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CONTRACT FARMING IN MEDICINAL PLANTS ACASE OF COLEUS IN KARNATAKA

Thesis submitted to theUniversity of Agricultural Sciences, Dharwad

in partial fulfillment of the requirements for theDegree of

MASTER OF BUSINESS ADMINISTRATION

IN

AGRIBUSINESS

By

SHARANESH JALIHAL

DEPARTMENT OF AGRIBUSINESS MANAGEMENTCOLLEGE OF AGRICULTURE, DHARWAD

UNIVERSITY OF AGRICULTURAL SCIENCES,DHARWAD 580 005

FEBRUARY, 2009

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ADVISORY COMMITTEE

Dharwad (BASAVARAJ BANAKAR)

FEBRUARY, 2009 MAJOR ADVISOR

Approved by:

Chairman : ______________________

(BASAVARAJ BANAKAR)

Members : 1.____________________

(H. BASAVARAJ)

2.____________________

(L. MANJUNATH)

3.____________________

(R.A. YELEDHALLI)

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CONTENTS

Sl. No. Chapter Particulars

CERTIFICATE

ACKNOWLEDGEMENT

LIST OF TABLES

1. INTRODUCTION

2. REVIEW OF LITERATURE

2.1 Socio-economic features of contract farmers

2.2 Terms and conditions of contract in production and marketing

2.3 Economics of production

2.4 Problems in contract farming

3. METHODOLOGY

3.1 Description of coleus crop

3.2 Description of the study area

3.3 Sampling procedure

3.4 Analytical tools and techniques

4. RESULTS

4.1 Socio economic feature of coleus growers

4.2 Terms and condition of contract in production and marketing ofcoleus

4.3 Cost and returns and resource use efficiency in production ofcoleus

4.4 Problem faced by the contract farmers in cultivation andmarketing of coleus

5. DISCUSSION

5.1 Socio economic feature of coleus growers

5.2 Terms and condition of contract in production and marketing ofcoleus

5.3 Cost and returns and resource use efficiency in production ofcoleus

5.4 Problem faced by the contract farmers in cultivation andmarketing of coleus

6. SUMMARY AND POLICY IMPLICATIONS

REFERENCES

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LIST OF TABLES

TableNo.

Title

3.1 Demographic profile of study area

3.2 Land use pattern in the study area

3.3 Distribution of sample farmers

4.1 Socio-economic features of coleus contract farmers

4.2 Terms and Conditions of Contract in Marketing of Coleus betweenCompany and Farmer

4.3 Services extended by the companies in coleus contract productionactivities

4.4 Inputs provided by the companies to contract farmers as opined bythem

4.5 Factors favoring contract farming by farmers

4.6 Factors that favour contract farming from the point of view of company

4.7 Pattern of employment in coleus production

4.8 Per hectare input use pattern and its cost in coleus cultivation

4.9 Cost structure in coleus production by contract farmers

4.10 Returns structure in Coleus production by sample farmers

4.11 Resource use efficiency in coleus production by sample farmers ofdifferent companies

4.12 Problems faced by sample farmers in cultivation

4.13 Problems faced by sample farmers in marketing to companies

4.14 Problems faced by contract firms

LIST OF APPENDICES

AppendixNo.

Title

I. Memorandum of Understanding (MoU) of Natural RemediesPrivate Limited

I I. Memorandum of Understanding (MoU) ofSemi-Labs Pvt. Ltd.

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1. INTRODUCTION

The globalization of Indian agriculture in recent years resulted in the need for theproduction of export-oriented quality products having comparative advantage. To fulfill thecommitment of the World Trade Organization (WTO), the recent dismantling of the system ofquantitative restrictions (QRs) on imports by the Union Government has provoked newchallenge to the Indian farmers to compete in the world market. With the WTOs demand for

trade liberalization and subsidy cut to farmer, the Indian farmers are facing threats to theirsurvival from every quarter. In this context contract farming could be one of the best solutionswhich may decrease the polarization of rich and poor and thus encourage Indian farmers tocompete with the very large, rich and highly indirect subsidized western farmers. Contractfarming can indeed to be a vehicle for the modernization of agriculture in India. It can be ameans to bring about a market focus to Indian farming. Also, the contract farming systemforms the most heartening part of the vision of the National Policy on agriculture. The agro-based industries require timely and adequate inputs of good quality agricultural produce. Thisunderlying paradox of the Indian agricultural scenario has given birth to the concept ofcontract farming which promise to provide a proper linkage between farm and market.

Contract farming is a system of farming wherein farmers grow selected crops under abuy back agreement with an agency in trading or processing. It is a system for theproduction and supply of agricultural/horticultural produce under forward contracts between

products/suppliers and buyers. The primary essence of this system of farming is to ensurecontinuous supply of raw materials and to meet quality and quantity requirements on asteady/seasonal basis to meet customer needs. Contract farming can be described as a halfway house between independent farm production and corporate farming.

Contract farming involves four things; Pre-agreed price, quantity or acreage(minimum/maximum), quality and time. Contract farming is a case for bringing the market tothe farmers, which is navigated by agribusiness farms. There is no standard and homogenousmethod in contract farming in agriculture. Simple market specification contracts or futurepurchase agreements in agriculture like supplying labour and machinery are more common(Wright, 1989).

Generally, there are three types of contract in agriculture viz., i) Procurementcontracts, under which only sale and purchase conditions are specified ii) Partial contracts,

wherein only the contracting firms supply some of the inputs and produce is bought at pre-agreed prices and iii) Total contracts, under which the contracting firm supplies and managesall the inputs on the farm and farmer is just a supplier of land and labour. The relevance andimportance of each type varies from product to product and these types are not mutuallyexclusive (Hill and Ingersent, 1982 and Key and Runsten, 1999). Whereas, the first type isgenerally referred to as marketing contracts, the other two are of production contracts. But,there is a systematic link between product market and factor markets under the contractarrangements as contracts requires a definite quality of produce. Different types of productioncontracts allocate production and market risks between the producer and the processor indifferent ways.

Reasons for contract farming

The production, marketing and distribution of agricultural products are becomingincreasingly sophisticated for i) Modern advances in technology have made it feasible foragricultural products to be produced to specifications and preserved in a fresh condition ii)The optimum scale of operations has been increasing, especially in processing anddistribution iii) New selling methods have emerged, emphasizing a brand image based onconsistent quality. On the demand side, due to raising income, consumers are increasinglydiscriminating their tastes and especially all time availability of the quality products. This hasmade complexity in consumer demand which gives an added impetus to search for improvingthe co-ordination of production, processing and distribution, especially with regard to timingand quality control (Hill and Ingersent, 1982). This provides a strong rationale, from thedemand side for the contract farming as a means of raw material supply.

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During the 1950s and 1960s Contract Farming emerged as an importantphenomenon in the western developed countries. By 1980, about one-third of the total USfarm output and as much as 100 per cent poultry meat, milk and certain vegetables wereproduced under contracts (Little Peteret al., 1994). Even in Tasmania Island of Australia, bythe mid 1990s, ninety per cent of the potato production was under contracts compared withalmost nil in the 1950s (Fulton and Clark, 1996). On the other hand, in the developingcountries, the multinational corporations (MNCs) brought in the system of contract farming

during the late 1970s and the early 1980s. Besides private and multinational enterprises,contract farming is also practiced by Statal and Parastatal agencies in many countries indifferent commodities sectors like tea in Kenya, tobacco and livestock in Thailand, rubber inMalaysia, coconut in Indonesia, palm oil in Philippines and seed in India (Nanda and Meera,1999; White, 1997; Shiva et al., 1998). Contract farming had been promoted in the recentthree decades as an institutional innovation to improve agricultural performance in underdeveloped countries, some times as a key element of rural development and/or settlementprojects (Ghee and Dorall, 1992). This system was accepted and used as one of thepromising institutional framework for the delivery of price incentive technology and otheragricultural inputs. Wide support has been received for contract farming under the StructuralAdjustment Programme (SAP) and liberalization policies everywhere by the InternationalDevelopment Agencies like the World bank, the United States Agency for InternationalDevelopment (USAID), the International Finance Corporation (IFC) and the Common WealthDevelopment Corporation (CDC, 1989) (Little and Watts, 1994 and White, 1997).

Sugar mills in Karnataka were practicing the contract farming since many decades,where farmers were growing sugarcane at the specified pre-agreed price. In the samemanner, corporate sector has introduced it to horticultural and medicinal crops. Similarly,contract farming in coleus was first introduced in districts like Chamarajnagar, Kolar, Mysore,Tumkur and Bangalore rural, Belgum by Semi-Labs Pvt. Ltd., a private sector in 1999-2000. Ithas its forskholin oil extracting unit at Bangalore.

Then in 2001-02 it was Natural remedies Private limited started contract farming incoleus for forskholin oil extraction and entered into contract production activities in Koppal,Mandya, Bagolkot and Gadag districts of Karnataka, having its Head Office at Pinya(Bangalore). The farmers had engaged since long time in the production of coleus in thesedistricts, hence growing of coleus by these farmers seems to be economically feasible andprofitable, besides the favourable climatic condition of the region to get better yield.

Benefits of contract farming

Contracts are generally signed prior to planting and specify how much produce thecompany will buy at what price. Often the firm provides credit, inputs, farm machinery rentals,technical advice and retains the rights to reject the substandard produce (Glover, 1990).

To firm

The companies know the acreage planted and is assured of the growers output thusreducing its supply risk.

The company is in control of the contract provision and stipulations that canencourage quality production through the terms of agreement.

The companies know their approximate cost of raw product in advance.

As better growers tend to contract with the same company over several years, somestability in company grower relationship is attained.

Since, some of the crops have no/less domestic market (at present), the farmershave no option to sell their produce outside and the company is assured to getregular supply of the produce.

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To farmers

There is an assured market of their produce, which will eliminate the risk of price fallduring glut.

Information on market price is made available ex ante. This instills confidence amongthe contract farmers.

It saves the difficulties involved in timely transportation and eradicates the exploitationby the middlemen.

Farmer can receive assistance from the processor in the form of technical serviceand input supply on credit with / without interest cost.

Companies often provide credit to the farmers, which reduce the burden of self-expenses to the farmer. This enables the farmers to escape from the evils of privatemoneylenders.

Farmer is assured of better returns compared to other field crops as the companiesoffer relatively better prices.

Importance of medicinal plants

Medicinal plants have been used for a long time for their medicinal properties. About2000 native plants speciecs have creative properties and 1,300 indian systems of medicinespopularly known as ayurveda, unani and sidha drugs are of great demand in the country.There is already spurt in demand of plant based drugs and lately many such native species ofmedicinal values are brought under systematic conditions.

In case of medicinal plants China and India are two major production centers havingmore than 40 percent of global diversity. International market of medicinal plants is over US$60 billion per year, which is growing at the rate of 7 percent. China besides meeting itsdomestic requirement is earning US $ 5 billion per year from herbal trade. India at presentexports herbal material and medicines to the tune of Rs. 446.3 crores and according to the

recent estimates (Source: Planning commission, GOI, March 2000) it can be realized to Rs.3000 crores by 2005.

Coleus forskholii belonging to the family Lamiaceae is a well known plant throughoutthe country and is known as Pashanbhedi, pathatchur in Hindi and Makkadi beru or Manganaberu in Kannada. It is one of the most potential medicinal crops of the future, as itspharmacopieal properties have been discovered only recently. Its tuberous roots are found tobe rich source of forskolin (Syn. Coleonol) which is being developed as a drug forhypertension, glaucoma, asthma, congestive heart failures and certain types of cancers. Inaddition, forskolin is reported to have been used in the preparation of medicines preventinghair greying and restoring grey hairs to its normal colour. While its foliage is employed intreating intestinal disorders and used as a condiment since a long time, it is under cultivationin parts of Rajasthan, Maharashtra, Karnataka and Tamil Nadu.

Coleus is also quite popular as an ornamental herb in many parts of the world, mostlydue to its large and colorful leaves. Potted coleus plants are often displayed indoors orplanted out in the gardens. The coleus plant is eaten as food in many Asian countries, forexample, in India the coleus is cultivated in some regions and used in making pickles andeaten as a fresh salad vegetable. The species of the genus, namely the C. edulis and C.parvifloris also give off edible tubers which are eaten in some Asian countries. Leaves of thecoleus have also been used as a mild hallucinogenic drug in some places. Coleus herbs arealso extensively used in the laboratory tests on the ability of these plants to perceive stressand the effects of excess fluoride on the growth of the plants has been researched in recentyears.

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The root tubers have got a number of medicinal properties. They are used asantihelmentic, a few drops of root extract in milk are administered to infants to relieveconstipation and abdominal pain. Application of fresh tubers to the boils allays burningsensation, and paste mixed with mustard oil for skin infection and eczema is recommendedby the natives in the Kumaon Himalayas (De Souza and shah, 1988). Leaves are indicatedfor stomach problems. Amongst the veterinary uses administration of fresh tubers, raw orcooked, mixed with feed to the ailing cattle suffering from loss of appetite, distended stomach

and sluggishness is a common practice in Kumaon Himalayas, Gujarat, Maharashtra andKarnataka. Root tubers mixed with milk are administered to stimulate breeding bulls inMethujani betta in Coimbtore district, Tamil Nadu. Outside India, the plant is reported to be ofmedicinal value in Zanzibar and Pemba as an expectorant, emmennagougue, and diureecticin Egypt and Arabia, and for liver fatigue and intestinal disorders in Brazil. Boiled leaves areused as a febrifuge and sap is taken for stomach trouble in Uganda. The species is beingcultivated to limited extent for tubers in the state as of Gujarat, Maharastra and Karnataka inIndia. Mainmool or mangani beru in Karnataka.

Scope of the study

Karnataka is bestowed with suitable agro-climatic condition to take up cultivation ofcoleus. Thus, a model of contract farming has emerged in a big way. The concept andpractice of contract farming that is being practiced by different companies differ. Hence, the

comparative study of forskohlin oil extraction by the private sectors with following objectives.

Objectives of the study

i. To study the socio-economic features of coleus growers.

ii. To study the terms and conditions of contract in production and marketing ofcoleus.

iii. To analyze the costs and returns and resource use efficiency in production ofcoleus plant

iv. To analyze the problems faced by the contract farmers in cultivation andmarketing of coleus plant.

Hypotheses Medicinal plants are cultivated by well to do farmers

The contractual arrangement prevailing in production and marketing is beneficial tofarmers.

The cultivation of coleus medicinal plants is profitable.

There are problems faced by contract farmer and contract firm.

Limitations of the study

Since, the data was collected by survey methods, the inherent lacunae associatedwith type of enquiry have crept into the study. Even though, the estimates were provided by

the recall memory on account of the non-maintenance of the farm records, sincere effortshave been made to elicit the accurate and reliable information as far as possible by crossquestioning.

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2. REVIEW OF LITERATURE

The comparative studies of contract farming practised by different companies are notavailable. In this chapter, the studies pertaining to terms and conditions, socio-economicfeatures, economics of marigold production, resource use efficiency and problems faced bythe contract farmer of different companies have been reviewed and presented. The reviewsare presented under the following sub-heads

2.1 Socio-economic features of contract farmers

2.2 Terms and conditions of contract in production and marketing

2.3 Economics of production

2.2 Problems in contract farming

2.1 Socio-economic features of contract farmers

Jayale (1992) conducted a study on horticultural crops in Parbhani district andobserved that, majority of the respondents (63.33%) had semi medium land holding followed

by 23.33 per cent respondents who had small land holding.

Saravanakumar (1996) in his study in Krishnagiri taluk of Dharmapuri district in Tamil

Nadu observed that, majority of the mango growers (64.18%) had medium land holding while21.66 per cent and 14.66 per cent had small and big land holdings, respectively.

Vijaya Kumar (1997) in his study on rose growers in Bangalore reported that, abouthalf of the growers (51 per cent) belonged to medium income category followed by low (47per cent) and high income category (2 per cent).

Angadi (1999) conducted a study in Bagalkot district of Karnataka state and reportedthat, majority (65%) of the pomegranate growers were middle aged. The respondents below35 years of age were 18.75 per cent while 16.25 per cent were of old age.

Meeran and Jayaseelan (1999) in their study in South Arcot district of Tamil Nadustate on shrimp farmers found that, majority of the farmers had received education up to highschool (42.00%) followed by pre-university (22.00%) and middle school (16.00%) levels ofeducation.

Karpagam (2000) conducted a study on Erode district of Tamil Nadu state andindicated that majority (70.83%) of the turmeric growing farmers belonged to middle aged

group.

Babanna (2001) in his study on arecanut growers of Shimoga district in Karnatakarevealed that 61.60 per cent of the respondents belonged to medium income category while23.40 and 15.00 per cent were under low and high income category, respectively.

Arunkumar (2002) opined that major problems faced by the contract farmers were lowcontract price and irregular payments. The other problems faced were unawareness ofpotentiality of crops, poor technical assistance, manipulation of norms by firms and higherrejection rate. He also opined that major problems faced by contract firms were landconstraints and fixing of contract price. The other problems were farmers discontent andholding up of vehicles. The contract farmers try to put lower grade into higher grade and it

was difficulty to check and make sure of the grade as quantity handled was more. Farmersheld up vehicles in the villages demanding that they should be paid higher prices even thoughagreement does not say so.

Shashidhara (2003) in his study on socio-economic profile of drip irrigation farmers inShimoga and Davanagere district of Karnataka state revealed that, comparatively morenumber of farmers (46.67%) belonged to semi medium category followed by medium

(32.22%) and small land holding categories (18.89%).

Shashidhara (2004) conducted a study on drip irrigation farmers in Bijapur district ofKarnataka and reported that, 49.17 per cent of the farmers belonged to medium income

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category followed by low (26.67 per cent) and high (24.16 per cent) income category,respectively.

Sunil Kumar (2004) conducted a study tomato growers in Belgaum district ofKarnataka and found that, majority of the respondents belonged to medium income category(48.33%), followed by 32.50 per cent and 19.16 per cent were under low and high incomecategory, respectively.

Sridhar (2008) studied on contract farming in maize an economic analysis andrevealed that the socio-economic characteristics of the farmers in Davanagere and Haveridistrict were noted in the study period. The average age of contract farmer was 43 years. Incase of non-contract farmers, it was 47 years. The annual income was found to be Rs. 73,823per family in contract farmer, whereas in case of non-contract farmer, the annual income wasRs. 66,950 per family. The education level of contract farmer was hardly 21.66 per cent of thefarmers were illiterate and 78.39 per cent were literate when compared to non-contractfarmers (23.34%) illiterate and 76.66 per cent were literates.

2.2 Terms and conditions of contract in production andmarketing

2.2.1 Contract farming

Glovar (1990) highlighted the experience of contract farming and out growersscheme of seven countries in the Eastern and the Southern Africa. In those schemes, farmerssold their crops under contract to private or public enterprises for processing or export inreturn for various inputs, services and price guarantee. The researcher identified some of thekey determinants of success and evaluated the performance and also examined theconstraints to replication. In most cases, performance in delivering services and providingincome to farmers have been quite good although high management costs were widelyapplied. According to author, lesser control, more reliance on price incentives and farmersparticipation might have increased overhead costs while developing management capabilityamong growers.

Porter and Kevin (1997) analysed and recorded the travails of farmers in Africa.Examining their own experience of contract farming in Nigeria and South Africa they havedrawn attention to important issues which have received little attention in the literature,notably staffing of schemes, farmers previous experience with Multinational Companies(MNCs), water and labour issues.

Rehber (1998) presented a brief history along with explanation of contract farmingconcepts. Further, the reasons behind contract farming were also discussed. Success andfailure of contract farming were analysed based on several research works and articles.Finally, a simplified model was presented for the success of private contractual arrangementsin the light of evidence taken from the experience.

Anonymous (1999) reported a success of contract farming in Nasik district ofMaharashtra state. The company supplied inputs viz., high yielding variety seeds, fertilizersetc. to the farmers on cash and carry basis along with technical advice and purchased theproduce at the prevailing market rates at the farm itself. The Nasik District CentralCooperative Bank, Dena Bank, State Bank of India and Bank of Maharashtra participated inthe project. About 2000 acres of maize involving 2036 farmers and 124 acres of soybean

involving 150 farmers had been covered under the scheme. The estimated availability ofmaize and soybean to the company after harvest was 4032 MTs and 150 MTs, respectively.

Key and Runsten (1999) examined the cause of the observed variations in the scaleof production and the success of smallholder contract farming. The authors opined how theorganizational structure of agro-processing firms and the characteristics of contract farmerswere influenced by imperfections in the markets for credit, insurance, information, factors ofproduction, the raw product and by transaction costs. The main disincentive for firms tocontract with small holders appeared to be the transaction costs associated with providinginputs, credit, extension services and product collection and grading. Many firms had found iteasier and more profitable to deal with a few large growers. The study suggested to increase

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small holders participation in contract farming with a renewed effort on the part of growers toorganize themselves or to organise with the help of government agencies, non-profitorganizations, or the agro-processors.

Singh (2000) reviewed the logic, practice and implications of contract farming forcontract farmers and the local economy with evidence of contract farming experiences fromAfrican, Latin America and Asian countries in different sectors of agriculture. He found thatagribusiness firms tend to deal with large producers only. Contracting lead to environmental,

equity, food security and sustainability problems, though it lead to better incomes for farmersand more employment for labour initially through the introduction of new crop technologiesand by providing markets and inputs. In fact, contract farming as a system affected producerspositively or negatively was dependent on the context of the economy.

The researcher further studied the role of contract farming in agriculturaldiversification and development in terms of its practices and implications for the producersand local economy in the Punjab in India. Hindustan lever Limited (HLL), Pepsi and Nijjerwere engaged in contract farming of tomato, potato and chilli respectively. The main benefitsof contracting as perceived by contract farmers were better and reliable income, new andbetter farming skills, better soil management and outlet for bulk sales.

Abhiram (2001) examined the supply chain management and role of contract farming.He opined that the services of contract farming system were advantageous to both the

farmers and company. The impact was clearly brought out by contract farming. Tomato yieldsincreased three fold (from 16 to 52 Mt/ha), chilly yields increased from 6 Mt to 18 Mt/ha, farmincomes increased by more than 2.5 times, processing season linked to fruit availabilityincreased from 28 to more than 55 days and there was an improvement in the quality ofproduce.

Kiresuret al. (2001) highlighted advantages of contract farming like reduced capitalinvestment, no risk of price fluctuations and guaranteed income. Reduced capital investment,improved efficiency and efficient marketing were the benefits realised by the companythrough contract farming. He quoted several examples of contract farming of different crops inIndia and also mentioned the active involvement of the Government of Karnataka to bringsome of the agricultural crops such as maize, cotton, tur, Bengal gram, barley and chilliesunder contract farming system to benefit both the farmers and the industry.

Matthew and Key (2001) under took an empirical case study of the impact of a

contract-farming scheme on Senegals rural community. Small holders in Senegals peanutbasin contract under the Arachide de Bouche (ARB) programme to provide confectionerypeanuts for the international market. ARBS contracting farmers received seeds, fertilizers,pesticides and herbicides on credit and were required to sell back their produce to theprogramme. The study examined the access of poorer community members to contracts andthe effect of the programme on the income of participants. The ARB programme performedvery well on both counts; participants and non-participants were indistinguishable by wealthmeasure and farmers increased their income sustainability by participating in the programme.The study attributed the participants success to the programs mobilization of local informationthrough its use of village intermediaries, permitting the substitution of social collateral forphysical collateral and making the programme more accessible to the poor.

Rausser and Simon (2001) examined the incentives and processor placementsregarding the broiler chicken production contracts in California. While analyzing thecontractual setup, the researchers found that the environmental management of processorplacements and production incentives to main factors that contribute to the success ofcontracts and contract renewal.

Shalander and Deoghare (2001) reported various aspects of contractualarrangements of goat rearing in north India. They found that 69 per cent of the farmers werein favour of arrangement and renewal of contracts where as 62 per cent of the farmers werewithout any land holdings.

Maung and Foster (2002) emphasized the need of vertical integration to facilitate thealternate marketing options in hog industry of Canada. The researcher opined that the vertical

integration will have direct impact on capital investment and other real option approaches.

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Dellal and Tan (2003) studied the socio-economic behaviour of contract Turkeyfarmers in Fukeoka, Japan as compared to the case of Turkey. The study recommended thesystem for the large scale production as against the small scale production of Turkey.

Merry et al. (2004) studied the systems of informal contracts in food plains of lowerAmazon. The study highlighted positive integral role by informal contracts in the growth ofsmall cattle heads which directly contribute for farm stabilization.

Tatlidil and Aktruk (2004) examined the viability of contract farming model inFaisalabad (Pakistan). They revealed that the price fluctuation and market glut can beavoided through adopting the models of contract farming over the traditional productionsystems.

Begum (2005) undertook study in Bangladesh to identify incentives for poultryfarmers to participate in contract farming in Bangladesh. She explored why farmers enter intocontract farming and evaluated the impact of a vertically integrated contract poultry farmingsystem on farmer's income by analysing the costs and returns and labour utilization,. It wasrevealed in the study that contract farmers get several incentives from the vertically integratedfirm, which include credit, production and price risk reduction, marketing assistance, technicalknow-how etc. she also concluded that contract farmers were better off in terms of net incomeby getting a high net return from the poultry farm.

Reimer (2005) reported that the only solution for the pork industry in Boston to

survive the risks of shortage was the adoption towards vertical integration. The researcherwas of the opinion that the pork industry trading autonomy will be at stake if neededmeasures are not applied immediate.

Hoffler (2006) advocated the promotion of contract farming in potato to sustain theinvestments and to reduce the transaction risks involved in potato value chain business inGermany.

Walli and Ponnusamy (2007) studied the aspects of contract dairy farming versus thedairy co-operatives in North India. The study revealed the comparative strengths andweaknesses of both the systems and recommended the process stream lining in case of dairycontracts. However, the study also revealed that the co-operative system is still the best.

2.2.2 Contractual arrangements

Roy (1963) defined contract farming as those contractual arrangements betweenfarmers and companies, whether oral or written, specifying one or more conditions ofproduction and /or marketing of an agricultural product. He highlighted various contractualarrangements prevailing in vegetables and fruit processing sector in USA. He observed twotypes of contracts namely bailment coupled with contract to produce and supply and contractto produce and sell. Further, observed that the processors were supplying the seed materialfor cultivation at a stated price to be paid by the grower after the harvest. Fertilizer and plantprotection provisions were not found in such contracts. Researcher also evidenced that theprocessors provided a variety of services other than technical support. The growers werefound to maintain better relationship with the extension worker of the company. The growershad problems with grading of the produce in some areas. The contracts made were exclusiveand growers were not supposed to sell their produce outside, other than the contractor. Theviolations of the contractual arrangements led to termination of contract with that crop.

Williamson (1979) examined the factors affecting the organization of productionsystems in a market hierarchy framework. He propounded that in such a framework theorganizational criteria were minimization of production and transaction costs. Further,suggested the use of various administered vertical exchange arrangements to reduce thetransaction costs and provided insight into the structure of contracts within the vertical co-ordination process and classified contractual arrangements into Classical, Neoclassical andrelational contracts. He defined relational contracts as agreement in principle, whichcircumscribes the contracting parties relationship, including tacit as well as explicitarrangements.

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Further, the author argued that increase in transaction complexity, frequency anduncertainty results in a shift in the co-ordination structure from classical to neoclassical thento bilateral and finally to relational contracts. One party typically becomes dominant in thisprogression.

Barry et al.(1992) opined in Baltimore that, due to self-interest of the agent, limitedcognitive powers, information asymmetries and uncertainties about future events, it wasvirtually impossible to write and complete comprehensive contracts to cover all possible future

events. Thus, contracts generally were incomplete. Agency costs were incurred in structuring,administering and enforcing contracts to more closely align the goals of the principal andagent. He concluded those decisions about integration or other forms of vertical controldepended on the degree of asset specificity, potentially opportunistic behaviour, contractcompleteness and on the effect of changes in the asset control on investment of the parties toa transaction.

Sporleder (1992) compared the various inter-firm relationships with particularreference to strategic alliances. He opined that a key differentiating feature of strategicalliance was trust, flexibility and unanticipated actions were discouraged in written contract.The exit costs were relatively low compared to other arrangements. Generally, a third partyenforcement was anticipated when breach occurred in a written contact.

Ramesh (1999) observed the contractual farming arrangements in Indian vegetable

and fruit processing industry with particular reference to Gherkin crop in Karnataka. He foundthat the contracts were oral in nature and trust on each other was the backbone of suchcontracts. The crops requiring skilled labour and less government intervention were the bestsuited for contract farming. Further the author stressed the need for financing agencies andbanks in financing the processors and growers.

Arunkumar (2002) opined that written agreement was used in potato and chillicontract farming in Belagaum. The agreements were drafted in short, simple terms, clarifyingthe responsibilities of both farmer and firms. Breach of contract was included in order tocontract the possibility of extra-contractual marketing. The agreements were effective fromthe time of handling over the seeds to the farmer and terminated upon the farmer handlingover the entire field of produce.

The researcher further studied the various aspects of modus operandi. Majority of thefarmers (>50%) took up cultivation of vegetables due to persuation of the company of the

staff. The influence of fellow farmers was the second major force in the case of 40 per cent ofthe farmers of tomato. All the companies provided technical guidance to farmers. In terms offrequency of field visits, chilli farmers had regular contracts while tomato and potato farmershad frequent contact with the officer. The farmers in chilli contract farming realized fullpayments within 30 and 45 days, respectively after final harvest. In potato 16 per cent of thefarmers received payments after 60 days and 70 per cent of the farmers in tomato received

payments in 31-45 days time.

2.3 Economics of production

2.3.1 Cost and returns

A detailed research study on economics of marigold production has not been done sofar. However, some case studies and estimates are available which are presented in thischapter. In addition to this, the studies on cost of cultivation and cost concepts used in

medicinal, aromatic and vegetables crops are also presented.

Ravishankar (1993) estimated the average cost of cultivation and net returns ofDavana (Artemesia pallens) at Rs. 8,145 per acre and Rs. 6,090 per acre, respectively. Thenet return per rupee of total cost was found to be Rs. 0.74, while the same per rupee ofvariable cost was at Rs. 1.07.

Farooqi and Vasundhara (1997) studied the cost of cultivation for medicinal crops likeAshwagandha, Coleus, Long pepper (as inter crop in coconut garden) and Periwinkle. Theyfound that the cost of cultivation and the net returns per acre for Ashwagandha were Rs.

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respectively. The per acre return of Patchouli was more than the Isabgoal. The Benefit Costratio was 1.26 and 2.00 for Isabgoal and Patchouli, respectively.

Karim et al.(2001) made an attempt to analyse the performance of the broiler farmsunder contract farming system in terms of profitability under constant rate of price located atBajitpur Upazila of Kishoregonj district, Bangladesh. Seventy five farmers (25 small, 25medium and 25 large farms) were purposively selected from the area. Costs and return werecalculated to find out the profitability of broiler production. The total costs per bird were

estimated at Tk. 78.43, Tk. 78.51, Tk. 78.32 and Tk. 78.31 for small, medium, large and allbroiler farms respectively. On the return side, the average gross returns per bird per batchstood at Tk. 89.21, Tk. 89.40, Tk. 90.71 and Tk. 89.87 for small, medium, large and all broilerfarms, respectively. The profit or net returns per bird for small, medium, large and all broilerfarms were Tk. 10.80, Tk. 10.85, Tk. 12.40 and Tk. 11.75, respectively. Findings of the studyclearly indicate that all broiler farms made good profit and the large farms, however, earned alittle higher profit.

Subrahmanyam et al.(2001) reported that the growers of lemongrass in Idukki districtof Kerala realised Rs. 5,996 as net returns per acre after meeting Rs. 24,017.50 towards thecost of cultivation including distillation.

Biswas et al. (2003) studied the sustainability of broiler farming in coastal districts ofWest Bengal. Their study parameters were stock procurement, market sales, profit, monthly

income, sale of meat, utilization of dead stock, rearing systems, and marketing. Theyconcluded that congenial and improved conditions of the state have prioritized the broilerproduction. The findings indicate the sustainability of broiler farming in the locality. Areas for

further improvement are identified and discussed.

Kumar and Rai (2004) studied the economic status of poultry farming enterprises inAndaman & Nicobar Islands. The study compared the investment patterns, Labour utilizationpattern, cost and returns and efficiency measures of small (300 birds), medium (900 birds)and large (1500) farms. The total cost per bird was found to be Rs 68.84, Rs 65.85 & Rs63.07 respectively. The net returns per bird were Rs 8.36 for small farms and was Rs 11.35 &Rs 14.13 for medium and large farms respectively. The study revealed that the BC ratio of allthree categories was even and was 1.13, 1.19 and 1.24 respectively. The study concludedthat the broiler farming was a profitable enterprise and a main source of income to a sizablenumber of farmers

Vinayak (2005) estimated cost and returns while studying contract farming inAshwagandha cultivation at Gadag, Raichur and Koppal districts of Karnataka. The total costof Ashwagandha production per acre was Rs. 6896 and total income was Rs. 14820. Themaximum cost Rs. 1428 was found in human labour followed by cost on FYM transportationand application (Rs. 832), cost on seeds (Rs. 484) and plant protection chemicals (Rs. 40).

Gnanakumar (2007) studied the financial feasibility of investments in contract poultryfarming in Tamil Nadu region. 50 integrated poultry were selected randomly in Coimbatoredistrict. He concluded that on an average, farmers received a growing coat Rs 2.36 per Kg ofbird. The study also calculated the profitability per chick, which was found to be Rs 1.50 in thebeginning. The study also estimated the returns on investment that was found to be 11.5 % inthe beginning and increased up to 20%.

Zakir Siraz (2008) presented a detailed structure on management of contract farmingin livestock : a case of poultry industry. Primary data was collected from the selected 30

poultry farers in each category, spread across two districts i.e., Bangalore rural and Dharwadin Karnataka state. Under cost comparison in case of contract farming, the total cost incurredwas Rs. 3.75 per bird. In case of non-contract, the total cost incurred per bird was Rs. 58.31.The net returns obtained for bird was Rs. 1.94 in case of contract farmers and it was Rs. 1.23in case of non-contract farmers. The meat feed price ratio was 1.74 in contract arrangementsand it was 1.56 in case of non-contract. Similarly, the benefit:cost ratio in case of contractpoultry farming was 1.52 and it was 1.02 in non-contract case.

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2.3.2 Resource use efficiency in crop production

Bal et al. (1983) employed Cob-Douglas type of production function to study thefactor share and productivity of various factors in crop cultivation in central districts of Punjab.It was noted that the elasticity of production for human labour, drought power and the rentalvalue of land was less than unity while that for irrigation, fertilizers and weedicides was morethan unity, indicating the scope for increasing the output by re-organizing the use of theseinputs.

Muralidharan (1987) studied the resource use efficiency in rice production in Keralaemploying the Cobb-Douglas type of production function. Adjusted R

2(0.84) indicated that 84

per cent of the variation in yield of paddy could be explained by the estimated productionfunction. The coefficient of land and human labour were positive and significant at one percent probability level.

Reddy (1988) studied the resources productivity and allocation efficiency in sunflowerand groundnut crops under rain fed conditions in Andhra Pradesh. The functional analysisrevealed that seeds, labour and fertilizers significantly influenced the production in both smalland large farms. The ratio of MVP to MFC was more than unity for the above said factorsindicating the possibility of intensifying the use of these resources to increase the profitabilityin sunflower and groundnut production.

Radha et al.(1989) evaluated the resource-use efficiency in rice-rice and rice-pulsefarming systems in Krishna district of Andhra Pradesh. The results indicated that manuresand fertilizers and irrigation were quite productively used in both the farming systems. Thesum of production elasticities indicated the operation of constant returns to scale in bothfarming systems.

Chandrareddy et al. (1990) studied the resource use efficiency in beetle vinecultivation in Cuddapah district of Andhra Pradesh. The study revealed that there was apotential for further use of labour, manures and fertilizers up to their optimum levels. But, useof additional seeds was not desirable as revealed from its non-significant coefficient.

Karisomanagoudar (1990) employed Cobb-Douglas type of production function inGadag taluk of Dharwad district to study resource use efficiency in rain fed onion production.It was observed that land and labour inputs significantly increased the gross revenue. Theseed variable exercised a significant negative influence on earnings from onion. The variables

included in the production function explained 96 per cent of the variation in output.

Nagaraj (1990) while studying the economics of flue cured virginia tobacco productionin Periyapatna taluk of Mysore district, found that land, human labour and fuel chargessignificantly influenced the production. On small farms, the ratio of MVP to MFC was less thanunity in the case of bullock labour, plant protection chemicals and capital investment for FVCtobacco. The ratio was greater than unity in the case of land indicating the possibility ofoptimizing the profits by brining more area under these crops.

Vasudha (1990) assessed the relationship between agricultural output and selectedexplanatory variables in Karnataka by using Cobb-Douglas production function. It was foundthat the gross cropped area, fertilizer consumption, bullock labour and human labour wereimportant variables in explaining variation in agriculture output. The study also indicated thatthe agricultural production was increased at the rate of 3.11 per cent per annum during theperiod between 1956 and 1983 and fertilizer and irrigation were the predominant contributors

for growth.

Manmohan Reddy (1992) reported economics of sugarcane production in Gulbargataluka of Karnataka State. By using the Cobb-Douglas type of production function, it wasconcluded that labour and fertilizer significantly increased the gross income. The variableinput bullock labour exercised a negative influence on the earnings from sugarcane. Thevariables included in the function explained 99 per cent of variation in the dependent variable(returns). The summation of production coefficients (1.27) showed that the production wasoperating in increasing returns to scale.

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Nagaraj (1993) studied the resource-use efficiency of various crops included in eachcropping system in Tungabhadra command area in Karnataka. The study indicated that landand manures and fertilizers together had maximum influence on gross returns of maize inmaize-sunflower system. In the case of sunflower after maize, land was the single most factorwhich was greatly influencing the gross returns. The ratio of MVP to MFC for machine labourand bullock labour were less than unity, indicating the overuse of these resources in maizeproduction. In the case of cotton in head-reach, seed had the maximum influence on farm

income followed by plant protection chemicals. The variables included in the analysisexplained 96.18 per cent of the variation in gross income for cotton. Similarly, the sameanalysis was done for other important crops in the command area.

Aswathareddy et al.(1997) studied resource use efficiency in groundnut productionunder rain fed conditions in Challakere taluk of Karnataka. The study revealed that land andfarmyard manure in the case of small farmers and farmyard manure in the case of largefarmers contributed significantly to production. The average mean technical efficiency indicesof small and large farm groups were 0.679 and 0.646, respectively showing that small farmergroups were achieving yield levels which were more efficient than the large farmer groups.

Naik et al. (1998) while analysing the resource use efficiency and productivity ofvarious factors involved in onion production using Cobb-Douglas type of production functionobserved that land and farmyard manure contributed significantly to the yield.

Chulaki (2001) studied the resource use efficiency of different inputs in hybrid seedproduction using Cobb-Douglas production function. Out of six selected variables in DCH-32,land, fertilizer, irrigation charges and human labour inputs were significant at one per centlevel, while FYM was significant at 5 per cent level of probability in the pooled category ofKSSC seed growers and Mahyco seed growers.

Varuna (2002) while analyzing economic, production, resource use efficiency,marketing and constrains of garlic production in Indhur district of Madhya Pradesh found thatvariables included in the regression analysis explained 86.89 per cent of the variation in grossreturns. The elasticity of production with respect to seed and bullock labour were 0.503 and0.1633 respectively. The regression coefficients of manures and fertilizers and plantprotection were 0.4795 and 0.3948 respectively. These variables were found positive andsignificant.

Vinayak (2005) while studying the economics of contract farming in ashwagandha

cultivation at Koppal, Gadag and Raichur districts of Karnataka found that variable costsexplained 82 per cent of the variation in the production function. Expenditure on humanlabour, machine labour and FYM found statistically significant and charges on seeds, bullocklabour and others were positive but non-significant.

2.4 Problems in contract farming

Srivastava and Seetharaman (1989) while providing an overview of agro-processingindustries suggested backward linkages as the key element for success of fruit processingunits. They observed that larger processing units often faced the problems of severe underutilisation of capacity due to inadequate and unsuitainable supply of raw materials. Theyconcluded that the uncertainty in supply was the major reason for private processing units toforge backward with the farmers for ensuring supplies.

Pandey and Swarup (1994) out constraints relating to water management, soil and

fertility, high yielding variety seeds, technical knowledge and institutional constraints in pulseproduction in Mohindergarh district. The findings revealed that the water management formedmajor problem (rank-I) followed by the non-availability of location specific drought and pestresistant high yielding variety seeds. The score relating to the technical knowledge andtraining of farmers indicated the communication gap, which formed constraint in achievinghigher yields of crops. The other problems related to soil and fertility, institutional facilities,weeds, insects, pests and diseases ranked fourth, fifth and sixth, respectively.

Bhattu and Sharma (1999) made an attempt to study region-wise constraintsencountered by broiler farmers in Haryana. The major constraints observed were high costand poor quality of inputs, oligopsony marketing structure, high electricity charges, incidence

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of diseases, non-remunerative prices of broilers, existence of rigid procedure for governmentgrant or bank loans, and lack of broiler insurance schemes

Rangi and Sidhu (2000) while studying contract farming practiced by Hindustan LeverLtd. (HLL) and Nijjar Agro Limited in tomato for processing venture at Punjab found that,tomato was mainly attacked tomato fruit borer sometimes leaf minor, aphid, cutworm and fruitfly also. To have a check on these attacks, the expenses on pesticides/insecticides were highand this also pushed up the labour cost. Continuous cultivation of tomato crop on the same

field has also adversely affected yield. Nijjar Agro Limited rejected the poor quality producebrought by the farmers. The HLL did not indulge in such practice. Farmers of both the firmsexpressed opinion regarding the low contract prices.

Singh (2000) identified the faults of contracting system both at company and atfarmers level. About two-thirds of Hindustan lever Limited growers and more than 50 per centof the Nijjer growers did not face any major problem in contracting. The other reportedproblems were poor coordination of activities, poor technical assistance, delayed payments,outright cheating in dealings and manipulation of norms by the fi rm. Some of the Pepsi potatofarmers had a few problems with the company system, but a large number of them (60%)were happy. The study also highlighted the implications of contract farming on croppingpattern, land lease market, sustainability, farm income and employment. Despite, variousproblems and conflicts between companies and growers, 62 per cent of Hindustan leverLimited, 80 per cent of Nijjer and 68 and 73 per cent of Pepsi (potato and chilli, respectively)

farmers wanted to continue contract farming.

Banumathi and Sita Devi (2001) an attempt was made to identify the major problemsin marketing of jasmine at Chidambaram taluk of Cuddaloe district of Tamil Nadu. They foundthat in case of small farmers lack of finance was the problem ranked first. Perishable nature offlowers, price fluctuations, poor market information and forced sale were other importantproblems. Medium farmers and large farmers ranked price fluctuation and perishable natureof flower as first and second respectively. Long distance to the primary market, lack of financeand poor market information were other important problems in medium farms.

Arunkumar (2002) opined that major problems faced by the contract farmers were lowcontract price and irregular payments. The other problems faced were unawareness ofpotentiality of crops, poor technical assistance, manipulation of norms by firms and higherrejection rate. He also opined that major problems faced by contract firms were landconstraints and fixing of contract price. The other problems were farmers discontent and

holding up of vehicles. The contract farmers try to put lower grade into higher grade and itwas difficulty to check and make sure of the grade as quantity handled was more. Farmersheld up vehicles in the villages demanding that they should be paid higher prices even thoughagreement does not say so.

Bridges et al. (2002) reported that the poultry farmers in china are prone to poultryassociated diseases but no extensive infections by the avian flu were seen. They also studiedvarious potential problems of poultry farmers w.r.t occupational hazards

Shiva Kumar Gupta (2002) studied major constraint in contract farming as thedifficulty in allocating the risk between the firm and farmers, where the distribution of risk wasdependent largely on factors such as bargaining power, availability of alternative and accessto information. In short duration crops such as vegetables, farmers tend to divert the produceto the open market rather than supply to the processing firm when the prices were high. Thecost calculations of the firm crumble, as they were forced to arrange supply of raw materialsfrom alternative sources. In long duration crops such as plantation crops, the firms often fail tohonour the contract, as they knew that farmers had no alternative but to sell the products tothem at lower prices.

Sukhpal Singh (2002) reviewed the status of contracting and present politicaleconomy of contract farming in Punjab. They opined that the small scale farmers faced thechunk of problems as compared to that of large farmers, the majority of problems beingrelated to policy and input decisions.

Kattimani et al. (2003) undertook an empirical study of Ashwagandha in selecteddistricts of North Karnataka revealed that, Ashwagandha is a most important and popular crop

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of rain fed areas under semi-arid tropics of North Karnataka. Problems faced by theAshwagandha growers in North Karnataka were high cost of seed material, lack of knowledgeon production technology, marketing problems, incidence of pest and diseases, harvestingand grading.

Ramdurg (2004) conducted a study on perception of bird flu disease on consumptionof chicken and eggs in Dharwad district of Karnataka. The findings of the study revealed thatthe effect of bird flu was not expected in India, yet due to wrong perception the bird flu

occurrence had a huge impact on the consumption as well as production activities.

Prasad (2005) studied problems in contract broiler farming as perceived by thefarmers in Andhra Pradesh. The problems cited by non-contract farmers included high feedcost (90.6% of the respondents), unremunerated price (87%), high electricity charges (77%),high chick cost (69%), poor quality feed ingredients (69%), delay in lifting of birds bywholesalers (53%), mortality and disease (43%), delay in chick supply (40%) and insufficientattention of hatchery men (39%). Contract farms cited delay in chick supply (87% of therespondents), high electricity charges (69%), mortality and diseases (40%), delay in payment(27%), lesser payment of hatchery to contract farmers (13%) and problems in the dailysupervision of the broiler unit by the supervisor (9%) as their problems. Based on these theyconcluded that non-contract farms have more difficulties in broiler farming.

Vinayaka (2005) in his study of economics of contract farming in Ashwangandha

reported two major problems faced by the contract farmers in North Karnataka. He revealedthat lack of prescribed contract norms and manipulations of norms were the major problems.

Yeshodha Devi and Kanchan (2006) studied the chicken consumption pattern andconsumer preference for processed chicken in Coimbatore. The study also discussed theproblems of live bird market as compared to that of the frozen products in poultry. It wasopined that the live bird market should be supplemented by the processed poultry products toreduce the costs and other seasonal vows of the poultry farmers in that region

Gnanakumar (2007) studied the financial feasibility of investments in contract poultryfarming in Tamil Nadu region. 50 integrated poultry were selected randomly in Coimbatoredistrict. The study found out the problems of poultry farmers that compelled them to enter acontract. Poor income from traditional agriculture, water scarcity, high market risk in traditionalagriculture, labour crunch and need for more substantial working capital were the primaryreasons that were evolved from the study.

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Table 3.1: Demographic profile of study area

Sample districts

Sl. No. Particulars

Belgaum Bagalkot

1. Geographical area (ha) 1344382 658877

2. Taluks (numbers) 10 6

3. Villages (numbers) 1255 623

4. Population (numbers) 4214505 1651892

5. Density of population (per sq. km) 13415 6575

6. Average rainfall (mm) 835 682

7. Literacy rate (%) 64.42 57.81

Source: Directorate of Economics and Statistics, Bangalore, 2006-07

Table 3.2: Land use pattern in the study area

(Hectares)

Sample districts

Sl. No. Particulars

Belgaum Bagalkot

1. Geographical area 1344382 658877

2. Forest area 190424 81126

3. Land not available for cultivation 44342 24810

4. Fallow land 278256 121219

5. Net cultivable area 723459 397214

6. Irrigated area 297827 157586

Source: Directorate of Economics and Statistics, Bangalore, 2006-07.

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According to 2001 census, this district has population of 17 lakh, literacy rate is 57.81 percent. Population density is 6575 sq. km. The average rainfall in the district is 682 mm. Cropslike sugarcane, jowar, maize, groundnut, cotton, horticultural crops and medicinal plants aregrown in this district.

3.3 Sampling procedure

A purposive sampling procedure was adopted for the purpose of selection ofrepresentative districts, taluks and villages which are detailed below.

3.3.1 Selection of the study area

Belgaum and Bagalkot districts were selected for the study, because these are theimportant and major coleus growing districts in Karnataka (Table 3.3).

3.3.2 Sampling procedure

To evaluate the objectives of the study all farmers who adopted contract farming incoleus considered in selected talukas where crop is cultivated. Of the Belgaum and Bagalkotdistricts, the coleus crop was grown by very few farmers hence most of talukas in the selected

district was selected for sample farmers.

3.3.3 Selection of taluks

In Belgaum district, Belgaum, Athani, Khanapur, Hukeri, Ramdurg Chikodi,Bailhongal and Gokak taluks were selected. In Bagalkot district, Bagalkot, Badami, Bilgi,Jamakhandi and Mudhol talukas were selected for the study because more area was undercontract farming in coleus in these taluks of the district.

3.3.4 Selection of villages

From the selected taluks, all the villages where coleus crop was cultivated on acontract basis were considered and contracting companies were concentrated. Hence, inthose villages contract farming of coleus was undertaken.

3.3.5 Selection of sample farmers

All the farmers under contract farming growing coleus were selected from eachvillage in consultation with the contracting companies. Thus, total contract farmers for NaturalRemedies were 20 and another 20 samples for Semi-lab leading to the total sample size of40.

3.3.6 Nature and source of data

For evaluating the objectives of the study necessary data relating to contract farmingwere obtained from the selected farmers with the help of pre-tested schedule. The farmerswere personally interviewed to ensure accuracy and comprehension. Since survey methodwas adopted, heavy reliance was on recall memory of the respondents. They were related tocropping pattern, land holdings, asset position, family size, educational levels and annualincome. The details regarding input use and output obtained in coleus crop was collected indetail. Further, the data on the quantity of coleus produce sold, the price of inputs and outputsobtained from the sample farmers, data on payment schedule, problems faced by the contractfarmers were also recorded. Efforts were made to elicit accurate information from the samplefarmers.

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Table 3.3: Distribution of sample farmers

Company Districts Talukas VillagesNo. of

farmersPer centto Total

Marihal 1Belgaum

Belgaum local 15.00

Arabhavi 2

Emakanamaradi 2

Nagnur 1Gokak

Muralgi 1

15.00

Shirur 1

Hattaragi 2Hukkeri

Kodavi 1

10

Kakamari 1Athani

Saudi 15.0

Ramdurga Ramdurga 1 2.5

Khanapur Karambal 1 2.5

Mamdapur 2Chikkodi

Sadalga 17.5

Semi-lab Belgaum

Bailhongal Neginal 1 2.5

Tualsigeri 1Bagalkot

Gaddanakeri 15.0

Kalloli 2

Muttur 2

Alagnur 1Jamkhandhi

Adihudi 1

15.0

Mantur 3

Shirol 1

Chikkalgundi 2Mudhol

Malali 1

17.5

Kerur 2Badami

Kulgeri 17.5

Bilagi Katarki 2 5.0

NaturalRemedies

Bagalkot

Total 40 100.00

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3.4 Analytical tools and techniques

In this study, based on the nature and extent of availability of data, the followinganalytical tools and techniques have been adopted. They are;

1. Tabular analysis

2. Statistical analysis

3.4.1 Tabular analysis

The technique of tabular analysis was employed for computing the costs, returns,terms and conditions of contract farming and problems faced by contract farmers weredocumented using averages and percentages.

3.4.2 Statistical analysis

To analyse the data, the following statistical tools were employed in the study.

3.4.2.1 Cobb-Douglas production function

The most widely used form of the production function in agriculture has been theCobb-Douglas form and the details are furnished as below.

In order to study the resource use efficiency in coleus cultivation, the above functionwas used. The production elasticities were used to assess the optimal use of resources inproduction activities.

Heady and Dillon (1963) indicated that the Cobb-Douglas type of function has beenthe most popular of the algebraic forms in farm firm analysis as it provides;

a. Comparison

b. Adequate fit

c. Computational feasibility

d. Sufficient degrees of freedom

They further indicated that Cobb-Douglas type of function has the greatest use inreflecting the marginal productivities at mean levels of returns.

The algebraic form of the function is written as;

Y = a xibi

e

This was modified into a log linear model by the application of logarithms, resulting in;

Log Y = loga+ bi log xi+ loge

In the present study, the log linear type of Cobb-Douglas production function wasemployed. The functional form was written as follows.

Y = a .x1b1

.x2b2

.x3b3

.x4b4

.x5b5

.x6b6

.e

Where,

Y = Yield per ha

a = Intercept

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x1= Cost of planting material (Rs./ha)

x2= Cost of FYM (Rs./ha)

x3= Cost of fertilizer used (Rs./ha)

x4= Cost of chemicals used (Rs./ha)

x5= Expenditure on bullock labour (Rs./ha)

x6= Expenditure on machine labour (Rs./ha)

bs are the regression coefficient of the explanatory variables and e is the randomterm.

For any production function, the total change in output is brought about by the shiftsin the parameters and by the changes in the volume of input. The resource use efficiency wasexamined by testing the equality of output (gross income) elasticities with respect to theexpenditure on various inputs.

The production function in the log linear form was written as;

Log Y = log a + b1log x1+ b2log x2+ b3log x3+ b4log x4+ b5log

x5+ b6log x6+ log e

Interest on working capital

This was calculated at the rate of 11 percent for the duration of crop, on the totalvalue of the seed, manure, fertilizer, plant protection chemicals, human labour, bullock labourand machine labour (based on the interest rates charged by financial institutions).

Fixed cost

This includes depreciation on farm implement and machinery, interest rate on fixedcapital and rental value of land.

The measurement and depreciation of fixed cost component are as follows:

(i) Depreciation charges : Depreciation on each capital equipment and machinery owned bythe farmers and used for plant was calculated separately, based on the purchase value usingthe straight line method. Thus, the

Annual depreciation =

The average life of an asset as indicated by each farmer was used in the computationof the depreciation. The average value of an asset after its useful life (time value) wasconsidered based on the value expressed by the respondents. The deprecation cost of eachequipment apportioned to the crop, based on its percentage use.

(ii) Rental value of land : Rental value of land was calculated at the prevailing rate per acreper annum in the locality and was apportioned to the coleus crops for the period for farmbusiness analysis.

Returns

For contract farmers, after harvest the maize are marketed based on prevailingmarket price, the companies pay Rs50 higher than the market price. The price for Non-

Purchase value junk value

Useful life of the asset (years)

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contract farmers was Rs.680 based on the prevailing market price at the time of datacollection in both Davangere and Haveri district respectively.

Gross returns - This can be worked out by multiplying total yield of maize with price. This canbe denoted as

Gross returns (GR) = yield price

Net returns over variable cost (TVC) - This can be obtained by deducting total variable costfrom gross return. This can be denoted as

Net returns over variable cost = GR- TVC

Net returns over total cost - Net returns over total cost was worked out by deducting total cost(TC) of production from gross return.

Net returns over total cost = GR-TC

B:C ratio - This can be worked out by dividing gross returns by total cost.

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4. RESULTS

In consonance with the objectives of the study, the data collected from differentsources were analyzed and interpreted. The results of the study are presented under thefollowing heads.

4.1 Socio economic feature of coleus growers

4.2 Terms and condition of contract in production and marketing of coleus

4.3 Cost and returns and resource use efficiency ion production of coleus

4.4 Problem faced by the contract farmers in cultivation and marketing of coleus

4.1 Socio economic feature of coleus growers

The results in respect of Socio-economic characteristics of the sample farmers onboth the companies are presented in Table 4.1.

The average age of Semi-lab contract farmers was 37 years with an average familysize of six. The annual income was found to be Rs. 66,950 per family. Nearly 35.00 per centof the farmers were illiterate and remaining 65.00 per cent were literate. Among the literate,53.85, 30.77 and 15.38 per cent of the farmers studied up to high school, primary school andcollege and above, respectively.

In the case of natural remedies company, the average age of contract farmers were42 years with an average family size of eight. The annual income was Rs. 56,950 per family.About 30.00 per cent of them were found to be illiterate and 70.00 per cent were literate.Among literate about 64.28, 21.42 and 14.30 per cent of the farmers studied upto, Highschool, primary school and college respectively.

Similarly, the land holding of each family, in the case of semi-lab was 4.92 ha and innatural remedies it was 5.41 ha. In the total land holding of the farmer, who had the contractwith semi-lab showed that nearly they hold 1.92 ha irrigated land and 3.0 ha of dryland. Theaverage area under coleus was only 0.54 ha in the case of contract farmers of semi-lab,where as in case of Natural remedies, it was 0.63 ha.

4.2 Terms and condition of contract in production and marketingof coleus

Terms and condition of contract in marketing of coleus between company and farmeris presented in Table 4.2.

The two forescholin extracting contract companys viz., semi-lab and Naturalremedies have their own system of contract with farmers. Here both contracting companiesprefer brown colour root. Both the companies fix the prices before signing memorandum ofunderstanding (MOU). (Based on the forschaline content in tuber roots the price is decided /fixed).

Both companies were processing the product after the primary level of processing

was completed. The transportation cost is borne by the companies along with loading andunloading charges.

Both semi-lab and natural remedies companies make payment after the harvest ofthe product. Semi-lab paid Rs. 40.00 per kg of dry coleus roots and natural remedies paid Rs.45 per kg of coleus roots.

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Table 4.1: Socio-economic features of coleus contract farmers

Farmers of Semi-lab(n=20)

Farmers of NaturalRemedies (n=20)Sl.

No.Particulars

Average % Average %

1. Age of the farmer (years) 37 - 42 -

2. Size of the family (No.) 6 - 8 -

3. Annual income (Rs.) 66,950 - 56,950 -

4. Educational level

A. Illiterate (No.) 7 35.00 6 30.00

B. Literate (No.) 13 65.00 14 70.00

i. Primary school 4 30.77 3 21.42

ii. High school 7 53.85 9 64.28

iii. College and above 2 15.00 2 14.30

5. Dry land (ha) 3.0 61.00 3.4 62.84

6. Irrigated land (ha) 1.92 39.00 2.01 37.16

7. Total land holding (ha) (5+ 6) 4.92 100.00 5.41 100.00

8. Average area under coleus(ha) 0.54 - 0.63

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Table 4.2: Terms and Conditions of Contract in Marketing of Coleus between Company and

Farmer

Sl.No.

Particulars Semi-lab Natural Remedies

1. Colour of the root preferred Brown Brown

2. Time of fixing price Before signing MOU Before signing MOU

3. Quality parameter Forskoline Content(0.5) Forskoline Content(0.5)

4. Delivery of the product After primary levelprocessing

After primary levelprocessing

5. Transportation cost Borne by company Borne by company

6. Loading and unloadingcharges

Borne by company Borne by company

7. Payment term After harvest After harvest

8. Price per kg Rs. 40/- Rs. 45/-

9. Condition of land preferred Well ploughed withirrigation facility (once infortnight)

Well ploughed withirrigation facility (once infortnight)

10. Minimum land preferred(hectares)

0.5 0.5

11. Maximum land preferred(hectares)

2.5 2.0

12. Advance towards inputs Only planting material Only planting material

13. Charges towards technicaladvice

Nil Nil

14. Compensation towards croploss

Nil Nil

15. Agreement Written Both written and Oral

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Table 4.3: Services extended by the companies in coleus contract farming activities

Sl. No. ParticularsSemi-lab

(n=20) (%)Natural Remedies

(n=20) (%)

1. Introduced to the crop by

a. Company staff 70.00 64.22

b. Fellow farmer 15.00 18.25

c. Friends and relatives 10.50 15.00

d. Horticultural Department 4.50 2.53

2. Frequency of field visits by Field Officer

a. Daily 0.00 0.00

b. Once a week 32.84 35.00

c. Twice a week 12.50 14.25

d. Once in fortnight 44.42 42.44

e. Once in a month 10.24 8.31

f. No visits 0.00 0.00

3. Payment schedule (after delivery ofproduct)

a.

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4.2.1 Services extended by the companies in coleus contract productionactivities

The company has selected the contract farmers based on the location of the farm,size of the holding, source of irrigation and willing to cultivate. The opinion with respect toservice extended by the companies in coleus contract production activities are presented inTable 4.3.

In coleus contract farming with respect to Semi-lab, it was observed that 70 per centof farmers were introduced by company staff, 15.00 per cent by fellow farmer, 10.50 per centby friends and relatives and 4.50 per cent by horticultural department advice.

In case of Natural remedies, 64.22 per cent of contract farmers were introduced tothe crop by the company, 18.25 per cent by fellow farmers, 15.00 per cent by friends andrelatives and 2.53 per cent were influenced by Horticultural Department advice.

The company personal visits the farmers to elucidate their interest in undertakingcultivation of coleus under contract farming. They are also educate and persuate them tocultivate the crop, 32.84 per cent of contract farmers of semi-lab expressed that field officervisits the field once in week, 12.50 per cent told twice a week, 44.42 per cent once in fortnightand 10.24 per cent have told that once in month.

Where as, in case of Natural Remedies 35.00 per cent told that field officer visitsonce a week, 14.25 per cent told twice a week, 42.44 per cent once in fortnight, and 8.31 percent once in month.

With regard to payment schedule, 78.50 per cent of contract farmers get theirpayment from Semi-lab within fifteen day, 14.22 per cent received in 16 to 30 days, 7.28 percent farmers received in 31 to 45 day after harvesting. In Natural Remedies 72.86 per cent ofcontract farmers received payment within 15 days after harvesting, whereas 18.55 per centreceived in 16 to 30 days, 6.25 per cent got between 31 to 45 days after harvesting.

4.2.2 Actual inputs provided by the companies to contract farmers

It could be seen from the Table 4.4 that, all contract farmers of Semi-lab agreed thatcompany provides inputs and technical advice. The input supply includes planting material

including transportation facility.

Similarly, natural remedies company also supplies technical advice and plantingmaterial supply.

4.2.3 Factors favoring contract farming by farmers

The factor favored by farmers to enter into contract farming in coleus is given in Table4.5.

All sample farmer of semi-lab have told they were into contract farming only becausethere is a buyback agreement. 90.00 per cent of them told due to input supply, 50.00 per centdue to technical advice, 85.00 per cent due to transportation facility and only 60.00 per centtold because of remunerative prices.

In natural remedies also all contract farmers told it is due to buyback agreements andinput supply, 75.00 per cent due to technical advice, and transportation facility. And only65.00 per cent they entered into contract system because of remunerative price.

4.2.4 Factors favouring contract farming from the point of view of company

The firm dealing with contract farming attributed physical and social environments asthe major factor responsible for the success or failure of the contract farming (Table 4.6).Apart from this, identification of loyal farmer (100%), utilities and communication (100%),experience of the farmer (100%), quality parameter (50.00%), technical assistance (100%),

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Table 4.4: Inputs provided by the companies to contract farmers as opined by them

Semi-lab(n=20) (%)

Natural Remedies (n=20)(%)Sl.

No.Particulars

SuppliedNot

supplied SuppliedNot

supplied

1. Technical advice 100.00 - 100.00 -

2. Input supply

a. Fertilizers Nil 100.00 100.00 -

b. Planting material 100.00 - 100.00 -

3. Transportation facility 100.00 - 100.00 -

Table 4.5: Factors favoring contract farming by farmers

Semi-lab (n=20) Natural Remedies (n=20)

Sl.No.

Particulars No. offarmersopined

%No. of

farmersopined

%

1. Buyback agreement 20 100.00 20 100.00

2. Input supply 18 90.00 20 100.00

3. Technical assistance 10 50.00 15 75.00

4. Transportation facility 17 85.00 15 75.00

5. Remunerative prices 12 60.00 13 65.00

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demand for the produce (100%) and experience of the company (50.00%) were the otherfactors attributed for the success of the contract farming.

4.2.5 Pattern of employment in coleus production

The contract farming with Semi-lab used 14 mandays of human labour for irrigationand 9.60 mandays for weeding. The fertilizers and chemical application needed 4.40 and 1.60

mandays of human labour, respectively (Table 4.7).

In case of Natural remedies, they used maximum mandays of human labour i.e.,17.60 for harvesting, 15.00 mandays for irrigation and 12.00 man days for weeding. Thelabour used for fertilizer and chemical application was 5.60 and 1.60 mandays, respectively.However, harvesting activities received higher mandays of human labour in natural remediescompany compared to Semi-lab Company. In both the cases, harvesting, irrigation andweeding activities constituted a maximum consumption of mandays of human labour andleast was fertilizer and chemical application.

The human labour consumption by contract farmers was high in Natural RemediesCompany compared to Semi-lab.

Among the family and hired labour in both the cases, it was constituted maximum thatis 77.40 per cent and 72.00 per cent of the total man days of human labour used in Natural

Remedies and Semi-lab company respectively. Further, it indicated that female labourmandays constituted maximum in both the companies contract farmer when compared toman mandays human labour. The above results are presented in Table 4.6.

4.2.6 Input use pattern in coleus cultivation

The results in respect of the average quantities of input used by the contract farmersare presented in Table 4.8.

Contract farmers of Semi-lab used, 37,500 number of planting material per ha, 9.5tones of FYM per ha, 150 kg of fertilizers, 12 ml of plant protection chemicals and 72.00mandays. Similarly, they used bullock labour of about 3.2 pair day and machine used forabout 2.5 hrs per hectare.

Contract farmers of Natural Remedies used 37,650 numbers of planting material perha, 9.4 tones of FYM, 150 kg of fertilizers, 1.3 ml of plant protection chemicals and 77.40mandays, 3.75 pair day of bullock labour and 2.5 machine hours.

4.3 Cost and returns, and resource use efficiency in productionof coleus

4.3.1 Cost structure in coleus production by contract farmers

The costs structure in respect of various inputs used per hectare of coleus cultivationare presented in Table 4.9 for both the companies.

In Semi-lab, among the variable cost, the expenditure on planting material was themajor cost, which was Rs. 9,375 accounting for 32.55 per cent of the grand total expenditure.

This followed by human labour, which was Rs. 4,320. The cost of FYM takes share of Rs.4,275 which constitutes 14.84 per cent of the grand total expenditure. The expenditure madeon bullock labour and machine hour was Rs. 800 and Rs. 1,000, respectively. The total costof coleus production was Rs. 28,800 per hectare.

In contract farming, the total cost of coleus production was Rs. 28,800 per hectare.Out of this, variable cost was Rs. 22,869 which was 79.41 per cent of the total cost andinterest on working capital was 5 per cent for six months (Rs. 1,089).

Among the fixed cost, rental value of land was major portion of the cost, which wasRs. 5,343 (18.55% of the total cost) and other fixed cost items were depreciation (Rs. 588).

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Table 4.6: Factors that favour contract farming from the point of view of company

Sl. No. Particulars No. of firms Percentage

1. Physical and social environment 2 100.00

2. Experience of the farmer 2 100.00

3. Identification of loyal farmer 2 100.00

4. Technical assistance 2 100.00

5. Demand for the produce 2 100.00

6. Utilities and communication 2 100.00

7. Quality parameter 1 50.00

8. Experience of the company 1 50.00

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Table 4.7: Pattern of employment in coleus production

(Labour in mSemi-lab

Family labour Hired labour Family labouSl.No.

Particulars

M F M F

Totalhumanlabour

M F

1. Land preparation 1 - - 1.82.80

(3.89)1 -

2.FYM (transportation and application) 1 - 8 0.6

9.60(13.30)

1 0.6

3.Transplanting 1 0.6 - 5.4

7.00(9.72)

2 -

4.Cutting - 1.2 - 4.80

6.00(8.33)

- 0.6

5.

Fertilizer (transpiration and application) 1 - 1 2.4

4.4

(6.11) 1 - 6.

Chemical application 1 0.6 - -1.6

(2.22)1 0.6

7.Weeding - - - 9.60

9.60(13.33)

- -

8.Irrigation 5 - 9 -

14.00(19.40)

4 -

9.Harvesting 1 - 1 15

17.00(23.60)

1 -

Total human labour11

(15.28)2.4

(3.33)19

(26.39)39.6

(55.00)72.00

(100.00)11

(14.21)1.8

(2.33

Note: Values in parentheses are the percentage to the total human labourM = Male, F = Female

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Table 4.8: Per hectare input use pattern and its cost in coleus cultivation

Semi-lab

Sl.No.

ParticularsQuantity

Units Cost/unit inRs

Quantityused

Total cost inRs

Cost/unit iRs

A. Inputs

1. Planting material No. 0.25 37500 9375 0.25

2. FYM Tonne 450 9.5 4275 450

3. Fertilizer Kg 9.00 150 1,350 890

4. Plant protection chemicals Kg 350 1.2 420 360

B. Labour

1. Human labour Man days 60 72.00 4320 60

2. Bullock labour Pair days 250 3.20 800 250

3. Machine hour Hours 400 2.5 1000 380.00

21540

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Table 4.9: Cost structure in coleus production by contract farmers

(Rs./ha)

Semi-lab Natural RemediesSl.No.

ItemsCost

Per cent tototal

CostPer cent to

total

A. Variable cost

1. Planting material 9375 32.55 9412 32.87

2. FYM 4275 14.84 4230 14.77

3. Fertilizers 1350 4.69 1335 4.66

6. Plant protection chemicals 420 1.46 468 1.63

7. Human labour 4320 15.00 4644 16.22

8. Bullock labour 800 2.78 937 3.27

9. Machine hour 1000 3.47 1064 3.69

10. Gunny bags (@ Rs. 16/bag) 240 0.83 240 0.84

11. Interest on working capital (@ 5%) 1089 3.78 1116 3.90

Sub-total 22869 79.41 22383 78.17

B. Fixed cost

1. Depreciation 588 2.04 613 2.14

2. Rental value 5343 18.55 5638 19.69

Sub-total 5931 20.59 6251 21.83

C. Total cost (C+D) 28800 100.00 28634 100.00

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In Natural Remedies also, the per hectare cost of planting material was Rs. 9,412

accounting for 32.87 per cent of the total cost. This was followed by the amount spent onhuman labour i.e., Rs. 4,644 per hectare, which accounts to 16.22 per cent of the total cost.Similarly, amount spent on FYM was Rs. 4,230 (14.77 %), on bullock labour Rs. 937 (3.27)and on machine hire charges Rs. 1,064 (3.69%) in the total cost of cultivation.

In contract farming, the total cost of coleus production was Rs. 28,634 per hectare.Out of this, variable cost was Rs. 22,383 which was 78.17 per cent of the total cost andinterest on working capital was 5 per cent for six months (Rs. 1,116).

Among the fixed cost, rental value of land was major chunk of the cost, which wasRs. 5,638 (19.69% of the total cost) and other fixed cost items were depreciation (Rs. 613).

Among the cost components, the cost incurred on planning material, FYM, andhuman labour was high in both semi-lab and natural remedies contract farmer. From thetable, it is observed that there was a slight difference in these costs.

4.3.2 Returns structure in coleus production by sample farmers

The details of returns structure per hectares presented in Table 4.10. In semi-lab, theyield per hectare was 1,600 kg and gross returns obtained was Rs. 64,000 per ha. Benefitcost ratio worked out to be 2.22. Similarly in natural remedies, the yield per hectare was 1,500

kg and gross returns obtained was Rs. 67,500 per ha which accounts for a benefit cost ratioof 2.35.

4.3.3 Resource use efficiency in coleus cultivation

The estimated coefficients of Cobb-Douglas production function are presented inTable 4.10. Five variables are included in the production function and these variablesexplained 82.00 per cent of variation is the production of coleus with respect to Semi-labcontract farmers. The coefficient of labour cost 0.8569 was positive and significant at 5 percent level. The coefficient of planting material (1.140) and FYM (1.240) was found to bepositive and significant at 1 per cent level.

In case of Natural remedies, the variables included in the model explained 89.00 percent of total production. The coefficient of labour (0.1875) was positive and significant at 5 per

cent level. The coefficient of planting materials (1.240) and FYM (1.310) was found to bepositive and significant at 1 per cent level.

4.4 Problem faced by the contract farmers in cultivation andmarketing of coleus

4.4.1 Problems faced as opined by sample farmers in cultivation

There were many problems found in