CHIDANAND PATIL, B.M. SHASHIDHARA, BASAVARAJ BANAKAR, R.A. YELEDHALLI AND KULDEEP CHOUDHARY

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1 INTERNATIONAL RESEARCH JOURNAL OF AGRICULTURAL ECONOMICS AND STATISTICS Volume 2 Issue 2 (September, 2011) Page : Received : February, 2011; Accepted : July, 2011 Research Paper Analysis of terms of contract and modus operandi in contract farming - A case of Mahyco, IAHS and Namdhari seeds companies in hybrid bitter gourd seed production CHIDANAND PATIL, B.M. SHASHIDHARA, BASAVARAJ BANAKAR, R.A. YELEDHALLI AND KULDEEP CHOUDHARY See end of the article for authors affiliations Correspondence to : CHIDANAND PATIL Department of Agribusiness Management, University of Agricultural Sciences, DHARWAD (KARNATAKA) INDIA ABSTRACT The study on hybrid bitter gourd seed production was conducted in Ranebennur Taluk of Haveri district of Karnataka, which is considered to be hub of vegetable seed production in the State and also in the country. Primary data were collected from 90 farmers who were into contract with three company s viz., Mahyco, Indo- American Hybrid Seeds and Namdhari Seeds. Necessary data were also collected from the contracting companies. The companies before making contract with farmers will identify the progressive farmers and leaders in the villages. They conduct meetings and select the farmers who are interested to enter into contract, with assured irrigation facility. The company officials visit the farmer s fields regularly for providing technical advice. After the harvest, the farmer has to handover the produce to the company. The company after receiving the quality test reports makes payment to the farmers. The constraints faced by the farmers in contract farming were nonavailability of skilled labour, lack of capital for carrying out agricultural operations, non-availability of crop insurance for seed production and low contract price. The problems faced by the contract companies were fixing of contract price, poor quality of grading by farmers at field level, non-availability of land for seed production in the area and seeds cross purchase. Chidanand, Patil, Shashidhara, B.M., Banakar, Basavaraj, Yeledhalli, R.A. and Choudhary, Kuldeep (2011). Analysis of terms of contract and modus operandi in contract farming - A case of Mahyco, IAHS and Namdhari seeds companies in hybrid bitter gourd seed production, Internat. Res. J. agric. Eco. & Stat., 2 (2) : Key words : Contract farming, Hybrid bitter gourd, Seed Production INTRODUCTION The main objective of green revolution was selfsufficiency in food production. Though the green revolution was very impressive for two to three decades, from the mid-1990s agricultural output has been falling short of demand. At present, farming has been beset with problems such as uncertain supply of inputs like fertilizers, seeds and pesticides antiquated farming practices, declining yield and productivity, exploitative middle men and unremunerative prices. Around 70 per cent of India s population lives in rural areas, dealing with these problems requires addressing the problems faced by the farmers. While the majority of the farmers are depending on agriculture and related activities for their sustenance, many do not produce adequate food or earn enough income to meet their basic needs. In many situations, small farmers would be able to make efficient production choices if they were not constrained in choosing optimal input and output levels. Increased production does not necessarily lead to higher incomes, particularly in situations where price fluctuations are high, markets are unorganized and inefficient, market access is limited, or bargaining power is weak. The most common complaint of small farmers in rural India is lack of access to stable markets. In this context, contract farming could be one of the best solutions to encourage Indian farmers access to high quality inputs to increase production and productivity and in turn reasonable level of income. Contract farming is a contract between a farmer and a purchaser established in advance of the growing season for a specific quantity, quality, and date of delivery of an agricultural output at a price or price formula fixed in advance. The contract provides the farmer with the assured sale of the crop and at times provides for technical HIND AGRICULTURAL RESEARCH AND TRAINING INSTITUTE

2 CHIDANAND PATIL, B.M. SHASHIDHARA, BASAVARAJ BANAKAR, R.A. YELEDHALLI AND KULDEEP CHOUDHARY assistance, credit, services, or inputs from the purchaser (Binswanger et al., 1995). The purchaser gets a guaranteed, steady supply of produce. Seed material is the primary input in agriculture and quality of seed is one of the determinants of output growth, given other complementary inputs. Seed cost forms only a small proportion of the total cultivation expenses. Yet, without quality seed the expenditure on fertilizer, pesticides and other inputs will not yield adequate returns. In fact, seed is the real vehicle of production where as other inputs like water and fertilizer can be regarded as fuel. Thus, quality seed production plays an important role in the agricultural development. India is one of the leading vegetable seed producing countries in Asia, others being China and Thailand. In India, vegetable seed production started by the two private companies way back in 1982 viz., Indo American Hybrid Seeds (IAHS) and Mahyco. A number of medium and small sized companies have begun to operate in seed production in Solanaceous and Cucurbitaceous vegetables for domestic and international market. They include Namdhari, Mahyco, IAHS, Nun hems, Syngenta, Seminis, Bejoshethal, Sungrow, Exim, Unicorn, Emergent Genetics, Nath seeds, Century, Oriental, Golden seeds, CK seeds, Ankur, Nijaveedu so on. India has a comparative advantage in production of hybrid seeds for foreign companies and meeting international seed quality standards, because of availability of skilled labour at low cost and favourable climate for production of major crops like tomato, chilli, okra and cucurbits. In India, seed production is outsourced to the farmers through contract farming by the seed companies. Currently, more than 150 registered companies are functioning in India concentrating on field crops and vegetables. The companies provide foundation seeds and technical guidance to the farmer, monitor the seed production activity and procures the seed material from the farmers. The terms of contract and modus operandi differ from company to company. Also farmers and companies are facing many problems in contract farming. Hence, the present study is an attempt to analyse the terms of contract and modus operandi in contract farming and problems faced by the contract seed growers and contact firms in contract hybrid bitter gourd seed production in Ranebennur Taluk of Haveri district. MATERIALS AND METHODS The study was conducted in Ranebennur Taluk of Haveri district of Karnataka, as it is recognized as the seed production zone in Karnataka State. The study was mainly based on the primary data collected from farmers and from the companies (Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company) who are involved in contract farming. The primary data were collected from a sample of 90 farmers who were into contract with three companies viz., Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company. The data were also collected from the respondent farmers using a structured schedule developed for the purpose, for the crop year Simple statistical tools like averages and percentages were used to analyse the cost and returns from hybrid bitter gourd seed production. RESULTS AND DATA ANALYSIS The findings obtained from the present studies as well as well as relevant discussion have been presented under following heads : Terms of contract and modus operandi: The private seed companies resort to contract farming with farmers for assured supply of quality seeds. Under contract farming, the companies enter into written agreement with farmers with the intention of procuring genuine seed material in required quantity with over all supervision of the company. The farmers on their side enter into contract farming with the objective of reducing price risk and also to realize more income from agricultural operations. The terms of contract and modus operandi followed by three companies viz., Mahyco Company, Indo- American Hybrid Seeds Company and Namdhari Seeds Company in the study area have been discussed below:. Agreement (terms of contract) for contract farming of hybrid bitter gourd seed production: Type of contract: At present in Karnataka, the contract farming is regulated under the Karnataka Agricultural Produce Marketing (Regulation and Development) Act, Since all the companies enter into contract farming with farmers automatically come under the purview of this act, it is mandatory on the part of seed companies to follow the norms stipulated by the act. All the three companies in the study area followed written agreement with the farmers. Seed registration and inspection charges: All the three companies collect seed registration and inspection charges from the farmers. However, registration 168

3 ANALYSIS OF TERMS OF CONTRACT & MODUS OPERANDI IN CONTRACT FARMING and inspection charges vary from company to company. Mahyco Company charges minimum (Rs. 250) and Indo- American Hybrid Seeds Company Rs However Namdhari Seeds Company charges are little bit on the higher side (Rs. 400). Exclusive area reserved for seed production: As per the company norms the farmer should take up the seed production activity in the prescribed land only. Further in no case, he is permitted to use the reserved area for the cultivation of other crops or taking the seed production activity in other areas. Besides, the farmer has to assure in writing the company that the land belonged to him is suitable for cultivation of hybrid seeds. Crop specification: As per the agreement, the farmer has to take only that crop which is specified in the agreement. He is not entitled to take any other crop other than the specified in the agreement. Period of contract: The farmer is entitled to produce the crop for a particular period as agreed in the agreement. In general, the period of contract depends on the type of the seed production and varies from crop to crop. With respect to bitter gourd it has been observed that the period of contract varies from 90 days to 120 days depending upon the variety and also depending upon the company in the study area. Cost of cultivation: As per the agreement, it is the responsibility of the farmer to meet the entire cost of cultivation including expenses on land preparation, irrigation, sowing/planting, interculture, fertilizer and manure, plant protection measures, rouging, emasculation, pollination, harvesting, seed extraction, seeds cleaning and all other farm operations connected with raising of the seed crop. It has been clearly specified in the agreement that under no circumstances, the company will bear any cost. Destruction of plants of pollinator parent: Farmer has to uproot, remove and destroy the plants of pollinator parent from the field immediately after completion of pollination work. All the three companies insist on the farmers to not to keep the pollinator parent in the field for the purpose of harvesting commercial seed from the parent line. Isolation requirements: The terms of the contract of all the companies also 169 stipulate that the farmer has to ensure that there will not be any crop of the same type within 500 meters from the plot where he is cultivating the crop. Inspection by the company personnel: As per the agreement, the farmer has to allow personnel of the company to supervise all operations related to agricultural operations, including use of machinery, implements and accessories to realise better results. The farmer also has to agree to abide by the conditions or advice provided by the supervisors of the company from sowing to harvesting to maintain quality of seed. Prohibition of transfer of seed material: As per the terms of contract, the farmer is prohibited to transfer or sell or part with possession of the seed material provided by company in any manner whatsoever to any third party and he has to ensure that the seeds supplied by the company will be exclusively used for the seed production activity in the same season and in the same land for which it has been issued. Further, farmer must return the left over seed material if any to the company after planting. Assistance from the company for seed production: For the company under the agreement provision is made for providing the necessary seedling material and technical advice needed for seed production. It is obligation on the part of farmer to take the advice of the company in all agricultural operations from sowing to harvest. Price fixation: As per the terms of agreement, it is the prerogative of the company to fix the price on seed produced by the farmer. In general, the price fixation policy of the company is determined by the actual cost of cultivation of the crop by the farmer taking into consideration the use of the land, fertilizer used, labour charges, farmers contribution for the cultivation of the crop and a margin as an incentive to the farmer without which no farmer will be willing to take this activity on behalf of the company. Further, the company while fixing the price also considers what will be the income to the farmer if he cultivates similar type of crops for sale in the market. However, the prices offered to the farmer vary from company to company. For example, Namdhari seeds is offering highest price (Rs. 800/kg), followed by Mahyco (Rs. 600/kg) and Indo-American (Rs 500/kg). The price offered by the companies varies mainly because the yield levels are not the same. In order to compensate lower yield levels the companies tries to

4 CHIDANAND PATIL, B.M. SHASHIDHARA, BASAVARAJ BANAKAR, R.A. YELEDHALLI AND KULDEEP CHOUDHARY compensate the farmers with higher prices for the seed. Payment period: The companies in the study area make payment to the farmer after 90 to 120 days after the receipt of the seed quality test reports. In general, the farmers who supply seed material to the company have to wait for 90 to 120 days after they hand over the seed material. Quality parameters: As per the terms of agreement, the hybrid seeds produced by the farmer have to meet the quality parameters of the company as per the written agreement such as seed germination (>90 per cent), genetic purity (>98 per cent), minimum physical purity (>99 per cent) and moisture content (7 per cent). Further, the seed should be free from any insect, pest and deleterious matter and not more than one per cent of broken seeds. In general, all the companies insist on the farmer to maintain stringent standards during harvest operations and also during post harvest period. Harvesting expenses: The farmer has to harvest the hybrid seeds with his own labour, equipment and any other consumables. Transportation charges: As per the terms of agreement, the farmer has to make his own arrangements for bagging and transporting (at his own risk and cost) the raw seed from his/her field to the processing plant as indicated by the company. Submission of produce by farmer to the company: Under the terms of agreement, the farmer has to bring the harvested seed in one or two installments. The company has the right to fix the maximum number of such installments in which seed will be accepted from the farmer. The farmer has no right to sell, keep, retain or use for planting the harvested seeds from his field. Company rights: During the entire operation of production by farmer, the company has all rights to enter into the field and oversee the activities being carried out by the farmer to satisfy itself with the required quality parameters fixed by the company. The farmer should follow the directions of the company personnel for all the agronomic practices, to be performed during the crop growth period. Right to reject unfit seeds: The company reserves the right to reject any seed material on the basis of bad appearance, infestation with fungus, damage and partial germination due to rains, and weevil infestation. In this regard the decision of the Area Production Officer of the company shall be binding and final. Risk in the event of crop failure: Under the terms of agreement the companies do not take any responsibility in the event of crop failure due to natural calamities, climatic aberrations or any other unforeseen circumstances. Hence, for the reasons beyond the company s control, the company stands absolved of any liability for failure of the crop. Payment based on quantity of healthy seeds: After harvesting and post harvest operations, the seeds handed over to the company shall be deemed to be the produce of the company for which the farmer would be entitled for compensation. However, according to the terms of agreement, the company has the prerogative of fixing the price based on the quality parameters, quantity and other considerations. Dispute settlement: In respect of dispute settlement the agreement allows the dispute to be settled either by a middleman or through court. For example, the agreement between Indo- American Hybrid Seeds Company and farmers has made provision for dispute settlement through middlemen. In case of Mahyco and Namdhari Seeds Company, any dispute between the company and farmer will be adjudicated to the court. Price strategy adopted during excess seed production: If the quantity of seeds obtained is more than the pre determined quantity (target quantity), then the right to accept the produce at the pre-agreed price lies with the company in case of Indo-American Hybrid Seeds Company. However, both Namdhari Seeds Company and Mahyco Company will procure the seed material at the pre-agreed price only. Strategy adopted in case of return of rejected seeds: Different companies adopt different strategies in case of return of rejected seeds. For example, rejected seeds will be returned back to the farmer if he approaches the company otherwise the seeds will be burnt in case of Mahyco Company. In case of Indo-American Hybrid Seeds Company, it was not returning seeds back to farmers, but due to pressure from the farmers now the 170

5 ANALYSIS OF TERMS OF CONTRACT & MODUS OPERANDI IN CONTRACT FARMING Fig. 1: Company Area manager Production officer Field Supervisor Contract farmer Visits seed production plots once a week Visits seed production plots thrice a week Stationed at seed village as a technical advisor to farmers Produces seed Modus operandi adopted by companies in hybrid bitter gourd seed production company is returning back the seed to farmers. In case of Namdhari Seeds Company, the rejected seeds are burnt. Problems faced by the contract seed growers and contract firms: Problems faced by the seed growers in contract hybrid bitter gourd seed production: In the present study, opinion survey was conducted regarding the production, financial and contractual constraints of seed growers of the Mahyco, Indo- American Hybrid Seeds Company and Namdhari Seeds Company and the results are presented in Table 1. The opinions of the seed growers on the problem of growing hybrid bitter gourd seed were gathered right from the procurement of inputs in seed production process till the crop was harvested. The important problems faced by these farmers are discussed below. Among the various production problems, nonavailability of skilled labour was the major one (80 per cent, 86.6 per cent and 86.6 per cent in case of Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company s farmers, respectively). The second important problem was high wage rate of the labour (70 per cent, 67 per cent and 80 per cent in case of Mahyco, Indo- American Hybrid Seeds and Namdhari Seeds Company s Table 1: Problems faced by the farmers in hybrid bitter gourd seed production Sr. No. Particulars Mahyco IAHS Namdhari seeds Production problems 1. Non-availability of seedlings on time 1 (3.33) 5 (16.66) 1 (3.33) 2. Non-availability of trained labour 24 (80.00) 26 (86.66) 26 (86.66) 3. High wage rate 21 (70.00) 20 (66.66) 24 (80.00) 4. Pest and disease problem 4 (13.33) 6 (20.00) 3 (10.00) 5. Inadequacy of irrigation water 17 (56.66) 12 (40.00) 14 (46.66) 6. Problem of isolation distance 2 (6.66) 4 (13.33) 2 (6.66) 7. Difficulties in technical operations 6 (20.00) 5 (16.66) 4 (13.33) 8. Climatic aberrations 28 (93.33) 27 (90.00) 25 (83.33) Financial problems 1. Inadequate and timely availability capital for purchase of inputs 15 (50.00) 18 (60.00) 10 (33.33) 2. Non-availability of crop loan 18 (60.00) 23 (76.66) 20 (66.66) 3. Non-prevalence of crop insurance 30 (100.00) 30 (100) 30 (100) 4. Higher investment requirement 7 (23.33) 9 (30.00) 7 (23.33) Contractual problems 1. Poor technical assistance 1 (3.33) 4 (13.33) 1 (3.33) 2. Delay in payment 0 (0.00) 2 (6.66) 0 (0.00) 3. Low contract price 4 (13.33) 5 (16.66) 2 (6.66) 4. Breach of contract 0 (0.00) 0 (0.00) 0 (0.00) Note: Figures in the parentheses indicate percentage to the total 171

6 CHIDANAND PATIL, B.M. SHASHIDHARA, BASAVARAJ BANAKAR, R.A. YELEDHALLI AND KULDEEP CHOUDHARY farmers, respectively). Hybrid bitter gourd seed production is a labour intensive enterprise which requires more number of laborers especially during the crossing time. Many seed growers had to pay advance wages to the laborers especially during the critical stages of operation that is crossing. Pollination activity has to be completed between 7 to 11 am in the morning. If crossing activity is delayed then there will be loss of crop yield. Nearly 13 per cent, 20 per cent and 10 per cent of the Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company s seed growers expressed the pest and disease problem. Few seed growers (7 per cent, 13 per cent and 7 per cent in case of Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company farmers, respectively) faced the problem of isolation distance. The other important problem faced by the seed growers was inadequacy of irrigation water (57 per cent, 40 per cent and 47 per cent in case of Mahyco, Indo- American Hybrid Seeds and Namdhari Seeds Company farmers, respectively). Because of this problem, major portion of water was used for seed production activity than growing other crops. Seed growers also complained about technical difficulties (20 per cent, 17 per cent and 13 per cent in case of Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company farmers, respectively) in operations such as rouging, emasculation and pollination. As emasculation and rouging are highly technical and the ultimate yield is based on these operations. Among the financial problems, seed growers experienced the problem with the inadequate and timely availability of capital (50 per cent, 60 per cent and 33 per cent in case of Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company farmers, respectively) for the purchase of inputs. Around 60 per cent, 77 per cent and 67 per cent of Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company seed growers felt the problem of non-availability of crop loan for seed production activity. Because of this problem, it becomes difficult for the farmers to take up seed production activity on a larger scale which required huge capital investment. Majority of the seed growers (100 per cent) have also demanded for the crop insurance facility on account of high degree of risk involved in hybrid bitter gourd seed production activity. Among the contractual problems, seed growers expressed the problem of poor technical assistance (3 per cent, 13 per cent and 3 per cent in case of Mahyco, Indo- American Hybrid Seeds and Namdhari Seeds Company farmers, respectively) by the technical staff of the company. Delay in payment was also one of the contractual problems faced by the Indo-American Hybrid Seeds Company farmers. Low contract price (13 per cent, 17 per cent and 7 per cent in case of Mahyco, Indo-American Hybrid Seeds and Namdhari Seeds Company farmers, respectively) was also one of the contractual problems faced by the contract farmers. Problems faced by the contract firms: The primary data were also collected from companies to know the issues and problems faced vis-à-vis farmers who are producing seeds through contract agreement. The important problems faced by these companies are presented in Table 2. The contract firms opined that the major problems are fixing of contract price (33.33 per cent) and poor quality of grading by farmers at field level (33.33 per cent). The firms also expressed that they were facing the land constraint (33.33 per cent). Seeds cross purchase was a major problem (66.66 per cent) faced by the companies because they don t have control over that. If there is a crop loss due to out-break of any disease or pest or floods, there will be drastic yield reduction. It is surprise to see that not a single company has reported breach of contract. This clearly indicated that Companies have a cordial relationship with the farming community. Singh (2001) Table 2: Problems faced by the seed companies Sr. No. Particulars Mahyco IAHS Company Namdhari Seeds Company Percentage 1. Fixing of contract price is highly complicated No Yes No Poor quality of grading by farmers at field level No Yes No Non-availability of land for seed production No Yes No Seeds cross purchase Yes Yes No Shortage of competent and elegant farmers No No No Inability of farmers to undertake farm operations No No No Government regulations No No No Climatic aberrations Yes Yes Yes Breach of contract by farmers No No No

7 ANALYSIS OF TERMS OF CONTRACT & MODUS OPERANDI IN CONTRACT FARMING greatly empharized on the role of contact farming while Asokan and Singh (2004) contraints of contact farming while Hemant Kumar and Singh (2005) discussed the conditions for success and failure of contact farming in Himachal Pradesh and Singh (2000) described the theory and practice of contract farming. Conclusion: Analysis of terms of contract and modus operandi reveal that, all the three companies had almost similar terms of contract and modus operandi. The companies selected only interested farmers who are having assured irrigation facilities, availability of skilled labour, and must agree to the terms and conditions of the company. The company supplies the seedling material at cost. The company personnel visits the farmer s fields regularly. Farmers are facing many problems like non-availability of skilled labour, high wage rate of labour, inadequacy of irrigation water, climatic aberrations, inadequate and timely availability of capital for purchase of inputs, non-availability of crop insurance and crop loan for seed production activity, delay in payment and low contract price. Even companies are also facing problems like fixing of contract price, poor quality of grading by farmers at field level, non-availability of land for seed production in the area and seeds cross purchase. The results have clearly indicated that existing contractual arrangements are helping the farmers to realise higher returns and similarly the companies are also benefited in terms of assured quality seeds. Authors affiliations: B.M. SHASHIDHARA, Department of Agricultural Marketing, Cooperation and Business Management, University of Agricultural Sciences, G.K.V.K., BENGALURU (KARNATAKA) INDIA. BASAVARAJ BANAKAR, R.A. YELEDHALLI AND KULDEEP CHOUDHARY, Department of Agribusiness Management, University of Agricultural Sciences, DHARWAD (KARNATAKA) INDIA. LITERATURE CITED Asokan, R.S. and Singh, G. (2004). Role and constraints of contract farming in Agro-processing industry. Indian J. agric. Eco., 58(3): Kumar, Hemant and Singh, Ranveer (2005). Success and failure of contract farming in Himachal Pradesh: A case of cauliflower seed production. Indian J. agric. Mktg, 19(2): 170. Singh, Abhiram (2001). Supply chain management Role of contract farming. Indian Food Packer, 51(2): Singh, Sukhpal (2000). Theory and practice of contract farming: A review. J. Social and Economic Development, 2(1): * * * * * * * * 173