What is Contract Farming?

Contract Farming is defined as an agricultural production carried out with mutual agreement between the buyer and the farmer. This establishes conditions for the production and marketing of farm products. Typically, a farmer agrees to provide quantities of specific agricultural products that meet quality standards and supplied at a time determined by the buyer. In turn, the buyer commits to purchase the farmer’s product and also support his production in the form of land preparation, provision of technical advice and supply of farm inputs.

The Cabinet Decision

the cabinet decision on contract farming

The government, on Wednesday, June 3rd brought in two key ordinances designed to boost the farm sector. While one gives a fillip to contract farming, the other frees the farmers from the clutches of the “sabzi mandis”. Minister Narendra Singh Tomar briefed the media on the cabinet decisions of approving The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020. This makes it possible for processors, aggregators, exporters and large retailers to engage farmers in contract farming by offering mutually agreeable minimum prices. It also allows farmers to sell their produce directly to anyone outside Agriculture Produce Marketing Committee (APMC) market yards.

Duty on Corporates

GDP per capita

The first ordinance lays down rules to ensure that farmers do not get cheated by the firms with which they enter into contracts with. It stipulates that any firm setting contracts with the farmers have to bear the risk of market unpredictability and ensure that the latter gets access to modern technology and better inputs.

The second ordinance allows farmers to sell their produce outside the notified APMC market yards. They can now sell from their fields or homes to anyone- corporate house, exporter, processing industry or a cooperative, without attracting any tax on the trade. Simply put, farmers can now trade at their will. The ordinance also allows any individual or firm to create an e-platform for trading agricultural commodities in adherence to rules and regulations that the centre shall lay down soon.

Amendment to ECA

market projection on contract farming

In a third decision, the cabinet decided to remove commodities such as cereals, pulses, oilseeds, onions, potatoes, edible oils from the purview of Essential Commodities Acts (ECA). The EC Act was a big hindrance to attracting investment in the agricultural value chain. Similarly, the ordinance on promoting barrier-free trade and the one on contract farming will change the dynamics of agri-trade and go a long way to bring farmers close to large retailers and exporters.

How can this transform Indian Agriculture?

Contract Farming benefits both farm producers and the agro-processing industries as well.

Production of foodgrains in Kharif and Rabi season
  • The producer/farmer makes small scale farming competitive. Small farmers can access credit, technology, marketing channels as well as information while they are reducing transaction costs.
  • The producer/farmer has assured markets for their produce at their doorsteps thereby reducing marketing and transaction costs.
  • The producer/farmer reduces the risk of production, price and marketing costs.
  • Contract Farming opens up new markets that would otherwise be unavailable to small farmers.
  • Higher production of better quality, financial support in cash and technical guidance to the farmers is ensured.
  • Taking the case of agri-processing level, it ensures a consistent supply of agricultural produce with quality at the correct time and lesser cost.
  • It helps agri-based firms optimally utilize their capacity, manpower and infrastructure responding to food safety and quality concerns of the consumers.
  • It facilitates direct private investment in agricultural activities.
  • The fixation of price is done by the negotiation between the producers and firms.

What could be the challenges faced?

  • Contract farming is criticized for being biased in favor of large farmers and big firms exploiting poor bargaining power of small farmers.
  • Problems like an undue quality cut on produce by firms, delayed deliveries, delayed payments, low price, pest attacks raise the cost of production.
  • Contract agreements are usually verbal and informal. Also written agreements often do not provide legal protection in India.
  • A case of Monopsony- Multiple sellers, single buyer may arise.


The Cabinet has passed a mammoth decision in the benefit of our farmers. But that is not where the government should stop- the government needs to make sure that it acts as a mediator between the parties and not be a mouthpiece for the company sponsor. Also there is a need of having an appropriate legislation to ensure that the farmer’s rights can be enforced in case of any disputes that might arise.