ISSN: 2320-5407 Int. J. Adv. Res.

11(06), 689-696

Journal Homepage: -www.journalijar.com

Article DOI:10.21474/IJAR01/17116
DOI URL: http://dx.doi.org/10.21474/IJAR01/17116

RESEARCH ARTICLE
CONTRACT FARMING: A REMEDY OF POOR FARMERS IN INDIA

Chinmoy Sarkar
Assistant Professor in Economics, Siliguri College of Commerce, Siliguri, College Para, West Bengal- 734001.
……………………………………………………………………………………………………....
Manuscript Info Abstract
……………………. ………………………………………………………………
Manuscript History Cost of cultivation of small farmers is increasing due to higher price of
Received: 20 April 2023 input of farming but they are getting profitable price. It is common
Final Accepted: 24 May 2023 phenomenon that price of crops decrease during the pick season of
Published: June 2023 farming. So farmers face tremendous problems in marketing of their
articles. The problems will be more tragic in case of vegetables since
Key words:-
Contract Farming, Rural Economy, Land farmers cannot enjoy the facility of cold storage. As a remedy of this
Holding great problem the concept of contract farming has raised in 2003-2004
in India. The process of contract farming in India involves scientific
and optimum use of land and farm resources for maximum output of
agriculture produce. Small farmers practicing primitive agricultural
methods for cultivation and harvesting of crops. But with the
liberalization of Indian economy, there has been a sudden spurt in
contract farming in India. Practice of this farming may bring revolution
to the poor farmers by successful implementation of it.

Copy Right, IJAR, 2023,. All rights reserved.

……………………………………………………………………………………………………....
Introduction:-
Since last few decades major changes has taken place in our agrarian structure in India. Land holding in India is
sliding downwards, with progressively greater concentration in the marginal and small holding groups. For the
country as whole, small (including marginal) farmers constitute 83.5 per cent of total holdings, with major
concentration in Uttar Pradesh, Bihar and Andhra Pradesh and West Bengal. Small and poor farmers of India are
facing the numbers of problems with this little land holding. They could not be able to implement big tools of
farming in their scattered land. Similarly they are not able to use high yielding seed verities, fertilizer, irrigation
facilities due to lack of financial assistance. As a result cost of cultivation has increased but they cannot sale their
product at profitable price. We know marketing is big problem of Indian farmers. It is common phenomenon that
price of crops decrease during the pick season of farming. So farmers face tremendous problems in marketing of
their articles. The problems will be more tragic in case of vegetables since farmers cannot enjoy the facility of cold
storage. So they are bound to sell their crops by the price of normal profit and sometime they sell their product at the
losing price. As a remedy of this great problem the concept of contract farming has raised in 2003-2004 in India. We
shall discuss here this line of thought with some current evidence.

The process of Contract Farming brings energy and way of lucrative cultivation in Indian farm sector. The process
of contract farming involves cultivating and harvesting for and on behalf of big business establishments or
Government agencies and forwarding the produce at a pre-determined price. In return, the contracted farmers are
offered high price against their farm produce. The role of contract farming in Indian rural economy is becoming
more and more important, since organized farming practice has become the need of the hour in the world of rapid
industrialization. The rapid industrialization process in India has created shortage of farmland, which in turn has

Corresponding Author:- Chinmoy Sarkar 689

Address:- Assistant Professor in Economics, Siliguri College of Commerce, Siliguri,
College Para, West Bengal- 734001.
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necessitated organized farming practice in India. The process of contract farming in India involves scientific and
optimum use of land and farm resources for maximum output of agriculture produce. Small farmers practicing
primitive agricultural methods for cultivation and harvesting of crops. But, with the liberalization of Indian
economy, there has been a sudden spurt in contract farming in India. Moreover, today more and more established
business houses are taking interest in the business of contract farming in India. This has happened as a result of rapid
growth of retail industry in India. The growth of retail industry in India has propelled the growth of farm retail in
India, which caters fresh vegetables and fruits from the farms to the Indian mass. The process of contract farming in
India involves, engaging rural Indian farmers for the cultivation of agricultural produce under strict government
policies. The role of Contract Farming in Indian Rural Economy involves government and private participation
along with the rural workers. Further, it engages a good number of farmers and other rural workers to discharge
other agriculture related activities.

Number of economists has obeyed that contract farming brings an era of rural farm revolution. It makes efficient
farming environment in India. Benziger 1996 and Singh, 2002 told that ―contract farming has been used in many
situations as a policy step by the state to bring about crop diversification for improving farm incomes and
employment‖. Contract farming is also seen as a way to reduce costs of cultivation as it can provide access to better
inputs and more efficient production methods. It can be defined as a system for the production and supply of
agricultural and horticultural produce by farmers/primary producers under advance contracts, the essence of such
arrangements being a commitment to provide an agricultural commodity of a type (quality/variety), at a specified
time, price, and in specified quantity to a known buyer. In fact, contract farming can be described as a halfway
house between independent farm production and corporate/captive farming and can be a case of a step towards
complete vertical integration or disintegration depending on the given context. Glover, 1987 told ―due to the
efficiency (co-ordination and quality control in a vertical system) and equity (smallholder inclusion) benefits of this
hybrid system, it has been promoted aggressively in the developing world by various agencies‖. Singh, 2002
suggested that ―it basically involves four things - pre-agreed price, quality, quantity or acreage
(minimum/maximum) and time‖. Bijman, 2008 told ―contract farming is generally undertaken when there is market
failure expressed in perish ability of produce, quality of produce and technicalities of producing a new/different
product‖. The contracts could be of three types; (i) procurement contracts under which only sale and purchase
conditions are specified; (ii) partial contracts wherein only some of the inputs are supplied by the contracting firm
and produce is bought at pre-agreed prices; and (iii) total contracts under which the contracting firm supplies and
manages all the inputs on the farm and the farmer becomes just a supplier of land and labour. The relevance and
importance of each type varies from product to product and over time and these types are not mutually exclusive.

This paper tries to find out the possible benefits of contract farming in India. As well as we try to give a clear picture
of implementation of this new farming. Conducting paper is constructed by collecting data from different journals,
internet, books edited by different authors etc.

Meaning, Economics and Extent of Contract Farming in India

Contract farming is a form of vertical integration within agricultural commodity chains, such that the firm has
greater control over the production process, as well as the quantity, quality, characteristics and the timing of what is
produced. The conventional approach to vertical integration has been for firms to invest directly in production
through large-scale estates or plantations (especially for traditional tropical commodities such as tea, bananas and
sugarcane). Contract farming, in its various forms, allows a degree of control over the production process and the
product without the firm directly entering into production.

Available studies indicate that contract farming, as an institutional arrangement, has offered higher profits and lower
costs to the contract farmers compared with non-contract farmers. In addition to the assured markets and stable
prices afforded farmers, the backward linkages help control transaction and marketing costs, yielding higher returns
to contract farmers. Although in the case of milk, prices offered by the cooperatives can be less than prevailing open
market prices, member farmers earn higher profits because the cooperatives provide low-cost inputs that lower the
cost of production. Of the three sectors examined—fruits and vegetables, dairy, and poultry – contract poultry
farmers appear to save significantly on production and transaction costs, as most of these costs are borne by the
contracting firms. An IFPRI study (Birthal et.al. 2005) of MDFVL, Nestle, and Venkateshwara Hatcheries showed
that contracting helped farmers reduce costs of cultivation and earn higher profits compared with non-contract
farmers. The results of this study shows that net profits for contract farmers were more than double those of non-
contract farmers in the case of dairy, 78 percent higher for vegetable (spinach) growing farmers, and 13

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percenthigher for poultry farmers. Costs of production for contract farmers were lower by approximately 21 percent
for milk and 21 percent for vegetables compared with non-contract farmers. The share of transaction and marketing
costs in total costs was markedly lower for contract growers. Among non-contract producers, transaction and
marketing costs accounted for 20 percent of costs for milk producers and 21 percent of costs for vegetable
producers. In contrast, transaction and marketing accounted for just 2 percent of total costs for contract milk and
vegetable producers. In the case of poultry, the cost of inputs such as chicks, medicines, and feed that are provided
by the integrators account for about 75 percent of total production costs. Also, with the contract firms bearing a
mortality risk of 5 percent and acquiring all output, the poultry integrators bear the bulk of both production and
marketing risk. Other studies on dairy cooperatives show that contract farmers earn higher profits compared with
non-contract farmers (Gupta, et al. 2006). In the case of milk fed, contract farmers earned 33 percent more net profit
per ton of milk sold compared with non-Milk fed farmers.

Similarly, a study of Mahagrapes showed that profits earned per acre per annum by contract growers were nearly 38
percent higher than that for non-contract growers (Roy and Thorat 2008). Since Mahagrapes serves global markets,
prices received are almost three times higher than in the local markets. Also, farmer members benefited from better
quality inputs and extension services at cheaper rates. A similar case study of contract grape growers in Andhra
Pradesh, also supplying the export market, showed that contract growers received 55 percent higher net returns than
supplying to the domestic markets (Rao et.al.2007). Although costs of production were 33 percent higher for
contract farmers in this case, higher costs were more than offset by higher output prices. All gherkin production in
Andhra Pradesh is under contract farming. According to survey results, the growers earned a net profit of Rs.35, 000
per hectare during 2004/05, and that returns over variable costs were 30 percent higher than for other vegetable
crops (Rao et.al. 2007). Existing research on contract farming shows that contract farmers are better off because they
are able to save a considerable proportion of the costs of cultivation and earn higher profits. The following table
shows initiative taken by private sector of contract farming in India.

Table1:- State Wise Contract Farming Initiatives by Private Sector.

State Crop Company/Corporate Area(ha)
Karnataka Ashwagandha Himalaya Health Care Ltd. 700
Karnataka Dhavana Mysore S N C Oil 400-500
Company
Karnataka Marigold Caprica Chili AVT Natural Products 4000
Ltd.
Karnataka Coleus Natural Remedies Private 150
Ltd.
Karnataka Gherkins 20 Pvt Companies* (Major 8000(inc of Tamil Nadu
Companies Global Green and AP
Company Pvt Ltd, Unicorn
Agrotech Ltd, Green Agro
Park Pvt Ltd, Ken
AgritechPvt Ltd, etc)

Maharashtra Soybean Tinna Oils and Chemicals 134800

Maharashtra Several Fruits, Vegetables, Ion Exchange Enviro

Cereals, Spices & Pulses Farms Ltd (IEEFL)

Maharashtra Safflower Oilseeds Marico Industries

Madhya Pradesh Wheat, Maize & Soybean Cargil India Ltd

Madhya Pradesh Wheat Hindusthan Lever Ltd Madhya Pradesh
(HLL)

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Madhya Pradesh Several Fruits, Vegetables, Ion Exchange Enviro

Cereals, Spices & Pulses Farms Ltd (IEEFL)
Madhya Pradesh Soybean ITC_IBD Madhya Pradesh
Punjab Tomato & Chilly Nijjer Agro Foods Ltd Punjab
Punjab Barley United Breweries Ltd Punjab
Punjab Basmati, Maize Satnam Overseas, Sukhjit Punjab
Starch (Mahindra
Shubhlabh Services Ltd)

Punjab Basmati Satnam Overseas, DD Intl Punjab

Incorp, Amira Foods India
Ltd (Escorts Ltd & Grain
Tech)
Punjab Basmati, Groundnut & PepsiCo India Ltd Punjab
Potato, tomato, chilli
Punjab Milk* Nestle India Ltd Punjab
65000000
Tamil Nadu Cotton Super Spinning Mills Tamil Nadu
Tamil Nadu Maize Bhuvi Care Pvt Ltd Tamil Nadu
Tamil Nadu Paddy Bhuvi Care Pvt Ltd Tamil Nadu
Tamil Nadu Cotton Appachi Cotton Company Tamil Nadu
* Involving about 90000 farmers in about 1600 villages
1
Source: NIAM (2003), Times Agriculture Journal (2003), (FICCI-IFPRI-ICRISAT: 2003 ) and Centad, Sukhpal
Singh: 2005)

In the above table we are highlighting state wise extent of contract farming in India. It is worth mentioning that the
magnitude of contract farming does not implement equally over the states. The concentration of this farming has
centralized only in few sates namely-Maharashtra, Punjab, Tamilnadu, Karnataka, and Madhya Pradesh. Very
recently contract farming has moved its direction in other states also. For example we can say potato contract
farming has initiated in Bardhaman, Birdhum district in West Bengal. Similarly contract farming in broiler
production has made big farming structure in West Bengal.

Pros and Cons of Contract Farming

Contract farming is a partnership between agribusiness/marketing firms and farmers, and has both advantages and
disadvantages to both the parties. For agribusiness firms, contract farming is an important means to have an assured
access to desired products or a quantitative and qualitative control over material supplies without actually engaging
itself in farming. These firms may provide inputs, technology and services to farmers as a part of contract. If a firm
want to produce its raw material requirements itself, using own or rented land and hired labor, the costs towards
wages, social benefits, training and supervision could be very high. Through contract farming, the firm can shift
and/or share some of these responsibilities with farmers, and secure supplies at a lower cost. Contract farming thus
enables agribusiness firms to optimally utilize their installed capacity, infrastructure and manpower, and respond to
food safety and quality concerns of the consumers. For farmers, contract farming serves as an assured market for
their produce at their doorsteps, reducing marketing and transaction costs and also price risk. Availability of an
assured market also acts as an incentive to farmers to use quality inputs, adopt improved technologies and scale up
their production systems. In circumstances when farmers face problems in accessing inputs, technology, information
and services, firms provide these as a part of contract and hence reduce uncertainty in their availability, quality and
prices for the farmers. In short the advantages of contract farming are follows:
1. Certainty on crop price;
2. Provision of inputs and production services;
3. Availability of farm credit;
4. Accessibility of appropriate technology;
5. Skill transfer;
6. Access to reliable markets etc.

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Although contract farming provides number of assistance for farmers, it is not free from criticizes. Many economists
have suggested that along with successful farming environment, contract farming is responsible for following
disadvantages of farming:
1. Increased risk of farming;
2. Unsuitable technology and crop incompatibility;
3. Manipulation of quotas and quality specifications;
4. Corruption;
5. Domination by monopolies;
6. Indebtedness and over reliance on advances etc.

Feature and Effectiveness of Contract Farming in India

There are several factors - economic and non-economic, internal and external to the contracts – that influence
relationship between farmers and firms, and hence the performance and the sustainability of contract farming.
Contract farming exhibits in various forms, depending on the type of commodity, buyers and sellers, and the socio-
economic environment surrounding farmers. Hence, the factors underlying performance of contract farming could be
different under different production and socioeconomic environments. Contract farming may be constructed in
different form. We are discussing here few of them to understand the figure of this farming. First of all we can
categories contract farming into corporate oriented contract farming and state oriented contract farming. We are
discussing two types of corporate contract farming and single type of state contract farming as follows:

Bi-partite contract farming model:

Bi-partite contract farming model is consist of company and farm sector. According to this model companies are
providing inputs of farming to the farmers. So poor farmers take the responsibilities of farming without burden of
farming credit and they send their produced commodities to the companies. So the presence of intermediaries who
was making huge price difference between cultivator and final consumers has diminished.

Supply of products

Company

Farmer
Supply of inputs on credit

Tri-partite Contract Farming Model:

In that model bank is interlinked along with company and farmer. Banks provides credit and payment to the farmers.
Companies also provide credit of farmers and farmers are providing products to the companies. On the other hand
company makes payments of products for the banks and similarly banks makes payments of inputs for the
companies.

Payments of products
Bank
Company Payments of inputs

Supply of credits Supply of product

Credit and payment
after deduction of dues
Farmer

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State-led Contract Farming:

This model of farming shows the engagement of state in farming system along with company, farmer and input
dealers. State provides inputs directly to the dealers rather than to the farmers. As a results farmers are getting inputs
from the dealers for cultivation. Farmers provide products to the state and state make payments of procurement and
payments of products. Then state sends the products to the companies and companies send the payments to the state.
Here MoU works as intermediaries of companies and state.

Procurement & Payments for producesSeed supply & extension work

Produces
Produces State (PAFC)
Payments
Payments for services MoU
Farmer
Company
Input Co/Dealer

Small landholding Indian farmers always facing two types of problem in farming- (a) uncertainty of production due
to different types natural calamities and attract of insect on their crops (b) over production of crops. Both are matter
of concern to the poor farmers. Although government has initiated crop insurance scheme and regulated price
system, these are not much effective practically. Recently the idea of contract farming raised big sound in favour of
gainful farming in India. Here we are giving a small study to understand the economics of contract farming.

There is a striking difference in the profits of contract and non-contract farmers particularly in the case of milk and
spinach. Contract farmers realize more profits as compared to non-contract farmers; the difference is more than
double in milk, and 78 percent in spinach. Other studies too indicate higher profits for contract farmers. Birthal, Jha
and others (2006) have reported contract dairy farmers receiving 70 percent more profits over non-contract farmers.
In potato, Kumar (2006) finds 143 percent higher profit for contract farmers over non-contract farmers.

Table 1:- Impact of contract versus non-contract production. (Rs/Ton)

Milk Spinach Broiler
Item Con- Non- % Con- Non- % Con- Non- %
tract contract difference tract contract difference tract contract difference
Yield* 11.9 11.4 4.4 8.6 8.3 4.0 1.78 1.79 -0.6
Production 5586 5782 -2.5 1485 1630 -8.9 - - -
cost
Marketing 100 1442 -93.1 35 437 -92.0 38 90 -57.8
and
transaction
costs
Total cost 5686 7170 -20.7 1520 2067 -26.5 - - -
Price 9337 8991 3.8 3311 3074 7.7 - - -
Net 3651 1821 100.5 1791 1007 77.9 2255 2003 12.6
revenue
* milk: 4 % fat corrected in kg per in-milk animal; spinach: tonnes/ha; broilers: body weight in kg/bird.
Source: Birthal et al. (2005)

In the above table we have shown the impact of contract and non-contract farming in respect of milk, spinach and
broiler production. The result shows that yield rate is higher in case of contract farming than non contract farming in
production of milk and spinach. But yield of broiler production is little bit unfavorable by contract farming. On the

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other hand production cost, transaction cost is smaller in contract farming. Similarly farmers are getting more price
and revenue in contract farming. So we can say contract farming has brought profitable farming environment.

Limitation of Contract Farming

Theoretically, farmers stand to gain from contractual agreements that provide lower transaction costs, assured
markets, and better allocation of risks. On the other hand, contracting firms have the advantage of more assured
supplies, and reasonable control over quality and other specifications. However, in practice, there are practical
problems that emerge in agricultural contracting that can result in losses to both farmers and firms. Contracting
agreements are often verbal or informal in nature, and even written contracts often do not provide the legal
protection in India that may be observed other countries. Lack of enforceability of contractual provisions can result
in breach of contracts by either party. In India, there have been instances of farmers refusing to sell to contracting
firms when market prices exceed the contract price, and of firms refusing to purchase contracted quantities or pay
contracted prices due to market conditions. Neither the contracting firm nor the farmers are keen to contest these
issues in a court. Most often, it is mutual understanding and faith that drives contractual relationships and it takes a
long time to win mutual trust and confidence. Contract farming arrangements are often criticized for being biased in
favor of firms or large farmers, while exploiting the poor bargaining power of small farmers. In such situations, a
viable approach seems to be to form clusters of small farmers that can create a scale effect and also enhance the
bargaining position of the farmers. Success in developing contracting models or other forms of farm-firm linkages
that are effective for small holders will be a key challenge to small holder participation in the transformation of
Indian agriculture. However, not much attention has been given to measures of risk mitigation against production
and price failures, which are important for sustainability and scalability of contracting ventures. Mutual trust and
confidence in the farm-firm relationship is a major driver of contract farming arrangements, and there are now a
number of examples in India where contracting is expanding and risk is apparently being adequately shared. In short
the success of contract farming is mitigating due to following reasons-
 Ignoring to accept the lower grading crops along with higher grading crops
 Risk of over matured crops due to delay in harvesting
 Risk of cultivating new crop and hence problem in adoption of new production technology
 Risk of Refusing to purchase the specified quota in the case of decline in export
 Exploitation by the firms by offering relatively lower price as compared to export price
 Misunderstanding between growers and representative of firms on adoption of production practices
 Chagrining higher prices for inputs
 Delay in payment of sale proceeds
 Poor quality of seeds and other inputs etc.

Conclusions:-
There is no doubt that contract farming makes tangible potential benefits. Farmers and firms both are getting
benefits through this farming concern. It provides greater confidentiality in pricing levels and reputational benefits.
Numbers of private concerns alone or along with government takes different initiatives to fulfill the aim of this
farming. It is worth mentioning that contract farming offers numerous opportunities for farms like it can allow
access to a reliable market; it can provide guaranteed and stable pricing structures; it can provide access to credit,
inputs, production and marketing services (seed, fertilizer, training, extension, transport, and even land preparation).
In short, contract farming can open doors to new markets for a farm’s produce, stimulate technology and skill
transfer (particularly for higher-risk crops, which resource-poor farmers might typically avoid), and it can support
farmers in meeting vital sanitary and phyto-sanitary standards. Contract farming can also provide many additional
benefits and opportunities: it can increase on-farm diversification; technical assistance and knowledge transfer can
spill over onto adjacent fields and into nearby villages; by-products from contract farming can be used for other
farming activities; it can simplify marketing decisions, thus improving efficiency; it can stimulate the broader
commercialization of smallholder farming. But the extent of contract farming is not equal over the nation. Only in
some states this farming perform well neglecting the others states. Practice of this farming may bring revolution to
the poor farmers by successful implementation of it. This farming also generates few drawbacks which may solve by
active initiatives of respective state government.

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