Contract Farming: A Boon or Bane?

Agricultural Farming
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Santosh Shinde 

CO-Founder and COO, FarmERP

Pune, December 28, 2020: Agriculture is the age-old occupation of India due to it being an Agrarian economy, it is a large contributor (16%) to the Gross Domestic Product of our country. Not just the Agrarian workforce, but similar to a ‘Domino Effect’, multiple other industries like retail, chemicals, e-commerce, widely rely on the output from the Agricultural Sector. 

This article talks about the topical ‘Contract Farming’ debate ongoing due to recent reforms initiated by the Indian Government. It aims to provide a holistic outlook on what contract farming is and how it may be beneficial for providing a structure to the Indian Agricultural Landscape. The article also interlinks the structure required with various inputs that technology can bring to the forefront.

What is Contract Farming? 

The much talked about pointer today is ‘Contract Farming’, owing to the reforms and farmer bills being passed by the Government. However, before driving a conclusive outlook, a basic understanding of what Contract Farming entails is imperative.

Colonial rulers incepted the arrangement of Contract Farming for mostly cash crops like coffee, poppy, indigo, tea, etc., and it has since been a prevalent segment of the Agricultural Landscape in India. The concept gained momentum once the Indian Economy opened up to economic liberalization. Contract Farming essentially involves carrying out agricultural production per an agreement between a farmer and a buyer post the establishment of conditions regarding the mass production, such as the quality and quantity of the crop required, as well as the tentative date of harvest. Based on the anticipated yield and contracted acreage, a pre-agreed price is regulated. To achieve the required output key equipment and inputs are supplied to the farmer.

The Importance of Contract Farming in India 

There is a steady growth of Contract Farming in India, owing to the need for structure and assistance in rural areas. Present-day farm-firm linkages of the contract farming model integrate production and marketing as well, especially for high-value Agri commodities. Contract Farming enables the overcoming of inadequate linkages with markets. Due to fragmented resources, the prevalence of illiteracy, low-grade groundwork, the farmers require adequate support for reducing wastage of large quantities of produce. Apart from these factors, the changes in consumption habits of consumers, heightening popularity of fast-food outlets, growth of the e-commerce of the food and retail sector, as well as the continuous escalation of global trading in fresh products leads to an increased demand for a well-structured Agricultural Sector.

Private Sector Involvement 

In present days, there has been large involvement of the private sector in the areas of contract farming, with entities like Nestle India Ltd., ICICI Bank Ltd., IDBI, Hindustan Lever Ltd., and various other corporates aiming to make a difference within the sector. The key functionalities rendered by these Corporates in the stream of Contract Farming involve the provision of Agricultural Inputs, technology integration, management of finances & credit, produce collection, quality inspection, farmer training, maturity, and harvest predictions, and various others.

Certain states are friendlier to contract to farm than others due to less marginal fields, optimum soil health and productivity, and enhanced irrigation facilities. From these parameters, states like Madhya Pradesh, Haryana, Karnataka, Tamil Nadu, Andhra Pradesh, Chhattisgarh, and Punjab are the favorable geographies to take up Contract Farming.

Various factors throughout the value chain inhibit the growth of the Agricultural Sector, and that play a negative impact on individual Farmer Incomes. The expanse of Agriculture has massive potential in India, being the primary source of income for 43% of the Indian workforce. Since the lion’s share of India’s farm holdings (approximately 86%) are owned by small and marginal farmers, considering solutions to challenges must involve their needs as well.

The recent policy reform announcements touched base upon the removal of stock limits, formalizing the methodologies of contract farming, and the repose of selling products across India. These reforms are aimed at an increase in capital shelled out by private corporates hence enabling the achievement of the Government’s aim at doubling farmers’ income by 2022. In lieu of these changes, the essential adoption of technology-driven digital platforms, analytics, machine learning, computer vision, artificial intelligence, blockchain, and IoT solutions are underway.

A Technological Solution 

The confluence of high-speed internet and maturing digital content has been building up to an affluent Digital Ecosystem in India. It has been establishing the groundwork for various innovations within the agriculture sector, where data digitalization and data platforms, analytics, etc., can be leveraged to regulate operations at multiple levels within the value chain.

The segments within the value chain like Market linkages (farm inputs), precision agriculture & farm management, quality management & traceability, supply chain tech & output market linkages, and financial services have the various market potential for investments within the sector. These segments have multiple pain points that can be capitalized on using technological processes.

Foreseeable Growth in the Indian AgriTech Sector 

AgriTech companies are coming up steadily with various business models like the margin-based models, subscription-based models, and transaction-based models. The AgriTech players take forward data-led decisions to accurately predict and work towards the supply and demand of inputs, and various other factors, thereby strengthening the path to scalability in the segment.

The space is looking towards the development of a robust ecosystem, strong technology and investments on research and development, cross-country collaboration for innovation ideas, and a favourable regulatory environment. Today, the Indian AgriTech market potential penetration is steady at 1%. Since there is so much additional potential for investment within the multifold segments of the value chain, there are several different ways in which AgriTech will be able to support the pain points within farming processes, enabling a structural change and sturdiness within the landscape.

farmerp santosh shinde

(Santosh Shinde is the CO-Founder, COO of FarmERP. FarmERP offers a future-ready, agriculture ERP platform for smart agriculture to achieve higher efficiency, higher yields, higher profitability, and complete traceability. Their solutions cater to multiple sub-verticals in the agriculture industry like Biotech, Organic Farming, Export, R&D, and a host of others.)