What is Contract Farming?
It refers to bipartite agreements made between the farmer and the sponsoring company where, the latter contributes directly to the management of the farm through input supplies as well as technical guidance and also markets the produce. Select crops are grown by farmers under a buy back agreement with the sponsoring company. The production and price risks are borne by that party as mentioned in the contract signed between the two.
How can small farmers benefit from Contract Farming?
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Small farmers in India are generally capital starved and cannot make major investment 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.
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Although the company deals only with the contract crop, the farmers’ overall management skill may improve, thereby helping him to raise the yields of both contract and non-contract crops.
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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.
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There are few success stories on contract farming such as Pepsi-co India in respect of potato, tomato, groundnut and chili in Punjab, Amul and NDDB for milk procurement, sugarcane cooperative in Maharashtra etc.
What are the issues of contract farming in India?
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Studies have highlighted a significant problem in some cases wherein: both firms and farmers breached contracts when market conditions provided arbitrage opportunities. Firms rejected more contracted produce on quality grounds when market prices dipped below contracted prices and farmers engaged in side-selling in open markets when market prices rose higher than contract prices.
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Companies prefer medium and large farmers because of transaction costs. They want farmers to dedicate a minimum acreage, say, five acres [one acre is 0.4 hectare] of land, to the contract crop. In India, 85 per cent of the farmers are marginal or small, operating less than two acres.
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Contract farming can work if there is a collectivization of small farmers. For instance, 10 to 15 farmers get together, form a group, and sign a group contract. It brings down the transaction costs, the farmers are better protected, and it is essentially a win-win situation for both the farmer and the corporate. It has been successful in Thailand.
How can contract farming be successful?
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It will work if the farmers have better bargaining power.
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They have to be legally protected.
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The terms and conditions of the contract are crucial — and the need to be more transparent.
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It has been found that quite often the farmer had not even seen the contract and did not know what the terms and conditions were.