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Day 31 – Q 4.What is contract farming? Examine its pros and cons from the perspective of farmers’ interests. Can it be a suitable means to curb the impediments posed by the existing marketing mechanism? Examine.

4. What is contract farming? Examine its pros and cons from the perspective of farmers’ interests. Can it be a suitable means to curb the impediments posed by the existing marketing mechanism? Examine. 

कॉन्ट्रैक्ट फार्मिंग क्या है? किसानों के हितों के दृष्टिकोण से इसका मूल्याङ्कन करें। क्या यह मौजूदा विपणन तंत्र द्वारा उत्पन्न बाधाओं पर अंकुश लगाने के लिए एक उपयुक्त साधन हो सकता है? जांच करें।


Contract farming is the process of agricultural production carried out according to an agreement between unequal parties, companies, government bodies or individual entrepreneurs on one side and economically weaker farmers on the other which establishes conditions for the production and marketing of farm products.


Contract Farming 

Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide agreed quantities of a specific agricultural product. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser. In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation and the provision of technical advice.

Pros of contract farming from the perspective of farmers interests

  • Makes small scale farming competitive – small farmers can access technology, credit, marketing channels and information while lowering transaction costs
  • Assured market for their produce at their doorsteps, reducing marketing and transaction costs
  • It reduces the risk of production, price and marketing costs.
  • Contract farming can open up new markets which would otherwise be unavailable to small farmers.
  • It also ensures higher production of better quality, financial support in cash and /or kind and technical guidance to the farmers.
  • In case of agri-processing level, it ensures consistent supply of agricultural produce with quality, at right time and lesser cost.

Cons of contract farming from the perspective of farmers interests.

  • Loss of flexibility to sell to alternative buyers when prices increase
  • Possible delays in payments and late delivery of inputs
  • Risk of indebtedness from loans provided by the buyer
  • Environmental risks from growing only one type of crop
  • Unequal bargaining power between farmers and buyers

Contract farming and different marketing Models

Through different marketing models Contract farming helps to curb the impediments posed by the existing marketing mechanism.

  • Informal model is the most speculative one among all types of contract farming models; where firms engage in informal seasonal production contracts with smallholders with a risk of default profit or loss for both the promoter and the agriculturist. However, long-term relationships generally reduce the risk of opportunistic behaviour, and increase chances of meaningful yields.
  • Intermediary model is where the buyer subcontracts an intermediary collector or farm aggregator to produce and purchase the crop, provide embedded services and incentives to farmers and ensure quality assurance of the yield output.
  • Multipartite model can develop from previously existing centralised models, and involve various types of organisations such as statutory bodies, private companies, financial institutions, and third party service providers. It generally guarantees equity share schemes for producers, attracting investors to draw attention towards the food processing industry at large.
  • Nucleus estate model is where the company manages and oversees a plantation or production facility to supplement the production of smallholders and provide minimum throughput through the year. This approach is mainly used for tree crops such as oilseeds and rubber.
  • A typical marketing paradox is that buyers, such as supermarkets and processors, complain about inadequate supply while farmers complain about lack of markets. Clearly the buyers have not been too active in seeking out new suppliers, while farmers have lacked the skills and resources to identify new markets. Contract farming solves this paradox.
  • organic product marketing: Many developing countries are in a strong position to supply organic produce, due to existing production practices that involve low, or no, chemical use, but arrangements for certification can be very costly. The extent to which supply of organic products to world markets by groups of small farmers can be sustainable therefore merits further research.10 As demand for organics grows, there is evidence that it is becoming increasingly attractive for larger, commercial farms. The economies of scale of such farms, combined with their capacity in some cases to meet all of the needs of a particular buyer, may well offer small farmers major competition
  • Diversifying export markets: Some markets report having more supplies offered, particularly of horticultural produce, than they can possibly absorb. There is, moreover, a tendency for supermarkets to consolidate suppliers in order to facilitate chain coordination and quality control measures.
  • Brand promotion: Farmers are responding to low commodity prices by marketing clearly identifiable brands, frequently with the assistance of donors and NGOs. Some of these may be organic or fair trade brands, but others may simply offer quality or taste attributes that require no certification. Additionally, there is increasing interest in the geographic origin of produce and the development of brands that reflect origin. Good marketing skills can develop profitable markets but marketing can be expensive and may not be viable for small farmers unless subsidized by linking organizations.


The government’s National Agricultural Policy envisages promotion of private participation via contract farming and land leasing arrangements. Fast-track implementation of contract farming in India could be the new ray of hope in the coming years for the agriculture industry. Once this is executed, accelerated technology transfer and capital inflow is expected to penetrate and an assured market for crop production will grow. It will safeguard the interest of small and marginal farmers, which in turn, could lead to a complete makeover of the agriculture industry in India.

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