Contract Farming: Opportunities & Challenges

Abstract

The Government of India’s National Agriculture Policy1 envisages that “Private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oilseeds, cotton and horticultural crops”. If we break down the term “contract farming” as two individual separate words it would mean a legal agreement associated with farming so naturally, it is an understanding between a producer which in this case would typically be a farmer and the buyer to whom the product is to be delivered with accordance to all the terms and conditions of the agreement. Going forward we aim to build a contrast between the different practices and ways and its effects and outcomes of two very distinct places in respect to their geographical and cultural ambience, India and USA. This will help us in grasping the advantages and disadvantages of various attributes which lead us to choose the better options at every turn.
In today’s world of impersonal and open-market transaction contract farming is a much more controlled way of exchange bound by a legal agreement which is meant to protect both sides, the producer as well as the buyer. The problem, however, arises in the implementation since more than often farmers are put in a weak position and have to agree for various reasons such as the constant change in market structure or due to financial conditions. Contract farming has many agro-based advantages and it is a fast-growing practice which could be interpreted as rural development but it also has a dark side which allows buyers to exploit farmers or results in more catastrophic consequences for the farmers if they aren’t able to comply with the terms of the agreement. India is a country of enormous diversity – geographic, economic and ethnic – that has made remarkable economic and social progress since the start of liberalization reforms in the early 1990s. It is the seventh largest country by land area (2.97 million km2) and the second most populous after China with over 1.3 billion people, accounting for 18% of the world’s population. However, at just 0.15 ha per capita, agricultural land is very scarce. While the level of urbanization increased from 27.8% to 31.1% over the past decade, two thirds of the population still live-in rural areas (World Bank WDI, 2018).2 Farming is an age-old means of livelihood for millions of Indians. However, there have been few systems/models in which farmers are assured of a market for their produce, leave alone a remunerative price. Farmers have on occasion had to throw their produce away for want of buyers. This is one side of the coin. On the other is the agri-based and food industry, which requires timely and adequate inputs of good quality agricultural produce. This underlying paradox of the Indian agricultural scenario has given birth to the concept of Contract Farming, which promises to provide a proper linkage between the ‘farm and market.’ Economic growth of around 7% over the last 5 years makes India one of the fastest-growing emerging economies (Box 1.1). The acceleration of structural reforms and low commodity prices since 2014 have boosted economic activity in India and improved the external current account position. In addition, continued fiscal consolidation, by reducing government deficits and debt accumulation, and an anti-inflationary monetary policy stance have helped consolidate macroeconomic stability (OECD, 2017a).3
Important steps have also been taken to make India a less fragmented domestic market. In July 2017, the Goods and Services Tax (GST) reform – in the making for over a decade – came into force. The GST replaced various taxes on goods and services levied previously by the central government and states by a single tax on value added, with the potential to enhance the efficiency of production and movement of goods and services between Indian states. Nonetheless, implementation challenges remain, stemming from the different tax rates applied across product categories, exclusion of certain products, and other administrative complexities related to registration and payment.4 Recognizing the need for and merits of such a linkage with the farming/producing community, several corporate involved in agro- commodity trading, processing, exports, etc. have attempted to establish convenient systems/models that ensure timely and consistent supply of raw material of the desired quality and low cost. This article discusses a few successful cases of contract farming and a brief note on the bottlenecks and criticisms leveled against this emerging alternative farm business model.