Farmer 5 12 31
40
Benefits from Contracts
Although less than half the respondents said that they got better
prices from contracts, they were nearly unanimous in their view that
contracts provided them higher incomes, clearly confirming the
superior physical impact of contracts. Almost three-quarters of the
respondents were pleased to be associated with a company such as
Wimco, which they considered bestowed prestige on them.
(N=48)
Particulars No responding No responding Not aware/

positively negatively No response
Higher price 22 15 7
Higher income 44 2 2
Association with good 35 1 12
organisation
Overall View of Contracts

As is to be expected, an overwhelming majority expressed their
satisfaction with contracts and over 60 per cent were ready to work
again with Wimco, although they knew this would not h a p p e n .
Perhaps this last response should be ignored!
(N=48)
Particulars No responding No responding Not aware/
Contracts are good 43 5 0
Ready to r e p e a t
contracts
- s a m e agency 33 1 14
General Conclusions
On the whole the Wimco programme succeeded very well by any
yardstick. Its major achievements were:
• Quick establishment of a new activity by no m e a n s easy to
manage;
41
• Better than expected results in field;
• High level of farmer satisfaction;
• Emergence of a competitive and lucrative market, leading to a
phase-out of contracts;
• S u b s t a n t i a l continuation of activity in post-contract period
without let-up.
The main reasons for this success were:

• Well-designed contract scheme, covering all aspects including
risks;
• Research and extension support of a high order;
• Clear contracts for the most part;
• Quick and amicable resolution of disputes.
The p r i m e factor u n d e r l y i n g t h i s s i t u a t i o n w a s t h e Wimco

management's total commitment to the programme. This came about
because the company's very survival depended on the success of the
p r o g r a m m e . It w a s not yet a n o t h e r activity t a k e n u p by t h e
promoter, but rather an integral part of the main corporate strategy.
It was thus able to forge the right partnerships and work with the
farmers to create a win-win situation.
The NABAPiD initiative ranks a close second as a factor responsible

for the success of this programme. It responded quickly to the novel
scheme and helped bankers take a somewhat different view of what
was, after all, a risky venture. The scheme would most likely not
have succeeded to the extent it did in the absence the critical
finance support.
42
THE WIMCO-PEPSI (HLL)-NIJJER
TOMATO-CHILLI PROGRAMME
Overview
India produces a sizeable quantity of tomato'. The prefen'ed mode of

its disposal and consumption is the fresh form, as is the case with
most Indian vegetables and fruits. A large number of areas within
t h e c o u n t r y p r o d u c e it, b u t its c o n s u m p t i o n is even m o r e
uldespread, covering the entire country, thereby necessitating even
fairly long distance transport (e.g., from southern Karnataka to
central Gujarat), almost entirely by road. It is widely used in all the
various regional cuisines of India and it must be rated among the
most commonly used and popular vegetables of the country. Its
processing to reduce transit and other losses, as well as making it
available in a convenient form at economic prices at locations
distant from the source of production would make abundant sense.
Yet its processing is confined to miniscule quantities, perhaps as
little as 100 - 200,000 tpa. While numerous small and tiny units,
some no more t h a n a large kitchen, p r o c e s s t o m a t o for local
consumption, the market is dominated by four large processing
organisations:
• Wimco [Now sold to o t h e r s - two p l a n t s . S u n - s i p and

Cleanfoods];
• Bhilai Engineering Co (one plant);
• Nijjer Agro Foods (one plant);
• H i n d u s t a n Lever [Culinary Products Division] (two p l a n t s at

present, both idle).
Aseptic Tomato Paste Manufacturing Process
Tomato paste, made by concentrating tomato juice from its original

strength (ca 4 - 5 ° Brlx under Indian conditions) to 28° Brix, can be
1. Popular estimates place India's annual tomato production at ca 5m tpa, out of

a total vegetable production of over 70m tpa. We have always maintained,
however, that this is a gross overestimate. The production of onion, a far more
commonly found vegetable, is under 5m tpa. We do not believe that the tomato
q u a n t i t y could ever be greater t h a n t h a t of onion. We e s t i m a t e t o m a t o
production to be ca 4m tpa.
43
preserved by a number of means, including freezing. The Indian
industry, however, follows the standard international practice of
using UHT aseptic packaging under sterile conditions. The relatively
simple manufacturing process comprises:
• Fresh tomatoes are received in bins, dumped in a water trough,

washed with water and conveyed to a sorting table. Operators
Inspect the incoming fruit, remove foreign materials, thin out and
discard bad tomatoes. Sorted tomatoes drop into chopper pumps;
• Chopped tomatoes flow to a hot break tank equipped with a

rotary coil for uniform heating to ca 100°C. Hot pulp is pumped
to a sterilising heater, where it is further heated to ca 112°C to
ensure that the enzyme pectinase is rendered inactive. The pulp
is then cooled to 100°C in a flash tank and sent by gravity to a
rough finisher-pulper for removing peel, sticks and pods (if any)
and then to a fine finisher for removing seeds and fibres;
• The finished juice flows by gravity to the feed surge tank of the
evaporator section (usually multiple-effect). It is then pumped to
t h e evaporator for concentration. The paste is pumped to a
holding t a n k and then to a heat exchanger (usually scraped
surface) for pasteurisation by heating to 104°C, held for 10
minutes, cooled, and filled in aseptic bags. The filled bags are
placed inside either corrugated cardboard cartons (smaller sizes)
or mild steel drums (larger sizes, usually 200 1). These are then
ready for storage and/or shipment.
Background of Organisations
Wimco
Wimco, the country's largest safety match manufacturer, was part of
the original Swedish Match group of Sweden up to 1988, which held
40 per cent of its equity and exercised management control. Its
sharee were among the most actively traded ones on the Mumbai
Stock Exchange. Financial institutions, Indian pension funds and
general public were all among its shareholders.
The company, under severe restrictions under MRTP, decided to
diversify in the i980s. Food processing, especially of mango and
tomato, appeared to be a very attractive opportunity.
Wimco was t h e first major I n d i a n o r g a n i s a t i o n to e n t e r into
h o r t i c u l t u r e p r o c e s s i n g . It did so by a c q u i r i n g Clean Foods
44
Corporation of Hyderabad and Sun-sip of Madanapalli. Both these
were primarily mango-processing plants, producing pulp to be
packed in t i n s . Wimco m o d e r n i s e d the two p l a n t s after t h e i r
acquisition, Madanapalli first and Hyderabad thereafter, by adding
concentration and aseptic hot packaging equipment. These were the
first two major p l a n t s in I n d i a a n d at t h e t i m e of t h e i r
establishment, were considered state-of-the-arts facilities. These
t a s k s were completed in 1985, making Wimco the first Indian
company to offer aseptic bulk packs of 200-1 in drums.
Shortly after its entry into the business, Wimco added tomato to its
processing and product line, having correctly identified limited use of
the capacity as affecting the viability of the enterprise (see below).
Given the pattern of availability of tomato in Andhra Pradesh, two
short seasons were identified, September through November and
February - March.
Wimco exported all its products, mostly to the then rupee-trade area
of the former USSR and East Europe. It showed great deal of
imagination, almost as in t h e case of poplars, by i n t r o d u c i n g
processing of the totapwi variety of mango, which still remains the
most widely used one for processing and is well accepted even in
Western Europe. In the mid-1980s, the food processing facilities of
Wimco were considered crown jewels.
S h o r t l y t h e r e a f t e r , t h e c o m p a n y ' s m a i n b u s i n e s s of m a t c h
m a n u f a c t u r e suffered s u b s t a n t i a l reverses. The foreign p a r e n t
company sold its holding following accumulation of losses to the
Jatia group, an NRI business family, which controlled the company
u p to 1997. At this time, the Swedish Match group (no longer
affiliated with the original Swedish Wallenberg family) invested in
Wimco once again and acquired the family stake. Wimco's overall
performance improved in the last decade, after it started to export
its matches to some African countries. Its food processing activities
also showed some marginal improvements in profits.
Wimco sold its tomato paste to Nestle in bulk, which used it as the
base for its Magi brand of ketchup. From 1987 to 1991, Wimco was
the sole source of supply to the leading ketchup brand. After the
emergence of Nijjer, its monopoly position ended and the Nestle
purchases became marginal. This caused a dramatic drop in the
Wimco tomato paste business, to around just 200 t a year.
As part of its strategy to reduce its overall asset base, the J a t i a

family h a d s p u n off t h e food activities a n d sold t h e m to
45
entrepreneurs, leasing the facilities back from them or getting raw
material processed in them for its own use, mostly for domestic and
international trade. Thus, technically, the company no longer owned
any food facilities in the late 1990s, b u t was very much in the
b u s i n e s s of buying t h e raw material and selling t h e finished
product.
With Swedish Match yet again in control, the leasing arrangements
were terminated as the new management wanted to make its focus
co-terminus with the parent organisation. At present, the facilities
a r e owned a n d m a n a g e d by e n t r e p r e n e u r s who were once
purchasing agents for Wimco. In popular parlance, however, the
plants are still known as Wimco.
BEC
BEC h a s perhaps had a somewhat distant connection with this
business. It is an offshoot of a trading company, specialising in the
former rupee trade areas. Its origins are closely linked to the Soviet-
assisted Bhilai steel plant.
In the mid- and late 1980s, the principal overseas buyers of the
processed Indian horticulture products were the USSR and East
European countries, buying them under the then prevalent rupee
t r a d e a r r a n g e m e n t s . Being closely involved in trade in mostly
engineering or capital goods with these countries, BEC also started
to t r a d e in h o r t i c u l t u r a l commodities, sourcing p r o d u c t s from
various local m a n u f a c t u r e r s . Since the t r a d e was lucrative, it
decided to create its own manufacturing base, in the hope of adding
further value. This decision also reflects the substantial interest
generated in this industry after the formation of the Ministry of
Food Processing in 1987.
Although a public limited company, BEC is closely-held, controlled

by the J a i n family of Bhilai (whose affairs are under investigation
for reasons other t h a n legitimate). Details of equity holders are
therefore difficult to obtain and could possibly not serve any useful
purpose. Its main activity, trading with East European countries,
has suffered a severe setback following the opening up of the trade
(albeit not with Russia). This seems to be affecting both its normal
activities and the enthusiasm for the expansion and modernisation
scheme.
The plant is reasonably modern and can handle a variety of fruits.
Mango dominates, with tomato following. BEC had hoped to create a
46
large base of captive, contract producers of raw material in the
virgin region around Bhilai. This plan, however, appears not to have
succeeded, although it claims that a third of its tomato is from "own
or captive" sources, the bulk of which is from its own farms. It has
not even k e p t u p t h e earlier (1994) r e l a t i o n s h i p w i t h t h e
neighbouring ACC plant for the supply of tomato from its surplus
land.
Nijjer
The family of the present Managing Director of Nijjer Agro Foods, Mr

Satbir Singh Nijjer, promoted the company. They have been very
active a n d progressive f a r m e r s in A m r i t s a r d i s t r i c t a n d t h e
surroundings. Mr Nijjer Senior enjoys an excellent reputation both
as a progressive farmer as well as a supplier of new varieties of
seeds and other inputs, often on a no-profit basis. The Nijjer family
had some prior experience of transporting small quantities of tomato
to Delhi markets. With Nestle's encouragement (it was the largest
ketchup seller in the country and bought Wimco paste), Nijjer set
u p at the same location a tomato processing plant of 300 tpd
capacity, with some shared utilities and process equipment in 1998.
It entered into formal, written contract with 200 farmers in 1998.
Nestle, who had depended upon Wlmco to supply tomato paste until
then, actively encouraged the setting up of this project. This was not
only because the new facility challenged the Wimco monopoly, but
more importantly, it was located closer to Nestle's own facilities at
Moga in Punjab.
The Nijjar family h a s not had any significant prior experience in

b u s i n e s s . The company made a public issue in 1991 a n d also
placed equity with financial institutions. The control, however, vests
firmly with the Nijjer family. There are lingering suspicions t h a t
Nestle may have advanced some funds to the Nijjer family, but there
would be no way of confirming this.
The main claim to fame of Nijjer is that it is the only facility to
have been exclusively designed for tomato. There is also a 250,000-
Ipd liquid milk h a n d l i n g and processing p l a n t on site, which
supplies the milk to Nestle and sells ghee in the open m a r k e t . In
addition, the plant also makes the final product, ketchup, according
to the recipes of Nestle and bottles it under the Nestle brand. This
last aspect of business h a s led to some questions as to whether
Nestle also participates in the operational management of the plant.
47
Visits a n d i n s p e c t i o n , however, showed no s i g n s of s u c h
participation, nor any attempt at covering up the tracks.
Pepsi-HLL
The international cola manufacturer had to agree to a Government
of India stipulation of undertaking exports from India as a pre-
condition for its entry into India in 1990. It was persuaded by the
Government of Punjab to set up a food processing plant in Punjab,
preferably for t o m a t o e s , a l t h o u g h P u n j a b did not grow any
significant quantities of tomato at that time. Pepsico decided to
accept the challenge and brought in its own experts to establish
feasibility of the crop and the plant.
It decided to set up Asia's largest and most modern tomato paste

plant in Punjab (650 tpd), even though the state had hardly any
crop to offer. Pepsico's scientific advisers and consultants thought
that tomato could be grown in the state and would be available for
120 days a year, which was adequate to meet the company's needs
of a viable operation. It started a tomato contract farming scheme in
1997 with over 400 farmers, covering more than 2,000 ha under
tomato itself. Contracts covered b o t h i n p u t supply (seedlings,
extension), some credit in the form of advance and loan of special
equipment. Contract price offered varied according to regions, to
cover the cost of transport. Quality considerations, vaguely specified,
included colour, firmness and worm-infection. Most of the Pepsico
contracts remained verbal.
Both Pepsico and Nijjer introduced chilli cultivation in Punjab, as

chilli sauce was considered complimentary to ketchup. In most
instances, the same farmers took up chilli cultivation as well, on
similar contracts.
The country's largest FMCG manufacturer and seller, Hindustan
Lever Ltd, acquired Kissan Products Ltd from the Mallya Group in
1988 with a view to make it a launching pad for its foray into foods
business. It had a processing plant on the outskirts of Bangalore,
which t h o u g h small, could handle a variety of raw materials,
Including tomato. HLL expanded the Kissan ketchup and tomato
paste business and by 1995, was in a position to challenge Nestle
for the top position. It sourced additional quantities of tomato paste
from numerous small manufacturers scattered over the country.
When Pepsico discovered in 1999 t h a t it no longer needed to

operate t h e tomato p a s t e plant to be able to meet its export
48
commitments (which had anjrway become less stringent), it started
looking for buyers. At this time, HLL was actively considering adding
two more facilities, preferably in the North. It made sense, therefore,
to acquire the Pepsico plant and contract farming business in 2000.
Shortly thereafter, the country faced a glut of cheap Chinese paste
and HLL s h u t down all its paste manufacturing in 2003, using
instead the imported raw material.
Current Tomato Purchase
Wimco initially depended upon its mango suppliers also to provide

tomatoes. When this did not happen in a cost-effective fashion, it
entered into supply contracts with the State Farms Corporation, as
also other, smaller p u r c h a s e agreements nearby. Ever since it
started this b u s i n e s s , Wimco depended on s u c h a r r a n g e m e n t s ,
which had a mixed record of success at best.
Its successors largely depended on open market purchase in their

areas of operation and surroundings, sometimes going as far as
Northern Karnataka. Their own agents procure the supplies. They
continue buying as long as the tomato price, worked backwards
from the selling price of the paste, is within the affordable range.
BEC claims that it has a contract growing system in place, but this
is not evident. It grows some tomato on its own land and about 100
ha taken on lease and depends on market purchase for the rest. Its
operation is similar to Wimco's. Neither Wimco nor BEC have been
large buyers of late; their purchase is around 1,000 - 1,500 tpa
each, at a factory-gate cost of about Rs 1,500 - Rs 2,500/t. About
5 to 10 per cent of the fruit is unusable and h a s to be thrown
away.
Nijjer alone h a s a contract farming system, somewhat uniquely

tailored to the ground reality in the first place. The main features
are:
• Contracted quantities are ca 60 to 100 per cent more t h a n its

requirements. Therefore, even if deliveries are only 50 to 60 per
c e n t of t h e c o n t r a c t s , it c a n still m e e t i t s c o n t r a c t u a l
commitments to its buyers;
• Secondly, it d i s t r i b u t e s American hybrid s e e d s , which a r e
otherwise not available to the local farmers. It claims an average
yield of 80 t / h a on the farmers' field. Even if this figure is
49
discounted by a reasonable factor, the performance would be
impressive enough for t h e farmer to adhere to the contract
arrangement for ensuring seed availability;
• The most important factor, however, a p p e a r s to be farmers'

selection. "Farmer" is somewhat of a misnomer, since most
suppliers to Nijjer are large farming units, rather than yeoman
peasantry. Generally, it is not difficult to find individual farms of
50 ha or larger sizes in Punjab. They belong mostly to well-off
families, often with equally attractive industrial or professional
incomes, who are, nevertheless, not absentee-landlords. Such
farms are run as business ventures, where honouring a contract
h a s a s t r o n g e r c o m m i t m e n t t h a n m o s t s m a l l f a r m e r s do
elsewhere in India. Since these farmers are relatively affluent,
they are more likely to be motivated by total income over the
season than by day-to-day fluctuations in prices. They are also
likely to be influenced by the assurance of payment, importance
of contractual relations and obligations in the long run, rather
than reaping some windfall gains merely for a few days.
These factors make it easier for Nijjer to count its supplies as

assured, even if it incurs a somewhat higher factory-gate cost of Rs
1,750/t. The burden is made lighter as it gets about half the money
paid out to the farmers as interest-free advance from its own buyer.
HLL/Pepsico are no longer active buyers at present.
The Table below shows a comparative p i c t u r e for these t h r e e

organisations:
Tomato Procurement Practices
Wimco BEC Nijjer

Mainly through agents in 1/3 through own farms, Contract farming.
mandis and/or markets; rest through agents in Provides nursery sup-
a mandis/markets within plies, extension servi-
a Some procurement radius 100-km off ces to farmers;
u through contract farming; around Bhilai; Some
contract farming;
o
Vc
0 Severe price fluctuations Some price fluctuations; Reasonably firm price;
s felt;
•M
CO Availability uncertain; Partly firm availability Reasonably firm avail-

from own farms; ability;
50
Wimco BEC Nijjer
a Procurement areas : Agreement with State Agreement with State
S Gauribadanur, Nagaman- Horticulture Board to Farms Corporation in
gala, Mulbagal, Malur, promote processing va- 1996-97, to acquire
Chintamanl, Siddala rieties, also own exten- 400 ha on lease, ter-
0 ghatta, some areas of sion group which act in minated owing to low
<I1
Hassan, Dharwad, a procurement group. yield;
0 Belgaum districts in
Kamataka, Narayangaon,
ain Pune, Nasik, Aurangabad
CO districts in Maharashtra.
Fl hybrid red varieties F l hybrids California-type varie-

>> (Rashmi, Naveen, Mangala, Raw fruit procured with ties with high cellulose
Sheetal, Rupali and 4.5° - 5° brix concen- content and reduced
9 Rohini) tration; placenta liquid used
CD {Brigade and APT-403
T3
(from Asgrow), BOS-
s>. 8147 (from Orsetti)
and 6109 (from Sun-
9 seed)}. Seeds supplied
QO to farmers. Quality
maintained through
seed supply and exten-
sion. Field staff moni-
tor haulage to reduce
damage;
Quantity : ca 22,200t
(1997-98)
ca 28,000t
(2002-03)
1997: Rs 1.50/kg raw 1997: Rs 1.75/kg raw 1997-98: Rs 1.75/kg

tomato tomato
s| 2002: Rs 2.00/kg 2002: Rs 2.00/kg 2002: Rs 2.50/kg
s| 2003: Rs 2.50/kg 2003: Rs 2.25/kg 2003: Rs 2.75/kg
Chillies in Punjab
Nijjer introduced chillies in Punjab in 1998, along with garlic and

turmeric, among its tomato contract growers. Nestle sells chiUi sauce
as well a n d u s e s some chillies to flavour its tomato k e t c h u p
products. Therefore, it was logical for Nijjer as the major supplier of
tomato paste to Nestle to consider adding chillies to the produce its
contract growers were cultivating.
Nijjer decided to introduce some North American varieties directly in
Punjab first on its own farms surrounding the factory and later on,
after one season, to some of its select contract growers in a small
51
way. About a dozen farmers were selected in 1998. Presently, some
40 to 45 of the 200 Nijjer contract growers take chillies on their
l a n d s a s well. The chilli acreage is relatively small, since t h e
requirement of the processor is much smaller than that of tomatoes.
Nijjer used only about 300 t of chillies in 2002-03. Almost all of it
was from the contract growers.
Nijjer followed the same mode of operation for chillies as it did for
tomato. It offered seedlings of exotic varieties to the growers it
considered reliable and contracted to buy back the entire output,
even if it exceeded its own requirements, as it did not want the
produce to enter the market at all. It seems to have succeeded in
doing so by keeping the number of growers small and exercising
care in their selection.
Word of chilli cultivation being possible spread rapidly among other
garden farmers, who watched the contract activities rather keenly.
They seem to have taken the initiative in procuring reasonably good
seeds from elsewhere in India, mostly from around Bareilly in Uttar
Pradesh, a traditional chilli-growing area, b u t some reportedly
ventured as far away as Haveri in Kamatcika and Guntur in Andhra
Pradesh for their seeds. Almost all the chilli grown is sold in local
markets. Wholesale prices have ranged between Rs 2,000/t and Rs
3,000/t, considered quite attractive by the farmers. The yields were
reportedly upward of 40t/ha. The production of the state as a whole
is estimated to be around 60,000 t a year at present.
Pepsico-HLL also made a small foray into chillies in 2000 and 2001.
Grower Experience
A sample survey of tomato growers was conducted as a part of this
Sample Composition
In this case also, the sample necessarily comprised some former
c o n t r a c t growers a n d n o n - c o n t r a c t growers, since there is no
contract growing of tomatoes any longer for all but one organisation.
The contract experience is, however, of a more recent origin.
The current Nijjer contract growers are considerably larger than the
former Pepsico g r o w e r s or n o n - c o n t r a c t g r o w e r s (who h a v e
52
comparable holdings). The Nijjer growers also devote a much larger
share of their land, nearly 90 per cent to tomatoes, as compared to
the other groups, who are content with only half the land devoted to
tomatoes. None of our sample growers took chillies.
Contract Former Non- All

Particulars Growers Contract contract
Growers Growers
No 16 22 19 57
Average l a n d holding (ha) 9.4 5.4 6.3 7.2
Average a r e a h a devoted to 8.1 2.6 3.1 4.7
tomatoes.
The Nijjer contract growers reported average borrowings amounting

to a b o u t Rs 1 , 5 0 0 / h a . The o t h e r c a t e g o r i e s r e p o r t e d lower
borrowings, with the non-contract growers reporting only about Rs
6 0 0 / h a . These figures are far too low to be reliable; nevertheless,
they establish the trend that the Nijjer contract growers do constitute
a larger and better-resource endowed farmers as compared to the
others.

Growers Growers
No 16 22 19 57
M e m b e r s of co-ops 5 11 12 28
No availing credit 12 14 15 41
Average crop credit, R s /
s e a s o n (for borrowers only) 12,000 3,400 1,800 7,200
History
Contract growers generally have had a somewhat longer history of

tomato farming. Only four reported written contracts. None of the
former contract growers claimed that they had a written contract.
Two respondent took short breaks from contract, while a third
claimed that he would not return.
53
Growers Growers
No 16 22 19 57
No of years tomatoes grown, 5.6 4.8 3.0 4.4
average
No of years under contact, 4.0 2.5
average
No reporting written contract 4 — NA NA
No reporting break in contract 3 — NA NA
No reporting resumption of 2 — NA NA
contract
Crop Performance
Contract growers reported almost a third higher yield t h a n the
former contract growers, whereas the non-contract growers had only
slightly better t h a n half the yield of the contract growers. This
corroborates the earlier finding of the contract growers using a
higher q u a n t u m of i n p u t s . It also suggests t h a t contract input
supply, such as it may be, does have a major impact on yields.
This is also consistent with the yield of alternate crops reported.

Growers Growers
No 16 22 19 57
Average yield of tomatoes 28.3 22.2 15.6 23.5
(t/ha)
Average jaeld of best alternate 4.0 3.5 2.2 3.7
crop, t / h a (wheat)
Price Performance
Both contract and former contract growers reported the same price
of Rs 250/q, while the price reported by the non-contract growers
was a third higher. This suggests that the last group caters to the
table demand mainly and is possibly reporting only the peak price,
not the season-long average, which could provide better comparisons.
54
The higher reported price m u s t also be set off against the m u c h
poorer yield.
Particukirs Growers Contract contract
Growers Growers
No 16 22 19 57
Average price received (Rs/q) 250 250 330 265
In subsequent Tables, contract and former contract growers are clubbed
together.
The main areas of concern were quality (74 per cent not clear),
exclusivity (68 per cent), sales arrangements (53 per cent) and
cropping practices (24 per cent). The respondents were quite vocal
that the buyer raised the quality bogey only when he wanted to
drive down the price. They were also quite agitated about the buyers
providing their proprietary planting material to non-contract growers
as well.
(N=38)
Buyer's obligations
- advance 22 14 2
- extension 19 15 4
- cultivation 10 29 9
- exclusivity 18 10 10
- sales a r r a n g e m e n t 12 4 20
- quality 4 4 28
F a r m e r ' s obligations
- planting 19 12 7
- Irrigation 22 11 2
- quality 7 3 28
55
Demonstrations seem to have carried the day with the growers, who
also seemed to be clear about training, although to a far lower
extent. The most doubts were expressed about the extension staffs
abilities, be it giving advice on the spot or in response to an SOS
situation. This suggests that while the organisations did perhaps an
acceptable job of iatroducing and creating an interest, their problem-
solving abilities were considered well below par.
(N=38)
clarity confiision doubts
Training 14 18 4
SOS visits 4 8 26

Since the contracts were primarily oral, no views were forthcoming
on procedures and documents involved.
Disputes arose over quality, quantity and payments; the last was
almost entirely among the Nijjer growers. Interestingly, the pajmient
disputes were the ones with the maximum satisfactory and quick
resolution. Those with quality disputes were equally divided between
satisfactory and unsatisfactory resolution.
(N=38)
No No reporting No not
Disputes reporting satisfactory happy
resolution
D i s p u t e on
- quality 24 12 12
- quantity 8 6 2
- other services 7 4 3
- pa)mients 14 12 2
56
An overwhelming proportion of respondents blamed the buyer for

disputes rather t h a n the farmer. This is both a general purpose
response, as well as a situation-specific one, since the bulk of the
disputes were about quality. The earlier finding about the growers'
perception of the misuse of the quality consideration by the buyer
stands further corroborated.
(N=38)
Particulars No, No not Not aware/
Buyer 24 6 8
Farmer 3 32 3
Only a third of the farmers said that they got better prices from
contracts, but nearly four out of five respondent felt that contracts
provided them higher incomes, clearly confirming the superior yields
achieved under contracts. Almost two-thirds of the respondents were
pleased to be associated with a company such as Pepsico, HLL or
Nestle/Nij[jer. They were proud be considered pioneers through these
contracts.
(N=38)
Details No responding No responding Not aware/
Higher price 12 14 12
Association with 24 1 13
good organisation

A large majority was pleased with contracts. Over 85 per cent said
that they would work with the same agency again, thus suggesting
that the confusions or doubts were not so important as the positive
feelings generated. This response shows possibly the true assessment
of the farmers.
57
(N=38)
Feed back No responding No responding Not aware/
Contracts are good 30 5 3
Ready to repeat 26 6 6
contracts
- same agency 33 4 1
General Conclusions
Tomato contracts in Punjab seem to have worked, while they were

virtually non-existent in the South. The major achievements of the
Punjab programme were :
• Quick establishment of new crop activities in an area otherwise

not considered suitable for them;
• Better than expected results in field; in fact, 5rields comparable to

better results from elsewhere in India;
• Reasonable farmer satisfaction; despite some reservations and

doubts, even in the absence of a written, formal contract;
• Emergence of a competitive and lucrative market, primarily

catering to alternative users (table purpose) along with fading
interest in contracts by earlier promoters;
• S u b s t a n t i a l continuation of activity in post-contract period

without let-up.
The main reasons for this success were:
• Farmer interest and motivation, cutting across classes, including

absentee owners;
• Attractive land diversification opportunity for farmers, otherwise
faced with near monoculture situation in winter.
Tomato succeeded in Punjab because of farmers' Interests and

motivation. Unlike poplars, none of the contract promoters showed
an abiding interest in tomato, either in Punjab or in the South.
58
This is evident from t h e fact t h a t t o m a t o p r o d u c t s were n o t
significant contributors to corporate revenue or profits in any
company involved. This is why the processing activities were wound
down when cheaper alternatives became available in the form of
Chinese imports. The lingering mistrust between the farmer and the
b u y e r even after t h e c o n t r a c t period s u g g e s t s t h a t a win-win
situation does not exist. The farmers' concluding positive reaction
indicates that he does, nevertheless, appreciate the good work done
initially by contracts. Such goodwill is notable by its absence in the
more established South.
59
SEEDS: J K, PRO AGRO, NATH
Overview
The role of the seed sector has been substantial in the advances
t h a t India m a d e in a g r i c u l t u r e in t h e last four d e c a d e s . The
expansion of seed industry has occurred in parallel with growth in
agricultural productivity. Given the fact that sustained growth to
cope w i t h i n c r e a s i n g d e m a n d would d e p e n d on t h e p a c e of
development and adoption of innovative technologies, the seed would
continue to be a vital component for decades to come. The organised
seed industry of the country is just forty years old. Yet, its growth
has been phenomenal. India is one of the few countries where the
seed sector is already r e a s o n a b l y advanced. The private seed
industry is no more confined to j u s t production and marketing of
seed. It has as well acquired technological strength to cater to the
varietal needs of tomorrow.
The Indian seed industry is currently valued around Rs 2,500 crore

($ 500 million) cind is expected to be around Rs 3,750 crore ($ 750
million) by 2006. There are about 150 organised seed companies in
India today. Several companies have Government of India (DSIR)
recognised r e s e a r c h a n d development d e p a r t m e n t s a n d h a v e
produced and released a large number of varieties and hybrids in
several crops. The contribution of private research in terms of value
is steadily increasing. The share of research hybrids in total turnover
of crops like pearl millet, sorghum-sudan grass, sunflower, maize,
sorghum and cotton was about 70 per cent in 1997-98 compared to
46 in 1 9 9 0 - 9 1 . Private R&D's real investment in r e s e a r c h h a s
quadrupled between 1986 and 1998.
Subsidiaries and joint v e n t u r e s with m u l t i n a t i o n a l c o m p a n i e s

account for 30 per cent of all private seed industry research. A
study covering nine private seed companies indicates t h a t t h e
amount spent on R&D ranged from 0.8 per cent (Rs 50 lakh) to 15
per cent (Rs 23 crore) in 1998-99.
Historical Perspective
The National Seeds Corporation was established in 1963. The
Government of India enacted the Seeds Act in 1966 to regulate the
growing seed industry. It stipulated that seeds should conform to
minimum levels of physical and genetic purity and an a s s u r e d
percentage germination either by compulsory labelling or voluntary
61
certification. It also provided a system for seed quality control
through independent state seed certification agencies placed under
the control of the respective state departments of agriculture. This
was a most eventful time for Indian agriculture, not only because of
introduction of high-yielding cereals, particularly wheat and rice, but
also for many other positive developments related to seed such as,
constitution of seed review team, enactment of Seeds Act, 1966 and
the formation of National Commission on Agriculture. The private
sector also made significant entries into seed business in this period.
The eighties witnessed two more important policy developments for
the seed industry, namely, allowing MRTP/FERA companies to invest
in the seed sector (1987) and the introduction of a new policy on
seed development in 1988. The 1991 Industrial Policy made a radical
departure from the earlier one on foreign investment. It identified
seed production as a high priority industry.
The New Policy on Seed Development greatly liberalised import of

vegetable and flower seeds in general and seeds of other commodities
in a restricted m a n n e r and also encouraged multinational seed
companies to enter the seed business. Over two dozen companies
initiated r e s e a r c h a n d development activities and have m a d e
s u b s t a n t i a l c o m m i t m e n t s for i n v e s t m e n t on r e s e a r c h a n d
development in response to this policy initiative. The investments are
expected to increase with increasing volumes of seeds of proprietary
hybrids and preparedness of farmers to pay higher price for quality
seed. The S e e d s Act 2 0 0 1 w a s finalised on t h e b a s i s of t h e
recommendations of Seed Policy Review Group. It replaced the
previous Act of 1966 and Seed (Control) Order of 1983.
Current Status of the Seed Industry

India's seed industry has grown in size and level of performance over
the past four decades. Both private and public sector companies/
c o r p o r a t i o n s a r e involved in seed p r o d u c t i o n . Two c e n t r a l
corporations, the National Seeds Corporation (NSC) and the State
Farm Corporation of India (SFCI) and 13 state seed corporations
comprise the public sector. There are around 150 national and
multi-national private seed producing and selling companies. The
industry has grown impressively from a modest beginning in seed
production in 1962-63 to over 5 lakh ha by 1995-96. The quantum
of seed produced and sold went up five times from 14 lakh quintals
to 70 lakh quintals in this period. The area planted with bought
seed was about 10 per cent in 1990-91, with a volume of around 6
lakh t valued at Rs 680 crore. These seeds comprised of proprietary
62
hybrids, public-bred hybrids and open-pollinated varieties (OPV). In
terms of quantity and value, OPV seeds were the largest, followed in
order by p u b l i c h y b r i d s a n d p r o p r i e t a r y h y b r i d s . A l t h o u g h
proprietary hybrids had only a 32 per cent share of the market,
their share in the value was 76 per cent.
The 1998-99 estimates present a different picture, with proprietary

hybrids growing at the expense of public hybrids. The area planted
under bought seed increased only by 3 per cent over that of 1990-
91; the market size, however, expanded significantly in terms of both
quantity and value. The total market for purchased seed was 8.64
lakh t, valued at Rs 2,250 crore. The volume of proprietary hybrid
seed was estimated to be around 51,000 t, valued at Rs 600 crore
,in 1998-99 as against 19,300 t and Rs 95 crore respectively in
1990-91. The volume of public hybrids fell to 39,000 t in 1998-99
as against 60,000 t in 1990-91. The OPV volume increased by 51
per cent to 775,000 t.
The present contribution of OPV in the total bought seed market has
grown, indicating greater use of bought seed by farmers. The price
paid by farmers for all hybrid seeds is higher than that in 1990-91.
This trend suggests that farmers do hot consider the seed price to
be a constraint to its use, so long a s it e n s u r e s higher r e t u r n
through higher productivity and other value-added traits.
Major Companies in t h e Indian S e e d Industry

Company Turnover, Rs Crore, (est 2 0 0 3 )
Mahyco 120
E m e r g e n t Genetics 140
Nuziveedu 82
J K Agri Genetics 57
Namdhari 56
Monsanto 50
Ankur 48
Pro Agro 46
Syngenta 43
Pioneer 26
Advanta 25
Total 650
All India Turnover 2,800-3,Q00
S h a r e of Companies 23-26%
63
Compaiison of Major Seed Companies in Private Sector
Total Mahyco Emer- Nuzi- JKAL Monsanto Ankur ProAgro Syngenta Pioneer Advanta
Market gent veedu
Year started 1961 1969 1983 1989 1988 1977 1988 1986 1974 1986
Sales Cotton 103.0 2.4 4.7 17.5 6.5 0.43 7.7 2.3 2.2 0.5
Jowar 10,000 618 1841 422 1600 586 265 316
Bajra 15,000 955 766 95 1400 89 794 101 763 307
Maize 30,000 234 617 554 1,000 1677 10 1,258 334 496 526
Sunflower 4,500 89 0.5 5 6 45 25 89 39 114

05
4i.
Rice-HY 4,000 161 20 95 132 869 429 33 225 192
Wheat 1,20,000 55,000 300 50,000

Mustard 3,000 300 250 300 350 300 400
Main crops Cotton Cotton Cotton Cotton Cotton Cotton Cotton Cotton Cotton Jowar
Jowar Jowar Jowar Jowar Maize Bajra Jowar Bajra Jowar Bajra
Bajra Bajra Bajra Bajra Maize Bajra Maize Bajra Maize
Maize Maize Maize Maize Rice Maize Rice Maize Rice-HY
Rice-HY Rice-HY Rice-HY Rice-HY Rlce-HY Tomato Rice-HY Hyola
Cotton in lakh packet ofc450 g each, vegetables in kg and other in tons

Market Size for Various Vegetable Seeds in India
(Tons)
O P Varieties Hybrids
Ladies Finger 3,890 500
Brinjal 250 15
Onion 2,190
Chilli 403 15
Tomato 300 28
Cauliflower 400 10
Cabbage 100 40
French Beans 2,085
Cluster Beans 1,350
Bottle Gourds 500
Sponge gourd 100
Beetroot 40
Lablab 500
Water Melon 800 40
Musk Melon 300 5.5
Cucumber 1000 3
Pumpkin 50
Radish 800
Carrot 800
Capsicum 25 1
Bitter gourd 300 30
Peas 8000
Knolkhol 70
Coriander 8000 5
Total Value Rs 6,000 crore Rs 2,500 crore
Contract Growing in Seed Industry
PubUc seed companies (NSC, SFCI) had large captive farms on which
they could multiply seed, but private seed companies could not own
land to multiply their own seed. Their search for a suitable solution
led to contract farming in select parts of the country. This solution
was adopted by both Indian and multinational companies.
65
The first large-scale activity started under the aegis of Mahyco in the
early 1970s, mainly in the Marathwada region of Maharashtra. It
spread to neighbouring areas of Andhra Pradesh, Vidarbha and
Karnataka. These s t a t e s / a r e a s dominate the seed business even
today, save for the hybrids of cold-weather crops. The original
selection may have been based on the promoters' familiarity, but it
h a s been proven sound by the agro-climatic factors and relative
isolation which make controlling conditions easier, as well as hard-
working and loyal peasantry.
The original contracts were mostly with individuals. At present,

almost all companies follow a group approach. The main features of
the contract system are:
• On-farm multiplication of seeds requires observance of both a

specified package of practices and adequate isolation and other
quarantine procedures to maintain the genetic identity of planting
material. Hence, multiplication is taken up on contiguous blocks
w h i c h could be effectively isolated from t h e r e m a i n d e r of
agricultural activity in the vicinity;
• Seed producers find it useful to contract all farmers of the area
that they want to operate in;
• Companies have identified their respective zones of operation and
groups of farmers for reproduction;
• Companies specify areas, supply parent seeds, provide advance at
times, supervise production, and estimate likely crop size;
• Company staff ensure that standard contracted practices are
followed on farm through well-scheduled supervision visits and
tests;
• The initial direct c o n t a c t with farmers is now replaced by
organisers, who become effective interfaces between companies
a n d c o n t r a c t farmers. They are responsible for a group of
farmers, and meeting the group target. They could be local
financiers or s u p p l i e r s of other i n p u t s . Any revisions are
invariably implemented through organisers.
Agreements
The seed contract system has possibly the most thorough agreement
executed between the farmer and the company. This agreement
66
could be considered the heart of the entire system. Neither buyer
nor grower would today v e n t u r e into t h i s activity w i t h o u t an
agreement.
The agreement is a detailed legal document, which lays down the

obligations of both the buyer and seller exhaustively. It lists clearly
and explicitly:
• all the inputs to be provided;

• activities to be undertaken and their schedule;
• schedule of supervision;
• mandated cultivation practices;
• tests to be performed with responsibilities and charges therefor;
• quality standards and acceptance procedures;
• pajrment and advance schedules;
• conflict resolution mechanism;
• legal responsibilities, among others.
The agreement also records the land owning, documentation and

banking details of the grower. It has provisions for making group
organisers parties to it and also possibly, a guarantor. A typical
agreement is reproduced below, to show its thoroughness.
Interestingly, not all companies register these agreements nor pursue

them through legal avenues in the event of defaults. They believe
these to be exceedingly cumbersome and expensive procedures,
which are tilted against a corporate entity to begin with. They
believe, instead, that the very fact of signing the agreement gives it
sanctity in conjunction with the trust that invariably is the product
of long relationships. They also believe t h a t the groups exercise
considerable power over their members and help ensure compliance
to agreements.
67
AGREEMENT FOR RESEARCH BRED HYBRID SEED
PRODUCTION OF CEREALS/VEGETABLES/OIL SEED CROPS
Agreement made this day of between (Hereinafter called the
Company which expression unless repugnant to context would mean
and include its legal heirs, executors and assigns) of the PART and
(Name and address of the Grower/Organiser)
(Hereinafter called the Grower which expression unless repugnant to
context would mean and include its legal heirs, executors) of the
other Part.
WHERE the parties have agreed to a scheme of seed production of
hybrids as described in Annexure 1 it is agreed by and between the
parties as follows:
1. Definitions:
1. "Male Parent", means line seed for use as the polled source in
producing the hybrid.
11. "Seed Parent", means Female parent on which crossing shall
be done.
ill. "Reserved Area", m e a n s t h e l a n d e a r m a r k e d for seed
production.
iv. "OFFICIAL", means an oflScer so appointed by the Company or
any authorised representative of the company.
2. The grower shall set apart an area of Acres of leveled,
fertile and well drained land in his estate located at for the
proposed seed production during Kharif/Rabl .....
3. The grower will bear the entire cost of land preparation, irrigation.
Sowing, interculture, fertiliser and m a n u r e s . Plant protection
measures, roguing, emasculation and pollination and all other
farm operations connected with the raising of Seed Crop.
4. The reserved area shall have an isolation as specified by the
company based on Minimum Seed Certification Standards, on
all sides of the filed for the purpose of seed production under
this agreement.
5. The foundation seed used for sowing will be seed parent and
male pared, the grower shall in no case used any seed other
68
than that supplied by the company for sowing purpose in the
reserved area. The foundation is not transferable and shall be
planted in the same season for which it has been issued.
6. The grower shall roguing of all the types as instructed and to
the satisfaction of official.
7. The grower shall pay to the company at the rate per acre as
specified in Annexure 1 towards the cost of foundation seed
supplied to him.
8. The sowing of foundation seed must be done before the cutout
date as specified in Annexure 1.
9. The grower shall also pay charges for Grow Out Test and
Germination Testing to the company as specified in Annexure 1.
10. If after Grow Out Test and Germination test in the m a n n e r
prescribed by the company, the seed lot does not conform to
the standards prescribed by the company, in Annexure 1, it will
stand rejected. In the event of failure of the seed lot, the grower
shall pay to the company the processing charges incurred for
that particular lot before taking back the seed. The company
reserves the right to retain the rejected lot and settle t h e
payment at prevailing grain rate. Failed lot of cotton if returned,
it will be in the delinted fonn.
11. The company shall be bound to purchase only the seed to the
extent as specified in Annexure 1 which complies with the
following specifications.
The seed production operation, t h e isolation requirement,
roguing and other operations recommended by the company.
The lots eligible for procurement shall not be discoloured, insect
damaged, rain damaged or damaged in any other way in
physical appearance
The company will have an option to purchase the produce in
excess of quantity mentioned in Annexure 1 at rate stipulated
at Annexure 1.
12. The seed which has met the prescribed standards of genetic
purity and geminiation shall be purchased by the company at
rate prescribed in Annexure 1 for processed and packed seed.
13. The entire produce as estimated on the bases of crop condition
indicated in the final inspection report from the reserved area
69
and conforming to the prescribed standards shall be offered to
the company by the grower who shall not sell or transfer to
any one else t h e produce eligible for p r o c u r e m e n t by the
company. In case of default, the grower shall be liable to pay to
the company damages amounting to the difference between the
company's procurement price and sales price for the less
quantity offered to the company for procurement t h a n the
estimated quantity.
14. The grower shall render all facilities to the seed officer for
conducting filed inspection of the seed crop any time and at
a n y s t a g e . A seed crop found by t h e c o m p a n y as not
conforming to the standards referred to clause No. 11 shall be
liable for rejection.
15. The c o m p a n y h a s m a d e k n o w n to t h e grower all t h e
characteristic and patter of behaviour in respect of the parents
herein contracted, despite the disclosure by the company and
for the reasons beyond company's control, the company stands
observed for any liability for such failure of the crop.
16. In the event of any dispute of difference existing under or in
connection with the agreement the same shall be referred to the
sole arbitration of the Vice President of the Company. It wiU not
be open to the parties here to object on the ground that the
arbitrator is the Vice President of Company that he had to deal
with matters to which the contract relates or that in course of
his duties as such Vice President has expressed views on all or
any of the matters in dispute or difference. It is a term of
contract that in the event of the Vice President vacating his
office by resignation or otherwise it shall be lawful for his
successor in office to proceed with the reference.
17. The male p l a n t s m u s t be uprooted immediately after the
pollination work is stopped.
18. Payment to the grower shall be made in the form of demand
draft by deducting back commission charges, within 30 days
from the date of receipt satisfactory germination and genetic
purity test result.
19. The grower h a s specifically agreed t h a t in case he fails to
supply the seeds other than due to natural calamity, he shall
be rendered liable for civil as well as criminal action.
20. In respect of contract for hybrid cotton seed production,
company has agreed to give Rs .... /acre as advance provided
70
t h e requisite information in r e s p e c t of t h e sown a r e a is
furnished by the grower and desired documents for releasing
the advance given to the company. This advance will attract
interest @ % per a n n u m a n d t h e i n t e r e s t would be
chargeable from the date of demand draft tiU the sampling work
is over and sampled quantity is handedover to the company. In
the event the grower fails to give back the advance paid by the
company. The company reserves right to recover such advance
along with the interest by way of selling immovable property,
belonging to the grower.
21. All payments payable of claimable under this Agreement shall
be paid and claimed by —. Neither of the parties shall
be entitled to pay or claim the pa3mients of the amounts due to
any place other than though the s a m e be paid or
accepted at any other place with mutual consent of the parties
in each case of payment.
22. Notwithstanding t h e place where t h i s a g r e e m e n t is to be
implemented it is mutually understood and agreed by a n d
between the parties here to that this contract shall be deemed
to have been entered into the parties concerned at
and the courts of law in alone shall have jurisdiction
to adjudicate thereon.
23. The grower being principal employer for the labour engaged in
seed production operations has agreed to comply with the rules
framed under section 3 of Child Labour (P & R) Act 1986.
In WITNESS WHEREOF the parties have set their hands on the day,
month and year mentioned above.
(Signature of Grower/Organiser) (Signature of the representative

of the Company)
Witness : Date :
1) 2)
(Signature) (Signature)
(Name and Address) (Name and Address)

Before execution the entire agreement has been explained to me and
I have signed after full understanding of all the clauses.
(Signature of Grower/Organiser)
71
ANNEXURE 1
Name of the Farmer / Organiser: M/s./Sri.

S/o
Village: Taluk: Dist:
Area : Crop.: Variety
Land Survey No.. Season: Kharif/Rabi/Summer
Year :
Last date of planting :
Cost of F/Seed and mode of payment: Rs /acre.
BANK ACCOUNT DETAILS
Account No.
Name of the Bank
Place :
Bank Code No. :
Procurement Rate : Basic rate Rs / Service charges:
Max. Quantity/acre :
acceptable to the company
Disposal of Remnant/Failed Lots : Company/Farmer
Grow Out Test Charges : Rs /lot
Germination Test Charges : Rs /lot
72
CROP-WISE STIPULATED QUALITY STANDARDS FOR
PROCUREMENT OF SEED LOTS
Crop Minimum Minimum Maximum Minimum

Isolation Germination moisture Genetic
Distance Purity
in m % % %
Hy Cotton 30 10
Hy Jowar 200 12
Hy Bajra 200 12
Hy Maize 200 12
Hy Paddy 100 13
Hy Sunflower 400 9
(Signature of the (Signature of the Company's

Grower/Organiser) representative)
73
Grower Experience
A sample survey of seed multipliers was conducted as a part of this
Sample Composition
The sample mostly comprised contract growers. We also chose some
former contract growers for comparison; we could not, however, find
reliable n o n - c o n t r a c t seed growers, since m a r k e t i n g s e e d s
independently is a difficult a n d risky proposition. The former
contract growers are no longer engaged in seed farming.
All current contract growers were p a r t s of groups. Three of the
former growers said t h a t there were no groups when they were
engaged in the activity.
Contract Former All

Particulars Growers Contract
Growers
No 53 11 64
No in g r o u p s 53 8 61
Average land holding, h a 3.4 3.1 3.3
Average a r e a devoted to seeds, h a 1.7 0.0 -

The greater membership of co-operatives among seed growers is a
region-specific feature. The contract growers reported a much larger
borrowing, possibly an exaggeration. Former contract growers had far
more modest borrowings.
Contract Fonner All
Growers
No 53 11 64
M e m b e r s of co-ops 45 11 56
No availing credit 52 10 62
Average crop credit, R s / s e a s o n 16,500 3,600 14,800
(for borrowers only)
74
History
All growers were in the seed activity for very long periods. Most of
them were second or third generation seed multipliers. They were
under contract for virtually the entire period of the activity, almost
invariably with the same company.
Contract Former All

Growers
No 53 11 64
No of y e a r s seeds grown, average 22.0 18.6 21.3

No of y e a r s u n d e r contact, average 19.6 14.7 17.8
No reporting written contract 53 — N A

No reporting b r e a k in contract 0 11 N A
Contract Lapses
Most former contract growers (nine out of 11) cited some lapse or
the other and owned up the responsibility for it as being the reason
for their not being contract seed multipliers any longer. There was
both an air of regret and resignation, since it was well-known that
most seed companies would not work with such farmers any longer.
In s u b s e q u e n t Tables, only current c o n t r a c t growers are

included.
The main areas of concern were cropping practices (44 per cent),
group discipline (28 per cent), pricing and advances (21 per cent
each). The prevalence of doubts was far less in these cases as
compared to tomato growing, showing the maturity and reliability of
the contract arrangements.
75
(N=53)
Item No No No
reporting reporting expressing
Buyer's obligations
- advance 20 14 11
- extension 21 9 23
- supervision 26 19 8
- group discipline 22 16 15
- quality 25 .10 8
- pricing 32 12 11
Farmer's obligations
- planting 39 12 2
- irrigation 42 10 1
- harvesting 45 8 0
- quality 46 2 5
The long experience of contracts and relationships is reflected in a

s h a r p e r a n d clearer u n d e r s t a n d i n g of c o n t r a c t s a n d facilities
available u n d e r them. There was a far lower degree of d o u b t s
e x p r e s s e d t h a n w a s t h e c a s e with t o m a t o e s . The e x t e n s i o n
m e c h a n i s m a n d p r o b l e m - s o l v i n g o u t r e a c h t h u s s e e m to be
satisfactory.
(N=53)
Item No No No
clarity confiisvon doubts
Training 44 8 1
SOS visits 36 8 9
76
All b u t one of t h e sample was clear a b o u t t h e d o c u m e n t a t i o n

required. This is only to be expected, since seed multiplication
invariably requires a written contract, which the fanners have been
executing over long periods.
(N=53)
Item No No No
Land documents 52 0 1
Other documents 52 0 1
Disputes were fewer aind more amicably and quickly settled.

(N=53)
No No reporting No not
Disputes reporting satisfactory happy
resolution
Dispute on
- quality 14 13 1
- quantity 5 5 0
- other services 4 4 0
- payments 1 1 0
About half the respondents felt that disputes arose from the buyers,
while nearly two-thirds denied that farmers had anything to do with
them.
{N=53)
Particulars No No not Not aware/
Buyer 32 15 11
Fcirmer 9 34 10
77
This relatively better perception of the origin of disputes and their
smooth and efficient disposal possibly stems from long associations
and dependency relations, as well as a sense of m u t u a l under-
standing.
There was near unanimity about the best benefits from contracts:
higher income and association considered prestigious. In fact, seed
multipliers appear to be among the upper echelon of farmers ia their
respective areas and are considered to be technically advanced.
(N=53)
No No Not aware/
Particulars responding responding No response
positively negatively
Association with good 50 2 1
organisation
The entire respondent population was ready to accept contracts, with

almost everyone ready to work with the same organisation. No one
said that they would not work with the same agency. This response
shows both the appeal of seed multiplication and contract farming.
(N=53)
No No Not aware/
responding responding No response
Feed back positively negatively
C o n t r a c t s are good 49 0 4
Ready to repeat contracts 53 0 0
- s a m e agency 49 0 4
78
General Conclusions
By any standard, the seed multiplication system is the very model of

a working, m a t u r e c o n t r a c t farming s y s t e m . C o n t r a c t s have
succeeded due to a combination of factors:
• Seed companies were unable to do own multiplication due to

land laws and hence had to depend on contracts. Therefore, their
very existence depended on a working, reliable contract system;
• Farmers could not defy seed companies for fear that they would
be cut off from the programme and lose a lucrative opportunity.
Further, while they could multiply the seed, they could not
Individually sell t h e m profitably, nor could claim b r a n d i n g
advantages;
• Farmers also understood that without the research and extension

support of the company, th3y could not be very successful seed
multipliers at all;
• Groups not only helped impose discipline among its members,

but also acted as buffers against possible disputes and helped
maintain unity and cohesion. They acted very much like the Self-
Help Groups (SHGs) of the currently In vogue microflnance;
• Unlike other contract system, a successful contract relationship

would not lead to an emergence of open markets. Seed multiplier
contracts are Indeed sacrosanct and inviolable.
The seed b u s i n e s s is p e r h a p s t h e b e s t example of a win-win

situation. What is more, all concerned seem to understand that a
breach of the trust is in no one's interest. This is the reason for its
emergence as a mature and stable system.
79
CO-OPERATIVE AND PRIVATE SUGAR FACTORIES
Overview of Indian Sugar Commodity System
India has always been among the largest producers of sugar in the
world, in keeping with its population base. It is the largest single
producer of sugar including traditional cane sugar sweeteners,
khandsari and gur, equivalent to 26 million t. Its annual production
of white crystal sugar has been close to 20 million t in recent years.
It produced some 300 million t of sugarcane on over 4 million ha in
2001-02. Thus, sugarcane is without doubt the most important cash
crop of India.
The Indian sugar commodity system is unique in many ways. First,
India has always had only one source of sugar, namely sugarcane.
This is in sharp contrast to major commercial commodity systems of
the world, which use diverse sources, depending on agro-climatic
conditions. For example, the United States produces sugar from
high-fructose corn as well as sugarbeet on the mainland and from
sugarcane in Hawaii. The other major cash commodity system of
India, edible oUs, uses a large number of oil-bearing materials. This
dependence on one source has led to some basic singularities of the
system, discussed below.
Second, unlike elsewhere in the world, almost all the sugarcane is

grown under irrigation. It is an extremely water-intensive crop. Given
its long duration, ranging between 10 to 18 months, it uses 20 or
more irrigations during the crop cycle. Yet, the national average yield
of sugarcane is relatively low: under 70 t/ha. Yields in the North are
lower than the national average, with Bihar producing under 50 t / h a
and Uttar Pradesh under 60 t / h a . Tamil Nadu, on the other hand,
achieves a yield of 110 t / h a with M a h a r a s h t r a and K a r n a t a k a
achieving over 80 t / h a . Sugar recovery p e r c e n t a g e s also vary
likewise, with higher recovery in the South than in the North.
Sources of irrigation also vary considerably. While Western Uttar

Pradesh, the largest producing region of the country, depends on
surface irrigation through canal water, central and eastern Uttar
Pradesh depend on well irrigation. Similarly, lift irrigation is
prevalent in Western Maharashtra, but wells are used elsewhere.
This obviously results in wide variations in cultivation practices and
farm economics of sugarcane across the country. As a consequence,
evolving a uniform cane and sugar pricing policy and providing
appropriate incentives to farmers and processors cutting across
81
various regions becomes a difficult task. More importantly, given the
high dependence on lifting water for irrigating sugarcane, the cost of
cultivation becomes high. The cost of producing sugar in India is
t h u s higher t h a n elsewhere in the world, since the high water
requirements and costs of energy Eire compounded by relatively low
yields and recoveries. This aspect, too, results in certain
singularities.
Policies on sugar and sugarcane commodity system are governed by

two major considerations: first, sugar m u s t be available to the
consumer at affordable prices in the Indian economic context and
second, the country m u s t produce almost all the sugar it needs,
rather than depend on international trade. This last is consistent
with the over all Indian economic policy of pursuing self-sufficiency
for all of its requirement followed ever since independence. It has
changed considerably in the last 10 years during the p h a s e of
economic l i b e r a l i s a t i o n for most o t h e r commodities, b u t not
effectively so for sugar. For example, India h a s been importing
substantial quantities of edible oil, amounting to about a third of its
requirements, for the last several years. Sugar imports, on the other
hand, have been sporadic and much more restricted, amounting to
about a million t in a year, and that, too, not on any regular basis.
Thus, the Indian sugar economy is circumscribed by seemingly
contradictory considerations of maintaining low consumer prices for
an essential commodity based on a high-cost raw material, for which
there are no other, cheaper alternatives.
The consequence is a very highly administered agribusiness system

with open markets virtually non-existent. The government controls
the establishment of sugar factories through strict licensing. At the
same time, it also offers them various incentives, such as lower
excise or import duties on equipment, exemptions for new factories
from levy requirements, even when they are under private ownership.
They have been allowed, at least in theory, exclusive zones of
operation where no other sugar factories may purchase cane. Sugar
production has been subjected to levies and dual pricing until very
recently. The government also offers a variety of other incentives
such as lower interests on borrowings, longer terms for pajmient of
loans etc to partly offset the losses suffered by sugar factories on
a c c o u n t of controlled m a r k e t i n g of s u g a r . S t a t e a n d Central
governments also stipulate minimum prices for sugarcane to protect
the interests of cane growers. All major sugarcane-growing states
have elaborate bureaucracies in place to control virtually every
aspect of sugarcane cultivation and processing, starting from the
82
area that may be allowed to be cultivated by the various factories, to
storage a n d movement of finished s u g a r a n d its d i s t r i b u t i o n .
Sugarcane t h u s stands out as being the most rigidly administered
sub-sector of the highly controlled Indian agriculture sector, with
practically no semblance of market transactions between growers of
sugarcane and makers of sugar.
Sugar factories are either privately owned or co-operatives. The

country has nearly 450 sugar mills, of which 250 are co-operatives.
Although sugarcane cultivation and sugar production are spread in
various major states, two states, namely Maharashtra and Uttar
Pradesh, are the critical ones. Maharashtra has 135 sugar factories,
122 of which are co-operatives, while Uttar Pradesh h a s 101, of
which 27 are co-operatives. The two states together account for
nearly one-half of the total sugar mills; with a combined s u g a r
capacity of over 10 million t out of the 18 million t for the country
as a whole. They produced 160 million t of sugarcane out of the 300
million t for the country in 2001-02 on 2.6 million ha (cf 4.4 million
ha for India). Their sugar production was nearly 11 million t out of
a total 18.5 million t for the country. Thus, these two states account
for the lion's s h a r e of s u g a r c a n e area, cane production, s u g a r
factories, processing capacity and sugar production.
History of Sugarcane and Sugar Production
Year Area, Cane Cane Facto- Average Average Cane Sugar Sugar
000 ha Output, Yield, ries Dura- Capa- Crus- Out- Reco-
ooot t/ha tion, city, hed, put, very,
days tpd ooot ooot %
1930-31 1,176 36.354 30.9 29 — — 1,339 120 8.96

1940-41 1,617 51,978 32.1 148 113 750 11,492 1.113 9.70
1950-51 1,707 54,823 32.1 139 101 882 11,348 1,100 9.99
1960-61 2,15 110,001 45.5 174 166 1,172 31.021 3,021 9.74
1970-71 2,615 126,368 48.3 215 139 1,394 38,205 3,740 9.79
1980-81 2,667 154,248 57.8 315 104 1,718 51,584 5,150 9.98
1990-91 3,686 241,045 65.4 385 166 2,088 122,338 12,047 9.84
2000-01 4,316 295,956 68.6 436 138 3,203 176,660 18,511 10.48
2001-02 4,403 300,096 68.2 434 138 3,285 180,346 18,528 10.27
83
Major Sugarcane Producing States
Area in 000 ha (A)
Production in OOOt (P)
State/Year 1995- 1996- 1997- 1998- 1999- 2000- 2001-
96 97 98 99 2000 01 02
Andhra Pradesh A 214 199 192 214 231 217 213
P 15,180 15,030 13,955 16,503 18,508 17,690 17,608
Bihar a n d J h a r k h a n d A 125 130 108 107 97 94 121
P 5,485 5,483 4,960 5,101 4,089 3,988 5,818
Gujarat A 162 166 165 196 201 178 176
P 10,511 11,404 11,836 13,566 14,066 12,695 12,465
Haryana A 144 162 142 125 137 143 162
P 8,090 9,020 7,550 6,880 7,640 8,170 9,330
Kamataka A 313 282 310 339 373 417 409
P 24,918 23,375 28,332 34,771 37,567 42,924 33,754
Maharashtra A 580 516 460 530 590 595 578
P 46,656 41,805 38,174 47,151 53,143 49,589 45,140
Punjab A 132 173 126 103 108 121 143
P 8,620 11,040 7,150 6,130 6,770 7,770 8,818
Tamil Nadu A 326 260 283 306 316 315 326
P 32,994 25,919 30,189 33,765 34,285 33,188 36,336
Uttar Pradesh and A 1974 2110 1985 1975 2011 1938 2004
Uttaranchal P 119,830 125,349 129,267 116,483 115,419 106,068 116,219
All India A 4147 4174 3930 4055 4220 4316 4403
P 281,100 277,560 279,541 288,722 299,324 295,956 300,096
The entire a m o u n t of cane produce is not converted into crystal

sugar. Only a b o u t 50 per cent of the s u g a r c a n e produce was
crushed for crystal sugar up to the 1990s; it has now inched up to
60 per cent. Some 30 per cent of the sugarcane is converted into
gur or khandsari, while the balance is used for seed purposes or
fresh consumption.
84
Use of Cane for Sugar and Gur in Major States
(% cane used for)

State 1999-2000 2000-01 20001-02
Sugar Gur & Sugar Gur & Sugar Gur &
Khand- Khand- Khand-
sari sari sari
Andhra Pradesh 63.3 29.0 55.8 36.6 49.1 43.2

Haiyana 67.4 20.1 73.2 14.4 55.8 26.7
Kamataka 39.3 27.6 34.8 26.4 35.5 38.3
Punjab 68.3 19.2 65.8 21.7 55.4 32.1
Tamil Nadu 45.5 35.4 55.7 34.2 51.7 38.2
Utter Pradesh 42.3 43.5 43.2 43.0 43.9 42.3
All India 59.6 28.9 59.7 28.9 55.4 33.0
Sugar factories also make molasses-based p r o d u c t s , including

various forms of alcohol, as by-products. Since converting sugarcane
into sugar is a highly controlled activity with limited margins, sugar
factories have increasingly resorted to diversification into value-added
p r o d u c t s for higher incomes a n d profits. Acetic acid, a c e t a t e
monomers and polymers and various other chemicals are among
s u c h p r o d u c t s , b u t potable alcohol r e m a i n s by far t h e m o s t
profitable one. Sugar factories, including co-operatives, therefore, look
to distilleries as sources of higher revenues and profits.
Almost all factories use bagasse as fuel for their boilers. They have
realised that installing co-generation projects frees them from the
uncertainty of power supply. Progressive units, both privately-owned
and co-operatives have invested in such projects as well. Another
area of investment relates of effluent treatment, standards for which
have become increasingly tougher. The earlier settling ponds are now
being replaced increasingly by biotechnology processes, which are
more effective in dealing with the problems of maintaining COD and
BOD at acceptable levels in the effluent stream.
The s u g a r economy is t h u s more complex t h a n t h a t of o t h e r

c o m m o d i t y s y s t e m s . On t h e one h a n d , t h e b a s i c c o m m o d i t y
production and disposal is rigidly and entirely governed with little
room for interplay of market forces. On the other hand, processors
have been seeking ways out of the constraints imposed by taking
recourse to products in demand in the market. The farmer, too, is
85
not immune to the attractions of the market djmamics, as indicated
by its diversion of the crop to the gur or khandsarl manufacturers
whenever he perceives prices offered by s u g a r mills to be not
attractive enough. Yet there is no clamour for free markets to cover
the entire sugarcane economy. On the contrary, the demand is for
greater control, which, the farmer believes, could lead to better
prices. He is often not wrong in this surmise, since political decision-
makers are aware of the value of farmer votes. Sugarcane is thus a
highly politicised commodity as well. The emergence of co-operative
and private procurement systems discussed below must be seen in
this overall context.
Emergence of Co-operatives
Prawaranagar, the Pioneer
Modem sugar processing in India started in 1930 with grant of tariff

protection to the Indian sugar industry. The number of sugar mills
increased from 30 in 1930 to 135 in 1935, while the production
increased from 1.2 lakh t to 9.3 lakh t. All this was under the
private sector.
India's first co-operative sugar factory was established in 1948 at

Prawaranagar (Loni) in Ahmednagar district of Maharashtra. The
founder was the late Viththalrao Vikhe-Patil, a local progressive
farmer and leader of the co-operative.
Ahmednagar was a drought-prone area. The provincial government

undertook canal irrigation by tapping the local rivers, mainly as
famine relief work. The area around Loni received waters from the
Prawara left bank canal in the late 1920s. The land and climate
were considered suitable for sugarcane cultivation. Yields up to 50-
60 t / h a were achieved.
As p a r t of its m e a s u r e s to encourage s u g a r production in the
country, the government invited European companies to invest in
sugar factories in the region. The first such, the Belapur Sugar
Factory, was established in 1918 and started producing sugar by
1925. It was to promote scientific cultivation of sugarcane using the
canal waters in the area and manufacture of crystal sugar. Similar
projects were taken up in Pune district as well, near Baramati, by a
member of the Belapur syndicate. The price at which farmers could
provide sugar to the factory, however, was so high t h a t sugar
manufacture was unprofitable and the companies had to go into
86
liquidation. The provincial government was concerned about this
state of affairs, which would affect the returns on the investment it
has made on the irrigation work. It decided to give further impetus
to sugarcane cultivation and offer attractive conditions for sugar
factories to be established in the region. It permitted long-term
leases of farmers' lands, exclusive areas of operation, reservation of
water for sugarcane, etc. Between 1931 and 1940, 13 new private
factories c a m e u p in M a h a r a s h t r a , of w h i c h t h r e e were in
Ahmednagar district, besides Belapur.
During t h i s time, however, farmers c o n t i n u e d to suffer from

variations in income due to vagaries of climate. Co-operative credit
societies were established in the 1920s, but they suffered from poor
recoveries of loans. Farmers' miseries would worsen if the co-
operatives were to be liquidated, since they would have no option
b u t to borrow from private moneylenders at exorbitant r a t e s of
interest a n d risk of losing their l a n d s on default. Vikhe-Patil
understood this clearly and worked hard to convince farmers in his
area to improve their repayment record. Consequently, the Loni
society was revitalised and undertook a number of other activities,
such as, providing seeds and inputs. During the Second World War,
it even managed to get an agency for supply of steel.
By this time, there were six factories in Ahmednagar district, all

making money because of the prevailing shortage of sugar in the
market, and the low prices they were habituated to pay the farmers.
Many new private entrepreneurs intended to start new factories,
including one which would cover five or six villages from the Loni
area. Their preferred mode of operation was to get farmers' land on
long leases (40 - 50 years) and use the canal water. The lease rates
were very low in the region of Rs 10/acre per year. Effectively, farm
owners became landless labourers working on their own lands.
Vikhe-Patil organised farmers not to lease or rent or sell their lands

to the factories even under greater lease rents and to boycott who
did so. With active support from Vaikunthbhai Mehta, an economist
and a Gandhian leader, who was also the Managing Director of the
Bombay Provincial Co-operative Bank and the noted economist
Professor D R Gadgil, Vikhe-Patil formed the Prawara Left Bank
Canal Owners' Cultivation Society, covering 23 villages. He convinced
his fellow members of the need to set up their own sugar factory
and raised share capital from them at the rate of Rs 300/acre, with
the limit of 25 shares per member.
87
The government committee empowered to clear the sugar factories
took a long time to clear the Prawara sugar factory application. After
considerable effort to convince the committee, with help from Mr
Mehta (who was then minister for co-operation) and Professor GadgU,
the Society (now renamed Bagaitdar Co-operative Sugar Producers
Society) was given the clearance to establish its factory at the end of
December 1948.
Addressing the first meeting of the Society, Vikhe-Patil said that "the
purpose is not just to make profit, but to see that we local farmers
do not merely work as farm labourers for capitalists who come from
outside and start factories in our area. The main purpose is to have
our own factory so that farming remains with us and we prosper."
Exactly two years after registering the new society, on 31 December
1950, its factory with a capacity of crusing 500 tpd of cane started
functioning on a 37-acre plot of barren land. The plant, which cost
Rs 22 lakh, was from Skoda of Czechoslovakia. It was financed with
a loan from the provincial co-operative bank, guaranteed by the
pledge of properties of some well-off friends of Vikhe-Patll.
He continued to advise farmers not to divert cane to gur producers

simply because gur prices were high. Otherwise, their factory would
be affected. On his advice, not only small farmers, but also large
landholders (who used to give their crushers on hire to others)
stopped crushing cane for gur manufacture. This sense of loyalty
and faith in their factory and their responsibility to supply cane to it
and not to other factories in spite of temptation of higher price, was
inculcated among t h e m e m b e r s . This difficult t a s k tested the
leadership ability of Vlkhe-Patil.
In the first year, the factory worked up to 15 May 1951, i e for 144
days. It crushed 33,055 t of cane and produced 37,501 bags of
sugar, which amounted to a recovery of 11.3 per cent. In J u n e
1952, the name of the Society was changed to The Prawara Co-
operative Sugar Factory Ltd and the factory campus was named
Prawaranagar.
The factory continued to face problems arising out of policies such

as reserving water for future crops of select farmers/areas. Vlkhe-
Patil persuaded the government to give priority to standing crops
and the society adopted practices of equitable water distribution
among its members, regardless of their holding size. This was to be
the key to the cohesiveness of membership of the Society.
88
Vikhe-Patil was very keen to increase the productivity by proper
seed, m a n u r i n g and cultivation practices. He also encouraged
competition among farmers. Those producing more than 100 t / h a
were given prizes. The factory set up its own farm to supply good
quality seed. All these efforts increased the supply of cane.
By 1954, four more co-operative factories were registered in

Ahmednagar district. Prawara decided to expand its capacity to
1,500 tpd of crushing.
Prawaranagar developed as a modern industrial townships' with

housing for workers, restaurants, hospital, schools, post office, bank,
playground, running water taps, street lighting etc. In the first seven
years of its operation, the society built 150 km of road to help
transport of cane from fields to factory.
It promoted Prawara Agriculture and Industrial Development Co-

operative Society in 1959-60 to manufacture sugar factory parts and
machinery and agricultural tools, pumps etc. It had to be wound up
eight years later due to a shortage of good technicians, labour
problems, politics, and indifference of other co-operative s u g a r
factories.
In all this period, Vikhe-Patil ensured t h a t an a u s t e r e working

culture took root in his organisations. Wastage and conspicuous
consumption were avoided, bribes not given despite pressure, and
savings in the society as well as households were encouraged.
Vikhe-Patil championed the farmers' causes, especially regarding

water and sugarcane prices. For example, in 1960-61, private sugar
factories complained to the government that they could not afford to
pay Rs 38-39/t of cane to the farmers, while Prawara paid Rs 42/t.
He bluntly told the government that private factories not only paid
lower prices, b u t also held back Rs 1 0 / t to compel farmers to
supply cane the next season. They sometimes paid in kind, which
led to farmers having to sell it to get cash, incurring a loss on the
transaction. All arguments were well-supported by detailed, factual
information. Consequently, the government directed all the factories
to pay Rs 45/t.
The co-operative withheld a small percentage of the farmers' dues as
non refundable deposit, and another sum as current, refundable
deposit, to be used for part-funding factory expansion and other
developmental schemes. It paid interest on these deposits. Vikhe-
89
Patil was firmly committed to inculcating the savings habit among
his farmer-members, as he felt that in its absence, they could be
r e n d e r e d p a u p e r s in t h e event of a d r o u g h t or other n a t u r a l
calamities. The non-refundable aspect of the deposits did not go
down well with a p a r t of the m e m b e r s h i p , which formed t h e
opposition to Vikhe-Patil's leadership. He gave up his chairmanship
in 1964, whereupon his son succeeded him, who later became a
central minister in 2001.
Wamanagar: Worthy Follower
The Wamanagar Co-operative was established in 1954 under the

leadership of V A Kore in Kolhapur district of Maharashtra. This
district in south-western Maharashtra also had a well established
river irrigation network and considered far more suitable for
sugarcane cultivation than Ahmednanagar. It was a traditional gur-
making area Even today, Kolhapur gur is considered to be the
market leader. The Kore family was engaged in trade and money-
lending. Subsequently, they became major landowners of the area.
They were leading brokers for agriculture commodity as well. They
also made gfur, like most other large sugarcane growers in the area.
Kore visited Prawaranagar at the end of 1951, and was greatly
impressed by the new factory, which had just started production. He
resolved to set u p a co-operative factory in his own area. He
collected about Rs 1 lakh as contribution to the share capital in
1952. Unfortunately, t h e r e was c o n s i d e r a b l e opposition a n d
scepticism about the factory and he gave up the effort, refunding the
contributions.
He did not, however, give up the idea and revived it in 1954, when
the state government was actively encouraging establishment of more
co-operative sugar factories in all parts of the state. Kolhapur district
alone was meant to be the home for five new plants. He managed to
get the proposal approved by August 1954. Unfortunately, recession
marked the s u g a r c a n e and gur market in 1954, which caused
difficulties in raising the share capital. By March 1956 through
tireless efforts, he h a d managed to ra;ise Rs. 10 lakh as s h a r e
capital, which was matched by the state government. The plant of
1,250 tpd capacity was to be set up at Kodoli, later renamed as
Wamanagar. Buckau Wolf of Germany was to provide 70 per cent of
the plant, with the remaining to be sourced from within the country
as per the government stipulations and started functioning in 1959.
The factory was dogged by trouble at the very beginning. Within
days of its opening, heavy unseasonal rain caused a shut-down of
90
15 days. The main turbine failed in February 1960 and could be
repaired only a few days before the close of the season in March
1960. Although the sugar recovery was 12.7 per cent, the highest in
India, the production was only 82,000 bags reflecting on the long
period of closure. Wamanagar sugar recoveries have been among the
best in the country throughout its existence.
The prior establishment of the Prawaranagar Co-operative was a

great help to all subsequent sugar factories in Maharashtra. The
state a n d central governments were now convinced of t h e co-
operative approach. So long as the promoters of new co-operatives
met the stipulations regairding area and share capital, administrative
clearances were no longer a problem. For example, Kore's meeting
the deadline of adequate membership by July 1954 was followed by
an approval of the project in August 1954, or within j u s t one
month. The Prawranagar approval took nearly three years. Vikhe-
Patil had to struggle to get approval for a capacity of 500 tpd of
crushing in 1949; Kore got an approval for 1,000 tpd (effectively
1,250 tpd, with permissible balancing) in 1956. This shows that a
more conducive climate now encouraged the emerging co-operatives.
Their promoters had to concentrate largely on their own membership
for share capital; the rather well-established co-operative banking
system helped mobilise the required resources. Kore took five years
to start the factory after the initial project approval, as compared to
the two year period for Vikhe-Patil. It took Kore over one and a half
years to raise the share capital of Rs 10 lakh, which the state
government matched in j u s t two weeks. Kore and others in the
district had also to lobby hard for getting permission for a Buckau-
Wolf plant. Thus, the hurdles were now no longer in the policy or
approval phases, but more in implementation of the concept. The
industrial policy of 1956, which imposed serious constraints on any
industrial venture, was partly responsible for this.
Co-operative Activities and Services

The Maharashtra co-operative sugar factory leadership realised early
on that farmers had various needs besides remunerative prices, such
as information about scientific cultivation and use of inputs. Both
Vikhe-Patil and Kore were themselves progressive farmers and had
hands-on experience of running co-operative credit societies. They
also possessed a great deal of analytical ability, which helped them
identify the difficulties confronting the less fortunate and progressive
farmers. Thus, the Prawaranagar factory started supplying seed and
other i n p u t s almost from its inception. Kore h a d a very good
91
understanding of the optimal usage of inputs, including chemical
fertilisers, which he had tried to pass on to his fellow cultivators
even before starting the factory. Various competing claims on the
critical resources of water also helped emphasise the need for proper
irrigation management, as opposed to the rather wasteful practices
farmers tended to follow when left to their own devices.
Such realisation resulted in the gradual evolution of an effective
extension network, under the supervision of qualified personnel.
Given their close linkages with co-operative credit institutions,
meeting farmers' finance requirements through co-operatives was an
obvious choice.
The major requirement for higher sugar recovery is that the cane
should be crushed as quickly as possible after the harvest. Efficient
post-harvest transportation and delivery systems would be required
to ensure this. Extending the crushing season would be possible
with a staggering of cane maturity. Thus, planning crop cycle and
managing harvesting and delivery are critical to the good perfor-
mance of the sugar factory.
Co-operatives in Maharashtra, under the enlightened and dynamic
leadership of pioneers such as Vikhe-PatU, Kore, Ratnappa Kumbhar
(also from Kolhapur) and Vasantdada Patil (from Sangli district)
made sure that the factory itself did the planning and co-ordination
for these tasks. Thus, farmers today are given plantation and harvest
dates. Sugar factories themselves engage specialised harvesting
labour, which moves from one farm to another under their own
supervision, thus improving the efficiency of operations and reducing
the cost. The factory itself transports the cane from the farm to the
factory, so as to minimise the delays and subsequent fall in the
sugar recovery.
The co-operatives now have separate wings for agriculture and cane
development, both staffed with qualified agriculture specialists. The
former deals with routine extension, supply of inputs and related
tasks, while the latter concentrates on developmental aspects, such
as experiments on newer varieties and techniques, multiplication of
seed stock a n d so on. In addition, t h e co-operatives are all
contributing members of the Vasantdada Sugar Institute, Pune,
which is recognised as the national leader in applied sugarcane
research. They also receive research support from the agricultural
universities in the state (mainly MPKW at Rahuri in Ahmednagar
district) and outside (mainly Tamil Nadu Agriculture University,
Coimbatore).
92
All these practices now appear to be dictated by common sense and
routine. It did, however, take a long period to evolve them and
getting t h e m accepted by t h e farmers. As of now, s u g a r c a n e
planting, cultivation, harvesting and managing the Inputs appears
highly systematised and requires very limited discretion on the part
of the farmers of Maharashtra sugarcane co-operatives. This is seen
as a model not only by private factories in the state, but also those
in other large sugar producing states, such as Uttar Pradesh and
Tamil Nadu.
Prices Paid and Performance of Co-operatives

Pricing of Sugarcane
The principal rationale for the emergence of co-operatives was to
ensure a remunerative price to cane growers, as Vikhe-Patil had
clearly stated at the start of the Prawaranagar Co-operative. Since
this was a sensitive question, the state government issued directives
to all sugar factories regarding the price to be paid from time to
time. This practice soon became institutionalised. The directive,
however, applies to minimum prices. Individual plants can and do
pay higher prices, depending on their performance.
At present, the Central Government announces minimum prices to

be paid for sugarcane, linked to sugar recovery. These are applicable
for the entire country. In addition, state governments may also notify
minimum prices for their states as well. Most large states notify
prices according to different zones within them, to a c c o u n t for
regional variations in yields and recoveries. The right of states to
notify m i n i m u m prices a s different from t h o s e of t h e c e n t r a l
government h a s been u p h e l d by a S u p r e m e Court j u d g e m e n t
recently, but is under appeal at present. Most states also levy a
market tax on purchase of sugarcane.
Minimum Sugarcane Prices Notified by Governments

Rs/t of sugarcane
Year/ Government 1998-99 1999-2000 2000-01 2001-02 2002-03
Central* Basic 527 561 595 621 695
Prem 6.20 6.60 7.00 7.30 8.20
Maharashtra 527-607 561-851 595-966 6'21-1,007 695-1,138
Tamil Nadu 527-663 561-700 595-763 635-818 695-957
Uttar Pradesh 527-670 561-686 595-742 621-818 695-892
Basic price linked to sugar recovery of 8.5%; premium for each additional 0.1%
recovery.
93
The government notified cane prices have steadily increased over
time, registering a rise of over 30 per cent in five years. Levy sugar
prices, which vary according to grades and regions, have also moved
more or less in the same direction. Open m a r k e t prices have,
however, either stagnated or declined in this period. This is due to a
surplus production of sugar in India and non-competitiveness of
Indian sugar in the international market.
This price situation has put a squeeze on the sugar industry as a
whole. This is true of co-operatives as well as private mills and
throughout the country. Increasing losses of sugar mills have led to
demands for rehabilitation packages, which would include loans at
concessional rates, waiver of some accumulated interest, and so on.
Even with such packages, the ability of sugar processors to sustain
production at the high levels of the initial years of this decade is
considered doubtful. The current year's Maharashtra output is widely
expected to be only half of the record production of 6.7 lakh t in
2000-01.
The Prawaranagar Co-operative has been more susceptible to these
factors. Its gross profit of Rs 7 lakh in 2000-01, which was nominal
to begin with, turned to a net loss of Rs 11.7 crore in 2001-02. This
was despite its pajrment of Rs 715/t as cane price, corresponding to
a sugar recovery of 9.8 per cent according to central norms, as
against its actual recovery of 11.7 per cent. While later year annual
reports are not available, losses are expected. Warnanagar fared
better, thanks to its larger crushing and better recovery, as well as
a somewhat more diversified activity mix (see next section). It paid
an average price corresponding to a 13.7 per cent recovery (as
against the actual 12.6 per cent) in the preceding year.
Performance of Sug ar Co-operatives, 1998-2002

Indicator Prawaranagar Warnanagar (Cap : 4,000
(Cap: 4,000 tpd) tpd, expanded to
7,000 tpd)
1998- 1999- 2000- 2001- 1998- 1999- 2000-
99 2000 01 02 99 2000 01
Members 11,496 11,745 11,745 11,745 19,670 19,670 19,670
Crushing, OOOt 849 945 844 686 1,237 1,027 1,170
Days worked 204 220 182 149 218 182 168
Average crush, tpd 4,181 4,321 4,668 4,629 5,674 5,642 6,964
Average yield, t / h a — — — 60 — — 99
Cane price, Rs/t — — 695 715 — — 960
Sugar, OOOq 959 1,093 1,026 803 1,440 1,285 1,482
Recovery, % 11.18 11.40 12.02 11.67 11.62 12.50 12.64
94
other Activities of Co-operatives
Economic Diversification of Co-operatives, Households
After stabilising their basic activity of sugarcane processing, both the

co-operatives took up various other related economic activities for
two major purposes: one, to increase their own income through
diversification, and two, to increase the members' indirect income
through related, preferably land-based, activities. The establishment
of distilleries, paper and board projects using bagasse and other
agricultural waste generated in the area, co-generation plants etc
falls in the former category. Their promotion of farm-based poultry
and dairy activities is in the latter categorJ^ The Warnanagar dairy
project h a s assumed major proportions, with over 2 lakh litres of
milk being collected by the sister dairy union. The full-fledged
p r o c e s s i n g p l a n t converted t h e raw milk into g h e e , b u t t e r ,
shrikhand, cheese, milk powder etc which were marketed throughout
t h e s t a t e . W a r n a n a g a r h a s also a fully e q u i p p e d fruit a n d
horticulture processing plant, while Prawara has only cooling units.
The importance of these diversiflcation activities can be assessed by
the fact that while the main sugar factory generates a turnover of a
little over Rs 200 crore per year for Warnanagar, the total turnover
of all the activities of average complex amounts to Rs 700 crore per
year. The factory estimates that these additional activities generate
over 6,000 jobs in the area. Most of these require some special
abilities and therefore, contribute to the skill upgradation of the local
labour force.
Social Development
The leadership of the co-operatives had overall developmental

considerations also in mind right from the beginning. Even though
their initial objective was to improve sugarcane cultivation practices,
both Vikhe-Patil and Kore knew (as did the founding fathers of other
co-operatives in Maharashtra) that the standards of education, health
care, infrastructure, communication and other factors affecting the
quality of life in their respective a r e a s were r a t h e r poor. Road
network was accorded the top priority since it affected the movement
of cane and economics of the sugar factory.
Education was a close second. Literacy rates were relatively low, at

around 5 - 1 0 per cent in the beginning. Both the areas now boast
of complete literacy. Every village h a s a school. The co-operatives
have promoted separate trusts for education, which provide not only
95
s e c o n d a r y a n d t e r t i a r y e d u c a t i o n , b u t also c a r e e r - o r i e n t e d ,
recognised, degree-granting medical and engineering colleges.
Sanitation and health also received substantial attention from the co-
operatives. Starting with provision of protected and assured sources
of potable water, the health cover now extends to dispensaries and
clinics in all villages and major hospitals at a central location. Both
the co-operatives have stressed family planning and have claimed
success in bringing down the population growth rates in their areas.
Other activities encouraged and promoted by the co-operatives
include establishment of libraries, women-oriented activities, such as
home-based enterprises and special co-operative savings associations.
Warnanagar's lead in these has been well recognised. They have
thus addressed gender-equality issues as well.
The net impact of all these is seen in a membership base that is

aware of its rights, and articulate and active in the affairs of the co-
operative.
Economic and Diversification Activities of Co-operatives
Activity Prawaranagar Wamanagar
Main Plant 500 tpd crush capacity 1,000 tpd crush capacity
initially, now 4,000 tpd initially, now 8,000 tpd
Distillery 180 lakh 1 p a capacity 90 lakh 1 p a capacity
Other alcohol based 402 t of acetaldehyde in

products 2001-02
Ethanol 20,000 Ipd capacity
Pulp and paper mill Closed due to mounting 6,600 tpa capacity
losses
Co-generation plant 35 mW 3.6 mW
Dairy Average collection of 2.25

lakh Ipd
Horticulture processing Cold store, pre-cooling 5 tph capacity for fruit

and grading pulp
Poultry 3 co-operative poultry

societies
96
Social and Developmental Activities of Co-operatives
Activity Prawaranagar Wamanagar

Education Prawara Rural Education Wama Education Society
Society (runs 59 schools (runs primary and high
and institutions) schools, arts, science and
commerce college, enginee-
Prawara Medical Trust ring and technology col-
Medical College lege, ITl)
Prawara Institute of Rese- MG Trust Dental College

arch and Education in Na-
tural and Social Sciences
JCrishi Vigyan Kendra
Health Prawara Medical Trust - Mahatma Gandhi Medical

500 bed hospital, clinic Trust (modem hospital at
in factory Wamanagar, OPDs in
villages)
Credit Societies Prawara Co-operative Bank Wama Co-operative Bank

Employees Co-operative Wama Mahila Credit
Credit Union Society
Others Prawara Education Credit Area Development Fund

Union (provides loans for (provides assistance to
education) needy students, co-opera-
tive members needing
Awards for rural literature, costly medical treatment,
scholastic and sports building of youth clubs
achievements s and sports facilities and
schools, offers Re 1/t of
Internet centres cane crushed to education
society, Rs 3/t to MG
Medical Tmst)
O
Sharada Library
Wama Gruhudyog - Lijjat

papad centre
Labour Society (runs

press, flour mills, bakery
etc
Savitri Women's Industrial

Society
97
Grower Experience
A sample survey of sugarcane growers was conducted as a part of

t h i s study. Its r e s u l t s generally bear out the conclusions a n d
inferences discussed in the above sections. Some salient findings are
shown below and briefly discussed.
Sample Composition
In this case, the sample necessarily comprised of co-operative

members in Maharashtra and those supplying to the respective mills
in Uttar Pradesh and Tamil Nadu.
Maharashtra U P T N All
Particulars
P W All
No 21 24 45 15 21 81
Average land holding (ha) 4.7 3.9 4.3 3.4 3.6 3.9
Average a r e a devoted to 4.0 3.6 3.7 2.6 3.1 3.4
s u g a r c a n e (ha)
While the sample holdings varied somewhat from one cluster to

another, almost the entire sample devoted more than 75 per cent of
the holding to sugarcane, showing its dominance in the cropping
p a t t e r n of the farmers. Our informal discussions revealed t h a t
farmers would have liked to put all their land under cane, if they
had enough water (Uttar Pradesh, Tamil Nadu) or if the co-operative
allowed them to do so (Maharashtra). This is direct evidence of their
complete satisfaction with the activity.
Institational Membership and Borrowing
All the Maharashtra farmers were members of credit co-operatives as

is to be expected. The Tamil Nadu farmers had a lower proportion of
co-operatives, while only half the Uttar Pradesh farmers joined co-
operatives.
The Tamil Nadu farmers show the highest use of credit per ha,
indicating a high degree of awareness of application of inputs. The
Maharashtra farmers use only two-thirds of the credit as compared
to Tamil Nadu, while Uttar Pradesh using less than one-half of the
Tamil Nadu use. This is clearly corroborated by and reflected in their
respective yields and incomes.
98
Maharashtra U P T N AU
Particulars
P W All
No 21 24 45 15 21 81
Members of credit co-ops 20 22 42 7 16 65
No availing institutional 21 24 45 8 21 74
credit
Average crop credit, Rs/ 23,050 26,340 24,805 16,240 35,760 26,990
ha/season (for borrowers only)
History
The Maharashtra cane growers have the longest association with

sugarcane, both as growers and suppliers to the factory. None of
them had ever made any break in their supply relationship with the
factory either. A third of the U P farmers and two of the Tamil Nadu
farmers reported some break in their relationship, but all of them
resumed it. This indicates the long and strong attachment of the
farmers to sugarcane, the strongest being in Maharashtra and the
weakest in U P, as is to be expected.
Sugarcane also ranks as the crop with the longest association with
farmers among all the commodity systems studied.
Maharashtra U P T N All
Particulars
P W All
No 21 24 45 15 21 81
No of years cane grown, 43.1 48.6 46.0 25.4 36.3 37.5
average
No of years cane supplied 37.0 35.4 36.4 12.6 20.1 27.9
to factory
No reporting break in 0 0 0 5 2 7
supply
No reporting resumption 0 0 0 5 2 7
of contract
99
Crop Performance
The reported average yields in all areas were higher than those of
the respective states, which shows the superior standing of the areas
in their own states. The sample jdelds were about 15 per cent higher
than the state yields in Maharashtra qnd U P, while the Tamil Nadu
sample yield was higher than the state yield by about 7 per cent
(the state and the sample yields are the highest in the country;
therefore, even this small increase must be seen as significant). The
h i g h e r yields a r e to be directly a t t r i b u t e d to t h e s u p e r i o r
organisation of the production systems in the areas studied as
compared to the respective states, as is to be expected in view of the
overall standing of the organisations involved.
Maharashtra UP TN
(state avg: 78.1 t/ha) (state avg: (state avg:
57.2 t/ha) 114.4 t/ha)
P W
No 21 24 15 21
Average yield (t/ha) 95.0 96.3 66.0 122.0
Price Performance
All farmers except those in Warnanagar reported receiving state-
notified prices for their sugarcane. Warnanagar paid a higher price,
reflecting its profitability and commitment to its members.
Maharashtra UP TN
P W
No 21 24 15 21
Average price (Rs/t) 715 1,200 735 940
Understanding Obligations
On the whole, farmers in UP had the most difficulty in under-
standing the obligations of buyers and sellers. More farmers reported
confusion than clarity on each of the aspects they were asked about.
Exactly the reverse situation prevailed in Maharashtra. This follows,
the long years of association these fanners have had with their co-
operatives and the overall nurturing orientation of the co-operatives.
The Tamil Nadu farmers were closer to M a h a r a s h t r a in their
understanding of the obligations but not quite as well aware as
them.
100
Pa5TTient procedures and pricing were the two issues on which the
greatest confusion prevailed among the sample as a whole. Here, too,
the extent of confusion was far lower in Maharashtra as compared
to the other areas, showing once again the higher extent of farmer
development and awareness in the co-operatives.
Some confusion appears evident regarding farmers' own tasks. This

is not surprising, as the line between what farmers have to do and
what the buyer is expected do is often blurred even in the best
areas.
Item Maharashtra Uttar Pradesh Tamil Nadu

(45) (15) (21)
Clear Not clear Clear Not clear Clear Not clear
Buyer's obligations
- input supply 39 2 2 10 12 5
- advance 38 3 5 6 9 12
- extension 42 1 1 12 12 5
- supervision 40 2 3 10 14 4
- harvesting 44 - 2 10 14 3
- transport 44 - 1 12 14 3
pricing 37 5 2 10 6 11
- payment procedures 24 18 2 13 5 13
F a r m e r ' s obligations 28 13 5 8 12 8
Satisfaction with Factory Services
Farmers in Maharashtra were nearly unanimous in terms of their

satisfaction with and appreciation of all the various services provided
by the co-operatives, both for cane production as well as improving
quality of life. This is in c o n s o n a n c e with t h e history of t h e
organisations discussed earlier. The extent of satisfaction was low in
U P, with a majority not being satisfied with any aspect of service
provided. The Tamil Nadu farmers were on the whole satisfied, but
the extent of satisfaction and appreciation was not as overwhelming
as in Maharashtra.
101
Item Maharashtra Uttar Pradesh Tamil Nadu
(45) (15) (21)
Satis- Not Satis- Not Satis- Not

fied Satisfied fied Satisfied fied Satisfied
Extension a n d 38 3 5 9 16 2
i n p u t supply
Demonstrations 39 4 9 4 18 2
Timely advice 41 2 9 • 4 17 3
a n d actions
Help in credit 44 — 3 7 16 3
Arranging h a r v e s t 44 — 4 10 17 2
a n d t r a n s p o r t of c a n e
Social services 44 — 2 12 14 7
Representing farmers' 41 1 — 13 5 15
interests
All of these indicators show the vastly more developed and advanced
n a t u r e of orientation a n d services provided by t h e oldest co-
operatives in Maharashtra.
Disputes
Disputes arose in Maharashtra over input supply. This was bound to

h a p p e n since the organisations took the major responsibility of
providing this critical service to a highly experienced and alert
membership. Most of them were, however, quickly and satisfactorily
resolved, indicating the efficacy of the dispute resolution mechanism
in place. A similar situation also prevailed in Tamil Nadu. Such
disputes were largely absent in UP, simply because farmers did not
expect to be served by the factory in these areas. Payments in UP
were the greatest bone of contention and appear to have remained
unresolved. This is due to the expectation of the farmers t h a t
ultimately the state government will step in to resolve the issue in
their favour, as has happened in the past. The on-going legal battle
in this connection also contributed to this situation. Similar disputes
arose in Maharashtra and Tamil Nadu as well, but to a far lower
extent as the farmers were quite aware of the basic issues involved.
They were also satisfactorily settled almost in all cases.
102
Dispute on Maharashtra Uttar Pradesh Tamil Nadu
(45) (15) (21)
Satis- Not Satis- Not Satis- Not
fied Satisfied fied Satisfied fied Satisfied
Supply of inputs 22/28 6/28 -/3 3/3 5/12 7/12
Harvesting 111
-n — — — —
Transport and 3/3 -/3 —• — 6/9 3/9
weighing
Payments 12/14 2/14 1/14 13/14 7/12 5/12
Other issues 4/6 1/6 2/8 6/8 11/13 1/13
All b u t a tiny proportion of r e s p o n d e n t s blamed t h e buyer for

disputes rather than the farmer on all issues. This seems to be a
standard, almost reflex-action response, as was the case with other
commodity systems.
Benefits fi'om Association
All the respondents in all the areas agreed that their association
with the respective organisation brought them the benefits of better
prices and higher incomes. Three-quarters of them expressed the
view that associating with the organisation brought them prestige as
well, with no disagreements at all in Maharashtra. There was a
similar u n a n i m i t y a m o n g co-operative m e m b e r s t h a t t h e i r
organisation provided them beneficial social services as well. A
majority of t h e remaining farmers did not agree with s u c h a
statement, since their organisations are not so active in this area.
Benefit from Maharashtra Uttar Pradesh Tamil Nadu

Association (45) (15) (21)
No No Not No No Not No No Not
agreeing agreeing agreeing agreeing agreeing agreeing
Better prices 44 — 10 4 20 —
Higher incomes 45 — 15 — 20 —
Prestige of 44 — 6 8 15 5
association
Social and other 44 — 1 14 7 13
services
103
Overall View of Association
A large majority was pleased with their association and would repeat
a similar arrangement as also continue working with the same
organisation. We believe that the negative response to this is not to
be taken seriously, as none of those who expressed such views had
actually followed up their intent by severing their connection with
the organisation or the activity.
View o n Maharashtra Uttar Pradesh Tamil Nadu

Association (45) (15) (21)
No No Not No No Not No No Not

agreeing agreeing agreeing agreeing agreeing agreeing
Satisfied 43 1 4 10 14 6
Will r e p e a t 43 — 3 11 13 7
arrangement
Will work with 44 — 4 11 13 8

organisation
General Conclusions
The s u g a r c a n e commodity s y s t e m is not a c o n t r a c t growing
a r r a n g e m e n t in the strictest sense. Yet it possess a n u m b e r of
features similar to contract growing:
• Prior commitment of certain acreage of crop to the designated

purchaser;
• Purchaser's active involvement in most aspects of cultivation
including supply of inputs, extension, supervision of crop and in
Maharashtra co-operatives, harvesting and transportation;
• Prices determined outside of market parameters and linked to the
quality of crop in part;
• In case of co-operatives, formal involvement between grower and

purchaser through the farmers' shareholding in the latter.
While sugarcane processors may not have introduced the crop de

novo, as was the case of the poplars, they were certainly responsible
for its spread manifold in their areas of operaton. This became
possible because farmers saw the crop as a remunerative one. Co-
operatives provided a viable and more attractive alternative to private
104
buyers and hence were able not only to retain their membership
base but expand it over a period of time.
As in the case of poplars, the sugarcane commodity system, too,

a n t i c i p a t e s for t h e m o s t p a r t v a r i o u s p r o d u c t i o n s u p p o r t
requirements of the farmers and makes provisions for them. The
extension packages have evolved through a clear understanding of
farmers' requirement and are structured to serve all their needs.
This became possible b e c a u s e the decision-making l e a d e r s h i p
comprised progressive farmers who had their ears to the ground at
all times. Other requirements, such as credit, were also effectively
met t h r o u g h sister institutions, which eliminated a n u m b e r of
problems and delays the farmers would have faced otherwise.
The commodity system also displays two unique characteristics.

First, unlike other commodity systems, pricing of the main product
as well as the principal crop is dictated by government policies. As
the present situation shows, sugar factories would find it extremely
difficult to make profits under these externally determined prices.
They have had to seek, not always successfully, value-addition
avenues to remain profitable u n d e r such circumstances. These
activities had led to indirect benefits for farmers of the area in terms
of additional employment opportunities and some amount of skill
enhancement.
Secondly, the enlightened leadership of co-operative factories ensured

that surpluses generated in the Initial period were used for providing
and improving physical and social infrastructure. Involvement of
sugar factories in the provision of roads, education, health and other
such facilities h a s created significantly stronger bonds between
farmers and processors. The Maharashtra pioneers have played a
truly outstanding role and their membership h a s rewarded them
with unflinching loyalty.
The more enlightened private companies, such as Sakthi Sugars,

have also realised t h a t they need to build a similar symbiotic
relationship with their growers to ensure their continued profitable
existence. A similar awareness is now beginning to be seen in
Western Uttar Pradesh as well.
It would be no exaggeration to say that sugar co-operatives have

acted as a nucleus of all round social and economic development of
the area they have served.
105
HOW HAS CONTRACT FARMING WORKED?
Beginnings of Programmes
Poplars - Quest for Raw Material Essential for Company Survived Leads
to Novel Approach
India's largest safety-match manufacturer, Wimco Ltd, faced an
a c u t e shortage of matchwood in t h e 1970s. Imports were not
allowed. Therefore, the company decided to investigate whether local
production of poplar, the preferred softwood for matches the world
over, was possible. It multiplied a large number of clones of different
varieties imported from Spain and Australia in government and own
n u r s e r i e s . Based on their s u c c e s s , it m o u n t e d an a m b i t i o u s
programme for growing them through farm-forestry in Western Uttar
Pradesh, Haryana and Punjab. The programme was launched in
1984. Realising the importance of getting all cultivation practices
right at the very beginning, the company arranged to supply planting
material from the nurseries of its joint venture, Wimco Seedlings,
other required inputs, and most important of all, extension.
The plant would take eight years to mature, which led to three
consequences. First, in the initial period, when there was no canopy,
large areas between adjacent trees, which were spaced in an 8 x 5
m grid, could be used to cultivate other crops. Shade-loving crops
would grow even at later stages. The company offered advice and
help for these crops as well. Second, the trees would yield a n
income only in eighth year, while their cultivation would need
expenditure all through the period, as would the sustenance needs
of the family. The company worked out a loan scheme, which
provided cash inflows over this period adequate to meet these needs;
income from the tree left a s u r p l u s even after repayment. The
scheme was refinanced by NABARD and executed by district lead
b a n k s . The Wimco team helped complete all the paperwork and
formalities. Third, the long period highlighted the potentially grave
r i s k in p r e m a t u r e d e a t h of t r e e s . The c o m p a n y offered free
replacement of mortalities in the first two years and persuaded GIC
to cover the risk thereafter at affordable costs.
Wimco recruited qualified forestry and extension specialists to r u n

the programme. A trained young mobile field staff not only looked
after e x t e n s i o n b u t also took care of liaison with b a n k s a n d
government officials for completing procedural formalities for the
finance programme. The same staff was to help procure the wood
upon maturity.
107
Tomatoes - Diversification Leads to Contracts, Entry CondiUonalities to
New Crop Introduction
Wimco also set up subsidiaries in Kamataka and Andhra Pradesh to

p r o c e s s m a n g o e s a n d t o m a t o e s in t h e 1 9 8 0 s . Mango j u i c e
concentrate was exported mainly to the erstwhile USSR and Eastern
Europe, while tomato paste was also sold in the domestic market to
ketchup manufacturers. These were the first large capacity modem
fruit processing plants in India based on aseptic bulk packaging
technologies. While Wimco had engaged leading intermediaries for
supplying fruit to its factories, it also attempted direct contracts with
growers in the vicinity of the plants for supply of tomatoes. Initially,
in 1984 to 1988, these were properly executed arrangements for the
supply of specific quantities at the factory gate at predetermined
prices. They did not include provision of inputs, extension or finance,
as the farmers were well-versed with tomato cultivation and used to
m a r k e t i n g t h e crop in n e a r b y m a r k e t s or to t r a d e r s . The
arrangements never worked satisfactorily, eventually deteriorating
into mere understandings with a few select farmers nearby.
Pepsico had to commit to s u b s t a n t i a l exports from India as a

condition for its entry into country in the 1990s. It decided to set
up Asia's largest and most modern tomato paste plant in Punjab
(650 TPD), even t h o u g h the state had hardly any crop to offer.
Pepsico's scientific advisers and consultants thought that tomato
could be grown in the state and would be available for 120 days a
year, which was adequate to meet the company's needs of a viable
operation. It started a tomato contract farming scheme in 1997 with
over 400 farmers, covering more than 2,000 ha under tomato itself.
Contracts covered both input supply (seedlings, extension), some
credit in the form of advance a n d loan of special e q u i p m e n t .
Contract price offered varied according to regions, to cover the cost
of transport. Quality considerations, vaguely specified, included
colour, firmness and worm-infection. Most of the Pepsico contracts
remained verbal.
The Nijjer family which had some prior experience of transporting

small q u a n t i t i e s of tomato to Delhi m a r k e t s , operated a milk
processing plant for supply to Nestle near Amritsar. With the latter's
encouragement (Nestle was the largest ketchup seller in the country
and bought Wimco paste), Nijjer set up at the same location a
tomato processing plant of 300 TPD capacity, with some shared
utilities and process equipment in 1998. It entered into formal,
written contract with 200 farmers in 1999.
108
Both Pepsico and Nijjer introduced chilli cultivation in Punjab, as
chilli s a u c e was considered complimentary to ketchup. In most
instances, the same farmers took up chilli cultivation as well, on
similar contracts.
Seeds: Emergence of Modern Seed fîrms Wholly Dependent on

Contracts
Seed supply as a major business emerged in India in the 1970s in

the wake of the Green Revolution. Farmers had now to buy the
high-yielding or hybrid seeds from the markets. Some enterprising
entrepreneurs tried to multiply seeds on large acreages under their
control, but found the task of managing large farms difficult. While
the state and Central governments promoted seeds corporations with
their own large farms, private firms had to depend on n u m e r o u s
small farmers for multiplication of seeds.
M a h a r a s h t r a Hybrid Seeds Co (Mahyco) w a s the first m o d e r n

company to enter the business, quickly followed by a host of others,
including subsidiaries of multinationals such as Pioneer. All of them
followed a similar approach, providing the parent material to farmers
and collecting the multiplied seed from them at predetermined
prices. They exercised strict control (to the extent provided by their
limited manpower) over all cropping activities of the participating
farmers. The c o n t r a c t s were all written a n d duly signed a n d
witnessed and have penalties for non-performance.
Organised seed trade emerged in the 1950s. Those in the business

had no choice but to multiply the seeds on growers' lands, since
their business could not own land and large enough parcels were
hard to come by in the areas best suited for this purpose, anyway.
Informal arrangements developed into proper contracts, which listed
various obligations of both sides including supply of basic materials,
adherence to prescribed practices, supervision and quality-checking
and exclusivity of selling at prescribed prices. This business could
not have developed at all without contract farming.
J K Agro-genetics started as a division to J K Tyres a s p a r t of

corporate diversification ui 1989. It is now an independent corporate
entity, and is the fourth overall. Pro-Agro is the Indian subsidiary of
t h e global g i a n t D u p o n t , d a t i n g b a c k to 1 9 8 8 . N a t h is a n
Independent company, its promoter having split from Mahyco around
the mid-1980s. The crop offerings, contracts and performance of the
three companies are quite similar.
109
Sugar: Striking Examples of Enlightened Farmer Leadership, Private
Companies Following Lead
Sugarcane farmers in the Maharashtra district of Ahmednagar faced

fluctuating fortunes due to prices paid by local gur manufacturers,
which varied widely. The late Vitthalrao Vikhe-Patil, a modestly
educated farmer-leader decided to organise farmers into a co-
operative to process their own cane into sugar. He was guided by
the eminent economist, the late Dr D R Gadgil, and the first co-
operative s u g a r factory in India came into being in 1948, at
Prawaranagar. Tatyasaheb Kore, another farmer leader in the south
Maharashtra district of Kolhapur, who had suffered the trauma of
burning his own standing cane field for want of a remunerative
prices, followed suit in 1956 with another co-operative sugar factory
at Warnanagar (both townships being named after rivers which
supplied the water for irrigating the crops).
These co-operatives, actively encouraged by the state government, set

u p w h a t were large p l a n t s at t h a t time (ca 1,000 TPD of cane
crushing) and over a short period of five or six years, developed first
delivery systems for inputs and extension, farm supervision, and
support activities, such as proper roads for transporting cane in time
and water supply arrangements. Realising the critical n a t u r e of
harvesting and quick delivery of cane to the factory thereafter, they
started planning fairm calendars and eventually took over harvesting
and transport themselves. In this sense, they exercised beneficial
and firm control over crop management. Payments became timely
and farmers could finance the purchase of inputs through their
expected incomes. Incentive schemes appeared over time, linking
bonuses to sugar recoveries.
These activities were funded out of the surpluses of the co-operative,

left over after paying members remunerative prices. They also built
housing for workers, community schools Eind hospitals subsequently.
Modi Sugars in the North and Sakthi in the South, both private
companies belonging to groups with diverse economic interests in
their respective areas, also came into existence in the late 1950s -
early 1960s. By this time, the already-established successful co-
operatives in M a h a r a s h t r a set the paradigm of practices to be
followed by other units, if they wished to retain the loyalty of their
supplier farmers. The UP units, however, do not offer harvest and
transport facilities, leaving these tasks to be managed by farmers
themselves.
110
Current Status
Poplars - Mission Accomplished, No Contracts
The poplar scheme, divided into three phases (1984-87, 1987-91 and
1992-96) had average annual targets of around 5 lakh, 19 lakh and
20 lakh plants. The shortfalls of achievement were small. Wimco
managed to achieve its objective of procuring matchwood, but the
interest among farmers far exceeded Wimco's needs. The Assam
pljrwood industry, forced to move out under a court ruling in the
1990s, relocated to Punjab, Haryana with the promised supply of
softwood. A good, weU-developed, competitive market had emerged at
Y a m u n a n a g a r in Haryana. As a result, prices of m a t u r e t r e e s
expected to fall in the third phase to Rs 600 from the original Rs
800, instead rose to over Rs 900. Farmers had also become quite
knowledgeable about poplar cultivation. Wimco, therefore, thought it
fit to concentrate on the supply of planting material alone through
its joint venture company, Wimco Seedlings, and depend on the
market for its wood requirements. Accordingly, there have been no
contracts since 1995. Yet WSL increased its supply of plants from
20 lakh annually to 30 lakh in 1997 and is today a modestly
profitable operation engaged solely in the sale of planting material.
Tomatoes - Mission Abandoned, Sporadic Contracts
Wimco's tomato contracts never worked satisfactorily, even in its

heyday. The attraction of the table market, which often had better
prices t h a n those offered by the factory, was too strong for the
farmers to resist. Day-to-day fluctuations in the market prices meant
either a glut or a complete absence of supplies for the factories.
Wimco therefore continued its own market operations and also
entered into more formal arrangements with larger entities such as
neighbouring farms of State Seeds or Farms Corporation. These
mostly were one-time arrangements between two corporate entities
and are not to be treated as instances of contract farming. By the
1990s, this diversification venture ceased to be of much interest to
the Compciny, resulting in its eventual sale and decline into a rather
poorly managed organisation with numerous creditors among its
suppliers. Its so-called orad contracts today are simply arrangements
for purchase on credit from selected large fairmers.
Pepsico sold its tomato plant a n d contract farming b u s i n e s s to

Hindustan Lever in 2000. HLL, also faced with unreliable supply for
its southern plants, had plans of outsourcing its requirements to
111
some smaller u n i t s in the West and concentrate on the Punjab
operations. The contract operations had already declined to around
1,000 ha. By 2 0 0 3 , HLL found t h a t its p r o d u c t was not cost-
competitive with Chinese imports and shut down its plants, giving
u p contracts. Nijjer continues with its core of Eiround 200 farmers,
assured of a market by Nestle.
Seeds - Contracts Forever

Seed companies large and small now consider contract farming as a
life-sustaining device. They cannot possibly manage any volumes
without the active support and involvement of their contract growers.
A senior decision-maker went so far as to say "This business will die
in a day if there were no contract growers." The firms studied have
current annual turnovers ranging between Rs 45 crore and Rs 57
crore and are engaged in food, c a s h and speciality crop seeds
business. Each one of them has considerable claim to research and
foreign t i e - u p s , w h i c h c o n t r i b u t e greatly to new a n d more
remunerative products. This in turn seems to please their contract
growers too.
Sugar - Loyalty Pays

Sugar industry as a whole has faced uncertainties in the recent
past, but the plants included in this study have been successful in
coping with this situation. One contributing factor to their success is
their diversification - all of them are major alcohol producers, both
industrial and potable. They also have co-generation projects, helping
them save energy costs. Their main business, however, remains cane
crushing and in a period of uncertainty for other units, they have
managed to post increasing volumes of cane crushing, however
modest such increases may be. Their crushing ranges between 5,000
and 10,000 TPD, and the annual season between 125 and 195 days.
Sugar recoveries range from 10 to 12 per cent. All of these are not
only above the national or regional averages, but also greater than
comparable figures of neighbouring plants.
Impact of Contract Fanning
Poplars in North, Tomatoes in Pwyab - New Crops Established
There were no poplars outside of government and Wimco nurseries
in the North prior to 1984. Punjab grew less t h a n 40,000 t of
tomato in 1995, the start of Pepsico operations, as compared to the
nearly 5 lakh t reported at present.
112
New Crop Acceptance
Crop and Region Achievement
Poplars in UP, Punjab, Haiyana 2 lakh plants in 1984 (5,000 ha)
22 lakh annually between 1988-91
(55,000 ha)
30 lakh annually at present (75,000 ha)
Tomato In Punjab 38,000 t in 1995
93,000 t in 1993
2,30,000 t in 2000
>5,00,000 t at present
Poplars, Sugarcane, Seeds - Assured Supply
Operations of the match manufacturer, sugar factories and seed

companies are critically dependent on assured supplies of the raw
material. This is achieved through their arrangements with producers
of the raw materials, as also one tomato paste maker.
Peak Performances
Entity Parameter Peak Performance
Wimco (Poplars) Plants distributed under 22 lakh in 1998, 1991
contracts and 1993
Pepsico Tomato processed 20,000 t in 1999

(75% under contract)
Nijjer Tomato processed 22,000 t in 1999, 2000

(all contract)
Wimco Tomato processed 6,000 t in 1999
J K Agro-genetics Turnover Rs 57 crore in 2003
Pro-Agro Seeds Turnover Rs 46 crore in 2003
Nath Seeds Turnover Rs 45 crore in 2002
Prawaranagar Sugar Crushing 15 lakh t in 2002

Co-operative
Wamanagar Sugar Crushing 12 lakh t in 2002

Co-operativep
Modi Sugar Crushing 10 lakh t in 2002

Sakthi Sugars Crushing 16 lakh t in 2002
113
Better Cane Yields, Sugar Recovery, Higher Farm Incomes
Sugarcane is an established crop in aU the regions under study. The

far greater yields and sugar recoveries in Maharashtra and Tamil
Nadu are generally attributed to the dominance of co-operatives or
co-operative like private firms in these states and their superior
performance. We found t h a t in these states, the organisations
studied had an even better performance than the state averages.
This indicates that these organisations clearly provided better inputs
and/or support services to their suppliers.
Cane Performance
Parameter Region Achievement
Sugarcane yield, t / h a (2001-2002) India 68.2

Bihar 48.2
U P 57.2
Modi Farmers 66.0
Tamil Nadu 114.4
Sakthi Farmers 122.0
Maharashtra 78.1
Prawara Farmers 95.0
Wama Farmers 96.3
Sugar recovery, % (2001-2002) India 10.3
Bihar 8.8
Western U P 9.9
Modi Farmers 10.2
Tamil Nadu 12.1
Sakthi Farmers 12.2
C Maharashtra 11.1
Prawara Farmers 11.5
S Maharashtra 11.1
Wama Farmers 12.8
Since sugarcane pricing is based on the recovery achieved, t h e

farmers of these organisations also received prices higher than the
state average. This translates into higher farm incom:es when coupled
with the higher yields achieved by these farmers. This is possibly the
most significant benefit arising from the relationship between the
farmers a n d t h e co-operative a n d t h e single m o s t i m p o r t a n t
determinant of the farmer loyalty to the co-operative.
114
Better Tomato Yields in Pwyah
The Punjab farmer h a s taken to tomatoes enthusiastically, as

indicated by the rapid growth of the crop. The contract areas show
that not only is the spread of the crop rapid and wide, b u t also
more productive as compared to the rest of the state.
Tomato Yield Comparisons
Region Grade Achievement
State 20 t / h a
Pepsico/HLL Average 26 t / h a
Best 56 t / h a
Nijyer Average 30 t / h a
Best 80 t / h a
The study thus shows the positive impact of contract farming

on establishing new crops, improving productivities and
desirable qualities and resulting in higher incomes to farmers
and continuing assured supply of raw material to the
organisations, when the programme works well.
The next Section analyses the reasons.
Perceptions of Contract Farming
Contracts Are Not Well Understood
Most c o n t r a c t s are not written down and hence differences of

opinion about contractual obligations would be expected. Even when
they are written, formal documents, as in case of poplars and seeds,
there is significant proportion of farmers who are not clear about
provisions of contract, especially their own obligations.
115
Areas of Darkness
System. Factor % Doubters
Poplars (N=65) Loan Terms 70
Intercropping 59
Pricing 54
Sales Arrangements 40
Tomato (N=38) Quality 74
Exclusivity 68
Sales Arrangements 53
Crop Practices 24
Seeds (N=43) Crop Practices 44
Group Discipline 28
Pricing 21
Advances 21
Sugarcane (N=81) Payment Procedure 54
Own Tasks 31
Pricing 31
Advances 25
Not Many Are Dissatisfied
Despite areas of misunderstanding, most farmers expressed their

satisfaction with the contract systems and expressed a desire to
repeat contracts in other commodities, as also with the same agency.
This suggests a general acceptance of contracts by most u s e r s ,
primarily because of the satisfaction of their economic expectations.
Feel Good About Contracts

System Factor % Positive
Poplars (N=65) Satisfaction 89
Repeat Contract 37
Work with Company 68
Tomato (N=38] Satisfaction 79
Repeat Contract 63
Seeds {N=43) Satisfaction 93
Repeat Contract 100
Sugarcane (N=81) Satisfaction 78
Repeat Arrangement 78
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Areas of Greatest Benefits
Most respondents were pleased about higher incomes and company

association, in that order. Cane growers also expressed satisfaction
about social facilities they enjoyed. These responses conform entirely
to prior expectations regarding contracts.
Best Benefits from Contracts

System Factor % Positive
Poplars (N=65) Higher Income 92
Association 72
Tomato (N=38) Higher Income 79
Association 66
Seeds (N=43) Higher Income 91
Association 95
Sugarcane (N=81) Higher Income 100
Association 74
Social Facilities 67
Reasonable Periods of Association

Most respondents were associated for reasonably long periods with
the organisations, sugarcane and seeds being longer than the others.
This suggests continuity, which is the most concrete indicator of
satisfaction with the contract system.
Going Steady with Contracts

System Average Length
of Association
Poplars 09.5 years

Tomatoes 05.6 years
Seeds 19.3 years
Sugarcane 27.9 years
Buyer Responsible for Defaults

Even though farmers felt good about their association with the
organisation, they also seemed to blame the buyer squarely for
defaults.
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Buyer Beware about Defaults
System % Blaming Buyer

Poplars (N=65) 38
Tomatoes (N=38) 89
Seeds (N=43) 51
Sugarcane (N=81) 30
Thus, there is a high degree of satisfaction with the contract

system as practised. The biggest contributors are income and
prestige associated with contracts. Yet the antagonistic
relationship between the two parties is real and there are clear
areas to improve understanding of what the contracts entail.
These aspects are further discussed in the next Section.
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CONTRACT FARMING:
POTENT BUT LIMITED REMEDY?
Need for Correct Perspective on Contract Fanning
Contract farming has b ^ n much in the news in the last couple of

years, not always for the right reasons. Most analysts believe tiiat it
would be an important component of agricultural reforms currently
on the anvil. There is even a discernible bandwagon effect following
various encouraging announcements and measures by both state
and central governments. The Punjab experiment not only attracted
a large number of agribusiness firms, but also a number of states
which would like to emulate it if it succeeds. Some enthusiasts have
gone so far as to call it the m e a n s to u s h e r in t h e next green
revolution.
There e x i s t s also a smaller, b u t no less vocal, g r o u p w h i c h

demonises it. It links the interest in contract farming to undesirable
consequences of globalisation. It believes that there could never be a
right balance of power between small growers and large, possibly
multinational, buyers. This case often rests on Pepsico and HLL
being the proponents of contract farming in the recent past. Some
critics have called such enterprises as the modem-day equivalent of
India's exploitation by the East India Company. The debate and
arguments get invariably linked with the on-going WTO negotiations
on access to agricultural markets and the well-publicised difference
of opinion between the OECD countries and the developing world led
by Brazil and India. The case is that since contract farming would
largely benefit MNCs and First World traders, India must shy away
from it to strengthen its position.
The preceding review of some major forays into contract farming over
the last several decades highlights the need to understand the exact
role it plays and u n d e r what specific conditions, both when it
appears to have succeeded and when it does not. Its consequences
for the local, national and global agricultural economy must be seen
in that order, along with the time dimension, to see iif it needs to be
in place always.
Finally, we need to develop an u n d e r s t a n d i n g on the extent of

applicability of this intervention so t h a t its place in t h e overall
spectrum of agriculture sector reforms is defined. We would then be
able to assess its contribution to on-going agricultural development
119
correctly and use it judiciously as a strategy, rather than see it as a
panacea or curse. Such a perspective would also help us identify the
areas and measures of support it would require to succeed.
What does Contract Farming Do?
A plain vanilla contract farming arrangement is a commitment by a

farmer or a group of farmers to grow and deliver to the buyer agreed
quantities of a commodity at a predetermined price. The buyer
(trader or a corporate), as always, h a s the additional options of
either buying the commodity from the market or growing it himself
on own or leased land. The following is a schematic representation:
Farming Models
and farm-market linking mechanisms
Farmer < ' Main Driver of the Chain ^> Corporate
Independent Farmer Farm Captive

Farmer Cooperative Management Farming
Farmer < ' Main Linking Mechanism ^> Corporate
I Auctions I
Therefore, at its simplest, contract farming is the creation of an

additional linking mechanism through another channel of disposal of
the crop. It is thus a part of the overall supply chain, which acts
parallel to the standard market mechanism.
When does Contract Farming Work?
The poplar programme embodied very many new ideas and concepts,
some almost revolutionary:
• Poplar was largely an unknown species of tree In the area where

it was to be propagated;
• Trees were supposed to be grown In forests or on bunds, but not

in fertile agricultural land;
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• Taking regular field crops in the field not occupied by trees was
a totally new concept;
• The income from trees was due only eight years hence, b u t the
cost stream was steady;
• No buyer other than Wimco was on the scene.
Similarly, large-scale cultivation of tomatoes was unknown in Punjab

at the beginning of the 1990s. The accepted wisdom had it that the
growing season was too short to be attractive to the farmer. Hardly
any markets existed for the farm p u r c h a s e (since there was no
production worth the while of traders) of this otherwise popular
constituent of the home kitchen vegetable basket.
T h u s , b o t h p o p l a r s a n d t o m a t o e s in P u n j a b were new crop

enterprises for the farmer, with attendant uncertainties of production
and meant that the farmer would be subject to risk. Large corporate
entities backing the new crop v e n t u r e t h r o u g h c o n t r a c t s a n d
supplies helped improve the risk perception and p e r s u a d e d the
farmer to accept the new crop.
Contract farming is an effective device for introductng unknown crops

or farm technologies.
Both these efforts also entailed considerable market risk (maximum

in the case of poplars), since there were no other known buyers.
P u r c h a s e c o n t r a c t s helped overcome t h e m a r k e t r i s k a s well.
Conversely, when good, competitive markets developed for both these
commodities within a decade of introduction of contracts, farmers
and buyers no longer needed the support of contracts. Markets
became the effective and key constituents of the supply chain.
Contract farming helps when markets do not exist or are

underdeveloped; conversely, contracts diminish in importance with
development of competitive markets
Seed multiplication imposes stringent quality restrictions. Seed

enterprises need to ofler the farmers attractive incentives to observe
them and/or deterrents for flouting them. This is made possible by
suitably structured contracts, but not otherwise.
121
Contract farming works when specie quality requirements need to be
observed.
Tomato growers in the South had access to m a r k e t s for table

purposes at all times, as did those in Punjab when the markets
developed. Processors in the South could source their supplies from
m a r k e t s , a n d Pepsico from n o n - c o n t r a c t growers. Under s u c h
circumstances, farmers could gain by selling in the open market at
the processors' expense when the market price was higher than
contract price. If it was lower, the processor could gain at the
farmers' expense by buying outside of contracts.
Seed multipliers and traders, on the other hand, have a strong

mutual dependence. Seed companies cannot function without their
contracts, as they would be bujring unknown and untested material
from the market, and individual seed multiplier's access to the
market is too limited and of too short term advantage to serve any
worthwhile purpose. Besides, straying destroys in one single instance
trust relationships built over long periods.
Contracts are effective when there is no zero-sum game (one party's

gain at the expense of the other). They are ideal for a win-win
situation, since they represent a natural mutual dependency.
Poplar farmers considered both free replacement of dead plants in

the first two years and proper insurance thereafter as fair and
adequate coverage of their major risk of plant mortality. This was
among the most attractive feature of the scheme. In contrast, Punjab
tomato farmers felt that while Pepsico covered itself adequately
against the risk of plant failure, farmers were left without any such
life-savers.
Contracts succeed when they contain demonstrably fair risk transfer or

coverage measures and trust relationships built over long periods.
Availability of poplars was crucial to Wimco's survival as a match

m a n u f a c t u r e r , b u t i t s t o m a t o p a s t e p l a n t s were p a r t s of
diversification a n d contributed only a small proportion of its
revenues. Tomato paste operations were only incidental for both
Pepsico and Hindustan, whose main b u s i n e s s activities did not
depend on them. Seed multiplication is the core of seed companies'
activities, as is sugarcane cultivation for sugar factories. Contracting
organisations paid far greater attention to the structure of contracts
and put in far greater effort to ensure that they work when their
122
own main activity was dependent on the successful performance of
the contract. When it did not, contracts, too, became incidental.
Contracts succeed when they are critiihl to the continued operations of

the buyer organisation. They are deficient when their contribution to the
buyer is minor.
Both Pepsico and Nijjer supplied the planting material initially. Nijjer
continued to do so well into the contract period, replacing older
varieties of tomato with newer ones, otherwise not available to
fanners. Farmers' access to chillies was also solely through Nijjer.
Even t h o u g h UP Forestry Department supplied poplar planting
material, their availability was negligible compared to the Wimco
programme requirements, which were met almost wholly from the
company's own n u r s e r i e s . Seed multipliers, of course, d e p e n d
entirely on the seed company for the planting material. Tomato
growers in the South, by contrast, were not at all beholden to the
buyer for planting material or any other input supply, as were
sugarcane growers in the North. Contract performance in s u c h
circumstances was, not surprisingly, weak.
Extension is different sort of input. If the farmers feel that they have
been in their business long enough, knowing all that there is to
know, or t h a t the company is not offering t h e m a n y t h i n g new
despite charging for the advice, their adverse reaction could be
substantial and damaging to the performance of contract.
Proprietary planting materials and other inputs, as well as genuinely

novel advice help improve contract performance by increasing the
degree of dependence.
Seed processors discovered that the best defence against possible

default is to deal with groups of farmers through their leader, rather
than work with individuals. The group, which has usually strong
kinship or other social ties, acts as a watchdog against default, since
the entire group contract is jeopardised in such an event, much the
same way as self-help groups do in case of micro finance. This
group also helps in reducing the cost of transactions, as the buyer
needs to deliver his contributions - supplies, extension, etc - within
a relatively compact area a n d could r e a s o n a b l y expect g r o u p
members to learn from each other.
The sugarcane co-operatives are even better examples of the positive

influence of group dynamics. They function in compact areas with
123
relatively homogeneous populations with strong internal social
coherence. Their elected leadership must go back to the members for
their office and are t h u s accountable to them, at least partially.
Their origins and orientations toward social service strengthen the
existing bonds greatly. Creation of education and health facilities,
infrastructure and other such activities have helped build u p the
c o m m u n i t y spirit a n d add to the social p r e s s u r e to a d h e r e to
contract provisions.
Strong, self-regulatory social systems and pressures help improve

contract performance.
The most important factor in determining whether contracts would

work or not is the selection of the crops in the first place. They can
be classified on the basis of the risks involved, both in production
(secondary, in economic parlance) and in marketing (primary).
Completely unknown crops are high in both these risks, whereas
newer varieties of existing crops or crops with stringent quality
specifications have high p r o d u c t i o n r i s k s , even w h e n b u y e r s
guarantee prices. Crops with relatively price-sensitive demands, such
as vegetables have high market risks, even as the farmer is well
familiar with the production technology. Finally, subsistence crops
are the least risky on both p a r a m e t e r s . The following diagram
illustrates this:
High
New seeds Poplars
^•3 3
^ is o
H ^ o
"i C u
Low High
Primary uncertainty
(marketing)
Cereals Vegetables
Low
Crop Suitability Classfication for Contract Farming
124
The north-east quadrant, where poplars are located, is the area with
the best prospects for contract fanning, while the south-west, where
cereals are, is the least suitable for it.
Priorities for Agriculture Development for Decade
Agriculture and rural development in the foreseeable future - say,

the next 10 years - would be driven by the objective of enhancing
its value-creation potential to help redress the present imbalance
between its contribution to GDP and t h e s h a r e of p o p u l a t i o n
dependent on agriculture. The per capita GDP of those engaged in
agriculture works out to be less than a fourth of those engaged in
other activities. Agriculture contributes less than a third of the GDP
while providing livelihood to nearly two-thirds of the population. This
in turn calls for two priorities. The first would be to maintain food
security at the present or higher level and the second would be to
adopt increasingly precise technologies to grow high-value crops for
processing as well as exports. The nature of strategies to be adopted
for the two sets of priorities is significantly different and calls for
well-defined and distinct sets of activity.
The first priority will cover a far larger proportion of rural activities. It
would include all food crops, as well as oilseeds, sugarcane and most
fibre crops. Infrastructure support and reform of policies currently
underway are likely to be the engine of growth here. Better roads and
storage facilities would help reduce the present value-destruction on
account of poor access to markets and help provide farmers additional
incentives for productivity increases. Similarly, institutional reforms
and better availability of credit could result in the easing of many of
the current constraints on productivity. Continuing stress on bio-
technology could provide superior planting material with b e t t e r
productivity. The latter priority is more a niche activity, with pockets
of high-value agriculture, based on the best technical inputs available.
It will be market-driven, in terms of both nature and quality of crops
to be grown. Precision application of all Inputs, including water and
micro-nutrients, will help reduce costs, while strict adherence to
quality parameters would help improve price realisation from both
domestic and export markets.
This is not to say t h a t t h e two sets of activities are m u t u a l l y

exclusive. It is quite likely t h a t the same farmer may cultivate
subsistence as well as high value crops on parts of his land, in
which case, spillover effects would help Improve results of both
activities. C o n c e r n s s u c h a s c o n s e r v a t i o n of r e s o u r c e s a n d
125
minimising environmental damage would be common to the entire
s e c t o r . Similarly, b e t t e r i n f r a s t r u c t u r e would h e l p improve
accessibility of all rural areas in general. All cultivators require
cheaper finance on easier and more liberal terms. The one overriding
concern for all of Indian agriculture in the immediate future would
be to reduce what appear to be enormous gaps in the norms of
input use and presence of residuals prevailing in India and abroad,
especially the developed countries. Unless this happens, India would
become increasingly isolated from the global agricultural mainstream.
What Role for Contract Farnaing'?
The crop suitability classification discussed earlier in this section

suggests that cereals and other such crops would be the least suitable
for c o n t r a c t farming. The primary r e a s o n for this is t h a t these
commodities, cultivated for long, have now well-established and inter-
connected markets in India, which minimises market risks. Given
their experience of newer varieties over the last three or four decades,
farmers are confident of their knowledge base. Progressive farmers
have access to agriculture universities and experimental stations in
their areas. The secondary risk is also t h u s mininised. The irony
inherent in the present experiment in contract farming is that the
remedy is being suggested not because of market failures, but because
of an unwillingness to face the markets. The Punjab farmers have long
got used to t h e paddy-wheat cycle cultivated for cash incomes,
primarily through the minimum support price operations. The prices
were generally calculated on a cost-plus b a s i s and a s s u r e d the
farmers a reasonable return with virtually no risk. When the Food
Corporation of India proposed price cuts due to inferior quality (such
as paddy blackened by moisture damage), high-powered political
lobbjang ensured that farmers got the announced price without cuts.
Thus, farmers were long used to assured prices and not face market
vicissitudes. As a senior administrator put it pithily, "The Punjab
farmer has long been a contract grower for the FCI."
Wider economic concerns, such as continuing and mounting cost of

subsidy implicit in the minimum support price operations, and the
u n d e s i r a b l e c o n s e q u e n c e s for w a t e r c o n s u m p t i o n a n d soil
productivity of the virtual mono-culture system, have now led to a
crop diversification campaign. The highly publicised large scale
scheme, a variant of contract farming covering other food crops, also
aims to shield the farmer from the market. It h a s some major
disquieting features. There is now a n intermediary - s u c h a s
Mahindra ShubhLabh or Escorts or Rallis - which h a s no direct
126
interest in the crop of its own. It provides inputs, mostly purchased
from others, offers extension at a price (which farmers increasingly
question) and sells the crop to the eventual buyer after adding on its
own commission. The unintended consequence is that there is now
an additional link with its own cost in the supply chain, which
l e n g t h e n s it i n s t e a d of s h o r t e n i n g a n d l e a d s to a d d i t i o n a l
intermediate retentions instead of reducing the difference between
consumer expenditure and farmer receipts.
Given the conceptual weaknesses in the many contract farming

schemes of this type now underway in Punjab and elsewhere and
their somewhat flawed implementation, the results could well fall
below the expectations of all concerned, namely the government,
firms involved and most of all, participating farmers. The current
enthusiasm for contract farming would then wane.
The solution is to help farmers face properly functioning markets

and train them to grow market-driven commodities. This can be best
achieved through accelerated reforms of agricultural marketing which
comprise removing older restrictions, improving information base and
access to it, and reducing delays a n d b o t t l e n e c k s c a u s e d by
inadequate and outdated physiccil facilities. In the United States, far
larger volumes are effectively and economically handled through
institutions and practices such as the Chicago Board of Trade, bulk
storage (grain elevator) operators and futures trade, efficient bulk
transport and free flow of appropriate information.
Contract farming would be, however, eminently suited for the other
set of activities. The high-value, precision-technology segment of
agriculture would be characterised by introduction of new crops and
hitherto unknown techniques as well as inputs for their production,
a s i t u a t i o n n o t u n l i k e t h a t of p o p l a r s in t h e 1 9 8 0 s . S u c h
commodities use relatively higher amounts of capital (both fixed as
well as working) and are faced with an attendant higher risk. They
require targetted, not general purpose, marketing, which often
involves special cirrangements for storage and marketing. These tasks
could well be beyond the means of an individual farmer and would
need a p o s s i b l e specialised agency a s a b u y e r , preferably a
contractual one.
The initiative would have to come from enterprises set up specially for
trading, processing or exporting such commodities. These bodies could
access technologies and inputs best suited for the selected area and
then devise contract schemes appropriate for their purpose. These
127
would be manageable, in the sense that they would be addressed to a
specific niche, within a well-defined area and covering a reasonable
number of growers, rather than spread over a very large tract with
innumerable farmers. Tliey would also be more balanced, in the sense
that the promoters and the growers would face a mutual dependence,
rather than a potentially exploitative situation.
Contract farming would have to be the preferred strategy for crops

which need to meet relatively stringent quality parameters, such as
seeds, organic and other crops meant for exports (with very SPS
standards and/or cultivation practices), since they would allow the
buyer a role in crop production management at all stages.
Contracts could also be means in the short- to medium-term for

bringing about some specific changes in crop varieties or techniques.
They would essentially provide an insurance coverage to the farmers
in the event of deviations from expected yields. Farmers would
themselves walk away from contracts on realising the full benefits of
the changes sought to be made.
An indicative listing of crops and regions where contract farming

could provide desirable results appears below. It would be easy to
add to this list fruit and vegetables currently used for processing,
s u c h as mango, citrus, tomato, peas and so on. As the tomato
processing experience so far suggests, the temptation of the table
m a r k e t is too great a n d t h e d e m a n d too large to n u r s e a n y
expectations of diligent performance of such contracts.
The Nijjer experience suggests that even for such crops, there is a
possibility of contract farming being effective. Two very fortuitous
conditions work in favour of Nijjer. First, it haS a long-standing and
proven relationship with Nestle which provides it not only technical
support but finance to bail out of trouble as well. Periodic delays in
Nijjer payments to suppliers ultimately affect the multinational. It,
therefore, pays the suppliers (or causes Nijjer to pay them) so as not
to affect its own supply chain. Secondly, the buUc of its 200 contract
growers are "gentlemen farmers," or absentee owners of lands. This
group is not concerned about daily fluctuations in the price and
gains or losses at the margin. It m u c h prefers the stability of
contract and payments from known sources. Their interest thus lies
in honouring the contract and receiving periodic payments. These
exceptional factors contribute immensely to the Nijjer success in
contract farming. They cannot be realistically expected to prevail in
sundry and other situations.
128
Crop Region Sub-region in
Maharash tra
Seeds Current respective regions Vidarbha, Marathwada
Organic Foods, Vegetables, Current respective regions Current respective regions
Medicinal Plants, Kashmir, Himachal Konkan, Parts of Narmada
Aromatics, etc Pradesh, Uttaranchal, and Tapi valleys,
the North-east, Western Chandrapur
Ghats, Kerala
Speciality Vegetables Current vegetable Pune, Satara, Nasik,
(Gherkins, Asparagus, growing regions Aurangabad Divisions
Coloured Capsicum,
Baby com, etc)
Required: Selective Use of Contract Farming

Contract farming offers an exciting way of marrying small-farm
efficiencies to scale economies of processing and marketing. An FAO
guide, "Contract Farming: Partnerships for Growth" argues that well-
managed contract farming has proven effective in linking small farms
sector to sources of extension advice, mechanisation, seeds, fertiliser
and credit, and to guaranteed and profitable markets for produce. "It
is an approach that can contribute to both increased income for
farmers and higher profitability for sponsors." When efficiently
o r g a n i s e d a n d m a n a g e d , c o n t r a c t farming r e d u c e s r i s k a n d
uncertainty for both parties and provides producers an opportunity
to add value to the production.
In the Indian context of limited land availability and deep-seated

antipathy towards corporate ownership of land backed by legislation,
contract farming is an acceptable via media for corporate ownership.
It would be an excellent boon to the processing industry. A senior
policy maker opined^that advantages of corporate farming can be
attained by contract farming; it is the latter that has great promise
in Indian agriculture and not corporate farming.
As Indian farm exports surge, so do the rejections of consignments
due to factors such as pesticide residues beyond specified limits.
Grapes, psyllium husks, lentil products, black pepper, sesame seed
were among such rejections from the lucrative European markets.
These warning lights have flashed j u s t before the b a r is further
raised next year, with traceability and trackability being essential
requirements of all agricultural exports. Export product integrity
m u s t be established t h r o u g h thorough records, a l m o s t in t h e
manner of provenancing an exotic species. Contract farming would
be an ideal means to handle such concerns.
129
N a t i o n a l A g r i c u l t u r a l Policy 2 0 0 0 envisaged p r i v a t e sector
p a r t i c i p a t i o n t h r o u g h c o n t r a c t farming a n d l a n d leasing
arrangements to facilitate accelerated technology transfer, capital
inflow a n d a s s u r e d m a r k e t for crop production, especially for
oilseeds, cotton and horticultural crops. The selection of crops could
be questioned, but not the basic logic of this potent tool.
Some major concerns about contract farming are about contracts

being tilted against farmers especially in view of their small size and
poor economic power. Farmers would likely end up as price takers
and corporates as price makers under such a situation.
The legal proeedures could be wholly one-sided. Defaults are usually
difficult to pin, and in the patently unequal power balance between
the farmer and the buyer, sympathies would always be with the
farmer. The survey shows that most farmers blame the buyer for all
defaults, anyway!
The legal system has no quick or cost-effective means to enforce

contract performance. Even if it did, the number of such contract
performance litigations would be so enormous as to hopelessly clog
the system.
Simiilar considerations make corporates want to deal with fewer
numbers of larger farmers. Otherwise they would have to deal with
t h o u s a n d s of contracts for even modest quantities. High cost of
interaction with many small fanners makes corporates tend to work
with fewer larger farmers in very few crops.
T h u s we m u s t view contract farming as well-planned, precisely
targetted tool of limited impact, not as a powerful weapon of mass
achievement. It is a step in the evolution of competitive marketing,
not a permanent substitute for it. As poplar and tomato farmers
have shown, emergence of properly functioning, competitive markets
h a s m e a n t the end of contracts. This is not necessarily a bad
d e v e l o p m e n t . C o n t r a c t farming h a s b e e n likened to vertical
integration. As more and more corporate entities have discovered to
their own chagrin, in-house sources of raw material are not always
cost-effective. Backward or forward integration makes sense in
underdeveloped or weak markets, not in strong, competitive fields.
Expectations from contract farming must be modest. It must be seen

to be based on trust, creating a sense of comfort for participating
farmers, as in case of seeds and sugarcane. Ideally, it would be self-
liquidating, as in case of poplars and tomatoes.
130
CONTRACT FARMING AND
INSTITUTIONAL FINANCE
Basic Appeal of Contract Fanning
Credit and Indian agriculture have been caught up in a vicious cycle

relationship. The relatively low profitability of Indian agriculture is
directly linked to a poor use of various bought inputs. Consequently,
realisation of cash from market disposal of crops is also relatively
low. Most s u b s i s t e n c e a g r i c u l t u r e is t h u s m a r k e d by poor
productivity and the attendant low surplus.
It is axiomatic that this logjam could be broken by an injection of

credit to facilitate greater purchase and application of inputs. Since
agricultural output depends critically upon vagaries of climate, the
prospect of additional output and surplus is fraught with substantial
risk. Given the dominance of small peasantry Indian agriculture,
credit providers have been extremely wary of lending to it.
This defining characteristic of Indian agriculture has been recognised

by the many groups and committees whose work spanned the entire
twentieth century. Therefore, creation of special institutions such as
multi-purpose and credit co-operative societies, radical policy changes
such as nationalisation of banks and imposing on them mandatory
minimum levels of lending to agriculture, establishing apex bodies
for provision of rural credit and refinance have been tried since
independence. Yet credit remains a constraining factor to increase
agriculture productivity even today. The consensus now is that credit
flow to agriculture needs to be doubled within the foreseeable future.
Apart from factors s u c h as w e a k n e s s a n d ineffectiveness of
institutions, increased credit flow to agriculture is constrained by two
other major causes: first, given the low resource base and limited
risk bearing ability of the peasantry, credit absorption capacity is
limited. Second, the cost of delivery credit and eventual recovery is
relatively high due to the diffused and dispersed distribution of the
intended users of credit, which cannot be offset by higher interest
rates, since that would further limit the ability of farmers to avail of
credit. This is yet another manifestation of the vicious cycle of credit
and agriculture.
At the level of individual farmer, a similar situation prevails. If he

fails to generate the expected cash surplus, he risks default, which
would otherwise make him ineligible for further institutional finance.
131
If he has borrowed from a private money-lender, this could lead to a
possible loss of his land. These considerations inhibit fanners from
taking full advantage of the available credit. If they overcome these
fears and borrow, there is a fear that natural calamities such as
droughts and floods could cause such enormous devastation as to
lead them to even suicides, as has been witnessed recently.
Market and production uncertainties lead to defaults and add to the

desperation. Vikhe-Patil realised this some 70 years ago. His early
campaign to persuade farmers in his area not to default on earlier
loans was motivated by a consideration of rescuing them from the
debt trap. He did so effectively and his Loni credit co-operative
became stronger.
Contract farming in a general sense places the responsibility of

provision of inputs and extension on the buyer, who possesses not
only an adequate information base b u t also has the resources to
bring the needed inputs and services to the field level. If this aspect
is effectively taken care of, production uncertainties inherent in
agriculture would be substantially reduced. At the same time, the
buyer also makes a cormnitment in advance to purchase the crop on
i t s m a t u r i t y a t m u t u a l l y agreed p r i c e s . T h i s would r e d u c e
considerably the market risk associated with crop cultivation, if not
eliminate it entirely. In this sense, contract farming is indeed a
possible instrument of credit deepening.
Some other factors make contract farming even more attractive for
increasing credit flow to agriculture. First, the presence of a third
party interested in a greater d i s b u r s a l of credit could lead to
outsourcing many preliminaries such as identification of borrowers,
t h e i r a s s e s s m e n t a n d r e l a t e d p a p e r work. S e c o n d , b u y e r s '
commitment of purchasing the offered quantum at predetermined
prices to the grower would substantially reduce the risk of default to
the lender. In this sense, cost of delivery of credit could be brought
down, while improving the prospects of recovery at the same time.
Therefore, credit institutions are interested greatly in using contract
farming as a means of improving credit disbursal and meeting the
mandatory targets for priority sector lending. NABAFiD's involvement
in such activities for over two decades and the more recent interest
of public sector and private commercial banks are clear indicators of
this.
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Increasing Involvement of Institutions in Contract Farming
Despite the strong appeal of contract farming for institutions in
principle, their actual involvement has been quite limited even at
present. This is because of two reasons: first, there are n o t r n a n y
well-planned contract farming schemes with adequate safeguards for
all concerned, backed by credible sponsors, and second, s u c h
experience as does exist h a s not been all positive. The Wimco-
NABARD poplar programme, possibly the largest and the most
successful one so far, still evokes some adverse r e a c t i o n s , as
discussed in the case study.
Some prior considerations, derived from the experience analysed in

this document, would go a long way to help improve the situation.
These include:
Niche Approach
Both the poplar and sugarcane commodity systems suggest t h a t
schemes, which are aimed at reasonably compact, well-defined,
homogenous areas are likely to succeed. The target crop activity
should also be a similarly well-defined one, which concerns a crop
likely to be taken up by a manageable number of growers within the
area. These growers should preferably share some other common
traits, so that appealing to them in common is both workable and
effective. This would considerably economise the effort required to
create awareness and interest among the intended participants.
Seriousness of Sponsor
Both Wimco a n d t h e M a h a r a s h t r a co-operatives d i s p l a y e d a
remarkable persistence with their chosen activities, poplar growing
a n d s u g a r c a n e . Wimco w a s w e l l - a r m e d w i t h r e s e a r c h a n d
experimentation, conducted over considerable period, to prove to
governments, growers and bankers alike that poplar cultivation was
not only physically possible, but also economically very attractive. It
was also in a position to find workable remedies to p r o b l e m s
e n c o u n t e r e d along t h e way. Both Vikhe-Patil a n d Kore h a d
persuasive powers not only with fellow-farmers b u t government
agencies as well, which converted an originally indifferent, if not
hostile, environment to a strongly supportive one. Their persuasion
was based not just on words, but their actual performance.
The very same Wimco, however, depended mostly on traders for its
horticulture operations and did not structure the programme with
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anywhere near as much care as it did the poplar one. Consequently,
it continued to be dependent largely on middlemen and market
operations rather than contract suppliers for tomatoes. HLL also was
in the s a m e situation. Pepsico may have been very serious in
launching tomatoes on the basis of substantial research inputs, but
did n o t d i s p l a y t h e s a m e t h o r o u g h n e s s in d e s i g n i n g a n d
implementing the contract farming scheme. Tomato processing was a
marginal activity for HLL, while it was nothing more than meeting a
stipulation for entry of its main activity for Pepsico. By contrast, the
much smaller and less professional Nijjer has worked its contract
s c h e m e m u c h b e t t e r . Size a n d ' p r e v i o u s r e p u t a t i o n s of a n
organisation are t h u s no guarantee of their commitment to the
scheme in question.
Therefore, bankers need to be particularly careful in selecting the

right sponsors.
Workable, Participative Procedures and Paperwork
The pioneers of sugar co-operatives had cut their teeth in credit co-
operatives. They not only understood the criticality of credit for their
activities, b u t also the need for all the preliminary work, which
would help ensure greater repayment. Similarly, Wimco acquired a
thorough knowledge of banking procedures and clearances when it
launched the poplar scheme. It recruited commerce graduates and
trained them thoroughly in these tasks. They could thus participate
as equals with bankers in the preliminaries. On their part, bankers
were happy to see a part of their task being performed without
unduly taxing their constrained resources and were thus pleased to
be of assistance in the further spread of the programme.
Dealing with Groups as against Individuals
The experience of seed companies shows that dealing with groups is

the preferred, if not the only, way of obtaining acceptable contract
performance. NABAFiD itself is now the sponsor and patron of the
largest Self-Help Group programme anywhere in the world. The
experience of sugar co-operatives also suggests t h a t there is a
s u b s t a n t i a l group synergy which could be exploited positively.
Therefore, there is considerable merit in dealing with groups, rather
than individuals, in devising contract schemes. This point further
highlights t h e need to work on niches, which would help form
groups.
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Risk Coverage : Critical!
Wimco h a d to necessarily seek suitable risk coverage b e c a u s e

poplars had a long term maturity and their premature mortality was
a real danger and risk. Its offer of free replacement of juvenile plants
and involvement of GIC in insuring older ones went a long way to
populcirise the programme. Sugarcane has not much of a production
risk, since it is an irrigated and old, established crop. Market risks
are covered through the regulated price mechanism, isolating farmers
from market shocks. Seed companies' offer of meeting market prices
covers this risk as an upside and limitation of growers helps avoid
the downside.
In sharp contrast, horticulture produce suffers from a complete

absence of any risk protection measure. Fcirmers are most concerned
about market price variations and the feast-or-famine syndrome
arises from it. Processors, too, are quite C5mical, using quality as an
excuse to default on purchase commitments in case of market gluts.
These experiences emphasise the need for a suitable risk coverage
mechanism to be an integral part of the contract farming scheme.
Fortunately, the entry of a large n u m b e r of private i n s u r a n c e
companies even in general and agriculture insurance areas opens up
numerous possibilities for innovation. NABAPUD itself has promoted
the Agriculture Insurance Corporation.
Bankers intending to participate in contract farming would be well-

advised to seek the involvement of an insurance agency to evolve a
tailor-made, innovative approach to cover potential risk and create
greater comfort for the farmer.
Repayment : Alertness to Changes
Most contract farming schemes r u n on a tri-partite arrangement

between sponsors, farmers and bankers. On purchase, the sponsor
deposits the payment in the account of the farmer in designated
bank, which then deducts the repayment at the source. On paper,
this arrangement should work well and ensure near-total and timely
repayment. This is how the Wimco poplar programme was envisaged
to work.
In reality, however, the rapidly developing shortage of soft wood

caused a heavy appreciation of poplars, to as much as 150 per cent
of the price promised by Wimco. This led to the wood being leaked
out of the system to other users, in a cash transaction. Farmers
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happily pocketed the cash and did not repay their loans. They did so
l a t e r on, r a t h e r r e l u c t a n t l y , w h e n t h e y discovered t h a t old
o u t s a n d i n g s would preclude their participation in fresh poplar
cultivation. This situation led to some litigation and considerable
mutual suspicion and acrimony between Wimco and bankers.
It is not as if this was a totally unforeseen occurrence. Wimco had

itself planned on using only 10 per cent of the wood available
through the programme. The balance was always meant to be sold
outside. Therefore, suitable strategies to ensure no leakages out of
the system or devising methods to recover funds even in the event of
a leakage are necessary. When it h a p p e n s , it m u s t come as no
surprise, unlike in the Wimco situation. One possible way is to
identify in advance avenues in which potential leakages would occur
and tie up with lead actors there to recover repayments even under
these circumstances. This calls for a continuing monitoring of the
market environment throughout the growing season and an arsenal
of actions to countervail the impact of such leakages.
Avoid Litigation
As in case of contract default, litigation to recover money on default

would be largely fruitless and quite expensive. Adoption of desperate
measures by farmers would worsen the situation. Therefore, bankers
need to support m e a s u r e s such as those suggested for conflict
resolution to ensure higher and prompt repayment. Bankers must
certainly avoid t h e t e m p t a t i o n to a t t a c h t h e b o r r o w e r s poor
belongings.
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MAKING CONTRACT FARMING
CONFIDENT FARMING
Reforming Agricultural Markets
Indian agriculture policy until recently was based on the premise

that the government must regulate agricultural commodity markets
to protect the farmers' interests. They were supposed to be exploited
by traders as a class through such means as collusive price fixing
and further short-changed through manipulation of weighment and
quality standards. Delayed and short pajnnents were also suspected
to be i n s t r u m e n t s of a b u s e by t r a d e r s . The regulated m a r k e t s
legislation s o u g h t to eliminate s u c h m a l p r a c t i c e s by allowing
transactions only in well-identified market yards and u n d e r the
supervision of a statutory market Committee. These y a r d s were
gradually provided infrastructure such as roads and other modes
communication linking hinterland to markets, auction yards and
platforms, godowns, branches of banks, amenities to users, among
others. The market committees levied a small market cess on the
volume of trade to finance these facilities.
The regulation act is now considered to have outlived its utility, the
obvious merit of the actions it provides being more than offset by its
negative effects, albeit unintended. Over time, procedures and paper
work became the focal points of market regulators and inspectors,
rather t h a n facilitation and enlarging of trade. Regulated markets
gradually became bottlenecks. For example, licensing of traders and
r e s t r i c t i n g t r a n s a c t i o n s only to licensed t r a d e r s b e c a m e a n
opportunity to create cartels, thus defeating the very purpose of open
and competitive trade. The proportion of cess to be charged also
went up, and at least in some states, became an i n s t r u m e n t of
generating resources for governments for purposes not related to
agriculture marketing. At the same, the addition of even a few
percentage points affected the existing low trade margin, effectively
making regulated markets less attractive as trading venues.
Limited access to open trade adversely affects overall production of

new and diversified crops. This is highly relevant now, when India
needs to move into competitive enterprises in the context of reduced
dependence on subsistence crops and greater recourse to global
trade. Confining trade to the existing yards and traders to recognised
ones may not suit new crops with new spatial patterns and trading
entities.
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Processing and value-addition undertaken by corporate bodies may
not be able to afford the cost of a chain of intermediaries and their
retention. Similarly, the present practices of unbagging and bagging
of produce for physical examination of the commodity prior to
auctions and its manual handling could cause not only avoidable
losses and deterioration of produce quality, but also add to costs,
further worsening the already narrow margin involved in this trade.
S u c h considerations prevail at p r e s e n t and there is a general
c o n s e n s u s freeing agriculture from s u c h c o n s t r a i n t s t h r o u g h
appropriate reform is an idea whose time has come. A draft model
law has been circulating for about a year now. The draft recognises
some of the shortcomings of the existing system and acknowledges
the need to reduce the chain of intermediaries, allowing greater
corporate presence and reducing the wastage, cost and time involved
in marketing.
The draft recommends that state governments and its designated

agencies may recognise additional sub-market yards, including those
managed by persons or bodies other than market committees as
markets under the act, to provide greater participation of those who
are presently not in the market. It also provides for the establish-
m e n t of special m a r k e t s for specific commodities a n d special
committees to govern them.
The draft also discusses contract farming. It proposes a regulatory

framework, which is quite formidable, with provisions for registration
and superintendence of activities.
The proposed draft suffers from a number of weaknesses:
• First, it seeks to present some of the practices already followed

by m a n y s t a t e g o v e r n m e n t s a s i n n o v a t i o n s . For example,
recognition of designated places outside of market yards as sub-
m a r k e t s for specific purposes is already accepted by a large
n u m b e r of s t a t e s . Soyabean and wheat in Madhya Pradesh,
spices in Kerala, vegetables and flowers in Andhra Pradesh and
Kamataka are a instances where the respective state governments
have granted such recognition to specific organisations. Such
concessions notwithstanding, problems associated with regulated
markets continue to be felt;
• Second, it appears t h a t the draft bill would still require the
physical movement of a commodity between the place it is
produced and a market, either an existing one or a facility to be
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recognised under the new procedures. A free and unrestricted
direct movement between the point of origin and processing
(which would include grading and packaging centres as well in
case of fresh produce) or consumption could still be a distant
dream, thus not permitting reduction of cost, delays and wastage,
not to speak of produce quality deterioration;
• Third, it is not entirely clear that the role of state administration
in the control and direction of trade would diminish under the
new provisions. On the contrary, vesting them with additional
powers of recognising and licensing new entities would seem to
add to their already substantial powers. Most of our legislation
suffers from the bane of exception-making, which provides
enormous discretion to those empowered to do so. Reform and
freer trade require removal of such discretion, which could and
has acted as a hindrance;
• Finally, the procedures laid down for the governance of contract

farming enjoining states to make appropriate legislation also
suffers from a similcir weakness of over-administration, instead of
facilitating its greater espousal.
Our experience of reform and liberalisation for over a d e c a d e

suggests that replacing one set of regulatory processes with another,
seemingly more benign ones, does not solve the problem caused by
unnecessary controls. The initial experiments of hesitant loosening of
control governing most industrial activities are now replaced by
removal of controls in almost all areas, with salutary results. Reform
of agriculture does not have to go through a prolonged and possibly
painful rediscovery of this phenomenon. It could be built on the
experience already with us and trade eind contract farming, wherever
applicable, could be freed of unnecessary control, even as farmers'
interests are adequately safeguarded.
Our recommendations below are guided by this consideration.

Needed : A Model Framework
Our case studies lead to the unequivocal conclusion that although
well-designed contract farming schemes generally work, they do not
guarantee performance. Farmers face a great deal of ambiguity in
most instances and responsibilities and duties of the contract are
not clearly understood. Conflicts are hard to resolve and legal
remedies are both cumbersome to come by and virtually impossible
to implement.
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Therefore, it is evident that we need a model framework, which
would help clarify most of these issues. It would further suggest
innovative measures for ensuring performance of contracts, avoiding
conflicts and resolving them efficaciously and economically should
they nevertheless arise. Some of t h e s e m e a s u r e s may require
modifications or amendments to the legal framework, which would
also need to be elaborated.
The task, therefore is to bring clarity to the basic issues, suggest

workable approaches to effective implementation of contracts and
conflict resolution, and a mix of policy and legislative measures, to
promote c o n t r a c t farming. The aim is to take the pain out of
contracts by providing comfort arrangements for all the parties.
The remaining paragraphs contain an attempt in this direction.

Clarity on Issues: Sponsors
Type and Content of Contract
The first issue t h a t needs to be clearly spelt out is the type of
c o n t r a c t . We have s e e n c o n t r a c t s to be simple p u r c h a s e
a r r a n g e m e n t s , r e s o u r c e provision a n d p u r c h a s e , a n d finally,
production management. Much of the later confusion is avoided by
stipulating the type of contract unambiguously at the outset. This
leads directly to duties and privileges under the contract, possibly
the most contentious area otherwise.
The simple m a r k e t i n g c o n t r a c t s would need to specify prices,
volumes a n d timings of p u r c h a s e as well p a y m e n t . Resource
provision contracts would need to spell out the type, extent and
quality of inputs/services to be provided, their costs and modes of
their recovery, in addition to the output purchase parameters as in
the first type. If the contracting agency is to take active part in some
or all of the operations, they need to be specified, along with a
schedule and cost concerns. For example, the co-operative sugar
factories have to specify the time of harvest as well as the harvesting
and transport arrangements they would make, for which they would
be wholly answerable. Inspections and agencies would also need to
be mentioned.
Mechanisms of Pricing and Payments

This is possibly the principal c a u s e of dispute, besides actual
defaults. Therefore, the greater the clarity about it, the less would be
the likelihood of disputes. The issues involved are:
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• Quantities (on volume, area or entire crop basis) and scheduling
of deliveries, if applicable, and points of delivery;
• ' Modes of grading for quality, responsibilities for grading, packing

and transport and its cost implications;
• Price mephanism: fixed in advance of season, flexible prices

{usually local market-plus), spot, consignment (to be determined
after further sales to ultimate user), split (minimum plus final,
after sale to ultimate user);
• Payment modalities: time, form (cash/bank deposits), hold-backs,

if any;
• Incentives based on quality and/or time performance;
• Advances and their recoveries;
• Insurance, market fee and other related costs;
• Indicative net realisation by farmer, to help him make u p his

mind.
The arrangements need to stipulate provisions applicable in case of

excess or short supply, which causes farmers considerable problems.
The situation in case short supplies is relatively simple: the buyer
has virtually no choice but to match market prices. The agreement
itself could specify a mechanism of linking the purchase price to the
prevailing market price in the event of the stipulated price falling
short of the market price beyond a specified level.
Generally, buyers could offer to buy at the specified price excess

supplies u p to a specified limit, say 10 to 20 per cent. F u r t h e r
supplies could also be bought at the buyer's option, at a reduced
price, which would also be stipulated in advance. The buyer would,
of course, be entirely in his right to refuse to buy additional supplies
if he h a s to fulfill back-to-back commitments of his own, or the
excess is more than, say, 40 per cent of the contracted level.
Quality
This is the next most likely cause of dispute, especially since the
Indian fanner has been relatively insensitive to the parameter. The
specification of quality arises from the ultimate purpose of t h e
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contract. If it is to obtain assured supplies for a processing unit,
q u a l i t y m a y b e m e a s u r e d by one or m o r e i n d i c a t o r s of t h e
composition: juice content, total soluble solids, protein contents and
so on. Similarly, purchase for table purposes would be governed by
parameters such size, shape, colour, firmness etc.
Some other aspects to be clarified are:
• P r o c e d u r e s a n d agencies for quality testing and agency to

approach in case of dispute;
• Consequences of quality defaults - cut in price (to stipulate

formula for price cut, as well as minimum limit for acceptance),
outright rejection, third party transactions;
The farmer generally pleads for acceptance of his entire crop,

because he finds marketing a most difficult task. Therefore,
m e c h a n i s m s t o m a r k e t / d i s p o s e off such final rejections
should also be preferably included. Farmers would readily
accept lower prices for off-grade produce since they would be
spared the problem of finding markets for them.
• Insurance and nature of its coverage linked to quality.
Group Approach
The success of this is abundantly clear and has been discussed at

various points above. Sponsors should encourage formation of groups
w h e r e v e r possible a n d work t h r o u g h t h e m for b o t h c o n t r a c t
performance as well as dispute resolution. They could also act as
arbiters of some contentious issues s u c h as flexible prices and
acceptable quality, when subjective criteria are involved.
Some No Nos
Provisions such as indemnifying the farmer against his loss of

property would go down very well. The buyer must have no
rights whatsoever t o any of the meagre p o s s e s s i o n s of t h e
farmer no matter what infringement of the contract is involved.
Dispute Resolution
Legal actions being cumbersome and expensive, other mechanisms,

s u c h as arbitration, etc are more important and need to stated
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explicitly, including the n a t u r e of s u c h arbitration (preferably
binding, to set limits on such activities).
Conflicts and their Resolution - Recourse to Group Mechanism
The best means of conflict resolution is their avoidance in the first

place. Clarity in understanding the various aspects of contracts as
discussed above would be of great help. In addition, the sponsor's
staff m u s t ensure considerable interaction before the contract is
executed, to explain the broad points as well as the nuances of the
contracts.
The best planned contracts cannot, however, guarantee an absence

of conflicts. Their resolution becomes an essential ingredient. This
resolution m u s t be based on the identity of farmers' and buyers'
Interests.
The temptation to default is the greatest when the contract is seen

as being between an individual farmer and a, large buyer. A single
supplier would naturally assume that his default on some parameter
or t h e o t h e r is not going to affect t h e e n t i r e lot p u r c h a s e d
significantly a n d therefore, he could ln4ulge in s u c h a c t s with
impunity. On the other hand, if the parties to the contract are a
group of farmers and the buyer, the situation changes dramatically.
The group would recognise the potential damage its default could do
to the entire consignment and not give in to such temptation. In
turn, it would also exercise similar Influence on its own members.
Peer group pressure is very effective under such circumstances. The
Self-Help Group approach to micro credit shows t h a t even the
borrowers were among the poorest, their default rate was low. The
group realised that if it could not recover the borrowed money from
all borrowers within the stated time, its borrowing ability suffers in
the next period.
Seed companies were among the first to realise this and now
routinely deal with groups alone. Not surprisingly, they face little by
way of defaults. The consequence of one member's default is the
blacklisting of the entire group subsequently.
The group approach has other merits to it. First, the tilt in favour of
t h e larger b u y e r (as c o m p a r e d to t h e farmer) i n h e r e n t in all
contracts becomes a lot less pronounced restoring a little of the
balance. Farmers' negotiating ability dramatically improves when they
are united, as is shown by the sugar co-operatives. They also learn
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to handle their own administrative details effectively and efficiently.
The important point is that these groups must remain simple,
flexible, entities, not tied down by registration, supervision and
monitoring requirements. They could regroup for another contract,
without necessarily having to dissolve the first group. They would
be t h u s quite a m o r p h o u s , which would leave them i m m u n e to
trappings of power.
Groups of farmers, rather than individual farmers, operating within

a well-defined, preferably contiguous area, should be the preferred
parties to contracts. Members of groups could be actual land owners
or lease holders, provided the lease is for a period longer than the
contract and is properly executed. Both categories of members would
have the same rights within the group.
The first step to conflict resolution is internal. The buyer and the
group try to resolve their differences in the spirit of the contract
(which is why its clarity becomes so crucial an issue). Unless the
Intention of either party is malqfide, most disputes would end here.
If any disputes remain, they must never get into the realm of legal
professionals and established courts. An alternative approach, based
again on tried rural practice and its modem manifestation could well
be tried.
A first-class judicial magistrate of the area should be designated an

ombudsman for resolving such disputes and should sit as a lok
adalat with a panel of three lay assessors. The case must be referred
to the adalat within one month of the dispute arising. The adalat
would hear the matter In its next monthly sitting. Legal briefs and
lawyers should be barred from these. The lok adalat generally
delivers its judgement the same day and offers no continuation or
delays. This practice should apply here as well.
The adalats verdict would be subject to one and only one appeal,
within two weeks of the adalat's verdict. A district judge In the area
would be the appellate authority. It would take up all complaints it
h a s received in its next meeting. Once again, the system would
function without lawyers, deferments, and dispose off the matter the
same day. The appellate authority decision would be binding. The
decisions would have the sanctity of law, in the sense of those not
obeying it would be subject to a specific penalty. The entire process
m u s t take no more t h a n three m o n t h s to resolve itself. Older
disputes will not be entertained.
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Enabling Provisions
Most writers on the subject of contract farming have recommended

registration of contracts and contracting bodies, by modifying the
APMC act accordingly. The main point, however, is to keep the
entire process as simple as possible and as far removed from legal
and administrative processes as possible. Therefore, groups of
farmers or individual farmers entering into contracts need not be
registered or required to fill out forms and returns and pay a filing
fee.
The following measures are necessary:
1. Contract farming must not be subject to Indian Contracts Act

and no remedy should be available to either party u n d e r its
provisions;
2. Contract farm transactions would be exempt from APMC cess;
3. All buyers wanting to enter into a contract arrangement would

have to register their plans with the department of agriculture.
For this purpose, the District Agriculture Officer of the district in
which the activity is to be conducted (or the largest of t h e
districts if the activity covers more than one district) will act as
the registering authority;
4. A First Class Judicial Magistrate will be designated as lok adalat

for contract farming purposes. The district j u d g e / m a g i s t r a t e
would be the appellate authority;
5. Decisions of the appellate authority would not be subject to

further appeal, but would have the full force of the law behind
them.
The first, second and fifth measure would need enabling legislation
and/or amendments to existing laws, while the other two would be
subjects of appropriate government resolutions.
Concluding Remarks
C o n t r a c t farming is a n i m p o r t a n t m e a n s of a c h i e v i n g crop
diversification, promoting new crops, especially the high-value,
precision technology activities, promoting processing and exports of
niche products. Wherever it has worked, farmers and buyers have
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benefitted alike from it. Opportunistic behaviour wrecks contracts. It
works best in non-zero sum game situations and leads to win-win
positions. It does, nevertheless, have some inherent imbalances and
conflict situations, which makes its working uneven. Thus, there is
c o n c e r n arising out of failed e x p e r i m e n t s regarding defaults,
enforceability of contracts and their equitability.
Contract farming has grown due to various reasons. Recent advances

in technology have made it feasible for agricultural produce to be
grown to specification and preserved in a fresh condition. Scale
economies have been increasing, especially in processing and
distribution. Consumers are becoming increasingly discriminating in
their tastes and the quality of produce. This increased sophistication
in c o n s u m e r d e m a n d leads to improved o-ordination between
production, processing, quality control and distribution.
Both farmers and processors may prefer contracts to complete

vertical integration. Farmers would prefer contracts, which are not
open-ended by definition. Contracts allow greater price assurance
and transfer of risk. Processors need not tax their own resources
totally to produce their raw material requirements. They have access
to farmers lands and institutional funds for this purpose.
Contracts could thus be win-win situations if properly executed.
This study has suggested that contracts should be seen as specific,

targetted, strategies, aimed at well-defined, compact areas and
activities, instead of mass activities. It suggests that contracts would
be more s u i t a b l e for new crops, t h o s e with s t r i n g e n t quality
parameters or aimed at export markets with high SPS requirements.
Activities marked by high production and marketing risks are best

suited for contracts, rather than established old activities such as
subsistence crops. It concludes that the most successful contract
farming experiments would result in the emergence competitive,
efficient m a r k e t s , which would remove the need for contracts.
Therefore, well-designed contracts are self-dissolving activities.
The study recommends focussing on groups as parties to contracts

and using peer group pressure to obtain compliance to contracts,
much the same way as done in Self-Help Groups and micro credit.
T h i s would also lead to m i n i m i s a t i o n of d e f a u l t s a n d n o n -
performance, as witnessed in seed industry contracts. Local bodies
acting expeditiously and with binding powers would be the best
146
means to settle disputes, rather than a recourse to courts, which
would be long, cumbersome, expensive and ultimately futile.
Postscript
The main recommendations of this Report were drafted in April 2004

and further refined in view of the feedback received in J u n e - July
2004.
In early August 2004, the Government of Haryana formulated a new

c o n t r a c t farming s c h e m e with s u p p o r t i n g m e a s u r e s a n d legal
provisions which are almost identical to those discussed here. The
research team had not interacted with Haryana Government except
to discuss contract farming in a general manner at a Seminar in
2003.
The timing of the drafting of the Haryana Scheme and this Report
may be purely a coincidence. The very great similarity of approach
does indicate its basic soundness, both in theoretical and practical
terms.
147

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s.

DR. C.S. DESHPANDE

ST. ?ft.TJ5T. ^§TOT^

Departnnent of Econonnic Analysis and Research

cpafecf5 3 l 1 f t ^ to, x^, ^4 - 400 001 5RT ^ J ^ I

Preface and Acknowledgements V - vi

Why this Study? 1

The Wimco-Poplar Programme 19-42

Seeds : J K, Pro Agro, Nath 61-79

Contract Farming: Potent but Limited Remedy? 119-130

Making Contract Farming Confident Farming 137-147

Viewed from this perspective, Contract-Farming (CF) form a n

The Maharashtra Economic Development Council (MEDC) deemed it

The Study h a s been financially supported by National Bank for

We are extremely grateful to MAHYCO LTD. for their generous

We are extremely thankful to Dr. Shreekant Sambrani, Management

Mr. M.N. Chaini, President, MEDC, desired that such a study be

I a m also thankful to - Mr. T.B. Sinha, Mr. Anil D e s h p a n d e ,

Dr. C.S. Deshpande

Contract farming is seen as an efTective means of generating supplies

The study was to help define the applicability, equitability a n d

The study reviewed relevant experiences and remedies. It involved

Brief History of Contract Farming in India and Forms of Contracts

Contract Farming Experiences

This programme, b o m of survival necessity of the sponsor, Wimco,

Wimco's efforts at about the same time of securing tomato supplies

Enlightened farmer leaders integrated cane growing and processing

Impact of Contract Farming

Poplar cultivation is now a stable, widely accepted agro-forestry

Tomatoes are currently cultivated in Punjab on ca 25,000 ha, with a

INDUSTRY RAW MATERIAL

Seeds are the business of over 150 companies, which survive on

Sugarcane cultivation is based on long-standing relationships between

Tomato contract farmers' average yield is 25 - 50 per cent higher

Sugarcane growers reported higher than average )delds, recoveries in

The sample surveys showed t h a t contracts are not always well

Contract Farming: Effectiveness, Pre-requisites and Problems

Contract farming helps when markets do not exist or are under-

Many factors also limit the utility of contract farming. Thousands of

This also causes problems in meeting stringent SPS requirements,

Contract Farming in Perspective

It is a step in evolution of competitive marketing and not permanent

Application Areas for Contract Farming

The following are the prime candidates, each of which is marked by

The same consideration rules out commodities for established mass

Interface with Institutional Finance

Increased credit flow to agriculture is constrained by weakness and

Contract farming in general helps reduce market risk associated with

Yet their actual involvement in contract fanning is limited because

The target crop activity should be well-defined, with manageable

p a n k e r s need to be particularly careful in selecting t h e right

WORKABLE, PARTICIPATIVE PROCEDURES AND PAPERWORK

Desirable sponsors need to participate as equals with bankers in the

DEALING WITH GROUPS AS AGAINST INDIVIDUALS

Dealing with g r o u p s is t h e preferred, if not t h e only, way of

RISK COVERAGE: CRITICAL!

A suitable risk coverage mechanism has to be an Integral part of the

REPAYMENT: ALERTNESS TO CHANGES

Most contract farming schemes r u n on a tri-partite arrangement

Litigation to recover money on default would be largely fruitless and

Model Contract Farming Schemes

A desirable contract-farming approach requires several actions on