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Notes on Contract Farming

Notes on Contract Farming:

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  • Contract farming: Organizing commercial agricultural production for various scale farmers.
  • Driven by changes in consumption habits, fast-food outlets, supermarket roles, and world trade in fresh/processed products.
  • Importance: Helps small-scale farmers participate in the market economy, preventing marginalization.
  • Governments and development agencies aim to generate rural income but face challenges without proper market linkages.
  • Contract farming offers these essential linkages.

Definition and Concept:

  • Defined as agreements between farmers and firms for agricultural product production and supply, often at predetermined prices.
  • Involves production support from the purchaser, like input supply and technical advice.
  • Types of commitments: Farmers provide specified commodities, companies support production and purchase the commodity.
  • Partnership model: Farmers grow contracted crops, sponsors manage through input supply and buy-back arrangements.
  • Contract farming can develop markets and transfer technical skills.

Types of Contract Farming:

  • Various models: Centralized, Nucleus-estate, Multipartite, Informal, Intermediary.
  • Decision on model type depends on market demand, production/processing requirements, and economic/social viability.

Centralized Model:

  • Vertical coordination: Sponsor buys, processes, markets the product.
  • Common with crops like tobacco, cotton, sugarcane, bananas, and certain tree crops.
  • Involvement level of sponsor varies.

Nucleus-estate Model:

  • Sponsor owns/operates a nearby estate plantation, providing throughput for processing plants.
  • Used for crops needing significant investment and immediate processing.

Multipartite Model:

  • Involves statutory bodies, private companies, and farmers.
  • Common in China and Mexico, with separate organizations for different functions.

Informal Model:

  • For seasonal crops with minimal support, often used by individual entrepreneurs or small companies.

Intermediary Model:

  • Common in Southeast Asia, using intermediaries for contracting crops to farmers.

Key Preconditions for Successful Contract Farming:

  • Profitable market: Essential for both sponsor and farmer.
  • Physical and social environments: Impact success significantly.
  • Land availability and tenure: Critical for farmers under contract.
  • Input availability: Necessary for both farmers and processing needs.
  • Social considerations: Cultural attitudes and practices influence success.

Government Support:

  • Legal framework and efficient legal system are essential.
  • Government roles: Enabling, regulatory, developmental.
  • Government intervention in market linkages and protection of farmers.

Advantages and Problems of Contract Farming:

  • Balances income and profitability for sponsors and farmers.
  • Advantages for farmers: Guaranteed purchase, access to services, credit, technology, skill transfer.
  • Problems for farmers: Increased risk, unsuitable technology, manipulation of quotas/quality, corruption, monopolies.
  • Advantages for sponsors: Political acceptability, overcoming land constraints, shared risk, quality consistency, promotion of inputs.
  • Problems for sponsors: Land availability, social/cultural constraints, farmer discontent, extra-contractual marketing, input diversion.

Contract Farming in India and its Relevance in Present Scenario:

  • India: Leading producer in various agricultural commodities.
  • Challenges: Low milk productivity, stagnation in production, inefficient resource use.

Limitations of Traditional Farming System in India:

  • Farmers face financial and technological constraints.
  • Traditional model disadvantages: Farmer exploitation, bad debts for financiers, quality issues for retailers.

Pre-Independence and Post-Independence Era:

  • Pre-independence: Introduction of cash crops like tea, coffee, rubber.
  • Post-independence: Seed multiplication under contract, innovative schemes like Wimco's farm-forestry, Pepsico's tomato cultivation.

Present Status of Contract Farming in India:

  • Various forms of contract farming in different states.
  • Success in milk production, sugarcane farming, floriculture.
  • Growing national and multinational involvement in contract farming.

Contract Farming in Punjab:

  • Companies like Pepsico, PAFC, Chambal Agritech active in contract farming.
  • Crops include tomato, potato, mentha, chillies, maize.
  • Farmer satisfaction levels generally high with services rendered.


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