Perceived drawbacks of Contract Farming

As with any new initiative, the country’s dalliance with contract farming so far has been a mixed experience. If there have been stellar successes stories in some cases, there have been instances of stark failures as well. But failures are the stepping stones for future success. Learning from the mistakes of past, the process needs to be streamlined and refined further.


All stakeholders especially the central and state governments need to put in place enabling legislative and administrative systems to bring contract farming to the forefront of India’s rural terra-firma. One can foresee a value based corporate intervention in agriculture bringing about a revolution in India’s staid and conservative agricultural milieu. Contract farming holds the promise of a win-win scenario for all the stakeholders if they play their roles in an effective and measured-style.


The Corporation will enhance their business prospects in agribusiness by getting an assured supply of graded, good quality raw material at predetermined prices. The farmers will be assured of a higher price realization, freedom from uncertainty of market forces due to assured marketing. The rural sector will gain due to improved agricultural practices, transfer of best of the corporate skills in the area of farm and marketing management. The country will gain through higher export of agri-produce and changing socio-economic face of the countryside.


At the same time, all the stakeholders need to put their act together and act fast in their key performance areas to make this experiment a resounding success. The contract farming system is a partnership between agribusiness and farmers. Long-term commitment from both parties is a must for its success. Exploitation by the sponsor will be only for a limited duration and can jeopardize agribusiness investments. Farmers on their part should understand that honoring contractual arrangements is likely to be their long term benefit. Undoubtedly, Contract Farming is an area of emerging opportunities for all the players.


Success of contract farming model in the long run will be dependent upon the type of crop, intensity of technology, length of the value chain and the stage of market evolution. It transfers the corporate management skills in the agriculture sector for high quality, competitive yields. It can be used to eliminate the middleman and provide value added linkages for food processing industry.



Contract farming in India, presently faces a number of constraints in terms of legal procedures, conservative rural mindset and the quality neutral domestic market. The feast or famine syndrome is also a damaging factor.


Perceived drawbacks of Contract Farming:


Adoption of unfamiliar agri-practices and new crops may not result in the kind of results expected by the sponsors. In case of overproduction, the sponsors may manipulate quality standards to buy less. In case the sponsors fail to honor the contract, the farmer may be left with an unserviceable debt burden. The farmer may enter into a contract with more than one sponsor and sell the seeds and other inputs received from one of the sponsors to the non- contracting farmers. In case of higher post harvest prices than contracted, the farmer may show the quantity of produce to be much lower than actual and sell the balance at a higher rate in the open market. He may further blame the sponsor for supplying ‘inferior’ seeds and other inputs.


In case of natural calamities like floods, drought or pestilence, if crop insurance scheme is not in place the farmer may suffer unilaterally. In case of prices being lower than the contracted prices, the farmer may show production to be higher than actual production and supply a larger quantity to the sponsor after buying it from the open market. Thus, both the parties to the contract may have lingering doubts till the completion of the contract. The legal enforcement of the contract may not be possible for the small farmer; whereas, the sponsor having deep pockets and being highly educated may engage well-known lawyers to plead his case.

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Other opinion makers, interest groups may launch whispering campaign to create a nuisance and become middlemen to broker the contracts thus reducing the actual benefit to the farmers.


Price determination of Contract Farming:


The sponsor needs to assure the prospective contract farmer that he will get higher income by entering into the contract than he could from alternative activities with the same or less risk. He should calculate realistic yields to forecast weather at the promised price of produce. The contract would be attractive to the farmer. He should base the estimate on the experience of the farmers of the area, historical production data, soil fertility and field trials. This will put the sponsor on a sounder footing to offer a remunerative rate to the farmer.


A farmer will stick to the sponsor on a long term basis, only when he is sure of a fair deal, transparent business and a sense of mutual trust. The sponsor’s extension staff should be fully conversant with the product and have local knowledge, transfer of technology and an awareness of problems of adaptation associated with small farmers. They should have knowledge of cropping schedules to ensure correct timing and sequencing of all contractual activities. Training of extension staff and farmers and research into varieties and cultivation practices is essential.


Suitable infrastructure such as link roads, telecommunication, water, and electricity should be available in sufficient measure in areas where contract farming is supposed to be introduced. Physical – soil type, agro-climatic zone etc. must be suitable for the production of the desired commodity. The farmer should have the unfettered right to the land till the expiry of the contract. The various inputs required should be made available near the place of farming. Cultural attitudes and practices should be conducive to fulfilling the farmers’ obligations under the contract. The sponsors should be conversant with and respectful of the social practices obtaining in the area/zone chosen for contract-farming.

Perceived drawbacks of Contract Farming

Perceived drawbacks of Contract Farming



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In respect of certain cash crops like sugarcane, coffee, tea, cotton, vegetables and grains, contract farming of some sorts has already been in vogue for the last 2-3 decades. Wimco started contract farming of Poplar trees more than a decade ago. Pepsico India resorted to contract farming for potato, tomato and chilli in Punjab. Other success stories are Sunflower in MP, Palm Oil in AP and seed production on contract by hybrid seed companies in different states. Amul and NDDB for milk procurement and sugarcane cooperatives in Maharashtra have also been a resounding success. On a non formal front, many commission agents buy the crops in advance from the farmers, in case of apple, mango and other fruits.


In Uttaranchal, one could do contract farming for products like medicinal plants, organic vegetables and fruits, mandua and Dehraduni basmati rice. While some sponsors are resorting to Contract farming only for the products for which they have orders in hand some others are resorting to full supply chain management and having integrated contract with the farmers. Faced with problems of excessive food grain production with additional expenditure on handling, bagging, transport, storage etc., declining water table; increased water logging and salinity in parts of South-West Punjab, environmental pollution, increased resistance to chemicals among pests, weeds and diseases, Punjab has decided to go in a big way for diversification of crops.


Based on its climate, Punjab farmers can grow up to three crops a year- a short duration winter crop, followed by a long string and then a monsoon crop. Punjab Aggro industries Corporation is also building linkages between the farmers and corporate entities to make alternate farming more attractive.

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