Contract farming: Lessons from 5 states

While contract farming valued an assured income, rent-fixing and contract bargaining were serious concerns

Three important laws concerning the farm sector were passed recently, including the one on Farmers’ (Empowerment and Protection) Agreement on Price Assurance and Farm Services Bill, 2020, to strengthen contract farming. These three Acts have become a matter of controversy against which the farmers are sitting in protest around Delhi demanding that the three Acts be repealed. I seek to elucidate here the principal determinants that drive contractual/lease relationships through the examples of various existing arrangements in the country.

Contract farming is a system in which production and supply of agricultural produce are done under forward or prior contracts and the essence of such contracts are commitments made by the farmers/producers to provide an agricultural commodity of a specific quality, at a time and a price, and in the quantity required by the buyers. In the early 1990s, tomato and chillies were brought under contract farming, which expanded later into multiple products, including contracting in exotic vegetables such as baby corn, bell peppers, jalapeños, gherkins, etc. This paper is an excerpt from a forthcoming book that systematically analyses contract farming in the broader framework of existing land and lease market systems.

The findings are primarily based on a primary survey of 2,014 farmers and 384 labourers from Punjab and Haryana in the North and Karnataka, Andhra Pradesh and Telangana in the South. Out of our selected sample, 70% of farmers and farm-labourers had been engaged in contract farming for at least four years.

As per these farmers’ opinions, the requirements for farmers entering into contract farming included assured irrigation, labour availability and having reasonable size of land holdings. An assured income, superior price based on the quality of the product supplied and hassle-free marketing were the main advantages of contract farming as per a majority of the farmers engaged in contract farming.

A clear majority of the contract farmers expressed their satisfaction with the contract farming system. On average, the value of crop output per acre was highest in the case of contract farming crops (Rs 52,000), followed by leased-in crops (Rs 43,000) and the least was in control crops (Rs 38,000).

The value of output per cropped area under contract farming was highest (Rs 91,000) in Andhra Pradesh (including Telangana), followed by Karnataka (Rs 68,000), Punjab (Rs 51,500), and it was the least in Haryana at Rs 41,000 per acre.

The southern states were growing high-value commodities under contract farming like gherkins, baby corn, jalapenos and green chillies. In comparison, cereal crops like paddy and wheat were grown in Haryana and wheat and potato were grown in Punjab under the contract farming system.

Thus, diversifying cropping pattern as per consumer preference towards high-value crops like fruits, vegetables and animal products can help achieve doubling of farmers’ income in a set time period. The role of contract farming in helping farmers adopt such a cropping pattern and disseminating information and technical know-how is highlighted by the above results.

The consolidation of farmers through FPOs, cooperatives and self-help groups can enhance firm-farm coordination and balance bargaining power between the contracting parties, an issue that has been a concern for most farmers.

An assured income was the primary reason the farmers participated in contract farming, following the system’s ability to obtain superior prices based on the quality of the produce. Hassle-free, guaranteed marketing was also a beneficial attribute that induced these farmers to enter into contracts. Employment creation was also high among vegetable and high-value crop-growers for which value-addition was done under contract farming. A small proportion of farmers also considered that via contracts/leases, they have access to new, cutting-edge production knowledge, inputs and upgraded technical support that small and marginal farmers were unable to acquire due to lack of financial capacity.

The disadvantages that were found about contract farming and which were of serious concern to the farmers were problems of rent-fixing that might have been related to the issue of power imbalances, which has been a prominent concern across other studies as well. Short-term contracts have also resulted in over-exploitation of leased land, especially resulting in the loss of soil quality, excessive use of groundwater, resulting in a high environmental footprint as witnessed by the contract farmers. Tenant-farmers were unable to make long-term investments. Input subsidies, crop insurance and crop loss compensation were transferred to land-owners’ accounts. These were among other demerits of contract farming that the farmers brought up in the study.

Institutional interventions can induce agribusiness firms to offer more attractive and equitable contracts through a negotiation process between the parties to the contract. Farmer producer organisations and producer companies can provide favourable returns to small landholders from contract farming, given their better combined bargaining power compared to that of individual marginal and small farmers.

(The writer is Professor and Dean, Research, Institute for Social and Economic Change, Bengaluru)