Overview About Contract Farming

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Posted on 4th October 2010 by Swapnil Waikar in Uncategorized

What is Contract farming?

Farming is an age-old means of livelihood for millions of Indians. However, there have been few systems/models in which farmers are assured of a market for their produce, leave alone a remunerative price.
Farmers have on occasion had to throw their produce away for want of buyers. This is one side of the coin. On the other is the agri-based and food industry, which requires timely and adequate inputs of good quality agricultural produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of Contract Farming, which promises to provide a proper linkage between the ‘farm and market. Farmers in India are all set to see a sea-change in agriculture sector soon, thanks to contract farming. contract farming is emerging as an important institutional arrangement in India that promotes coordination between production and marketing activities.
Contract farming involves a pre-agreed price between the company and the farmer. The agreement is defined by the commitment of the farmer to provide an agricultural commodity of a certain type at a time and a price and in the quantity required by a committed buyer, mostly a large company.
It is clear why the business sector is gunning for contract farming. They seek to integrate the supply chain to ensure timely availability of quality and quantity of raw material. Significantly, it also reduces the procurement cost for them by doing away with the middlemen. It leads to significant gains for them, as not only do they get the raw material as per their specific demands, the cost is also much less.
It is also believed that the participation of the corporate sector in the farming segment will play a crucial role in technology transfer, capital inflow as well as lead to assured markets for crop production.
The model which is most popular in the country today is the one in which the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contracts vary according to the crops grown, the agencies involved, the farmers themselves and technologies and the context in which contract farming is taken up. Generally, a farmer’s participation is limited to production in the fields.
However, in the present context, contract farming is clearly a win-win situation for both the corporates and the farmers. Agriculture sector is facing a number of problems in the country and farmers actually don’t have many options in the matter of deciding whether or not to go in for contract farming.
With rising debt and soaring seed and fertiliser costs, contract farming seems to be the only choice left open to them. This is mainly because the company provides all the material including seeds as well as technical know-how and there is also a guarantee of purchase of the produce after harvest. In most cases, the minimum price of the produce is fixed in advance. In the present scenario, the increasing number of farmers’ suicides is seen as a reflection of the fact that agriculture is no longer seen as a profitable venture.
This makes the economic security offered by the contract farming very attractive. The detractors of the contract farming believe that far from being a panacea for agriculture sector, contract farming is likely to increase the problems.
The main concern is that the land, which is currently used to grow staple crops like wheat and rice, will be used to grow crops required by the food-processing industry, which also has a significant overseas market. The switch to contract farming, therefore, leads to a rise in exports.
The main thing is that farmers don’t have any role to play in contract farming except providing the corporates with labour and land. About 70 per cent of the population is dependent on agriculture.

Contract farming is defined as a system for the production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the producer/ seller to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer.
Contract farming is an organizational arrangement that allows firms to participate in and exert control over the production process without owning or operating the farms. Independent growers perform the cultivation.

What are the different types of contracts?
The contracts can be classified into three, not mutually exclusive categories viz., market specification, resource providing and production management. The market specification contracts are pre-harvest agreements that bind the firm and grower to a particular set of conditions governing the sale of the crop. The conditions specify price, quality and pricing. Resource providing contracts oblige the processor to supply crop inputs, extension or credit, in exchange for a marketing agreement.
Production management contracts bind the farmer to follow a particular production method or input management, usually in exchange for a marketing agreement or resource provision. In various combinations these contract forms permit the firms to influence the production technology and respond to the markets without having to operate their own plantations.

Contract farming is not totally new to our country. When the white revolution was born in India, Contract farming also came into being by the introduction of Operation Flood I & II. Milk cooperatives of Gujarat under the banner Amul are running examples of a type of Contract farming. The Sugar Cooperatives of Maharashtra and also in many states, growing of fruit crops (papaya, passion fruit, pine apple) and seed cotton in Tamil Nadu on similar pattern, cultivation of oil seeds especially Sunflower in North are examples of the currently practiced systems of Contract farming.

Why Contract farming in India?
1. In our country the farmers face the problems of traditional technology and management practices, little bargaining power with input suppliers and produce markets, inadequate infrastructure and market information, lack of post-harvest
management expertise, poor package of produce and inadequate capital to grow a quality crop. They are waiting for change for better living standards.
2. Contract farming helps small farmers to participate in the production of high value crops like vegetables, flowers, fruits etc and benefit from market led growth.
3. Extensive areas are required by the Agroprocessors for an intensive cultivation to build an uniform method of cultivation that would reduce their production and transaction costs with the growers.
4. Effective & efficient monitoring of production operations, extension activities and credit delivery in a conjugal area is easy in Contract farming.
5. Contract farming will maximise the profits to the farmers and minimise risk in farming like production related risks, transfer price risk and produce risk.
6. There is a tendency amongst the users to go in for environmental friendly, value added quality agroproducts in their daily life.
7. The farmers find it easy to get under one roof inputs, technological & extension services, postharvest processing facilities and more importantly, the marketing of their produce with assured cash returns.
8. Contract farming facilitates more and more private Companies to develop backward linkages with the farmers.
9. Access to crop loans at attractive terms through tie-ups with Banks is facilitated through contract farming.
10. There is a tendency amongst farmers to go in for an alternate cropping systems for better monetary returns.

What is the present stage of contract farming in India?
The Union Agriculture Ministry is putting its weight behind contract farming drafting a model law to give legal support to a practice that can give small farmers access to modern technology and resources. An institutional mechanism is being contemplated to record contractual arrangements and help resolve possible disputes.

The farm ministry detailed an agenda for expansion of agricultural credit to the tune of Rs.7,36,570 cr. during 10th Plan and the official note to the finance ministry gave financing of contract farming by banks priority.

Agricultural and Processed Food Products Development Authority is developing policy guidelines on contract farming for forwarding to state governments for implementation. The guidelines will focus on regularising the relation between producers and processors of food materials. During this year, 20 Agri-Export zones will be set-up in different states that would integrate the complete process from production to export stage and contract farming is being
encouraged to rope in local farmers to join these export zones as members to pool in their produce.

The national agricultural policy, announced last year, had highlighted the need for an increase inthe private sector participation in farming by leasing private land for agri-business and contract farming to private companies.

The Standing Committee on Food Management and Agricultural Exports had recommended suitable amendments to the State Agricultural Produce Marketing Regulation Act to promote development of marketing infrastructure in private and co-operative sectors, direct marketing and contract farming.

Contract farming is already undertaken in tea estates by major companies including Pepsi Food, ITC, Hindustan Lever and for crop diversification by Mahindra Shubhlab Services with Punjab Agro Food grains Corporation;Escort Limited with Punjab Agro for Basmati rice and durum wheat besides drawing a plan to set up grain handling and storage facilities like conveyor belts and silos and earmarking Rs.1 billion for contract farming and creating post-harvest infrastructure in Punjab and other states in next 3 years.

Punjab plans to diversify crops in 1.5 million acres in next 4 years through contract farming. Already 3 lacs acres under contract farming have been diversified from paddy and wheat to commercial crops like maize, barley, white
mustard, Basmati rice and oil seeds during this year.

In Karnataka, wide varieties of vegetables, gherkins, lime, pomegranate, grapes for resins, pearl onions, asparagus and mangoes for pulp are already covered under contract farming.

Our Bank financed under contract farming to the tune of Rs.14.86 lacs in Villupuram, Chiitoor and Salem districts for gherkins,cotton, maize etc. Financing for medicinal plants has been taken up under contract farming.

What are the advantages for Bankers?
More coverage under credit to agriculture is facilitated with comparatively less production, processing and marketing risks with the spread of risk between different players in the field.

There will be reduction in transaction cost of lending as the intermediaries is less.

Banks can go in for diversification in financing practices and coverage of crops.

As there would be tie-up with reputed companies, the risk of NPA would be the least. The farmers realise remunerative and assured prices for their produce with better surplus that Banks could tap for their resources by way of deposits.

Being part of second green revolution it enhances the emotional bondage between farmer-banker relationship and thereby giving customer-delight to the backbone of this country viz. the farmers. To conclude, Contract farming is a ‘grow to order’ way of farming that facilitates easy access to millions of farmers for an assured and organized production, processing, marketing and credit linkages to usher in Green Revolution II in India.

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