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Corporate giants look at the whole value chain

The aim of corporates is backward integration of supply chains to ensure right quality and quantity, reports Radhieka Mittal.

india Updated: Jan 08, 2007 16:23 IST

In India the trend started as far back as in 1989 with Pepsi Foods entering into contract farming to source tomatoes and potatoes for its processing units in Punjab.

Other multinationals such as Unilever, Cadbury and ITC have entered into contracts for various crops. The bigwigs of India Inc like Reliance, Godrej, Mahindra have also jumped on to the bandwagon. Various government and semi-government agencies have joined in with varying degrees of success, with banks like NABARD, SBI,  and ICICI providing finance.

With deep pockets and big ticket investments in the offing, these corporates are looking at every aspect of the value chain. The reason for this interest in agricultural economy is not altruistic. Their objective is the backward integration of supply chains to ensure timely availability of right quality and quantity of materials for the food processing industry and the slew of upcoming hypermarkets like ITC for retail initiatives like Choupal Fresh.

Reliance and Bharti also have plans to set up a chain of cold storages and refrigerated vans for procurement to reduce wastages and ensure freshness. The FICCI Food and Beverage Study of 2006 estimates that 30
per cent of the farm produce is being wasted every year due to the lack of such infrastructure.

Since the labour intensity of vegetable crops is higher than for traditional crops like wheat, contract farming has led to greater employment opportunities especially for women. According to a working paper of the Indian Institute of Management, Ahmedabad (IIM-A), titled “Corporate Farming in India,” a direct result of corporate farming will be to provide employment to professional farm management graduates of agricultural universities.

However, contract farming may not after all this furor be such a great deal. The study “Contract Farming for Agricultural Development” by Center for Trade and Development says that this type of farming has not benefited the country’s farmers. Contract farming also tends to shift production in favour of export-oriented and cash crops at the cost of basic food crops leading to higher prices for food commodities.

According to the NGO India Together, the experiences of Andhra Pradesh show that growing incidents of pre-determined prices being reduced on the pretext of inferior quality of the crop, and delayed payments have led to farmers resenting a system that has put them under the total control of corporations.

Professor Sukhpal Singh, Center for Management in Agriculture, IIM-A, feels that in order to make contract farming an effective development tool, strong systems to monitor contracts should be there to ensure that growers - the more vulnerable partners - are not exploited.