Contract farming refers to an agreement between farmers and marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.

The contract farming provides benefits like insulating farmers from price risk, helping them in developing new skills and better market availability at fair prices. It also reduces buyer’s risk of non-availability of quality produce.

In India, contract farming is regulated under the Indian Contract Act, 1872. In addition, the model APMC Act, 2003 provides specific provisions for contract farming. However, it suffers from market failures as it leads to monopsony where differentiated crops are grown. This turns the firms into sole buyer and they can exploit by offering lower price. Other factor is information asymmetry which results in production of below quality crops or farmers not understanding terms and conditions. Also, taxes charged by APMC for contract farming are exploitative.

Government can take following measures to correct problems that lead to contract failures:

1. Government needs to create market-based incentives for both parties. E-NAM is a right step in this direction.
2. The government should maintain information repository which will help farmers and sponsors to evaluate each other prior to engaging in contracts.
3. Government can facilitate the establishment and enforcement of standards for crops.
4. Government can educate farmers and make them more aware about contract farming and model contracts.
5. Contract farming can be taken out of the ambit of APMC, as recommended by Committee of State Ministers on Agricultural Reforms.

In this context, the Model Contract Farming Act, 2018 seems to be a step in right direction. It brings Contract farming out of purview of APMC which would deduct some transaction charges. It also protects the ownership right of the farmers on land as the sponsor is not allowed to construct any structures on it. It also makes crop insurance a part of Contract farming arrangement. It also involves a dispute settlement mechanism at the lower level possible for quick disposal of disputes.

However, still there are certain things that need a relook in the model Act. The Act requires the sponsors and farmers to register the contracts with registering and agreement recording committee where small and medium farmers cannot easily afford these costs. The Act also proposes price protections by pre- agreed price which can be counterproductive. It also uses the concept of family farms which is not relevant in Indian context as 86 percent farms are marginal or small.

As such, addressing the issues of failure of contract farming and preventing exploitation of farmers by large companies remains an issue in progress. Addressing the information asymmetry and bringing a balance in the relative cost of violation of contracts for both the farmers and the buyers should be the target of further reforms in Contract farming.