The production augmenting agro-technologies that heralded the process of the green revolution and made India food secure. The benefits of quality seed, timely irrigation and fertilization with improved technology were observed as higher productivity with quality production. Farmers face market volatility at the time of marketing their produce. Therefore, the Government started procuring some commonly cultivated agri-commodities at Minimum Support Price (MSP). The cultivation of other crops not supported by MSP becomes risky and unfavorable, consequently improper diversification of agricultural crops led to over-production of certain commodities and under-production of certain agri-commodities. The unremunerative returns forced farmers to look for alternatives of farming. The Contract farming encourages farmers to safeguard themselves from market volatility (abnormally price crash due to over production). The is is step towards achieving assured income by providing the farmers improved marketing channels with or without better seeds, other inputs, financial support and technical know-how.

What is Contract farming?

Contract farming is not totally new to our country. The success of Milk Cooperatives and Sugar Cooperatives explains the depth and reach of contracting farming in India. It is formal contract between producers (farmers) and buyers (generally processors or exporters). Contract farming can be defined as an agreement between farmers and contracting firms for the production and supply of agricultural products under advance agreements, frequently at predetermined prices. The basis being 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. Contracting farming allows firms to participate in and exert control over the production process without owning or operating the farms. The arrangements can vary by crops and by contracting firms. The contracts may be for i) market support contracts are pre-harvest agreements essentially between firm and farmers to a particular set of conditions for the sale and purchase of the crop. The contract specifies price, quality and pricing; ii) resource support contracts are agreement between farmers and firms in conjunction with the marketing arrangements, the firms agrees to supply selected inputs, including on occasions land preparation and technical advice, credit, etc.; and iii) production management contracts bind the farmer to follow a particular input management, agronomic practices and harvesting specifications usually in exchange for a marketing agreement or resource provision.

CONTRACT FARMING: A WIN-WIN SITUATION FOR

(1) Farmers: In general, the farmers have poor knowledge of package of practices of cultivation of crop and inadequate capital to grow a quality crop, little bargaining power with input suppliers and produce markets, lack of post-harvest management expertise, inadequate infrastructure and market information. Often the firms provide credit, inputs, farm machinery, and a wide range of managerial, technical and extension services with assurance to purchase produce and always retains the right to reject substandard produce. Farmers can also use the contract agreement as collateral to arrange credit with commercial banks and financial institutions in order to fund inputs. The skill transfer is another feature of contract farming. Skills transferred can include the efficient use of farm resources, carrying out field activities according to a strict timetable, improved methods of applying chemicals and fertilizers, and a knowledge of the importance of quality and of the demands of export markets and good record keeping. Contract farming helps small farmers to participate in the production of high value crops like vegetables, flowers, fruits, etc. and benefit from market led growth at minimum market, transport, post harvest handling risks. Contract farming system reduces the yield uncertainty and removes the price uncertainty. The contract farming requires no large investments of the farmers' money, indeed, it reduces the cost incurred on purchase of inputs as they are supplied by contracting firms.

(2) Contracting firms: Contract farming is most commonly practiced by food processing companies. Contract farming had solved the problem of supply of raw material of the desired quality and quantity from reliable source near to the processing plants. Companies gain access to crop production on land that would otherwise be unavailable, with the additional advantage of not having to buy or lease it. Further, it reduces uncertainties that would exist if the company simply bought crops on the open market, and gives the company some control over the production process. Contract farming may not necessarily be profit centres for companies.

(3) Bankers: Contract farming is also promoted and supported by financial institutions and banks. Effective & efficient monitoring of production operations, extension activities and credit delivery in a conjugal area is easy in contract farming. Access to crop loans at attractive terms through tie-ups with Banks is facilitated through contract farming.

(4) Government: There are also various government and semi-government agencies involved directly or indirectly in contract farming. The government understands that the farm sector needs to be competitive to survive and to contribute to poverty alleviation and economic growth of country. The best possible solution is to involve private sector through contract farming to allow accelerated technology transfer, capital inflow and assured market for agricultural crops. Private agribusiness will usually offer technology more effectively than government agricultural extension services, because it has a direct economic interest in improving farmers' production. This will also generate the opportunities of employment in the rural area, processing industries, agri-input industries and financial institutions.

Risks with Contract farming: Path of success of contract farming is not free from risks.

It is not as easy to popularize contract farming among farmers. Uncertainty involved in growing new, unfamiliar crops and producing for markets that might not always come up to their expectations - or their sponsors' forecasts. Most companies offer contract farming to the big to medium farmers. They neglect small and marginal farmers whose proportion is more in Indian context. Farmers renege on contract as the cost of cultivation could be lower than in non-contract production (as technology and management practices brought by the processor; access some inputs such as insurance and credit at lower cost). If the market price is more advantageous than the contract price, farmers renege on the contract. Farmers' inability to meet strict timetables and regulations because of social obligations or religious practices The firms may manipulate quality standards in order to reduce purchases or dictate exploitative terms with the farmers. The legal enforcement system is too tedious for both growers and firms and to lawfully enforcing the contracting terms with the farmers gives a negative message of the contracting firm among the farming community. Debt caused by production problems, poor technical advice, significant changes in market conditions, or a company's failure to honor contracts.

Development of contract farming schemes is the strategy for benefiting from globalization through vertical coordination of small farms with processors and exporters. Through the contract farming initiatives we can give a second push to the green revolution in India. Contract farming also improves the micro-economy of village. The key to the success of this venture lies in building up a healthy trust between grower and buyer.