1. An Overview of Contract Farming in Sri Lanka:
Lessons Learned
Vajira Balasuriya and Jeevika Weerahewa
Department of Agricultural Economics & Business Management
University of Peradeniya
Sri Lanka

2. OUTLINE
• Tenant Contracts
• Farmer Companies
• Contract Grower or Buy-back system
• (Hybrid) Cooperative Enterprises
• Participatory / Partnership Contracts
• Conclusions
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3. TENANT CONTRACTS
(Mainly Paddy Cultivation)
• The tenant farming system is still continuing in Sri Lanka, even though it no longer exists in
many countries of the world (Gamage, 2000; Jayasuriya & Hemaratne, 2011)
• In 1958 Paddy Lands Bill and 1956 The Agrarian Development Act
• Assist tenants to purchase the land they worked
• Protect them against eviction
• Establish a rent ceiling at around 25 percent of the crop.
• ¾ of the profit (yield) goes to the tenant farmer who cultivates the field
• ¼ of the profit (yield) to the owner of the agricultural land
• Agrarian Banks to grant bank loans to the tenant farmers (difficult times)
• Established cultivation committees, composed of rice farmers, to assume general
responsibility for rice cultivation in their respective areas, including the direction and control
of minor irrigation projects
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4. Issues and Constraints of Tenant (Paddy) Farming
• Asymmetric information (distance of land owner and farmer)
• Deteriorating landlord-tenant relationship
• Uncultivated land was acquired by the government and was transferred to various
government agencies or to cooperative organizations
• Productivity and the adoption of new technology both are hampered
• Deviating from paddy to vegetables (necessity driven)
• Tendency of losing interest of the land owner (opting for formal wage)
• absence of a suitable institutional framework
• Lack of coordination among the agencies with overlapping mandates
• Lack of transparency
• Lack of technical expertise to handle the issues efficiently
• Lack of accessibility
• High transaction costs
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Tenant Contracts; Contd.

5. FARMER COMPANIES
organizing small farmers into collective groups
Promoter Nature of Organisation Major Activity
Export Development Board People’s companies Export Production Villages (EPVs)
• 36 EPVs established
• ̴ 20 in agricultural products
United State Agency for
International
Development (USAID)
Shared Control of
Natural Resource
• Huruluwewa Farmer Company :
Soya bean project
• Nilwala Farmer Company :
Dairy project
Department of Agriculture Farmer companies
• 32 farmer companies
• Main aim -
commercialization
• Provide inputs
• Credit facilities
• Seed paddy Production
In the 80s : Government initiatives
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6. In the 80s : Government initiatives; Contd.
Promoter Nature of Organisation Major Activity
Ministry of Irrigation Farmer companies
• Based on major irrigation
schemes (e.g., Udawalawa)
• Provide inputs
• Paddy purchasing
• Milk collection
• Irrigation management
• Credit facilities
Mahaweli Authority Farmer companies
• Originated from farmer
federations in the Mahaweli
scheme.
• Commercialization
• Irrigation management
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7. Lessons Learned from Farmer Companies
Issue Context Concerns
Viewing institutions as
service providers
rather than business
enterprises
Majority of farmer shareholders
perceived the company as a service
providing organization.
Many farmers just own the minimum
number of shares to have access to
the services provided by the
company
Professional fees Farmers believe that the company should
neither charge a fee for coordinating
farmers-agribusiness linkages nor charge
a market-based interest rate for credit
Capital base as well as the business
orientation of the company
Private sector
participation
limited as only about 10% farmers are
involved in farmers-agribusiness linkages
No significant activities to add value
to products in the scheme
Irrigation management Improvement in irrigation water use
efficiency/maintenance of structures
problems like inadequacy, timeliness,
unreliability, water stealing, violation
of rotation, water wastage and
structural issues 7

8. CONTRACT GROWER OR BUY-BACK SYSTEM
Broiler industry
• Dressed whole chicken represents more than 60% of the chicken sale in the Sri Lankan market
• Large companies with environmentally controlled-houses; form of out-growers
• Inputs and technological assistance
• The uncertainty about sales price is often reduced; contracts typically specify at the beginning of
the growing cycle the prices to be paid at product delivery.
• Market outlet is secured for the contracted production
• Income stability and access to credit is enhanced
• by-products and residues from the contracted farming activity is used in complementary farm
enterprises
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9. Contract Grower or Buy-back system; Contd.
• Established for sugar cane cultivation to reduce the country's dependency of
imported sugar
• Cane cultivation under rain fed conditions and setting up a sugar factory in
Southwest of Sri Lanka
• It has the lease ownership of a nucleus estate of approximately 4300 ha, settler
area of 6300 ha (1500 families), and 3000 private outgrowers
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Pelwatte Sugar Industries

10. 10
Provisions Made by the Contracting Firm Challenges
Inputs on credit and extension services Lack of farmers’ representation in company management
Fertilizer at subsidized rate, seeds, pesticide Corrupt field staff and bad communication
Land development costs on credit Weak legal framework protecting the farmer
Nutrition supplements Disagreements in the financial relationship
picking bags, tillage and transportation on credit/
subsidized
Exploitation of monopolistic position by the companies
Technical assistance Low preference for smallholders (Pelwatte)
Few alternative income possibilities
Lack of farmers’ organizations (sugar cane)

11. (HYBRID) COOPERATIVE ENTERPRISES
Case of Bio Foods (Pvt.) Ltd - Organic and Fairtrade Company
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5 -50 farmers
create a society
3 members from
each society
Board of Representatives
MOPA (cinnamon & ginger)
Marginalized Organic Producers
Association
•1500 farmers
•4 years
5 -50 farmers
create a society
3 members from
each society
Board of Representatives
NEOPA (lemon-grass & chilli)
North East Organic Producers
Association
•500 farmers
•1.5 years
5 -50 farmers
create a society
3 members from
each society
Board of Representatives
SOFA (tea, ginger & spices)
Small Organic Farmers Association
•3000 farmers
•16 years

12. Case of Bio Foods (Pvt.) Ltd - Organic and Fairtrade Company; Contd.
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Bio Foods (Pvt.) Ltd
• Purchase Directly
• Only communicate with MOPA, SOFA & NEOPA
• Legal contact with ‘no compensation’ policy
MOPA (cinnamon & ginger)
SOFA (tea, ginger & spices)
NEOPA (lemon-grass & chilli)
Farmer
Cooperatives
Challenges
• Conversion to organic takes 2 -3 years
• Volume (capacity) problems
• Meeting fair trade standards
• Issues in (initial) predictions of yield
• Fluctuations of Premium price
• Abundant regulatory requirements
• Farmer enrollment : prominent key informant
Challenges
• Systematic conversion is a challenging process
• Only trade agreement (absence of legal agreements)
• Large players purchase the produce (farmers sell to local outlets
when market price is high)
• Meeting fair trade standards
• Increasing labour costs
• farmers’ perception of comparatively lower yield; in spite of
premium price

13. PARTICIPATORY / PARTNERSHIP CONTRACTS
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Building Bridges with Papaya
Local Empowerment through Economic Development
(ILO Country Office for Sri Lanka and Maldives)
Creation of Partnerships
Disparate CommunitiesImprove LivelihoodMarket Linkages
• Newly resettled farming community
• Little assets other than small land holdings
• Farmer’s preference to continue farming
• No markets for their products
• Joint-venture formed; fruit exporter and a newly formed fruit growers cooperative
• Involvement of a wide range of state and local authority actors

14. Building Bridges with Papaya; Contd.
• Necessity to develop new value chains based on studies in the fruit and vegetable sector – 2011
(gender focused value chain analysis)
• Fair trade approach to economic growth in a newly emerging post conflict national market
• Identification of exporter
• Technical assistance from Department of Agriculture
• 200 vulnerable families identified by Divisional Secretary offices
• Support provided for inputs, training and extension service to the 200 farmers
• Farmers organized themselves into a cooperative with assistance from the Department of
Cooperative Development
• Cooperative and Exporter established a joint venture company (North South Fruit Processors)
• Grant of US$100,000 - 5000m2 packing shed
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15. 15
200
Members
Vavuniya North
Dept. of Agriculture
VN Divisional Secretariat
Dept. of Coop Development
LEED project of ILO
Vavuniya North Fruit Grower’s
Cooperative Society
Joint Company
North South Fruit Processors (Pvt.) Ltd
C.R. Exports (Pvt.) Ltd
Fruit Processing Plant – Vavuniya North
55% 45%
•Guaranteed Price
•Share of Profits
• 100 -150 MT / Month
• Rs. 30 per (US$ 0.23) 1kg @ farm gate

16. Lessons learned
• Risk is a feature of all enterprise but in the case of very vulnerable households
failure is not an option
• Measures to reduce risk through income support for the six months prior to
the first crop being harvested is critical to the startup of the fruit growers
scheme
• Household incomes of individual poor farmers, in some cases raising incomes
by 700%
• Form a cooperative empowering them to negotiate for better terms with
suppliers and buyers
• As shareholders of a joint venture company, farmers are gaining a deeper
appreciation of agricultural markets and are becoming more conscious of
planning their activities to be more responsive to market demand
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Building Bridges with Papaya; Contd.

17. Challenges
• Price fluctuation in the open market make it hard to keep the balance
• Since minimum value addition is done, viability of the company is at a
stake
• Highly vulnerable for disease outbreaks and natural disasters
• Majority of the vulnerable people are at the lower end of the value
chain
• Spread of the income is weak, contribution from the big farmers need
to be controlled
• Diversification for other crops and other business ventures remain
another challenge
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18. CONCLUSIONS
• Appropriate enabling environment; institutional and political setting
•labour relations, land tenure, property rights, anti-trust measures, and
commercial licensing
• The normative framework must also deal explicitly with the issue of contractual hold-
up
• Through associations, farmers can have stronger voices in negotiation processes and
in this way better protect their interests
• Appropriate consideration of production risks in the contract design
• High valued crops and livestock, destined to processing or to export markets, seem to
be the better candidates for contracting
• Designing contract models based on market recognition and providing adequate
training and knowledge dissemination of technical, managerial, marketing
• If entrepreneurship is to be triggered among the farmers, entrepreneurial skills
needs to be identified; farmer enterprises
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19. Thank you
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20. Constraints that account for this situation are:
• Politicization of farmer companies
• Lack of managerial and entrepreneurial skills due to poor recruitment of management staff
• Lack of sound plans and poor management by incompetent board of directors without
professional advice
• Lack of proper mechanisms to monitor and evaluate
• Mistrust between farmer company management and farmers – shareholders’ petite
knowledge of the activities undertaken by the company
• Confusion regarding the role of the farmer company, as it is believed that the farmer
company has replaced the farmer organizations.
• Low quality of input materials (seeds, fertilizer)
Lessons Learned from Farmer Companies; Contd.
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21. Process
Fruits are purchased from the farmers by cooperatives
Sell to North South at an agreed price
North South prepares the fruit for exports
Sell to C.R. Exports (Pvt.) Limited
At a price that covers cost and a profit margin for the Joint Venture Company
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Building Bridges with Papaya; Contd.

22. Typical Organisational Structure of a Farmer Organisation
Board of Directors
Crop Production
Manager
Animal Production
Manager
Credit Manager Accounts and
Administrative
Manager
Water Resources
Manager
Agriculture
Assistant
Salesman
Agriculture
Assistant
Water
Masters
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23. Farmers-agribusiness linkages arranged by a Farmer Company
Farmer
Farmer
Company
Supermarket Chain
Agro Industries
Agrarian Service
Centres
Produce
Input/Credit/
Extension
Seed
paddy/Vegetable
Rice varieties
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