It is defined as a system for the production and

supply of Agricultural/horticultural produce under

forward contracts between producers/suppliers and
buyers. The essence of such an arrangement is the
commitment of the producer/seller to provide an
Agril commodity of a certain type, at a time and a
price and in the quantity required by a known and
committed buyers. It involves the following basic
elements.
 HLL, RALLIS and ICICI formed and alliance
with the farmers
 PEPSI FOOD LTD. i.e. PEPSICO entered India
in 1989 by installing a Rs 22 Crore tomato
processing plant at Zahura in Hoshiarpur district
of Punjab.
 PEPSICO Joined with Punjab Agril-University
and Punjab Agro-industries corporation Ltd.
Contract with the farmers for food grain
production (Basumati Rice) spices (Chilies), oil
seeds (Groundnut)
 Inputs can be provided by agribusiness firms, there
by reducing the uncertainties associated with the
input availability, quality and cost.
 Technological assistance offered by the contract firm
favouring the production of higher valued often
riskier crops and livestock.
 A market outlet is secured for the contracted
production reducing the marketing risk.
 The uncertainty about sales price is often reduced
 With the reduction of product and market risk,
income stability is favoured.
 Access to credit is enhanced
 Problems occur when staff responsible for issuing
contracts and buying crops exploits their position
such practices result in a collapse of trust and
communication between the contracted parties
and soon undermine any contract.
 Firms usually have more influence on the terms of
the contract and can create unfavourable
conditions
 The monopoly of a single crop by a firm can have
a negative effect i.e. farmers lose flexibility in
enterprise choice.
 Farmers debt can accumulate if the firms credit
and inputs are excessive relative to actual crop
yields.
 Firms might intentionally avoid transparency in
the price determination mechanism of the
contract.
 Delivery schedules might be set by firms so as to
influence price paid to farmers. For example in
case of sugarcane delay might depress price
received if these are based on the degree of
sucrose.
 Long term contracts might lead to gradually
decreasing real prices received by farmers.
 The risk that are normally associated with
monoculture practices are increased.
 Greater regularity of Agril product supplies to the
firm is ensured.
 Greater conformity to desirable product quality
attributes and to safety standards in promoted
 Input costs per unit are reduced
 Access to agricultural credit and eventual
financial incentives and subsidies is facilitated
 Labour costs are reduced
 Expansion and interaction of production is
facilitated.
 Transaction cost of dealing with large number of
farmers are high. Firms prefer to work larger
rather than smaller farmers.,
 Risk of misuse or deviation of supplied inputs
and of final products.
 Internalization of support service cost
 Conflicts with farmers may arise or negative
impacts of the contracted operations on the
environment.