It is an agreement between farmers and the companies where farmers sell their crops to companies at pre- determined prices so farmers get assured remuneration for their produce and dont have to worry about market fluctuations.

1. CONTRACT FARMING
IMPROVING AGRICULTURE AND
IMPROVING LIVES
Prepared By:-
Soham Sahoo
College of Veterinary Science and Animal Husbandry
Odisha University of Agriculture & Technology
Bhubaneswar

2. What is Contract
Farming?

3. DEFINITION
 It is an agreement between farmers and market
processing firms for the production and supply of
agricultural products under certain agreement, frequently
at predetermined prices.

4. OBJECTIVES OF CONTRACT FARMING
To reduce the load on the central & state level procurement system.
• To increase private sector investment in agriculture.
• To bring about a market focus in terms of crop selection by Indian farmers.
• To generate a steady source of income at the individual farmer level.
• To promote processing & value addition.
• To generate gainful employment in rural communities, particularly for landless agricultural labour.
• To flatten as far as possible, any seasonality associated with such employment.

5. HISTORY OF CONTRACT FARMING
Contract farming can be traced back to colonial period
In 1920s ITC introduced cultivation of Virginia Tobacco in
coastal Andhra Pradesh on the basis of fair contract
farming system.
In 1990s PEPSICO introduced cultivation of tomatoes in
Punjab for its paste manufacture.

6. MODELS OF CONTRACT FARMING Centralized Model (Out-grower Schemes): Under this, contracting company provides necessary support to
the farmers for production of required crops; purchases the crop from the farmers, and then processes,
packages and markets the product by tightly controlling its quality. This type of farming is quite famous in
developing countries for high value crops such as tobacco, cotton, paprika, sugar cane, banana, coffee, tea,
cocoa or rubber etc. It may involve tens of thousands of farmers and level of participation of the contracting
company in production may vary.
 Nucleus Estate Model: Under this, company own and manages an estate plantation to ensure the limited
guarantee of required output. This type of contract farming is highly used for tree crops such as palm oil etc.
and also sometimes used in case of export of fresh vegetables.
 Multipartite Model: It is a common joint venture approach in between statutory bodies or state agencies and
private companies; those are jointly participating with farmers. Multipartite arrangements may include different
specialized organizations for purpose of credit provision, production, management, processing, distribution or
marketing etc. In Mexico, Kenya, and West Africa, among other countries, governments have actively invested
in contract farming through joint ventures with the private sector.
 Informal model: It usually includes small entrepreneurs or companies who enter into informal contracts with
farmers on a seasonal basis which mainly includes crops like fresh vegetables, watermelons or tropical fruits
etc. Material inputs are mainly limited to fertilizers and seeds. A common example of the informal model is
where the sponsor, after purchasing the crop, simply grades and packages it for resale to the retail trade such
as supermarkets, etc.
 Intermediary Model: Under this model, companies make formal sub-contracts with intermediaries (like
agents, farmer groups or NGOs) for production of crops. The intermediaries generally enter into informal
contracts with farmers to meet the obligations under formal contract with companies. This is a common
practice in South-East Asia region.

11. Advantages
of Contract
Farming to
Farmers

12. Easy to get credit from Bank under contractual agreements.
It helps in skilling of farmers as farmer learn to use resources efficiently like fertilizer, pesticides and get in
touch with new technology in some cases.
Farmers get opportunity for diversification of crops and learn about new crops that have demand in market.
Farmers' price risk is often reduced as many contracts specify prices in advance.
Contract farming can open up new markets which would otherwise be unavailable to small farmers.

13. Advantages of
Contract
Farming to the
Sponsors

14. Uninterrupted & regular flow of raw material and that of high quality.
Protection from fluctuation in market pricing.
Long term planning made possible.
Concept can be extended to other crops.
Builds long term commitment.
Dedicated supplier base.
Generates goodwill for the organisation.

16. Examples

19. Contract farming leads to monocultures which lead to depletion of soil quality, and effect of fertilizers and pesticides on natural
resources, environment, humans and animals.
• It lead to over-exploitation of groundwater, salination of soils, decline in soil fertility, and pollution
• The firms do not pay heed as the costs of such effects are externalized so far as the firm is concerned
• It is also argued that CF as part of the globalization process might lead to increasing investments in developing countries which
have low environmental standards and, thus, the natural resource base might end up irreversibly depleted or damaged.

20. LIMITATIONS

21.  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 other countries.
 When growing new crops, farmers face the risks of both market failure and production problems
 Farmers investing in crops with a long growing period receive no income until the crops bear fruit. For
most small farmers such investments are impossible without funding from a company, the government or a
development bank. Even if such funding is available it is unlikely to come as a gift and thus farmers
become more indebted than they would if following traditional farming practices, even though in the long
run they may be much better off.
 Farmers tied to a contract are unable to benefit from high prices on the open market.
 Most of the crops grown under contract arrangements are cash crops which give more income to farmers
but at the same time due to this profit motive food crops are being neglected.
 The seeds of generally modified crops to tackle pests, diseases and to get maximum output are sold by
the MNCs. The seeds once used cannot be regenerated as is the case of BT cotton.
 There are no standard legal procedures in resolving the disputes arising under contract agreements.
 It leads to greater casualisation of labour as well as the greater use of female and child labour.