Linking Small Farmers to Global Markets: Role of Contracting Farming and Cooperatives in Asian Countries Mr. Chairman, Distinguished Rotarians, Ladies and Gentlemen, It is my great pleasure and honour to be with you – the leaders and entrepreneurs in different fields who have joined together for social service through the Rotary Club of Bangkapi. I thank you Mr. Chairman for giving me this opportunity to share my views and perspectives on the important topic of food security which is the mission of the Food and Agriculture Organization of the United Nations for which I work as the head of its Regional Office for Asia and the Pacific. The issue of food security is both challenging and complex. This problem cannot be solved by the governments alone. Effective partnership with the private sector and civil society is needed to eradicate hunger. Therefore, if the presentation I make here today contributes to the raising of the awareness and reinforcing your concerns and resolve to address this issue, I will consider my endeavour today quite successful. I would be delighted to answer any questions you may have to further clarify my statements after the presentation. Without further ado, now I move to my presentation. Purushottam K. Mudbhary Senior Policy Officer Policy Assistance Branch Regional Office for Asia and the Pacific

Contents Introduction Definition of contract farming Areas covered by contract farming Contract farming models Positive lessons Risks for farmers Risks for sponsors Key preconditions for success Cooperatives in Asia Cooperatives in Asia: Selected Examples My presentation today will have the following content. First, I present the food security situation globally and regionally in the historical context. In this part we will note the international commitments to eradicate hunger and the progress we have made in achieving the same. We will also note the major factors helping or hindering the progress in achieving the hunger eradication goals. The second part of the presentation will deal with the main challenges for sustainable food security in the region. The third and final part will concern with the building of national and international alliance for concerted actions against hunger.

INTRODUCTION “…globalization is more than the flow of money and commodities—it is the growing interdependence of the world’s people. And globalization is a process integrating not just the economy but culture, technology and governance. People everywhere are becoming connected–affected by events in the far corners of the world.” UNDP – Human Development Report 1999

INTRODUCTION Major features of the present globalization New markets—foreign exchange and capital markets linked globally, operating 24 hours a day New tools—Internet links, cellular phones and media networks. New actors—WTO, with authority over national governments, the MNCs with more economic power than many states, the global networks of NGOs and other groups that transcend national boundaries. New rules—multilateral agreements on trade, services and intellectual property, backed by strong enforcement mechanisms and more binding for national governments, reducing the scope for national policy.

INTRODUCTION Trade is a key link of globalization The farm sector need to be competitive to survive and to contribute to poverty alleviation and economic growth in low income countries Ability to compete will depend on: the efficiency of production at the farm level, the efficiency of marketing and processing systems, the domestic policies and market access conditions

INTRODUCTION Market access also depends on the ability to meet the quality and safety standards of importers Most farmers in Asia are small farmers and poverty is highly concentrated among them Definition of small farmers differs, both in terms of size and organization There is duality in the organization of the farming sector, but commercialization is increasing

INTRODUCTION Development of cooperatives and contract farming schemes are the two key strategies for benefiting from globalization through vertical coordination of small farms with processors and exporters These can enhance the economy of scale and the quality standards at the production, marketing and processing level Public goods – policies, infrastructure and support services including market info., research, testing and certification – reducing transactions costs, building human capital and removing credit constraints are crucial Vertical coordination with processors and exporters and a pro-active public sector are essential

DEFINITION OF CONTRACT FARMING An Agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices FAO; Contract Farming: Partnerships for Growth; 2001

AREAS COVERED BY CONTRACT FARMING Market provision: The grower and buyer agree to terms and condition for the future sale and purchase of a crop or livestock product Resource provision: In conjunction with the marketing arrangements, the buyer agrees to supply selected inputs, including on occasions land preparation and technical advice Management specifications: The grower agrees to follow recommended production methods, inputs regimes, and cultivation and harvesting specifications

CONTRACT FARMING MODELS The centralized model. The sponsor purchases crops from farmers for processing, and markets the product. Quotas are distributed at the beginning of each growing season and quality is tightly controlled. Generally associated with tobacco, cotton, sugar cane, bananas, coffee, tea, cocoa and rubber. Can also cover poultry, pork, dairy, fresh vegetables and fruits. Examples: sugarcane production in Thailand, tomato processing in Punjab, India, vegetable canning in the Philippines. The extent of the sponsor’s involvement varies

CONTRACT FARMING MODELS Nucleus estate model. The sponsor owns and manages a plantation, usually close to a processing plant, and introduces technology and management techniques to farmers (sometimes called "satellite" growers). Mainly used for tree crops, but has also been applied to dairy production. Examples: Oil palm (in resettlement areas) and dairy in Indonesia, tea estates in India, Nepal and Sri Lanka.

CONTRACT FARMING MODELS Multipartite model. Usually involves statutory bodies and private companies jointly participating with farmers. Usually, contract commitment to provide material and management inputs to farmers. Example: common in China, where government departments, township committees and foreign companies have jointly entered into contracts with villages and individual farmers.

CONTRACT FARMING MODELS Informal model. Individual entrepreneurs or small companies make simple, informal production contracts with farmers on a seasonal basis, particularly for fresh vegetables and tropical fruits. Supermarkets frequently purchase fresh produce through individual developers. Normally, minimal processing and few inputs to farmers; availability of govt. support services crucial. Examples: Gherkins production in Sri Lanka; bananas, squash and papaya production for export in the South Pacific and chrysanthemums and fresh vegetable production in northern provinces of Thailand.

CONTRACT FARMING MODELS Intermediary model. Formal subcontracting of crop production to intermediaries is common in Southeast Asia. Large food processing companies purchase crops from individual "collectors" or farmer committees, who make their own informal arrangements with farmers. The risk is that the sponsor loses control over production and over prices paid to farmers by middlemen. Examples: Soybean, green beans and baby corn production in Northern Thailand; in Indonesia, this practice is widespread and termed plasma.

POSITIVE LESSONS Can be effective in linking the small farm sector to sources of extension advice, mechanization, seeds, fertilizer and credit, and to guaranteed and profitable markets for produce Private agribusiness will usually offer technology more effectively than government agricultural extension services, because it has a direct economic interest in improving farmers' production

POSITIVE LESSONS Skills transferred can include the efficient use of farm resources, carrying out field activities according to a strict timetable, improved methods of applying chemicals and fertilizers, and a knowledge of the importance of quality and of the demands of export markets and good record keeping Reduce price uncertainty to farmers

POSITIVE LESSONS Companies gain access to crop production on land that would otherwise be unavailable, with the additional advantage of not having to buy or lease it Enables them to share risks, find reliable supplies of raw materials for processing plants, and guarantee that their products conform to quality standards Can contribute to both increased income for farmers and higher profitability for sponsors

RISKS FOR FARMERS Uncertainty involved in growing new, unfamiliar crops and producing for markets that might not always live up to their expectations - or their sponsors' forecasts Loss of bargaining power vis-à-vis a large agro-industry, monopsonistic market power and exploitative terms Manipulation of quality standards by the sponsor in order to reduce purchases Debt caused by production problems, poor technical advice, significant changes in market conditions, or a company's failure to honor contracts

RISKS FOR SPONSORS Insecurity of the access to land Farmers’ inability to meet strict timetables and regulations because of social obligations or religious practices “Extra-contractual marketing" - farmers breaking the contract and selling their produce on alternative markets – sometimes encouraged by rival sponsors

KEY PRECONDITIONS FOR SUCCESS A profitable market For the sponsor an identified market for the planned production that such market can be supplied profitably on a long-term basis The farmer must find the potential returns attractive on the basis of realistic, demonstrated yield and acceptable risks

KEY PRECONDITIONS FOR SUCCESS The physical and social environments The physical environment Utilities and communications Land availability and tenure Inputs availability Social considerations

KEY PRECONDITIONS FOR SUCCESS Government Support Suitable laws of contract and an efficient legal system Awareness of unintended consequences of regulation and avoid tendency to over-regulate Provision of research and extension Take steps to bring together agribusiness and suitable farmers

COOPERATIVES IN ASIA Agricultural cooperatives functioning in almost all countries of the region Various forms: formal and informal farmers’ organizations, production groups, producer cooperatives, collectives, marketing cooperatives, agricultural credit cooperatives, multipurpose and single-purpose cooperatives Started mostly with government assistance and initiative or as a result of development projects

COOPERATIVES IN ASIA The success spectrum varies from country to country. Many suffer from managerial problem, lack of membership participation, heavy participation and influence of government, little involvement of members in decision making Primary cooperatives suffer from weaknesses and deficiencies due to small size and low membership

COOPERATIVES IN ASIA: SELECTED EXAMPLES India One of the oldest in the region and largest in the world in terms of the number of cooperatives and membership; around 504,000 cooperatives in 1998 serving 209 million people of which 65% agricultural cooperatives with 137 million Vertically integrated through respective federations at district, state and national levels

COOPERATIVES IN ASIA: SELECTED EXAMPLES India Active in agro-processing – 320 cooperative sugar factories producing more of 60% of sugar produced in the country; around 90,000 dairy cooperatives making India the largest producer of milk; specialized cooperatives for oilseeds, rubber, horticulture and fertilizer Strongly backed by cooperative education and staff training – largest in the world training managers and providing member education

COOPERATIVES IN ASIA: SELECTED EXAMPLES Bangladesh More than 40,000 traditional cooperatives and more than 100,000 farmers’ cooperatives Not very successful due administrative interference and control, lack of managerial skills, small size and low membership Republic of Korea Vertically organized into three levels: township level primary cooperatives, city/county cooperatives and national federation (NACF)

COOPERATIVES IN ASIA: SELECTED EXAMPLES Republic of Korea Regional primary cooperatives engaged in grain production; special primary cooperatives for fruits and vegetables Almost all farmers affiliated with the cooperatives; 2 million members at the end of 1997; number of regional cooperatives reduced due to amalgamation drive to achieve economy of scale

COOPERATIVES IN ASIA: SELECTED EXAMPLES Republic of Korea Member-cooperatives perform marketing of agricultural products, supply of farm inputs and consumer goods, agricultural extension, banking and credit and insurance NACF has 40% share of local agricultural marketing and runs one of the largest deposit banking operation in the country

I thank you for your kind attention. Have a good day!