Contract farming is an agreement made between the farmer and the supplier (agro-processing firms) on the finished goods. There are many contract farming models in India; the most prominent ones have preset buying and selling conditions even before the farmer begins the seeding process. In contract farming, the supplier agrees to pay the farmer a price for a lot of finished goods at the end of the season, regardless of the market condition, inflation, and other factors that could inflate or deflate the value of the finished goods.
In some cases, they also agree to supply the farmer with the raw materials required. This includes farming gear, seeds, pesticides (if needed) and more.
However, for the deal (contract farming agreement) to complete in fruition, the farmer will have to deliver in quantity and quality in the finished goods as agreed.
The benefits of contract farming are many. Contract farming opens avenues for small and medium-scale farmers to technology that is otherwise only accessible to farmers with large capital.
It reduces the risk for the farmer on cultivation, marketing, and logistics. The fixed income module that contract farming runs on ensures that the farmers receive a steady pay-check even in dire conditions. The farmer and supplier connection open them to newer markets with a steady supply & Demand ratio. With quality as a parameter, the suppliers and the end-users are assured that they would consistently receive high-quality goods at competitive prices.
Studies by the UN came up with predictive models which showed radical improvement in the farmers below the poverty line using the contract farming approach. Most farmers are not equipped with investment capital, resources, technology, or large landholdings to make sizable investments. This puts them in a vicious cycle of loans, poverty, and low yields.
With contract farming, farmers are able to mitigate risks in production, marketing, and distribution. The pre-set agreement in place ensures that the steady paycheck comes in to bridge the gap between one crop to another.
Farmers with small holdings can leverage the advantages the contract has to offer to access better markets, imbibe newer processes in agri-tech, and expand their market potential.
Agriculture technology in India has taken enormous strides towards enforcing sustainable methods of cultivation, P&L management, and risk management. With Agtech farmers are now able to leverage technology to make informed decisions on the type of crop they wish to cultivate, the newer and improvised methods in pest management, and now have access to newer markets to get the maximum return on Investment.
Agribusinesses can deploy Agtech platforms such as Farm Management ERPs to have an eagle eye view of all the small landholding farmers and large farmers involved in contract farming at different stages of their supply chain. The contracts that dictate the terms and conditions and the crop schedules to be maintained can be done on one unified farm management platform instead of maintaining separate records for separate farmers.
Farm managers can flag off risks that they foresee in crop schedule, possible disease, climatic conditions and alert their pods of farmers to these risks. This ensures that individual farmers benefit from the oversight they get from the companies and they do not fail to meet the quality and yield standards outlined in the contracts.
In the long term, once contract farmers are familiarized with the Agtech platform, they can make their farming decisions based on crop data and market rates. This ensures that there are no middle men or lack of transparency in the process of wholesale buying or selling of the crops. Although hand holding will be required in the initial stages, the farmers can eventually start leveraging these platforms themselves even without the intervention of savvier farm managers.