How Can Contract Farming be Made Successful in India?

In an age of market liberalization, globalization and expanding agribusiness, there is a danger that small-scale farmers will find difficulty in fully participating in the market economy. In many countries such farmers could become marginalized as larger farms become increasingly necessary for a profitable operation. A consequence of this will be a continuation of the drift of populations to urban areas that is being witnessed almost everywhere.

Attempts by governments and development agencies to arrest this drift have tended to emphasize the identification of "income generation" activities for rural people. Unfortunately, there is relatively little evidence that such attempts have borne fruit. This is largely because the necessary backward and forward market linkages are rarely in place, i.e., rural farmers and small-scale entrepreneurs lack both reliable and cost-efficient inputs such as extension advice, mechanization services, seeds, fertilizers and credit, and guaranteed and profitable markets for their output. Well-organized contract farming does, however, provide such linkages, and would appear to offer an important way in which smaller producers can farm in a commercial manner. Similarly, it also provides investors with the opportunity to guarantee a reliable source of supply, from the perspectives of both quantity and quality.

The contracting of crops has existed from time immemorial. In ancient Greece the practice was widespread, with specified percentages of particular crops being a means of paying tithes, rents and debts. During the first century, China also recorded various forms of sharecropping. In the United States as recently as the end of the nineteenth century, sharecropping agreements allowed for between one-third and one-half of the crop to be deducted for rent payment to the landowner. These practices were, of course, a form of serfdom and usually promoted permanent farmer indebtedness. In the first decades of the twentieth century, formal farmer-corporate agreements were established in colonies controlled by European powers. For example, at Gezira in central Sudan, farmers were contracted to grow cotton as part of a larger land tenancy agreement. This project served as a model from which many smallholder contract farming projects subsequently evolved.

What does ‘Contract Farming’ Mean?

Contract farming can be defined as an agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices. The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice. The basis of such arrangements is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the company to support the farmer's production and to purchase the commodity.

The intensity of the contractual arrangement varies according to the depth and complexity of the provisions in each of the following three areas:

Market provision: The grower and buyer agree to terms and conditions for the future sale and purchase of a crop or livestock product;

Resource provision: In conjunction with the marketing arrangements the buyer agrees to supply selected inputs, including on occasions land preparation and technical advice;

Management specifications: The grower agrees to follow recommended production methods, inputs regimes, and cultivation and harvesting specifications.

With effective management, contract farming can be a means to develop markets and to bring about the transfer of technical skills in a way that is profitable for both the sponsors and farmers. The approach is widely used, not only for tree and other cash crops but, increasingly, for fruits and vegetables, poultry, pigs, dairy produce and even prawns and fish. Indeed, contract farming is characterized by its "enormous diversity" not only with regard to the products contracted but also in relation to the many different ways in which it can be carried out.

The contract farming system should be seen as a partnership between agribusiness and farmers. To be successful it requires a long-term commitment from both parties. Exploitative arrangements by managers are likely to have only a limited duration and can jeopardize agribusiness investments. Similarly, farmers need to consider that honouring contractual arrangements is likely to be to their long-term benefit.

Contract farming is becoming an increasingly important aspect of agribusiness, whether the products are purchased by multinationals, smaller companies, government agencies, farmer cooperatives or individual entrepreneurs. As noted above, the approach would appear to have considerable potential in countries where small-scale agriculture continues to be widespread, as in many cases small-scale farmers can no longer be competitive without access to the services provided by contract farming companies. It must be stressed, however, that the decision to use the contract farming modality must be a commercial one. It is not a development model to be tried by aid donors, governments or non-governmental organizations (NGOs) because other rural development approaches have failed. Projects that are primarily motivated by political and social concerns rather than economic and technical realities will inevitably fail.

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, however, an approach that can contribute to both increased income for farmers and higher profitability for sponsors.3 When efficiently organized and managed, contract farming reduces risk and uncertainty for both parties as compared to buying and selling crops on the open market.

Critics of contract farming tend to emphasize the inequality of the relationship and the stronger position of sponsors with respect to that of growers. Contract farming is viewed as essentially benefiting sponsors by enabling them to obtain cheap labour and to transfer risks to growers. However, this view contrasts with the increasing attention that contract farming is receiving in many countries, as evidence indicates that it represents a way of reducing uncertainty for both parties. Furthermore, it will inevitably prove difficult to maintain a relationship where benefits are unfairly distributed between sponsors and growers.

The advantages, disadvantages and problems arising from contract farming will vary according to the physical, social and market environments. More specifically, the distribution of risks will depend on such factors as the nature of the markets for both the raw material and the processed product, the availability of alternative earning opportunities for farmers, and the extent to which relevant technical information is provided to the contracted farmers. These factors are likely to change over time, as will the distribution of risks.

Goals of contract farming

This also helps farmers in generating a permanent source of income for every farmer. It also generates employment opportunities in rural areas, farmers are getting paid for working on the field and for many other agricultural works. It reduces the load on central and state-level occupation systems. With the help of contract farming the investments of the private sector in agriculture are also increasing. It also brings the market focus of crop selection by Indian farmers. This overcomes the migration level in India of rural people who shift to urban areas due to the condition of unemployment.

Why we need contract farming?

Due to contract farming the risk of farmers is reduced at 80% whenever there is a pest attack, production got destroyed by rain and because of any other reason the company will bear it not the farmers, in fact, they will get their compensation hence 0%risk.

The best part of contract farming is that there is no middleman in this contract the farmers will get to pay at the market selling price.

Contract farming was introduced for the benefit of the farmer so they can get reasonable profits from their production. It is important to set a predefined amount of the production, to be paid to the farmers.

Through Contract Farming the farmers get seeds and proper pieces of equipment to produce the crop. Through Contract Farming the farmer’s knowledge increases and their production market value increases.

Challenges of Contract Farming in India

The problems farmers have to face in contract farming are given below:

The contract farming is more beneficial for large farmers in terms of production so the small earn less profit in comparison to large farmers.

Basically, in India there are no strict rules and regulations regarding the fulfilment of the contract, which results in the failure of the contract.

The sellers (farmers) are many in comparison to corporate buyers. This results in a monopoly due to a lack of buyers.

The Basic Formula for a Good Contract

An ideal contract between farmers and the corporative is when they have a mutual understanding regarding the contract

Through contract farming, farmers get to know about the record-keeping, efficient use of farm resources and correct method of using the fertilizers, when they gain information about exporting the production, they gain experience in how to deal with buyers.

Therefore, a long-term partnership can be achieved by creating a transparent contract between both the parties the three keywords that will help them to achieve that are as follow

Quantity: - Specifying the amount of product that is to delivered by farmers

Quality: – The quality level of the product Farmer will produce for the corporation.

Price: – The fixed amount of price for the crops to be paid by the corporation.

Contract farming works if its advantages outweigh the disadvantages for both agribusiness firms and farmers, and both feel better off with contract than without it. Putting it differently, success of contract farming depends on that factors that address sources of potential disadvantages that countervail the synergy between firms and farmers. There are several factors - economic and non-economic, internal and external to the contracts – that influence relationship between farmers and firms, and hence the performance and the sustainability of contract farming. Contract farming exhibits in various forms, depending on the type of commodity, buyers and sellers, and the socio-economic environment surrounding farmers. Hence, the factors underlying performance of contract farming could be different under different production and socioeconomic environments.

There is no single recipe to make contract farming work in smallholder agriculture. A number of factors, intrinsic and extrinsic to the contract, influence the relationship between agribusiness firms and farmers, and therefore the performance and the sustainability of contract farming.

Agribusiness firms while improving their own profits should ensure that contract crop/commodity is more remunerative for farmers than the competing crops/commodities and they earn more with contract farming than without it; and the marketing and transaction costs associated with farmers’ disposal of produce and acquisition of inputs, technology and services are lower with contract farming.

Second, for high-risk commodities firms must share production and marketing risks to the extent possible, and also assist farmers in managing production risks. Third, firms should abstain from a tendency of extracting monopsony and monopoly rents. Fourth, firms should base their pricing strategy on the market trends, and create incentives for farmers for better efficiency and product quality as to manage the problem of extra-contractual sales or any problem of moral hazards.

Fifth, firms should value timeliness in off-take of produce, and delivery of payments, inputs, technology and services. Sixth, to make contract farming politically acceptable and socially desirable it is important to adopt innovative approaches such as intermediate contracts, growers’ associations, self-help groups, etc. to create opportunities for smallholders to participate in contract farming, and also to reduce their own transaction costs of contracting and supply risks.

Finally, for making contract farming a sustainable institution, it is important for firms to win the confidence and trust of the farmers through price and non-price instruments. To develop contract farming as a pro-poor market institution the central and state governments should create a conducive climate for private investment in agribusiness, promote competition among various market players whilst curbing any tendency of regional monopsony and collusive oligopsony, develop and facilitate the implementation of grades and standards, improve farmers’ access to credit, insurance, technology and extension services, and facilitate smallholders to organize themselves into cooperatives, growers’ associations and self-help groups as to empower them to effectively deal with big business firms.

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