Contract farming can be defined as the production of crops which is based on an agreement that is carried between the farmer and the buyer. The farmer agrees to provide the buyer a specified quantity of the agricultural crop. However, the quality standard of the buyer should be met. In addition, the buyer should support crop production through farming techniques, preparing land for the cultivation and supplying of inputs.
It is very important that the buyers and the farmers should have a common objective while undertaking contract farming. The arrangement of the contract should be based on the principle that both the parties benefit from the contract. The agreement should protect both the farmers and the buyers against the risk involved by maintaining contractual obligations. The aim is to promote the production of the agricultural crop and ensure a secure market for the same. So that the farmers can revenue and the buyers get an ideal return for the investment.
Small farmers in India are generally capital starved and cannot make a major investment in land improvement and modern inputs. Contract farming can fill up this gap by providing the farmers with quality inputs, technical guidance, and management skills. Although the company deals only with the contracted crop, the farmers' overall management skill may improve, thereby helping him to raise the yields of both contract and non-contract crops. From the standpoint of corporate bodies, farming reduces the supply risk, while the farmers enter into contractual arrangements with companies in order to minimize price risks. The company and the farmers enter into contracts to supply or purchase a specified quantum of the commodity at agreed prices. The agreed contract may be either formal or informal and may cover the supply of inputs and marketing of output. By entering into a contract, the company reduces the risk of non-availability of raw material and the farmer reduces the risk of market demand and price for the crop produced. The inputs and services supplied by firms may include plants, fertilizers, pesticides, credit, farm machinery, technical advice, extension etc., or may involve only the supply and marketing of produce.