Contract Farming

Contract farming arrangements of different types have existed in various parts of the country for centuries for both subsistence and commercial crops. Commercial crops like sugarcane, cotton, tea, coffee, etc. have always involved some forms of contract farming. Even in the case of some fruit crops and fisheries, contracts, and farming arrangements, involving mainly the forward trading of commodities have been observed.

In the wake of economic liberalization, the concept of contract farming in which national or multinational companies enter into contracts for marketing the horticultural produce and also provide technologies and capital to contract farmers has gained importance.

According to this, party arrangements are made between the farmers and the company and the latter contributes directly to the management of the farm through input supply as well as technical guidance and also markets the produce.

Main features of Contract farming

The main features of this type of contract farming are that selected crops are grown by farmers under a buy-back agreement with an agency engaged in trading or processing. In such cases, the centralized processing and marketing agencies supply technology and resources, including planting materials and occasional crop supervision. Under such contracts, the farmer assumes the production-related risks, and the price risk is transferred to the company.

In some cases, the company also bears the production risk, depending on the stage of crop growth at which the contract is made. In any case, the company bears the entire costs of transactions and marketing. It is this variant of contract farming that is said to be one of the ways by which small farmers can participate in high-value crops like fruits, vegetables, flowers, etc., and benefit from market-led growth.

Small farmers in India are generally capital-starved and cannot make major investments in land improvement and modern inputs. Contract farming can fill up this gap by providing the farmers with quality inputs, technical guidance, and management skills.

From the standpoint of corporate bodies, farming reduces the supply risk, while the farmers enter into contractual arrangements with companies in order to minimize price risks. The company and the farmers enter into contracts to supply or purchase a specified quantum of the commodity at agreed prices. The agreed contract may be either formal or informal and may cover the supply of inputs and marketing of output.

By entering into a contract, the company reduces the risk of non-availability of raw material and the farmer reduces the risk of market demand and prices of his produces. The inputs and services supplied by firms may include seeds, fertilizers, pesticides, credit, farm machinery, technical advice, extension, etc., or may involve only the supply of hybrid seeds and marketing of produce.

Contract farming is becoming an increasingly important aspect of agribusiness, whether products are purchased by multinational or by smaller companies. There are a few success stories on contract farming such as PepsiCo India in respect of potato, tomato, groundnut, and chili in Punjab, Safflower in Madhya Pradesh, oil palm in Andhra Pradesh, and seed production contacts for hybrids seed companies, etc. which helped the growers in the realization of better returns for their produce.

The limited commodity-specific experience of contract farming in the country shows that the spread and success of contract farming would require the following conditions to be met- Contract farming should be made legal. In case of violation of contract, from either side, farmers, as well as the company, should be in a position to approach an organization or institution, which can mediate and settle the dispute.

There should be an institutional arrangement to record all contractual arrangements, maybe with the local market committee or Panchayat or some government machinery. This will promote and strengthen confidence-building between the parties and also help solve any dispute, arising out of violation of the contract.

Provision for both forward and backward linkages

Contract farming should have a provision for both forward and backward linkages. Unless both input supply and market for the products are assured, small farmers will not be in a position to participate in contract farming. There should be bank finance for small and marginal farmers on easy terms. As the payment for contractual produce is made through the bank, the recovery of such loans will be easier.

The contract should be managed in a more transparent and participatory manner so that there is greater social consensus in handling contract violations from either side without getting involved in costly as well as a lengthy process of litigation. The proposed contract crop should have a distinct advantage in terms of relative yield and profit, which will provide higher income to the contract farmers on a stable basis.

In many parts of the country, an agricultural tenancy is legally banned, although concealed tenancy exists. Tenants who do not enjoy the security of tenure cannot participate in contract farming. Hence, the legalization of tenancy would be a precondition for enabling tenant farmers to benefit from contract farming.

The success of contract farming requires that there should be adequate, infrastructure facilities of roads, public transport, telephone, postal services, stable power and water supplies, cold storage facilities, etc. The government needs to ensure that contract farming, which is generally commodity-specific and tends to promote monoculture, does not grow beyond proportion to destroy biodiversity and agricultural ecology. It may be necessary to provide necessary guidelines for land use planning in each region in order to prevent such eventualities.