Contract Farming - The Vertical Integration of Farmers and Buyers.

What Is Contract Farming?

Contract farming is an agreement between a farmer and a buyer, often an agribusiness, to grow to produce with set terms and conditions, quantity, quality and inputs. The agreement between the two helps with current agricultural data, value chain transparency, technical assistance and specific markets and value.

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Contract Farming & Sustainability.

When it comes down to the sustainability of an agricultural business, there are many views that you can take into account to asses the durability of the market as well as the final product itself. Like any other, it does come with Pros and Cons.

Common Contract Farming Business Types

  • Informal Model - This model is the most transient and unsure of all contract farming models, with a risk of default by both the promoter and the farmer. However, this depends on the situation: interdependence of contract parties or long-term trustful relationships may reduce the risk of opportunistic behaviour.

  • Intermediary Model- In this model, the buyer subcontracts an intermediary (collector, aggregator or farmer organisation) who formally or informally contracts farmers (a combination of the centralised/ informal models)

  • Multipartite Model- This model can develop from the centralised or nucleus estate models, e.g. following the privatisation of parastatals. It involves various organisations such as governmental statutory bodies alongside private companies and sometimes financial institutions.

  • Centralized Model - In this model, the buyers’ involvement may vary from minimal input provision (e.g. specific varieties) to control of most production aspects (e.g. from land preparation to harvesting).

  • Nucleus Estate Model - In this model, the buyer sources both from own estates/ plantations and from contracted farmers. The estate system involves significant investments by the buyer into land, machines, staff and management.

NABARD’s Initiatives In Contract Farming

NABARD developed a specific refinance package for contract farming arrangements (within and outside AEZs) directed at promoting increased production of commercial crops and creation of marketing avenues for the farmers. The various initiatives undertaken by NABARD in this direction are:

  • Financial Interventions
  • Special Refinance package for financing farmers for contract farming in AEZs
  • 100% refinance to disbursements made by Cooperative Banks, SCBs, RRBs and select SCARDBs (having net NPA less than 5%)
  • Term facility for repayments (3 years)
  • Fixation of a larger scale of finance for crops under contract farming.
  • Extension of refinances scheme for financing farmers for contract farming in AEZs to contract farming outside AEZs besides coverage of medicinal and aromatic plants.
  • Extension of Refinance scheme for contract farming under Automatic Refinance Facility.


Fixed Price Leads To Increased Income.

Since the contract binds them, prices fix occurs before the harvest securing farmer's income. As these large organisations require yield over a long period and in large quantities, if the conditions are favourable, the income of the farmers tend to increase more than twice.

International Standards & Regulations

In most cases of contract farming the organisations export their products, they have to adhere to international standards and regulations. They make sure to implement all guideline right from the start of the supply chain. With country-specific standards now in place, organisations follow more rigorous guidance. To maintain such measures, the organisation transfer technical know-how to farmers to enable efficient farming methods, including organic farming to the farmers they are contracting.

Assured Market

Case Study - Hindustan Lever

Hindustan Lever issued contracts to 400 farmers in northern India to grow selected varieties of tomatoes for paste. A study of the project confirmed that production yields and farmers' incomes increased as a result of the use of hybrid seeds and the availability of an assured market. An analysis of the returns and profits of the contracted farmers compared with farmers who grew tomatoes for the open market showed that yields of the farmers under contract were 64 per cent higher than those outside the project.


Forced Monocrop

Farmers generally rely on crop diversification and other sources of income. But large corporations might tend to force farmers to mono-crop. The setbacks in case of crop failure have devastating effects on the family of the farmers.

Lack Of Crop Rotation Due To Contract Requirements

To maintain soil nutrient cycle and health, farmers need to rotate crops at required intervals. When farmers mono-crop, it strips certain soil nutrients, which makes it challenging to grow individual plants in the future and eventually leads to a decrease in soil health and quality.

Technology & Crop Compatibility

While corporations who contract, introduce sophisticated machinery and technology within the already existing farming techniques, it may lead to local workers losing their jobs at the farm. Farmlands get used for food crops in most developing countries. They may seem more suitable to farm as they would look more fertile for large scale production. But the local farmers may not have the knowledge to grow and harvest these crops.

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Agricultural Produce Suitable For Contract Farming

The various agrarian food are ideal for applications under contract farming like tomato pulp, organic dyes, poultry, pulpwood, mushrooms, dairy processing, edible oils, exotic vegetables, baby corn farming, basmati rice, medicinal plants, potato for preparing chips and wafers, onions, mandarin oranges, durum wheat, flowers and orchids, etc.

Contract Farming Can Open Up New Markets.

Contract farming can start up new businesses which would otherwise be unavailable to small farmers. Contract farming should be regulated by a written contract which spells out the details and obligations of both the company and the out - growers. It should be written clearly and understandably with out-growers given sufficient time to review it;

Contracts must be transparent about how the prices are determined, the duration of the project and how production inputs and other services are to be supplied and used by farmers; Must contain build in a clause for the renegotiation of the contract at agreed intervals, and specify the sharing of production and market risks among the parties; The government must act as a third party, or mediator, between the parties and not, be a spokesman for the company sponsor and also ensure farmers’ rights are implemented with appropriate legislation.