Contract Farming
There are three basic kinds of integration between agro-based firms and farms. One is vertical integration which occurs when a firm combines processing / marketing and production activities. Second is horizontal integration which occurs when a firm gains control over other firms performing similar activities at the same level in production or / and marketing sequence. Firms often expand both vertically and horizontally. Thus the circular integration takes place if both vertical and horizontal integrations are tied, together. Vertical integration between farmer and firm is a continuum with end of the spectrum is co-ordination without any contract, which is also known as spot market or open market and the other end is ownership integration. In spot market, there is no written or oral contract between the firm and the farmer for both buying and selling. In this type of integration, the farmer buys supplies from and sells his produce to whomever he chooses. Though spot market operation provides freedom to farmers there are uncertainties both in buying the supplies and selling the produce. In ownership integration, each individual farm loses its identity and becomes a company owned farm. Middle of the spectrum is contract farming, which is sometimes called as quasi integration. Here there is a kind of written or oral contract between the firm and the farmer. It brings about a long-term relationship between the farming community and the firms that use the farm produce. While the spot market transaction is widely practiced in India, the contract farming seems to be more appropriate considering the need to improve productivity, quality of the output and also for involving farmers in the development process. |
