Contract farming is an agricultural production system where farmers grow crops or raise livestock according to an agreement with a purchaser. The essence is a commitment by farmers to provide an agreed upon commodity at an agreed upon time, price, quantity and quality. Benefits include guaranteed markets for farmers and supply for purchasers. Issues can arise if contracts are not respected by either party. Maximizing success requires trust, collaboration, clear specifications, flexibility and dispute resolution.

1. CONTRACT FARMING

2. DEFINITION
 It is defined as a system for the production and
supply of agricultural or horticultural produce
under forward contracts between producers
and buyers
 The essence of such an arrangement is the
commitment of the producer to provide an
agricultural commodity of a certain type, at a
time and a price, and in the quantity required
by a known and committed buyer

3. BASIC ELEMENTS
 Pre-agreed price
 Pre-agreed quality
 Pre-agreed quantity/acreage
 Pre-agreed time

4. BASIC ELEMENTS
 One village, one group(SHG)
 One village, one variety product
 Crop loan at 12% per annum on group’s guarantee
 Door delivery of quality inputs at discounted rates
 Crop insurance
 Synchronized sowing
 Integrated crop management through competent Farm Service
Centers
 Contamination control measures from farm to factory
 Assured buyback of final produce from farmer’s doorstep
 The sponsor plays the role of a perfect facilitator between producer
and consumer
 Unique partnership with local agencies including a public sector
enterprise

5. BASIC ELEMENTS
 Core R&D team
 Execution of technology transfer through well- trained
extension personnel
 Supply of all kinds of agricultural implements free of cost to
contracted farmers
 Supply of timely and quality farm inputs on credit
 Prompt delivery of the mature produce from every individual
contracted farmer through the system of ‘Quota Slips’
 Effective use of modern communication technology like
pagers for communication with field executives
 Regular and timely payment to contracted farmer through
computerized receipts and transparent system
 Maintenance of perfect logistics system and global marketing
standards

6. BENEFITS
 Both partners engaged in contract farming can
benefit
 Farmers have a guaranteed market outlet,
reduce their uncertainty regarding prices and
often are supplied with loans in kind, through
the provision of farming inputs such as seeds
and fertilizers
 Purchasing firms benefit from having a
guaranteed supply of agricultural products that
meet their specifications regarding quality,
quantity and timing of delivery

7. MODELS - Eaton and Shepherd
 Centralized model: A company provides support to
smallholder production, purchases the crop, and then
processes it, closely controlling its quality. This model
is used for crops such as tobacco, cotton, sugar cane,
banana, tea, and rubber
 Nucleus Estate model: The company also manages a
plantation in order to supplement smallholder
production and provide minimum throughput for the
processing plant. This approach is mainly used for
tree crops such as oil palm and rubber
 Multipartite model: Usually involves a partnership
between government bodies, private companies and
farmers

8. MODELS - Eaton and Shepherd
 Intermediary model: At a lower level of
sophistication, this can involve subcontracting
by companies to intermediaries who have their
own (informal) arrangements with farmers
 Informal model: Involves small and medium
enterprises who make simple contracts with
farmers on a seasonal basis. Although these
are usually just seasonal arrangements they
are often repeated annually and usually rely
for their success on the proximity of the buyer
to the seller

9. ISSUES
 If the terms of the contract are not respected by one
of the contracting parties, then the affected party
stands to lose
 Common contractual problems include farmer sales to
a different buyer (side selling), a company's refusal to
buy products at the agreed prices, or the downgrading
of produce quality by the company
 A frequent criticism of contract farming arrangements
is the uneven nature of the business relationship
between farmers and their buyers
 Buying firms, who are invariably more powerful than
farmers, may use their bargaining clout to their short-
term financial advantage, although in the long run this
would be counterproductive as farmers would cease
to supply them

10. PRESENT STAGE IN INDIA
 The farm ministry details an agenda for expansion
of agricultural credit to the tune of Rs.736570
crores during 10th plan and the official note to the
finance ministry gave financial of contract farming
by bank priority
 Agricultural and processed food product
development authority is developing policy
guideline on contract farming for forwarding to
state government for implementation the
guidelines will focus on regularizing the relation
between producer and processor of food material

11. PRESENT STAGE IN INDIA
 Contact farming is already undertaken in tea
estates by major companies including Pepsi
food, ITC, Hindustan lever and for crop
diversification by Mahindra subhalabh services
with Punjab agro for basmati rice and durum
wheat besides drawing a plan to setup grain
handling and storage facilities
 In Karnataka wide varieties of vegetable,
gherkins, lime, pomegranate, grapes for
resins, pearl onion, asparagus and mangoes
for pulp are already covered under contact
farming

12. MAXIMISING THE CHANCES OF
SUCCESS
 Contract farming has to be commercially viable.
To maximise profitability companies need to
choose the best available farmers
 Once suitable farmers have been identified it is
then necessary to develop trust, as contracts will
only work when both parties believe they are
better off by engaging in them
 To achieve this requires a willingness to
collaborate and share information
 Late payment can immediately cause a
breakdown of trust and must be avoided

13. MAXIMISING THE CHANCES OF
SUCCESS
 Disagreements over product grading can be avoided by
providing clear, simple specifications in a contract and
by ensuring that farmers or their representatives are
present when the produce is graded
 Contracts should be flexible to take into account the
possibility of extreme events such as high open market
prices or bad weather
 However hard the parties try, disagreements are
inevitable. Contracts should ideally make provision for
arbitration by someone acceptable to both the company
and the farmers

14. SUITABILITY
 There is no restriction to the types of agriculture
products that can be the object of a contract
 There are numerous examples of successful
contract farming arrangements for most types of
crops & livestock and also for forestry, aquaculture
and fibre products, as well as for flowers and
tobacco
 While the applicability is fairly general, there is
evidence that the most successful schemes are
associated with agricultural products that are high-
valued or produced for processing and /or exports
 Products for which there is high local demand may
be more susceptible to side selling and thus may be
less suitable for contract farming

15. LEGISLATION REGULATING
CONTRACT FARMING
 While there is specific legislation about
contract farming in some countries, in many
others general contract laws have sufficed
 There might be a need to reconcile general
contract laws with other types of legislation
affecting agricultural production, agricultural
marketing and / or land use, for instance

16. REFERENCE
 http://www.fao.org/ag/ags/contract-
farming/faq/en/
 https://en.wikipedia.org/wiki/Contract_farming