CONTRACT FARMING Contract farming may be defined as a system for the production and supply of agricultural products under forward agreements. The main feature of such agreements is to obtain a commitment from farmers to provide an agricultural commodity of a specific type, at a specified time, price, and quantity, to a buyer. The arrangement generally requires the buyer to provide a degree of production support through, for example, the supply of inputs, credit, or the provision of technical advice. Contract farming is becoming an increasingly important aspect of agribusiness, whether the products are purchased by multinationals, smaller companies, government agencies, farmer cooperatives or individual entrepreneurs
In India, contract farming can be traced back to the nineteenth century, when commercial crops like cotton, indigo, and tobacco were grown under contract. In the late twentieth century, there were contracts for sugarcane and seed production. At the turn of the twenty-first century, some form of contract arrangements existed for several agricultural crops, including tomatoes, potatoes, chili peppers, cucumbers, baby corn, onions, cotton, wheat, basmati rice, groundnuts, flowers, and medicinal plants. Large corporations like Hindustan Lever, Pepsi Foods, A. V. Thomas, Daburs, Thapars, Marico, Godrej, Mahindras, and Wimco used contract farming for many crops, but the coverage is as yet small compared to the potential. Experiences in a few states are discussed below.
EFFECT OF ASSURED MARKETS: TOMATO PRODUCTION IN INDIA
Hindustan Lever issued contracts to 400 farmers in northern India to grow selected varieties of tomatoes for paste. A study of the project confirmed that productivity yields and farmers' incomes increased as a result of the use of hybrid seeds and the availability of an assured market. An analysis of the yields and incomes of the contracted farmers, compared 'with farmers who grew tomatoes for the open market, shows that yields of the farmers under contract were 64 percent higher than those outside the project.
Source: Eaton and Shepherd, 2001.
The state of Punjab has largely grown wheat and rice for many decades. The Johl Committee Report of 1986 recommended that at least 20 percent of the area under wheat and paddy should be brought under new crops, especially fruits and vegetables. Contract farming in Punjab started in the early 1990s with the entry of Pepsi Foods into the production of tomatoes and chilies and Nijjer Agro Foods, a local firm, into tomatoes. Pepsi sold its tomato facility to Hindustan Lever Limited (HLL) in 1995 and entered potato contracting in the mid-1990s. HLL works with 400 contract farmers, while Pepsi Foods works with a few farmers in both chilies and potatoes. The HLL experience shows that contract farming helped both farmers and the processing industry.
Contract farming has been increasing in Andhra, and is most prevalent in crops like cucumbers, oil palm, and some fruits and vegetables. There is also contract farming between poultry companies and the corn producers. In the Kuppam area of Chittor district, farmers are practicing the Israeli type of cultivation in 10,000 acres, using little water and reaping higher yields. In the future, it is expected that the cultivated area using this technology will be increased to 55,000 acres. The introduction of cucumber cultivation on a contract basis in the Kuppam area is being undertaken by the Bata Hachita Company Agro India (BHCAI), whose field staff collects a list of farmers willing to take up cucumber cultivation. The processors assess the demand for exports and inform farmers of their requirements. They also supply seeds, fertilizers, and pesticides to the allotted farmers on loan, without interest, at market prices. The BHCAI also advances money if the farmer requires it. This crop attracted considerable attention in Andhra state and became quite popular.
This state is now supporting many new initiatives in contract farming for agricultural exports, particularly sugarcane, cotton, and horticultural crops. Contract farming has also begun for cultivation of medicinal plants, and it is now practiced in the poultry sector as well, with companies supplying chicks, feed, medicines, and technical guidance to the farmers. The firms then buy the birds when they are eight weeks old at a predetermined price. Beginning in a limited way in 2002–2003, EID Parry took tentative steps toward establishing contract farming in rice. EID Parry sold approximately 60 tons of improved seeds for fine quality ponno rice and provided extension services to sugarcane farmers who sold sugarcane to the firm's sugar mill and were also willing to grow rice. With improved rice technology, paddy yields were approximately 25 percent higher than normal yields of 3.75 tons/hectare. EID Parry later purchased the output.
Benefits and Problems
Contract farming provides credit, inputs, and technology to farmers, and its pricing arrangements may reduce risk and uncertainty. Some contract farming ventures have led to better crop diversification from cereals to horticulture and floriculture. They have also opened up new markets that would otherwise be unavailable to small farmers. Because of technological improvements, there is improvement in the yields and profits of farmers. In the case of sponsoring companies, contract farming provides a guaranteed supply of agricultural produce in the required quantity and desired quality.
Offsetting the above benefits, there are many problems associated with contract farming. From the farmers' perspective, there are risks of market failure and production problems while growing new crops. The sponsoring companies may be unreliable, may exploit their monopoly position, and may have inefficient management and marketing teams, resulting in the manipulation of quotas or the nonfulfillment of commitments. Contract farming in India is regulated neither by law nor by an efficient legal system—the most serious constraint to its widespread use in India. Contract farming in Africa, Latin America, and in several Asian countries "has led to many ill-effects in the spheres of livelihoods of producers, community organizations and institutions, environment and gender..Most of the studies which are in the context of relatively less developed regions find contracts inequitable, short-term, and ambiguous" (Singh, 2000).
Requirements needed for successful contract farming include the support of contracts by law and by an efficient legal system. There also must be a reasonably long-term commitment between sponsoring companies and farmers. There must be a market for each product that will ensure profitability.
According to the World Bank, the Indian legal system can be improved with the following legislative measures:
Model contract and code of practice. The governments in different states may wish to prepare and disseminate a model contract and outline a generic code of practice for farmers as well as for the sponsors.
Registration of contracts with marketing committees. Contracts can be registered with the local Mandi Parishad (Marketing Committee) and entered in the revenue records, providing the necessary legal backup.
Local tribunal as the last resort of dispute resolution. If the above two policies do not address the concerns of the farmers and sponsors, the governments can constitute local tribunals, which will have the power to arbitrate and settle disputes about the contract.
Contract farming has become a dominant mode of production in agriculture worldwide. With liberalization and structural changes, it is expected to increase in India over time.
S. Mahendra Dev
Eaton, Charles, and Andrew W. Shepherd. "Contract Farming: Partnerships for Growth." Food and Agricultural Organisation. Available at <http://www.fao.org/DOCREP/004/Y0937E>
Singh, Sukhpal. "Theory and Practice of Contract Farming: A Review." Journal of Social and Economic Development 2, no. 2 (2000a): 228–246.
——. "Contract Farming for Agricultural Diversification in the Indian Punjab: A Study of Performance and Problems." Indian Journal of Agricultural Economics 55, no. 3 (2000b): 283–294.
——. "Unlocking Andhra Pradesh's Growth Potential: An Agenda to Achieve the Vision 2020 Growth Targets." Washington, D.C.: Poverty Reduction and Economic Management Sector Unit, South Asia Region, World Bank, 2003.