Contract Farming

Contract farming is defined as an agricultural production that is carried out based on an agreement between buyer and farmer, with established conditions for production and marketing of farm products. In simple words, contract farming refers to a varied formal and informal agreement made between producers and processors/buyers. It includes loose buying arrangements, simple purchase agreement and supervised production with input provision, with tied loans and risk coverage. In this farming process, a  farmer agrees to provide specific agricultural products that meet the standards determined by the purchaser. In return, the buyer commits to purchase and support the production by supplying farm input, land preparation and the provision of technical advice. This article discusses in detail about Contract Farming.

Objectives

Contract Farming works towards:

• Reducing the load on the central and state level procurement systems.
• Increasing private sector investment in agriculture.
• Bringing the market focus of crop selection by Indian farmers.
• Generating a steady source of income at the individual farmer level.
• Promoting processing and value addition.
• Generating gainful employment in rural communities.
• Reducing migration from rural to urban areas.
• Promoting rural self-reliance in general by pooling locally available resources and expertise to meet new challenges.

Contract Farming Business Models

Informal Model: This model is the most temporary and speculative of all contract farming models, used by both promoters and farmers. However, this is based on the situation, interdependence of contract parties or long-term trustful relationships that minimises the risk of opportunistic behaviour. The features of this business model include:

• Small firms conclude simple and informal seasonal production contracts with smallholders.
• The quality and availability of external extension services.
• Embedded services that are restricted to the delivery of necessary inputs and credit advice that is restricted to grading and control.
• Typical products that require minimal processing, packaging and vertical coordination.

Intermediary Model: In this model, the buyer subcontracts an intermediary who formally or informally makes contracts with farmers. The features of this model include:

• Intermediaries providing and purchasing embedded services of the crop.
• Working with well-designed and incentive structures that are adequately provided.
• Disadvantages of vertical coordination and providing incentives to farmers.

Multipartite Model: This model is developed from centralised or nucleus estate models and comprises of various organizations such as governmental statutory bodies, as well as private companies and financial institutions. The features of the business model include:

• Serving as a joint venture of parastatals/community companies with domestic/foreign investors for processing.
• Vertical coordination, depending on the discretion of the firm. Required attention has to be paid to possible political interference.
• Farm-firm arrangement complemented by agreements with third party service providers.
• Separate organizations that are organised by farmers and offer embedded services.
• Equity share schemes for producers.

Centralised Model: The model is a platform where buyers’ involvement varies from minimal input provision to control most production aspects. This commonly used CF model is characterised as given below:

• The buyer sources products and offers services to a large number of small, medium or large farmers.
• The relation/coordination between farmers and the contractor is strictly organised.
• The quantities, qualities and delivery conditions are estimated at the beginning of the season.
• The production, harvesting processes and qualities are tightly controlled and directly implemented by the buyer’s staff.
• Typical products include large volumes of uniform quality that are utilised for processing.

Nucleus Estate Model: In this model, the buyer sources from their estates/plantations and contracted farmers. The estate system involves significant investment by the buyer into land, machines, staff and management. The CF model is characterised into the following:

• The nucleus estate usually guarantees supplies to ensure cost-efficient utilisation of installed processing capacities and satisfies firm sales obligations.
• Irrespective of this, in some instances the nucleus estate is used for varied purposes like research, breeding or piloting, demonstration and collection point.
• The farmers also called ‘satellite farmers’, since they demonstrate their connection to the nucleus farm. This model was often used for state-owned farms that re-allocate land to former workers.
• This model is also called ‘outgrower model’.

Advantages

Contract farming is intended to provide benefits for both the farm-producers and the agro-processing firms.

Producer/Farmer

• Enables small scale farming competitive – small farmers can access technology, credit, marketing channels and information while lowering transaction costs.
• Assured market to sell their produce at the doorsteps by reducing marketing and transaction costs.
• Minimises the risk of production, price and marketing costs.
• Opens new markets that otherwise is unavailable to small farmers.
• Assures higher production of better quality, financial support in cash and technical guidance to the farmers.
• For agri-processing level, it assures a consistent supply of agricultural produce with quality at the appropriate and lesser cost.

Agro-based Firms

• This is the most preferred way to utilise their installed capacity, infrastructure and human resources and respond to quality concerns and food safety of the consumers.
• Make direct private investment in agricultural activities.
• The price fixation is made by negotiating with producers and firms.
• The farmers enter into a contract production with an assured price, subject to the terms and conditions.

Challenges

The challenges faced by farmers in Contract Farming are mentioned below:

• Contract farming arrangements are criticised for biased favour of firms or large farmers while exploiting the weak bargaining power of small farmers.
• The problems faced by an undue quality cut on produce by delayed deliveries at factories, late payments, low price and pest attack on the contract crop that elevates the production cost.
• Contracting agreements are often verbal or informal, and written contracts often do not provide legal protection in India. Insufficient enforcement of contractual provision results in the breach of commitments by either party.
• Single buyer – multiple sellers (Monopsony)
• Adverse gender effects – women have less access to contract farming when compared to men.

Policy Support

Agricultural marketing is authorised by the States’ Agricultural Produce Marketing Regulation (APMR) Acts. To regulate and develop the practice of farming, the Government has been assisting the State/Union Territories to reform their agri marketing laws to provide a system of registration of contract farming sponsors, recording their agreement and proper dispute settlement mechanism for the promotion of contract farming across the nation. APMR has been amended by 21 states, namely Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Haryana, Gujarat, Himachal Pradesh, Karnataka, Jharkhand, Maharashtra, Madhya Pradesh, Mizoram, Nagaland, Odisha, Punjab (separate Act), Rajasthan, Sikkim, Telangana, Tripura and Uttarakhand, out of which only 13 States have notified the rules to implement the provision.

Agricultural Produce for CF

There are various agricultural produce suitable for practises under contract farming, which includes tomato pulp, organic dyes, basmati rice, poultry, pulpwood, mushrooms, edible oils, exotic vegetables, dairy processing, baby corn cultivation, medicinal plants, potato for making chips and wafers, onion, mandarin oranges, durum wheat, flowers and orchids etc.

Requirements

The minimum requirements to avail the benefits of the scheme are as follows:

• The project should not
  • result in farmers’ overspecialization in certain crops that affects the resilience and contribution to local food security.
  • promote sustainable farming practises to rely on chemicals or expensive seeds or lead to excessive debts.
  • lead to higher incomes for farmers when compared to alternative models.
  • promote land rights of the farmers.
  • apply free, prior and informal consent of these affected in terms of project design and implementation.
• The project should include women farmers and promote their rights.

However, the project has to be

• Negotiated transparently and fairly among the parties, and provide adequate information on the financial aspects of the project.
• Considerate about alternative contract farming models.
• Regulated by a written contract, mentioning the details and obligations of both the company and the out-growers.
• Transparent about the price determined, the duration of the project, and how production inputs and other services that are supplied are used by farmers.
• Creating a renegotiation of the contract at agreed intervals, specify the sharing production and the market risks among the parties.
• Track and communicate performance to the affected stakeholders to build accountability at the operational level.
• Prevent unfair practices in buyer-farmer relations, and not restrict/discourage farmers to work with other farmers to address concerns or problems or compare contractual clauses.
• Have detailed mechanisms for settling disputes.

The Government has to

• Act as a mediator or third party or between the parties and not a mouthpiece for the company sponsor.
• Have appropriate legislation to make sure that farmers’ rights can be enforced.