The working group on risk management in
resource providing contract
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| resource providing contract, where the contracting firms supplies production inputs, extension and credit, in exchange fora marketing arrangement. The last one, is the management and income guaranteeing contract, which includes the production and marketing stipulations, of the former two types. In addition, market and price risks are transferred from the farmer to the firm, and the farmer is assured of a certain level of revenue. However, the contracting firms, take a substantial part of the managerial responsibility of the farmer. These types of contracts are common in the case of the poultry industry. The price in contract farming is determined in two ways, through fixed price and through formula price contracts. The former fixes price in advance. It generally increases risk for the firm- buyer, and guarantees a floor price for the farmer. The latter calculates price as a residual, after subtracting processors costs from revenues obtained. Another locus of any contract is its capacity to shape, regulate and discipline the production and labour process, of the grower. Many contracts specify, that growers adhere to specific farming practices prescribed by the firm. These specifications frequently surface as points of friction, between growers and processor-buyers. The feasibility of enforcement, depends largely on the strength of legal institutions and political circumstances. Agribusiness companies need an assured and regular inflow of supplies, to operate their processing facilities efficiently and often, they require the commodities to be processed to satisfy certain quality standards. The conditions that favour contracting are an opportunity for reducing price & sales volume uncertainties, the need for the standardised farm produce by the firms, inability of spot market to provide such produce, etc. Of the broader motives of contracting, avoiding conflicts overland ownership and labour issues, are probably equally important. For crops requiring much labour and careful attention, small holder production, maybe more efficient than plantations. From the viewpoint of farmers, contract farming is a mechanism to overcome institutional and market failures, that are prevalent in agriculture in the developing countries. Market failure or imperfect markets for technology, credit, insurance, information, factors of production and final product, are identified as the factors that influence the farmer, to go in for contract farming. Factors like transaction cost, local organizations and crop characteristics, influence both the farmer and contracting firms. Irrespective of demand, there are certain technical characteristics that make some crops more suited for contract farming. These are perishability, bulkiness, permanence, need for processing and variations in quality. Perishable crops needs to be processed quickly and need elaborate collection systems. The setting up of such systems can be done more easily, when risks are reduced through contracts. Bulky crops such as fruits and vegetables, are the most likely commodities for contract farming. Permanent and semi permanent crops are also more suited than annual crops, for contract farming. The reason is that growers of coffee, tea and similar crops, cannot easily abandon production and so are locked into a relationship with the processor. Crops requiring extensive processing are most appealing to agribusiness, which can then use its processing facilities, to discipline suppliers. Crops that vary significantly in quality and for which quality is important, are also suited for contract production. Many crops produced under contract farming, occupy special market niches that are subject to strong international forces. Contracts often require firms to supply credit, input, technology, extension and surveillance support, as well as provide for stipulated price and resolution of conflict. The farmers have to supply the right quality output and adhere to the package of practices and other terms of the contract. End market requirements and government policies affect firms in a contract farming situation and price in open market, experience in contract farming, knowledge level and natural calamities, affect farmers. Download 0.68 Mb. Share with your friends:
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