Contract farming is generally defined under an agreement between farmers and a Sponsor (e.g. processor, exporter, and marketing firm) for the production and supply of agricultural products under a Forward Agreement at pre-determined prices. The basis of the relationship between the parties is a commitment on the part of (i) the farmer to provide a specific commodity in quantities and quality standards determined by the Sponsor and (ii) an undertaking of the Sponsor to support farmer’s production as to purchase the commodity. It has the potential of providing assured markets, combining small farmer efficiency and utilizing corporate management skills in reducing transaction costs through vertical integration. Contract farming is a win-win situation for both parties and leads to the improvement of farmer incomes, development of agro-processing and rural economic transformation. In recent years India has witnessed a shift to higher value products for export. Contract farming offers, perhaps, the only way to make small scale farming competitive by enabling small farmers to access technology, credit, market channels and information whilst lowering transaction costs. In tandem it offers a feasible and viable model of private sector participation in agriculture on a massive scale. Contract farming has the potential to be an effective instrument to aggregate at the grassroot level. Successful contract farming schemes provide a platform for supply of reliable agricultural produce of specified quality for the establishment and development of processing sector and reliable and competitive channels to supply for exports as well.
