ALL ABOUT CONTRACT FARMING

What is contract farming

Contract farming is a type of agreement between farmers and buyers for agricultural production of their outputs. Contract farming also establishes conditions for producing and marketing a farm product or products. The agreement lays down necessary conditions such as producing the agricultural products in the specified time, quantity and quality. The farmer must meet the standards determined by the purchaser and the purchaser in return commits to purchase the said production and aid the farmer by supplying required farm input, land preparation and the provision of technical advice. Contract farming includes simple purchase agreements, loose buying arrangements, and supervised production with input provision comprising loans and risk coverage. 

The concept of contract farming is not new to India, it has been practised since British rule, even after the independence contract farming was practised in the commercial production of seed and sugarcane, milk, tomatoes, and poplar. In 1988, despite opposition, India allowed PepsiCo to procure and process some horticulture crops in Punjab through a joint venture with a state-owned Punjab Agro Industries Corporation. This venture was later extended to the production of tomatoes under the contract farming system. These measures led to the expansion of contract farming in India. 

Objectives of contract farming

The objectives of contract farming are as below :

• To reduce the load in the central and state-level procurement system.
• To increase private sector investment in the agricultural sector.
• To generate a steady source of income for the farmers.
• To develop gainful employment in rural communities. 
• To help in promoting a self-reliance system in the rural areas by gathering locally available resources and expertise.
• To reduce migration from rural to urban areas.

Features of contract farming

The features of contract farming are:

• It helps in creating new markets for agricultural products.
• It maintains the adequate quality of the products.
• It minimises the transaction costs between the parties.
• It helps in facilitating the diffusion of modern techniques.
• It shares the risks between the parties involved.
• It helps in the proper distribution of information among the farmers.

Types of contract farming business models

The different types of contract farming business models are as follows:

Informal model

This is the most unreliable and transient model of all the contract farming models. It also poses a risk of facing default by both the farmer and the agent. However, it also depends on the kind of relationship shared by the parties, contractual parties or long-term partnerships which may reduce the risk of opportunistic behaviour. 

Some aspects of this contract farming model are:

• The success and outcome of these agreements depend on the availability and quality of external services.
• Small firms enter into these agreements by conducting simple and informal seasonal production contracts with smallholders.

In this model typical products are produced such as fresh fruits or vegetables for local markets, etc. requiring minimal packaging.

Intermediary model

In this model, the consumer employs an intermediary such as an agent, collector, aggregator or farmer organisation to hire the farmer formally or informally.

 Characteristics of this model are :

• The intermediary provides embedded services (usually passing through services provided by buyers against service charges) and purchases the crop. This model can produce the desired outcome if well-designed and incentive structures are adequate. 
• However, this model can have some disadvantages such as providing incentives to the farmers, quality assurance, regulatory of supplies, farmers might not benefit from technological transfer, reduced pay for the farmers, etc.

Multipartite model

This contract farming model includes numerous entities such as governmental statutory bodies, private companies and occasionally financial institutions. The unique characteristics include: 

• Separate organisations such as cooperatives may provide embedded services like credits, extension, marketing, etc.
• This model may feature community companies with domestic or foreign investors for processing.
• It may also involve the equity share schemes for the producers.

Centralised model

It is the most common type of contract farming model. In this model, the buyer’s involvement may vary from minimal input provision to control of most production aspects. This model is characterised as:

• The buyer sources products and provides services to large numbers of small, medium or large farmers.
• The relationship between the buyer and the farmer is strictly vertically organised.
• The quality, quantity, and delivery conditions are determined at the beginning of the season.
• The production and harvesting processes are tightly controlled, and sometimes directly implemented by the buyer’s staff.

Nucleus estate model

In this model of contract farming, the buyer sources product from their own plantations or estates and from contracted farmers. The buyer in the nucleus estate model invests in land, machines, staff and management. The special features of this type of contract farming model include :

• It guarantees supplies to assure cost-efficient utilisation of installed processing capacities and to satisfy firm sales obligations.
• The nucleus estate model is often used for research, breeding, etc.
• This model was often used in the past for state-owned farms that re-allocated land to former workers.

Advantages of contract farming 

The practice of contract farming in the 21st century has proved to be beneficial for producers, farmers and agricultural processing firms. 

• It enables the farmers in the rural areas to be more accessible to technology, credit, marketing channels and required information at a much less transaction cost.
• It decreases the risk of production and marketing costs, thus enabling the farmers to produce the products hassle-free.
• Contract farming opens up new marketing opportunities for farmers, which otherwise would not be easily available to small scale farmers.
• Contract farming ensures a higher production rate and better quality at a much lower cost.
• It also provides technical assistance to the farmers.
• Contract farming facilitates direct private investment in agricultural activities.
• Farmers and producers enter into the contract by reading the terms and conditions of the agreement so that they are well aware of their rights and responsibilities. 

Challenges of contract farming

The challenges of contract farming are mentioned below.

• Contract farming is often criticised as it favours large farmers and firms over the bargaining power of small scale farmers.
• Producers frequently face problems such as undue quality cuts on produce by firms, delayed deliveries at the factory, delayed payments, low prices and pest attacks on the contract crop which raised the cost of production.
• In India, the lack of enforceability of contracts fails to protect the rights of the farmers.
• Also, women get less access to contract farming than men.

Contract farming in India

In India, the agricultural sector supports the livelihood of millions of people. However, due to the decrease in income, the farmers are opting for alternate ways to earn money. Thus, in order to make more money, the farmers would give their land on a contractual basis. Contractual farming has proved to be disastrous for a lot of people associated with the agricultural sector.  

Contractual farming would give entry to the corporates in the agriculture sector which would enable them to acquire the land rendering numerous farmers penniless.

Sustainable development is rarely on the corporate agenda as they intend to maximise their profits, therefore, they would hardly care about the preservation of the land and soil.

Contract farming could lead to the farming of foreign varieties being grown on Indian soil causing malnourishment among the Indian population as locally grown varieties of crops have provided nutrition and sustenance to the natives for centuries.

Contractual farming would also employ merchandised farming leading to a decrease in farm labourers.

Corporates tend to deploy machinery which leads to unemployment in the agricultural sector.

In the corporate sector in order to maximise the results would use chemical-based fertilisers that are detrimental to the health and causes tremendous damage to the soil.

Contractual farming is an extraordinary idea but it must be incorporated into the agricultural sector so that it not only benefits the producers but also looks into the welfare of the farmers and must aid in the preservation of land and soil. 

Policies related to contract farming in India

In order to regulate and develop the practice of contract farming, the Government of India has been actively advocating to reform the agricultural marketing laws to provide a system of registration of contract farming sponsors, recording of their agreements and a proper dispute settlement mechanism for the orderly promotion of contract farming in the country. 

So far, 21 states such as; Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Madhya Pradesh, Mizoram, Nagaland, Odisha, Punjab (separate Act), Rajasthan, Sikkim, Telangana, Tripura and Uttarakhand have amended their Agricultural Produce Marketing Regulation (APMR) Acts to provide for contract farming and of them, only 13 states like; Andhra Pradesh, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Madhya Pradesh, Odisha, Rajasthan and Telangana have notified the rules to implement the provision.

Conclusion

Contract farming is a lucrative proposition. Therefore, it must be followed with the assistance of proper rules and guidelines and must be governed by the administrative authority for it to function in India. Contract farming can not only be beneficial for the producers in optimising maximum output but also looking after the welfare of the farmers and helping in their economic prosperity. Therefore, the Government of India is taking several measures and implementing new laws in order to enhance agricultural productivity, farmers’ profit and reduce poverty. These crucial steps taken by the government would facilitate the smooth implementation of contract farming schemes and boost the productivity of the agricultural sector.