Contract farming is an agreement between agro-processing firms and companies with a group of farmers regarding the production and marketing of farm produce. The firm agrees to provide the farmers the necessary inputs such as seeds, fertilisers and technical advice and purchase the output from them at pre-agreed market prices. The farmers, on the other hand, promise to supply produce that meet the firm’s requirements and standards within the given timeframe.  

While contract farming may be a fairly new concept in Nepal, the system has been widely practiced in many parts of the world. Many African economies have emphasised contract farming as a means of increasing agricultural productivity and reducing rural poverty. Development practitioners believe that this mechanism supports smallholder farmers in an economy like ours, where public sector agencies have a limited capacity of addressing farm input-output supply bottlenecks.

Agricultural growth in Nepal has stagnated for years. There is an ever-growing stress on the production of traditional crops such as rice, wheat, maize and so forth in which Nepal does not have a competitive edge. There is, therefore, a need to diversify Nepali agriculture. Nepal’s hilly areas are suitable for the cultivation of high value agro products such as off-season vegetables, tea, coffee, ginger and many others. But large-scale commercial farming is not feasible mainly due to the existence of many smallholder farmers that practice subsistence farming. They rely on subsistence farming because of limited resources, small land size and low technical capabilities. Though Nepal has a favourable climatic environment for the production of these niche agro products, a uniform and large-scale production is not feasible due to fragmented farming patterns. Given this scenario, contract farming can provide an opportunity to small farmers in Nepal to cultivate high value and low volume agro products on a commercial scale. Contract farming enables agro processing industries and companies to enter into a formal contract with a group of smallholder farmers regarding the production and marketing of agro products. This will not only promote commercial farming but also enhance rural livelihoods. It links small-scale farmers into rapidly growing global markets. Agro processing industries can use the produce of small-scale farmers as primary inputs, thereby supplying the final products to national and international markets.

Among various agro products identified by the Nepal Trade Integration Strategy (NTIS), ginger is one in which Nepal has a comparative advantage. The advantage is due to low labour costs, favourable climatic environment, well adapted local varieties and good marketing network. In fact, Nepal is the third largest exporter of ginger in terms of total export volume. Nonetheless, ginger production suffers from a number of issues like traditional cultivation practices, market insecurity, limited knowhow, low quality and low prices, among others.

Many of these constraints can be overcome via contract farming. Presently, subsistence farmers, small commercial farmers and large scale commercial producers are engaged in ginger production. And it is the production of large scale commercial producers that hit the international markets.

Contract farming can be a pathway to move from subsistence farming to commercial farming. For instance, a majority of small farmers engaged in ginger production can be organised for contract farming. Presently, they have been cultivating local varieties using traditionally grown rhizomes. With contract farming, they will receive technical assistance, credit facility, quality inputs and market assurance with better prices. The firms, on the other hand, will have a consistent supply, increased quality control and lower transaction costs, among others. At a time when Nepali ginger lacks international competitiveness mainly due to poor quality standards, contract farming can help minimise the issue.

Besides ginger, Nepal has a comparative advantage in various other agro products such as tea, coffee and off-season vegetables, among others. Large-scale commercial farming of these products is feasible via contract farming. The Seed Entrepreneurs’ Association of Nepal (Sean) has initiated contract farming of vegetable seeds through its business wings. This venture has proven to be an effective one.

Nevertheless, in the absence of a contract farming act, the system has not gained momentum in Nepal. And there have been cases of contract farming failures in the absence of enforcement, regulatory and legal settings. Though the government of Nepal has accorded priority to contract farming in its various policy documents, it has not yet enacted a legal framework. And while the preliminary draft of the constitution has rightly emphasised commercialisation of agriculture, it has not categorically mentioned avenues of commercialising and industrialising the sector.

Finally, agriculture in Nepal suffers from various bottlenecks, the main being marketing infrastructure such as roads, electricity, storage and other facilities; quality assurance of agro products and right market prices to farmers, among others. While all these issues cannot be addressed solely by contract farming, the mechanism surely provides an enabling environment towards the promotion of commercial agriculture in the country.

Khadka holds a Masters in Agricultural and Resource Economics from the University of Maryland, the US