Contract farming is a business practice where agribusiness firms procure raw materials by contracting directly with farmers. It involves the firm specifying requirements around volume, quality, and sometimes price of goods. The firm provides inputs, funding, and training to help farmers meet these obligations. It benefits firms by ensuring stable supply, and benefits farmers by giving access to markets, financing, and technical knowledge they lack. The document outlines the key parties, conditions, and process involved in contract farming arrangements.

1. Basics of
Contract Farming
Jayaram S
June 2010
Bangalore
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2. What
Definitions
Co ac a
Contract farming is a unique bus ess p ac ce followed by ag bus ess firms to
g s u que business practice o o ed agribusiness s o
procure quality raw materials
Little and Watts ( 1994 )
Contract Farming as a form of vertical coordination between growers and buyer
processors that directly shape production decisions through contractually specifying
market obligations like value, volume, quality and at times price, provides certain
inputs and exercise some control at the point of production.
Key and Runsten ( 1999 )
Contract farming is explained as an institutional response to imperfections in the
market for credit, insurance, information, factors of production and raw product.
Gurudev and Asokan ( 2005)
Contract farming is a system in which agricultural commodities are produced and
supplied to particular buyers, mostly processors under pre-negotiated arrangement
about price, quality and quantity It brings producers and processors closer on
price quantity.
mutually beneficial terms.
In simple words, Contract farming is a purchasing mechanism used by Agribusiness
firms to purchase raw material by getting into contracts with farmers. Firms resort to
farmers
this practice when required raw materials cannot be procured from the free market.
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3. Who
Agribusiness Firm
g
Firms which gives commitment to customer community to deliver specific products
and fulfills the same by procuring quality raw materials and by doing special value
additions to increase the value
Farm
Entity which owns or leases the land and which is in the business of producing
agricultural commodities. The objective of the farm is to maximize the asset ( land )
utilization (i ) t grow quality products with minimum i
tili ti (ie) to lit d t ith i i input cost and which will f t h
t t d hi h ill fetch
maximum price in the market in the shortest possible time
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4. Where
Free Market for the output product is imperfect (ie) where the farm output cannot be
purchased in required quality, quantity at the right price and right time
Market is willing to pay premium for specific products and where the Farm is
operating in an sub optimal level
Productivity of the farms can be increased significantly with quality inputs ( seeds,
saplings, fertliser ), additional capital ( for labour, water, power and other inputs),
knowledge ( good agricultural practices )
Farmer who is ambitious and who is looking for opportunities to increase the
productivity of the farm and who is willing to take additional risks
Environment where required quantity can be produced from a geographical area
and where farms and farmers are living in similar socio-economic conditions
Environment where farmers have basic literacy ( to read the contract and write few
words – to accept etc ) and where farmers are willing to enter into a formal long term
agreement and operate like a small business
Legal,
Legal political and social conditions around the farm facilitate contract farming
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5. When
When there is a stable and predictable demand for the farm products
When Agri Businesses has the ability to find the right market linkages for the output
products
Suppliers ie ( Farms ) have been identified and are educated about the basic
operating procedures
When Farms consider growing the required output as the best p
g g q p possible option after
p
considering other potential alternatives
When the Agri Business has the sufficient knowledge, capital, time and access to
required input materials to de e op supp e base
equ ed put ate a s develop supplier
When the free market does not have the ability to scale up and deliver required
products at the right time, right quality, quantity and price
When the output products can fetch enough premium to Agri Business to cover the
investments incurred in educating and developing the Farms and when Agri
Businesses are satisfied with the profit margin.
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6. Why
Government does not allow Firms to hold large parcel of Agricultural lands in order
to protect the rights of farmers who hold small farms
Farmers does not have required knowledge about what kind of output products are
in demand
Lack of Cooperatives - Farmers cannot come together on their own to decide what
to produce, how to produce at what cost and at what time – to satisfy the
requirements in terms of quantity and quality for the Agri Business Firms
Farmers lack knowledge to produce special products that demand premium in the
market
Agri Business firms have access to right technology to process, preserve, pack and
transport the products from the point of production to the point of consumption
Competing companies try to enter into long term agreement with farms to produce
products in order to develop a stable predictable supplier base
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7. How
Process Steps followed by Agribusiness
2
1. Find Customer 6. Receive product
2. Issue Farm Contracts 7. Process product
6 7 8 9 3. Arrange Funds 8. Pack product
4. Provide knowhow 9. Ship product
5. Provide inputs
5 4 3 1
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8. Basics of
Contract Farming
Jayaram S
Srini_jayaram@yahoo.com
j y @y
June 2010
Bangalore
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