Effectiveness of Contract Farming: Evidence from Cultivators of Onion in Maharashtra, India

Contract farming based on a contract between farmers and agro-processing and/or marketing firms is catching on in Indian agriculture due to increase in the demand for processed products, change in consumption habits and conducive policy environment. The concept behind the promotion of contract farming is to encourage private investment in agriculture and to reduce market risks as well as post-harvest losses, especially risk-oriented fruits, vegetables and high value crops. The private sector may play a role in providing a range of services to small and marginal farmers from input supply to marketing of produce. In this context, the present paper attempts to quantify the benefits of contract farming on farmers’ income and investigates the determinants of participation in contract farming. This is based on a survey of 180 farmers engaged in cultivation of onion from Maharashtra State. The study reveals that contract farming, by connecting smallholders to high-end international market, ensures them with higher returns to the tune of Rs. 12.5 per kilogram over independent farmers. It is seen that to some extent contract farming would remove the constraints faced by the small and marginal holders in Indian agriculture and help them to move out from the poverty trap. Access to institutional credit, extension services, farm-size, own transport, and migration significantly affected farmers’ participation in contract farming. The empirical evidence on benefits from contract farming in high value export commodities should induce conducive policies for promotion and up scaling of contract farming in India. It was observed that contract farming cannot be seen as a panacea for all the problems afflicting the Indian agriculture while it has the potential to address the problems relating to access to market (input and output), new technology and price stability. A need is suggested for better institutional mechanism to make contract farming more inclusive and sustainable.