Contract Farming Objectives, Importance, Advantages

Contract Farming

Contract farming is one type of farming that can be described as a contract or an agreement between a farmer and a buyer. Due to this agreement or contract between two people, there would be terms and conditions involved in production as well as marketing. In this type of farming, the farmer will come to an agreement with the buyer that he would produce the quantities of particular agricultural products which he has agreed. So, the farmer will need to produce the promised quantity of the crop at the specified time, which would be set by the buyer. At the same time, the buyer also needs to provide the farmer with the necessary inputs required for the farm like preparation of land, technical aspects, etc. He should also make sure that he would be buying the products.

Advantages of contract farming to the farmer:

  • Contract farming will be very helpful to the farmers at small-scale commercial farming so that can enlarge the farm with a various range of products.
  • Contract farming will help in the increase of the inputs in terms of production as they will be given by the buyers or the contractors.
  • The farmer will get all the credit for the farming which he has done in the form of cash.
  • The buyers will also provide extra services to the farmer in order to make sure that the product is meeting the standards required by them.
  • The crop produced by the farmer will reach large markets like exports etc.
  • The farmers will also have an opportunity to learn new methods of production and also the skills which are required in the technical aspects of the farm. This will gradually enhance the production as well as profits of the farm.
Advantages of Contract Farming.
Advantages of Contract Farming.

Advantages of Contract farming to the buyer:

  • There would be a continuous flow of the raw material and this happens without any sort of interruption.
  • There would be security in terms of fluctuations in the price of the market.
  • The buyer can plan the produce very prior to the season.
  • The contract can also be extended to other crops so that there would be a long-term commitment with the farmer.
  • This type of farming will get a good name for the firm as it helps the farmers in many ways.

Read this: Hydrogel Agriculture Technology.

Disadvantages of contract farming:

  • If there are any sudden changes in terms of weather, or if any kind of pest has suddenly affected the crops, the farmer will be unable to produce the amount of crop promised in the agreement with the buyer.
  • If the agreement which the farmer had will need large amounts of capital to meet the production and quality standards, then there would be a chance that the farmer has to take loans for the equipment required, installation, and execution.
  • It would be very difficult for the farmer to produce the agreed quantity of crops on his own. Moreover, as this completely benefits him, there is also a chance that other farmers in the locality will not come forward to help him.
  • The farmer will not have all the rights to do whatever he wants on the farm. He needs to follow the terms and conditions mentioned in the agreement.
  • The farmers will also not be able to sell the produced crops if it does meet the standard of quality which has been set during the time of the agreement.
  • It would be very tough for the farmers to bargain the produce for a price that is reasonable at the time of selling.

Types of Contract farming:

Limited Management Contract:

In this type of contract farming, the farmer will get all the inputs required for production and he sells the crops which are produced to the firm. The farmer will have no guarantee of getting the price which he has spent on the production.

Full Management Contract:

In this type of contract farming, the farmer will enter an agreement with a firm for a specific quantity of production in a certain amount of time. Here, the farmer will announce the price of the crop which is to be produced before the season. Hence there would be less risk to the farmer. The marketing of the crop will be taken care of by the firm if all the quality standards are met by the farmer.

Market specification contract:

In this type of contract farming, the harvesting plan will be arranged before the production by the buyer and the farmer by getting bound by certain terms and conditions which helps in the selling of the crop.  The conditions will generally involve the price of the crop, quantity, quality, time of production for delivery.

Resource providing contract:

In this type of contract farming, the buyers or the firms will provide the inputs for production to the farmers along with the marketing.

Management and income guaranteeing contract:

In this type of contract farming, production and marketing will be taken care of by the buyers. In addition to these two, the marketing and the price issue will also be dealt with by the buyers. The farmers will also get some revenue from the buyers. But in this contract, the buyer will take care of most of the management of the farm and the farmer has fewer rights on it.

Different models of contract farming:

There would be different types of sponsors for contract farming such as multinational companies, small-scale private firms, etc. There would also be investors to finance in contract farming. Contract farming is of many ways and is completely dependent on the type of crop selected. Any type of crop, dairy, or poultry can come under contract farming. Contract farming has five models:

Centralized model:

This is a model of contract farming in which the coordination is done vertically. That is, in this type of contract farming, the buyer will purchase the crop from the farmer. He will be the one who is solely responsible for processing and marketing of the crop which is taken from the farmer. The buyer has all the rights to come in contact with any number of farmers for one project. This model will generally be associated with crops like banana, sugarcane rubber, coffee, tea. This model can also be used for livestock.

The Nucleus estate model:

The nucleus estates are different from the centralized model. In this type of contract farming, the buyer will also maintain the estate plantation. Estate plantation is very much similar to the processing of plants. The estate will be very large so that there would be some sort of security of high output from the plants. But if the estate is just for a trial, then the output might be less. The approach of this estate model is that the buyers will have a demo on the estate which is prepared for the trial, train the farmers in technical aspects, and management of the crops which the buyer intends to grow. This would help the farmer in terms of production and also guarantees the buyer the estimated quality standards. This model is generally used for tree crops.

The Multipartite model:

In this model, the public and private bodies will participate in the contract with farmers. This model of contract farming will have different organizations which will take care of money, management, marketing, and various stages of farming. This kind of farming is majorly seen in China where the government and the private committees will enter joint agreements. In this farming, the branches of the county will implement the terms and conditions of the agreement along with the technicians in the field.  The public and private joint venture and the branches of the country will come to an agreement in a formal way, but the farmers will just have an understanding of this agreement orally. Then the farmers will lead the cultivation as mentioned by the joint venture. As there has been a  lot of miscommunication between the different executive bodies, this has come to an end gradually.

The Informal Model:

This model of contract farming is one that involves the entrepreneurs which are individual and make simple agreements with the farmers on the basis of crops, seasons. This model helps in the production of vegetables, fruits like watermelon, and a few tropical fruits. These crops will need a very less amount of processing. The inputs in terms of material required for the production will be very limited such as they just provide the farmers with minimal guidance in terms of technical aspects and the basic fertilizers required.

The buyer will buy the crop, completes the grading, and packs it for the sale in the retail market. These will be bought by the supermarkets as the product will be fresh. These will be bought from the supermarkets through the buyers or in some cases. The investment in this model will be very less for the buyers. This is the best model of contract farming as it involves less risk for both buyer and farmer.

The Intermediary model:

The intermediary model is mostly followed in Asia, where the subcontracts occur between the farmer and the intermediaries. These intermediaries are collectors of crops which would be generally from the community of farmers. These intermediaries will come into an informal agreement with the farmers for the collection of produce and the marketing.

These intermediaries should be mostly avoided. But if used, care should be taken as the buyer who is in the formal contract with the farmer will lose control over the farm and the production. This is because the intermediaries pay more money to the farmers for the crop. The buyer will lose contact with the farmer and hence there would be losses to the buyer.

Now let us see some of the crops which really require contract farming.

Aloe Vera Contract Farming:

Well, If you are planning for commercial Aloe Vera farming, you must have some kind of marketing arrangements to sell the produce. These selling arrangements should be made in advance with any contract farming companies such as Patanjali, Himalaya, Emami, and other herbal companies.  Either you can sell the fresh Aloe Vera leaves or you make Aloe juice by procuring related machinery. You can also have contract farming of Aloe Vera products made at your farm. It is a good idea to contact the marketing division of these companies for any agreement of Aloe Vera produce. Never start Aloe Vera farming on a large scale without any buyback agreement.

Read this: Aloe Vera Farming Project Report.

Tulsi Contract Farming:

Tulsi leaves are commonly is used for the extraction of essential oil and powder. In the case of large-scale production, it will be difficult to market in bulk unless you make any buyback agreement or contract farming. In this case, you should try with popular herbal and cosmetic companies for a bulk buying agreements. This has to be done, just before or in the initial stages of Tulsi cultivation. Some of the companies to look for Tulsi are Dabur India, Surya Herbal, Lotus Herbals, Ayush Herbals, Vaadi Herbals, and Ayur Herbals.

Papaya Contract Farming:

Many people also look for Papaya contract farming as they are perishable and selling bulk quantities on a daily basis is a difficult task. If you have labor and transport service, you can supply them to the nearest fruit market. Otherwise, look for some kind of agent who can pick fruits and sell them. Some cosmetic companies may buy in bulk, so contact them for the buyback agreement of Papaya. If you grow good hybrid and high-quality Papaya like Thai red lady, you can easily sell in the market.

Read this: Papaya Farming Project Report.

Kadaknath Chicken Contract Farming:

Black Chicken.
Black Chicken.

Nowadays, many people are showing interest in Kadaknath chicken farming due to its medicinal values. However, selling Kadaknath chicken in large quantities is not that easy. To supply the Kadaknath chicken, you can have some kind of buy agreement with local retail chicken shops. Any meat processing companies may be ready for Kadaknath chicken contract farming.

Read this: Kadaknath Chicken Farming Project Report.

Ashwagandha Contract Farming:

Growing Ashwagandha is very easy, but marketing the product would be tough unless you have contracted with herbals companies. Contact Himalaya, Patanjali, and any other Herbal companies.

In case if you are interested in this: Organic Vegetable Farming Plan.



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