Contract Farming

What is Contract Farming?

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.

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

  • To promote a steady source of earnings at the individual farmer level.
  • To expand private sector investment in agricultural business.
  • To inspire financially rewarding employment opportunities in rural communities, especially for landless
    agricultural labour.
  • To bring down the burden of central and state-level procurement systems.
  •  To minimize migration from rural to urban areas.
  • To create a market focus on crop selection by Indian farmers.
  • To promote value addition and processing.
  • To bring down as far as feasible, any seasonality associated with such employment.
  • To encourage rural self-reliance by pooling locally available resources and expertise to meet new
Tamil Nadu has become the first State in the country to enact a law on contract farming with President giving assent to the Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act.


Advantages of Contract Farming

First 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.

Second, 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, and cold storage and design the logistics in long term.

Third it makes small-scale farming competitive. Small farmers can access technology, credit, marketing channels and information while lowering transaction costs.They the assured market for their produce at their doorsteps, reducing marketing and transaction costs.

Fourth 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.

Fifth, 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.

Last 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.


Problems related to Contract farming in India:

First, very 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.

Second, the medium size 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.

Third 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.

Fourth, 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.

Last, 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.


Salient features of the Model Contract Farming Act, 2018 are:

  1. The Act lays special emphasis on protecting the interests of the farmers, considering them as the weaker of the two parties entering into a contract.
  2. In addition to contract farming, services contract all along the value chain including pre-production, production and post-production have been included.
  3. “Registering and Agreement Recording Committee” or an “Officer” for the purpose at district/block/ taluka level for online registration of sponsor and recording of agreement is provided.
  4. Contracted produce is to be covered under crop/livestock insurance.
  5. Contract framing is to be outside the ambit of the APMC Act.
  6. No permanent structure can be developed on farmers’ land/premises.
  7. Promotion of Farmer Producer Organizations (FPOs)/Farmer Producer Companies (FPCs) to mobilise small and marginal farmers has been provided.
  8. It ensures buying of the entire pre-agreed quantity of one or more of agricultural produce, livestock or its product of the contract farming producer as per the contract.
  9. Contract Farming Facilitation Group (CFFG) is being created for promoting contract farming and services at village/panchayat the level provided.
  10. An accessible and simple dispute settlement mechanism at the lowest level possible is provided for the quick disposal of disputes.


Way Forward

  • 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.
  • 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.
  • Efforts should be made to encourage softer means for enforcement such as risk-sharingT mechanisms in contracts, renegotiation options, and simplified and transparent contract terms.
  • 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.
  •  Technology should be leveraged and Research and Development should be promoted. Some of the areas which can be explored are:
    • GIS/Remote Sensing
    • Soil Mapping
    • Crop Clinics
    • Farm experimental Facilities.





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