This article is written by Abanti Bose, studying at Amity University Kolkata, India. The article talks about benefits, challenges, and impact of contract farming among the rural population in India. It also states some famous cases of contract farming being successfully operated by top Indian companies which aid in the welfare of farmers and promote sustainability.

This article has been published by Sneha Mahawar.

What is contract farming

Contract farming is a type of agreement between farmers and buyers for agricultural production of their outputs. Contract farming also establishes conditions for producing and marketing a farm product or products. The agreement lays down necessary conditions such as producing the agricultural products in the specified time, quantity and quality. The farmer must meet the standards determined by the purchaser and the purchaser in return commits to purchase the said production and aid the farmer by supplying required farm input, land preparation and the provision of technical advice. Contract farming includes simple purchase agreements, loose buying arrangements, and supervised production with input provision comprising loans and risk coverage. 

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The concept of contract farming is not new to India, it has been practised since British rule, even after the independence contract farming was practised in the commercial production of seed and sugarcane, milk, tomatoes, and poplar. In 1988, despite opposition, India allowed PepsiCo to procure and process some horticulture crops in Punjab through a joint venture with a state-owned Punjab Agro Industries Corporation. This venture was later extended to the production of tomatoes under the contract farming system. These measures led to the expansion of contract farming in India. 

Objectives of contract farming

The objectives of contract farming are as below :

  1. To reduce the load in the central and state-level procurement system.
  2. To increase private sector investment in the agricultural sector.
  3. To generate a steady source of income for the farmers.
  4. To develop gainful employment in rural communities. 
  5. To help in promoting a self-reliance system in the rural areas by gathering locally available resources and expertise.
  6. To reduce migration from rural to urban areas.

Features of contract farming

The features of contract farming are:

  1. It helps in creating new markets for agricultural products.
  2. It maintains the adequate quality of the products.
  3. It minimises the transaction costs between the parties.
  4. It helps in facilitating the diffusion of modern techniques.
  5. It shares the risks between the parties involved.
  6. It helps in the proper distribution of information among the farmers.

Types of contract farming business models

The different types of contract farming business models are as follows:

Informal model

This is the most unreliable and transient model of all the contract farming models. It also poses a risk of facing default by both the farmer and the agent. However, it also depends on the kind of relationship shared by the parties, contractual parties or long-term partnerships which may reduce the risk of opportunistic behaviour. Some aspects of this contract farming model are:

  • The success and outcome of these agreements depend on the availability and quality of external services.
  • Small firms enter into these agreements by conducting simple and informal seasonal production contracts with smallholders.
  • In this model typical products are produced such as fresh fruits or vegetables for local markets, etc. requiring minimal packaging.

Intermediary model

In this model, the consumer employs an intermediary such as an agent, collector, aggregator or farmer organisation to hire the farmer formally or informally. Characteristics of this model are :

  • The intermediary provides embedded services (usually passing through services provided by buyers against service charges) and purchases the crop. This model can produce the desired outcome if well-designed and incentive structures are adequate. 
  • However, this model can have some disadvantages such as providing incentives to the farmers, quality assurance, regulatory of supplies, farmers might not benefit from technological transfer, reduced pay for the farmers, etc.

Multipartite model

This contract farming model includes numerous entities such as governmental statutory bodies, private companies and occasionally financial institutions. The unique characteristics include: 

  • Separate organisations such as cooperatives may provide embedded services like credits, extension, marketing, etc.
  • This model may feature community companies with domestic or foreign investors for processing.
  • It may also involve the equity share schemes for the producers.

Centralised model

It is the most common type of contract farming model. In this model, the buyer’s involvement may vary from minimal input provision to control of most production aspects. This model is characterised as:

  • The buyer sources products and provides services to large numbers of small, medium or large farmers.
  • The relationship between the buyer and the farmer is strictly vertically organised.
  • The quality, quantity, and delivery conditions are determined at the beginning of the season.
  • The production and harvesting processes are tightly controlled, and sometimes directly implemented by the buyer’s staff.

Nucleus estate model

In this model of contract farming, the buyer sources product from their own plantations or estates and from contracted farmers. The buyer in the nucleus estate model invests in land, machines, staff and management. The special features of this type of contract farming model include :

  • It guarantees supplies to assure cost-efficient utilisation of installed processing capacities and to satisfy firm sales obligations.
  • The nucleus estate model is often used for research, breeding, etc.
  • This model was often used in the past for state-owned farms that re-allocated land to former workers.

Advantages of contract farming 

The practice of contract farming in the 21st century has proved to be beneficial for producers, farmers and agricultural processing firms. 

  1. It enables the farmers in the rural areas to be more accessible to technology, credit, marketing channels and required information at a much less transaction cost.
  2. It decreases the risk of production and marketing costs, thus enabling the farmers to produce the products hassle-free.
  3. Contract farming opens up new marketing opportunities for farmers, which otherwise would not be easily available to small scale farmers.
  4. Contract farming ensures a higher production rate and better quality at a much lower cost.
  5. It also provides technical assistance to the farmers.
  6. Contract farming facilitates direct private investment in agricultural activities.
  7. Farmers and producers enter into the contract by reading the terms and conditions of the agreement so that they are well aware of their rights and responsibilities. 

Challenges of contract farming

The challenges of contract farming are mentioned below.

  1. Contract farming is often criticised as it favours large farmers and firms over the bargaining power of small scale farmers.
  2. Producers frequently face problems such as undue quality cuts on produce by firms, delayed deliveries at the factory, delayed payments, low prices and pest attacks on the contract crop which raised the cost of production.
  3. In India, the lack of enforceability of contracts fails to protect the rights of the farmers.
  4. Also, women get less access to contract farming than men.

Contract farming in India

In India, the agricultural sector supports the livelihood of millions of people. However, due to the decrease in income, the farmers are opting for alternate ways to earn money. Thus, in order to make more money, the farmers would give their land on a contractual basis. Contractual farming has proved to be disastrous for a lot of people associated with the agricultural sector.  

  • Contractual farming would give entry to the corporates in the agriculture sector which would enable them to acquire the land rendering numerous farmers penniless.
  • Sustainable development is rarely on the corporate agenda as they intend to maximise their profits, therefore, they would hardly care about the preservation of the land and soil.
  • Contract farming could lead to the farming of foreign varieties being grown on Indian soil causing malnourishment among the Indian population as locally grown varieties of crops have provided nutrition and sustenance to the natives for centuries.
  • Contractual farming would also employ merchandised farming leading to a decrease in farm labourers.
  • Corporates tend to deploy machinery which leads to unemployment in the agricultural sector.
  • In the corporate sector in order to maximise the results would use chemical-based fertilisers that are detrimental to the health and causes tremendous damage to the soil.

Contractual farming is an extraordinary idea but it must be incorporated into the agricultural sector so that it not only benefits the producers but also looks into the welfare of the farmers and must aid in the preservation of land and soil. 

Policies related to contract farming in India

In order to regulate and develop the practice of contract farming, the Government of India has been actively advocating to reform the agricultural marketing laws to provide a system of registration of contract farming sponsors, recording of their agreements and a proper dispute settlement mechanism for the orderly promotion of contract farming in the country. 

So far, 21 states such as; Andhra Pradesh, Arunachal Pradesh, Assam, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Madhya Pradesh, Mizoram, Nagaland, Odisha, Punjab (separate Act), Rajasthan, Sikkim, Telangana, Tripura and Uttarakhand have amended their Agricultural Produce Marketing Regulation (APMR) Acts to provide for contract farming and of them, only 13 states like; Andhra Pradesh, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jharkhand, Karnataka, Maharashtra, Madhya Pradesh, Odisha, Rajasthan and Telangana have notified the rules to implement the provision.

NABARD’s role in contract farming 

National Bank For Agriculture And Rural Development (NABARD), developed a special refinance package for contract farming arrangements that aim to promote increased production of commercial crops and creation of marketing opportunities for the farmers. The steps taken are mentioned below:

  • Fixation of higher scale of finance for crops under contract farming.
  • Providing financial assistance to the farmers.
  • Special Refinance package for financing farmers for contract farming in AEZs.
  • Providing a term facility for repayments to the farmers.

Contract farming companies in India

However, despite the challenges, some famous instances of contract farming in India have been operating successfully. Some very famous instances of contract farming in India are listed below.

Dabur contract farming

Dabur contract farming is operated by Dabur India Ltd., and it is among the top ten contract farming companies in India. In the past, it has organised 12 training camps attended by over 800 farmers and distributed 5 lakh seeds for free.

It focuses on growing medicinal plants and herbs with the help of sustainable techniques. Local NGOs assist in training and educating the farmers about the latest trends and techniques of contract farming to boost production.

Tata coffee ltd.

As the name suggests it falls under the Tata group. It grows different varieties of coffee like green coffee beans and instant coffee. The company also focuses on sustainable farming. It is a global conglomerate with 100 companies operating across virtually all sectors and geographies. 

Patanjali contract farming

The company explored contract farming with the aim of providing farmers with much-needed monetary security and development opportunities. It provides the farmers with agriculture-related information, equipment, and technical aid to keep farmers profitable. Patanjali contract farming mainly focuses on cultivating ayurvedic herbs for the numerous Patanjali products.

Himalaya herbal healthcare

The company relies on rural communities to develop and procure medicinal herbs. The Himalaya herbal healthcare pays upfront and the amount is higher than the market prices to support rural communities to stay profitable.

Model Contract Farming Act, 2018

The Model Contract Farming Act, 2018 was introduced by the Ministry of Agriculture and Farmers Welfare. The objective of this Act was to educate farmers about the better pricing of their products, create job opportunities, and reduce post-harvest losses.  

Incorporation of Contract Farming (Promotion and Facilitation) Authority

The Act establishes and incorporates Contract Farming (Promotion and Facilitation) Authority, for the purpose of exercising the powers conferred by the Act. The authority comprises a Chairperson as the head of the authority to be appointed by the government in the field of agricultural sciences, agricultural marketing, agri-business, agri-based trade and commerce, land revenue and management, etc. Two other persons are appointed by the government in the field of agricultural sciences, agricultural marketing, agri-business, agri-based trade and commerce, land revenue and management, etc having experience not less than twenty years and must be associated with the subject and are holding or have held the position, not below the rank of Principal Secretary in State and Joint Secretary in the Government. One member of the authority must belong to the farmer’s association, at least one member of the authority must be a woman and a Chief Executive Officer (CEO) will be appointed by the State Government, not below the rank of director of state.

The Act lays down the tenure of the office and conditions of service by the officers. Salary allowance and other terms and conditions of the Chairperson and other members are also stated under Section 6 of the Act. 

Powers and functions of the authority under the Act

Under this Act, it is the duty of the Authority to oversee the proper functioning of the provisions of the Act and to make necessary suggestions to the Central and State governments for the improvements of contract farming in the country. The Authority has the power to carry out suo moto inquiry where it is required. And the inquiries carried out by the Authority will have the same power as any Civil Court established under the Code of Civil Procedure, 1908 in the following matters such as:

  • Summoning and enforcing the attendance of the person,
  • Requiring the discovery and inspection of the documents,
  • Receiving evidence on affidavit,
  • Issuing summons for examination of witnesses or documents.

Furthermore, it is the duty of the authority to prepare a report regarding the activities of the authority in the previous year, records of the work done, and the annual accounts, and such a report must be duly submitted to the government for publication. 

Finance

The government after the due approval of the State Legislative bodies may grant such a sum of money to the Authority which will be utilised for the purposes under the Model Contract Farming Act, 2018. A fund shall be constituted as laid down in Section 16(2) of the aforesaid Act known as the State/UT Contract Farming (Promotion and Facilitation) Authority Fund, which shall be credited by the grants provided by the government, all the sums received by the authority, all the penalties collected, etc. 

The fund will be utilised for paying the salaries, allowance of all the members, and all the necessary functions which must be carried out by the Authority as laid down in the Act.

The way forward

The following schemes can be implemented to improve contract farming in India.

The project 

The project should aim to work in a certain way that:

  • Does not result in farmers’ over specialisation in certain crops which results in harming the local food security.
  • It must promote sustainable farming practices and not promote dependence on chemicals or spending too much on expensive seeds or other resources.
  • It should promote the land rights of farmers.
  • It should also lead to higher incomes for farmers.

Contractual terms

The contractual terms concerning the project.

  • The project should be negotiated transparently and reasonably among all the parties, and it should provide adequate information on the financial aspects of the project and the risks and likely impacts.
  • The project should consider alternative farming models.
  • The project should build in a clause for the renegotiation of the contract at agreed intervals.
  • The project should prevent unfair practices in buyer-farmer relations, and not prohibit or discourage farmers from associating with other farmers to compare contractual clauses.
  • The project should establish proper mechanisms for resolving disputes.

The role played by the government

The government plays an important role in administering the functions of the project, such as:

  • The government must have appropriate legislation to ensure that farmers’ rights can be enforced under the provisions of the project.
  • The government should establish bodies to resolve disputes between the parties.

Conclusion

Contract farming is a lucrative proposition. Therefore, it must be followed with the assistance of proper rules and guidelines and must be governed by the administrative authority for it to function in India. Contract farming can not only be beneficial for the producers in optimising maximum output but also looking after the welfare of the farmers and helping in their economic prosperity. Therefore, the Government of India is taking several measures and implementing new laws in order to enhance agricultural productivity, farmers’ profit and reduce poverty. These crucial steps taken by the government would facilitate the smooth implementation of contract farming schemes and boost the productivity of the agricultural sector.

References

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