Contract farming

WHAT IS CONTRACT FARMING?
 Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide agreed quantities of a specific agricultural products.
Theory and practice of contract farming
 A central processing or exporting unit purchases the harvests of independent farmers.
 Most commonly practiced by food processing companies.

1. CONTRACT FARMING

2. WHAT IS CONTRACT FARMING? Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide agreed quantities of a specific agricultural products.

3. Theory and practice of contract farming A central processing or exporting unit purchases the harvests of independent farmers. Most commonly practiced by food processing companies.

4. Two types of contract farming schemes One type produces traditional tropical commodities,such as sugar,rubber,or oil palm. Another type,usually on a smaller scale and with more private-sector involvement.

5. Types of contract farming Centralized model Nucleus Estate model Multipartite model Informal model Intermediary model

6. Centralized model – outgrower system Contracting company provides support to the production of the crop by smallholder farmers,purchases the crop from the farmers,and then processes,packages and markets the product,threby tightly controlling its quality. Eg . Tobacco,cotton,bannana,coffee,tea,cocoa,rubber .

7. Nucleus estate model Variation of the centralized model Close supervision of production Eg . Mainly tree crops,but also fresh vegetables and fruits for export

8. Multipartite model Usually involves government statutory bodies and private companies jointly participating with farmers May have separate organizations responsible for credit provision,production,management,processing and marketing

9. Informal model Individual intrepreneurs or small companies who make simple,informal production contracts with farmers on a seasonal basis Financial management is usually minimal Most speculative of all contract farming models,with risk of default by both promoter and farmer Eg . Vegetables,watermelons,fruits

10. Intermediary model Formal subcontracting by companies to intermediaries( collectors,farmer groups,NGOs ) Intermediaries have their own(informal) arrangement with farmers Disconnects links between company and farmer Risks: -losing control over prices paid to farmers -poorer quality standards and irregular production

11. Historical background For the first time it was introduced in Taiwan in 1895 by Japanese government. In India it was introduced by Pepsi company for the cultivation of vegetables particularly potato and tomato in Rajasthan in 1927. In Karnataka contract farming was started in 20 th century.

12. Till today, PepsiCo India’s project with the Punjab Agro Industries Corporation and Punjab agriculture university remains one of the most ambitious contracts farming projects in the country.

13. Nature of contract farming The contracts farming may fall into three categories Market specification contracts : are pre harvest agreement that bind the processing firm and the growth to a particular set of conditions governing the sale of the crop. The conditions often specify price and quantity. Resource-providing contracts : obliges the processor to supply crop inputs, extension or credit,in exchange for the marketing agreement. Production management contracts : binds the farmer to follow a particular production method a input regimen,usually in exchange for a marketing agreement or resource provision.

14. Why contract farming To reduce the load on the central and state level procurement system. To increase private sector investment in agriculture. To bring about a market focus in terms of crop selection by Indian farmers. To generate a steady source of income at the individual farmer level.

15. To promote processing and value addition. To reduce migration from rural to urban areas

16. Advantages to the farmers Inputs and production services are often supplied by the sponsor. This is usually done on credit through advances from the sponsor. Contract farming often introduces new technology and also enables farmers to learn new skills. Assured market for the produce. Contract farming can open up new markets which would otherwise be unavailable to small farmers.

17. PROBLEMS FACED BY FARMERS Particularly when growing new crops,farmers face the risks of both market failure and production problems. Farmers may become indebted because of production problem and excessive advances.

18. Benefits to the company Uninterrupted and Regular Flow of Raw Material Protection from Fluctuation in market pricing Long term planning made possible Builds long term commitment Dedicated supplier base Generates goodwill for the organization

19. Issues and concerns Soil fertility concern. Environmental issues. Food security concerns. Seed problems. Labour problems. Contract disputes. Middle man’s influence.

20. conclusion India,given the diverse agro climatic zones,can be a competitive producer of a large number of crops. There is a need to convert our factor price advantage into sustainable competitive advantage. Contract farming offers one possible solution.