13 May, 2022
What is contract farming?
Contract farming is defined as agricultural production carried out under the terms of an agreement between a buyer and a farmer, with pre-determined production and marketing parameters for farm products. Contract farming, in simple terms, refers to a variety of official and informal agreements signed between producers and processors/buyers.
It includes loose buying arrangements, basic purchase agreements, supervised production with input provision, as well as risk coverage, and connected loans. A farmer promises to supply certain agricultural goods that meet the specifications set by the buyer in this farming process. In exchange, the buyer agrees to acquire the product and support it by providing farm input, land preparation, and technical help.
It provides marginal farmers with economies of scale, raising their income and ensuring companies of product quality, quantity, and timely delivery. Pre-agreed price, quality, amount of acreage (minimum/maximum), and time are the four essential factors of contract farming.
According to the contract, the farmer must plant the contractor's crop on his land, as well as harvest and send a number of products to the contractor depending on expected yield and contractual acreage. This could be at a pre-determined cost. To this purpose, the contractor provides the farmer with a variety of inputs as well as technical assistance.
The contractor provides all of the necessary cultivation inputs, while the farmer provides the land and labor. The terms and nature of the contract, on the other hand, vary depending on the nature of the crops to be cultivated, the agency, the farmers, and the technologies used, as well as the context in which they are used.
The contract act was passed by the government of India so as to provide benefits to the farmers and make them aware of the acts and the conditions, and objectives mentioned in it.
Silent features of the model contract farming act are as follows,
Benefits of contract farming to farmers.
Contract farming aims to benefit both agricultural producers and agro-processing companies. Producer/farmer
Small farmers may access technology, credit, marketing channels, and information while cutting transaction costs, making small-scale farming more competitive.
They will have a guaranteed market for their products just outside their door, lowering marketing and transaction costs.
It lowers the risk of production, as well as the costs of price and promotion.
Contract farming can open up new markets for small farmers that would otherwise be closed to them.
It also ensures higher-quality production, financial assistance in cash and/or kind, and technical assistance to farmers.
At the Agri-processing level, it assures a steady supply of high-quality agricultural products delivered on time and at a lower cost.
It aids farmers' skill development by teaching them how to effectively use various resources such as fertilizer and pesticides, as well as exposing them to new technologies in some circumstances.
Farmers will be able to diversify their crop mix because many contracts set prices in advance, and price risk is greatly reduced.
Contract farming can provide access to new markets that would otherwise be closed to small farmers. Under contractual agreements, farmers can also acquire simple loans from the bank.
It enables a steady supply of high-quality agricultural produce at the proper time and at a lower cost at the Agri-processing level.
Utilize their established capacity, equipment, and staff to the fullest extent possible, and respond to consumer concerns about food safety and quality.
Invest directly in agricultural activities with private capital.
Negotiation between producers and businesses is used to fix prices.
Farmers agree to contract output in exchange for a guaranteed payment and a set of terms and conditions.
Contract Farming works towards the following Goals
Business models in Contract Farming
Limitations or challenges under contract farming
Contract farming is sometimes criticized for favoring large corporations or large farms while exploiting small farmers' lack of bargaining strength.
Growers encountered issues such as an excessive quality reduction on products by firms, delayed deliveries at the factory, delayed payments, low pricing, and pest assault on the contract crop, all of which increased the cost of production.
Contracts are frequently verbal or informal in character, and even written contracts in India may not always afford the same legal protection as they do in other countries. Contractual clauses that are not enforceable may result in a breach of contract by either party.
Multiple Sellers – Single Buyer (Monopsony).
Women have less access to contract farming than men, resulting in negative gender impacts.
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