Contract Farming: Partnership for Growth

No one should be in doubt that Contract Farming is a commercial activity and should be seen as such. Any element of political or social concern rather than technical and economic realities is likely to derail the process.
Small and marginal farmers in India are likely to face difficulties in fully participating in the market economy in the face of growing liberalization, privatization and globalization of agribusiness, if they work alone. They will also not be able to reap the benefits of economies of scale.

 

Due to lack of access to quality inputs in the form of the latest seeds, technical advice, post-harvest technology and lack of muscle in marketing the produce, the farmers are likely to lose heavily on the big sharks of international business. Further, reliance on the age old traditional way of farming will put them out of the market in the very near future.

 

In the post WTO regime, millions of Indian farmers, with small uneconomical land holdings, cannot be competitive unless they enter into strategic alliances with other service/ technology providers.

 

It, therefore, becomes imperative that such small and marginal farmers are organized into a critical mass -either by forming cooperatives or through some other means. This will enable them to tap the latest technology initiatives in the field of agriculture production/ processing as well as marketing so that they could realize economically attractive price for their produce.

 

Contract farming has, of late, emerged as the appropriate platform for such farmers. A number of distinguished corporate have pioneered the concept of contract farming in India. M/s Rallis India, Hindustan Lever Limited, Mahindra and Mahindra, Escorts Farms Limited, Wimco and Pepsico India are some of the prominent corporate engaged in contract farming in different parts of the country.

 

What is Contract Farming?

 

It is an arrangement between farmers and processing and/or marketing companies for the production and supply of agri-inputs under forward purchase agreements at predetermined prices. The company also undertakes to supply high quality inputs like seeds and pesticides as well as technical advice.

 

The farmers commit to provide a commodity in quantity and quality specified by the Company. The Company commits to support the farmer in production and purchase of the commodity.

Contract Farming

Contract Farming

 

Benefits to corporate sponsors in Contract Farming:

 

Without owning the land and without investment of funds in working capital, the Company regulates the production of commodities at predetermined prices. It procures raw material/commodities as per its quality standards.

 

• Produce Quality better than open market purchases.

• No risk on production variance.

• Land constraints due to present laws are overcome.

• More politically correct than production in estates.

• Risk of disease is minimized as production is spread over larger and different areas, expands sources of reliable supplies of raw materials for processing plants and guarantees that the contracted products conform to the requisite quality norms.

 

Benefits to contract farmers in Corporate Farming:

 

a) Assured quality of inputs

b) Appropriate technical help/guidance

c) Learning new farming skills

d) The farmer may learn record-keeping, improved methods of applying chemicals and fertilizers

e) Better price of production and thus higher earnings with reduced uncertainties

f) No need to transport the produce to the commission agent and pay him commission

g) Reduction in price risk

h) Cultivation of new profitable crops

I) Easy availability of farm credit from banks at cheaper interest rates. He can get credit at higher scales of finance and, that too, without collateral. The farmer is free from the clutches of the money lenders and commission agents.

 

Benefits to the financial institutions in Contract Farming:

 

The banks can deploy their surplus funds and achieve the priority sector benchmark of 18% advances being given to the agricultural sector. Relatively lower incidence of NPAs due to lesser chances of crop failure or price fluctuation/crash. Involvement of sponsor adds to the confidence level.

 

Benefits to the economy from Contract Farming:

 

Contract farming is a process which creates value addition for all concerned. The production of small farmers can be exported which an individual small farmer could not have thought of even in his wildest dreams. Setting up of agro-processing plants could be encouraged due to availability of quality raw material. Technical collaboration and expert guidance result in higher output. Higher quality of produce, better handling, preservation and grading facilities result in higher value realization for all concerned.

 

Due to higher per capita income, the spending power of the farmers increases giving a boost to the national economy. Interaction with educated agri-experts increases the awareness level of the farmers which lead to socio-economic transformation of the traditionally conservative rural society.

 

Catalytic enrichment to Contract Farming:

 

Any new economic order calls for a suitable playing field and certain rules of business. For contract farming to be successful, support from the government of the day is of utmost importance. It requires a conducive environment with certain mechanisms in place to work effectively.

 

Natural reciprocal dependence between grower and buyer, with tangible benefits to both; mature risk transfer mechanisms to provision for crop and weather insurance have to be put in place.

 

Conclusion:

 

As for the servicing of any contract, in contract farming to, a strong legal framework to resolve the disputes needs to be put in place. An efficient legal system and suitable fast acting contract act and other laws are a prerequisite for ensuring success of contract farming. A model contract farming agreement needs to be put in place to ensure fair treatment to the small farmers.

 

Contract Farming Dispute Resolution Forum needs to be put in place at the district level. Tendency to over-regulate should, however, be shunned. All contract farmers should have instant coverage under the National Agriculture Insurance Scheme.

 

Private sector should be encouraged to build sufficient aggro processing infrastructure by providing incentives in the form of subsidy/tax holidays. Research and extension facilities at Agricultural Institutes/universities and regional research laboratories should be made available to sponsors at subsidized/actual cost. The government should act as a facilitator to bring the agribusiness and the farmers closer to each other.

This entry was posted in Managing Business Finances on by .

Modified: 1st Mar 2015

About Mohan Manohar Mekap

Mohan Manohar is a blogger from India who founded Ittech back in 2007. He is passionate about all things tech and knows the Internet and computers like the back of his hand.

Leave a Reply

Your email address will not be published. Required fields are marked *

two × four =