Contract Farming

Last Updated: Feb 2023 (Contract Farming)

Contract Farming

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 

Contract Farming
Buyer 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.
Farmer 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


  1. PepsiCo is doing contract farming with Potato farmers of the Hoshiarpur district.
  2. ITC is doing contract farming for Soyabean.
  3. Mahindra Shubhlabh is doing contract farming for Basmati rice 


  • Himalaya is doing contract farming with Ashwagandha producers.

Madhya Pradesh

  • 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). 

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