Transforming Agriculture in South Asia

The Role of Value Chains and Contract Farming

Ashok K. Mishra, Anjani Kumar, Pramod K. Joshi

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000336436
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Debates about public expenditure in the agricultural sector have reopened in many developing and emerging economies because of high budget deficits and changes in public opinion. As a result, agricultural policy in many of these countries is beginning to take a more market-oriented approach to agrarian problems, most notably through the introduction of contract farming. This book explores the policy issues around contract farming and its transformative potential and addresses the lack of empirical research on this topic by focusing on South Asia: principally India, Bangladesh and Nepal.

The book first addresses the effects of contract farming (vertical coordination) on productivity, food security indicators (yield, consumption expenditures, prices), employment and input usage. Then it draws lessons from the South Asian case studies on the impact of institutional changes, like contract farming, on income and food security of smallholder households. The core of the book includes case study chapters on several commodities that are produced under contract farming, including vegetables and fisheries in Bangladesh, low-value crops in Nepal and coffee in India. Other chapters also explore contracts, storage, input usage and technical efficiency in these cases.

This book serves as an essential guide to academics, researchers, students, legislative liaisons and think tank groups interested in agrarian issues, agricultural economics and agricultural policy in emerging economies and particularly in South Asia.

1 Introduction and overview

Ashok K. Mishra, Anjani Kumar and Pramod K. Joshi

The food system in South Asia has been undergoing a paradigm shift, and one of the most visible market phenomena in India is the emergence of an integrated food supply chain. This paradigm change is attributed to the region’s increasing income, growing urbanization, expanding female employment and gradual integration with the global economy. These developments, in addition to food security goals, have led the dietary transition from food grains to high-value commodities such as fruits, vegetables, livestock, marine foods and processed products. However, this dietary transition has put additional pressure on supply chain integration. In this context, contract farming (CF) has emerged as one of the most viable instruments to facilitate integration among different stakeholders along the agricultural value chain. In contract farming, agribusiness firms contract with external farmers to receive goods at a fixed price with the certainty of delivery of a specified quality and quantity at a specified time. Rather than owning farms themselves, the firms rely on these smallholders to produce and provide their goods.

Some 70% of South Asia’s population (70%) is rural and engaged in agriculture, and crop failure assistance and rural livelihood support programs are significant national expenses. For example, the Government of India’s National Agricultural Policy 2000 and National Policy for Farmers 2007 both emphasized and promoted contract farming as a way to accelerate technology transfer, to secure capital inflow and to ensure markets for agricultural products, especially horticultural crops. Contract farming is evolving quickly as a mechanism of alternative marketing in India. To further promote contract farming in the country, the Government of India enacted an ordinance called the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance. This legislation, enacted in June 2020, is a comprehensive, promotional and facilitative contract farming act that is expected to enable large-scale adoption of contract farming. According to Chand, Raju and Pandey (2007), contract farming’s benefits for smallholders go beyond access to credit, inputs and extension services. Contract farming can help improve the links between these smallholders and international markets by organizing the production of high-value food crops. Additionally, contract farming mutually benefits smallholders and agribusiness firms by significantly reducing imperfections in the spot market and reducing costs arising from uncertainty over quantity and prices. For more on contract farming in the broader context of supply chain management issues, see Bellemare (2018). Contract farming offers numerous opportunities for farmers, including access to stable markets and pricing, inputs, information and marketing services (Otsuka, Nakano and Kazushi, 2016; Mishra et al., 2018; Bellemare and Lim, 2018).

The rationale for vertical coordination in developing and emerging economies

Contract farming has been used for a long time in different forms, such as sharecropping contracts, which initially were regarded as a feudal form of agriculture because of the dominant nature of absent or underdeveloped markets (Eswaran and Kotwal, 1985). Today, farmers and buyers commonly use contract farming to make advance agreements on volume, specific requirements, delivery and price. Initially, contract farming was a common practice in developed countries, principally driven by concerns about food safety and quality (Otsuka, Nakano and Kazushi, 2016; Mishra et al., 2018; Bellemare and Bloem, 2018). Glover (1984) describes contract farming as institutional arrangements that have advantages of both plantations and smallholder production. Over the past five decades, Indian agriculture has undergone significant changes, including in its production capacity and institutional reforms (Asokan and Singh, 2003). However, the rural and agricultural landscape still is dominated by smallholders with less than two hectares of land. Contract farming is viewed as a way to overcome the credit, input and extension constraints that these smallholders face. The role and impact of contract farming in developing countries have been fertile ground for controversy and debate (see Masakure and Henson, 2005; Winters, Simmons and Patrick 2005; Oya, 2012; Prowse, 2012; Otsuka, Nakano and Kazushi, 2016; Mishra et al., 2018; Bellemare and Bloem, 2018).

A growing body of the recent empirical literature, based on case studies from around the world, documents contract farming’s positive effects on welfare. However, a second strand of research on contract farming in developing countries highlights the dangers that it can pose for smallholder households (see Simmons, 2017; Singh, 2002; Little and Watts, 1994). These studies argue that contractors gain more from contracts than the farmers with whom they contract; the farmers, by contrast, end up with debt, skewed income distribution, food insecurity and family tensions. Looking specifically at developing economies, earlier work by Minot (1986) found that contract farming improved participants’ incomes but noted that contract farming schemes had very high failure rates.¹ However, it should be pointed out that Little and Watts (1994) found that participants in contract farming increased their incomes between 30% and 60% compared to non-participants. In another study in Africa, Porter and Phillips-Howard (1997) concluded that although there were social problems related to contract farming, farmers who participated in it generally were better off than those who did not. The strand of literature that focuses on positive outcomes of smallholders’ participation in contract farming (Govereh and Jayne, 2003) has investigated farmers’ decisions to contract (Zhu and Wang, 2007) and has studied contract farming’s impact on the welfare of more impoverished farmers (Simmons, Winters and Patrick, 2005). Most of these studies show that contract farming can improve the marketing of crops, enhance poor farmers’ access to technology and lower the costs of other inputs and extension services.

With looming budget deficits, losses in agricultural productivity and increased food security goals, the governments in South Asia’s developing countries have encouraged private-sector investments through contract farming.² Contract farming can help accelerate technology transfer, secure capital inflow and ensure markets for crop production, especially for high-value horticultural crops like baby corn. Contract farming also may reduce cultivation costs, as it can provide access to better inputs and more efficient production methods. Contract farming benefits smallholders by lowering production and marketing risks (Allen and Lueck, 1995) through the provision of inputs, access to credit and technical assistance. Through contract farming, contractors or corporations can overcome land size constraints and achieve reliability and consistency in production (Eaton and Shepherd, 2001). Contract farming is common in developed countries, principally driven by concerns about food safety and quality. The role and impact of contract farming in developing countries have prompted extensive debate (see Simmons, Winters and Patrick, 2005). Recent studies by Mishra et al. (2018) and Bellemare and Bloem (2018) provide an extensive literature review and examples of contract farming in general and contract farming in developing countries in particular. But Bellemare and Bloem (2018) concluded that there is still no substantial evidence for confirming whether contract farming improves farmers’ welfare. This issue is paramount in South Asia, where smallholders dominate the rural landscape and produce several commodities, including high-value products. Specifically, the literature lacks a common source of information assessing contract farming’s impacts on food security indicators (yield, income and prices), employment, resource use, productivity and the welfare of smallholder farm families as it relates to developing and emerging economies.

A structured discussion around contract farming

This book is a rich source of analytical information on various aspects of agricultural transformation and the role of contract farming in South Asia. It covers a wide range of issues and provides policy options for the government and other stakeholders to address the emerging challenges and to harness the benefits of new opportunities. The importance of vertical coordination and its impact on rural smallholders in South Asia is not underestimated, but a more concise book was thought to be more attractive to the readership. We hope this book will be useful to policymakers, academia, development partners, civil society and those interested in economic and agricultural development in South Asia.

This book is divided into three parts. The first part discusses the role of agriculture in South Asia, the agricultural sector in various South Asian countries and the transformation of agriculture via vertical coordination in these countries. These chapters present cases on how and why contract farming plays a vital role in modern food retail chains. The second part presents results from case studies on contract farming at the farm level in various commodities in Nepal, India and Bangladesh. The third part draws out and distills contract farming’s impact on commodity storage, input usage and technical productivity.

Understanding the agricultural sector, transformation, value chains and contract farming

The first part of this book presents an expansive view of the agricultural sector in Nepal, Bangladesh and India. It illustrates the transformation taking place in the farming sector, the role of vertical coordination, the development of value chains and the financing of the value chains.

Chapter 2 reviews the recent trends in and prospects for South Asia’s agricultural sector. In particular, the chapter sheds light on the critical patterns of agricultural production growth, modernization, diversification and trade over the past few decades. In doing so, the chapter also highlights the relatively unique aspects of South Asia, compared to other regions in Asia, including Eastern and Southeastern Asia. The chapter also reviews the critical studies offering projections on demand, production, trade growth and the impacts of climate change for South Asian agriculture. The chapter concludes that South Asia’s agricultural sector has evolved steadily over several decades. The industry has experienced unique diversification in terms of its set of commodity groups. Domestic markets remain dominant, but trade within South Asia and outside South Asian regions has expanded. The potential can be substantial in terms of geography and commodity and in the scope for agricultural business produced by contract farming in South Asia. The economic stakes remain high for further agricultural modernization in South Asia, including contract farming, and the productivity growth to realize such potential can be significant if continuous investments are made to sustain past productivity growth.

Chapter 3 highlights the value chain patterns of three major crops—wheat, maize and rice—in Bangladesh. The wheat value chain is highly segmented between the smallholder and ‘chakki’ mill owners’ value chain and the large wheat- and flour-importing companies’ value chain. To ensure benefits to smallholder farmers, smallholders must generate a market surplus to connect to the growing wheat value chain. For this, enhancing wheat yield is imperative. In comparison, maize farmers are strongly linked to maize value chains, but there is still scope to provide more significant benefits to those farmers. In Bangladesh, smallholder rice farmers produce rice mostly for self-consumption. However, they apply modern inputs, such as fertilizer and pesticides, extensively. Thus, although they are strongly linked with the backward-linkage value chain, they mostly are disconnected from the forward-linkage progressive value chains. This chapter highlights pathways for the development of Bangladesh’s agricultural sector, which can generate valuable lessons for other emerging nations in sub-Saharan Africa and South Asia.

Chapter 4 deals with the structural transformation and sources of growth in South Asian agriculture. The primary focus of this chapter is to understand paths to agricultural transformation in the countries in South Asia in a broader context of economy-wide changes in domestic and international markets. The chapter tracks trajectories of agricultural growth and factors underlying the trajectories and decomposes agricultural growth due to technological change, area expansion, diversification and price increases. The chapter also identifies crops or crop groups that potentially can influence the pace of agricultural transformation.

Chapter 5 assesses agricultural performance in Nepal, emphasizing the importance of agriculture in the country’s economy, and presents the challenges and problems of the farming sector. The chapter also illustrates the scope and significance of high-value crops and examines the status and importance of value chain linkages and contract farming, both of which are required for the promotion of high-value crops and agricultural commercialization in Nepal. The agricultural policies that aim to promote agricultural commercialization in the country and the program activities of development agencies on value chain development and agribusiness promotion also are discussed in this chapter with an illustration of some case studies. The chapter concludes with policy implications for promoting contract farming, value chain development and commercial agriculture in Nepal.

Chapter 6 explores the prospects of the value chain approach in improving the interface between financial institutions and product markets. The chapter discusses opportunities for value chain development in South Asia and provides the conceptual framework of value chain finance. The chapter also provides a brief review of a few successful value chain models, focusing on their financing mechanisms, their efficiency and inclusiveness and their economic impacts. Lessons drawn from these models are presented and discussed in this chapter.

Chapter 7 attempts to quantify the impact of opportunistic behavior and asymmetric information on chili farmers in India. The authors measure the magnitude of transaction costs and their components (such as bargaining costs, information costs and enforcement costs) in production and marketing contracts, compared to transaction costs incurred by independent farmers in traditional marketing channels (TMCs). The study also measures the impact of transaction costs on profits earned by marginal and small farmers. The findings from this chapter can help in implementing policies aimed at reducing transaction costs, given that they may constitute a significant proportion of expenses of small and marginal growers.

Case studies in contract farming

With a better understanding of the role of contract farming, the second section of this book adds to the discussion of vertical coordination by examining a set of commodity- and country-specific case studies. The viewpoints gained from these case studies of vertical coordination in commodities and countries are critical to understanding contract farming, its success and its failure in raising the welfare of smallholders in developing and emerging economies. Because products, farmers and markets have unique attributes that influence the adoption of c...

Table of contents

• Cover
• Half Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Foreword
• Acknowledgements
• 1 Introduction and overview
• Part I Understanding the agricultural sector, transformation, value chains and contract farming
• Part II Case studies in contract farming
• Part III Contract farming, storage and technical efficiency
• Index