TOUGH TO BREAK: Government-regulated mandis are still competitive in terms of price (Pic by Dileep Prakash)

Aggregation was easy for the Jains given the proximity of farm lands to processing factories that have a capacity of 20,000 tonne per day. But what makes Jain Irrigation’s model of contract farming different is that there are no formal signed contracts with the farmers. The arrangement is based on the strong relationship built by the company by selling drip irrigation systems to these farmers.

A similar business model is followed by Vista Foods, a food processing company that supplies to McDonald’s. The company works with over 500 farmers in Ooty, Tamil Nadu to source iceberg lettuce. Another little known company Desai Fruit and Vegetable in Gujarat works with over 2,000 farmers aggregating over 5,000 acres of land. Most of the produce it contracts — bananas and mangoes — end up in Europe. The Bharti joint venture with processing firm Delmonte aggregates another 2,000 acres.

But corporate ownership of land is a minuscule part of the farm aggregation story, and an area fraught with politically driven conflict, despite being successful businesses. Take Essar Agro — owned by the Essar Group’s Ruia family — which owns about 2,000 acres of land around Pune. It exports fruits and vegetables and provides iceberg lettuce to McDonald’s. But this is not so much a business but a hobby, according to a company spokesman. Reliance Industries subsidiary Jamnagar Farms was originally set up as an environmental protection measure near the refinery. Today, it is a profitable venture on its own.

Because contract farming is an issue in the country, Indian companies are acquiring land in other countries, and developing alternative models. KS Oils, an edible oil refiner, has been given 50,000 acres of land by the Indonesian government to refine palm oil and create inclusive growth for 10 villages. “These villagers are given a loan by the company and will work in 10,000 acres,” says Sanjay Agarwal, MD of KS Oils in Morena in Madhya Pradesh.

About 1,500 farmers will work in the plantation by forming a cooperative and will sell the entire produce to the company. “On repaying the loan after eight years, the farmers will become our employees,” says Agarwal. KS Oils has also been sourcing, storing, processing and selling mustard oil — called Kalash — in the Indian market. By working with over 2,000 farmers, the group has consolidated 5,000 acres of farm land in Chambal in Madhya Pradesh to produce 4,800 tonne of oil per day.

It’s Not Hunky Dory For All
Not all stories have been that good. Four years ago, when Mahindra Shubhlabh contracted for 72,000 acres of land in Punjab for producing Basmati, wheat, sunflower and barley, they believed the farm-to-market connect was real. In 2009, the company is working with only 4,000 acres, and it has now limited its production to seed potato and grapes.

Vikram Puri, CEO of Mahindra Shubhlabh, says the most difficult task in agri-produce aggregation was to find a market that could pay a premium for parameters of quality such as grading and packing. The food business burns fingers. Mahindra Shubhlabh took nine years to make operational profits and Jain Irrigation took 10 years to break even in agri business. “Agri aggregation needs deep pockets and not many have the patience to survive,” says Puri.

Pantaloon Retail’s Kishore Biyani was the only retailer who did not want to dabble in aggregation, and has been strongly advocating his own approach to managing supply chains and sourcing. “It’s not the job of the retailer to aggregate,” he told BW in an earlier interview. “India has a traditional system that requires us to know how to work with farmers.” Emails to Reliance Fresh on its aggregation experience remained unanswered.

*Investment made over the past five years; NA: not available Source: BW research

In one sense, though, the biggest aggregator of them all is the government of India — both on inputs and outputs. For the majority of farmers who grow foodgrains — rice, wheat and pulses — the government offers a minimum support price, besides subsidies on fertiliser and other input. Since contract farming or any other similar arrangement offers no particular advantage, does aggregation help in any way?

Will It Work?
“Aggregation is a small cog in a larger wheel; we have larger issues to address here,” says R. Ramaseshan, CEO of the National Commodities Exchange in Mumbai. “The real task is in creating a holistic marketing approach for farmers.” Others think that aggregation helps in addressing other issues. “Farm aggregation avoids wastage,” says B.S. Shiva Kumar, executive vice-president, agricultural business group, at Kotak Mahindra Bank in Mumbai.

On a medium-sized scale, aggregation has worked. Look to Samar Gupta, the promoter of Trikaya Agriculture. He has aggregated 125 acres of land and has leased another 120 acres from migrating farmers. By growing niche vegetables such as gherkins for local markets and hotels in Mumbai, Samar’s business generates at least Rs 10 crore in revenues a year.

“Fragmentation is environmentally destroying the farmlands,” says Gupta. “The future is in aggregation, and it will work if farmers themselves set the pace of change.” He adds that there are many young farmers who are already en route to creating their own companies.

It seems likely that more companies will try different approaches to corporate farming. And it is also likely that states will continue to liberalise agricultural policy to accommodate some form of corporate participation in farming. The family and corporate farms could very well co-exist, and be successful models.

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(Businessworld Issue Dated 21-27 July 2009)