Last Updated: Feb 2023 (Contract Farming)
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This article deals with ‘Contract Farming.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.
It is a forward agreement between farmers & buyers in which
|– Agrees to buy produce from the farmer at a predetermined price.
– Usually, the buyer also provides inputs like seeds to ensure that the final product meets desired quality.
|– Agrees to supply the produce of predetermined quality to the buyer.
But the problem is, this is prevalent in only a few states where APMC laws allow contract farming.
Examples of Contract Farming in India
- PepsiCo is doing contract farming with Potato farmers of the Hoshiarpur district.
- ITC is doing contract farming for Soyabean.
- Mahindra Shubhlabh is doing contract farming for Basmati rice
- Himalaya is doing contract farming with Ashwagandha producers.
- Hindustan Unilever is doing contract farming with wheat farmers.
Benefits of Contract Farming
- Improving Farmer’s Productivity: It provides access to better inputs, scientific practices and credit facilities.
- Insurance to post-harvest price fluctuations: Farmers are saved from price fluctuations since the price is fixed.
- Crop Diversification: In the absence of contract farming, farmers grow only wheat and rice, which the government procures.
- Crop Diversification: Contract farming helps in promoting Food Processing Industry.
- The company can get desired quality of agro products.
- Consumers Benefit: It leads to the elimination of intermediaries that can reduce food price inflation.
Challenges with Contract Farming
- Stockholdings limits on the contracted produce under the Essential Commodities Act, 1955 act as a hindrance in contract farming.
- Not benefiting Small Farmers: Buyers have no incentive for contract farming with a large number of small and marginal farmers due to high transactions and marketing costs, creating socio-economic distortions and preference for large farmers.
- It is a capital-intensive and less sustainable cultivation pattern as it promotes increased use of fertilizers and pesticides, which have detrimental impacts on natural resources, the environment, humans and animals.
- Encourages Monoculture Farming: It impacts soil health negatively and poses a risk to food security.
- Monopsony: Product is generally a particular crop and is the only buyer for that company. Hence, the farmer can be price takers only because the company is the sole buyer.
- Predetermined prices deny farmers the benefits of higher prices prevailing in the market.
Key Features of the Contract Farming Act
- Mainly to address the breach of contract by the company (because the company can breach the contract if they are getting goods at a low price and then afford a lawyer to fight the case).
- It sets up Contract Farming Authority and Recording Committees to register the contracts and implement them effectively.
- It provides to keep contract farming outside the ambit of the APMC act.
- The produce will be insured under the existing agriculture insurance schemes.
- It makes provisions for making Farmer Producer Companies (FPCs).