Presentation on Potentials to and

Constraints of Contract Farming

Presented by:
Durga Prasad Dahal
Director-Research Enclave Pvt.Ltd
HOD Santwona College
 Introduction
 Agriculture is the principal driving forces of the rural economy for these
developing countries like Nepal
 Agricultural policy decides to what extent and how the state made
mechanisms govern the agriculture
 Nepalese agriculture since a long time has been recognized as a means of
livelihood rather than industry
 69 % of the total households of the country are small holders and their
share of total cultivable land is just 8 %
 Either the real tillers are having less than 0.5 ha. of land or are having no
land.
 Real tillers do not get land to till
 Landlords do not till the land themselves and left fallow rather than giving
it to the tillers due to the threats of tenancy rights because of the land rights
 Total arable land is 41, 21,000 ha. but out of this 10, 30,000 ha. arable land
is left fallow across the country
Statements of Problem
 Farming system has been rather traditional and the majority of the farmers
cultivate to supply the kitchen requirement
 The pattern of labor use is not calculated in monetary term
 Electricity and irrigation facilities, agro-inputs are not generally available to
subsistence farming
 Small holders always prefer subsistence farming due to the lack of low risk
bearing capacity
 Result of fragmentation, production and productivity of land is decreasing
everyday, which increases food insecurity, it encourages economically active
population to divert their professions
 The tenancy rights of the tillers have unknowingly been threatened by the
big landlords
 The question of scientific land reform and comprehensive solution of the
land issues has been hotly debated in political arena
Contd……..

 Most land is rain-fed

 Seeds, fertilizers, technology and knowledge are not accessible to all
the tillers
 Domination of food grains is also a major problem. It encourages many
more factors which stop to be commercial
 Due to not having adequate production management the quality food
grains is too difficult to get.
 Government is reluctant to fix the minimum support price in time
 Especially market is not easily accessible for the perishable items
 Middle men play influential role in market price
Objectives of the Study

review the global contract farming adaptation and

implications to the national policy design;
study the possible and alternative potentials of contract
farming;
study the hindrances factors that affect to the
promotion of contract farming.
Study Area

Topgachhi VDC, Jhapa District

Tikathali VDC, Lalitpur District
What is Contract Farming?
 A farming system having legal contract between a firm and a farm
holder with pre-agreed codes under specific terms and condition
 It is all about Market Specification, Resource Providing and Production
Management
 It refers to the forwarded agreement in which a producer and a firm
(processer, marketer or manufacturer) come up with written or verbal
accord for the production and supply of agricultural commodities
mostly with pre-determined price
 The agreement further clarifies the terms related to present marketing
and future purchase, management of technical and financial assistance
etc
 In fact, it is understood as an agricultural production system mutually
involved a contract between a specific producer and a buyer
Why Contract Farming?
 Demand Side Factors
 Supply Side Factors

As the production is made in contractual basis neither the grower will

have uncertainties to sell the crops nor will the firm have problems for
regular supplies. In this respect, the contract farming equally promotes
both the producer and the buyer.
Contract Farming: Global Overview
 Japanese have 100 years history of contract farming in Taiwan
 Seed industry in Europe produced vegetable in the US on contract
basis before the Second World War
 The trend of contract farming increased worldwide and contract
farming in US accounts 49 % of the total value of US agricultural
production in 2010 as it was about 30 % in 1997 and Hobbs, 2002).
Similarly, its practice extended in Latin America since 1950, such as
bananas in Honduras, Barley in Peru, vegetable and corn in Mexico
 Further the contract farming in Asian region was in practice since 40s
 In India, contract farming was practiced since 60s, and currently
producing poultry, dairy products, rice, potatoes and other in
contractual basis
 The Chinese government has been supporting the contract farming
since 90s. China has got a tremendous success of covering 18 billion
ha. contract farms by 2001
Contract Act in Nepal: A Trace Back
 In Nepal, the basic concept of contract farming was included in fifth
Five-Year plan
 The same concept was initiated after a series of workshops by MoAC
with the name of Public Private Partnership (PPP)
 The initiation of AEC and MoAC somehow worked after the several
workshops and seminars conducted by AEC/FNCCI and other agencies
and ultimately led to conclude the essence of contract farming in 1999
 The legal framework was also prepared and submitted to the ministry
in 2003/4 by AEC/FNCCI but till the date no result has been found
 The concept is included in National Agriculture Policy 2061
 Cooperative agreement between USAID and FNCCI helped to launch
contract farming model to some commodities but the policy is not
traders friendly
 The numbers of contracting firms and farms are not clear but at present
more than 10 organizations are working on contract farming
Contd…….
SSSC has been working in seed production since 1992 which alone
produced 2000 MT vegetable seeds and supplies in domestic and
international market yearly,
CEAPRED is facilitating agro-entrepreneurs and farmers through
cooperatives organizing marketing workshop
The maize seed multiplication program was initiated through
Community Based Seed Production (CBSP) approach in 2000 by
CIMMYT Hill Maize Research Project (HMRP)
 Under the direct supervision of Agriculture Development Multi-
Purpose Cooperative, 64 HHs have been working in contract farming
covering 270 Ropani in Takathali VDC Ward No 2, Lalitpur.
 At present, more than 1500 united firms are there in surrounding of
Kathmandu valley which are producing vegetables and cash crops
 Similarly, Chaudhary Group, Dabur Nepal, Surya Tobacco and other
sugar factories have been making contract with the farmers
 Land Holding Ratio
 China alone has 193 million small farms followed by 93 million small
farms from India
 The small farmers (holding less than 2 ha. farm size) belonging to
Indonesia are 17 million, Viet Nam 10 million and Bangladesh 17 million
 The majority of Asian smallholders, in average, owned less than 1.5 ha.
farm size
 The average holding of Sri Lanka 1.4 ha., Nepal is 0.8 ha., Bangladesh 0.5
ha.
 About 80 % of total farm size in India is operating less than 2 ha. 95.0 % in
China and 93.0 %in Nepal
Contract farming in this region is being an impressive model to incorporate
the small holders into ever growing big market opportunity for high value
commodities. Another impressive fact for the small holders to tie-up with
contract mechanism is the advance assurance of guaranteed price at the
harvest along with the provision of seed, fertilizers, technologies and access to
credits
Small Holder and Contract Farming
 Contract farming is a way of bringing different interest group in
common platform
 It is especially to the small holders, provides a stable and perpetual
opportunity to establish stronger and wider market net-work through
the means of using stakeholders involved in contracts
 The farmers with small plot can better manage the farm effectively that
help to them to make quality production
 Stable income through assured market, access to more affordable
credits and production input, good access to new technologies and
training opportunity are some of the options, the small farmers doing
contract farming get to use and become able to escape from poverty
 Simply the farming system gives better incentives to those doing
contract farming.
Models of Contract Farming
 Centralized model: - a firm contracts a large number of farmers
with strict quality requirement and set quantity targets
 Nucleus-estate model: - a firm enters the production node through
an estate or plantation but also contracts with independent producers
 Tripartite model: - it works in a joint venture (between a public
entity and private firm) and enters into a contract with farmers
 Informal model: - smaller firms or local traders enter into annual
agreements, often on a verbal basis with limited number of
farmers which requires minimal process
 Intermediary model: - firm sub-contracts interaction with the
farmers to an intermediary, such as a farming committee or a trader
 Population, Sampling and Size
 The study was basically concentrated in all the wards of Topgachhi VDC of
Jhapa district and Ward no 2 of Tikathali VDC of Lalitpur district. The
sampling method was done randomly as the sampling procedures were
followed as the following.
 Based on the population assumed of each of the VDCs above, the
proportion of sample size was determined. Total sample size thus was
determined at 101 households as the following.

Sample Area Sample Size (HHs) HHs Percent (%) No. of HHs
S1 60 1.25 4833
S2 41 1.7 2413
Total HHs 101 1.4 7246
Sources of Data Collection
Primary Data
 Household Survey
 FGD
 Key Informant Survey
 Interview
 Close Observation

• Secondary Data
(relevant books, research reports, journals and articles, academic
research and dissertations, Internet sources
 Results and Discussions
 The aim of the policy was not met because of top to bottom approach
 The policy had to be discussed with the concerned stakeholders but only 32
% respondents had heard about APP-1995
 Failure of the government policy and programs was the formation of
irrelevance designing of such programs as the programs lack in depth study
and research while preparing the development policy
 The study showed that 11.6 ha. of land produced 552.7 mt. vegetable with
the market price of NRs. 15223 thousand
 41.71 ha. of land produced only 58.3 mt. of cereal crops with the market
value of NRs. 1166 thousand
 Cash crops found highly profitable in comparison to cereal crops
 Contd….
 Cereal crops occupied much land and produced less where as the area used
for vegetable production was much less compared to cereal crops
production
 However the return rate of vegetable production found much better to that
of cereal crops
 Livestock farming found to be more profitable compare to cereal
production as livestock on the one gives satisfactory return from milk or
meat and supplies organic manure for vegetable production
 Livestock and vegetable farming required less manpower as much is
required for cereal crops
 The demand of animal products and vegetables in the present market is ever
increasing
 Farmer/ agro-producers have higher income from livestock and vegetable
production rather than food crops.
 Majority of the farmers do not know how to calculate BCR
Contd…
 Lack of irrigation facility instantly discouraged the farmers to adopt
commercial farming
 The producer of Lalitpur seemed motivated from the principle of "more
risk more gain" where as the farmers of Jhapa not yet rise up to identify
scope and assess market demand
 The farmers have perceived the initiation of the government in
different ways as the farmer still not well understand what the pocket
area really is
 More than 80 % respondents said that contract farming increases
income from the sale of cash crops, utilization of own resources to
maximize the profit, improves in farming system through technology
 More than 72 % respondents agreed that it could decrease food
insecurity
Contd….
 Farmers’ risk bearing capacity would be high which helps them to
implement new technology
 It would improve in livelihood and social standard
 In a similar way, firms reduce per unit input cost and maximize the
profit
 More than 85 % respondents were found very much positive that the
firms reduce labor cost, get agricultural credits, and establish the
branding of the products, develop new technology for farmers and
supply local to international level.
Recommendations
 Government policies are in probation. And therefore, the body of
policy makers and implementer from the side of the government should
come up with different modalities of CF so the growers, investors and
the consumers equally benefited
 To groom CF, policy initiation along with the assurance of market,
agro-inputs, technology, credit and other infrastructure are highly
essential. Management of such requirement is not possible without
visionary plans and programs
 Land fragmentation, land encroachment, increasing population
pressure on productive land and unnatural and unjust urbanization are
some the drawbacks. Nepalese's work force believes in short term
employment far better than exploiting land resource. The preference of
foreign labor job escalates the Nepali youths and socio- cultural as well
as anthropological difficulties
Thank You
Any questions

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