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Abstract:

PEPSICO INDIA offers a variety of seeds for contract farming, which aids farmers in using technology, obtaining agricultural loans, and guaranteeing their harvests in addition to offering a ready market. Farmers and businesses enter into a contract for the produce and supply of certain goods.

A given type of commodity, such as agricultural products, is regularly purchased under advance agreements at a predetermined price and quantity. This case study is an effort to highlight the successful Contract Farming for potatoes in India carried out by Pepsico India Holdings Private Ltd, the Indian division of Pepsico International. The case study offers a thorough understanding of contract farming concepts as well as the interaction between farmers and the PepsiCo Company.

Contract Farming

Contract farming involves agricultural production where the farmers and buyers enter into an agreement establishing conditions for production and marketing of a farm product. It involves the specifications and requirements of the buyer and agreed quantities and price for the particular agricultural products. These farm products should meet the quality standards of the buyer and should be supplied at the determined time of the buyer. In return, the buyer agrees to buy the product and support its production by supplying agricultural input, preparing the land, and offering technical guidance.

Contract farming is fundamentally market-driven farming, as opposed to conventional farming, in which farmers first produce a product and then seek a market for it.  It essentially involves four factors like pre-agreed price, quality, quantity and time. 

Objectives of contract farming

• To decrease the burden on the state and federal procurement systems
• To encourage a reliable source of income for individual farmers
• To increase the amount of private sector money going into agriculture
• To reduce the amount of rural-to-urban migration
• To encourage value addition and processing
• To direct Indian farmers’ attention on the market when choosing crops
• To encourage general rural self-sufficiency by combining locally accessible resources and knowledge to tackle new challenges

Different types of contract farming models

In India, various models of contract farming are used. The buyer has complete control over the models that should be used. The following are the different types of models:

• Informal Model – Of all the contract farming methods, this one is the most speculative and transient and is employed by both promoters and farmers. This business model includes small firms and typical products which require minimal processing and packaging.
• Intermediary Model – In this method, the buyer hires a middleman or an intermediary who, formally or informally, enters into agreements with farmers.
• Multipartite Model – This model, which includes several entities like governmental statutory agencies, private businesses, and financial institutions, was created from centralised or nucleus estate models.
• Centralised Model – In this model, the buyer’s engagement might range from providing only a little amount of input to controlling the majority of production-related factors.
• Nucleus Estate Model – In this strategy, the buyer sources from contractual farmers and their estates and plantations. The buyer must make a large investment in land, equipment, personnel, and management under the estate system. 

Contract farming by PepsiCo in India

India, which ranks third in the world for potato production, the efforts of the potato farmers is very significant. These efforts are vital to the production efforts of PepsiCo as well. In the year 1989, PepsiCo (formerly known as Pepsi Foods Ltd.) launched its agro business in India in Hoshiarpur District of Punjab by introducing a world class tomato processing plant. In this kind of contract farming model, PepsiCo supplied seeds or saplings and agricultural applications to the farmers and in return the farmer harvests the company’s crop on his land. Being inspired by the success of contract farming for tomatoes in numerous Punjabi districts PepsiCo has been meticulously replicating the model of food crops, such as potato and Basmati rice, as well as spices and oil seeds like ground nuts and chilis. 

Contract farming for potato by PepsiCo

In the year 1987, FritoLay, a PepsiCo group company set up its first potato chips plant in Channo, district Sangrur, Punjab. Later two more plants were started, one at Ranjangaon, Pune (MH) and the other at Howrah in West Bengal. PepsiCoCompany requires more than 100,000 MT of processed grade potato annually for the operations in these factories. Though India is the third largest producer producing nearly 25 million tons per annum after China and Russia, meeting the requirement of process grade potato is still uncertain.

In India, the majority of the freshly harvested potatoes are produced in the Indo-Gangetic Plains, the North Western Plains, the Central Region, and the Northeast during the brief winter days. 

However, potatoes grown in the cooler northwestern and west central plains are not suitable for processing due to the build-up of high reducing sugars and low dry matter in the potato tuber at the time of crop maturity. 

Hence, FritoLay, a member of the PepsiCo group, engages in contract farming in the states of West Bengal, Maharashtra, Punjab, Jharkhand, and Karnataka to satisfy its need for processed potatoes. Acceptable variations have been identified after many years of experiments in various locations. With more than 14000 farmers across 12000 acres in several states, PepsiCo contracts with farmers to grow potatoes. Farmer relationships are long-lasting, and more than 90% of farmers are repeat cultivators.

Case Study: PepsiCo India vs. Gujarat Potato Farmers

PepsiCo India sued nine farmers on April 5, 2019, in three separate courts located in the Gujarati districts of Sabarkantha, Aravalli, Deesa, and Banaskantha for cultivating and marketing the FC5 potato variety, over which it asserted exclusive rights under section 28 of the Protection of Plant Varieties and Farmers Right Act 2001 (PPVFR). PepsiCo filed a lawsuit against the farmers, claiming that they had violated its intellectual property rights and that they deserved compensation ranging from Rs. 2 million to Rs. 10 million. Following PepsiCo India’s lawsuit filing, pro-farmer rights protests and negative social media comments calling for a nationwide boycott of PepsiCo India products were made. Faced with massive protests, PepsiCo withdrew the lawsuits against the farmers.

Issues addressed

The case is structured to achieve the following objectives:-

• Analyse the provisions of the PPVFR Act of 2001 with a focus on the rights of farmers and plant breeders
• Understand the distinctions between national and international laws
• Recognize the tactics a company uses while facing competition and a drop in sales revenues
• Consider the organisation’s response to a global market catastrophe

PepsiCo India accuses farmers of violating intellectual property rights

The FC5 potato type was utilised by PepsiCo to make their Lays brand of potato chips. Compared to other potato varieties, the FC5 variety had a moisture level of 80% as opposed to the other kinds’ 85%. It was easier to store and process FC5 since it had a low moisture level, which was good for manufacturing chips. The FC5 cultivar was developed by PepsiCo India in 2009, and the firm sent the seeds to the farmers along with a repurchase agreement that required them to sell the full crop to the corporation. The problem started when some farmers in Gujarat grew the FC5 variety of potatoes without permission from PepsiCo India and sold them on the open market.

Challenges

• Inadequate investment knowledge
• Technical specifications to ensure standard quality
• Lack of refrigerated vehicles for movement
• Engaging small-scale farmers is challenging

Opportunities

• A new market sector
• Less expensive distribution
• Creation of a reliable supply chain
• Agriculture productivity can be enhanced

Conclusion

The purpose of the Protection of Plant Varieties and Farmers’s Rights Act 2001, is to safeguard the rights of farmers. Additionally, it is a global trade reality. A robust legal system is necessary if you want people to invest in India. Strong legal protections for intellectual property rights ought to exist. TRIPS was the first step in creating a solid IPR (Intellectual Property Rights) framework. India has ratified the TRIPS system and is a party to it. India must create municipal laws in order to meet a number of requirements. However, we are permitted to safeguard our native species when we enact these laws. Different nations employ this flexibility in different ways.

This case study of PepsiCo’s Frito Lay contract farming for potatoes is a good illustration of how tiny farmers in India are able to meet international quality standards. PepsiCo Co.’s extremely robust extension network contributes to the monitoring and upkeep of quality at every level. There are obviously many advantages for farmers who work as contract growers: there is thorough training and education of farmers regarding the right timing and method of sowing, harvesting, and other field operations; farmers’ overall management capabilities are improved by meetings and visits from agricultural experts on occasion. Contract farmers have higher gross margins.

Future Perspectives 

In order to see significant investments in the sector over the next few years, many organised companies should be encouraged to enter this market and make an impact. A combination of cooperative and corporate models may be the most effective for this industry, according to the Contract Farming, which anticipates significant improvements in quality, productivity, and reduced losses in the French produce supply chain. For successful growth possibilities, it might be necessary to investigate the role of subsidies.

 

Works Cited

• Aloy Dutta. “A Case Study of Pepsico Contract Farming For Potatoes.”
• International Labour Organization. “PepsiCo Contract Farming.”
• “PepsiCo India vs. Gujarat Potato Farmers|Economics|Case Study|Case Studies.” Icmrindia.org, https://www.icmrindia.org/casestudies/catalogue/Economics/PepsiCo_India_Gujarat-Case.htm. 

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Written by- Meghana D