The importance of agriculture in a country’s economy lies in that it provides ecological and livelihood security and ensures its national sovereignty. In India, agriculture is facing a complex situation in the present era of globalization and liberalization, more than ever before. Farm sector’s contribution to National GDP (Gross Domestic Product) has declined over the years. The growth rate of GDP of agriculture and allied sector declined from 9.6 per cent in 1996-97 to 6.2 per cent in 1998-99 and further to 6.0 per cent in 2005-06 (Economic survey, 2006-07).
Enhancing agricultural growth to targeted 4 per cent seems to be a difficult task. Agriculture in India is not just an industry but is a way of life. The social aspect, especially employment provided by the sector, cannot be ignored. It also provides agricultural inputs to the agriculture based food industries. Timely and adequate quantity of good quality agricultural inputs is a sine qua non for smooth functioning of the agro industries. This underlying paradox of the Indian agricultural scenario has given birth to the concept of contract farming, which promises to (i) provide a proper linkage between the farm and market (ii) promote high degree of competition at the supply and market end, and (iii) minimize intermediaries in order to increase farmers’ income.
"Contract farming is defined as those contractual arrangements, between farmers and companies, whether oral or written, specifying one or more conditions of production and / or marketing of an agricultural product (Roy, 1963)."
There are several agricultural and horticultural crops such as tomatoes, potatoes, chillies, gherkin, baby corn, rose, onions, cotton, wheat, basmati rice, groundnut, flowers, medicinal plants etc. produced in some form of contractual arrangements with the farmers in India. Big corporate houses such as Hindustan Lever, pepsi foods, A.V. Thomas, Daburs, Thapars, Marico, Godrej, Mahindra, Wimco, etc. undertake contract farming for many crops apart from several small players. Contract farming system provides economic security to the farmers by providing assured price for agricultural produce. Endeavours of contract farming by Pepsi in Punjab and Hindustan Lever Limited (HLL) in Karnataka are some of its examples. Punjab Agro revealed that better and reliable assured income through contract farming reduced the risk and uncertainty in the commodity price fluctuation. Growers are ensured stable and sustained market for their produce.
Contract farming framework that must be considered when planning and implementing such venture (FAO, 2001
Types of Contracting Farming
There are several types of contract farming ranging from just buying certain quantity at a pre-determined price to having complete control over production from supply of seed to harvesting. However, basically, there are five models of contract farming that are accepted globally.
1. Centralized model:
The contracting company provides support to the production of the crop by smallholder farmers, purchases the crop from the farmers, and then processes, packages and markets the product, thereby tightly controlling its quality. This can be used for crops such as tobacco, cotton, barley, sugarcane, banana, coffee, tea, cocoa and rubber. This may involve thousands of farmers. The level of involvement of the contracting company in supporting production may vary.
2. Nucleus Estate model:
This is a variation of the centralized model. The promoter also owns and manages an estate plantation (usually close to a processing plant) and the estate is often fairly large in order to provide some guarantee of throughput for the plant. It is mainly used for tree crops, but can also be used for, e.g., fresh vegetables and fruits for export.
3. Multipartite model:
The multipartite model usually involves the government, statutory bodies and private companies jointly participating with the local farmers. The model may have separate organizations responsible for credit provision, production, processing, marketing and management of the produce.
4. Informal model:
This model is basically run by individual entrepreneurs or small companies who make simple, informal production contracts with farmers on a seasonal basis. The crops usually require only a minimal amount of processing or packaging for resale to the retail trade or local markets, as
with vegetables, watermelons, and fruits. Financial investment is usually minimal. This is perhaps the most speculative of all contract farming models, with a risk of default by both promoter and farmer.
5. Intermediary model:
This model has formal subcontracting by companies to intermediaries (collectors, farmer groups, NGOs) and the intermediaries have their own (informal) arrangements with farmers. The main disadvantage in this model is it disconnects the link between company and farmer.
Advantage of Contract Farming for farmers
The prime advantage of a contractual agreement for farmers is that the sponsor will normally undertake to purchase all produce grown, within specified quality and quantity parameters. Contracts can also provide farmers with access to a wide range of managerial, technical and extension services that otherwise may be unobtainable. Farmers can use the contract agreement as collateral to arrange credit with a commercial bank in order to fund inputs. Thus, the main potential advantages for farmers are:
- 1. Provision of inputs and production services
- 2. Access to credit
- 3. Introduction of appropriate technology
- 4. Skill transfer
- 5. Guaranteed and fixed pricing structures and
- 6. Access to reliable markets.
Disadvantage of Contract Farming for farmers
For farmers, the potential problems associated with contract farming include:
- Increased risk
- Unsuitable technology and crop incompatibility
- Manipulation of quotas and quality specifications
- Domination by monopolies and
- Indebtedness and over reliance on advances.
How can contract farming be successful?
- It will work if the farmers have better bargaining power.
- They have to be legally protected.
- Furthermore, in contract farming, it is extremely important to understand the contracting operations.
- The terms and conditions of the contract are crucial. The contracts need to be more transparent.
- It has been found that quite often the farmer had not even seen the contract and did not know what the terms and conditions were.
Banshi Lal Verma
Ph. D. Scholar, Department of Agricultural Economics,
S.K.N. College of Agriculture, Jobner - 303329