Industrial Agriculture Recap Unit-III recap

Contract Farming

The Challenge

• front-end activities like whole-selling, marketing, processing, logistics and retailing are growing and being consolidated
• back-end activities of Production Agriculture are being neglected and continuously fragmented

We will have to link the two ends (farms and firms):

• ensure viable business activities for both farmers and agri-business

Not only providing market, risk-safety and price-assurance (MRP) But also services: Credit, Insurance, Grading, Inspection, Tech ext., market info.u

We need institutions to build these linkages:

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One of them is contract farming, led by: Cooperatives, farmer groups or various types of private sector resource intermediation that creates a backward linkage to the growers.

Consolidation at the Top of the Value Chain

• India’s current tide in the growth of organized retail expansion $16\%\to 15\%$.

• Top 10 organized food & grocery sectors grew from 2002 $\to$ 2007 @ $72.4\%$.

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• There is ample scope for scaling up organized food and grocery retailing which is proven by the higher growth rates of the top players in both food and grocery in the organized retail sales in India.

• growing demand for processed foods

  • boost to India’s food processing sector 2002-03 to 2006-07 @ $13\%$

Fragmentation at the Bottom of the Supply Chain

• Production agriculture has a fragmentation trend
• Average landholding sizes are declining $2.2$ hectares $\to 1.06$ hectares.¹
• $88\%$ of farmers have $<2$ hectares of land → Marginal and Small farmers
  • account for $44\%$ of operated area
  • their share in total value of agricultural-output → $51\%$

Contract Farming & Farm-Firm Linkages

• future sources of agricultural income is most likely to come from the high value segment, driven by rising demand: horticulture, livestock and fishery
• key challenges:
  • meet farmers’ production needs
  • mitigate production and marketing risk
  • efficient and compititive
  • inclusive - working with small farmers

Direct Procurement

• processors and retailors may choose to source raw materials directly from the farmers (or regulated market yards, small traders)

• no conceptual tie-up with the farmers, can buy from anyone

• can be only done in states where Agricultural Produce Marketing Committee has been amended

  • permits buyers to buy directly from producers

• e.g. Food Bazaar, Reliance

• contractual buy-back agreements:

  • provide seeds and inputs to the farmers
  • primarily driven by size and quality requirements

Open-Source Intermediation

• info
  • market price
  • crop
  • good cultivation practices
• no buy-back gaurantee
• bridge the knowledge gap
• e.g. Godrej Aadhar

Limitations

• many of them are informal agreements
• small farmers have limited bargaining farmers
• dependency of very few firms

Market Structures

• Structuring conditions
  • Number of Firms
  • Product Differentiation
  • Entry barriers
  • Degree to which firms are vertically integrated
  • market concentration
• info about structural characteristics may be obtained from concentration curve

Market Structures are influenced by 5 Factors

They are analyzed as structure, conduct and performance (SC-PD-ES-I-EB)

1. Sellers’ Concentration

• conduct for firms in fixation of prices (independently, or in collusion)
• it is influenced when
  1. Customer switch, small firm to larger
  2. Entry of new firms (below average size)
  3. Product-wise concentration, total industry output → 4 firms or largest.

2. Product Differentiation

• space for price manipulation

• enticing consumers, establishing supremacy of product

• innovating improvements, challenge to competitors

• retaining customer support → RnD

• PD can backfire, uncertainty, impact profitability and survivability of firm

3. Economies of scale

• technological considerations
• cost of: input, labor, production expenses will show a declining trend as output increases
• achieved through: efficiency, saving of labor costs, reduction in per-labor cost

4. Innovation

• invention
  • generation of new idea
    • result of human inquisitiveness, inspiration
  • subsequent development
• diffusion
  • perspiration, hard work
  • entrance of that idea into the market
• 5 types
  • new product
  • new method
  • development through diffusion
  • exploitation of new supply source
  • reorg of operations

5. Entry Barriers

• new entrant is placed at a comparative disadvantage with existing monopolistic firms
• Three types:
  • Econ of scale: New entrant doesn’t enjoy this (smaller scale)
  • Absolute cost advantages: (uncertain demand, to increase scale, inflate abs cost. Disadvantageous)
  • Product differentiation: Existing firms may have created bias

Footnotes

1. 1970-71 $\to$ 2003 ↩