Contract Farming
The GOI passed three farm reform bills. This is on the backdrop of the Government’s ambitious plan of doubling the farm income by 2022. The bill allows India’s 80% small holder farmers much needed technology access, Financial inclusion and market linkage. It also eliminate the autonomy of APMC’s and the intermediaries.
One of the bills provides the farmers to enter into contract farming- that is signing a written contract with a company to produce what the company wants in return of a healthy remuneration.
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. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser. In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation and the provision of technical advice.
Advantages
Contract farming benefits both for the farm-producers as well as the agro-processing firms.
Producer/farmer
- Makes small scale farming competitive – small farmers can access technology, credit, marketing channels and information while lowering transaction costs
- Assured market for their produce at their doorsteps, reducing marketing and transaction costs
- 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.
- It also ensures higher production of better quality, financial support in cash and /or kind and technical guidance to the farmers.
- In case of agri-processing level, it ensures consistent supply of agricultural produce with quality, at right time and lesser cost.
Agri-Business
Optimally utilize their installed capacity, infrastructure and manpower, and respond to food safety and quality concerns of the consumers.
- Make direct private investment in agricultural activities.
- The price fixation is done by the negotiation between the producers and firms.
- The farmers enter into contract production with an assured price under term and conditions.
Challenges
- Contract farming arrangements are sometimes criticized for being biased in favour of firms or large farmers, while exploiting the poor bargaining power of small farmers.
- Problems faced by growers like undue quality cut on produce by firms, delayed deliveries at the factory, delayed payments, low price and pest attack on the contract crop which raised the cost of production.
- Single Buyer – Multiple Sellers (Monopsony) .
