What is Contract Farming?

The uncontrollable devil of population growth calls for higher productivity of agricultural products per unit of land, labor, water and other inputs in an equitable and sustainable manner. Population has been increasing @ 1.2% per annume whereas average growth rate of total food grain production is within the vicinity of 0.8%. Hence we have to produce more. Moreover, Indian still predominantly remains an agriculture country with 65 to 70% of its population dependent on agriculture. But its contribution to nation’s GDP has declined from 34.9% in 1990-91 to barely 18.5% in 2006-07. Alarmingly annual average growth of agriculture and allied sectors has gone down from 3.2% to 2.3% during seventh and Tenth plan period.

Structural deficiencies in agriculture sector in India are mainly responsible for this debacle. These include the small size of land holdings, dependence on monsoons, lack of irrigation facilities, unbalanced use of fertilizers, lack of communication and easy access to credit and scarcity of improved seed varieties notwithstanding the large number of intermediaries in the channel of farm produce between producer and the consumer. These shortcomings and related problems generated the idea of contract farming.

What is Contract Farming? Contract farming is a sort of agreement between the farmer on the one part and some contracting agency on the other part whereby the farmers of some particular locality agree to grow some specified crop or crops and supply the produce thereof at a presented price. The contract, therefore, includes the commitment of the farmers to grow and supply the specified product in specified quantity of the specified quality level for some particular period.

The contractor (purchaser) on his part is committed to purchase the produced at the predetermined price. Usually, the contracting firm also agrees to procure and provide certain inputs such as seeds, fertilizers, technology, finances and credit facilities. Contracting is, therefore, a means to provide a sort of insurance to the farmer whereby market risk is transferred to the contracting firm. In nutshell, the idea of contract farming is based upon three points:


(i) Pre-determined quantity,

(ii)Pre-determined quality,

(iii)Pre-determined price.

Contract farming in India owes its origin to the installation of tomato processing plant in Hoshiarpur (Punjab) by popsi Foods Ltd. Currently it is being practiced by some multi-national companies as also local firms such as Pepsi, HLL, ICC, MacDonald, Cadbury, Nestle, Wimco etc. Rallis India, a Tata group undertaking is a leading company to promote contract farming in India. They have set up Farm Management Service to undertake contract farming. They have arranged with ICICI Bank to provide credit facilities to the farmers and have also sought collaboration with some leading firms to promote contract farming.

Contract Farming | Agrinavitas

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In accordance with the purpose and prevailing market conditions different models of contract farming have been devised by the contracting firms. Mainly these are of three types:

(i) Contract under which only sale and purchase conditions are settled and there is no responsibility of the contractor regarding inputs.

(ii) Contract under which along with sale and purchase of the produce some particular inputs are supplied the contractor e.g. Pepsi supplies only saplings to the cultivator and purchases the produce. They do not provide any other iputs.


(iii) Contract under which the contractor firm undertakes the responsibility to supply all the inputs to the farmer. Under such total contract almost all the needs of the farmer are fulfilled under one roof.

Contracting farming is gradually gaining ground among rural masses specially in the states of Punjab, Maharashtra Gujarat, Karnataka and Andhra Pradesh. Contract farming is advantageous to both the contracting parties. Firstly, it reduced the number if intermediaries in the disposal chain. Secondly, it reduces the marketing and pricing risk as the purchaser is already there and the prices have been settled. Thirdly, it provides a more reliable, regular and timely sources of income to the farmer.

Fourthly, it ensures timely supply of good quality raw material at reasonable price to the farmer. Fifthly, it also assures timely supply good quality raw material at reasonable cost to the contractor firm. Finally, it has opened new vistas to the farmer who gets the option of adopting new crops suitable to the local conditions of soil and climate and available irrigation facilities thereby enabling him to move away from non-profitable time old traditional farming practices.

Farmers are benefited by adopting improved technology and better quality seeds, credit and banking facilities also reach the door of the farmer as long business houses and companies are there to cover the risk of credit. Contract farming generally promotes export oriented and cash crops and as result the nations is benefited by getting additional foreign exchange.

The concept of contract farming is not free from demerits. So far as bargaining power is concerned the contractor has the upper hand and the position of the farmer is comparatively weaker. The contractor companies are always money minded and emphasize on the cultivation of cash crops which are export oriented. Food grains like wheat and rice are of secondary importance to them. Then, in case the farmer shall be at the mercy of the aggrieved intermediaries. Furthermore, if the market price rises high, the farmers are bound to sell at the predetermined price and the profit entirely goes to the contractor.

But these demerits can easily be avoided by taking some remedial and precautionary steps. Central Ministry of agriculture has already taken some steps and has formulated a law to popularize contract farming in order to allow accelerated technology transfer, credit flow and assured market for farm produce. Agriculture produce Marketing Act has been amended to meet the emerging needs. With the amendment of the Act the concept of contract farming comes with vogue in the required scale. 15 states and 5 union territories have so far opted to derive the advantage of market reforms. NABARD has also decided to support such arrangements. Steps should be taken to improve the bargaining power of small farmers who far outnumber the big farmers. Small farmers may adopt co-operative farming whereby they can negotiate with the contracting firm and can engage in large scale production

Companies should develop long term relationship with farmers and should adopt such policies which are conducive for sustained agricultural growth. There should be transparency in fixation of prices of farmers should be very well trained and properly informed through media programmes.

India has to establish herself as a global economic power by 2020. But this goal cannot be achieved without accelerated and sustained growth in agriculture sector. Agriculture and industry are correlated and interdependent. Industries should be playing more positive and effective role in increasing agriculture production and land productively. Contract Farming can prove to be the best medium to narrow the widening gulf of disparity and can prove to be an effective catalyst for the process of growth of Indian agriculture.

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