The Ultimate Contract Farming Guide

profile picture BookMyCrop May 31, 2022

The future of contract farming in India seems bright, thanks to rising middle-class awareness of food safety and quality, as well as the quality needs of the export market in industrialised countries.
The Indian economy welcomes numerous international corporations to intervene in the conventional agricultural system in order to achieve quick agricultural development and high production.
Agriculture is underdeveloped, with insufficient agricultural credit facilities and infrastructure.
Contract farming has a number of negative effects on the environment, including over-exploitation of groundwater, excessive use of fertilizers and pesticides, which can cause health problems and mono-cropping, which reduces soil fertility.
The contract farming concept was initially discovered in Taiwan in 1895 by the Japanese government. Contract farming has a long history in India, dating back to the time when Europeans first introduced opium and indigo cultivation in the Bengal region, under the control of the East India Company.

What Is Contract Agriculture and How Does It Work?

  • Contract farming or marketing is an agreement between a farmer, a producer and an agribusiness firm to produce a specific quality and quantity of produce at a specific price.
  • It could be purely a procurement transaction, or it could be used to enhance the supply of inputs or something else entirely.
  • This is a critical start-up for lowering transaction costs by developing farmer processor links in addition to the traditional methods of connecting farmers to consumers.

Contract Farming Models:

Model of Control:
This type of farm is well-known in developing countries for high-value crops such as cotton, banana, coffee, tea, cocoa or rubber. The contracting company provides necessary support to the farmers for the production of required crops purchases the crop from the farmers and then packages and markets the product while closely controlling its quality.

Model with Multiple Parts:
It's a common joint venture technique in which statutory entities or state agencies collaborate with private enterprises and farmers.
Different specialized organizations for credit provision, processing, distribution, or marketing, for example, may be included in the multipartite system. In West Africa, Mexico, and Kenya, for example.

Model of Informality:
It usually involves tiny start-ups, entrepreneurs, or businesses who enter into seasonal informal contracts with farmers for products such as fresh vegetables or tropical fruits.
Simple informal seasonal production contracts with smallholders or small land accessible farmers are examples of small businesses.
The success of the project is contingent on the availability and quality of external extension services. If embedded services are provided at all, they are limited to the delivery of basic inputs and on rare occasions, grading and quality control.

Model of the Intermediary:
Companies make formal sub-contracts for crop production with intermediaries (such as agents, farmer groups, or NGOs) under this paradigm. In most cases, the intermediaries enter into informal arrangements with farmers in order to fulfil their commitments under legal contracts with companies.
The intermediate model offers embedded services as well as crop purchases. This model can function if it is well-designed, with a suitable incentive structure and control mechanisms in place.

Regulatory Framework in Place:
In a few jurisdictions, contract farming now requires registration with the agricultural produce marketing committee (APMC). To engage in contract farming, the APMC is paid market cost and levies. The Model APMC Act of 2003 prompted 14 states to publish contract farming rules.

Contract Farming's Environmental Impact:
Monocultures emerge from contract farming, which reduces soil quality and has negative consequences for natural resources, the environment, humans and animals. It leads to the use of groundwater, as well as soil salination. Pollution and a reduction in soil fertility.
Firms are unconcerned since the costs of such consequences are externalised in terms of the firm. Contract Overexploitation of groundwater, excessive use of fertiliser and pesticides resulting in health problems and mono-cropping resulting in deterioration of soil quality are all examples of how farming has an impact on the environment.
Agribusiness businesses advised usage of pesticides that were not environmentally friendly to protect cotton crops from insects.

Contract Farming's Benefits:

Farmers Benefits Include:
Better inputs and production services are available. It also entails providing basic inputs such as seeds and fertilisers in order to improve productivity.
Land preparation, field cultivation and harvesting, threshing, as well as free training and extension services are provided by sponsors to farmers.

Credit is available quickly:
Farmers may be able to obtain financing to finance production inputs when they engage in contract farming.
Crop loans with the sponsor's guarantee, i.e. when the contract acts as collateral, should be arranged with commercial banks or government organizations.

Improved technology applications:
Because it has a strong economic interest in enhancing farmers production, private agribusiness will usually offer technology more diligently than government agricultural extension programmes.

System of guaranteed pricing:
Farmers receive an open market in exchange for their crops, which is based on current market prices as well as their ability to discount with consumers.

Sponsorship benefits include:
Overcoming land limits is a challenge.
Most vast expanses of appropriate land are now either traditionally owned, prohibitively expensive to purchase, or unavailable for commercial development.
Contract farming, as a result, provides access to crop production lands that would otherwise be unavailable to a corporation, with the added benefit of not having to acquire it.

Consistency in production and shared risk:
Sponsors can share the risk of crop failure due to bad weather, disease and other factors by working with contracted farmers.
Purchasing raw materials through estate and contract farming is substantially more trustworthy than purchasing them on the open market.

Contract farming's issues include:

  • Possibility of a higher level of risk
  • Farmers crop sales outside of contractual agreements
  • Constraints of social and cultural nature
  • Corruption
  • Agro-inputs of poor quality
  • Unemployment in the area is high.

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