Contract Farming

May 19, 2021

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Contract Farming

Contract farming signifies an agricultural production (including livestock and poultry) based on pre-harvest agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations).

The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement. Under contract farming, the producer can reduce the risk of fluctuating market price and demand. The buyer can reduce the risk of non-availability of quality produce. Well managed contract farming is an effective way to coordinate and promote production and marketing in agriculture. Nevertheless, it is essentially an agreement between unequal parties, companies, government bodies or individual entrepreneurs on the one hand and economically weaker farmers on the other. It is an approach that can contribute to both increased income for farmers and higher profitability for companies. It is varied formal and informal agreements between producers and processors or buyers. The concept of contract farming was introduced in Indian agricultural scenario in the early 2000s. Pepsico was one of the earliest promoters of the contract farming model in India.

Contracts include

Loose buying arrangements.

Farmers are open to sell product anywhere but preference is given to whom he has made contract.

Simple purchase agreement.
Supervised production with input provision, with tied loans and risk coverage

Production is done according to company’s advice with respect to growing crops, better quality of seed, loan provisioning and time to time supervision.

Quality of crop, price and the time of handing over produce is fixed in advance.
Contracts can be done in formal, registered, oral and written form.

Why do we need contract farming?

Guaranteeing buy-back of produce at an agreed price or price range.
Farmers are assured that whatever has been grown will be sold out, as the price is already assigned.
Demand for more standardized, higher quality of agriculture produce.
It reduces the risk of production price and marketing cost.
Provide financial support and technical guidance to the farmers.
Ensure consistent supply of agricultural produce with quality at right time and lesser cost.
It will free growers from middlemen of money lenders.
Encourages new generation to take to farming instead of migrating to cities.
Supports rural employment along with agro-processing and manufacturing unit.

Disadvantages in contract farming

While it guarantees market but contractors keep prices very low in order to maximize profit because farmers do not get a chance for bargaining.
Contract companies can reject sub-standard commodities; final decision is in their hand. The contracts are not honoured by big companies thus degrading the credibility of the contracts.
It creates dependency syndrome. Once farmers get any contract while they are preparing to handover first contract again next contract comes, so it creates dependency among farmers.
Most contract arrangements promote monoculture. As farmers are involved in only one type of crop production so it does not leave farmers for diversity production which leads to decrease in fertility of soil.

Way-forward

Fast track implementation of contract farming in India could be the new ray of hope in the coming years for agriculture industry. Once this is executed and accelerated, technology transfer and capital inflow is expected to penetrate and an assured market for crop production will grow. It will safeguard the interest of small and marginal farmers, which in turn, could lead to a complete makeover of the agriculture industry in India. In India, contract farming is regulated under the Indian Contract Act, 1872. Since agriculture is a state list subject, therefore contract farming is not uniform. The need of the hour is to create a regulatory and policy framework for a uniform contract farming enforcement. The NITI Aayog (apex think-tank of India) observed that market fees are paid to APMC for contract farming when no services such as market facilities and infrastructure are provided by them. Contract farming should be out of the ambit of APMCs and an independent regulatory authority must be brought in. A uniform contract farming could be a revolutionary step to realise the governments flagship programme of doubling farmers income. However, it must be remembered that for growers agriculture is a livelihood issue and for processors and aggregators it is a business. Hence, government should play the role of a facilitator to promote and develop a healthy system of farmer-corporate relationship for development of the agriculture sector in India.