CORPORATE FARMING OPPORTUNITY AND ISSUES

INTRODUCTION
Agriculture is vital to India. It produces 23% of GDP, feeds a billion people,
and employs 66% of the or!force. "ecause of the Green #evolution, India$s agricultural productivity has improved to the point that it is both self%sufficient and a net e&porter of a variety of food grains. 'et most Indian farmers have remained (uite poor. )he causes include remnants of scarcity%era regulation and an agricultural system based on small, inefficient landholdings. )he agricultural system has traditionally been unfair to primary producers. *oybeans, for e&ample, are an important oilseed crop that has been e&empted from India$s *mall *cale Industries +ct to allo for processing in large, modern facilities. 'et ,-% of the soybean crop is sold by farmers ith small holdings to traders, ho act as purchasing agents for buyers at a local, government%mandated mar!etplace, called a mandi. .armers have only an appro&imate idea of price trends and have to accept the price offered them at auctions on the day that they bring their grain to the mandi. +s a result, traders are ell positioned to e&ploit both farmers and buyers through practices that sustain system% ide inefficiencies Indian agriculture sector has undergone several revolutionary changes after its independence. *ince /,,-, hen the liberalisation process has been initiated, the change in consumer preference, multinational food 0oints, processed foods, and ready%to%eat commodities. 1any Indian incorporates are also loo!ing for ard to enter into agriculture sector foreseeing the unprecedented potential for gro th. 2ot only have tried to mar!et agriculture products, but they have also e&tended their supply chain 0oining hands ith the farmers to store the products hich ill enable the consumers both in India and abroad access to good and fresh farm products

DEFINATION AND MEANING

34orporate farming$ is defined as system for production and supply of agricultural or horticultural products under for ards contracts bet een producers and buyers. It is a commitment made by the cultivator to provide an agricultural commodity of certain type and (uantity by a committed buyer, usually a large company. )he farmer is re(uired to plant the contractor$s crop in his land and harvest and deliver a certain amount of product based upon anticipated yield and contracted acreage. In other term that describe the business of agriculture, hich involves the practices of corporation in the food production on a large%scale. It is a modern ay of doing agri%business,

encompasses not only farm itself, but also the entire chain of agriculture%related business, hich includes supply of seed and agrichemicals, food processing, storage, transport, distribution, mar!eting, advertising, retail sales and so on. )he term also includes the influence of these companies on education, research and policy, through their educational funding and commitment to social responsibility. 54orporate farming6 is often used tantamount ith agribusiness 7although 5agribusiness6 (uite often is not used in the corporate farming sense8 and it is seen as destroyer of family farm. 4ritics argue that the ultimate goal of corporate farming is to vertically the entire process of food processing, from the development of proprietary strains of D.2.+ through to the distribution and sale of food to the consumer. *ome corporations are considered to be ell achieving the ob0ective, and have become a very large in the process.

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*ince the ne economical policy has made a substantial progress in the manufacturing and service sector, the focus is no shifting to ards bringing about structural reforms in agriculture terms of mode of organi;ation of production and mar!eting of agricultural products. )hese efforts are needed in order to bring in better efficiency of input and output and promote gro th performance of the sector, ultimately resulting in rural poverty in India. )hough the economy gre at a higher rate averaging over 6 percent during the last decade, agricultural sector$s gro th lags far behind at less than 2 percent 79&hibit < /8 *ector ise, the contribution of agriculture to GDP is also very lo as compared ith the manufacturing and service sectors 79&hibit < 28. .rom the year /,6-t to 2--= the average gro th rate of agriculture 73>.?%8 is much better, as compared ith the manufacturing sector 722.>%8 and almost the same ith the service sector 73>.>%8. "ut, the other sectors have positive cumulative gro th rates of ,.>/ percent and /@.// percent respectively over the years, hereas, agriculture sector$s rate as abysmally on the negative side ith a cumulative gro th rate of %2-.@, percent hich sho s the poor state of Indian agricultural sector. In terms of contribution of agricultural products to the total global trade of agricultural products to the global e&port is also very lo 79&hibit < 38. In the year 2--?, of the global trade of a agricultural products of A*B @>3bn ith a paltry share of /.2 percent.

EXHIBIT 1
INDIA GDP% +gricultural C +llied activities 2000 2001 2002 2003 2004 2005 2006 6.2 -.6 ?.? -.2 =.> =.> 3.> %=.6 >.= ,.6 @.= /.2 >./ 2./ Average 6.33 /.,,

EXHIBIT 2
INDIA +griculture 1anufacturing *ervice 1960 =3 /> 2, 1970 ?6 2/ 33 1980 ?23 3@ 1990 33 26 ?/ 2005 226 =? Average 3>.? 22.> 3>.> CGR %2-.@, ,.>/ /@.//

EXHIBIT - 3
YEAR 2004 +gricultural Products 7in A*Bbn8 Dorld *hare % World @>3 /--% INDIA , /.2-%

)he reasons are obvious. )he productivity of Indian agriculture is lo and cost is very high. )he prices of farm products in the international and Indian mar!ets are moving in the opposite directions. Prices in the International mar!et are declining, hereas in the Indian mar!et, these are increasing due to lo productivity vis%E%vis high cost. .ifty%odd years of protectionism of protectionism, politicalised, lac! of ade(uate research and development 7#CD8, poor infrastructural facility etc ere the ma0or reason for such lo gro th. +part from the above stated reasons, the follo ing factors are also vital to note the stagnancy of the Indian agricultural sectorF a. Demographic changes and economic gro th e&ert strong and competing pressure on the finite natural resources especially ater b. )he fertili;ers, pesticides and (uality seeds hich triggered the green revolution in late /,6-s has completed its cycle, no it is no more effective as before. c. Gandholding si;e is becoming smaller and smaller due to fragmentation and this may be the largest contributing factor in retarding the pace of agricultural gro th in India It hinters the gro th in various ays such asF +pplication of latest technology and mechani;ation 9conomic and commercial scale of operation Dastage of lands +doption of drip irrigation facilities .or the reasons stated above, the only solution viable is 4orporatisation not only solves the above said problems, but also improves the agricultural productivity manifold and triggers the rural upliftment in a big ay.

A NEW FACELIFT IN INDIAN FARMING

In India, corporate farming gains momentum in the recent times as a number of players are entering into this ne venture mostly through bac! ard integration of their supply chain. #iding this ind of change are the big igs of Indian incorporate and 124sF Relia !e" #a$i dra" %$ar&i" Godre'" I(C" )e*+i!o to name a fe . +ll of them are ma0or corporate players ith enormous resources at their disposal, ho have the !no %ho to rema!e the face of Indian agriculture. 1ore importantly, ith their massive investments, these entrepreneur%farmers are all set to change the fortune of an industry that has consistently lagged the GDP gro th for decades, but still employs about 6@% of the country$s population. )hese corporates are loo!ing at all aspects of this value chain, vi;., research and development, distribution of the fine variety of seeds, fertili;ers and pesticides, improved irrigational facilities, application of latest technology and supply of timely mar!et information. )hey are also

e&tending credit facilities for farming and food processing, to set up cold chains and arehouses and transportation of farm products. )he factors that have triggered this onrush of investment by corporations in farms sector are multi%fold and varied. .oremost among them being the reali;ation by Indian incorporates that agriculture is a big business in the developed orld, hich involves huge value addition, before the products reaches shop%shelves. In sheer potential, India could become the food bas!et of the orld < a supplier of high value food products that fetch revenue running into billions. 1oreover, the country has vast cultivable land 7=2% of the total land is under cultivation compared to the global average of //%8, suitable climate condition and most importantly there is a substantial labour cost advantage. )o unloc! the full potential of this business, the country ould re(uire huge investment in a number of areas. :ne such critical point is the storage system. .or instance, the country produces around 134.5 million tones of fruits and vegetables per annum, the second biggest in the orld but cold storage facility e&ist only for 10% of the total product. )his results in enormous loss through astages. .i&ing this chin! in the country$s supply chain alone could alter the sector$s dynamic radically. .urther, corporations source millions of dollars orth of fruits and vegetables all the year round due to ever increasing demand for farm products both in India and abroad. )his has spar!ed off boom in the food transport logistic business. .or instances, a storage centre for perishables is already started functioning at Ha aharlal 2ehru Port )rust in IandlaJ the 2ational +gricultural 4ooperative 1ar!eting .ederation of India 72+.9D8 plans to set up pac!ing houses and arehousesJ in 4entral and Destern IndiaJ 1itsubishi has already initiated steps to start a fleet of cold chain truc!s and #eliance also moves to set up its o n supply chain logistics. 4orporate farming helps the farmers in many ays. It enables the de% ris!ing other farmer$s life in every possible ay. "y tying up ith hundreds of farmers 7signing a lease8, the corporations are not only assuring them a fi&ed return, but also promising them to buy all their products at pre%determined prices. 1oreover, the corporations al ays pay a little more than the prevailing mandi prices for the products. )his ensures competitive prices to the farm products. *ince the corporations ta!es the agro products directly to the mar!et, even the logistics problems that used to dog the farmer are ta!en care of. 4orporate farming also enables the farmers for crop diversification to retain the fertility of top soil, arrest ater depletion 7for instances, Pun0ab is losing t o feet of ground ater every year8 and generate good income for farmers. *ince the corporations are involved in every point in the value chain ith the help of modern technologies, they are capable of running the ris!s and

sustaining losses than small farmers. )hey supply high (uality seeds, fertili;ers and involve the transfer of technology from high%end to lo of the supply chain ith the promise of buying the product at a pre%determined price. +lso, by moving in and ta!ing over the supply chain in agriculture, corporate India can brea! the stranglehold of middleman and loan traps hich have not only been e&ploiting the farmers, but also routinely mar!ed up prices by as much as 6-% ithout actually adding any value.

FEW CASES OF EMERGING CORPORATE FARMING:

.ertili;er ma0or (A(A C$e,i!al+ has ?=,--- acres under contract ith farmers in Pun0ab, Karyana, Attar Pradesh, Dest "engal, and Hhar!hand. Ander the term of contract, the company acts as a technology provider and facilitator of cultivation, hile allo ing buyers to buy the crops directly from the farmers. .or the services rendered, both the farmers and the buyers have to pay a fee to the )+)+ 4hemicals. *ince the fee is small, the parties involved have ta!en the fees in a big ay. )he retention rate among farmers, hich used to be 2-%2=% a couple of years ago, has risen to=-%6-% by this method.

ITCs E-CHOUPAL
I)4 is one of India$s leading private companies, ith annual revenues of A*B2 billion. Its International "usiness Division as created in /,,- as an agricultural trading companyJ it no generates A*B/=- million in revenues annually. )he company has initiated an e%4houpal effort that places computers ith Internet access in rural farming villagesJ the e%4houpals serve as both a social gathering place for e&change of information 7choupal means gathering place in Kindi8 and an e%commerce hub. Dhat began as an effort to re%engineer the procurement process for soy, tobacco, heat, shrimp, and other cropping systems in rural India has also created a highly profitable distribution and product design channel for the companyLan e%commerce platform that is also a lo %cost fulfillment system focused on the needs of rural India. )he e%4houpal system has also cataly;ed rural transformation that is helping to alleviate rural isolation, create more transparency for farmers, and improve their productivity and incomes.
)his case analy;es the e%4houpal initiative for soyJ efforts in other cropping systems 7coffee, heat, and shrimp a(uaculture8, hile different in detail, reflect the same general approach.

BUSINESS MODEL
+ pure trading model does not re(uire much capital investment. )he e%4houpal model, in contrast, has re(uired that I)4 ma!e significant investments to create and maintain its o n I) net or! in rural India and to identify and train a local farmer to manage each e%4houpal. )he computer, typically housed in the farmer$s house, is lin!ed to the Internet via phone lines or, increasingly, by a M*+) connection, and serves an average of 6-- farmers in /- surrounding villages ithin about a five !ilometer radius. 9ach e%4houpal costs bet een A*B3,--- and A*B6,--- to set up and about A*B/-- per year to maintain. Asing the system costs farmers nothing, but the host farmer, called a sanchala!, incurs some operating costs and is obligated by a public oath to serve the entire communityJ the sanchala! benefits from increased prestige and a commission paid him for all e%4houpal transactions. )he farmers can use the computer to access daily closing prices on local mandis, as ell as to trac! global price trends or find information about ne farming techni(uesLeither directly or, because many farmers are illiterate, via the sanchala!. )hey also use the e%4houpal to order seed, fertili;er, and other products such as consumer goods from I)4 or its partners, at prices lo er than those available from village tradersJ the sanchala! typically aggregates the village demand for these products and transmits the order to an I)4 representative. +t harvest time, I)4 offers to buy the crop directly from any farmer at the previous day$s closing priceJ the farmer then transports his crop to an I)4 processing center, here the crop is eighed electronically and assessed for (uality. )he farmer is then paid for the crop and a transport fee. 5"onus points,6 hich are e&changeable for products that I)4 sells, are given for crops ith (uality above the norm. In this ay, the e%4houpal system bypasses the government% mandated trading mandis. .armers benefit from more accurate eighing, faster processing time, and prompt payment, and from access to a ide range of information, including accurate mar!et price !no ledge, and mar!et trends, hich help them decide hen, here, and at hat price to sell. .armers selling directly to I)4 through an e%4houpal typically receive a higher price for their crops than they ould receive through the mandi system, on average about 2.=% higher 7about A*B6 per ton8. )he total benefit to farmers includes lo er prices for inputs and other goods, higher yields, and a sense of empo erment. )he e%4houpal system has had a measurable impact on hat farmers chose to doF in areas covered by e%4houpals, the percentage of farmers planting soy has increased dramatically, from =- to ,-% in some regions, hile the volume of soy mar!eted through mandis has dropped as much as half. +t the same time, I)4 benefits from net procurement costs that are about 2.=% lo er 7it saves the commission fee and part of the transport costs it ould other ise pay to traders ho serve as its buying agents at the mandi8 and it has more direct control over the (uality of hat it buys. )he system also provides direct access to the farmer and to information about conditions on the ground, improving planning and building relationships that increase its security of supply. )he company reports that it recovers its e(uipment costs from an e%4houpal in the first year of operation and that the venture as a hole is profitable.

In mid%2--3, e%4houpal services reached more than / million farmers in nearly //,--- villages, and the system is e&panding rapidly. I)4 gains additional benefits from using this net or! as a distribution channel for its products 7and those of its partners8 and a source of innovation for ne products. .or e&ample, farmers can buy seeds, fertili;er, and some consumer goods at the I)4 processing center, hen they bring in their grain. *anchala!s often aggregate village demand for some products and place a single order, lo ering I)4$s logistic costs. )he system is also a channel for soil testing services and for educational efforts to help farmers improve crop (uality. I)4 is also e&ploring partnering ith ban!s to offer farmers access to credit, insurance, and other services that are not currently offered or are prohibitively e&pensive. 1oreover, farmers are beginning to suggestLand in some cases, demand Lthat I)4 supply ne products or services or e&pand into additional crops, such as onions and potatoes. )hus farmers are becoming a source of product innovation for I)4.

DEVELOPMENT BENEFIT )he e%4houpal system gives farmers more control over their choices, a higher profit margin on their crops, and access to information that improves their productivity. "y providing a more transparent process and empo ering local people as !ey nodes in the system, I)4 increases trust and fairness. )he increased efficiencies and potential for improving crop (uality contribute to ma!ing Indian agriculture more competitive. Despite difficulties from undependable phone and electric po er infrastructure that sometimes limit hours of use, the system also lin!s farmers and their families to the orld. *ome sanchala!s trac! futures prices on the 4hicago "oard of )rade as ell as local mandi prices, and village children have used the computers for school or!, games, and to obtain and print out their academic test results. )he result is a significant step to ard rural development. KEY LESSONS
The e-Choupal model demon !"a!e !ha! a la"#e $o"po"a!%on $an pla& a ma'o" "ole %n "e$o#n%(%n# ma")e! and %n$"ea %n# !he e**%$%en$& o* an a#"%$ul!u"al & !em+ ,h%le do%n# o %n ,a& !ha! -ene*%! *a"me" and "u"al $ommun%!%e a ,ell a ha"eholde" . The $a e al o ho, !he )e& "ole o* %n*o"ma!%on !e$hnolo#&/%n !h% $a e p"o0%ded and ma%n!a%ned -& a $o"po"a!%on+ -u! u ed -& lo$al *a"me" /%n help%n# -"%n# a-ou! !"an pa"en$&+ %n$"ea ed a$$e !o %n*o"ma!%on+ and "u"al !"an *o"ma!%on. C"%!%$al *a$!o" %n !he appa"en! u$$e o* !he 0en!u"e a"e ITC1 e2!en %0e )no,led#e o* a#"%$ul!u"e+ !he e**o"! ITC ha made !o "e!a%n man& a pe$! o* !he e2% !%n# p"odu$!%on & !em+ %n$lud%n# ma%n!enan$e o* lo$al pa"!ne" + !he $ompan&1 $omm%!men! !o !"an pa"en$&+ and !he "e pe$! and *a%"ne ,%!h ,h%$h -o!h *a"me" and lo$al pa"!ne" a"e !"ea!ed.

Glo-al Gree Co,*a ., an G 1 )hapar Group food ma0or that as engaged in contract farming, have 0oined the e&port band agon and are ra!ing in big buc!s from international mar!ets. It vaulted to the position of the third%

biggest pic!le ma!er in the orld after ac(uiring the "elgium%based Inter%garden Group in +ugust 2--6. #a$i dra Agri/%0+i e++ 7formerly 1ahindra *hubhlabh *ervices8 plans to get farmers ho have been using over%strained potato seeds for several generations to s itch over to high%yield ones and to e&tend it to cover 3-- acres 7 it has 22 acres under crop currently8. 5)his ill help to produce 6,--- tonnes of potatoes that e plan to e&port to Pa!istan, "angladesh, +fghanistan and 1iddle 9ast. De have a price advantage of B/-- < /=- per tonne over potatoes that come from 9uropean nations,6 says Mi!ram Puri, the companyN 4hief 9&ecutive :fficer. Relia !e is also venturing into agriculture retail business through contract farming. It$s .resh Plus, a bigger version of #eliance .resh, is already in operation to cater food and grocery, pharmacy and apparel. 1u!esh +mbani outlines his vision for the sector, sayingF 54onceptually, #eliance is creating a virtuous cycle of prosperity by bringing farmers, small shop!eepers and consumers in a in% in situation. Dith our initiative, #eliance ill forge strong and enduring bonds ith millions of farmers and transform the relationship ith consumers to a ne level6

ISSUE IN CORPORATE FARMING LAND TRANSFER

It is argued by the opponents of corporate farming that allo ing companies to buy land ill lead the farmers landless since the companies ould offer attractive prices hich may be tempting the farmers to sell their valuable lands and ould run the ris! of becoming landless.

INTERNAL AND EXTERNAL PROBLEMS

9&periments reveal that corporate farming has not been successful in many countries 7for e.g. Iran, "ra;il, Philippines8 due to the internal problems of agribusiness firms li!e mismanagement of undercapitalisation, managerial infle&ibility, and poor labour relations. .urther, the government support in the form of subsidi;edOfree electricity, fertili;er and seeds, lo interest credit and ta& and duty benefits may be deprived once the companies too! control of their landholdings

LAND CEILINGS
+griculture is a state sub0ect in India so far as policy ma!ing is concerned. )herefore, many state governments have attempted liberali;ation of land la s, especially land ceiling la s. "ut there is a lot of pressure from political parties and big farmers for the removal or rela&ation of land ceilings. .or instances, in

Pun0ab, hich lead the field among the states, corporate cannot lease land for more than 3- month, hich poses uncertainties for corporate investors.

COST OF PRODUCTION
In India, cost associate ith corporate farming is usually high due to poor rural infrastructural facilities such as access roads, storage, electricity and ater management. 4ost associated ith drip irrigation is another issue, even in states li!e Pun0ab and Karyana. It is estimated that drip irrigation costs #s.=-,--- per acre and if one ant to use it on /,--- acresJ it ill cost no less than #s.= crores, hich eats a ay lion share of profit margin.

QUALITY OF PRODUCTS
+ critical consideration is hether the (uality of the food hich reaches the consumer is as good as it ould be under alternative structures of o nership and production. )o the e&tent that corporate farming primarily see!s to ma&imi;e yield and profit, this is seen as adversely affecting upon nutritional value, freshness and flavour, as ell as upon the range of the products available for consumers. 4orporate farming practices may also more readily involve the use of genetically modified crops, hormones, preservatives, colour additives and insecticides, to ma&imi;ing yield and profit.

CONCLUSION
Dhatever the arguments against corporate farming, it$s beyond doubt that large scale corporate agri%business is more efficient than peasant farming prevalent in the country. It leads to better allocative efficiency, induces higher private investment in agriculture, and results in higher output income and e&ports. If the issues are properly addressed by the concrete effort of policy ma!ers, bureaucrats and all sta!eholders, corporate farming ill definitely bring a revolutionary changes in the Indian agricultural sector.