Authors: Rajendra Jangid, Mahendra and Babu lal
Contract farming is a system which refers to production and supply of agricultural produce under a forward contract. It is a commitment to provide an agricultural product at a fixed price, time and required quantity to a known buyer (Singh 2002). It basically, involves four things- pre-agreed price, quality, quantity and time. The way farmers perceive contract farming, it is a relationship with the firm while from the purchaser’s point of view, it is a good quality, timely availability of material at a pre-determined price, which is the basic requirement for any successful agro-business firm whether operating at National /International market. Simply, it allows for establishing direct relationship between the farmer and firm, as substitute for open market. It is a flexible means which supports price and production and an assured market in advance. Contract farming is essentially a market driven farming, not like traditional farming, where farmers first produce a product and then search for its market. Contract farming provides provisions in three main areas are given below-
1. Market Provision: In this both grower and buyer agree to the terms and conditions of future sale of a product.
2. Resource Provision: In this buyer agrees to supply selected inputs like seeds, fertilizers, technical advice regarding the cultivation of crop.
3. Management Specification: The grower agrees to follow the recommended production method and input supply from the firm (Eton et al., 2001).
Definitions – Contract Farming
- 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/products (FAO,2009)
- Contract farming (CF) is defined as forward agreements specifying the obligations of farmers and buyers as partners in business.
Nature of contract farming
- CONTRACT farming (CF) is central to the ‘linking farmers with markets’ policy thrust in developing world agriculture/agribusiness as it brings private corporate agribusiness entities in direct contact with the primary producers. In simple terms, CF is a system for production and supply of agricultural products by farmers to a buyer under advance contracts. There is a commitment by the farmer to produce and provide the specified commodity, at a specified time and location, price, and in specified quantity to a known committed buyer. The contracts could be only procurement agreements, input supply and purchase contracts or could control the entire production process on the farm. But, the exact nature of CF varies depending on the nature and type of contracting agency, technology, nature of crop/produce, and the local/national context. Also, different types of production contracts allocate production and market risks differently between the producer and the buyer.
- Due to the efficiency and equity (smallholder inclusion) benefits (compared with corporate farming), CF has been aggressively promoted in the developing world by various agencies. In India, food supermarket chain growth; international trade aspects like sanitary and phyto-sanitary measures, and organic/fair/ethical trade; state promotion of CF; banking and input industry push for CF; farming crisis and reverse tenancy; and the failure of traditional cooperatives, will help spread of CF as they provide new space to CF in the context of withdrawal of state from agricultural sector especially procurement, extension, credit, and insurance.
- Farmer – Companies
- Farmer – Government bodies
- Farmer – Individual Entrepreneur
- Farming is an old-age means of livelihood for millions of Indians. Farmers have on occasion had to throw their produce away for want of buyers. This is the one side of the coin. On the other side is the agro-based and food industry which requires timely and adequate inputs of good quality agricultural produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of contract farming which promises to provide a proper linkage between the farm and the industry. Farmers need assured market. Agro-based and food industry requires inputs of good quality agricultural produce. Contract farming can provide a linkage between the farm and the industry. Some other reasons for the introduction of contract farming: Financial burden of central and state governments will be reduced. Private investment in agriculture will increase. Contract farming is needed to bring about a market focus in terms of crop selection by Indian farmers. Contract farming will generate a steady source of income at the individual farmer level. Contract farming will provide a linkage between agriculture and processing industries. Contract farming will generate gainful employment in rural areas. Contract farming will reduce migration of labour from rural areas to urban areas. Advantages and problems of contract farming FARMER Advantages for farmers
- Ú Inputs and production services are often supplied by the sponsor
- Ú this is usually done on credit through advances from the sponsor
- Ú Contract farming often introduces new technology and also
- Enables farmers to learn new skills.
Provision of inputs and production services Many contractual arrangements involve considerable production support in Addition to the supply of basic inputs such as seed and fertilizer. Sponsors May also provide land preparation, field cultivation and harvesting as well as Free training and extension. This is primarily to ensure that proper crop Husbandry practices are followed in order to achieve projected yields and required qualities.
There is, however, a danger that such arrangements may lead to the farmer being little more than a laborer on his or her own land. It is often difficult for small-scale farmers outside the contract-farming Context to gain access to inputs. In Africa, in particular, fertilizer distribution Arrangements have been disrupted by structural adjustment measures, with the private sector having yet to fill adequately the void created by the closure Of parastatal agencies.
The policies and conditions that control advances are normally described in attachments to contracts Introduction of appropriate technology New techniques are often required to upgrade agricultural commodities for Markets that demand high quality standards. New production techniques are often necessary to increase productivity as well as to ensure that the commodity Meets market demands
PROBLEMS FACED BY FARMERS
Both market failure and production problems
- Ú Inefficient management or marketing problems can mean that
- Quotas are manipulated so that not all contracted production is
- purchased Prices in advance
- Ú Contract farming can open up new markets which would
- Otherwise be unavailable to small farmers
- Ú Sponsoring companies may be unreliable or exploit a
- Monopoly position
- Ú The staff of sponsoring organizations may be corrupt,
- Particularly in the a
Advantages for sponsors
- the contract (Produce to managers’ specifications
- Ú Poor management and lack of consultation with farmers may
- Lead to farmer discontent
- Ú Farmers may sell outside extra-contractual
- marketing) thereby reducing processing factory throughput
- Ú Farmers may divert inputs supplied on credit to other purposes,
- thereby reducing yields Ú Contract farming with small farmers is more politically
CENTRALIZED THE MODEL
This is a vertically coordinated model where the sponsor purchases the crop from farmers and processes or packages and markets the product (Figure 2). Except in a limited number of cases, farmer quotas are normally distributed at The beginning of each growing season and quality is tightly controlled. A Sponsor may purchase from tens of thousands of small-scale farmers within a single project. The centralized scheme is generally associated with tobacco, Cotton, sugar cane and bananas and with tree crops such as coffee, tea, cocoaAnd rubber, but can also be used for poultry, pork and dairy production.
THE MULTIPARTITE MODEL
The multipartite model usually involves statutory bodies and private companies Jointly participating with farmers. Multipartite contract farming may have Separate organizations responsible for credit provision, production, and management, processing and marketing. In Mexico, Kenya, and West Africa, Among other countries, governments have actively invested in contract farming Through joint ventures with the private sector.19 multipartite structures are Common in China where government departments as well as township Committees and, at times, foreign companies have jointly entered into contracts With village committees and, since the early 1980s, individual farmers.
THE INFORMAL MODEL
This model applies to individual entrepreneurs or small companies who Normally make simple, informal production contracts with farmers on a Seasonal basis, particularly for crops such as fresh vegetables, watermelons And tropical fruits. Crops usually require only a minimal amount of processing. Material inputs are often restricted to the provision of seeds and basic fertilizers, With technical advice limited to grading and quality control matters.
THE INTERMEDIARY MODEL
Throughout Southeast Asia the formal subcontracting of crops to intermediaries is a common practice. In Thailand, for example, large food processing companies and fresh vegetable entrepreneurs purchase crops from individual “collectors” or from farmer committees, who have their own informal arrangements with farmers. In Indonesia, this practice is widespread and is Termed plasma. The use of intermediaries must always be approached with caution because of the danger of sponsors losing control over production and over prices paid to farmers by middlemen. In addition, the technical policies and management inputs of the sponsors can become diluted and production data distorted.
PRECONDITIONS FOR SUCCESS
A profitable market
- Sponsor must have identified a market for the planned production
- Sponsor must be sure that such a market can be supplied profitably on a long-term basis
- Farmer Must find potential returns more attractive than returns from alternative activities and must find the level of risk acceptable
- Farmer Must have potential returns demonstrated on the basis of realistic yield estimates Government Support- Regulatory Role
- Suitable laws of contract and other laws are required as well as an efficient legal system
- Governments need to be aware of the possible unintended consequences of regulations and should avoid the tendency to over regulate
- Governments should provide services such as research and, sometimes extension.
- Governments can take steps to bring together agribusiness and suitable farmers
- Provision of training and technological and managerial skills at all levels.
- Initiation and facilitation of research studies into the product under contract, in collaboration and consultation with the sponsors.
- State research institutes can particularly benefit small ventures , especially those managed by individual developers who can not sustain their own plant breeding programmed etc.
Contract farming is nothing new. During the British period there was indigo plantation through contract farming. But that was exploitative. Modern contract farming is mutually advantageous. Since the company is financially stronger than individual farmers the terms of the contract may go against the farmers. Herein the Govt. will have to come forward. India, given the diverse agro climatic zones, can be a competitive producer of a large number of crops. There is a Need to convert our factor price advantage into sustainable competitive advantage. Contract farming offers one possible solution.
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About Author / Additional Info:
I am currently pursuing Ph.D. in Agricultural Economics from SKRAU, Bikaner.