Contract farming refers to a system in which bulk purchasers, including agro-processing, exporting and trading units, enter into contracts with farmer(s) to purchase a specified quantity of any agricultural commodity at a pre-agreed price.
- 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.
Benefits of Contract Farming
- Contract farming enhances market linkages and reduces dependence on middlemen.
- Integrate farmers with bulk purchasers including exporters, agro- industries etc. Since the factories will be next to clusters of farms, wastages will be very largely eliminated.
- Better price realization through mitigation of market and price risks to the farmers. It facilitates better access to technology, crop diversification, extension services, financing and crop insurance.
- Farmers no need to transport their produce to the mandis, as sponsors usually collect the produce from the farm gate.
- This reduces farmers’ cost and, thereby, translates into increased incomes. Ensures smooth agro raw material supply to the agro industries. Food-processing will get a boost as an employment generator.
- Encourage the new generation to takeup farming instead of migrating to cities. Rural women, instead of being employed as farm labourers will work in sorting and grading of fruits and vegetables.
- It also gives farmers an alternative in cases where the procurement mechanism is ineffective.
Challenges in contract Farming
- Contract farming can be detrimental by encouraging large monoculture farming.
- Dependency of farmers on companies for seeds and equipment also needs to be looked at.
- Contracting firms can exploit the monopsony situation to their advantage by offering lower prices to farmers.
- High incidence of conflicts in some places between the farmer and the procuring entity on quality/quantity of produce as well as a high risk of post-harvest losses.
- Being a State subject, Operationalizing agriculture reforms needs State cooperation. Most often, these reforms fall victim to Centre-States political differences
- Contract farming arrangements are often criticized for being biased in favor 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.
- Contracting agreements are often verbal or informal in nature, and even written contracts often do not provide the legal protection in India that may be observed in other countries . Lack of enforceability of contractual provisions can result in breach of contracts by either party.
How is it regulated in India?
- Regulated under the Indian Contract Act, 1872.
- The Model APMC (Agricultural Produce Market Committee) Act, 2003 provides specific provisions for contract farming, like compulsory registration of contract farming sponsors and dispute settlement.
- Ministry of Agriculture came out with a draft Model Contract Farming Act, 2018. The draft Model Act seeks to create a regulatory and policy framework for contract farming. Based on this draft Model Act, legislatures of states can enact a law on contract farming.
Model Contract Farming Act, 2018
- Model Contract Farming Act, 2018 lays emphasis on protecting the interests of farmers.
- The Model Contract Farming Act, 2018 allows farmers and farmer producer organisations (FPOs) to directly link with companies, thus enhancing market linkage and removing dependence on middlemen.
- The Act will have an indirect effect on small and marginal farmers for a better say in determining the prices of their produce.
- The Act insulates land ownership rights of the farmers from any potential infringement from the sponsors or the buyers.
- The fear of losing their land has always inhibited farmers from embracing any new policy.