Current Economic Statistics and Review For the Week Ended September 15

Contract farming can be defined as an agreement between farmers and firms processing and/or marketing, and/or exporting firms for the production and supply of agricultural products, these are forward agreements, frequently at predetermined prices. The essence of the arrangement is commitment on part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser at the time of signing the contract and on the part of the company in providing production support and purchasing the commodity. The company’s production support obligation involves provision of credit, inputs, farm machinery rentals and technical advice. The company always retains the right to reject substandard produce.

The key feature of contract farming is hedging of risks both for the firm and the farmers. Contracting is fundamentally a way of allocating risk between the company and the crop growers. The latter assume most risks associated with production while the former bears risks related to marketing the final product, thereby reducing the total risk relative to non-contract situation of that crop.

It has been observed worldwide that contract farming schemes generally follows two trends. The first one pertains to out growers schemes, where by there is usually heavy involvement of external donors in these schemes along with the central processing unit exercising a tight control over a large number of growers. Generally, traditional tropical commodities, such as sugar, rubber, oil palm, etc., are being produced under these schemes. This type of contract farming is common in Indonesia and Malaysia (for producing rubber and oil palm) and in Africa (oil palm, sugar, and tea). The second type of schemes include farming activities oriented towards the export of high-value items, such as asparagus, cucumbers, melons, strawberries, etc. These are usually carried out on a smaller scale with more private sector involvement and less tight centralised control and are being widely used in fruit and vegetable production, particularly in Central America and Thailand . In India , firms like Pepsi/ Fritolays, HLL, Chambal Agritech, A M Todd etc. operate under this category.

Advantages and Disadvantages of Contract Farming
Farmers	Agri-business Firm
Advantages
Secured market access and assured support price for the contracted product there by reducing uncertainty and transaction costs involved in the search for market. Lower product and market risks resulting in income stability.	Backward market integration is possible with regularity of agricultural product supplies thus facilitating optimal utilisation of processing capacity and/or distribution infrastructure.
Access to a wide range of managerial, technical and extension services that otherwise may be unobtainable Assured quality of seeds and pesticides.	Ensured quantity and quality consistent because of which firms are in a better position to meet consumer requirements and mandatory quality and safety standards.
Contract agreement as collateral to arrange credit with commercial banks and financial institutions in order to fund inputs.	Circumventing limitations in accessing land usually arising in the form of caps farm sizes or exclusion of private companies from land ownership via legislation.
Farm production and management skills are enhanced by the technical assistance provision, and spillover effects might occur if farmers engage in non-contracted crops and livestock enterprise activities.	Input costs per unit are reduced. Firms that acquire large quantities of farm inputs can attain economies of scale in purchasing through greater bargaining power of firms, reduced costs of bulk transportation, etc.
Disadvantages
Firms might opportunistically renege on contractual terms if market circumstances change. This can take form of change in remuneration promised (substantial variations in the realisation of expectations can lead firms to force renegotiation or engage in contractual hold-up), rejection of products delivered (under pretext of non-conformity to quality regulations),	Transaction costs of dealing with large numbers of farmers are high, as it requires investments in personnel, in controls and in monitoring systems. The logistical costs tend also to be high when inputs must be distributed and production assembled by the contracting firm.
Farmers lose flexibility in enterprise choice. Bound to a crop or livestock enterprise by a contract, farmers cannot adjust production mixes so as to benefit from market opportunities. As also sub-standard quality of inputs and technology provided.	Risk of mis-utilisation of distributed inputs in alternative crop and livestock enterprises and of deviation of final products. Farmers may also consume part of the production or, as we have already seen, simply sell to third parties.
Firms might intentionally avoid transparency in the price determination mechanism of the contract, utilising complex formulas or quantity and quality measurements not well understood by farmers.	Threat of spoiling its corporate image in case of conflicts with farmers or negative impacts of contracted operations on environment or in animal welfare, for instance, might exist.
Long-term contracts might gradually decrease real prices received by farmers. As asset specificity is inbuilt in farm operations, firms might use this constraint as a way to establish and reinforce monopsonistic power and thus gradually impose lower prices on farmers.

Some firms engaged in contract farming in India , are operating through the Punjab Agro Foodgrains Corporation Limited (PAFC)[1]. PAFC has tied up with three sets of companies to provide inputs and extension services to the farmers and to buy back their contracted crops. The first includes seed companies namely, Pro Agro; ‘Advanta India ’; ‘Sygenta India ’; ‘Pioneer India’ and Monsanto. The second set are consultant companies engaged by PAFC for consultancy on agronomic practices to contract growers like Escorts, DCM Sriram, Mahindra Shubh Labh and Tata Chemicals. The third consists of buyer/ processor/exporter companies such as LT Overseas, KRBL, United Breweries and Cargil. The contracts are tripartite agreements between the farmer, PAFC and the companies providing seeds, extension services and buy-back guarantee to farmers on behalf of PAFC.

Contract farming in wheat is being practised in Madhya Pradesh by Hindustan Lever Ltd (HLL), Rallis and ICICI. Under the system, Rallis supplies agri-inputs and know-how, and ICICI finances (farm credit) the farmers. HLL, the processing company, which requires the farm produce as raw material for its food processing industry, provides the buyback arrangement for the farm output. In this arrangement, farmers benefit through an assured market for their produce in addition to timely, adequate and quality input supply including free technical know-how; HLL benefits through supply-chain efficiency; while Rallis and ICICI benefit through assured clientele for their products and services. The consortium is also planning to rope in other specialist partners including insurance, equipment and storage companies.

Contract farming seems to have existed in the country since the colonial period. A study by MEDC has revealed that cultivation of Virginia tobacco in coastal Andhra Pradesh in the 1920s by ITC had incorporated most elements of a fair contract farming system, which was well received by farmer lobbies. Commodity co-operatives, like dairies in Gujarat and sugar producers in Maharashtra , which emerged in the 1950s, involved providing various kinds of services to their members and buying back the supplies offered at contracted prices from them. The quasi-contractual nature of these operations was a huge success and that encouraged private players to adopt a similar approach. For instance, Wimco, the country’s sole mechanised match manufacturer, instituted an innovative farm-forestry scheme for the cultivation of poplars in Punjab , Haryana and Uttar Pradesh. , It has been met with a good response despite the trees being exotic to the regions.

Apart from this, organised public and private seed companies, which emerged in the 1960s, had always indulged in contracts with individual farms for multiplication of seeds, as they did not own land. In fact, during 1980s and 1990s, contract farming become a popular strategy among the food processing companies, which were facing a serious problem of unreliable and uneconomic supply of raw material. For instance, Pepsico introduced tomato cultivation in Punjab in the 1990s under contract farming to obtain inputs for its paste-manufacturing facility. Nijjer in Punjab and Bhilai Engineering in Madhya Pradesh also took up tomato contract cultivation programmes shortly after Pepsico.

Contract farming has been even attempted for bulk production of subsistence crops, such as paddy-rice, maize and wheat. Smaller projects involving specialised export crops, aromatics, medicinal plants and herbs, etc still actively use contracts in their own restricted areas. Most contracts in recent times have specialised contract agencies as interfaces between farmers and input suppliers/crop purchasers.

Pepsi Foods Ltd. (‘PepsiCo’ hereafter) launched its agro-business in India in 1989 by installing a Rs 22 crore state of- the-art tomato processing plant at Zahura in Hoshiarpur district of Punjab with special focus on exports of value-added processed foods. PepsiCo adopted the contract farming method described earlier, where farmers in Punjab planted tomatoes on their land, while the company provided selected inputs like seeds/saplings etc. and also advisory services for crop management on a regular basis; which turned out to be lucrative for the company. It focused on developing region-specific and produce-specific research and extensive extension services. Contract farming of tomatoes helped farmers attain higher productivity and acquire new production techniques and also provided them with new options for crop diversification. Encouraged by the success of contract farming in tomato in several districts of Punjab , PepsiCo has successfully emulated the model for food grains (basmati rice), spices (chillies) and oilseeds (groundnut), apart from other vegetable crops like potato.

The company, a ginning and trading house from Pollachi ( Coimbatore district of Tamil Nadu , India ), practices contract farming in cotton. In the kharif season 2002, the company persuaded farmers belonging to various districts of Tamil Nadu to undertake cotton cultivation on their fields, informing them that they would be backed by a model called Integrated Cotton Cultivation (ICC), which would guarantee a market-supportive mechanism for selling their produce. The Appachi scheme differed significantly from other existing contract farming models on its ‘pricing’ front in that no prior price fixing is done in this model. ACC’s unique and transparent MoU allowed the farmer to sell his commodity at the market prices prevailing during the time of negotiation. Formation of self-help-group (SHG) of the farmers belonging to a village, provision of crop loan at 12 per cent per annum on group’s guarantee, door delivery of quality inputs at discounted rates, cotton crop insurance, integrated crop management through competent farm service centres, adoption of contamination control measures for transportation from farm to factory facilitated cotton growers to obtain improved productivity and higher gains.

Few studies by various researchers have highlighted positive results of different contract farming ventures in the country. For instance, Singhand Asokan (2003), who studied four different cases of contract farming, namely gherkins, basmati paddy, broiler chicken and safflower, observed that gherkin farmers were satisfied with contract farming as returns were higher than competing crops. Similarly, Dev and Rao (2005), who examined contract farming in oil palm and gherkin in Andhra Pradesh, found that despite various shortcomings, on the whole contracts were working well for both crops. While contract farming solved the problem of supply of quality raw material for the processors, they were unable or even in some instances unwilling to meet the needs of cultivators.

With commercial agriculture gaining importance in the era of liberalisation and globalisation, participation of private players in farm activities has been promoted on all fronts. Two major routes of entry for private players have been corporate farming and contract farming. Corporate farming essentially involves the business of agriculture, specifically, what is seen by some as practices of would-be mega corporations involved in food production on a very large scale. It encompasses not only the farm itself but also the entire chain of agriculture-related business, including seed supply, agrochemicals, food processing, machinery, storage, transport, distribution, marketing, advertising and retail sales. However, its disputing feature is ‘transfer of ownership of land’. Corporate farming involves the permanent transfer of ownership of land to companies whereas the land rights of contract farmers remain fully protected. Thus, contract farming prevents disenfranchisement and dispossession of farmers.

Further, in a country like India, where agriculture is considered a way of life, lands are not merely pieces of equipment supplied by some company but they are assets of farmers who own them and hence farmers have strong incentives to effectively manage the size, complexity and risks in agriculture even if the returns are lower. Farm assets would be safer and more productive in the hands of farmers, small or big. Contrarily, there is no reason for private corporate firms to protect farming and to promote farm productivity, since their interest would be to maximise profits in the short-term and they are not necessarily interested in the long-term sustainability of cultivation.

Corporate farming, generally, has been governed by motive of increasing profitability. This can affect the pattern of land use and hence of food availability adversely. Besides, there is a high possibility of corporate players passing on low prices to growers but not high prices given the phenomenon of price fluctuations (in the absence of government intervention).

Corporate farming where by companies undertake large-scale farming on their own cannot be an answer to problem of unemployment and especially in case of farm sector, which has been the second largest employer in the country and also in the backdrop of fragmentation of land holdings. What is required instead is consolidation of small landholders and not the land holdings, which can be achieved to some extent through contract farming.

In the wake of trade liberalisation, changing consumer preferences, technical developments farming activities and supply management systems are being forced to modernise by becoming more organised, where production, processing, and distribution activities need to be co-ordinated efficiently. In this context, contract farming can be seen as an alternative form of vertical coordination in which firms can engage in and which can replace spot market purchases that carry uncertainties vis-à-vis quality, quantity and price.

The exclusive feature of contract farming is that it eliminates the chain of middlemen and brings producers and processors face-to-face. For the processing firm, it is an important step in supply-chain management. It appears advantageous to Indian farmers, who are low cost producers subject to many risks. Though all risks cannot be removed, contract farming helps reduce incidence of the same.

Given that the spread of contract farming could significantly help increase incomes of small farmers and also help promote agricultural diversification and value addition, several state governments, in Andhra Pradesh, Gujarat, Karnataka, Punjab and Tamil Nadu, are actively promoting contract farming, changing laws to enable and support it, and providing companies interested in it with a variety of incentives, including lifting of land ceilings, subsidies and tax rebates.

However, the system does have some constraints. Various studies reveal that contracting firms prefer large farmers and in some cases neglect smaller ones. Contract farming generally prefers labour saving farm practices and the level of commitment of rural development is lower than that of corporate development. It can lead to a phenomenon widely quoted in the literature as ‘reverse tenancy’, whereby small and marginal farmers lease out land in favour of medium and large farmers. It would only help entry of big companies driven by short-term profit motive into agriculture. This would, in turn, make small and marginal farmers either labourers on their own land or get alienated from agriculture itself.

Apart from this, some contract farming ventures have displayed unsatisfactory results. In the same study mentioned above, Singhand observed that basmati paddy growers were dissatisfied as their yield and income were lower compared to normal paddy Cultivators. In the case of broilers, the growing charges paid to the farmers were low compared to their investment, making the investment non-viable.

However, experts have suggested various measures to improve the system. According to some, the organisational change that can provide an alternative to this is the formation, co-operative organizations of growers, with government support and participation, of. These co-operatives would carry out operations involved in supply chain like procurement of commodities from growers at fixed prices and marketing of the produce after suitable value addition. The corporates would then have to deal with these co-operatives rather than individual peasants, thus possibly getting better remuneration due to improved bargaining power.

References

‘Contract Farming Ventures in India : A Few Successful Cases’ (2003), National Institute of Agricultural Extension Management (MANAGE), Volume 1 No. 4

Da Silva Carlos Arthur B. (2005): ‘The Growing Role Of Contract Farming In Agri-Food Systems Development: Drivers, Theory And Practice’, Food and Agriculture Organisation of United Nations.

HAQUE T (2003): ‘Reforms for Agricultural Growth and Rural Development’, Economic and Political Weekly

Kumar Pramod (2006), ‘Contract Farming through Agribusiness Firms and State Corporation, A Case Study in Punjab ’, Economic and Political Weekly,

[1] Source: Kumar Pramod (2006),‘Contract Farming through Agribusiness Firms and State Corporation, A Case Study in Punjab ’, Economic and Political Weekly

In response to the second tender floated on June 26, 2007 by the State Trading Corporation’s (STC) for import of 10-lakh tonnes wheat for the current fiscal 2007-08, seven bidders have quoted prices between $317.95 and $370 per tonne cost and freight (C&F). The bidders include Alfred C. Toepfer International of Germany, Cargill Inc of the US, Glencore AG of Switzerland , Concordia Agritrading (a subsidiary of the Dutch trading house, Nidera) and Louis Dreyfus of France . However, not a single one of them bid for the entire 10 lakh tonnes. In fact, the aggregate quantity offered by all the seven bidders came to only 9.2 lakh tonnes — reflecting the tight international supply situation.

As the quoted prices are higher compared to the $265.5-302 per tonne range that was received in its earlier tender issued on April 30, 2007. The central government is likely to pay Rs 2,460 more per tonne on imported wheat than it paid to farmers in its recent procurement programme. Moreover, it would have to bear an additional burden of Rs 246 crore on the first import consignment of one million tonne. The country had imported 5.5 million tonnes of wheat at an average price of around $205 per tonne in 2006-07. The sharp rise in the price in this year is because of an export ban in Ukraine and Pakistan , India ’s strict phyto-sanitary norms (that prevent the US from selling wheat to India ) and expectation of a lower harvest in Australia . Hence, the choice of suppliers is now restricted to France , Canada and Russia .

The central government is planning to do away with the license system required for setting up manufacturing units for gur and khandsari. This is being considered in view of some of the major sugar producing states witnessing a bumper crop with excess production. The move is expected to provide farmers an alternative route to dispose off surplus cane. The move is likely to benefit at least 35 million sugarcane farmers and their families boosting the employment in rural areas. The removal of the license system would give an outlet for the disposal of cane in areas where sugar factories have not been set up or capabilities of existing sugar factories are inadequate to crush all the cane grown in the area.

According to data compiled by the Solvent Extractors’ Association of India (SEA), the oilmeal exports from the country has declined by 30 per cent in June 2007 at 153,625 tonnes compared with 219,650 tonnes in the corresponding month last year. The drop was the result of a substantial decrease in soybean meal (25 per cent in June at 424,900 tonnes) and groundnut meal month last year (by 89 per cent to 4,775 tonnes). On the contrary, the shipment of castor meal has recorded a growth of 185 per cent to 97,225 tonnes in the same period. On a quarterly basis, however, the exports of oilmeal dropped by 7 per cent in the first quarter of the current financial year to settle at 816,600 tonnes compared with 875,200 tonnes in the comparable quarter last year.

The sugar industry is expected to face a shortage of storage capacity to the tune of 9 million tonnes next season October – September 2007-08. As per the industry experts, the sector might either need to invest Rs 900 crore to add permanent storage capacity or incur a monthly expense of Rs 6.3 crore on temporary arrangement. The peak level stock during current season has been 19 million tonnes (versus 16 million tonnes last season), which is likely to touch 24 million tonnes in the next season. The industry has a storage capacity of 16 million tonnes and would need to add 9 million tonnes. The creation of a permanent godown with a 40,000-tonne storage capacity would cost about Rs 4 crore.

Coffee Exports (in tonnes)
Type of Coffee	January-June
Type of Coffee	2007	2006
Arabica Parchment	20,585	36,838
Arabica Cherry	7,441	7,307
Robusta Parchment	13,398	12,046
Robusta Cherry	55,281	50,730
Instant coffee	27,088	8,346

According to Coffee Board, coffee exports from the country during January-June, 2007, have risen 7.4 per cent to 123,793 tonnes from 115,267 lakh tonnes of the corresponding period last year. Provisional re-exports from the country have stood at 6,616 tonnes during first half of 2007 against 15,703 tonnes registered during the same period last year. According to International Coffee Organisation (ICO), global coffee exports have been 4.8 per cent higher to 8.9 million bags by the end of May 2007over a period of one year.

Cadbury India Ltd and the Tamil Nadu Horticulture Department have entered into an agreement to promote cocoa farming as an intercrop through a contract farming and buyback arrangement with coconut farmers. The five-year agreement aims to bring 50,000 acres under cocoa farming, which would provide coconut farmers an additional income of Rs 80 crore per year. Under the arrangement, cocoa would be promoted as an intercrop in the coconut farms. Cadbury and the Horticulture Commissionerate would identify cocoa farming areas, assist the farmers financially and provide technical inputs and facilitate institutional credit. The farmers would be eligible for a financial assistance of Rs 11,250 a hectare for establishing a new cocoa garden and 50 per cent of the unit cost for micro irrigation facilities. Cadbury India would provide the seedlings at Rs 4 each and buy the cocoa beans at a minimum floor price of Rs 60 a kg.

ABN Amro Bank NV has posted a significant jump of 59.4 per cent in net profit from its India operations to Rs 385 crore during the financial year 2006-07 over Rs 242 crore in FY 06. The bank attributes the jump in profits to the balanced growth in its interest and fee-based income.

Expansion of Indian companies in overseas countries has generated huge potential for the banking business. Considering this business potential, Bank of Baroda has planned to start ‘regional hubs in overseas countries’. The bank is planning to launch at least 10 new overseas branches during the fiscal 2007-08. These new branches are expected to come up in Trinidad and Tobago , Ghana , Australia , Bahrain , Canada and New Zealand .

After the recent hike of 75 basis points in home loan rates, banks are now devising ways for smooth recoveries of passed-on costs. While the public sector banks are working on increasing the tenure of equated monthly installments (EMIs), for existing customers, private-owned banks have a list options from a one-time bullet payment on differential interests to extended EMIs depending upon the capacity of the customers. SBI is devising extended term loans tenure instead of hike in EMIs while HDFC has devised schemes to suit repaying capacities of customers. Banks are even considering a combination of prepayment and staggered differential payments. Also, bankers are keenly awaiting the quarterly monetary policy review by RBI before deciding on further home late rate hikes.

Accumulated losses by regional rural banks have gone up by Rs 100 crore in 2006-07 to Rs 1,700 crore during the financial year compared with Rs 1,600 crore in 2005-06. Though the government has promised to recapitalise these banks, the amount is yet to be finalised. To wipe out the accumulated losses, an amount of about Rs 1,500-1,700 crore would be required. At preset, there are 96 RRBs in the country. It may be noted that these banks have managed to increase their net profits to about Rs 800 crore in 2006-07 against Rs 600 crore in the previous year.

Everonn Systems India Limited has tapped the market between July 05 and 11 by issuing equity shares aggregating Rs. 5000 Lakhs with face value Rs.10 per share, in a price band of Rs 125-140.

Allied Digital Services Limited has tapped the market between July 03 and 05 by issuing 42.22 lakhs equity shares with face value Rs.10 per share, in a price band of Rs 170-190.

It was a historical week for the markets, with the barometer index BSE Sensex hitting the 15,000 level and the S&P CNX Nifty also crossing the 4,400 mark. They also managed to settle at all time high levels. Fall in inflation, easing fears of interest rate hike, steady progress of monsoon, fresh build-up of positions in derivatives markets were the factors that triggered rally on the bourses. The market settled with gains in 4 out of 5 sessions in the week

The BSE Sensex gained 313 points to 14,964.12 in the week ended 6 July 2007 while the S&P CNX Nifty rose 67 points to 4,384.85

The week started on upbeat note with the BSE 30-share Sensex gaining 13.75 points to 14,664.25, on Monday, 2 July 2007. Auto, capital goods, and healthcare shares were in demand, while cement and IT shares witnessed selling.

Sensex jumped 142.25 points to 14,806.51, on Tuesday, 3 July 2007, with banking, telecom, FMCG, and construction stocks leading the rally.

The rally continued for the fifth straight trading with the BSE Sensex advancing 73.73 points at 14,880.24 on Wednesday, 4 July 2007. Shares from the metal, cement and sugar sectors saw buying, while IT pivotals were offloaded.

The five-day rally fizzled on Thursday, 5 July 2007, with the Sensex declining by 18.35 points to 14,861.89, in highly volatile trade. Auto and capital goods shares were in demand, while IT pivotals were offloaded. Realty major DLF debuted on the bourses on that day.

The benchmark 30-shares BSE Sensex galloped 102.23 points at 14,964.12, an all time closing high on Friday, 6 July 2007. It also struck a record high of 15,007.22 on on that day.

The Nifty July 2007 futures settled at 4,374, a discount of 10.85 points as compared to spot closing of 4,384.85. The Nifty July 2007 struck an all time high of 4,378 today.

RBI conducted the auction of “7.99 per cent Government Stock 2017” and “8.33 per cent Government Stock 2036” for the notified amounts of Rs.6000 crores and Rs.4000 crores respectively. The cut-off yields for the “7.99 per cent Government Stock 2017” and “8.33 per cent Government Stock 2036” were 7.9900 per cent and 8.4478 per cent respectively.

The cut-off yield in 91-day T-Bill auction moved lower to 6.1908 per cent as against 7.3937 per cent during the previous week. The cut-off yield in 364 -day T-Bill auction moved lower to 7.1663 per cent as against the previous cut-off yield of 7.6520 per cent.

During the week, the weighted average call rates during the period ranged between 0.35 per cent and 2.28 per cent, while weighted average repo rates ranged between 0.26 per cent and 7.75 per cent and the weighted average CBLO rates ranged between 0.03 per cent and 0.50 per cent. The average volumes of Call, Repo, and CBLO segments were Rs.9,246 crores, Rs.118,44 crores and Rs.180,56 crores respectively. The daily average outstanding amount in the LAF (reverse repo) operation conducted during the period was Rs. 2995 crore. The 1-10 year YTM spreads increased by 28 bps to 77 bps.

The rupee closed at Rs.40.46/USD on July 06, 2007 as compared with Rs. 40.75/USD as on June 29, 2007. The Rupee moved between Rs. 40.46 and Rs.40.66, with a standard deviation of 9 paise during the week. Similarly during the fortnight (June 25, 2007 - July 06, 2007), the Rupee moved between Rs.40.46 and Rs.41.01, with a standard deviation of 20 paise. The Rupee moved between Rs.40.46 and Rs.41.01 during the last 1 month (June 11, 2007 -July 06, 2007), with a standard deviation of 16 paise.

The six-month forward premia closed at 2.48 per cent (annualized) on July 06, 2007 vis-à-vis 2.53 per cent on June 29, 2007.

The Forward Markets Commission (FMC), the commodities market regulator, has directed the commodity exchanges to bring down the circuit filter (maximum price volatility) in rubber to 4 per cent from 9 per cent earlier, effective July 2.According to an FMC circular, the initial price volatility has been set at 2 per cent from the previous level of 6 per cent. There will be a 15 minutes’ cooling period, when the prices rise or fall by 2 per cent. The trading would be stopped for rest of the day, if the prices move either up or down by another 2 per cent.

The Forward Markets Commission (FMC) had recommended to the government to allow banks, foreign investors (FIs) and mutual funds (MFs) in commodity trading for wider participation, said chairman B C Khatua on the sideline of the release of a quarterly magazine, ‘Commodity Vision’ in Mumbai. The recommendations assume importance in the backdrop of a recent government view not to allow banks and MFs in commodity markets, on the fears of futures markets stoking inflation. The recommendations are currently under the consideration of a Parliamentary committee, which is looking into the amendment to the Forward Contracts (Regulation) Act, 1952.

The munificent rains have resulted in higher sowing rates of coarse cereals, cotton, oilseeds and pulses, with only rice somewhat lagging behind. An area of 60.778 lakh hectares (lh) to have been planted so far in the ongoing kharif season, as against 58.481 lh for the corresponding period of 2006.Acreages under most kharif crops have increased significantly on the back of excellent monsoon rains so far, boosting hopes of a further easing of inflationary pressures in the economy. During the current south-west monsoon season (June-September), the country as a whole had received an average area-weighted rainfall of 237.6 millimeters (mm) till July 4. This is 20.3 per cent higher than the historical ‘normal’ or long period average (LPA) of 197.5 mm for this period. As many as 20 out of 36 meteorological sub-divisions have recorded ‘excess’ precipitation (20 per cent or more above LPA), while being ‘normal’ (within plus or minus 80 per cent of LPA) in 11 others. The only areas to have experienced lacklustre monsoon activity are eastern Uttar Pradesh (UP), Bihar , Jharkhand and eastern Madhya Pradesh. The munificent rains have resulted in higher sowing rates of coarse cereals, cotton, oilseeds and pulses, with only rice somewhat lagging behind. The Agriculture Ministry’s Crop Weather Watch report, released here on Friday, shows an area of 60.778 lakh hectares (lh) to have been planted so far in the ongoing kharif season, as against 58.481 lh for the corresponding period of 2006. Farmers have sown 17.134 lh under bajra (against last year’s 14.45 lh), 12.813 lh under jowar (12.089 lh), and 27.035 lh under maize (28.751 lh). Cotton acreages have gone up even more — from 37 lh to 59.60 lh, with Bt cotton alone accounting for an estimated 23.36 lh till now. The progressive area under oilseeds, too, is up from 32.63 lh to 42.27 lh. The latter includes 19.39 lh under groundnut (16.14 lh), 14.80 lh under soybean (9.23 lh), 3.33 lh under sesamum (2.93 lh), 3.23 lh under sunflower (3.33 lh), and 1.39 lh under castor (0.84 lh). Pulses coverage has so far been higher, at 26.574 lh (20.07 lh), led by arhar at 8.604 (6.021), moong at 7.388 (6.566), and urad at 5.819 (2.147). Only rice has reported a decline in cumulative coverage, from 47.72 lh to 46.02 lh, lagging mainly in Chhattisgarh, Uttar Pradesh, and Punjab . In Punjab , some rice area has been diverted to cotton. In all, the country seems well set for a bumper kharif crop, provided the monsoon holds its current course.

The National Multi-Commodity Exchange (NMCE) has revised the initial margins in pepper (kali mirch) and cumin (jeera) futures contract, which shall be 12.5 per cent for the sellers and 18.5 per cent for the buyers, from Friday. The revised margins would be collected on real-time basis and would be applicable with effect from commencement of trade today, according to a release here. This is in pursuance of the latest circular of Forward Markets Commission (FMC), superseding its earlier directive issued in April last. India contributes about 70 per cent of global production of cumin seed and 20 per cent of pepper.

MCX Academia of Economic Research, an independent research unit set up by the country’s leading commodity bourse MCX, has launched Commodity Vision, a quarterly journal that aims at generating quality information and research inputs about the commodity segment. Commodity Vision seeks to be an independent research journal that aims at improving the understanding of participants in the commodity market. It also seeks to serve the industry by disseminating information about fundamentals on commodities. Though the initial inspiration has come from MCX, eventually the journal will be independent and self-sustaining, and MCX will play the role of a facilitator. The journal also aims at generating critical debates among scholars, academicians, researchers, politicians, policymakers, and intelligent public on the research papers published therein.

The National Spot Exchange Ltd, an arm of the Multi Commodity Exchange of India (MCX), is slated to launch online trading in seasame seeds, cotton, groundnut and castor seeds by September this year. MCX also plans to start futures trading in electricity, carbon credit, coal, freight index, weather index, real estate index and rain index after the amendment to the Futures Contracts Regulation Act is passed by both the houses of the Parliament.

Interim pension fund regulator, PFRDA said that it has received technical and commercial bids from the four short listed entities and the final three may be selected by July 20, 2007 for managing the Rs 1,500 crore pension funds of central and most state government employees. The 4 short listed entities are SBI, LIC, IDBI Capital and UTI AMC. By the end of this year, funds of about 5 lakh employees of central government, 19 state governments and some autonomous institutions lying idle would come to active use.

Neyveli Lignite Corporation (NLC) is floating a joint venture coal mining company with Mahanadi Coalfields (MCL) and Hindalco Industries for Talabira II and III coal blocks. The proposed JV is expected to be formed over the next three to six months and intends to mine around 20 million tonnes of coal a year. The mining is expected to start in 2009-10. NLC is planning to set up a mega power plant in Orissa, which is the biggest and most ambitious. It is also planning to set up a power project in Gujarat in cooperation with the State Power Corporation.

FMCG major, Godrej Sara Lee, which is a joint venture company between the Godrej Group and US based Sara Lee Corporation, has acquired Sara Lee Household & Body Care, India and its subsidiary in Sri Lanka for a consideration of $13 million (Rs 52 crore). The business and operations of Sara Lee Household and Body Care will be transferred to GSLL with effect from July 2007.

Tata Group has forayed into the processed foods business by acquiring 70 per cent stake in Innovative Foods (IFL) from the Amalgam Group. The group’s investment has been routed through Residency Foods and Beverages Ltd (RFBL), a subsidiary of Indian Hotels Company Ltd (IHCL). RFBL has recently entered into an exclusive agreement with Jasper Aqua Exports Pvt Ltd, a seafood company based in Vizag, whereby Jasper Aqua will manufacture products exclusively for the RFBL product portfolio. This arrangement will essentially facilitate the company’s plans for exports to the East Asian markets amongst others. As a first step, the Tata Group will be investing to upgrade IFL’s plant in Cochin to international standards.

Deloitte, a global professional services firm, has launched a new company, Deloitte & Touche Consulting India, to consolidate its consulting services in India . The move is a part of the company’s growth strategy to meet the needs and challenges of the growing Indian market.

The country’s largest mobile operator, Bharti Airtel awarded a $900 million contract to telecom equipment provider Nokia Siemens for expansion of its mobile, fixed and intelligent network platforms. Nokia Siemens will expand Bharti’s GSM network in eight existing circles and help scale up its international calling card prepaid service capacity by 4.5 million news users. The Finnish-German joint venture, which committed $100 million investment in India to grow its business operations, will also expand Bharti’s national and international long distance network with 1.8 million next generation network (NGN) ports.

Ashok Leyland has entered into a 50:50 joint venture agreement with Finland-based Alteams group for setting up a Rs 335 crore plant near Chennai to manufacture high pressure die casting aluminium products for automotive and telecom sectors in India. The JV will invest Rs 175 crore initially which will be scaled up to Rs 335 crore.

The Anil Ambani led Reliance Capital, which has a presence in the mutual fund, insurance, stock broking and private equity space is planning start its consumer finance business shortly.

Navratna engineering and manufacturing enterprise BHEL has bagged the ‘ICWAI National Award for Excellence in Cost Management’ for the second year in a row. The Institute of Cost and Works Accountants of India (ICWAI) present the awards annually to corporate entities for excellence in cost, quality and delivery.

Software services provider Patni Computer Systems has acquired European telecommunications consulting services company Logan- Orviss International.

Low-cost carrier GoAir, promoted by the Wadia Group, is planning to extend their ‘Go’ brand by investing in engineering and ground services, along with cargo operations. GoAir has already entered into a joint venture with Singapore Airlines (SIA) Engineering for setting up an engineering facility in India . Simultaneously, it is planning to expand its fleet size to 18 by 2009 and 35 by 2011 that would be fully funded internally.

The public sector Fertilisers and Chemicals Travancore (FACT) has close down its caprolactum plant owing to steep hike in the price of sulphur. In the last four months, sulphur prices have increased by 100 per cent, from $89 a tonne to $168, making the production cost unbearably high. FACT consumes about two lakh tonne of sulphur and three lakh tonne of rock phosphate annually as raw material for its main plant. The price of another raw material, rock phosphate, had also gone up from $79 to $125 as a result the ailing company might be forced to close down its ammonia plant in the coming days.

Wipro had signed an agreement to wholly acquire Singapore-based FMCG company Unza Holdings Ltd for Rs 1,010 crore. Unza, which is Rs 683 crore company, had 48 brands, five factories two in Malaysia , one each in Indonesia , China and Vietnam and over 4,000 employees.

EXTERNAL SECTOR

According to the provisional data presented by the commerce ministry, export growth of India during May has seen a decline of 18.1 per cent to US $ 11.86 billion from US $ 10.04 billion in May 2006, reflecting an appreciation in the rupee during the recent period. The growth during April 2007 has witnessed a significant growth of 23 per cent over the corresponding month of the previous year. The imports of the country have grown by 26.4 per cent during May 2007 to stand at US $ 18.1 billion. The growth has mainly been driven by the huge 41.6 per cent increase in non-oil imports during the month. The trade deficit during May 2007 has widened by 45 per cent to US $ 6.21 billion over the year. With this, the cumulative value of merchandise exports for April-May 2007 has stood at US $ 22.4 billion. The target for the year 2007-08 has been set at US $ 160 billion. To guard the impact of a rising rupee, the commerce ministry has asked the finance ministry to enhance the duty drawback rates by 5 per cent. In addition, it has asked for making the exchange earners foreign currency accounts interest bearing as well as reduction of interest on pre-shipment and post shipment credit.

Imports of sensitive items have dropped by 15.8 per cent to Rs 1,118 crore in April from Rs 1,328 crore during the same period of the previous year. The gross import of commodities during the same period stood at Rs 17,635 crore. The import of sensitive items constituted 6.3 per cent the gross imports during the current year. Imports of edible oil, cotton and silk, fruits and vegetables (including nuts), products of small-scale industries, spices and marble and granite have shown a decline during the period. Imports of items like automobiles, rubber, alcoholic beverages and milk and milk products have shown an increase during the same period. The import of edible oil has decreased to Rs 625 crore in April against Rs 810 crore in the corresponding period last year. Imports of both crude and refined oil have gone down by 23 per cent and 21.1 per cent, respectively. The fall in edible oil import can be attributed to a significant decrease in the import of soybean oil and its fractions (crude), which has gone down by 62 per cent during the period under consideration.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

Advantages and Disadvantages of Contract Farming

Advantages

Disadvantages

References

EXTERNAL SECTOR