Topic of the Day – Contract Farming

UPSC Exam Preparation: Topic of the Day – Contract Farming

When there is an agreement between the byer and the farm producer for trading the agricultural produce, it is known as contract farming. Under certain circumstances, the quality required, price etc are specified beforehand and the farmer agrees to deliver it on a future date.

  • Under contract farming inputs material may be provided by purchasing partyfor a particular crop and there is a crop buyback agreement in advance Quality is specified in advance.
  • This is mainly entered into by big corporate who are in business of food processing.



  • In India, contract farming is regulated under the Indian Contract Act, 1872. The Act has many general provisions that are relevant to contract farming, including the formation of contracts, obligations of parties, and consequences in case of breach of contract.
  • In addition, the model APMC (agricultural produce market committee) Act, 2003 provides specific provisions for contract farming, like compulsory registration of contract farming sponsors and dispute settlement.



  • It removes uncertainty of Income for the farmer and he can fetch good prices.
  • the arrangement can offer both an assured market and access to production support
  • It has also come to be viewed as an effective approach to help solve many of the market access and input supply problems faced by small farmers.
  • There are also potential benefits for national economies as contract farming leads to economies of scale
  • From the standpoint of corporate bodies, farming reduces the supply risk, while the farmers enter into contractual arrangements with companies in order to minimize price risks.


Issues of concern

  • Monopsony (a market situation in which there is only one buyer): Typically, contract firms enter into an agreement with farmers to grow differentiated crops. This turns the firm into a sole buyer and farmers into price-takers. Contracting firms can exploit this situation to their advantage by offering lower prices to farmers.
  • farmers selling to a buyer other than the one with whom they hold a contract (known as side selling, extra-contractual marketing or, in the Philippines, “pole vaulting”)
  • Using inputs supplied by the company for purposes other than intended.
  • Company sometimes fails to buy products at the agreed prices or in the agreed quantities, or arbitrarily downgrades produce quality.


Why does India need a model contract farming?

  • More than 50% population is in Agriculture Industry and the Industry is stagnating.
  • Agriculture being state subject for much uniformity a model contract farming at union level is required.
  • GOI’s promise to double the income of farmers by 2019 requires measures like formation of model contract farming would be one of the step to achieve the goal.
  • Dependency on seeds and fertilizers also a much needed financial impetus to agriculture Industry, farmers can avail it easily if contract farming model is placed.

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