Contract Farming Getting a Better Deal for Indian Farmers
By: Ravish Chavan *
India continues to be a largely agro-based economy with agriculture the mainstay in providing the sustainable livelihood for a large section of India’s rural population. Though advanced farming techniques have improved land productivity considerably, India’s agriculture sector continues to be under-leveraged owing to several challenges.
Traditionally, land-holdings in India have been small and fragmented, limiting the farm yield in net acreage. Uncertainty in water supply and rudimentary methods of irrigation often result in poor water harvesting and inefficiencies in water management. Inadequacies in the Indian agricultural supply chain system have led to poor development of agricultural marketing facilities and deficient allied infrastructure like storage facilities often lead to wastage of crops in transit. Lack of access to institutional credit and insurance hamper the capacities of farmers to raise working capital. A deficient agro-marketing infrastructure does not help farmers get the best procurement prices for their crops. The concept of contract farming can plug these lacunae, augment the incomes of farmers and boost the competitiveness of Indian agriculture.
How does this Concept usually Work?
The contract farming can be understood as a contractual arrangement between a buyer and a farmer for their agricultural produce. Typically, the farmer agrees upon a quantity of a specified product with its buyer at a pre-decided cost for a stipulated period of time, thereby making the farmer, a producer; and the buyer, a contractor; of this produce.
Identifying its advantages and opportunities for several corporate communities especially those involved in agro commodity trading, exports, etc. have attempted to establish models convenient to them for procuring raw materials at an agreed-upon cost and time. This practice can be observed in a classic case by reputed brands like Citrus Processing India (P) Ltd and Desai Fruits and Vegetables among others. The former tackles with the serious challenges of wastage in fruit production of oranges whereas the latter caters to the supply of bananas which availed benefits through contract farming.
As per the agreed upon contract, the farmer is required to plant the crop in their land, harvest and deliver the produce on the pre-agreed price to the contractor. This practice also helps eliminate market volatility, making it a win-win situation for the farmer and the contractor. The contractor also provides the farmer with key inputs and technical advice beneficial during the start to finish process.
Contract Farming: Interesting Facts
• Contract farming was first introduced in India for the cultivation of tomatoes and potatoes in Rajasthan in 1927 and in Karnataka, it was started with the cultivation of gherkin;
• The government introduced the Model Contract Farming Act, 2018 in the budget 2017-2018;
• The three crucial elements in contract farming include: predefined price; quantity; and time taken to produce;
• The contract farming in India is regulated under the Indian Contract Act, 1872. Now the department of agriculture and farmers welfare has a new draft model named contract farming Act, 2018;
• Farmers can use the contract as collateral to arrange credit with a bank.
Impact of Contract Farming to the Farmers
Now, the question here is – Is contract farming beneficial to farmers? The answer is – Yes, it is! It helps in reviving India’s growth story through contract farming by paving way for mutual trust and confidence between the two parties. The new contract farming model act aims to create a regulatory body to enforce the contract, creating protection for farmers.
Such practices help reduce the risk appetite and uncertainty between both parties through implementation of its organised and focused teamwork practices. However, it should also be noted that the advantage may fluctuate subject to its physical, social and market settings. The other benefits include: generating a steady source of income at the individual farmer level; generating employment opportunities in rural communities especially for landless agricultural labour; reducing migration to urban areas; and promoting rural self-reliance among others. The biggest advantage is transparency in pricing as the price is pre-decided.
Need for Supply Chain Management
Having looked at its benefits, for farmers to flourish, it is also essential for them to be able to manage and ensure high-quality produce. In order to maintain such standards, the need and urgency for supply chain management become very crucial. This is where a companies like FarmLink come into play; they provide farmers with a secured income based on long-term off-take agreements and all-round support to improve productivity and quality. The company procures fruits and vegetables directly from their farmers through a network of collection and service centres and delivering to retail stores, Hotel-Restaurant-Cafe (HORECA) chains, industrial processors and e-commerce food platforms. Thereby restructuring the supply chain, the company brings efficiency in delivery from farm to fork which results in minimum wastage of the produce and ensuring better pricing for the farmers.
An integrated farming initiative of ‘hub and spoke’ approach is going to be a game changer towards organised farming. In collaboration with the farming community and government, large tracts of land including cultivable waste lands shall be leased to generate high-quality farm produce. The companies like FarmLink would leverage their global expertise and deploy the latest technology and best practices in these farms enabled by farm extension services. Such farms would be termed as Model Farms and would set an example for farmers in the neighbourhood to benefit in terms of capacity building, technical support as well as forward and backward integration. These farms shall act as hubs enabling the farmers to be spoke suppliers. The farmers would also have an opportunity to get into contract farming with respect to a specific crop, either individually or collectively organised into farmer producer organisations for aggregation of farm produce in large volumes.
Future of Contract Farming
The future of the Indian agriculture sector may well be greener. Contract farming is growing at an exceptional rate and its primary drivers include: produce e.g. tomato pulp, organic dyes, poultry, mushrooms, dairy processing, onions, exotic vegetables, baby corn, basmati rice, medicinal plants, potatoes for making chips, mandarin oranges, orchid, pulpwood to name a few. Given the diverse agro zones in our country there lies various opportunities to cultivate and produce numerous crops keeping into account the climatic conditions. To help convert such farming practices for the advantage of farmers, contract farming offers one such possible solution. Under contract farming, companies can provide a mechanism which may include offering seeds, fertilizers and technical advice customised as per their needs and requirements. This practice helps eliminate the middleman thus benefiting the farmers in a large way!
* Ravish Chavan, COO of FarmLink, has played a key role in improving the company’s operational efficiency and bring in process discipline. Prior to his appointment as COO, Ravish was heading investor relations and transaction advisory at Pioneering Ventures – the company that incubated FarmLink. He holds an MBA in Finance and CFA and FRM charters.