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SPECIAL ARTI CLE
oc to ber 15, 20 11 vol xlvi no 4 2 EPW E conomic & Politica l Weekly
60
Braja Bandhu Swain (brajacds@gmail.com, braja@cds.ac.in) is with the
Centre for Development Studies, Thiruvananthapuram.
Contract Farming in Andhra Pradesh:
A Case of Rice Seed and Gherkin Cultivation
Bra ja Bandhu Swain
This paper discusses the performance of contract
farming in Mahbubnagar and Karimnagar districts of
Andhra Pradesh. It compares contract farming in gherkin
and rice seed with non-contract farming. It shows the
difference in the characteristics of contract and
non-contract farm households. Delayed payment, lack
of credit, scarcity of water, and difficulty in meeting
quality requirements are found to be the major
constraints faced by contract farmers. Whenever there
is a decline in productivity, the concerned contracting
company has a tendency to shift production to other
farmers and also to other regions.
Since the past decade contract farming has emerged as an
alternative institutional innovation in Indian agriculture
to reduce the uncertainties faced by both the farmer and
the firm. The logic behind promoting contract farming is the
e xpected increase in agricultural productivity, employment and
i ncome for the farmer. Contract farming is an intermediate form
of industrial organisation, standing between the spot market
and vertical integration in the degree of authority relationships
bet ween the grower and user of the crop (Grosh 1994). In spot
markets, growers and processors meet at a time and agree on
price and delivery immediately. At the other extreme is vertical
integ ration, where the growers and the users of the crop are
within the same firm. Hence, crop production is fully coordi-
nated with processing and marketing. Contract farming is a
situation where growers and users of the crop are different. It
is a way of organising agricultural production whereby farmers
are obliged to supply their produce to agro-enterprises in
accordance with conditions specified in written or oral agree-
ment. In the strict sense, it refers to “an alternative market,
which establishes an agreement (formal or informal) between
grower(s) and firm(s) (exporters, processors, retail outlets, or
shippers, for example) to produce and to supply an agricultural
commodity under forward contract”.1 The contract basically
includes four things – pre-agreed price, quality, quantity or
acreage (maximum and minimum) and time (Singh 2002; Eaton
and Shepherd 2001).
A review of literature in the context of the outcome of contract
farming in many developing countries reveals a mixed perform-
ance with some successes and some failures (Little and Watts
1994; Opondo 2000; Morvaridi 1995; Baumann 2000; Key and
Rusten 1999; Glover and Kusterer 1990; Goldsmith 1985; Glover
1984; Simmons et al 2005; Porter and Howard 1997). Proponents
of contract farming analyse it by looking at the income and
employment it generates (Glover and Kusterer 1990; Key and
Rusten 1999; Goldsmith 1985; Glover 1984) and they observe
that contracting helps the farmer to improve her/his situation
by providing reliable incomes and generating employment for
the rural poor. On the other hand, opponents analyse it by look-
ing at the environment, the welfare of farmers and the power
structure i nvolved (Opondo 2000; Morvaridi 1995; Little and
Watts 1994). They argue that though a contracting firm takes
the decision on production and land management, it does not
look after the long-term impact on land and environment.2
Figure 1 (p 61) demonstrates the positive and negative outcomes
of contract farming.
SPECIAL ARTI CLE
Economic & Polit ical We ekly EPW oc tob er 15 , 201 1 vol x lvi no 4 2 61
Figure 1: The Impac t of Contract Farming on Local Economy
Contract Farmin g
More employme nt Environment Food Income
generatio n degradati on insecuri ty inequalit y
Crop under contrac t Excess water Contract far mers Contract fa rmers
farming is labour- exploit ation and abuse of ignores food cro ps have higher income
intensive crop fertilis ers and pesticide than the other non-
monocult ure contract fa rmers
Table 1: Design of Contract in Gherkin and Rice Seed Contracting
Particula rs Gherkin Crop Hybrid Rice Seed
Nature of contract Formal (written) Formal (confusing)
Kind of contract Direct Indirect (throug h intermediary)
Language Not local language Not local language
Categories of farm er Small, medium and large Small, medium and large
Nature of price Pre-fixe d price Pre-fixe d price but it could
change upon the market price
Mode of payment Payment after end 2/3rd paym ent after harvest
of the season +1/3rd after ‘OK’ report
Market intricac y Free from both inpu t Input suppl y (seed and some
and output markets amount of pesticide and
buyback outpu t)
Compensation for Nil Rs 18,000 -20,000 per acre if
crop damage crop damage is because of
natural calamitie s
Arbitratio n mechanism No Yes
Credit faciliti es No Yes (sometime s credit
facilitate d by servi ce provider)
Productio n decision Dictates of firm prev ail Both farmer and fir m
Source: Based on our sur vey (2008).
A set of Indian studies like Dev and Rao (2005), Nagraj et al
(2008), Kumar J and P K Kumar (2008), Kumar (2006) and
Dileep et al (2002) reveal that contract production gives much
higher (almost three times) gross returns compared to the tradi-
tional crops like wheat and paddy because of higher yield and
assured price. Though the crop under contract farming is labour-
intensive and perishable in nature, it generates more employ-
ment in the economy. The classic examples are gherkin cultiva-
tion in I ndia (Dev and Rao 2005; Nagraj et al 2008; Kumar et al
2008) and tomato cultivation in Punjab (Singh 2002; Dileep et al
2002). The trend of higher income under contract farming may
not last long as the firm has monopsony power as reflected in
tomato and potato cultivation in India. In this instance producers
end up making losses, while processors make substantial profits
from the same crop (Singh 2002).
This paper examines the benefits and problems of contract
farming in gherkin and rice seed cultivation in Andhra Pradesh.
There are many reasons for taking up a study of contract farming
in Andhra Pradesh including the state government’s efforts to
promote contract farming in the wake of the agrarian crisis,
spread of contract farming across different crops and regions,
and absence of a compressive study of it in Andhra Pradesh.
Thus, this study will provide insights on the performance of con-
tract farming in Andhra Pradesh.
The paper is divided into seven sections. Section 1 explains
the sampling method used for the selection of farm households.
The nature of contract environment between firm and farmer is
elaborated in Section 2. Section 3 explores the characteristics of
c ontract and non-contract farm households. Section 4 examines
the income and employment generation in contract farming.
The environmental implication of contract f arming is discussed
in Section 5. Section 6 deals with the performance of contract
agreement between farmer and firm. Section 7 concludes.
1 Selection of Sample Households
A survey was conducted among rice seed, non-rice seed, and gher-
kin and non-gherkin farm households in Mahbubnagar and Kar-
imnagar districts of Andhra Pradesh during 2008. The survey
comprised 295 farm households of which 159 were contract farm
households and 136 were non-contract farm households. Among
the 159 contract farm households 86 were rice seed and 73 were
gherkin contract farm households. For gherkin, the households
with Global Green were selected whereas for rice seed, house-
holds with Pioneer Seeds (HR-3), UPL and Pro-Gro were selected.
Gherkin and rice seed are chosen
for the study because the contract-
ing schemes for these crops have
been in practice since last one dec-
ade and also have export potential.
Only 15 to 20 farm households
e ngaged in contract farming in a
village, hence we selected eight vil-
lages in two districts. A two-stage
sampling method was adopted. In
the first stage, eight villages (se-
lected four villages for each crop)
of two districts were s elected purposefully based on the area,
where contract farming was in o peration. The second stage in-
volved a stratified random sampling method. After selection of
villages, the survey identified contract and non-contract farm
households. Non-contract farm households were selected in the
peripheral areas with similar cropping pattern as that of contract
farms. Different size classes were given proportionate represen-
tation, while selecting the sample for non-contract farms. From
each village 15 to 20 contract and non-contract farms were
surveyed. Data were collected through a well-structured ques-
tionnaire designed for collecting information on socio- economic
characteristics of farm households and production strategies (use
pattern of chemicals and water).
2 Nature of Contract Agreement
An enquiry into the implementation of the contract has
revealed-wide deviation from the original contract and the one
actually implemented. This can be seen in the provision of
technical ser vices, inputs and credit allocation. Simmons et al
(2005), Singh (2002) and Eaton and Shepherd (2001) noted
that contract design varies across production regimes – each
production regime follows a particular form of arrangement.
It is obser ved from our analysis that the implementation of
contract varied across two crops, namely, gherkin and rice
seed (Table 1).
SPECIAL ARTI CLE
oc to ber 15, 20 11 vol xlvi no 4 2 EPW Econom ic & Political W eekly
62
Table 2: Price of Gherkin across Grades
Grade Name Size of Fruits No of Fruits per kg Price per kg Average
(mm) (Rs) Price (Rs)
3rd grade (every day 18.5 80 -160 6.50 3.50
procurement) 26 30-80 3.50
39 10-20 0.50
2nd grade (every day 26 30-80 4.50 2.50
procurement) 29 20-30 2.50
39 10-20 0.50
Single grade (every day <39 10-20 3.00 2.0 0
procurement) 39-45 5-15 0.50
Stacker grade (every day 33-45 5-15 3.00 2.00
procurement) < 30 15-30 0.50
New grade (alternative day 26 30-80 4.50 2.50
procurement) 33 15-30 1.50
48 5-10 1.50
Source: Company.
2.1 Gherkin
Gherkin is an exotic crop, which is known as pickle cucumber.
Though India is a traditional producer of cucumber, the export
potential of this crop was realised in the late 1980s (Kumar et al
2008). This particular type of cucumber production in India is
concentrated in southern states of Karnataka, Tamil Nadu and
Andhra Pradesh. Among these states Karnataka accounts for
60% and both Tamil Nadu and Andhra Pradesh contribute 20%
each of total production (Anonymous 2005). Around four proces-
sors are currently involved in gherkin cultivation in Andhra
Pradesh. Among them, the Global Green Company is the promi-
nent one. It is operating3 in Medak, Gadwal and Jadcharla in
Mahbubnagar and Vikarabad in Ranga Reddy district. The com-
pany has followed a centralised model.4 The contract agreement
between farmer and the Global Green Company is written and
formal. Terms of contract include the supply of inputs like seeds,
fertiliser, plant protection chemicals and new techniques of pro-
duction5 by the company to farmer. Further, the farmer supplies
the harvest to the company at a pre-agreed price. To maintain the
contract agreement, farmers are provided with “passbooks”,
which record the amount of crop purchased by the company and
the amount of fertiliser and plant protection chemicals sold
to the farmer. Farmers are also provided with high-yielding and
disease-resistant plant materials, which are procured from top
international companies.6 The costs of these inputs are d educted
from post-harvest payment for the crop.
Farmers are paid on the basis of grades and weights of crop
r ecorded at the first procurement centre. Payment is made 20 to 30
days after procurement through the bank to the respective farm-
er’s account. The company sets the price on the basis of cost of
cultivation. As per the company record, the price offered is about
50% to 60% more than the cost of cultivation. The price of gherkin
is linked to its grade. Generally, there are five grades – third, second,
single, stacker and new.7 The pricing of different grades is demon-
strated in Table 2. Average third grade crop fetches the highest
price (Rs 3.50 per kg) and stacker grade and single grade fetch the
lowest price (Rs 2 per kg). Third grade with crop size 18.5 mm
fetches the highest price – Rs 6.5 per kg.
2.2 Rice Seed
The production of the usual rice seed is fairly straightforward
and requires no special equipment beyond a seed cleaner. Since
certified seed production requires cross-fertilisation between
male and female plants, crop management is more complicated
than the usual rice production. Rice seed production requires
separation from standard seed plants to avoid cross- pollination.
Further, since rice seed is not treated with chemicals, unsold seed
can be taken back to the grain market.
The processors follow a subcontracting approach8 to deal
with the contract agreement. In the subcontracting agreement,
the ser vice provider or the organiser plays an important role to
facilitate the contract. The service provider identifies the farmers
and s ecures their commitment to the respective processor for
production of seed during the season. To avoid cross-pollina-
tion, the service provider makes contracts with geographically-
based communities and requires cultivation of only rice seed.
After the selection of farmers, the organiser informs the proces-
sor about the extent of area and the number of farmers willing
to take over the crop.
The contractual environments between the farmer and the
firm are relatively simple. Farmers are provided with free foun-
dation seed and extension advice and must deliver all f emale rice
to the respective firms. Quality is an important issue in seed pro-
duction and although different varieties are grown, only one
quality standard is used for procurement. All the male rice pro-
duced is retained for the farmers’ own use or sold in the open
market. All the female corn seeds are delivered to test the quality.
The organiser arranges a number of technical staff for conduct-
ing p eriodic field inspections at various stages of the growth of
seed. It is the duty of the organiser to ensure field inspections by
seed certification staff. The performance of these technical staff
is assessed on the basis of the success of the contract. Farms are
usually visited four times by the technical staff and they are paid
by the processor to undertake the advisory and monitoring role.
The technical staff visits farms during land preparation, 30 days
after sowing, then between 40 and 60 days during the pre-flow-
ering stage and then a week prior to the harvest. The service pro-
vider arranges for the completion of all formalities to get the seed
c ertified from the concerned processor.
The farmer bears the cost of cultivation, quality monitoring
cost, grading and packaging, excluding the cost of parent/foun-
dation seed and some pesticide, which is provided by the proces-
sor. In addition, the farmer also bears the risks arising out of low
germination, low yield, poor quality and seed rejections. It is
reported that companies insure against weather uncertainty. If
the minimum output (six quintal per acre) could not be achieved
due to bad weather, the firm provides cash compensation. Com-
pensation varies from processor to processor ranging between
Rs 18,000 and Rs 20,000 per acre. The price paid to the con-
tracted farmers is around four times more than the prevailing
spot price for consumption rice. Payments are made through
commercial banks and in some cases directly. They are paid the
pre-agreed price only after testing the quality of seed and for
only that quantity which passes those tests. Fifty per cent of the
total value of seeds is paid immediately after procurement, and
the rest is paid after the certification of the seed. Normally, it
takes around 60 to 90 days to receive the total payment.
SPECIAL ARTI CLE
Economic & Polit ical We ekly EPW oc tob er 15 , 201 1 vol x lvi no 4 2 63
Table 4: Average Annual Gross Farm and Non-Farm Income of Contract
and Non-contract Farmers
Particula rs Contract Non-co ntract Chan ge over
Farmers Farmers Non-contra ct Farmers
Rice seed: On-farm gross income
Per year* 1,89,708 (86.95) 91,689.57 (81.38) 98018.43 (106.90)
Per acre* 23,950.23 20,052 3,898 (19.44)
Non-farm gross income 28,4 65 (13.05) 20,974 (18.62) 7,491 (35.72)
Total* 2,18,173.21 (100) 1,12,663.5 (100) 1,05,509 (93.65)
Gherkin: On-fa rm gross income
Per year* 1,24,407 (87.52) 59,106 (68.39) 65,301 (110.48)
Per acre* 16,308 11,851 4,457 (37.61)
Non-farm gross income** 17,737 (12.48) 27,313 (31.61) - 9,576 (-35.06)
Total** 1,42,144.4 (100) 86,419.85 (100) 55,724.55 (64.78)
*, **, indicat es significance at 1% and 5% level.
Figures withi n the parentheses indicate the per centage to total farm househol d’s income and
italic figur es within the parenthese s indicate the percentage chang e over non-contract far ms.
3 Comparison between Contract
and Non-Contract Farmers
Though growing contract crops need a higher
investment, generally wealthier and progressive
farmers participate in contract faming. Little
(1994) argued that contract farming typically
i nvolves wealthier farmers, who already have
significant amounts of capital and non-farm
investment. In addition, most studies o bser-
ved that contract farmers are from better
s egments of the rural population. Table 3
presents the differences in characteristics be-
tween contract and non-contract farm house-
holds. The a verage family size of contract
farm households is higher than the non-con-
tract ones in rice-growing region, however,
no such differences are seen in the gherkin-
growing region. Though some difference is
observed in the education of the farmer, no
difference is observed in the age between
contract and non-contract farmers in rice
seed growing region.
The average landholding size of contract
farm households is around 7.42 acres, whereas
it is only 4.93 acres for non-contract farm
households in the gherkin-growing region. In
the rice seed growing regions, average land-
holding size of contract farm households is
5.54 acres and 4.13 acres for non-contract
ones. Further, there is a large difference in
case of irrigated land between contract and
non-contract farm households. These results support the find-
ings of Singh (2002) and Kumar (2006), that the average land-
holding size of contract farmers is higher than the non-contract
ones. If one looks at the level of investment, there is a big difference
between contract and non-contract farm households. Though,
there is no difference between contract and non-contract farms
in accessing credit (formal/informal), there is a difference in
a ccessing the formal credit. The result on technology adoption
suggests that some difference is in the source of technology
adopted by contract and non-contract farmers in the rice seed-
growing region, but no difference is seen in the gherkin-grow-
ing region. On the whole, contract farmers are better off in
terms of education, production strategy and access to the mar-
ket compared to non-contract ones.
4 Income, Employment and Contract Farming
4.1 Income
The farmer’s satisfaction with contracts may be measured by the
level of income earned from a contract crop and its distribution.
Farm gross income (barring income from livestock) and off-farm
income of contract and non-contract farmers are presented in
Table 4. It is evident that the mean difference between per acre
gross income and annual gross income of contract and non-con-
tract farmers is significant at 1% level.
The average on-farm gross income is higher among contract
farmers than the non-contract ones by about 106% in the rice
seed-growing region and it is higher by 110% in the gherkin-
growing region. Further, per acre gross income is higher for con-
tract farmers than for the non-contract ones. Non-farm income is
higher among non-contract farmers compared to contract farm-
ers in the gherkin-growing region, however, the opposite is in the
rice seed-growing region. The total income from all sources is
higher for contract farmers than non-contract ones by 93.65%
in the rice seed-growing region and by 64.78% in the gherkin-
growing region.
Table 3: Diff erences in Characteristics between Contrac t and Non-contrac t Farm Househol ds
Farm and Farmer’s Characteris tics Mean of Responses Separate Variance
Estim ated
Total CF No n-CF t- value P-va lue
Sample farm househo lds in gherkin growing region
No of farm households 140 73 67
Age of farmer** 46.03 44.16 48. 06 -1.98 0.02
Year of schooling of farmer*** 3.19 2.64 2.69 1.32 0.09
Family size 5.02 5.0 8 4.95 0.57 0.28
Family size (14-65 years) 3.99 4.07 3.9 0 0.69 0.25
Non-far m income** 22,320 17,737 27,313 -2.11 0.02
Land* (areas in acres) 6.23 7.42 4.93 3.94 0.00
Irrigated land* (area in acres) 1.65 2.49 0.75 6.53 0.00
Livestoc k use for farming pur pose* (number) 1.63 1.93 1.29 3.31 0.00
Total investment for agricultur e* (Rs) 42,367 65,524 17,136 9.77 0.0 0
Access to credit market (yes = 1, no = 0) 0.97 0.98 0.95 1.07 0.14
Access to formal credit* (yes = 1, no = 0) 0.61 0.79 0.42 4.88 0.0 0
Technology adoptio n (own only = 1, other = 0) 0.58 0.57 0.58 -0.0 8 0.46
Sample farm househo lds in rice seed growin g region
No of households 155 86 69
Age of farmer 43.72 43.55 43.94 0.21 0.41
Year of schooling of farmer** 5.39 5.99 4.65 1.64 0.05
Total member in household 4.17 4.19 4.14 0.21 0.41
Total members in household** (14-65 years) 3.23 3.36 3.03 1.60 0.05
Non-far m income 25,130 28,4 65 20,974 0.84 0. 20
Agricultur al land** (area in acres) 4.91 5.54 4.13 4.0 6 0.00
Irrigated land owne d** (area in acres) 4.04 5.11 2.71 7.22 0 .00
Livestoc k use for farming pur pose** (number) 1.43 1.62 1.20 2.76 0.01
Total value of agricultural instrum ents** (Rs) 1,27,142 1,52,912 52,02 3 2.99 0 .00
Access to credit market (yes = 1, no = 0) 0.80 0.79 0.81 - 0.81 0.37
Access to formal credit (yes = 1, no = 0) 0.79 0.79 0.80 -0.01 0.46
Technology adoptio n** (own = 1, other = 0) 0.89 0.84 0.96 -2.53 0.01
CF = Contract Farmer, Non-CF = Non- Contract Farmer.
***, **, * Statis tically signifi cant difference in means at the 10%, 5% and 1% level.
Source: Field Surv ey.
SPECIAL ARTI CLE
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Table 5: Per Acre Gross Income from Different Crops between Contrac t
and Non-contract Farmer
Crop Contr act Farmers N on-contract Change over
Far mers No n-Contract Farmer s
Rice seed contract
Rice seed 36,399
Rice** 13,389 14,210 -821 (-5.78)
Maize** 20,213.3 21,592 -1,378.7 (-6.39)
Cotton*** 25,740 24,231.5 1,508. 5 (6.23)
Gherkin contrac t
Gherkin 30, 829.52
Rice 11,316.53 9,711.4 1,605 (16.53)
Maize* 9,034 10,756 -1,722 (-16.01)
Cotton*** 18,543 14,604 3,939 (26.97)
*, **, *** indic ate significance at 1%, 5%, 10% level.
Figures within the par entheses indicate the per centages change over non- contract farmer s.
The income from other crop s was not considered for analysis.
The crops grown under contract farming are not being grown
generally by non-contract farmers. So it is worthwhile to com-
pare per acre gross income from non-contract crop commonly
grown by both contract and non-contract farmers. The per acre
gross incomes from various crops under contract and non-
contract farmers are reported in Table 5. It reveals that, the gross
value of the rice seed is higher (Rs 36,399) compared to that of
the gherkin (Rs 30,829).
In the rice seed-growing region, cotton has contributed the
maximum income (Rs 25,740) followed by maize and rice among
non-contract crops. Interestingly, non-contract farmers are earning
more income per acre from non-contract crops except cotton. The
mean differences of income from rice, maize and cotton between
the contract and non-contract farmers are statistically significant at
1%, 5% and 10% level. In the gherkin-growing region, cotton con-
tributed the maximum income followed by rice and maize. Non-
contract farmers are able to earn more income only from maize.
The results indicate that in the case of some non-contract crops,
non-contract farmers are better off than contract farmers.
4.2 Employment
Table 6 presents the labour demanded per acre for contract and
non-contract crops. The results indicate that more labour is em-
ployed in contract crop cultivation relative to non-contract crops.
It is argued that generally firms promote the cultivation of high
value crops (fruits and vegetables), which require more labour to
standardise the production that cannot be met by mechanical
methods. The results show that the labour concentration is higher
in contract crops compared to non-contract ones – 95.37 mandays
per acre for rice seed, 171.55 mandays for gherkin against 28.45
mandays for rice and 25.85 mandays for maize. Further, it could
be noticed that more labour is acquired to grow gherkin com-
pared to rice seed. In this regard, Dev and Rao (2005) recorded
that 100% of farmers have reported that gherkin has potential for
higher employment. Gherkin is a labour-intensive and short dura-
tion crop, so it demands higher labour resulting in a rise in wage
rate. Most farmers reported that during the gherkin-growing
period, the wage rate increases by 40% to 50%.
It is observed that the rice seed demands more hired labour
than the non-contract crops but this is not so in the case of gherkin.
Large farmers hired more labour followed by medium and small
farmers in the case of rice seed. Thus, it could be argued that
small f armers are better equipped for growing contract crop as
they have higher levels of own family labour, which they can
e asily monitor during the production process (Eaton and Shep-
herd 2001). There is no such difference in the demand for hired
labour across farmer groups in the case of gherkin. Rice seed cul-
tivation was also found to use more women labour (86.56%) com-
pared to gherkin (47%). This is so because rice seed cultivation
involves planting and weeding which are done by women.
5 Environmental Implications of Contract Farming
Contract farming affects the environment in different ways like
over-exploitation of groundwater, excess use of fertiliser and pesti-
cides leading to health hazard and monocropping leading to de-
cline of soil quality (Opondo 2000). In the following sub-section
we have analysed hypothetical argument on the impact of contract
farming on groundwater and land quality in the study region.
5.1 Water Use Pattern
Water is the major input for agriculture. However, misuse and
excess use of water raise the question of sustainability. The key
water source in the study regions are rainfall and groundwater.
Although, a few small dams exist in the region, they are insuffi-
cient to meet domestic, agricultural and industrial demands.
Groundwater reserves, therefore, becomes the main water source
for farmers. Reddy and Kumari (2008) observe that indiscrimi-
nate tapping of groundwater has led to decline in the water level
by 2.97 m within four years in this region.
It is observed that in both the study regions farmers growing
contract crop are more dependent on groundwater for irrigation.
Further, the Global Green Company (which deals with gherkin)
allows farmers to grow the crop only if the farmer has access to
bore irrigation facilities. The irrigation intensity for contract crop
like gherkin and rice seed is higher than that of non-contract crop
like maize and rice. It is observed that gherkin needs 9 to 10
times of irrigation within two months, whereas maize needs only
three to four times of irrigation. Thus, excess use of groundwater
for the contract crop has depleted the water level drastically
Table 6: Per Acre Own and Hired Labour Employed in Contract
and Non-contract Crop across Farm Size
Sm all Medium Large Total
Gherkin contrac t farmer
Contract crop (gherk in)
Own labour 101.26 (59.42) 107.40 (57.26) 98.3 8 (57.47) 97.69 (56.95)
Hired labour 69.16 (40.58) 80.15 (42.74) 72.81 (42.53) 73.86 (43.05)
Total 170.42 (100) 187.55 (100.00) 171.19 (100.00) 171.55 (171.02)
Non-contr act crop (maize)
Own labour 25.23 (66.34) 22.12 (68.87) 13.87 (59.48) 20. 55 (65.99)
Hired labour 12.8 (33.66) 10 (31.13) 9.45 (40.52) 10.59 (34.01)
Total 38.02 (100.00) 32.12 (100.00) 23.32 (100.00) 31.14 (100.00)
Rice seed contract far mer
Contract crop (rice seed)
Own labour 17.64 (19.52) 12.03 (12.61) 10.67 (11.15) 12.25 (12.82)
Hired labour 72.72 (80.48) 83.39 (87.39) 85.04 (88.85) 83.3 (87.18)
Total 90.36 (100.00) 95.42 (100.00) 95.71 (100.00) 95.55 (100.00)
Non-contr act crop (rice)
Own labour 4.4 (17.07) 3.15 (11.64) 1.88 (6.70) 3.12 (11.56)
Hired labour 21.38 (82.93) 23.91 (88.36) 26.19 (93.30) 23.86 (88.44)
Total 25.78 (100.00) 27.06 (100.00) 28.07 (100.00) 26.98 (100.00)
Figures withi n the parentheses indicate the per centage.
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Economic & Polit ical We ekly EPW oc tob er 15 , 201 1 vol x lvi no 4 2 65
of fertilisers used by small farmers is higher (281 kg per acre)
compared to the large ones (259 kg per acre). In the case of rice seed,
large farmers use more fertilisers (233 kg per acre) compared to
smaller ones (227 kg per acre). It could be argued that smaller
farmers are more risk averse, and, since fertilisers increase risk,
these farmers would tend to use less of that input per acre.
6 Performance of Contract Agreement
It is common for the firm to supply inputs under contract farm-
ing. However, the intensity of supply depends upon the nature of
the contract. The fact is that once production begins, the firm
uses its monopoly power over the provision of specialised inputs
as markets are missing for these inputs. By rationing these
inputs, firms restrict the supply of inputs below the required
quantity and quality. Based on the information furnished by
sample farmers, the performance and problems in practising
contract farming are presented in Table 7 (p 66). Gherkin farm-
ers do not appreciate the company’s behaviour in supplying in-
puts. Both rice seed and gherkin farmers find generally that the
seed and pesticide supplied by the company are inadequate for
the area to be sown. About 21% of gherkin farmers report that
the fertiliser supplied is insufficient for the area to be sown. As
farmers are not able to sell and they lack information on the
price of inputs, the company can increase the price of inputs.
Around 17.3% of gherkin farmers reported that the company
supplies inputs at a higher rate than the market rate. For instance,
the company charges Rs 70 in excess of the market rate for
fertiliser and Rs 110 for pesticide.
Generally, processing firms promote high value crops and
new crops which are not grown in a particular local economy.
There is a chance of crop failure even if adequate technology is
supplied by the company. More than three-fourths of gherkin
and 6% of rice seed farmers are affected by crop failure (lower
yield, poor quality). The main reasons for gherkin crop failure
are diseases (pest attack), bad weather, lack of information and
poor quality seed respectively. About 17.81% of gherkin farmers
and only 3.43% of rice seed farmers are facing the problem of
poor quality of seed which leads to crop failure. Some gherkin
farmers noted that the company provides poor quality seeds. In
addition, 52%, 43% and 21% of gherkin farmers reported crop
diseases, bad weather and lack of knowledge, respectively as
reasons for crop failure. However, no compensation is made for
Figure 2: Per Acre Fertiliser Consumption (kg) across Crops
Fertilis er
DAP
Nitrogen
Potash
Ammonia and Phosphat e
Total
Gherkin Mai ze (CF) Maize (NCF ) Rice see d Rice (CF) Ri ce (NCF)
CF = Contract farmer, NCF = Non-co ntract farmer.
Source: Field Sur vey.
Crop
300
250
200
150
100
50
0
r aising the concern of sustainability. The apprehension is that
exploitation of groundwater will deteriorate its quality especially
aggravating the fluoride9 problem. The report of the State
Groundwater Department (SGWD) has pointed out that, fl uoride
concentration in groundwater is higher in this region. Over-ex-
ploitation of groundwater, thus, has caused a decline in soil fertil-
ity and an increase in health problems.
5.2 Use and Abuse of Agrochemicals
The use of agrochemicals (fertilisers, pesticides, herbicides and
fungicides) in India has increased rapidly since 2000. This is
seen in states like Punjab, Andhra Pradesh and Karnataka,
where rapid commercialisation of agriculture has taken place.
There are two types of consequences of the use of agrochemi-
cals. First, it increases agricultural productivity. Second, it ad-
versely a ffects human health and environment in a number of
ways.10 Indeed, there is substantial evidence that intensification
of f ertiliser and pesticide use has deteriorated land quality, and
i ncreased health risks.
Generally, firms promote high value crops that need more
chemicals. It is obser ved that to protect the crop (gherkin) from
insects, the firm recommended the use of pesticides which were
not environmentally-friendly. In addition, major food importing
countries11 specify the use of certain pesticides for crops, which
determine whether food imports can be accepted into their food
chains or not. It is thus argued that most of the new pesticides
used in the crop cultivation precede a range of pests rather than
specific t arget organism and destroy the natural in-built protec-
tion of the ecosystem.
Large differences in pesticide use are observed between con-
tract and non-contract crops. For growing gherkin, around seven
to eight times pesticide has to be sprayed in a season and four to
five times for rice seed. In addition, five types of pesticides,
namely, Chloropicrin, Confidor, Zinc, AP Loud and Antrocol are
used for rice seed. On the other hand, little/no pesticide is used
for growing non-contract crops. To protect gherkin (contract
crop) from i nsects, the company recommends using pesticide
one day before plucking the gherkin. Farmers do not protect their
hands while doing so. This has a negative impact on human
health. In this regard, G andhi and Patel (1997) have argued that
where the farmer is not aware of the negative effects of pesticide
use on the environment, it will have a higher negative impact on
the economy.
Figure 2 shows the level of fertiliser consumption across crops.
The results indicate that the consumption of fertiliser is higher for
contract crops than for non-contract crops. For instance, the ferti-
liser consumption for gherkin is 50% higher (266 kg per acre)
than the non-contract crop like maize (121 kg). The same trend is
observed also from the rice seed farmers. It is observed to be 243 kg
per acre for rice seed, whereas it is only 188 kg per acre for rice. If
one compares crops grown both by contract and non-contract
farmer, gherkin contract farmers are using more fertiliser com-
pared to non-contract farmers. The contrary trend is observed in
the case of rice seed farmers. For instance, fertiliser consumption is
higher (151 kg per acre) for maize grown by non-contract farmers
when it is compared to contract ones (121 kg per acre). The level
SPECIAL ARTI CLE
oc to ber 15, 20 11 vol xlvi no 4 2 EPW Econom ic & Political W eekly
66
Table 7: Constrai nt and Problems Faced by Contract Farmer’s
in Practising Contract Farming
Constraint s and Problems Gher kin Farmers Rice Seed
Farmers
Not procured output as per contrac t agreement 4 6 (63.01) 26 (30.23)
Because of quality dif ferentiation company did
not procure output 42 (57.53) 25 (29.07)
Diff iculty in meeting quality requireme nts 20 (27.40)
Less seed 1 (1.37) 2 (2.33)
Less fertiliser 15 (20.55)
Less pesticide 21 (28.77) 8 (9.30)
No proper transpor tation 2 (2.74) 4 (4.65)
Lack of quality inputs 38 (52.05)
Inputs at higher price 13 (17.81)
Poor extension ser vice 17 (23.29) 14 (16.28)
Crop failure 64 (87.67) 5 (5.81)
Crop failure because of disease s 38 (52.05)
Crop failure/ba d weather 31 (42.47)
Crop failure because of bad seed 13 (17.81) 3 (3.49)
Crop failure because of lack of informatio n
and own negligence 15 (20.55)
Because of higher produc tion firm increased quality 11 (15.07)
Rejected af ter procurement 23 (26.74)
Low price 19 (26.03)
Delay payment 31 (42.47) 5 4 (62.79)
Labour problem 41 (56.16)
Figures within the par entheses indicate the per centage.
Source: Filed Sur vey.
these crop failures. Problems of disease and low yield are not
r eported by the rice seed farmers.
6.1 Procurement and Default
Farmer satisfaction in contract farming could be observed from
the income earned, efficiency of payments, input supply and
market assurance for the harvest. There is no doubt that contract
farming is profitable and beneficial for farmers. A majority of
contract farmers interviewed want to continue contract agree-
ment and some others (around 60% non-contract farmers inter-
viewed) want to get into contract production. Around 96% of
gherkin and 97% of rice seed farmers reported that contract
farming is beneficial. However, only 54% of gherkin and 89% of
rice seed farmers are happy with the prevailing contract agreement.
This may be explained with reference to the monopsonistic12
behaviour of the firm.
The company’s default in procuring output and manipulation
of quality differs across crops due to differences in the nature of
crop. For instance, the default rate would be higher for a perisha-
ble crop compared to a non-perishable one. Around 63% of gher-
kin farmers and 30% of rice seed farmers reported that the com-
pany did not procure contracted output. Company’s default rate
(procurement failure) was higher for small farmers compared to
medium and large farmers. This could be explained in terms of
bargaining power – because of the lower bargaining power of
small farmers, the company may have tried to exploit them.
About 57.53% of gherkin and 29.07% of rice seed farmers have
observed that quality is the major problem for the crop not being
procured. Most of the gherkin farmers observe that if the crop is
slightly longer the company does not procure it at the contract
price. The company also forces farmers to sell the crops at a low
price (50 paisa per kg), when the market price would be Re 1 per kg.
In this regard, Glover and Kusterer (1990) argued that the d efault
on quantity and/or quality has been one of the most c ommon
problems in contract farming.
It is not that only the farmer faces the problem in contract
farming. Agribusiness firms also face different problems when
opting for contractual arrangement as a governance mode in
their supply chain. Like the firm, a farmer may break a contract
agreement in different ways. Sometimes, a farmer can sell output
of his/her production to a third party, when prices are perceived
to be higher outside the contractual bond. The particular type of
problem prevails where alternative markets are easily accessible
for the crop under contract. However, the crops (gherkin and rice
seed) under the present study have no alternative market, thus, it
is difficult for the farmer to renege on a contract by not supplying
the output to the company. But, around 24% and 28% of gherkin
farmers fail to meet the quantity and quality p rescribed in the
contract. It is argued that in resource provision contracts, a
known problem is the potential use of the distributed inputs in
alternative crop. Farmers may use fertilisers in their subsistence
crops. Around 15% of gherkin farmers used the s upplied inputs
for non-contract crop.
6.2 Problems and Remedies
The benefits of contract farming may not last long because of the
monopsonic behaviour of the firms and the practice of agribusi-
ness normalisation13 by the contracting firm. More than half
(52.05%) of gherkin and 80% of rice seed farmers have not faced
any major problem so far in contracting. Other farmers report
problems like poor coordination of activities, poor technical as-
sistance, delay in payments and cheating even after procurement
of output. More than one-fourth of rice seed farmers reported
that the company has rejected the seed even after procurement.
The same problems are faced by gherkin farmers. Crop damage
on the way to factory is cited as the reason. Farmers note that the
company cheats in different ways by taking advantage of their
illiteracy. It could be that dependency on a prescribed technology
makes farmers vulnerable to output and productivity manipula-
tion by agribusiness firms. Manipulation, in this process, can be
seen as an indirect, sophisticated means to control payments to
farmers (Silva 2005).
In the long run, contract farming may lead to a gradual fall in
the real prices received by farmers. As asset specificity is built in the
farm operation, firms may use this constraint as a way to establish
and reinforce monopsonic power, and thus, gradually impose
lower prices on farmers. More than one-fourth of gherkin farmers
complained about lower prices – as the company is providing a
lower price compare to their cost of cultivation. Most farmers
report that though the cost of inputs like fertiliser, pesticide and
labour has been increased, gherkin price has not been increased
for the past five years. The question may arise, why do the farmers
not exit gherkin cultivation. The answer is that, though the firm
provides a low price, the profit is higher compared to other crops.
Another explanation could be that though the farmer depends on
the firm for inputs, to repay the cost of i nputs, the farmer keeps the
contract for a long time. Little (1994) argues that a farmer cannot
move out after entering into contract even if the expected benefits
SPECIAL ARTI CLE
Economic & Polit ical We ekly EPW oc tob er 15 , 201 1 vol x lvi no 4 2 67
do not materialise due to low price or crop rejection or crop failure.
For sustaining the contract, the price should be increased from the
prevailing Rs 5 per kg to Rs 8 to Rs 10 per kg. However, the price
problem is not observed in case of rice seed. The company paid
more than the agreed price.
Delay in payment is a disguised form of mistreatment of farm-
ers by firms. It is argued that delay in payment may confuse the
quantity and quality of output that was transacted between the
farmers and the firm. One result of this is that the firm tries to
maximise its benefit by manipulating the contract14 through
i ncreasing the required quality of output. The study found that
delay in payment is the major problem in the contract agreement.
An agreement is made for payment to be made within 30 days
from the date of delivery for gherkin and 60 days for rice seed.
However, around 43% of gherkin farmers and 63% of rice seed
farmers face the problem of delay in payment. Further, the ma-
jority of gherkin farmers (small) and rice seed farmers (large) are
paid late. Due to delays in payment, most of the gherkin farmers
are forced to sell their assets and take non-institutional credit to
pay wages to the labour employed for the contract crop. In the
absence of effective enforcement mechanisms, there is little that
a farmer can do to avoid the negative impact of contract farming.
In this regard, around three-fourths of gherkin farmers and
44% of rice seed farmers demand a legal contract enforcement.
Further, about 77% of gherkin and 61% of rice seed-growers
seek government intervention for institutionalising the contract
agreement. Labour problem is reported to be another major con-
straint for practising contract farming. About 56% of gherkin
farmers face labour problems during cultivation.15 Shortage of
l abour has become more pronounced after the implementation of
the National Rural Employment Guarantee Scheme (NREGS)16 as
most gherkin farmers reported. Most of the farmers have re-
ported that it is difficult to get labour at the normal wage rate and
when it is needed.
Problems faced by the non-contract farmers in adopting contract
farming are presented in Table 8. The information gap remains the
major problem. In the poverty literature it is argued that people are
poor because they lack information regarding the income-earn-
ing opportunities available in the economy. It is observed that
about 42% of sample non-contract farmers in gherkin-growing
region and 13.43% of sample non-contract farmers in rice seed
growing region are not aware of the contract crops. Further,
nearly three-fourths of non-contract farmers in the gherkin-
growing region and 40% of non-contract farmers in the rice seed-
growing region are not aware of contract farming. Therefore, the
role of information and communication technology is important
for promoting contract farming. The benefits and problems of
contract farming can be disseminated through radio, TV or
through newspapers.
Among the sample of non-contract farmers, about 12% were in
the gherkin-growing region and 6% were in rice seed- growing
region and had participated in contract farming previously, but
due to the higher labour need and risks involved in these crops,
they moved out. Credit constraints and problems of irrigation
were also major constraints. To improve farmers’ participation in
contract farming, around 60% of sample non-contract farmers in
both the regions demand an active government intervention.
7 Conclusions
To sum up, contract farming in Andhra Pradesh has had both
positive and negative outcomes. By and large, firms initiate the
contract and so the farmer’s participation in contract farming
d epends more on the firm’s criteria than the farmer’s choice. It is
observed that in most cases firms entered into contracts with
farmers having higher landholding size and also b etter irrigation
facilities. Further, farm households with high family size, better
education, younger farmers and higher agricultural investment
are participating in contract farming.
An attempt has been carried out to ascertain if contract farm-
ing has increased income and employment. The total income
earned by contract farmers is found to be higher than, almost
double, that of the non-contract ones, except in the case of live-
stock income. Labour demanded by contract crops is also found
to be higher, almost twice that of the non-contract ones. Further,
more employment is recorded for women per acre in the case of
rice seed cultivation compared to the gherkin crop. The environ-
mental aspect of contract farming shows that when productivity
declines, the company tries to shift the production relation to
other farmers and also to other regions. Further, there is an excess
use of agro-chemicals for the contract crop compared to non-
contract ones. Thus, it raises the question of sustainability.
The firm’s monopsonic behaviour makes it unlikely that the
contract will be sustained. Most farmers faced the problems of
crop rejection by the firm. It is noticed that the company is reluc-
tant to procure the contracted output because of differences in
the quality of crop. The company also tries to re-grade the crop
without informing farmers, which reduces the expected income.
Delayed payment, lack of credit, scarcity of water and difficulty
in meeting quality requirements are found to be the major
c onstraints faced by contract farmers. Lack of credit and water
scarcity is the major constraint for non-contract farmers.
Table 8: Constraints Faced by Non-cont ract Farmers in Adopting Contract Farming
Constraint s Gherkin Regio n Rice Seed Region
Not aware about contract crop (gherk in/rice seed) 29 (42.0.3) 9 (13.43)
Not aware about contract farm ing 49 (73.13) 27 (39.13)
Participa ted in contrac t farming before 8 (11.94) 5 (7.25)
Moved out from contract far ming because of higher
labour and risk 6 (9.00) 4 (5.80)
Credit constrain t 30 (44.78) 35 (50.72)
Irrigation probl em 35 (52.24) 18 (26.09)
Need for government inter vention 40 (59.70) 42 (60.87)
Figures within the par entheses indicate the per centage.
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oc to ber 15, 20 11 vol xlvi no 4 2 EPW Econom ic & Political W eekly
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Notes
1 Thi s is a contract where the price is agreed upon
for commodities and secu rities to be delivered at
a futu re date. It may be used for hedging, to de-
crease risk, or as a speculat ion, taking on risk for
the sake of an expected profit.
2 Monoc ulture in contract farming leads to soil
e rosion and heavy use of chemicals (pesticide and
fertiliser) has harmful impact on natural resources,
environment, human beings and animals (Opondo
2000). Further, contract farming also has led to
over-exploitation of groundwater, salination of soil,
decline in soil fertility and increase of pollution.
3 The Global Green Company is an industrial unit
owned by Thapa r group, which has operations in
different industries like paper, cotton and electrical
instrument. With the advantages of ag roclimat ic
diversity of India over the years, the company has
grown asparagus, baby corn, papaya, pickling cu-
cumbers, and peppers (coloured b ell-peppers,
jalapenos, paprik a, sweet banana peppers).
4 For better understa nding see Eaton and Shepherd
(2001).
5 Company has ex tension team in each crop-grow-
ing region to provide new methods of cultivation.
The team consists of senior managers, area man-
agers, area extension officers and village level
workers (who are mostly the leadi ng cultivators).
Village level workers maintain contact with farmers
and provide necessary advice like how to manage
crop, use of pesticides and post-harvesting tech-
niques. For capacity-building, frequent Farmer to
Farmer (F2F) programmes are also conducted,
where speci fic traini ng is given on how to ensure
freshne ss and quality.
6 For more details see ht tp://www.globalgreen-
company.com
7 Grading is done based on the size and the quality
of the crop. To get different variet y of grades, the
firm a sks fa rmer i n an area to grow a part icular
variety. After the harvest, t he field officer grades
the crop at the buying point.
8 In subcontracting agreement, the processor pro-
cures crops from an intermediar y (production or-
ganiser or service provider) and contract is signed
with farmer on ly by the serv ice providers not by
the processor directly. The serv ice provider is
generally a farmer who has a minimum of inter-
mediate level of education. He would be selected
on his past organisational experience. Further,
the service providers are those who have a licence
to do this business.
9 Certai nly, there has been more l itigation on al-
leged damage to agriculture by fluoride than all
other pollutants combined. It reduces agricultural
productiv ity, lessen the growth rate of plants as
well as bring down the soil fertility within a rela-
tively short time. Moreover, it also shows many
perilous effects on human health. Intake of fluo-
ride water causes many fluoride -related diseases
like periodonta l disease.
10 Pesticide s that are toxic for man and other forms
of life may be harmful if not used properly. In
some instances, thei r application often extends to
other areas not intended for their use. For exam-
ple, they may find their way into aquatic ecosys -
tems and contaminate the li fe t heir in. Furt her,
among all pla nt nutrients, m ismanagement of
two nut rients such as nitrogen (N) creates envi-
ronmental problems. These inc lude the eutrophi-
cation of lakes, bays and non-flowing water bodies.
The symptoms are algal blooms, heav y growths
of aquatic plants and deoxygenating.
11 The major importing countr ies of gherkin are
Germany, Australia, France, Japan, UK, US, etc
(www.globalgreencompany.com).
12 T his is a situation where a single buyer buys pro-
duce of hundreds and thousands of farmers. A
typica l agreement in contract farming involves
two unequal par ties – one is a highly mechanised
sponsoring company, and on the other side, i s a
large number of illiterate farmers. In this situation,
the bargaining power of farmer’s the remains low
compared to that of the company.
13 Agribusiness normalisation refers to a process
wherein ag ribusiness firms, in thei r start-up
stage, offer promotional policies such as high prices,
low quality standards, and generous input and
credit support to contract growers which exceed
what they expect to maintain over t he long run.
But the firm may find it impossible to sustain
these costs beyond one or two years. So to ma x-
imise profit, firms have to increase the quality
standard and lower the procurement price (Singh
2002). As a whole, agribusiness normalisation
process means lower producer prices and this
along with higher input costs for farmers may
lead to a growing discontent among them.
14 In the long run, farmer may forget the quantity
and qua lity of crop supplied to company. In th is
situation firm may manipulate the records.
15 It is argued t hat agricu lture is a seasonal activ ity
and the extension of agricultural activit ies in-
creases the labour demand in a particula r period.
16 NREGS is a pro-poor scheme. It promises Rs 90
per day for 100 days of employment a year to one
member of every rural unemployed fa mily, espe-
cially rural family, coming under the poverty line.
It started from September 2005. Most of the farm-
ers reported that af ter the implementation of
NREGS, the wage rate has increased and they are
able to get labour at lower wage rate (Rs 50 p er
day). The question here is at what wage rate con-
tract farming generates employment.
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Mumbai Chennai New Delhi Kolkata Bangalore Bhubaneshwar Ernakulam Guwahati Jaipur Lucknow Patna Chandigarh Hyderabad
Contact: info@orientblackswan.com
