Contract Farming: The Modern Way of Traditional Farming.

 Increased production in agricultural techniques heralded the process of the Green Revolution and made Indian food safe. The benefits of good seeds, timely irrigation, and fertilization with improved technology with increased productivity with quality products are noted. Farmers face market fluctuations at the time of marketing their products. Therefore, the government has started to buy some of the commonly grown agricultural commodities at the lowest support price (MSP). Cultivation of other crops not supported by MSP becomes risky and unfavorable and thus improper diversification of agricultural crops has led to the overproduction of some commodities and underproduction of some agricultural commodities. The unrewarding returns forced farmers to search for alternatives to farming. Contract farming encourages farmers to protect themselves from market fluctuations (abnormally collapsed prices due to overproduction). This is a step towards secure income by providing farmers with improved marketing channels with or without better seeds and other inputs, financial support, and technical know-how.

What is contract farming?

Contract farming is not entirely new to our country. The success of milk cooperatives and sugar cooperatives explains the depth and extent of contract farming in India. It is a formal contract between producers (farmers) and buyers (generally processors or exporters). Contract farming can be defined as an agreement between farmers and contracting companies to produce and supply agricultural products under prior agreements, often at predetermined prices. The basis is an obligation on the part of the farmer to provide a certain commodity in quantities and with quality standards set by the buyer, and an obligation on the part of the company to support the production of the farmer and purchase the commodity. Contract farming allows companies to participate in and control the production process without owning or operating farms. Arrangements can vary depending on the crops and contracting companies. Contracts for 1) market support contracts may be essentially pre-harvest agreements between a company and farmers for a specific set of terms for the sale and purchase of the crop. The contract sets the price, quality, and pricing; 2) Resource support contracts are an agreement between farmers and companies in conjunction with marketing arrangements, companies agree to provide selected inputs, including on occasions land preparation, technical advice, credit, etc.; (iii) Production management contracts obligate the farmer to follow the management of certain inputs, agricultural practices, and harvest specifications usually in exchange for a marketing or resource provision agreement.

Contract farming: a win-win situation.

(i) Farmers: 

In general, farmers have poor knowledge of a range of crop-growing practices and insufficient capital to grow a quality crop, little bargaining power with input suppliers and production markets, lack of experience in post-harvest management, and inadequate infrastructure, and market information. Companies often provide credit, inputs, agricultural machinery, and a wide range of administrative, technical, and extension services with a guarantee of purchase of products and always reserve the right to refuse substandard products. Farmers can also use the contract agreement as security to arrange credit with commercial banks and financial institutions to finance the inputs. Transferred skills can include efficient use of farm resources, implementation of field activities according to a strict schedule, improved methods of using chemicals and fertilizers, knowledge of the importance of quality and requirements of export markets, and good record keeping. Contract farming helps small farmers to participate in the production of high-value crops like vegetables, flowers, fruits, etc., and benefit from market-led growth in minimal market risk, transportation, and post-harvest processing. A contract farming system reduces yield uncertainty and eliminates price uncertainty. Contract farming does not require a large investment of farmers' money, rather it reduces the cost incurred in purchasing the inputs as they are provided by the contracting firms.

(2) Contracting companies:

 Contract farming is most commonly used by food processing companies. Contract farming has solved the problem of supplying raw materials with the desired quality and quantity from a reliable source near the processing plants. Companies gain access to crop production on land that might not otherwise be available, with the added advantage of not having to buy or rent it. Moreover, it reduces the uncertainty that might exist if the company simply buys the crops on the open market, and gives the company some control over the production process. Contract farming may not necessarily be a profit center for companies.

(3) Bankers.

This farming is also encouraged and by financial institutions and banks. Effective and efficient monitoring of production operations, extension activities, and credit delivery in a conjugal area is easy in contract farming. Access to crop loans on attractive terms through partnerships with banks is facilitated through contract farming.

(4) Government: 

 The government understands that the agricultural sector needs to be competitive to survive and contribute to poverty alleviation and economic growth in the country. The best possible solution is to engage the private sector through contract farming to enable accelerated technology transfer, capital inflow, and an assured market for agricultural crops. Private agribusiness will generally offer technology more effectively than government agricultural extension services because it has a direct economic interest in improving farmers' production. This will also generate employment opportunities in rural areas, processing industries, agricultural input industries, and financial institutions.

Risks of Contract Farming:

 The path to success in contract farming is not without its risks. aIt is not so easy to popularize contract farming among farmers. Uncertainty related to growing new and unknown crops and producing for markets that may not always meet your expectations or your sponsors' forecasts. Most companies offer contract farming to large and medium farmers. They neglect the small and marginal farmers whose proportion is more in the Indian context. Farmers breach the contract as the cost of cultivation could be lower than in non-contract production (such as technology and management practices provided by the processor; access to some inputs such as insurance and credit at a lower cost). If the market price is more advantageous than the contract price, the farmers default on the contract. The inability of farmers to comply with strict schedules and regulations due to social obligations or religious practices.

Companies can manipulate quality standards to reduce purchases or dictate operating conditions with farmers. The legal enforcement system is too tedious for both producers and companies, and legally enforcing the terms of the contract with farmers sends a negative message from the contracting company to the farming community. Debt is caused by production problems, poor technical advice, significant changes in market conditions, or a company's breach of contracts.

The development of contract farming schemes is the strategy to benefit from globalization through the vertical coordination of small farms with processors and exporters. Through contract farming initiatives we can give a second impetus to the green revolution in India. Contract farming also improves the micro-economy of the village. The key to the success of this company lies in generating healthy trust between the producer and the buyer.