Agricultural Sector and Marketing Reforms – eNAM, Model APMC Act, Eco Survey Reco, etc.

Explained: Contract Farming and its benefitsPriority 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Contract Farming

Mains level : Contract Farming and its feasibilty


The Odisha government has promulgated an ordinance allowing investors and farmers to enter into an agreement for contract farming in view of the continuing uncertainties due to the pandemic.

Practice question for mains:

Q. What is Contract Farming? Examine its potentials and feasibility from the perspective of farmers’ interests.

Moving on with Odisha’s law

  • The Odisha ordinance is aimed at facilitating both farmers and sponsors to develop mutually beneficial and efficient contract farming system.
  • It is argued that the new system will lead to improved production and marketing of agricultural produce and livestock while promoting farmers’ interest.
  • The agreement will be entered into between the contract farming sponsor, who offers to participate in any component or entire value chain including preproduction, and the contract farming producer (farmers), who agree to produce the crop or rear the livestock.
  • Both the loans and advances given by the sponsor to the producer can be recovered from the sale proceeds of the produce.
  • And in no case realized, recovery can be through the sale or mortgage or lease of the land in respect of which the agreement has been entered into.

What is Contract Farming?

  • Contract farming (CF) 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.

Some business models in CF

1) Informal model – This model is the most transient and speculative of all contract farming models, with a risk of default by both the promoter and the farmer. However, this depends on the situation: interdependence of contract parties or long-term trustful relationships may reduce the risk of opportunistic behaviour.

2) Intermediary model – In this model, the buyer subcontracts an intermediary (collector, aggregator or farmer organisation) who formally or informally contracts farmers (a combination of the centralised/ informal models).

3) Multipartite model – This model can develop from the centralised or nucleus estate models. It involves various organisations such as governmental statutory bodies alongside private companies and sometimes financial institutions.

4) Centralized model – In this model, the buyers’ involvement may vary from minimal input provision (e.g. specific varieties) to control of most production aspects (e.g. from land preparation to harvesting). This is the most common CF model.

Advantages of Contract Farming:

To the farmers:

  • It helps in skilling of farmers as they learn to use various resources efficiently like fertilizer, pesticides and get in touch with new technology in some cases.
  • Farmers get the opportunity for diversification of crops.
  • Price risk is drastically reduced as many contracts specify prices in advance.
  • Contract farming can open up new markets which would otherwise have been unavailable to small farmers. The farmers can also get easy credit from the Bank under contractual agreements.
  • In the case of agri-processing level, it ensures a consistent supply of agricultural produce with quality, at the right time and lesser cost.

To the Client:

  • They get uninterrupted & regular flow of raw material of high quality which helps in protection from fluctuation in market pricing.
  • Long term planning of business is possible as they have a dedicated supplier base of raw material.
  • Concept of contract farming can be extended to other crops also which helps to generate goodwill for the organisation.

Limitations

  • Contract farming arrangements are often 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 an 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.
  • Contracting agreements are often verbal or informal in nature, and even written contracts often do not provide legal protection in India that may be observed in other countries. Lack of enforceability of contractual provisions can result in a breach of contracts by either party.
  • Single Buyer – Multiple Sellers (Monopsony).
  • Adverse gender effects – Women have less access to contract farming than men.

Also read

What is contract farming? Critically analyze the features of the draft “Model Contract Farming Act – 2018”. (150 W)

With inputs from Vikaspedia

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