Contract farming can be defined as agricultural production carried out according to an agreement between farmers and buyers, which includes some conditions for the farmers as well as the contractor. Typically, a farmer agrees to provide required quantities of different products including crops if the buyer sets the condition. In return to it, the contractor may provide the farm inputs, financial supply and the provision of technical advice regarding the land and crop cultivation practices to the farmer. Farmers have no restrictions on selling their products as decided in the agreement. The private trade mechanism is marginalised in contract farming. Absence of a market mechanism can cause MSP to cease at safety net and with the help of this agreement market can assume the role of reference price. The agreement has open ended occupancy and no termination clause. The company which agrees for the contract also provides perks to the farmer such as, land preparation and planting, crop monitoring during growing period, transportation & logistics etc.
Necessity of contract farming
- Contract farming reduces the risk level of farmers by nearly 80%.
- One of the best advantages about contract farming is that farmers can engage in direct marketing by eliminating intermediaries for full price realization.
- Contract farming reduces cost of marketing for farmers & boost their income substantially.
- With the help of such agreement, farmers get access to planting material, seeds, better inputs & modern technology. Marginal & small farmers with land less than five hectares will gain with via aggregation & contract (Marginal & small farmers account for 80% farmers in India)
- Farmers and the buyers have to set a predefined amount of production and profit at the time of agreement which leads to reasonable profits and noble amounts of goods for the market.
- Contract farming helps to increase the knowledge level of farmers and also increases the production market value.
- It enables small scale farming more efficiently and reliably. Small farmers can have access to technology, marketing channels and information while lowering transaction costs.
- They get assured markets to sell their products at the doorsteps by reducing marketing costs.
- Risk level for production gradually decreases and market value increases
- Assures highest production of better quality products and technical guidance to the farmers.
- Without the need of a middleman farmers are directly able to know the market price and current crop condition.
- Contract farming is the best way to utilize their capacity, infrastructure and human resources and respond to quality factors and food quality of the consumers.
- Buyers are making direct investment in agricultural activities.
- Price can be fixed by having a negotiable agreement between the producers and the firms.
- Farmers are introduced to a contract production with an assured price with respect to terms and conditions.
However, there are some limitations which both the parties should be aware of.
- When companies get first-hand on the market then there is a chance that they start to keep their prices low for maximizing the profit for themselves.
- Even though farmers get technical assistance from the contractors based on the agreement, still there is no communication level between the producers and consumers. This leads to no improvement in production of goods.
- Farmers may get bound to the agreement they made with the company, and to follow that they have to make a certain amount of goods within a specific time frame.
- Farmers may sell the crop to a third party thereby leaving the contractors / Buyers with no crop.
Influence of contract farming in India
- Tomato yields increased from 16 – 52MT. Chilli and potato yield improvements were equally great.
- According to a study held in 2016, production of tomato in the state of Punjab went upto 200,000 MT from 28,000 MT.
- Producers also moved to other contract farming crops such as Groundnut, Basmati & non-Basmati paddy.
- The study based on a survey of 1331 farmers from Maharashtra state indicates that contract farming ensures higher returns for smallholders to the tune of 14.5 per kilogram over independent farmers.
- On the other side, 66% of poultry farming go through contract farming which help farmers to get a stable price for their goods.
- In Bengaluru Rural, the annual income of the respondents increased from 1,77,606 to 1,98,415.
UKPL has been working with farmers in a contract farming system in Agro-forestry since its inception, three decades ago. The company today is growing short rotation trees, spices, medicinal plants and aromatic grass etc through contract farming in various states of India. The company provides market linkage on all of the products it promotes though contract farming.
This helps the farmers to actually avoid the middleman to sell their produce and the Buyers to outsource their agro raw material production within their current geography or develop a new area.