Addressing the Challenges Faced by Farmers in Contract Farming

Small-scale farmers in India cultivate potatoes for their consumption instead of business. However, the bulk cultivation of potatoes requires substantial capital and inputs inaccessible to smallholder farmers. Usually, this is produced by farmers in productive areas, but with soil problems, the production inputs are very expensive. Contract farming can easily deal with inaccessible inputs and investment, mainly when the buyers offer inputs to small farmers by superior quality seeds and financial and technical assistance to ensure a consistent supply of quality products resulting in self-consumption production for farmers and can sell in the local and overseas market. The global contract farming market size was valued at $ 58.75 billion in 2022 and is predicted to grow to around $ 78.42 billion by 2030.

Contract farming has become a crucial mechanism in agricultural production, as it enhances the partnerships between agricultural companies and farmers. It also helps farmers in multiple ways, such as improving productivity, quality, and market access for their products. However, it's vital to acknowledge the challenges that farmers face in the process of contract farming and seek ways to mitigate them.

Price Volatility

The price volatility occurs due to several factors and presents substantial difficulties in contract farming and it cannot be in the control of farmers unless they have a clear picture of what affects pricing. In such cases, contract agreements are unable to support farmers on price due to the quick drop or any other factors leading to a change in demand. As a result of this, farmers may not be able to gain profit or income making their money management and other decisions at stake. Besides, there can be unstable weather conditions, unexpected political occurrences, and market changes that can worsen price volatility affecting farmers' profit. To get rid of these challenges it is imperative to gain market knowledge, getting effective from experts streamlining the whole process.

Let us consider a scenario of a vegetable farmer who has agreed to supply a lot of onions at a fixed price. Unfortunately, due to unexpected events, the supply of onion to the market diminishes, contributing to an increase in price. Nonetheless, the contract's terms and conditions will remain fixed, and farmers cannot change the price, impacting their profit.

Market Risks

The farmers should keep an eye on the market to ascertain the latest trends. However, failure to keep track of this will lead to a severe market in contract farming due to price changes and demand volatility. Although there is certainty in the pricing of contracts, farmers remain vulnerable to unanticipated market changes that can impact their income. There can be instances wherein the immediate shift in the tastes of consumers, market changes, and interruptions in the supply chain can weaken the steadiness of agreement in contract farming. To stay away from these risks, the farmer needs effective strategies, such as not farming the same crop every time and being alert to the latest market information and policies that improve farmers' toughness to market uncertainties.

For instance, Potato farmer contracts with an international firm to export their vegetable to the foreign market. Trade-related issues between the export and import nations lead to complex agricultural product restrictions. Consequently, the need for potatoes in the import market decreases, lowering the farmer's opportunity to export and taking them to market risks.

Vishal Bhatnagar, Group Chief Product Officer (CPO), Vamani Overseas Private Limited said "Balancing short-term and long-term goals in product management is a common challenge that requires careful planning, prioritization, and communication"

Power Imbalance

Power imbalance is one of the key challenges farmers face in contract farming due to their lack of knowledge. In the case of agri-related firms, they have great influence over farmers in terms of negotiation, and farmers end up losing their contract in their favor, which leads to severe loss. Usually, the farmers don't have many options to deal with more agricultural firms and have talks with limited businesses, forcing them to enter into a contract. All these incidents lead to power imbalance, resulting in lower profits, market risks and other challenges. Hence, to avoid these challenges, the farmers have to showcase transparency in dealings, sharpening skills in the negotiation process, and robust decision-making ability to lower the risk in contract farming.

For example, dairy farmers who have agreed to distribute milk to the processing firms mostly face power imbalances in contract agreements. Generally, processing companies have the power over price fixation, distribution and quality checks. Because of these, farmers have to rely on them as they are their main buyers, contributing to less power.

Quality Compliance

Considering the existing quality compliance in contract farming, it requires potential funding by farmers in infrastructure, advanced technology, and the latest knowledge on market trends, which farmers may not be able to afford. These are the standards set by the buyers for farmers, and meeting all criteria can be challenging. Nevertheless, being unable to meet the requirements of quality compliance will lead to the cancellation of the contract, or a fine may be imposed, which badly impacts the farmer's livelihoods. Moreover, as farmers don't have access to premium resources and technical knowledge, this complicates regulatory adherence. To strengthen quality compliance issues need to comprehend the advanced technology, and supportive systems that provide complete information and empower farmers to meet quality while dealing with contract farming arrangements.

For example, farmers approach distributors to supply their crops. Still, there can be instances where they cannot maintain compliance with appropriate organic certification norms because of pests in the paddy field. Even if the pest controls are implemented in the farming process, the farmers may lose the agreement if the end products fail to meet the standard.

All in all, several challenges exist with contract farming, but they must be rectified with effective strategies that assist farmers in agriculture. Efforts on the field might or might not happen for farmers, but to get things to work out in their favor, they need to have a clear understanding of what is happening on the market, vast knowledge of farming methods and how to handle it with bigger firms. Contract farming has great potential to improve the farmer's standard of life, bringing their agricultural activity to the next level and contributing value to the agricultural market.