Improving farm-to-market linkages through contract farming. a case study of smallholder dairying in India

This study is an empirical assessment of the costs and benefits of contract farming in dairying in India, focussing on productivity, production and transaction costs, milk prices, and profitability. Using field survey-based data from the western state of Rajasthan, the authors show that contract farming is more profitable than independent production. Its major benefits come from:

• areduction in marketing and transaction costs, which are otherwise much higher in the open markets.
• improvement in milk yield and reduction in production costs
• provision of services and technical advice to milk producers by integrators/firms who secure milk supplies from farmers

The benefits of contract farming, however, vary by scale of operation. The benefits are skewed toward large producers mainly due to economies of scale in the use of family labour in production and disposal of milk.

At similar scales of production, economies of scale are also important determinants of competitiveness, in which large farms (both contract and independent) have lower per unit cost due to buying of inputs in bulk and greater access to markets. Smallholders, on the other hand, derive significant benefits from a reduction in marketing and transaction costs due to their participation in contract farming.

Dairy markets in India have been liberalised to induce private processors to strengthen backward linkages with the producers through institutions like contract farming. However, this has not been backed up by legal instruments that provide protection to producers as well as to processors against problems like moral hazards, wilful defaults, and the like.

The authors conclude that a proactive role by the government is needed to provide adequate legal protection to facilitate sharing of risks and benefits for both contracting parties.