Table of Content

A Report of Credit Seminar on

Contract Farming:
Policy Implications and Impact in India

Shanmukh Sagar K.
R.No: 714602
Batch: 2014
Food Business Management

A Report on CONTRACT FARMING: Policy Implications and Impact in India

I.

Introduction.........................................................................................................................2

II. Definition and Meaning......................................................................................................2

III.

History of Contract Farming in India..............................................................................3

IV.

Contract farming in high value agriculture.....................................................................4

V. Contract Farming and Farm-Firm Linkages.......................................................................5

Direct Procurement.................................................................................................................5
Open-Source Intermediation..................................................................................................6
VI.

Contract Farming in India...............................................................................................6

Dairy.......................................................................................................................................7
Poultry....................................................................................................................................8
Fruit and Vegetables...............................................................................................................9
Public Private Partnership......................................................................................................9
VII.

Policy Recommendations..............................................................................................10

1.

Improve Physical Infrastructure:...................................................................................11

2.

Promote Competition:...................................................................................................11

3.

Evolve Mechanisms for Resolution of Conflicts:.........................................................11

4.

Promote Farmers Organizations and Other Intermediaries:.........................................11

5.

Develop Grades and Standards:....................................................................................12

6.

Improve Farmers Capacity to Invest, and Cope-up with Risks:..................................12

VIII. Summary.......................................................................................................................13
IX.

References.....................................................................................................................14

Online References................................................................................................................14

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

I.

Introduction
The Indian agri-food system is undergoing rapid transformation and there is growing

evidence that contract farming will have an important role in this transformation. An
important concern in Indian agriculture is that while front end activities including
wholesaling, processing, logistics, and retailing are rapidly expanding and consolidating,
the back end activities of production agriculture have been continuously fragmenting
(Gulati, 2008)1. The challenge lies in linking the two ends and ensuring viable business
opportunities for both farmers and agri-businesses.
Establishing farm-firm linkages is not only about providing assured markets, reducing
risk, and ensuring remunerative prices, but also providing critical services such as credit,
insurance, grading and inspection, technology extension, and market information. These
institutional services can help elevate the scale at which small holders can operate, raise their
productivity and income, and mitigate the risks involved in participating in markets for high
value horticultural, livestock, and fishery products.
The recent growth and diversification of consumer demand and the expansion of
organized agricultural processing and marketing ventures in India has the potential to boost
the market opportunities, productivity, and incomes of farmers, including small holders.
However, achieving these goals will likely require creation of new institutions and
innovations to develop supply chains and facilitate linkages between farmers, wholesalers,
processors, and retailers. Among these institutions and innovations are various models of
contract farming, including those led by cooperatives, by farmer groups, and by various types
of private sector resource intermediation that develop backward linkages to growers.

II.

Definition and Meaning

Contract farming (CF) is defined as forward agreements specifying the obligations of

farmers and buyers as partners in business. Legally, farming contracts entail the sellers
(farmers) obligation to supply the volumes and qualities as specified, and the buyers
(processors/ traders) obligation to off-take the goods and realise payments as agreed.
Furthermore, the buyers normally provide embedded services such as:
1 Gulati, Ashok. 2008. Fragmenting Bottom and Consolidating Top: Indias Changing Food System
and Implications for Small Holders, in India: Some aspects of Economic and Social development
(eds.) S.Mahendra Dev and K.S. Babu. Academic Foundation, India. 2008.

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

i.
ii.
iii.

upfront delivery of inputs (e.g. seeds, fertilizers, plant protection products);

pre-financing of input delivery on credit
Other non-financial services (e.g. extension, training, transport and logistics).

With regard to substance, form and the process of concluding such arrangements, farming
contracts are quite variable:
i.
agreements may be established informally or formally, in verbal or written form;
ii.
contracts may be concluded with individual farmers or farmer groups;
iii.
description of obligations may remain quite vague or be reasonably specific;
iv. contracts may be renewed each season or cover long-term agreements;
v. Specifications may be based on case by case negotiations or on a sub-sector code of
practice.

III.

History of Contract Farming in India

Contract Farming can be traced back to colonial period when commodities like Collin Indigo

were produced by the Indian farmers for English factories. Seed production has been carried out
through contract farming by the seed companies quite successfully for more than four decades in the
country. The new agricultural policy of 2000 sought to promote growth of private sector participation
in agribusiness through contract farming and land bearing arrangements to accelerate technology
transfers, capital inflows and assured market for crops. The colonial period saw the introduction of
cash crops such as tea, coffee, and rubber, poppy and indigo in various parts of the country, mostly
through a central expatriate-owned estate surrounded by small out growers model. ITC introduced
cultivation of Virginia tobacco in Coastal Andhra Pradesh in the 1920s incorporating most elements
of a fair contract farming system and met with good farmer response. This was replaced by auctions
in 1984. Organized public and private seed companies, which emerged in the 1960s. The Pepsico
introduced tomato cultivation in Punjab in the 1990s under farming to obtain inputs for its pastemanufacturing facility established as a pre-condition to its entry in to India. This was sold to
Hindustan Lever in 2000, which had earlier acquired the kissan Karnataka. Contract Farming was the
strategy of choice for almost all food processing projects contemplated in the 1980s and
1990s.Contract Farming is again vogue, and even tried for bulk production of subsistence crops, such
as rice, maize and wheat. Commodity co-operatives, which emerged in the 1950,s provided most
services envisaged under ideal contract farming to their members and bought back the supplies
offered at contracted prices, although these were not strictly contract arrangements. The succeeded
enormously, leading to their replication and compelling private companies also to adopt similar
approaches. Contract Farming is now considered to be a corrective to market imperfections and
serving a useful purpose in India in its own limited sphere.
Contract Farming has been promoted in the recent three decades as an institutional innovation to
improve agricultural performance in less developed countries. This system was accepted and used as

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

one of the promising institutional frameworks for the delivery of price incentives, technology and
other agricultural inputs. Local Governments, private local firms, Multinational companies, some
international aid and lending agencies etc have been involved in these contract farming schemes
(Glover 1994)2.

IV.

Contract farming in high value agriculture

Contractual agreements can be of three basic types:
i.
ii.

Contracts under which only sale and purchase conditions are specified;
Contracts under which a corporate firm supplies the farmer with agricultural

iii.

inputs and the final produce is bought at a contracted price, and

Arrangements where a corporate firm invests all capital and technical knowhow in the field and the farmer provides land and labor.

The significance of the different models of marketing and production contracts varies
across commodities and with the nature of markets and regions (Key and Runsten 1999 3,
Singh 20024). Each model is guided by distinct market, resource and management provisions
that determine the role and capacity of the firms in linking with the farmers.
In the first two models, the pattern of risk sharing depends on the contract provisions
and farmers may have to bear the risk of production or price shocks. In the third model all
risks remain with the firm and farmers neither bear any risk nor is party to any profits. Past
experiences reveal that in the advent of price volatility either farmers have refused to sell the
produce to processors/retailers (when market price exceeded contracted price) or the latter
have not procured produce (when the contracted price exceeded the market price). Also, in
case of crop failure, farmers may have to bear the loss without any support from
processors/retailers. There are also cases when poor quality produce has resulted in firms
refusal to procure produce. These issues need to be addressed in balanced, transparent,
quasilegal provisions in order to protect the interests of both growers and buyers.

Glover, D 1984. Contract Farming and Smaller holder Out grower Schemes in the Less DevelopedCountries,
World Development, Pp. 1143-1157. 66

Key, N and D Runsten. 1999. Contract Farming, Smallholders and Rural Development in Latin America: The
Organization of Agroprocessing Firms and the Scale of Outgrower Production, World Development, 27(2), p
381-401.

Singh, Sukhpal. 2002. Contracting Out Solutions: Political Economy of Contract Farming in the Indian Punjab,
World Development, 30(9), p 1621-1638.

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

V.

Contract Farming and Farm-Firm Linkages

Indian agriculture has begun to diversify and future sources of agricultural income are

likely to come increasingly from the high value segment, driven by rising demand for high
value horticultural, livestock, and fishery products. While the potential benefits of high value
agriculture, including higher income and employment, are significant, it will be necessary to
overcome key challenges associated with meeting farmer resource needs and mitigating
production and marketing risk. The challenge is to identify innovative solutions, possibly
based on contract farming models, that are efficient and competitive and also inclusive in
terms of working with small holders on sustainable basis.

Direct Procurement
There are different models of farm-firm linkage ranging from simple marketing
agreements, to risk sharing, to forward marketing and futures contracting. In a bid to keep
their supply chain moving, processors and retailers may choose to source raw materials from
government regulated market yards, small traders, or directly from farmers. Direct
procurement may be preferred given the transaction costs and quality problems associated
with procuring from government regulated markets (mandis). In such an arrangement, there is
no contractual tie-up with the farmers and anyone is free to sell their produce subject to
certain quality criteria. Indian retailers such as Reliance, Spencers, Subhiksha, and Food
Bazaar currently use this procurement model. Direct procurement from farmers can be done
only in states that have amended their Agricultural Produce Marketing Committee (APMC)
Act to permit buyers to purchase directly from producers, farmers in line with the Model Act
2003 proposed by the central government.2In states that have not amended their APMC Act,
purchases must be through government regulated mandis, paying the commissions and
marketing fees imposed in those markets. Some retailers and processors, such as Field Fresh,
Pepsico, and Nijjer, have contractual buyback arrangements with the farmers that specify
quantity, quality, and a pre-agreed price. Some of these firms provide back end support to
farmers including extension services, provision of seed and other inputs, and credit
facilities with the costs often adjusted in final payments made to farmers. Such backward
linkages are primarily driven by the size and quality requirements of the market and the need
to ensure smooth and regular supply of a product that meet certain quality standards.

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

Open-Source Intermediation
Another variant of farm-firm linkage is open-source intermediation, involving
provision of information about market prices, crop, and good cultivation practices to farmers
without any buy back guarantee. The idea is not to create a backend supply line of a
particular company, but bridge the knowledge and information gap that exists at the farm
level, and also supply inputs to farmers without any lock in agreement. However, in due
course, the model of open-source intermediation can be adapted for specific supply lines, as
and when an opportunity arises. This is well observed in the case of the Choupal Sagar and
Choupal Fresh models adopted by ITC following the success of e-choupal.
There appears to be a large unmet demand for agricultural services and creation of rural
service platforms that has given rise to another option for forging effective firm-farm
linkages. Research and development activities lose their effectiveness unless they reach
farmers fields, and much depends on the effectiveness of the extension service network.
Rural business or agri-hubs led by public-private partnerships between panchayats and the
private sector (CII in partnership with the Ministry of Panchayati Raj) provide input services
for farmers and provide markets for their produce. Several private sector players are also
developing the concept of business hubs to reach out to farmers, including DSCL Hariyali
Kisan Bazar, TATA Kisan Kendras, Godrej Aadhaar, and ITC e-Choupal and Choupal Sagar.
The scale of these operations remains small in comparison to the needs of farmers and rural
areas, but this model may offer an opportunity to rapidly scale up the activities of private
firms, and resulting farm-firm linkages. These agri-hubs potentially can provide one stop
shopping for farmers by providing inputs such as seed, technology, and credit, and services
such as extension and insurance, as well as daily household products.

VI.

Contract Farming in India

Contracting in agriculture in India can be traced back to the sugarcane sector, which

was primarily organized under the cooperative structure. Although the sugarcane industry
became dependent on state support and a target of political intervention, the dairy sector in
India flourished under the cooperative structure and millions of smallholders benefited
through Operation Flood beginning in the 1970s. Later, private players in dairying also
followed the Anand pattern of cooperative dairy development and, in a way, have been
contracting with dairy farmers for sourcing liquid milk. Contract farming has also been

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

popular and successful in the poultry industry and in basmati rice and potato production,
primarily led by corporate firms. Contracting in high value commodities, such as tomato, and
chilies, started as early as the 1990s, and contracting in exotic vegetables, such as baby corn
and bell peppers has been a more recent phenomenon. Contract farming in fruit, such as
mango, citrus, litchis and grapes, has been quite popular.
Punjab has been a pioneering state in introducing contract farming, with the entry of
PepsiCo in tomato processing in 1989. This was followed by a local firm, Nijjer Agro Foods
Limited in 1991. Andhra Pradesh, Tamil Nadu, and Maharashtra have been in the forefront
for contract farming in poultry, with major poultry integrators such as Suguna, Shanthi,
Pioneer, Godrej Agrovet, and Ventakeshwara Hatcheries having a wide presence in these
states.

Dairy
The onus of development of the dairy sector in India has been primarily with the
cooperatives. Operation Flood (1970-1996) was a major breakthrough in the Indian dairy
sector that rendered dairying a profitable occupation for millions of farmers, resulting in a
significant impact on the livelihoods of small and marginal farmers. However with the
amendment of the MMPO in March 2002, a number of private companies have entered the
dairy market and are scaling up their procurement and processing activities. Nestle India,
Limited, which started operations in 1961 in Moga district of Punjab with just 180 farmers,
now has more than 98,000 contract farmers to source its daily requirement of liquid milk
(Nestle 2006)5. Recently, Reliance has ventured into dairying, also starting its operations
from Punjab, and there are reports of it rapidly expanding procurement volumes of liquid
milk and network of contract farmers. The approach to contracting with farmers is similar in
both the cooperative and private sector models. The price of liquid milk is determined by the
fat content of the milk. Farmers voluntarily join the cooperative and, even as members have
the freedom to sell to anyone they choose. A similar condition holds for farmers contracting
with Nestle and other private firms. While there are incidences of irregular milk supply or
impurities in milk from the farmers, and of delayed payments, under-pricing, and underweighing of produce by cooperatives or private firms that can result in termination of
contracts, often these conflicts are equitably resolved (IFPRI study by Gupta et.al. 2006) 6.
Apart from the direct buying and selling, the farmers receive inputs and extension services.
5

Nestle India Limited.2006. Annual Report 2006.

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

Nestle too provides a number of services veterinary services, medicines, and feed supplies
on a no profit, no loss basis. Nestle follows two types of contracting arrangements. For
producers with more than 25 milch animals, it enters into a legal contract. For smaller
farmers, milk is procured through agents who have a legal contract with Nestle.

Poultry
The poultry sector is highly susceptible to production and marketing risks which
periodically affect profitability, particularly of small farms. These risks also threaten the
profitability of the industries engaged in breeding of chicks, and manufacturing of feed,
vaccines and medicines. In order to minimize the risks to the producers and sustain the
growth and profitability of the industry, some large poultry firms (for example,
Venkateshawara Hatcheries Ltd., Suguna Poultry Farm Ltd., and Godrej Agrovet Ltd.) began
vertically integrating breeding, hatchery, feed, and veterinary enterprises with broiler
production through the institution of contract farming in the late 1980s and early 1990s. In a
typical poultry contract, integrators provide day-old chicks, feed, medicines, and expertise to
contract growers, who in turn supply land, poultry houses, equipment, labor, and other inputs.
At the end of the production cycle, the integrators take responsibility for marketing all of the
production, with farmers receiving either a net price (by weight) pegged to an industry price
set by a group of integrators (not the retail price) or a growing fee (by weight) adjusted for
performance norms such as mortality rate and feed conversion efficiency. These approaches
afford more stability to grower returns than market prices, sharply reducing price and
marketing risk for growers.
Venkateshwara Hatcheries started its contract broiler operations during the mid-1990s
in south and western India. In their model, broiler, prices are fixed by BROMARK 7, with
growers also receiving a share of any additional profits earned due to rise in market prices,
as well as an incentive for better feed-conversion efficiency. Suguna Poultry Farm Ltd. with a
turnover of Rs.20.2 billion ($450 million) in 2007/08, is the largest poultry integrator in
India, beginning operations in 1984 in Coimbatore and now operating with more than 15,000
contract growers in 11 states. Sugunas model provides contract growers with quality day-old
6

Gupta, Kanupriya, Devesh Roy and Harsh Vivek. 2006. Do Small Farmers gain from participation in
producers organizations? The Case of Milkfed Dairy Cooperative in Indian Punjab, in From Plate to Plough:
agricultural Diversification and Its Implications for the Smallholders in India. Submitted to Ford Foundation,
New Delhi by International Food Policy Research Institute, Washington D.C.

BROMARK stands for All India Broiler Farmers Marketing Cooperative Ltd

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

chicks, feed, medicines, and technical support and guidance. Suguna then markets all output,
paying growers an agreed fee per kilogram of weight gain, plus incentives for reducing
mortality or improving feed conversion beyond specified norms. Contract farming in poultry
has been successful in India due to the presence of strong backward linkages. The nature of
contracting has been instrumental in removing grower risk through buyback guarantee and
also provision of coping against production failure. Provision of quality inputs such as chicks,
feed and medicine has helped the poultry farmers raise quality chickens. Apparently, balanced
contracts that benefit both parties in terms of assured markets, competitive price and
guarantee against risk have resulted in the success of poultry contract farming.

Fruit and Vegetables

Contract farming in fruits and vegetables is being led by cooperatives, farmer groups,
and private firms, both multinational and domestic. The entry of private firms can be traced
back to the operations of PepsiCo in Punjab in 1989 and, in the recent past, quite a few
retailers and agro processors have joined the fray. However, Mother Dairy, organized as a
cooperative, is one of oldest players in this sector, entering into retailing of fresh fruit and
vegetables and some processed items under the Safal brand in Delhi in 1988. Mahagrapes is
an example contract farming led by a farmer group in Maharashtra.

Public Private Partnership

In an example of a public-private partnership, the Council for Citrus and Agri Juices in
Punjab has ventured into contract farming of citrus orchards to supply Tropicana juices, a
product of Pepsico. The Council has acquired 5,185 acres of land, of which 2,600 acres have
been planted with sweet oranges, with a target to bring an additional 10,000 acres under citrus
cultivation in 2008. Sam Agritech is a private company in Andhra Pradesh engaged in
contract farming for grapes, pomegranates, mangoes, chikoos, and exotic vegetables. Initially,
Sam Agritech contracted with large farmers based on the condition of their orchards and other
details, but now is tying up with small farmers as well. Contract farming in gherkins in
Andhra Pradesh by Global Green Company is yet another private model that has helped link
the smallholders with the global markets. Mother Dairy Fruits and Vegetables Limited
(MDFVL) procure fresh fruit and vegetables from about 100 producer associations that
include more than 18,000 farmers. Most producer associations are informal cooperatives or
self-help groups managed by the producers themselves. The associations are educated about
the quality of fruit and vegetables that should be grown and farmersincluding both

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A Report on CONTRACT FARMING: Policy Implications and Impact in India

members and non-membersdeliver produce at their own cost to Mother Dairy collection
and processing centers, eliminating local consolidators from the supply chain. Farmers
receive prices at par with prevailing mandi prices. Payment is made by cheque, with both
growers and milk suppliers receiving payment within 10 days. For fruit and vegetable
procurement, the producer associations are paid a commission of 1.75 percent to meet the
expenses of running the association, such as salaries, electricity, and water costs. While
growers benefit from an assured market for produce of acceptable quality, there is no written
contract agreement with the farmers to safeguard their vulnerability to production and price
risks.
Mahagrapes8 is the first organization in Maharashtra to have the characteristics of
both a cooperative and a private sector marketing partnership. Built upon the existing
association of grape grower (Draksha Bagitdar Sangha), Mahagrapes initially had 20,000
farmers and 29 farmer cooperatives as its members. Over the years, membership declined to
16 farmer cooperatives comprising of 2,500 grape growers in the districts of Sangli, Solapur,
Latur, Pune, and Nasik, with Mahagrapes as the marketing arm of the collection of
cooperatives. Consistent with the objectives of the Maharashtra State Agriculture and
Marketing Board (MSAMB) to promote fruit marketing by providing technical financial and
marketing support, Mahagrapes enables market access by lowering transaction costs. The
MSAMB supported Mahagrapes during its initial years, which were characterized by
problems resulting from high rates of consignment rejections in the European markets (Roy
and Thorat 2008). The cooperative, with the help of the public sector, was able to upgrade
storage facilities, install pre-cooling and cold chain facilities as well as learn about the
international food safety standards. As a result, shipment rejections were reduced to less than
10 percent in late 1990s, and to less than 1 percent after 2001 (Roy and Thorat 2008)9.

It came into existence in 1991 and owes its origins to the Maharashtra State Agriculture and Marketing Board
(MSAMB), established on 23rd March 1984 under the Section 39-A of the Maharashtra Agriculture Produce
Marketing (Regulation) Act, 1963. MSAMB was instrumental in the formation of Mahagrapes along with.
MahaMangoes and MahaBanana were also set up subsequently in mangoes and bananas respectively to follow
thereafter.

Roy, D. and A. Thorat. 2008. Success in High Value Horticulture Export Markets for the Small Farmers: The
Case of Mahagrapes in India. World Development Vol. 36, Issue 10, pp 1874-1890.

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VII.

Policy Recommendations
Contract farming can be developed as a propoor institution through appropriate

policies and regulations. Though, the central and state governments have taken a number of
policy initiatives in this direction, some issues that are generic in nature merit more attention.

1. Improve Physical Infrastructure:

A firms decision to invest in agribusiness, to a great extent, is influenced by the
availability of public infrastructure (roads, electricity, communication network, electricity,
etc.), government policies and regulations. Public infrastructure in India, however, is not
welldeveloped, leading to a slow growth in private investment in infrastructural
developments like refrigerated transport, cold storages and food processing. It is reflected in
low level of value-addition to agricultural produce in the organized sector. Only 1.4 per cent
of the fruits and vegetables, 13 per cent of the milk, 6 per cent of the poultry meat, 21 per
cent of the buffalo meat and 8 per cent of the fish produced in the country undergoes
processing in the organized sector (GoI, 2005).

2. Promote Competition:
By enacting the Model Act (The State Agricultural Produce Marketing Development
& Regulation Act) in 2003 the Government of India has taken a bold step towards creating a
level playing field for the private investment in agricultural markets, agribusiness and
contract farming. Its implementation has remained poor. Only a few states have amended
their existing Marketing Acts in true spirit, and others have made some cosmetic changes. It
is however cautioned that while implementing such policies the governments should take
appropriate measures to curb any tendency of regional monopsony and collusive oligopsony.

3. Evolve Mechanisms for Resolution of Conflicts:

The Model Act, 2003 outlines provisions for regulating contract farming to protect
interests of both firms and farmers. However, one of the provisions that merit attention is the
mechanisms for dispute resolution. Considering lengthy legal procedures, the Act provides
that any dispute between the firm and farmer should be mutually resolved or settled by the
market committee with which the contract farming scheme is registered. It is a novel
recommendation. However, many contract farming schemes remain unregistered and are not
legally vetted, at present. Nevertheless, the need for some judicial or quasi-judicial body for
resolution of disputes cannot be ignored as contract farming becomes widespread.

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4. Promote Farmers Organizations and Other Intermediaries:

An effective way to involve smallholders in contract farming is to encourage and
facilitate them to organize into cooperatives, self-help groups or growers associations. Such
organizational structures also improve their bargaining power vis--vis agribusiness firms,
and generate scale economies in acquisition of inputs, technology, services and information.

5. Develop Grades and Standards:

Price and quality of output are two important factors that can make or mar contract
farming. Agribusiness firms can reject farm produce or pay a lower price on the pretext of its
poor quality. This happens due to lack of well-defined grades and standards and transparency
thereof in the contract agreement. Organized retailers, exporters and processors often impose
their own grades and standards. The need for developing effective grades and standards
cannot be ignored with rising demand for safe and quality foods in both domestic and
international markets.

6. Improve Farmers Capacity to Invest, and Cope-up with Risks:

Two important factors in scaling-out/up of contract farming relate to credit and
insurance. An overwhelming majority of smallholders lack capacity to invest in high-value
agriculture and are risk averse. Some activities like poultry and plantations are capitalintensive and riskier, and need institutional support in terms of finance and insurance. In
India although formal rural credit system is fairly well developed, institutions for agricultural
insurance remain under-developed. It is therefore imperative to enhance farmers access to
financial institutions using the string of contract farming or otherwise.
To develop contract farming as a pro-poor market institution, the governments should
create a conducive climate for private investment in agribusiness, promote competition in the
market whilst curbing any tendency of regional monopsony and collusive oligopsony,
develop and facilitate implementation of grades and standards, improve farmers access to
credit, insurance, technology and extension services, and sensitize and facilitate smallholders
to organize into cooperatives, growers associations and self-help groups so as to effectively
deal with agribusiness firms.

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VIII.

Summary
Consumption patterns are changing towards high value agricultural commodities and

this is driving the process of agricultural diversification in India. The share of high value
agriculture is increasing in the total value of agricultural output and these commodities being
highly expenditure elastic are the potential sources of future income. This demand led
phenomenon can help achieve many strides for the agricultural sector in India, provided
policy can look beyond farming and better integrate production agriculture with other
components of the agri-structure. Despite large production volumes, India continues to suffer
major bottlenecks in enhancing its export and food processing capacities. This is largely
attributed to the lack public and private investment in infrastructure, logistics, information
and technology, which have resulted in inefficient and uncompetitive markets.
Hence, it is important to step beyond farming and conceive agriculture as a complete
agri-food system that incorporates farming, logistics, wholesaling, warehousing, processing
and retailing. In this framework, contract farming can be perceived as an institutional
arrangement that can help address many existing market imperfections and facilitate firmfarm linkages, but not as a panacea for all ills. It will likely be important for contract farming
to move beyond a limited buyer-seller relationship and to gradually bring in the elements of
backward linkage. This could be instrumental in providing the farmers much more than
assured markets and fair prices, but also support in the form of risk mitigation, access to
information on cultivation, post-harvest technology, and markets, and access to credit and
other inputs.
With the growing retail operations in the food and grocery segment in the country, the
process of diversification is likely to continue and argue for devising a congenial policy
environment that can balance food security concerns with the need for private investment in
value added activities in marketing and processing. Readjusting incentives and restructuring
the current food security complex to create an enabling environment for greater investments
and private sector participation has the potential to yield significant benefits to producers and
consumers alike.

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IX.

References

Glover, D 1984. Contract Farming and Smaller holder Out grower Schemes in the Less
Developed Countries, World Development, Pp. 1143-1157. 66
Gulati, Ashok. 2008. Fragmenting Bottom and Consolidating Top: Indias Changing Food
System and Implications for Small Holders, in India: Some aspects of Economic and Social
development (eds.) S.Mahendra Dev and K.S. Babu. Academic Foundation, India. 2008.
Gulati, Ashok and Landes, Maurice. 2009. Toward Contract Farming in a Changing Agrifood System
Gupta, Kanupriya, Devesh Roy and Harsh Vivek. 2006. Do Small Farmers gain from
participation in producers organizations? The Case of Milkfed Dairy Cooperative in Indian
Punjab, in From Plate to Plough: agricultural Diversification and Its Implications for the
Smallholders in India. Submitted to Ford Foundation, New Delhi by International Food
Policy Research Institute, Washington D.C.
Key, N and D Runsten. 1999. Contract Farming, Smallholders and Rural Development in
Latin America: The Organization of Agroprocessing Firms and the Scale of Outgrower
Production, World Development, 27(2), p 381-401.
Nestle India Limited.2006. Annual Report 2006.
Pratap S Birthal. 2008, Making Contract Farming Work in Smallholder Agriculture
Roy, D. and A. Thorat. 2008. Success in High Value Horticulture Export Markets for the
Small Farmers: The Case of Mahagrapes in India. World Development Vol. 36, Issue 10, pp
1874-1890.
Singh, Sukhpal. 2002. Contracting Out Solutions: Political Economy of Contract Farming
in the Indian Punjab, World Development, 30(9), p 1621-1638.

Online References
http://www.fao.org/ag/ags/contract-farming/index_cf/en/
http://www.ncap.res.in/contract_%20farming/Contents.htm
http://www.ers.usda.gov/publications/aer807/aer807fm.pdf

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