Presented at the Pulses for Sustainable Agriculture and Human Health” on 31 May-1 June 2016 at NASC, New Delhi, India. The conference was jointly organised by the International Food Policy Research Institute (IFPRI), National Academy of Agricultural Sciences (NAAS), TCi of Cornell University (TCi-CU) and Agriculture Today.

1. Lentil Contract Farming in Nepal
Participation and Impact
Anjani Kumar
Devesh Roy
Gaurav Tripathi
P. K. Joshi
Rajendra P. Adhikari
International Food Policy Research Institute
South Asia Office, New Delhi

2. International Food Policy Research Institute
 Contract farming is envisaged as one of the strategies to
 increase productivity
 enhance farmers’ incomes,
 reduce transaction cost,
 minimize risk
 improve product quality and safety
 At present, contract farming in Nepal is at its infancy and
needs to be popularized.
 enabling polices and appropriate institutional arrangements.
 There are good models of contract farming which are being
practiced globally and in neighbouring countries of
Nepal.
 Initial evidence in Nepal is also promising
Background

3. International Food Policy Research Institute
Concerns/constraints
 predominance of smallholders
 small-scale enterprise,
 low marketable surplus,
 scattered production
 diseconomies of scale in aggregation of outputs and provision of
technology, inputs and services
 higher transaction costs (contracting, monitoring, enforcement etc.)
 weak technical capacity,
 lack of capital,
 high vulnerability to risks and
 challenges to comply with food safety and quality standards,

4. International Food Policy Research Institute
Key Questions
 What factors motivate farmers’ participation in contract
farming (CF)?
 Does CF raise profits, increase yield, and reduce cost of
production?
 Does CF enhance food quality and safety through adoption
of good agricultural practices?
 These research questions are addressed with one case study-
 Lentil

5. International Food Policy Research Institute
Lentil
 Lentil is Nepal’s number one agricultural export
commodity.
 In Nepal it is the most significant pulse in terms of both
area and production,
 It constitutes more than 60 % of the total pulses produced
in the country.
 Lentil has a share of about 13 percent of total agricultural
exports from Nepal.
 Globally, the most traded pulse is lentils.

6. International Food Policy Research Institute
Snapshot of lentil in Nepal
Year
(TE)
Percenta
ge share
in GCA
Percenta
ge share
in
agricultu
ral VOP
Percentage
share in total
agricultural
exports (in
value terms)
1981 3.40 2.38 0.00
1991 2.97 2.25 11.46
2001 3.95 3.07 10.83
2013 4.16 2.94 11.35
Year (TE)
Area
(,000
ha)
Production
(,000 tons)
Yield
(kilogra
ms/ha)
1981 98.0 48.7 497
1991 120.6 74.5 618
2001 178.0 137.6 773
2013 207.2 214.0 1,033
CAGR(
%)
2.5 4.7 2.1

7. International Food Policy Research Institute
Lentil

8. International Food Policy Research Institute
Data


9. International Food Policy Research Institute
Contd.
 We surveyed 602 lentil farmers
comprising 300 contract farmers
and 302 noncontract farmers,
 Bardiya, Banke, and Chitwan
 Chosen randomly from 27 wards
under seven village development
councils
 The share of the sample size
allocated to each sample district
was in proportion to the number
of contract farmers.
District Number of sample
households
Contract
farmers
Non-
contract
farmers
1. Banke 112 89
1. Bardia 155 145
1. Chitwan 33 68

10. International Food Policy Research Institute
Methodology
 Descriptive analysis
 Socio-economic characteristics
 Economics of cultivation
 Econometric analysis
 Determinants of participation in CF
 Logit model
 Impact of CF on profit and adoption of FSM
 Instrumental variable approach

11. International Food Policy Research Institute
Methodology
 To try to address the issue of the nonrandom nature of participation in
CF, several papers have used a two-step procedure in assessing the
impact of CF on farmers’ returns
 (for example, Bellemare 2012; Ito, Bao, and Sun 2012; Katchova and
Miranda 2004; Miyata, Minot, and Hu 2009; Simmons, Winters, and
Patrick 2005; Wang, Zhang, and Wu 2011; Gupta and Roy 2012).
 We also involve a two-step procedure using instrumental variables (IVs)
to address the issue of endogeneity of the contracting variable.
 In the first stage, the dependent variable is binary (farmers’
participation in contracts = 1, otherwise = 0), and the independent
variables are a mix of qualitative and quantitative variables
 The logistic regression is given by
jjo XppY  )]1/(ln[
,

12. International Food Policy Research Institute
Methodology

,

13. International Food Policy Research Institute
Socio-economic characteristics
 A simple look reveals significant differences in some characteristics and
small differences in others.
 Significant difference in terms of
 operational holding size,
 gross cultivated area,
 cropping intensity, and
 household size.
 Non-significant difference in
 terms of age,
 education,
 occupation,
 irrigation,
 experience in farming,
 incidence of migration, and
 monthly remittances.

14. International Food Policy Research Institute
Contd.
Lentil
CF Non-CF Difference
Yield (Q/ha) 11.4 10.1 1.3***
Price (NPR/Q) 8,886 7,528 1,358***
Value of production (NPR/ha) 102,461 75,714 26,747***
Cost of cultivation (NPR/ha) 54,333 52,231 2,102
Cost of production (NPR/Q) 4,759 5,171 –412*
Profit (NPR/ha) 48,128 23,482 24,646***
Profit (NPR/Q) 4,216 2,325 1,891***

15. International Food Policy Research Institute
Farm size and CF-Rs/ha
0
10,000
20,000
30,000
40,000
50,000
60,000
Marginal Small Medium Large
CF Non-CF

16. International Food Policy Research Institute
CF: Participation and Impact
 Our results show that farm size and access to mobile phones are
significant determinants of participation in CF.
 Family size and caste attributes also are related to participation in CF.
Though an overwhelming majority of farmers in lentil cultivation are
small farmers, there still is stratification, with land size positively
associated; comparatively large farmers have a greater chance of
participating in CF.
 Conditional on participation, contract farmers earn significantly higher
profits, realize higher yields, and register lower costs of production.
 Profit for lentil farmers increase from NPR 13.27 per kg to NPR 35.73
per kg for different specifications due to contract.

17. International Food Policy Research Institute
Conclusions and policy implications
 One of the strongest criticisms of CF in developing countries stems
from the perception that small farmers will be exploited by the “big”
integrators, especially when they have limited options.
 In fact, there has been an intense debate in the formal literature, and
some researchers and policymakers perceive CF as being close to
bonded labor (for instance Sivaramkrishna and Jyotishi 2008; Ghosh
2003; Singh 2002),
 While others perceive it as a way of promoting agricultural
commercialization (Warning and Key 2002; Simmons, Winters, and
Patrick 2005; Birthal, Joshi, and Gulati 2005; Pomareda 2006; Miyata,
Minot, and Hu 2007; Bellemare 2008).

18. International Food Policy Research Institute
Conclusions and policy implications
 Further, Nepal has the opportunity to exploit the huge Indian pulse
market, which imports 2 to 3 million metric tons of pulses annually to
meet its domestic demand.
 CF through a collective mechanism could be one of the most promising
vehicles to increase lentil production and enhance quality to harness
the potential of the neighboring international market.
 The legal system for export licensing is in place, but adequate attention
needs to be given to ensure the quality and safety of the produce.
 Policy makers in Nepal should devise appropriate strategies and
mechanisms to promote CF in such commodities, which can contribute
to enhancing farmers’ welfare and mitigating poverty.
 GOI should also examine the possibilities of importing from Nepal,
which may require less transportation cost.

19. International Food Policy Research Institute
Thank you