A CASE STUDY ON SUGUNA POULTRY PRODUCTION THROUGH CONTRACT FARMING IN ANDHRA PRADESH

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1 A CASE STUDY ON SUGUNA POULTRY PRODUCTION THROUGH CONTRACT FARMING IN ANDHRA PRADESH MRK MURTHY*; S. BINDU MADHURI** *RESEARCH ASSOCIATE, PH.D RESEARCH SCHOLAR, JNTUH, NATIONAL ACADEMY OF AGRICULTURAL RESEARCH MANAGEMENT (NAARM), RAJENDRANAGAR, HYDERABAD, A.P, INDIA **ASSISTANT PROFESSOR, DEPARTMENT OF POULTRY SCIENCE, COLLEGE OF VETERINARY SCIENCE, SRI VENKATESWARA VETERINARY UNIVERSITY TIRUPATI, RAJENDRANAGAR, HYDERABAD ABSTRACT Contract Farming has become an increasingly important aspect of agri-business as well as poultry sector in recent years. Poultry farming could play an effective role in improving the economic status of the rural people by increasing their income besides providing nutritious food through meat and eggs. From the farmer s point of view, contractual arrangement can provide them with access to production services, credit as well as knowledge of new technology and moreover pricing arrangements can reduce the risk and uncertainty. Contract farming can act as an effective tool in mitigating risks faced by farmers while marketing of broiler produce to final consumer. This paper will throw light on contract farming helps both the parties i.e., the producers and the companies, which are involved in contract farming system. The case study found that contract farming major benefits come from reduction in transaction costs and assurance of regular income for broilers farmers. A comparative analysis made of the contract and non-contract farming techniques carried by specifying how these can be overcome and can be advantageous to the producer for the overall development and improvement. KEYWORD: Contract Farming, Non-Contract Farming, Poultry, Meat, Marketing, Livestock, Rural income INTRODUCTION: Growth in poultry sector can contribute to enhanced nutrition and poverty reduction in India, because a large share of the rural poor is dependent on poultry for food and income. The Government of India recognizes the growth in the poultry sector has so far marginally contributed to the poverty reduction and improved nutrition. Both demand and supply side factors are responsible for the growing importance of livestock in Indian agriculture. According to the 2006 National Sample Survey (NSS) Report on Livestock Ownership (GoI, 2006a), the landless, marginal and small scale farmers, which account for about 90% of the 107 million agricultural households in India, keep about 85% of the poultry stock of the country. The export of meat and meat products, which recorded a growth rate of per cent per annum during , accelerated to 27 per cent during India is currently ranked as the fifth largest poultry producer in the world, behind the United States, Brazil, the European Union (EU), and 58

2 China in the year Of late India is the world s fourth largest egg producer and fifth major producer of broilers. India exports a variety of poultry products like eggs, hatching eggs, egg powder, frozen egg yolk, frozen poultry and poultry meat to Europe, Japan, Maldives, Oman and other countries. Poultry exports are mostly to Maldives and Oman. The Indian poultry products have good market in Japan, Malaysia, Indonesia and Singapore. Poultry industry in Andhra Pradesh: The era of globalization, the concept of Contract Farming is an effective way to co-ordinate and promotes production and marketing in agriculture. Contract Farming can be defined as an agreement between farmers and processing or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices. The advantages, disadvantages and problems arising from contract farming will vary according to the physical, social and market environments. More specifically, the distribution of risks will depend on such factors as the nature of the markets for both the raw material and the processed product, the availability of alternative earning opportunities for farmers, and the extent to which relevant technical information is provided to the contracted farmers. These factors are likely to change over time, as will the distribution of risks. Andhra Pradesh is the leading poultry meat producing state within India and it accounts for onefifth of the poultry meat as well as egg production in the country. About 30% of its broiler output and 15% of the egg output are exported to other states in India. One major aspect that can be observed in the poultry sector is it is highly prone to production and market risk, which in turn affect the profitability of broiler production particularly on the small farms. In order to reduce the risks to the producers and sustain the profitability in the industry, some of the major firms (like Suguna Hatcheries, Venkateshwara Hatcheries) began integrating their activities with that of the broiler producers through the contract farming. The impressive growth in the poultry meat industry is the technological breakthroughs in breeding, feeding and health, sizeable investments from the private sector. The expansion in the supply has been spurred by rising incomes and has resulted in the lower poultry prices in South India where much of the growth has occurred (USDA 2004). In this paper a comparative study is been carried out between the producers of the contract and non-contract farming techniques carried so as to minimize the production risk and increase the profit for the producers. Contract in poultry production: In a poultry contract, the hatcheries provide day-old chick, feed and medicines to the contract growers. The contract growers supply land, labour and other variable like inputs. At the end of the production cycle the farmer receives a net price that is the price set by a group of poultry companies (not the retail price). Thus the farmers receive considerable price insurance. For the deviations of the retail price from the industry price farmers receive an incentive. This practice lessens the incentives to default on the part of the growers and reflects the competition from the non- contract sector. The broiler contract is an instance of a production management contract where the processor supplies inputs and extension, credit, provides price insurance and monitors grower effort through inspections. The detailed monitoring is required because of the considerable credit advanced by the processor that provides more than 90 percent of the cost of production in terms of the value of inputs. 59

3 Figure 1. Marketing channels for sampled broiler farms in Andhra Pradesh Poultry farmers Contract Farmers Integrators Independent Producers Traders Own Processing Plant Big wholesale traders Retailers Retailers Small wholesale traders Consumers Consumers Retailers Consumers METHODS AND METHODOLOGY: The primary data was collected from 40 contract growers (who are in contract with Suguna Foods) and the non-contract growers from the parts of Ranga Reddy district (Shadnagar, Chevella, Moinabad, Shankerpally, Uppal, Ghatkesar) where in poultry production is much followed and practiced. The data was collected with the help of questionnaire where it included of three parts a) Village profile b) House hold profile c) Cost and returns in broiler farming and also from the other farm income. In the first part Village profile mostly concentrates on the transportation aspects to the villages i.e., Road and railway connectivity and how far is the urban center located from the village of the producer. This in turn helps us to find out the effect transportation cost for the marketing of the end produce (especially for the non contract farmers where in the sell the produce directly and not in the case of contract farming where in the company sells the produce to their traders) and it was observed that as the peri-urban areas Ranga Reddy district are quite well developed with transportation facilities not much of difficulty is been faced by the producers either in the contract or non contract. All the villages have connectivity to the commercial bank, veterinary dispensary and hospital and its seen observed that 90% facilities are available from the villages of the producers. 60

4 Table 1. Infrastructure availability (in the villages of the producers Hypothesis) Road connectivity + + Railway connectivity + + Post office + + Cooperative credit society + + Regional Rural bank + + Commercial bank + + Primary dairy cooperative society + + Veterinary Hospital + + Veterinary dispensary + + For the contract producers the farms/hatcheries provide the day old chick, feed, vaccination and medicines to the contract growers. The producer has the supply the land, labor and other variable inputs like electricity, which is not in the observed in the case of the non-contract producers where in the producer, has to go to the nearby urban village for any of the transaction regarding the poultry rearing. The second part of the questionnaire consists of the characteristics of the poultry growers in contract and non-contract farming. It is been observed in the table that the non contract growers are more experienced in the poultry rearing when compared to the contract growers and the growers aged between years are more interested in poultry rearing where in persons aged more than 40 years are interested in contract farming and poultry rearing. It can also be observed from the table that non contract farmers were more involved in the agriculture and their main occupation was not in poultry rearing. Table 2. Characteristics of Poultry Producers Experience in poultry Age Years of schooling Proportion of farmers whose main occupation is in poultry Proportion of farmers who earlier occupation was in agriculture/poultry/ dairy/agriculture related activities Proportion of farmers who s earlier occupation was in non agriculture The third aspect of the questionnaire is consists of the input, output and the revenues obtained per cycle for contract and non-contract producers. 61

5 Table3. Input use by poultry producers: Average per production cycle Time (cycle) Manure value (Rs.) Litter value (Rs.) Number of chicks Chick value Feed quantity Medicine + feed value (Rs.) Vaccination per cycle 3 2 Veterinarian fees (Rs.) Labour cost Total shed area(square feet) per grower Total equipment cost (Rs.) Electricity charges It can be observed from the table that the non contract producers have longer production cycles and they invest less on the labour, medicine and also on the vaccination when compared to the contract growers but the feed quantity is more even though their flock size is less when related to the contract producers. Table 4. Output and revenue: Average per production cycle Output (no. of birds sold) Mortality Average weight of the total birds sold (Kgs.) Revenues from the bird sold Average revenue / kg of bird sold This table tries to compare the output and the revenues of both contract and non-contract growers. The contract producers have larger chick size housed in their output thought the kgs sold is not much high the amount they receive on the whole is more which is not in the case of non contract growers this is because the company assures that the quality produced is of high standards and sells it to the trader where in it fetches more price and also the producer is assured of the price incentive when price fluctuations are observed where as in the case of non contract producers they sell the produce near the farm gate where at times they are not assured about the price risks at times they might fetch high price according to the prevailing market prices and at times low price. The last section of the questionnaire is considered for the contract growers i.e., the information between the contract growers and the processors. As specified before the in contract poultry the 62

6 chicks, feed, medicines and other veterinary services are given by the company and the farmer has to supply land, buildings, labour and other variable inputs like the disinfectants and electricity. On an average the out of pocket expenses for the inputs for the contract farmers is less than 4% of the total input costs. The below table describes the major components of production costs in both modes of production. It can be observed that cost structure s comparable across two production systems. Feed, medicine and veterinary services account for about 75% of the total variable cost. The expenditure on chicks account for about 20 to 25% where as the labour and electricity charges account for about 4-5% of the total variable cost. Table 5. Cost structure of poultry production averages per cycle Chicks value (Rs.) Feed & medicines (including vaccinations) Labour electricity and over head charges In the total input and output cost the farm income has also been taken into account to know the percent contribution of it in the overall income the producer gets. For this purpose the crops grown and its farm revenue was also been calculated and compared with the broiler management. Two crops which are predominantly grown in the Ranga Reddy district where taken into account they are Paddy and Vegetable crops (especially green chillies, tomato where grown mostly). Their amount received and the net profit was been calculated and it is compared with the average of the poultry cycle can be observed: Table 6. Net profit of contract and non contract broiler, vegetable and paddy producers Paddy area (Acres) Production (Quintals) Amount received Cost of production net profit Vegetables Contract Non contract area (Acres) Production (Quintals) Amount received cost of production net profit Broiler production Number of chicks placed per cycle Cost of production Amount received Net profit

7 It can be observed from the above chart is that when compared to the vegetable production the producers prefer to grow paddy as it fetches them better market price and value and most of the producers prefer rearing of the poultry though the market risks is quite high in the broiler management at times the amount received after completion of each cycle is huge when compared with any other cultivation and the vegetables production is mostly used for the household purpose and very negligible amount of it is been used for commercial purpose Table 7. Production costs from vegetables under contract and non-contract farming Item Contract farmers Non contract % Difference farmers Paddy Area (Acres) Production (Q) Cost of production Amount received (Rs.) Net profit Vegetables area (Acres) Production (Q) Cost of production Amount received The above table gives us the brief idea about the production cost involved by the contract and non contract farmers in paddy and vegetable growing and how this is in turn contributing for improving the living standards for both the sectors and a percent difference is also been calculated to know the exact value of difference in each sector. 64

8 Table 8. Production costs and net benefits from broilers under contract and non-contract farming Item Contract Noncontract % Difference T- statistic Number of producer households NA NA Number of chicks placed per crop (cycle) Mean length of the production cycle NA Mortality rate (percent) Feed conversion rate (kg feed/kg body weight) Body weight (kg/ bird) Cost of production (Rs/ton body NA weight) Gross profit (Rs/ton body weight) NA NA Sale from poultry manure NA NA Sale from litter NA NA Net profit from broilers (Rs/ ton body NA NA weight) Note: At 0.5% and 1% level of significance, NA- Not Applicable From above tables 7and 8 where the production and transaction cost of the contract and non contract farmers the t statistic and the percent difference was calculated at 0.5 and 1% level of significance (this significance is taken to get the accurate values at very less percent of difference). Table 9. Selected characteristics of Contract and Non-contract producers Variable Definition Hypothesis Age of the household Age in years of the household makes decision + Schooling of the household Schooling years of the household makes + decision Experience in particular Experience in years of producing a particular + activity commodity. Land size Size of the land in acres + Total stock Number of live stock or size of the broiler shed + Non-farm income Yes if there is any non farm income, otherwise + zero Labour available with the household Adult workers available for agriculture in the household + An hypothesis is been calculated by taking in few common characteristics of both contract and non contract farmers to know their similarities and does it contribute and have and positive (+) effect on the improving the living standards of the farmers and it can be observed that all the 65

9 characteristics have an positive effect and they do contribute in improving the living standards of the farmers in both the sectors. Is contract production more efficient than the non contract farming can also be derived from the above data available in table 7 and 8. Cost in the contract production could be lower than in non contract production in two different ways. First because of technology and management practices given by the processor, contract production could be more efficient than non contract production and the second reason can be that if the processor can access some inputs such as insurance and credit at lower cost to the growers then contract production could be cheaper than non contract production even if the production efficiency is unchanged. There have been certain apprehension that the contract farming could ultimately lead to a situation where in it could lead the exploitation of the farmers. Such a situation arises when the market is not competitive and one of the trading partners tries to exploit the farmers. To verify this phenomenon a comparison was done for the prices offered to contract farmers with those in the current market. In the case of broilers the prices were fixed by BROMARK and the firm shared additional profits due to rise in the market prices with the farmers. Also the firm offered an incentive of 25 per cent for a better feed conversion ratio. Sharing of risk between the producer and the firm is and big advantage present in the poultry production industry because the firm bears the markets risks up to certain extent. The mortality risk up to 5 percent is been borne by the firm. For mortality exceeding more than 5 percent the firm charges Rs. 0.10/ kg of live body weight of the grown up broiler for every one percent increase in the mortality. This kind of risk sharing mechanism provides protection to the producer s especially marginal and small land holding farmers under very risk and volatile markets situations. Do contract growers earn more than non contract growers to know this we calculate their average income per kg of output from a production cycle. This is the difference between the revenues and input costs. Revenues are from the sale of grown chicks, litter and manure. The value of home consumption if any is also taken into account if present but in the current study this was not taken because there was no home consumption seen in the both sectors. Inputs consist of chicks, feed, medicine, vaccine, litter, veterinary fees, labour, electricity and disinfectants. Compared to the non contract growers the contract growers needs less working capital and therefore incurs lower interest costs. According to the all India rural credit survey, formal sector accounted for 53% of all rural credit in Money lenders and friends or relatives account for rest. More recent data from the World Bank indicates that access to formal sector credit is very limited for poorer households. According to the same survey, the median interest from the banks (the primary institutional source) in 2003 was 12.5% per annum while the average interest rate from informal sources was 48%. For credit from institutional sources, transactions costs are also significant. These arise because of distance to financial institutions, cumbersome procedures and bribes ranging from 10% to 20% of loan amount (Srivastava and Basu). As a result the effective cost of credit from the formal sources is likely to be greater than the median interest rate. A survey in 2001 of the poultry sector reports that interest rates on commercial loans were typically around 15% per annum (USDA, 2004). As informal credit is more costly than this, an interest cost of 15% per annum can be taken to be a lower bound to the cost of credit for growers. 66

10 CONCLUSION: The contract farming we find that the gains to the contract growers is in relative to the non contract growers is much higher and greater in cost of funds and we can also observe that contracting shifts a large portion of the risks from the growers to the processors. We find that the contract production is more beneficial when compared to the independent poultry growers this is because the poultry processor choose those whose skills, experience and access to credit market make them relatively poor prospects as the independent growers. The next major advantage of the contract farming is the improved technology and specialized management practices. This results in low feed consumption. The poultry farming suggest that contracting is a useful institutional arrangement for supply of credit, insurance and technology for the farmers which are quite beneficial to the producer otherwise all of these are quite demanding problems. As mentioned earlier the major advantage in the non contract farming is that the producer is able to sell the produce directly to the traders at the current prevailing market price on the current day at the nearest market where as this is not possible in the case of contract farming and disadvantage is that he cannot be assured of market risks and any price fluctuations. However we can observe from the two modes of production is that the independent producers are the ones who are more interested in taking up the poultry farming but due to some lacunas like non availability of labour at times and providing of medicines and vaccinations at improper time and the time taken by the company processing (delaying) of the accounts (i.e., payments) after the end produce is ready they are not willing to shift into the contracting with any company even though they face the market risks. The key advantage to the contract growers is that the poultry processors choose those whose skills, experience and access to credit make them relatively poor prospects as independent growers. With the contract production, these growers achieve incomes comparable to that of independent growers. As a result the processor is able to capture most of the surplus from contract production while offering at the same time significant gains to contract growers in terms of a reduction in risk as well as higher expected returns. Crucial to this outcome are the improved technology and management practices that are employed in contract production. This results in lower feed conversion ratio and is achieved by producers whose endowments are not as well versed with that of poultry production as the independent growers. This is possibly due to the standardization of production practices in contract production as contract growers exhibit a striking homogeneity in feed conversion ratios and expected returns relative to independent growers as this is achieved by close supervision by the processor. These lacunas can be overcome by the company by providing better extension services i.e., regular vaccinations and medicines to the chicks without any delay seeing that the payment is done at the time when the produce is handed over to the processor and avoiding any late payments seeing that the process time to start a particular unit is being reduced extension services should not only be provided for the rearing the chicks but also to the producer in case of any trouble faced like getting a bank loan for setting up a new unit seeing that the amount is received at less rate of interest. This in turn helps in building up good faith and rapport between the processor and the producers 67

11 By following certain institutional arrangements the contract farming can be made quite popular among the farming community as the current trend is shifting from agriculture to non-agriculture activities this contracting method can help the producer to fetch more revenue when compared to the other allied activities and that to at completion of each cycle (35-40 days maximum). The poultry case study suggest that contract farming is a useful institutional arrangement for the supply of insurance, credit and technology to farmers all of which are otherwise very crucial and demanding problems. For many commodities, however contract faming in India is not legal because of the agricultural produce marketing acts which make it mandatory for commodities under the act to be wholesaled in regulated markets. Removing these prohibitions would be important to widen the scope of contract farming. Some believe that the contract farming should be regulated to ensure that processors live up to the promises made in the contract regarding the quality of inputs, provision of credit and the buyback arrangement. As a result the interests of the processors and the grower are closely aligned together. REFERENCES: 1. Bhavani, T.A., Ashok Gulati and Devesh Roy Structure of the Indian Food Processing Industry: Towards Scaling Up and Consolidation. International Food Policy Research Institute, New Delhi. 2. Gulati, Ashok Fragmenting Bottom and Consolidating Top: India s Changing Food System and Implications for Small Holders, in India: Some aspects of Economic and Social development (eds.) S.Mahendra Dev and K.S. Babu. Academic Foundation, India Srivastava, Ravi Prospects for Small Holding Agriculture in India presented at the workshop titled Exploring Alternatives Futures for Agricultural Knowledge, Science and Technology (KST) organized by National Council of Applied Economic Research and International Food Policy Research Institute at India Habitat Center, Amaltas Hall, New Delhi. 01 July Birthal.S. Pratap, Joshi P.K, Gulati April 2005, Vertical co-ordination in High Value Food Commodities : Implications for Small holders (International Food Policy Research Institute) 5. Birthal.S.Pratap: Making Contract Farming work in Smallholder Agriculture. 6. Kumar Promod: Resource Provision, Productivity and Contract Farming A Case study in Punjab. 7. Otte.J and Ciamarra-Pica.U Research report: RR Nr ; February 2009: Poultry, Food Security and Poverty in India: looking beyond the Farm Gate 8. Eswaran, Mukesh and Ashok Kotwal, (1985), A Theory of Contractual Structure in Agriculture, American Economic Review, pp USDA, (2004), India s Poultry Sec-tor, Development and Prospects, Agriculture and Trade Reports, Economics Research Service, WRS Ramaswami Bharat, Bhirthal Pratap, Joshi P.K: February, 2005: Efficiency Distribution in Contract Farming: The case study of Indian Poultry Growers. 68