Empral Contract Farms

Contract farming is an agreement between a buyer and a farmer that outlines the terms and conditions for the production and marketing of a farm product. The agreement typically includes:

• Price: The price the farmer will receive for the product
• Quantity and quality: The quantity and quality of the product the buyer requires
• Delivery date: The date the product is to be delivered to the buyer
• Production methods: How the product will be produced
• Inputs: Whether the buyer will provide inputs like seeds, fertilizers, or technical advice 

Contract farming can help small-scale farmers integrate into modern agricultural value chains by providing them with a guaranteed market, technical assistance, and inputs. However, some critics say that farmers may be abused by their contract partners.

There are different types of contract farming agreements, including:

• Fixed-price contracts: Guarantee a price to the producer, insulating them from price risk
• Production-management contracts: Specify how the product should be grown, reducing technical inefficiency
• Input-supply contracts: The buyer provides inputs, often on credit, which can help farmers with credit or liquidity constraints 

In India, contract farming began in the 1950s with contract-based seed production. It gained recognition when PepsiCo established a tomato processing plant in Hoshiarpur, Punjab and directly contracted with farmers to supply tomatoes.

In an age of market liberalization, globalization and expanding agribusiness, there is a danger that small-scale farmers will find difficulty in fully participating in the market economy. In many countries such farmers could become marginalized as larger farms become increasingly necessary for a profitable operation. A consequence of this will be a continuation of the drift of populations to urban areas that is being witnessed almost everywhere.

Attempts by governments and development agencies to arrest this drift have tended to emphasize the identification of “income generation” activities for rural people. Unfortunately there is relatively little evidence that such attempts have borne fruit. This is largely because the necessary backward and forward market linkages are rarely in place, i.e. rural farmers and small-scale entrepreneurs lack both reliable and cost-efficient inputs such as extension advice, mechanization services, seeds, fertilizers and credit, and guaranteed and profitable markets for their output. Well-organized contract farming does, however, provide such linkages, and would appear to offer an important way in which smaller producers can farm in a commercial manner. Similarly, it also provides investors with the opportunity to guarantee a reliable source of supply, from the perspectives of both quantity and quality.

The contracting of crops has existed from time immemorial. In ancient Greece the practice was widespread, with specified percentages of particular crops being a means of paying tithes, rents and debts.¹ During the first century, China also recorded various forms of sharecropping. In the United States as recently as the end of the nineteenth century, sharecropping agreements allowed for between one-third and one-half of the crop to be deducted for rent payment to the landowner. These practices were, of course, a form of serfdom and usually promoted permanent farmer indebtedness. In the first decades of the twentieth century, formal farmer-corporate agreements were established in colonies controlled by European powers. For example, at Gezira in central Sudan, farmers were contracted to grow cotton as part of a larger land tenancy agreement. This project served as a model from which many smallholder contract farming projects subsequently evolved.

Contract farming can be defined as an agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices. The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice. The basis of such arrangements is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the company to support the farmer’s production and to purchase the commodity.

The CF Act stipulates that farmers can opt for a contract for one crop season or a mutually agreeable period. This provides freedom for farmers to change their choice of firms.