Economic and social empowerment is the principal result of this combination. It would make ‘small’ people feel ‘big’ and stabilise and expand their purchasing power. It would better disperse purchasing power across the nation’s geography and better distribute it across the nation’s households. Corporate farming and the continued legal restrictions on generic forward contracts are unlikely to achieve any of the above.

Why contract farming?

Companies engaged in processing and marketing of agricultural products are entering into contracts with the farmers. They provide the farmers with the inputs and buy back the product with a rate specified in advance. Following are the inputs normally provided by the contract farming company:

The terms of the contract are well designed and spelt out in advance and a consent letter is obtained from the farmer. The company monitors the arrangements from “seed to shelf”.

Advantages for farmer:

Advantages for the company:

Corporate vs. contract

The system helps eliminate the chain of middlemen and brings the producers and processors face-to-face. For the processing firm, it is an important step in supply-chain management. Spot market purchases are fraught with uncertainties vis-à-vis quality, quantity and price. The search and information costs for the right quality and quantity are high under open market purchases, whereas contract farming takes care of all these uncertainties. The advantages to the farmers are in terms of assured market, access to technology, supply of inputs and extension services.

In India, contract farming is confined to certain crops in select pockets. But there is immense potential. The increasing income has created quality and health consciousness among consumers who demand food products of certain specifications. The only way the demands of niche domestic and export market can be met is by having control over production of the crops at different stages. Contract farming allows firms to have such controls.

Despite these advantages, farming under contract has many constraints. Though contract farming is basically a way of allocating risk between the firm and its farmers, the distribution of risk depends largely on such factors as bargaining power, availability of alternatives and access to information. The advantage export - that is, after the investment has been made to one party - leads to reneging on contract and exploiting the other party with the disadvantage. When, say, the vendor and the firm are locked in asset-specific investments with no room for either party to use the resource alternatively, the contract is fairly smooth. Especially in short- term crops such as vegetables, farmers tend to divert the produce to the open market rather than supply to the processing firm when the prices are high. The cost calculations of the firm crumble, as they are forced to arrange supply of raw materials from alternative sources with attendant uncertainties.

Similarly, in long-duration crops such as plantation crops, the firms often fail to honour the contract, as they know that farmers have no alternative but to sell the, products to them at lower prices. The latter often succumb to the firm’s diktats. The solution to these problems must be found within the framework of the contract so as to ensure a smooth relationship between the firm and the farmer.

The firm can avoid to an extent the opportunistic behaviour of the farmer by adopting an innovative price policy. Contract farming is viewed aptly as an important tool to increase private corporate involvement in agro-processing, and help improve rural employment and income. However, to ensure smooth functioning of contract, innovative features need to be built in. The author is faculty, SBIRD, Hyderabad.