17 Arun Pandit

Ind. Jn. of Agri.Econ.
Vol.64, No.3, July-Sept. 2009
An Empirical Study of Gains from Potato Contract Farming

Arun Pandit*, N.K. Pandey**, Rajesh K. Rana** and Barsati Lal†
I
INTRODUCTION
Agricultural economies of developing countries including India are characterised

by low productivity with the dominance of subsistence production especially among
small growers. Even though commercialisation can yield substantial gains, the
transition from subsistence farming to market-driven production is fraught with
perils. First, market volatility is an enduring feature of commodity markets. This
makes cultivation of cash crops risky. Second, as incomes grow, consumer taste shifts
in favour of processed foods. Small farmers are too remote from consumers to track
their preferences. Third, small farmers typically lack capital and technical expertise to
undertake cash crop production, which are usually more input intensive than
subsistence crops (Ramaswami et al., 2006). On the other hand, agricultural
processing firms very often face the problem of acquiring good quality raw material.
In the open market there is no guarantee of uninterrupted supply of the material and it
is very difficult to trace back the origin of the produce. Hence, contract farming, if
carefully planned and executed, provides a win-win situation for both the producer
and processors. It ensures better linkage between farm and market where processor
gets timely and consistent supply of raw material of the desired quality at low cost.
MANAGE (MANAGE, 2006) defines contract farming as a system for the
production and supply of agricultural/horticultural produce under forward contracts
between producers/suppliers and buyers. The essence of such an arrangement is the
commitment of the producer/seller to provide an agricultural commodity of a certain
type, at a time and a price, and in the quantity required by a known and committed
buyer. Indian agriculture is now more interlinked with world agriculture than ever
before. In the context of liberalised global trade regime, among different possible
avenues that could safeguard the interest of small and marginal farmers, contract
farming is the most convenient and safer option (Kiresur et al., 2002). With the
initiation of boom in retailing sector, the contract farming gets further fillip. A
number of big companies both national and MNCs are setting up retail chains.
*Sr. Scientist, Central Rice Research Institute, Cuttack – 753 006 (Orissa), **Principal Scientist and Sr.
Scientist, Central Potato Research Institute, Shimla and †Scientist, Sr. Scale, Central Potato Research Station, Patna.
The authors thankfully acknowledge the services and help rendered by T.K. Sinha, Arjun Sharma, Dist.
Agricultural Offices of West Bengal, Rahul Chaturvedi, Pratap Bose and all the officers and officials of FritoLays
who helped in the field survey work. Further, the authors also thank the anonymous referee for his valuable
suggestions and S.K. Pandey, Director-CPRI for guidance and financial assistance.
498 INDIAN JOURNAL OF AGRICULTURAL ECONOMICS
Majority of their agricultural supply will come through the backward linkage by
contract farming. The National Agricultural Policy (2000) announced by the
Government of India sought to promote contract farming by involving the private
sector in order to accelerate technology transfer, capital inflow and assured marketing
of crop production (Asokan, 2005).
Contract farming has a major role to play in the potato processing sector in India
(Pandit and Pandey, 2007). Prior to nineties, potato processing sector in India was
very poorly developed. One of the major reasons was the lack of sufficient processing
grade potatoes due to unavailability of suitable varieties. With the introduction of
indigenous processing varieties like Chipsona I, II, III and foreign varieties like
Atlantic and Kennebec, significantly more potato area is now become suitable for
growing potato for processing. A number of big potato processing companies set up
their plants, the raw materials for which are mainly collected through contract
farming. Pepsi foods is one of the earliest entrants in the food processing sector in
India. Its Frito-Lays division makes popular ‘Lays potato chips’. It established
processing plants in Maharashtra, Punjab and West Bengal.
However, notwithstanding the theoretical benefits, contract farming has been
controversial and has been criticised for being exploitative. Farmers have little
bargaining power against the giant corporation. Sometimes growers encountered the
problems of manipulation of quality standards, poor technical assistance, and
sometimes plain cheating and deliberate default (Glover, 1989). On the other hand,
the companies also face the problem of selling of the produce in the open market by
the farmers, if the market price rules higher than the contract price. Against this
backdrop, it is imperative to study the performance of contract farming at the field
level. However, most of the literature discussed the general issues of contract farming
in India. Some studies like Asokan and Singh (2003) Kumar et al., (2007) dealt with
some specific issues like conduct, performance and constraints of contract farming.
But it will be important to know how farmers benefited from the contract farming.
Therefore, this paper empirically analyses the gains from contract farming from the
farmers point of view. Besides, the technical efficiency was also estimated using Data
Envelopment Analysis technique for both the contract farmers as well as non-contract
(ordinary) farmers in the present study.
II
METHODOLOGY
The contract farmers in the present study were the potato farmers who were under
contract with the Frito Lays of Pepsi. The factory is located in Sankrail of Howrah
district. The primary data were collected through survey work conducted during
March-April, 2008. Four districts of West Bengal, viz., Hooghly, Bankura, Burdwan
and Howrah were selected purposively due to the presence of higher concentration of
contract farmers. A total of 13 blocks, minimum 3 from each district were selected
AN EMPIRICAL STUDY OF GAINS FROM POTATO CONTRACT FARMING 499
purposively depending upon the concentration of the contract farmers from each
district. Data were collected from the 144 contract potato growers and 139 ordinary
or non-contract potato growers spread over 76 villages. The samples of contract and
non-contract growers were drawn randomly preferably from the same location.
Analytical Framework
The socio-economic analysis and economics of potato production was worked

out with the help of simple tools of mathematics, i.e., averages percentages, etc.
Instead of conventional cost concepts like cost A1, A2, etc. Here the cost has been
calculated operation-wise to compare the cost structures between contract and non-
contract method of production in each stage of cultivation.
Technical efficiency is the ability of a farm/firm to achieve maximum possible
output with the available resources. In India most of the studies of technical
efficiencies have been done in the recent past. Moreover, the studies have been
attempted mainly on the field crops like, paddy (Mythili and Shanmugam, 2000;
Shanmugam, 2003; Goyal et al., 2006), maize (Rao et al., 2003; Anupama et al.,
2005), wheat (Singh, 2007), cotton (Shanmugam, 2003), edible oil (Mrutyunjaya et
al., 2005), groundnut (Shanmugam, 2003), etc. The research works carried out in
India related to efficiency analysis on horticultural crop is scanty. Moreover, most of
the efficiency analysis studies employed stochastic frontier production function,
which requires some assumptions. In this study, similar to Kumar et al. (2005), Data
Envelopment Analysis (DEA), a non-parametric technique of technical efficiency
estimation was employed.
It uses a mathematical program to estimate the efficiency frontier. It does not
need the pre-specification of the production function coefficients. Unlike parametric
approaches, DEA makes no assumption of the distribution of the underlying data, and
all deviations are assumed to be due to inefficiency (Banker et al., 1989). DEA
analyses farms separately while measuring its efficiency relative to all the
observations in the sample. Let X be the input matrix of order k × n and Y the output
vector. Here k is the number of inputs. Thus, for i-th farm, Xi and Yi represent the
respective inputs and output. Now the problem reduces to obtaining a ratio measure
μ’Yi/ν’Xi where μ and ν are the output and input weights, respectively. Optimal
weights are obtained by solving the following mathematical program:
Max μ,ν (μ ′i Yi /ν ′i X i )
Subject to
μ ′ Yj / ν ′ X j ≤ 1 , j = 1, …, n
μ, ν ≥ 0
In order to avoid infinite number of solutions, imposing a constraint ν′ X j = 1, we

get
min θ,λ θ
subject to
− y i + Yλ ≥ 0
θx i − Xλ ≥ 0
λ≥0
Here, θ is a scalar and λ is an n × 1 vector of optimal weights. θ represents the
technical efficiency (TE) corresponded to constant return to scale (CRS). Imposing
an additional constraint 1′ λ =1 gives the technical efficiency under variable return to
scale (VRS). Efficiency measurements by the DEA model can be used to determine
both pure technical and scale efficiencies (TECRS/TEVRS). The product of these two
gives the overall technical efficiency. Efficiency scores in this study are estimated
using the computer program, DEAP Ver. 2.1. described in Coelli (1996).
III
RESULTS AND DISCUSSION
Contract Farming Scheme
Frito Lays is undertaking contract farming in several states of India. The quantity
under Pepsico contract farming programme has grown almost five times since 2003.
The number of farmers contracted has jumped from 800 in 2003 to almost 11000 in
2007. Acreages under contract has grown from 2000 acres to 11600 acres in 2007
(Mukkavilli, 2008).
The potato contract of Frito-Lays in West Bengal is an instance of a “production
management” contract where the company supplies inputs and extension, advances
credit (in kind), provides price insurance and monitors grower effort through frequent
inspections. During 2007-08 about 1650 acres were under direct contract in 7 districts
of West Bengal, viz., Hooghly, Bankura, Burdwan, Birbhum, Paschim Medinipur and
Howrah. The farmers had been provided seed largely on credit. The company also
provided insecticide and pesticide at cost, but this was optional for the farmers. The
contract growers supplied land, labour and other variable inputs. It has been seen that
the contract agreement was largely verbal. No Government functionary was involved
in the contract farming programme. In some places the agreement was not very clear
to the farmers and hence, disputes arise. Vendor was appointed by the company who
manages the total affair for a group of villages. He is generally an influential person
in the society. The big farmer, potato trader, co-operative society etc. were some of
the vendors. Technical aspects were looked after by the field agents. He sorts out
problems especially regarding disease/pest, cultural practices and visits the farmer
frequently. The whole production process was closely monitored to ensure the quality
production. Monitoring was also helpful for maintaining good relationship. The price
was fixed well before planting. In the open market price fluctuates vigorously. Thus,
a farmer received considerable price insurance in the contract farming. However, the
price fixed was not uniform across the state. Depending upon the vendor, it was fixed
for whole produce or graded produce. In some places some incentive was provided
with the base price. Incentive was given on the basis of ‘pay for performance’, i.e. for
quality produce and good cultural practices. Farmers’ responsibility ended at heap
making in the field or in some cases he had to bring the produce upto the road head.
The seed of the variety Atlantic was supplied @ Rs. 2000/q to the farmers. The
technical help was provided free of cost.
Socio-Economic Profile of the Potato Farmers
The analysis of socio-economic profiles is very important since they provide the
status of society in which farmers operate. Moreover, they exert profound influence
on the farmer’s decision making pattern. Table 1 presents the potato farmers socio-
economic profiles and it could be seen that the contract farmers were more
experienced and have more years of schooling. The social participation was
significantly more in case of contract farmers. Social participation, i.e., member or
office bearer of co-operative societies, religious bodies, political parties, etc. helps
farmers to venture out for new scheme of production like contract farming.
TABLE 1. SOCIO-ECONOMIC PROFILE OF THE POTATO FARMERS
Parameter Non-contract farmers Contract farmers

(1) (2) (3)
Age (Years) 42.56 44.05
Years of schooling 8.03 9.10
Family size (number) 6.38 6.98
Social participation (per cent of farmers) 40.58 54.41
Per cent of total income comes from
Farming 88.09 85.97
Service 1.18 4.15
Pension 0.07 1.83
Business 3.09 6.86
Others 7.57 1.19
Operational holdings (ha) 1.03 1.46
Table 1 also shows that in addition to the larger operational holding, the contract
farmers got comparatively higher share of their total income from the non-farm
sources. However, except social participation the difference in other parameters was
not very much acute. In fact the company does not discriminate the farmers to include
them in the contract farming scheme. But comparatively small and poor farmers
hesitate to join the programme.
Varietal Performance
It would be interesting to determine the varietal preferences and yield difference

of different potato varieties between these two groups of farmers. Table 2 shows that
Atlantic was cultivated only by the contract farmers and it occupied about 43 per cent
of their potato area. Frito-Lay gave only Atlantic variety for contract farming. K.
Jyoti was the predominant variety for both categories of farmers, the area under it
being about 70 and 44 per cent for ordinary and contract farmers, respectively. K.
Pukhraj and K. Chandramukhi were the other major varieties. It is interesting to note
that the yield level of all the varieties were comparatively lower in contract farmers as
compared to non-contract farmers. The possible reasons is that contract farmers
devote superior quality land to contract production and also much of his attention are
grabbed by the contract cultivation.
TABLE 2. VARIETAL PERFORMANCE
Variety Particulars Non-contract farmers Contract Farmers

(1) (2) (3) (4)
Atlantic Per cent of potato area 0.00 42.96
Average yield - 199.70
K. Jyoti Per cent of potato area 69.45 43.88
Average yield 244.37 227.30
K. Chandramukhi Per cent of potato area 9.29 3.23
K. Pukhraj Per cent of potato area 19.67 8.71
Others Per cent of potato area 1.60 1.04
Actual weighted average harvest price ATL - 450.94
(Rs./quintal) K. Jyoti 229.31 239.25
The price fixed in the contract system was not uniform across the state.
However, the average price of Atlantic was much higher than the K. Jyoti. It is also to
be noted that the contract farmers could fetch higher prices even for K. Jyoti than the
ordinary farmers. This may be due to their higher social influences. The yield of
Atlantic was comparatively less as compared to the next most popular variety Kufri
Jyoti. The yield difference may be due to the genetic potential and altered crop
geometry. Traditional geometry cannot give processed grade potatoes. Replacing the
traditional geometry with advanced geometry increase the process grade yields, while
the total yield may drop (Mukkavilli, 2008). In some places farmers complained
about the poor quality of supplied seed which may also be one of the reasons. When
vendors do not purchase the whole produce, farmers faced the problem of disposing
off the rejected potatoes. Due to the bad taste of Atlantic for table purposes, its
consumption at home is minimal. Therefore, farmers require a good processing
variety which will be of short duration (85-90 days), good yielder (at least at par with
K. Jyoti) and having good taste for table purpose. However, by and large, farmers
were happy about the return of contract farming as market price plummeted to a very
low level for K. Jyoti in that year.
Economic Analysis of Potato Cultivation
The details of economic analysis are presented in Table 3. The table shows that
farmers had to spend Rs. 70,705 and Rs. 74,909 per hectare for cultivation of K. Jyoti
and Atlantic, respectively. For same variety K. Jyoti, the contract farmers spent about
Rs.4000 less per ha for cultivation as compared to non-contract farmers. This
difference was mainly due to the higher seed price and higher dose of fertiliser
applied by the non-contract farmers. Higher seed prices in case of non-contract
farmers were due to purchase of more percentage of seed coming from the external
sources. When K. Jyoti in all farmers and Atlantic was compared it could be seen
from the table that the contract farmers spent Rs. 4000 more for cultivation of
Atlantic as compared to K. Jyoti. The components for which farmers had to spend
more are land preparation, earthingup and plant protection. Deep ploughing and thick
ridge make land preparation and earthingup to cost more. The field agents of contract
farming recommended expensive plant protection chemicals like Acrobat, Curzate,
Crocide, etc. Although the purchase of plant protection chemical was optional, but
many farmers purchased those to protect their crops. The higher plant protection cost
for K. Jyoti for contract farmers is due to the same reason as compared to ordinary
farmers. The percentage share of different cost components have been presented in
Figure 1.
TABLE 3. ECONOMIC ANALYSIS OF CONTRACT AND NONCONTRACT POTATO PRODUCTION
Kufri Jyoti Atlantic
Particulars Non-contract farmer Contract farmer Overall Contract farmer

(1) (2) (3) (4) (5)
Cost of cultivation (Rs./ha)
Land preparation 5945 6138 6036 6358
Planting 35427 31372 33478 37021
Irrigation 7297 7262 7280 7478
Earthing up 3824 4104 3958 4163
Fertilisers+micro-nutrients 13179 12376 12386 10791
Plant protection 2601 3172 2872 4264
Harvesting 4646 4748 4695 4833
Total cost 72920 69171 70705 74909
Avg. yield (qtl/ha) 244.37 227.30 235.58 199.70
Production cost (Rs./qtl) 317.54 293.05 303.84 375.10
Harvest price (Rs./qtl) 229.31 239.25 234.53 449.82
Gross return (Rs./ha) 52660.00 56472.62 54575.59 89830.73
Net Return (Rs./ha) -20259.90 -12698.32 -16129.52 14921.92
B:C 0.72 0.82 0.77 1.20
Harvesting Land preparation Harvesting Land preparation

6.64% 8.54% 6.45% 8.49%
Plant protection Plant protection
4.06% 5.69%
Fertilizers+micro- Fertilizers+micro-
nutrients nutrients
17.52% 14.41%
Earthing up
5.56%
Earthing up
5.60% Planting
47.35% Planting
49.42%
Irrigation
Irrigation 9.98%
10.30%
K. Jyoti (for overall farmers) Atlantic

Figure 1. Percentage Share of Different Cost Components
Figure 1 indicates that the major cost components were cost of planting,
fertilisers and micronutrients, irrigation and land preparation both for K. Jyoti and
Atlantic. The share of planting and plant protection was more in Atlantic as compared
to K. Jyoti. Though the yield level of Atlantic was lower but the net return was much
higher than that of K. Jyoti. Both the categories of farmers incurred losses in
cultivating K. Jyoti but Atlantic gave handsome return of around Rs.15000 per
hectare. This was due to the higher prices received by the contract farmers for
Atlantic. Tripathy et al., (2005) also found significant better profitability of potato
production in Haryana contract farming system. Similarly Singh (2002) also observed
that contracting has led to higher farm incomes and more employment for labor in
Punjab. Hence, the above discussion concludes that the contract farming is an
economically viable enterprise for the farmers. However, it is required to study the
long term impact of contract farming by taking multiple years data.
Technical Efficiency
Data Envelopment Analysis was employed to estimate the technical efficiencies.

All the inputs and output were converted into their monetary units. The analysis
showed that the average measure of overall technical efficiency was 40 per cent for
non-contract farmers and 68 per cent for contract farmers. Average scale efficiency
was estimated at 47 per cent and 77 per cent for non-contract and contract growers,
respectively, while the figures for pure technical efficiency were 86 per cent and 89
per cent, respectively. Hence the results indicated that the contract potato farming
was more efficient in all the three measures of technical efficiencies. Further average
efficiency scores indicate that the scale in-inefficiency (53 per cent and 23 per cent)
was primarily responsible for the overall technical inefficiency as compared to the
technical inefficiency (14 per cent and 11 per cent). The analysis indicates contract
and non-contract potato farms can, on an average, reduce their inputs by 60 per cent
and 32 per cent, respectively by operating at an optimal scale and by eliminating pure
technical inefficiencies through the adoption of best practices of the efficient farms of
the farms.
TABLE 4. EFFICIENCY MEASURES OF POTATO GROWING FARMS
Overall technical efficiency Scale efficiency Pure tech efficiency

Particulars Non-contract Contract Non-contract Contract Non-contract Contract
(1) (2) (3) (4) (5) (6) (7)
Average 0.40 0.68 0.47 0.77 0.86 0.89
Minimum 0.02 0.20 0.03 0.25 0.56 0.25
No. of Efficient farms 1.00 17.00 2.00 17.00 29.00 46.00
Standard Deviation 0.20 0.22 0.21 0.20 0.12 0.12
The scale efficiency of the contract and non-contract growers are summarised in
Figure 2. The figure depicts that only 1 per cent of the non-contract farmers were
operating under optimal scale. The figure is much higher for contract growers which
stood at 12 per cent. Almost all the non-contract farmers and a sizeable population
(87 per cent) of contract farmers were operating under sub-optimal scale. No non-
contract farmer was operating under above optimal scale whereas, the same for
contract growers was 1 per cent. Hence, the study indicated that the largest of overall
technical inefficiency can be tackled by solving the problem of increasing returns to
scale.
Non-contract farms Contract farms

Figure 2. Scale Efficiency of Potato Farms
The frequency distribution of potato farmers by level of efficiency is summarised

in Table 5. The table indicates that, as far as overall technical efficiency is concerned,
majority of the non-contract potato growers were within the group of 25 to 50 per
cent, whereas same for contract group is 50 to 75 per cent.
TABLE 5. FREQUENCY DISTRIBUTION OF FARMERS BY LEVEL OF EFFICIENCY
<0.25 0.25 - 0.50 0.50 - 0.75 0.75 to 0.90 >0.90

Efficiency NCF CF NCF CF NCF CF NCF CF NCF CF
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
Overall 29 3 61 31 39 50 2 29 3 31
Technical (21.64) (2.08) (45.53) (21.53) (29.10) (34.72) (1.49) (20.14) (2.24) (21.53)
efficiency
Scale 21 1 52 16 52 44 6 37 3 46
efficiency (15.67) (0.69) (38.81) (11.11) (38.81) (30.56) (4.47) (25.69) (2.23) (31.95)
Pure
Technical - - - - 27 19 49 45 58 80
efficiency (20.16) (13.19) (36.56) (31.25) (43.28) (55.56)
Note: NCF= Non contract farmers, CF= Contract farmers. Figures in the parentheses indicate the percentage to
the respective total farmers.
When the pure technical efficiency is considered it was found that none of the
farmers were below the efficiency level of 50 per cent. Further, around 43 per cent of
non-contract farmers and 55 per cent of contract farmers were found to be in the
efficiency group of more than 90 per cent.
IV
SUMMARY AND CONCLUSIONS
The study analyses the data collected from 139 non-contract and 144 contract
potato growers from four districts of West Bengal in the year 2008. It was found that
the contract farmers were more experienced and had more years of schooling and
social participation. The average farm harvest price of Atlantic (contract variety) was
much higher than the K. Jyoti. Cost of cultivation was higher in Atlantic
(Rs.74,909/ha) as compared to K. Jyoti (Rs. 70,705/ha). Contract farming gave good
returns of around Rs.15,000 per hectare when non-contract farmers as well as K.
Jyoti cultivator of contract farmers incurred losses. The Data Envelopment Analysis
for technical efficiency estimation indicates that the contract method of production
was more efficient than non-contract production. Further the scale inefficiency was
primarily responsible for overall technical inefficiency as compared to the technical
inefficiency. Majority of the non-contract as well as contract farmers were operating
under sub-optimal scale.
Technical inefficiencies could be improved through the adoption of best practices
of the efficient farms and the problem of overall technical inefficiency can be tackled
by solving the problem of increasing returns to scale. For successful running of
contract farming in the long run the agreement should be written documents and
legally binding. Further, the agreement should be for long term, so that farmers can
realise its full potential. Keeping in view the two asymmetrical parties, written
contract and involvement of Government Departments of Agriculture or local
panchayats are necessary as it will help in settling the disputes. Price fixation should
be uniform across the state and other terms and conditions should be clearly spelt out.
Very often farmers face the problem of disposing off the rejected Atlantic potatoes.
Home consumption of this variety as table purpose is minimal due to bad taste.
Therefore, a good processing variety with short duration (80-85 days), good yielder
(at least at par with K. Jyoti) and having good taste for table purpose may be
developed.
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Ind. Jn. of Agri.Econ.

Vol.64, No.3, July-Sept. 2009

An Empirical Study of Gains from Potato Contract Farming

Agricultural economies of developing countries including India are characterised

The socio-economic analysis and economics of potato production was worked

In order to avoid infinite number of solutions, imposing a constraint ν′ X j = 1, we

RESULTS AND DISCUSSION

Contract Farming Scheme

Socio-Economic Profile of the Potato Farmers

TABLE 1. SOCIO-ECONOMIC PROFILE OF THE POTATO FARMERS

Parameter Non-contract farmers Contract farmers

It would be interesting to determine the varietal preferences and yield difference

TABLE 2. VARIETAL PERFORMANCE

Variety Particulars Non-contract farmers Contract Farmers

Economic Analysis of Potato Cultivation

TABLE 3. ECONOMIC ANALYSIS OF CONTRACT AND NONCONTRACT POTATO PRODUCTION

Kufri Jyoti Atlantic

Particulars Non-contract farmer Contract farmer Overall Contract farmer

Harvesting Land preparation Harvesting Land preparation

K. Jyoti (for overall farmers) Atlantic

Data Envelopment Analysis was employed to estimate the technical efficiencies.

Overall technical efficiency Scale efficiency Pure tech efficiency

Non-contract farms Contract farms

The frequency distribution of potato farmers by level of efficiency is summarised

TABLE 5. FREQUENCY DISTRIBUTION OF FARMERS BY LEVEL OF EFFICIENCY

<0.25 0.25 - 0.50 0.50 - 0.75 0.75 to 0.90 >0.90

SUMMARY AND CONCLUSIONS

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