role of contract farming

8/7/2019 Role of contract farming

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It is defined as a system for the productionand supply of Agricultural/horticulturalproduce under forward contracts betweenproducers/suppliers and buyers. Theessence of such an arrangement is thecommitment of the producer/seller toprovide an Agril commodity of a certain

type, at a time and a price and in thequantity required by a known andcommitted buyers. It involves the followingbasic elements.


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HLL, RALLIS and ICICI formed and alliancewith the farmers

PEPSI FOOD LTD. i.e. PEPSICO entered Indiain 1989 by installing a Rs 22 Crore tomatoprocessing plant at Zahura in Hoshiarpurdistrict of Punjab.

PEPSICO Joined with Punjab Agril-University

and Punjab Agro-industries corporation Ltd.Contract with the farmers for food grainproduction (Basumati Rice) spices (Chilies),oil seeds (Groundnut)


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Inputs can be provided by agribusiness firms,there by reducing the uncertainties associatedwith the input availability, quality and cost.

Technological assistance offered by the

contract firm favouring the production ofhigher valued often riskier crops and livestock. A market outlet is secured for the contracted

production reducing the marketing risk. The uncertainty about sales price is often

reduced With the reduction of product and market risk,income stability is favoured.

Access to credit is enhanced


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Problems occur when staff responsible forissuing contracts and buying crops exploitstheir position such practices result in a

collapse of trust and communicationbetween the contracted parties and soonundermine any contract.

Firms usually have more influence on theterms of the contract and can createunfavourable conditions

The monopoly of a single crop by a firmcan have a negative effect i.e. farmers loseflexibility in enterprise choice.


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Farmers debt can accumulate if the firmscredit and inputs are excessive relative toactual crop yields.

Firms might intentionally avoidtransparency in the price determinationmechanism of the contract.

Delivery schedules might be set by firms so

as to influence price paid to farmers. Forexample in case of sugarcane delay mightdepress price received if these are basedon the degree of sucrose.


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Long term contracts might lead to

gradually decreasing real prices

received by farmers. The risk that are normally associated with

monoculture practices are increased.


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Greater regularity of Agril product suppliesto the firm is ensured.

Greater conformity to desirable product

quality attributes and to safety standards inpromoted Input costs per unit are reduced Access to agricultural credit and eventual

financial incentives and subsidies is

facilitated Labour costs are reduced Expansion and interaction of production is

facilitated.


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Transaction cost of dealing with largenumber of farmers are high. Firms preferto work larger rather than smallerfarmers.,

Risk of misuse or deviation of suppliedinputs and of final products.

Internalization of support service cost Conflicts with farmers may arise or

negative impacts of the contractedoperations on the environment.


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role of contract farming

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