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Reliance Industries, ITC, Godrej and Pepsi are just a few companies eager to enter contract farming in a big way. These companies are looking at the irrigated field of western Maharashtra to pursue investment plans. An analysis of how far contract farming has come, and what needs to be done to plough ahead. Will contract farming mean more jobs, regulated farming and changing crop patterns? Contract farming has been in existence for many years as a means of organising the commercial agricultural production of both large-scale and small-scale farmers. It is now once again in vogue, and even tried for bulk production of subsistence crops, such as paddy-rice, maize and wheat. Interest in it continues to expand as changes in consumption habits, such as the increasing number of fast-food outlets, the growing role played by supermarkets in many states, and the continued expansion of world trade in fresh and processed products have provided the impetus for further development of this mode of production. Contract farming is seen as an effective means of generating supplies for processing industries and exporters, with a substantial potential of adding value to agriculture in India. Several state governments have actively encouraged it as a means of crop diversification. Most such contracts now have specialised contract agencies as interfaces between farmers and input suppliers/crop purchasers. Contract farming is now considered to be a corrective to market imperfections and serving a useful purpose in India in its own limited sphere. Commodity co-operatives (dairies in Gujarat, sugarcane in Maharashtra), which emerged in the 1950s, 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. They succeeded enormously, leading to their replication and compelling private companies also to adopt similar approaches. Contract farming in India covers loose buying arrangements, simple purchase agreements, supervised production with input provision, with possibly tied loans/advance and risk coverage, and managed production with input provision and tied loans/advance. Sugar and milk co-operatives provide significant social and community services as well. Effectiveness, Pre-requisites and Problems Contract farming is one among several possible interfaces between crop cultivation and its processing and consumption. It is a powerful means of introduction of new crops or farm technologies, especially when both marketing and production uncertainties predominate. It helps when markets do not exist or are underdeveloped; conversely, contracts diminish in importance with development of competitive markets. Contract farming works when specific quality requirements must be met. The effectiveness of contracts depends on the offer of a fair price and adequate risk coverage. Other factors helping adherence to contracts include exclusiveness, provision of proprietary planting materials or inputs, and a strong, self-regulatory social systems among growers. It is an acceptable via media for corporate ownership and could be a boon to processing industry, if properly designed and implemented. Many factors also limit the utility of contract farming. Thousands of contracts are needed for securing even modest quantities. The large, quality-indifferent Indian market for fresh commodities acts as a main roadblock, leading to a "Feast-or-Famine" syndrome; shortages cause supply contracts to be flouted, and surpluses cause glut at the buyer's doorstep. Contract farming in general helps reduce market risk associated with crop cultivation and is thus a possible instrument of credit deepening. The presence of a third party could lead to outsourcing some preliminaries of credit disbursal and help reduce the cost. The buyers' commitment to purchase substantially reduces the risk of default to the lender. Therefore, credit institutions would be interested in using contract farming as a means of improving credit disbursal and meeting the mandatory targets for priority sector lending. Yet their actual involvement in contract farming is limited because there are not many well-planned contract farming schemes with adequate safeguards for all concerned, backed by credible sponsors, and previous experience has not been all positive.
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