A Case Study of Pepsico Contract Farming For Potatoes
PEPSICO INDIA provides farmers with variant of seeds for Contract Farming that helps farmers not only providing a ready market but also in technological application, getting farm credit and insuring their crops. Contract farming is an agreement between farmers and the company for production and supply of agricultural products or commodities of a certain type, under forward agreements regularly at a pre agreed price and time for a certain quantity. This case study is an initiative to demonstrate Pepsico India Holdings Private Ltd, the Indian arm of Pepsico International's successful Contract Farming for potatoes in India. The case study provides a detailed outlook of the concepts of contract farming and the relationship of the farmers with that of the PEPSICO Company. I. Contract Farming: Strategising the Concept Contract farming is an agreement between a buyer and farmers, to carry out agricultural production that refers to production and supply of agricultural produce under a forward contract. Singh (2002) stated that it is a commitment to provide an agricultural product at a fixed price, time and required quantity to a known buyer. The companies often meet farmers to introduce them to the best agronomy practices. It has been observed that Indian Companies are mainly embracing contract farming to support their export demands where they have to ensure product qualities and other specifications. However, farmers perceive contract farming as a relationship with the firm while from the purchaser's point of view, it is a good quality, timely availability of material at a predetermined price, which is the basic requirement for any successful agro business firm whether operating at National /International market. Collier and Dercon argue, potential benefits for national economies as contract farming leads to economies of scale are bound to provide for a more dynamic agricultural sector. It is a flexible means which supports price and production and an assured market in advance. Contract farming is essentially a market driven farming, not like traditional farming, where farmers first produce a product and then search for its market. It essentially involves four factors like pre agreed price, quality, quantity and time. Contract farming is a strategy adopted by food processors in gaining momentum due to sharp rise in the economy, rising food demand, organising retail boom and increasing shift towards branded food consumption. Market Perspective The grower and buyer agree to terms and condition for the future sale and purchase of a product. Resource perspective In conjunction with the marketing arrangements, the buyer agrees to supply selected inputs such as seeds, fertilizers for the cultivation of crop including on occasions land preparation and technical advice. Management Specification Perspective The grower agrees to follow recommended production methods, inputs regimes, and cultivation and harvesting specifications from the firm (Eton et al. 2001) Contract farming has been used for agricultural production for decades but its popularity appears to have been increasing in recent years. The use of contracts has become attractive to many farmers because the arrangement can offer both an assured market and access to IOSR Journal of Business and Management (IOSR JBM) e ISSN: 2278 487X, p ISSN: 2319 7668 PP 75 85 www.iosrjournals.org IES Management College and Research Centre 76 |Page (IESMCRC 2016) production support. Contracts with farmers can also reduce risk from disease or weather and facilitate certification, which is being increasingly demanded by advanced markets. Contract farming is also of interest to buyers, who seek supplies of products for sale further along the value chain or for processing. Processors constitute the main users of contracts, as the guaranteed supply enables them to maximise utilization of their processing capacity. A Win Win Situation It is extremely beneficial for companies involves in it as it can be a means to develop markets and technology transfer in a way that is profitable for both the companies and farmers. The contractual agreement can provide the farmers with access to production services and credit as well as knowledge of new skills and technology. Some contract farming ventures give farmers the opportunity to diversify into new crops and new markets. Contract Farming ensures timely supply of quality seeds to the companies which in turn increase the yields of the particular firm. Objectives of Contract Farming To promote a steady source of earnings at the individual farmer level. To expand private sector investment in agricultural business. To inspirefinancially rewarding employment opportunities in rural communities, especially for landless agricultural labour. To bring down the burdenof central and state level procurement system. To minimize migration from rural to urban areas. To create a market focus in the matter of crop selection by Indian farmers. To promote value addition and processing. To bring down as far as feasible, any seasonality associated with such employment. To encourage rural self reliance by pooling locally available resources and expertise to meet new challenges. Types of Contract Farming Contracts Contract of Procurement, where buy and supply terms and conditions are intimated. Partial Contract, where agro firm supplies some inputs to farmer and produces are acquired by agro firm at pre determined price. Total Contract, where agro firm supplies all the inputs required, to farmersforproducing crops on his own land.In case of total contract, farmershave to bear only land and labour. Commencement of Contract Farming By Pepsico in India In the year 1989, PepsiCo (formerly known as Pepsi Foods Ltd. launched its agro business in Indiain Hoshiarpur District of Punjab with special emphasis on exports of value added processed foods by introducing world class tomato processing plant. TheContract farming model followed by PepsiCo, where thefarmerharvests the company's crop on his land, and the company suppliesthe farmer with inputs such seeds/saplings, agricultural applications and regular monitoring of crops by its technical team. Motivated by the success of contract farming for tomato in several district of Punjab, PepsiCo has been stronglyimitating the IOSR Journal of Business and Management (IOSR JBM) e ISSN: 2278 487X, p ISSN: 2319 7668 PP 75 85 www.iosrjournals.org IES Management College and Research Centre 77 |Page (IESMCRC 2016) model of food grains, such as in case of Basmati rice, spices like chilies, oil seeds namely ground nuts and vegetable crops like potato. Since 1990,PepsiCo has been engrossed in the export of Basmati rice, the first processor in India to invest and build up linkages for Basmati rice. Before undertaking contract farming of Basmati rice, PepsiComoved through in depth multi location field tests to assess several varieties for their acceptability.PepsiCocompany's scientistsestablish successful transplant of technology from the tests to the commercial field level, associated from the stage of selecting varieties of Basmati rice, evaluation of combination of practices for farmers and seed multiplication of these varieties. In the contract farming mechanism, the company procures entire pre agreed quantity of the harvested produce at the farm gates at the pre determined price. For the purpose of processing, packaging and exports, theprocured raw material is transferred to the processing plant at Sonepat in Punjab. The company plans to expand and therefore has been organising several trials in Karnataka to assess hybrids/varieties of chilies, tomato, potato and maize. PepsiCo/Tropicana is moving forward in the field of contract farming for citrus fruits in collaborationwith theGovernment of Punjab, the Punjab Agricultural University and Department of Horticulture,where Punjab government has providedassistance in creation of nursery infrastructure, bearing cost of importing germplasm and allotment of land as demonstration plots at various locations. In the same time Tropicana Products Inc, a PepsiCo owned company has facilitatedentry to numerous varieties and knowledge base for various practices for farmers. Leveraging services of international experts to part expertise from US nurseries and educating people on grafting and planting. A Group of Farmers from Punjab were sent to visit Citrus groves in Florida by PepsiCo. Farmers in Punjab will now have access to world class resource of planting material with this venture.With the help of this gainful venture with PepsiCo, farmers are now be able to select among more than fifty varieties of citrus and sixteen varieties of root stock for the purpose of production. Contract Farming for Potato by Pepsico In the year 1987, FritoLay, a PepsiCo group company set up its first potato chips plant in Channo, district Sangrur, Punjab. Later two more plants were started one at Ranjangaon, Pune (MH) and the other at Howrah in West Bengal. For the operations in these plants, PepsiCoCompany required more than 100,000 MT of processed grade potato per annum. Though India is the third largest producer producing nearly 25 million tons per annum after China and Russia, meeting the requirement of process grade potato is still uncertain. Potato is widely available but the challenge is in getting a year round supply of the processed quality of potatoes that are required for producing chips.The major factor behind this gap is non availability of processing grade varieties. Immediately after the unveiling of K. Chipsona 1, K. Chipsona 2 and K. Chipsona 3 process grade IOSR Journal of Business and Management (IOSR JBM) e ISSN: 2278 487X, p ISSN: 2319 7668 PP 75 85 www.iosrjournals.org IES Management College and Research Centre 78 |Page (IESMCRC 2016) varieties by the Central Potato Research Institute, Shimla this difference is being diminished. Seasonality, is the other vital limiting fac