Contract Farming – Significance & Challenges – Way Forward

Contract farming is a significant and evolving topic in Indian agriculture, representing a formal, forward-looking link between farmers and commercial buyers. It aims to reduce market risk for farmers and ensure a consistent supply chain for companies. 

Introduction:

• Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide agreed quantities of a specific agricultural product.
• To regulate contract farming in India, the Ministry of Agriculture came out with a draft Model Contract Farming Act, 2018. The draft Model Act seeks to create a regulatory and policy framework for contract farming. Based on this draft Model Act, legislatures of states can enact a law on contract farming.
• Currently, contract farming in India requires registration with the Agricultural Produce Marketing Committee (APMC) in a few states. This means that contractual agreements are recorded with the APMCs which can also resolve disputes arising out of these contracts.

How does Contract Farming work?

• Under contract farming, farmers can be given seeds, credit, fertilizers, machinery and technical advice so that their product is tailor-made for the requirements of the companies.
• There would be no middlemen involved and farmers would get a predetermined sale price from the companies.
• The farmer does not have to make trips to the mandis nor worry about getting seeds and credit for farming operations.
• By entering into a contract, the farmer reduces the risk of fluctuating market demand and prices for his produce and the companies reduce the risk of non-availability of raw materials.

Objectives of Contract Farming:

1. To promote a steady source of earnings at the individual farmer level.
2. To expand private sector investment in agricultural business.
3. To inspire financially rewarding employment opportunities in rural communities, especially for landless agricultural labour.
4. To bring down the burden of central and state-level procurement systems.
5. To minimize migration from rural to urban areas.
6. To create a market focus on crop selection by Indian farmers.
7. To promote value addition and processing.
8. To bring down as far as feasible, any seasonality associated with such employment.
9. To encourage rural self-reliance by pooling locally available resources and expertise to meet new challenges.

Advantages of Contract Farming:

1. Contract farming ensures a consistent supply of agricultural produce with quality, at the right time and lesser cost resulting in better control over the factors of production.
2. Farmers benefit from assured procurement and price stability, reducing uncertainties in agricultural marketing e.g. HyFun Foods procured 300,000 tonnes of potatoes from 6,000 farmers in Gujarat in 2023-24 and plans to engage 20,000 farmers by 2027-28 across 80,000 acres.
3. Assured supply aids food processing industries in better supply chain management. It reduces the demand-supply gap by plugging supply-side constraints. Contract farming also enables the food processing industries to invest in warehouses, cold storage and design the logistics in the long term.
4. It makes small-scale farming competitive. Small farmers can access technology, credit, marketing channels and information while lowering transaction costs. They are assured the market for their produce at their doorsteps, reducing marketing and transaction costs.
5. It reduces the risk of production, price and marketing costs. Contract farming can open up new markets which would otherwise be unavailable to small farmers, thereby reducing intermediaries thus providing more options to farmers.
6. Contract farming also ensures higher production of better quality, financial support in cash and /or kind and technical guidance. It enables optimal utilisation of installed capacity, infrastructure and manpower, and responds to food safety and quality concerns of the consumers.
7. It leads to direct private investment in agricultural activities as they find it profitable. The farmers enter into contract production with an assured price under terms and conditions.

Challenges/Limitations of Contract Farming:

1. Small and marginal farmers may not be roped in for this form of farming because companies may want a particular size of the crop which small farmers with their small parcels of land may not be able to produce. So, this will leave out the most vulnerable farmers from the ambit of corporate farming.
2. A medium sized farmer may not be literate enough to understand the nitty-gritty of the contract and all the clauses, and if the product does not meet the standards of the company, he may face mass rejection.
3. The farmer may be forced to produce only one type of crop year after year which will lead to monoculture, This invariably leads to the deterioration of soil.
4. Predetermined prices do not take care of food inflation and in case there is a price rise of the product, the farmer cannot take advantage and make a windfall profit because he is under contract to sell at the price agreed upon beforehand.
5. The average farmer being poor and semi-literate has little bargaining power vis-à-vis big corporations and hence there is little chance of his getting a fair price for his produce.
6. Informal or weakly enforced contracts limit farmers’ legal recourse, leaving them exposed to unfair practices, such as stricter quality standards during bumper crop seasons.
7. A single buyer engaging with multiple farmers creates dependency, reducing farmers’ negotiating power and enabling firms to dictate terms and maximize profits.

Way Forward:

1. Design policies specifically benefiting small-scale farmers, ensuring equitable terms, access to inputs, and fair prices to prevent marginalization.
2. Foster more competition to incentivise firms to offer better terms and services to the farmers. Steps should be taken to improve farmers’ connectivity to spot markets and mandis across the country.
3. Information asymmetry should be addressed by maintaining an information repository of farmers, contracting firms, land availability, default rate and performance standards. This will help farmers and sponsors to evaluate each other prior to engaging in contracts.
4. Efforts should be made to encourage softer means for enforcement such as risk-sharing mechanisms in contracts, renegotiation options, and simplified and transparent contract terms.
5. Emphasis should be given to education and awareness regarding Farmer’s rights. This can be done by leveraging Farmer Produce Organisations (FPO) and cooperative farming models.
6. Technology should be leveraged and Research and Development should be promoted. for contract registration, price monitoring, and grievance redressal to enhance transparency and efficiency in contract farming operations. Some of the areas which can be explored are:
   • GIS/Remote Sensing
   • Soil Mapping
   • Crop Clinics
   • Farm experimental Facilities
   • Artificial Intelligence

Conclusion:

Contract farming is therefore seen as a key strategy to modernize India’s supply chains and reduce agricultural risk, provided the regulatory framework remains strong enough to protect the interests of the small farmer.