Contract Farming: Pros & ‘Cons’ of the Agri Practice

contract farming

One of the most contentious issues in the new farm laws, contract farming is touted as a crucial reform in agriculture as it takes the farmer a step closer to the market, exposing her to cutting-edge farm practices and technologies. Really?       

For the right-wing, it’s the biggest gift PM Modi has given the farmers of India. For the centrists, it is a win-win for farmers, buyers and even traders. For the left, it is something that can trigger a coup de grâce for farmers in India. Indeed, contract farming, which forms the spine of the new farm laws in India, is a classic political hot potato today.

But what exactly is called contract farming?  

Jargon-free, this is an agreement between farmers and those who buy their produce. It is a contract. Here, the buyer (usually a company) gets to tell the farmer what to grow and at what price it will buy (‘procure’, in market lingo) the harvested crop. Since the buyer firms require high-quality raw material, they supply the farmer with the requisite seeds, fertilizer and technical know-how. Farmers, on their part, supply the land as well as labour. In the event of crop loss, the company supposedly bears the loss. 

Sounds cool and kosher. 

But wait; is this a new practice? When did it actually start? Let’s dig a little into its history. 

The earliest example of contract farming dates back to 1885. That year, Japan hired farmers on contract for sugar production in Taiwan. In a span of another 100 years, the system had spread to the Americas and Europe. It soon became a popular practice in banana cultivation, vegetable canning and the seed industry.   

It came to India with, yes you’ve guessed it right, the British. The Raj used the method for cultivating indigo, among other crops. With the advent of the LPG reforms (by which we mean liberalisation, privatisation and globalisation in the 1990s), contract farming shifted form with big companies investing in agricultural production in developing nations. Enter corporate farming. 

Benefits ahoy!

On paper, contract farming looks bewitchingly rosy. It aims to give farmers a guaranteed market, better income, reduces the need for them to move to cities and towns, and introduces them to modern farming methods and tools. It also focuses on boosting production (which means less imports and more exports). Contract farming also promises to eliminate the seasonal or undependable nature of agricultural income.  

Is it too good to be true? 

Profits drive companies. So, what will happen when a large company gets into farming? It would want to mint money. Many fear it will use its power to influence public policies as well as research to ensure a ‘good yield’.

An example from Punjab in the 1990s  

American multinational PepsiCo was the first to introduce contract farming in independent India. This was in Punjab, to grow tomatoes and green chillies. Contract farming was taken up in Hoshiarpur in the 1990s in an attempt to increase farmers’ incomes and to help local youths find jobs.

It was meant to be a win-win. The farmers would have a guaranteed buyer and the company would have a clear idea of the quantity of produce they would be able to procure. The latter bit of information was crucial to the corporate which was invested in large-scale ketchup manufacturing. This meant that to keep up production, it had to be in control of the amount of the produce they collected. 

To ensure high-quality yield, the company provided high-quality seeds, taught new methods of transplantation and gave other technical inputs. The results were astonishing. In a span of three years, the tomato yield rose from 7.5 tonnes/acre to nearly 20 tonnes/acre. 

But the devil’s in the detail

Small farmers were largely unhappy. When the crop quality was inconsistent the company refused to buy it, they found. At times, they couldn’t supply produce in bulk, which again led to rejection. Thus they ended up with produce that needed buyers who weren’t always easy to find. If prices were low, they were forced to sell the yield for a pittance as they couldn’t afford to set up stocking facilities. Tomato being a perishable product only made it worse.

The ‘contract’ itself was merely a verbal one. The farmers had no say in the terms of the agreement. When the company rejected a large amount of produce one year, the market got flooded with tomatoes and they had to be dumped or sold for next to nothing. This also hit those farmers who did not get into contract farming as the demand for their crop also crashed drastically.   

Farmers get cornered

Whatever be the avowed aims of contract farming, it puts farmers in a precarious position, say farmers. There will always be more farmers than companies which procure produce, giving the latter a greater say in the system.  

This takes away the farmer’s bargaining power, they lament. In case the market price for the particular crop increases, the farmer will not be able to sell it in the open market due to the prior arrangement with the contractor. 

Prevalent practices in African countries such as Kenya, Zambia and Zimbabwe have shown that over time, contractors tend to keep the prices really low in order to maximise profit. There is also the hidden danger of the farmers growing dependent on the firms since it is the company that controls the seed variety used, agricultural methods employed and several other inputs.

One factor that is often overlooked is the impact of contract farming on the environment. Since contractors only look at profits, they ignore the long term impact of harmful chemicals used in farming and even actively supply them. On the contrary, small farmers usually form a bond with their land and are unwilling to compromise on its long-term viability. Hence, it is believed that they would prefer sustainable farming practices over ones that grant only immediate results.  

One farmer committed suicide every hour last year 

Data with the National Crime Records Bureau show that 10,281 distressed farmers committed suicide in 2019. That’s an average of 28 farmers every day or about one farmer every hour. According to, as of 2020 over 41.49% of India’s workforce is engaged in agriculture, but this only contributes to around 15% of the country’s GDP. 

Clearly, things aren’t going well.  

Farmers and agricultural experts in the country have long been crying for reforms in the sector. Many have demanded that the suggestions of the Swaminathan Commission (20014-06) be implemented. These reports basically call for better control for farmers over resources like land and water besides insurance and modern technology. But the government has not been too keen.

Where the new law comes in

Instead, amid a pandemic, the central government pushed three farm laws through the Parliament this year without proper discussions or consultations with major stakeholders. 

Of the new laws, the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act gives legal backing to the practice of contract farming. It promises to prevent exploitation of farmers by allowing for mutual agreement between the farmer and company on remunerative prices. However, it does not put forth any solid mechanism for price fixation. So farmers worry that corporations can easily take advantage of them. 

Even though the Modi government has been harping on the supposed benefits of the farm laws, massive protests across the country indicate that the kind of changes on the anvil is not what farmers had in mind. If anything, they are now wary of losing whatever little control they had on their means of livelihood.

Also Read: Contract Farming in India by Gulati, Joshi and Landes

And This:  1% of Farms Operate 70% of the World’s farmland

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