Contract farming is a pact between a firm and farmers, to carry out farming activities that denote the production and supply produce under a forward contract. PepsiCo has been contacting directly with small farmers in impoverished regions such as Mexico. The program entails PepsiCo providing fixed prices for the crops and farmers only need to dedicate efforts towards crop production. This essay seeks to expound on the benefits and drawbacks of the program, societal benefits to Mexico and my views on the program if I were a PepsiCo shareholder.
Benefits and Drawbacks
The benefits of the program are that it creates a win-win situation for both the company and the farmer. It is beneficial to companies involved in that it can be a way to grow markets and technology exchange in a way that is gainful to both the company and smallholders. The noticeable advantage for the firm is getting an assured quantity and quality for the crisp making to permit utilization of the manufacturing plant at optimal capacity. Direct engagement with farmers facilitates good communication to ensure accessibility and presence of produce which meets the specified quality standards for processing and pointers of the company's ISO certification. For example, Potatoes grown in Mexico have a higher sugar level and fewer solids. However, processing necessitates potatoes with low sugar level and high solids (Bandookwala & Sharma, 2011). Thus PepsiCo can introduce the appropriate potatoes. By being involved in harvesting and packaging, the company minimizes post-harvest damage to potatoes thus increasing its supply of raw potatoes. Kaur, (2015) argues that by using local farmers in Mexico, PepsiCo drastically reduced its transportation cost, which not only lessens environmental impact but also eliminates the uncertainty of line item on their budget. Contract farming makes sure PepsiCo has an assured supply base.
The program has its drawback that can make the company suffer losses. The direct relationship is risky especially when the market prices go high than those of the contract price. Contract farming without constructive and mutual trust with supply chain partners is unsafe for the company itself. In the case of a rise in market prices, they may refuse to supply or enter into price negotiation with company resulting in a raw material shortage. The contract farming is treated with a lot of suspicion by governments and farmers who only view PepsiCo's intention as that of just creating supply bases (Dutta, Dutta, & Sengupta, 2016). Moreover, farmers argue that as the acreage under potatoes increase and production also increases, the open market prices will fall, and Pepsi can maintain a constant price or buy low from non-contractual farmers. This misunderstanding is bad for PepsiCo's strategy.
Societal Benefits in Mexico
The contract agreement provides the smallholders with accessibility to production services and loan as well as knowledge of new knowledge and technology. Some contract farming allows and gives farmers the freedom to diversify into new crops and new markets. PepsiCo's contract farming has also increased income for contract farmers. The sizable increase in income is evidenced by the fact that contract farming ventures which do not provide farmers with high income are likely to lose farmers and eventually fail. Moreover, the assured market offered by contract farming is essential in providing sustainable income to households. Overall the program has lifted many farmers from poverty. Another societal benefit of contract farming is that it has resulted in the development of commercial culture in the societies they operate. By participating in contracts, smallholder farmers are involved in negotiations, means of production, loan arrangement, storage and delivery which is mainly conversation that lies outside the traditional farming experience. Put differently, and the program acts as a facilitator in shifting a country's agricultural sector towards a cash exchange culture.
The program creates a win-win situation for both the farmers and the company. However, contract farming involves a lot of risks and is prone to uncertainty (Rothaermel, 2017). In case of a large scale breach of contract by the farmers the jurisdiction in which the program operates, maintains that the agreement is between the company and the farmer; hence governments do not interfere. Small scale farming is also ineffective considering farmers may opt to grow other staple foods or keep animals on the same farm. In such cases, it can be difficult for the company to achieve its target of raw material essential for optimal production. The lack of an insurance cover for comprehensive crop protection in case of a calamity is detrimental to the company. The change in climate and weather pattern exposes farming to drought and flooding. It is for these reasons that as a shareholder I would not approve of the program as it is likely to eat into the company's revenue. Sustaining the program in its initial stages is also prone to challenges of oppositions from other firms doing having the same program or locals (Vicol, 2018).
In conclusion, contract farming offers benefits to all players involved. The essay has expounded on the benefits that PepsiCo has gained from the program as well as the drawbacks. Moreover, it has examined the societal benefits of the program in Mexico. Basing my argument on these elements, I have argued why as a shareholder I would not approve of the program.
Bandookwala, N., & Sharma, M. (2011). Avenues of Contract Farming in Gujarat: A study of Potatoes. Indian Journal of Applied Research, 3(1), 31-33. doi:10.15373/2249555x/jan2013/13
Dutta, A., Dutta, A., & Sengupta, S. (2016). A Case Study of Pepsico Contract Farming For Potatoes. IOSR Journal of Business and Management, 75-85. Retrieved from p-ISSN: 2319-7668
Kaur, P. (2015). Contract Farming of Potatoes: A Case Study of PEPSICO Plant. International Journal of Scientific and Research Publications, 4(6). Retrieved from ISSN 2250-3153
Rothaermel, F. T. (2017). Strategic management concepts (Custom 3rd ed.) New York, NY: McGraw-Hill.
Vicol, M. (2018). Potatoes, Petty Commodity Producers and Livelihoods: Contract farming and agrarian change in Maharashtra, India. Journal Of Agrarian Change, 19(1), 135-161. doi: 10.1111/joac.12273
Cite this page
Essay Sample on Contract Farming. (2022, Dec 14). Retrieved from https://proessays.net/essays/essay-sample-on-contract-farming
If you are the original author of this essay and no longer wish to have it published on the ProEssays website, please click below to request its removal:
- Paper Example on Nike vs. Under Armour: Liquidity of the Two Companies
- Amazon Company Overview
- Essay Example on Data Management
- Essay on the Issue of Stakeholder Management and Corporate Performance
- Project Proposal for Increase the Profits and Augment the Product Portfolio of the Seamus Company
- Specificity of Addictions, Employee Motivation and Workshop Diversity Articles Analysis
- Course Work: Effects of Groundwater Contamination. Water Treatment. Drinking Water Quality.