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Contract Farming — the need and apprehensions

“When tillage begins, other arts follow. The farmers, therefore, are the founders of human civilization.” — Daniel Webster. Without progress in the agricultural sector, it would not be possible to ensure that 70% of the rural population dependent on the sector have better lives. Among the many mechanisms to foster growth in the agricultural sector is Contract Farming — a pre-production season agreement between farmers (either individually or collectively) and sponsor(s). While it could have a positive impact and drive the sector on the path of progress, more harm could be done than good if devoid of effective implementation and monitoring.

Firstly, the World Bank points out that raising agricultural productivity is one of the three challenges faced by the agriculture sector in contributing to the overall development of India. Access to technology, technical education, research, and infrastructure development are crucial to the growth of the sector. For infrastructure development, investment is imperative and India’s experience reveals that since the early 1990s, investment growth in the agriculture sector averaged over a low 4%

Additionally, the downscaling of agricultural production due to the fragmentation of farmland is another factor responsible for the slow growth in the agricultural sector. In 1960-1961, 60% of the cultivated area was owned by farmers with farmland exceeding 4 hectares. This figure dropped to 35% in the period 2002-2003. This indicates the increasing trend of cultivation in smaller farmers. There is operational inefficiency associated with the shrinking size of farms as farmers have limited incentive to adopt high-cost capital-intensive farming techniques and cannot take advantage of economies of scale. 

Furthermore, agro-processing industries are on the rise due to increased demand for processed food and the availability of technology to extend the life of food products. For the perfect functioning of such industries, a continuous supply of crops must be ensured. In a market where the crop prices and output is fluctuating, and also where the market is composed of a large number of small and marginal farmers, there is a need for better mechanisms to smoothly integrate farmers and firms. For it would be mutually beneficial for the farmer and the company if the firms could provide technical and economic assistance which would ensure an undisturbed supply of the raw materials from the farmers. It could reduce the production risk to the processors and the price risk to the farmers. With the Land Ceilings Act and Land Leasing Act in place, such firms are greatly constrained as it holds that non-agriculturist cannot own or lease agricultural land. 

In light of the above, the Government of India’s National Agriculture Policy envisaged that “Private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oilseeds, cotton and horticultural crops”. 

The Model Contract Farming Act 2018 noted: “when small parcels of farmers’ land are pooled, not by dispossession, but by mobilizing the owners into some form of collective operational unit, the advantages of scales of the economy can be harvested to benefit small and marginal farmers”. Thereby, the Act suggests contract farming as a measure that could tackle the issue of fragmentation. Contract farming has the potential to stimulate infrastructure development and it helps to address other problems like natural vagaries, price fluctuations, input procurement, and access to credit. It lowers the transactional cost and has the potential to increase the income of farmers. 

Pepsi Foods Ltd. in 1989 engaged in a backward linkage with Punjab farmers to operate its gigantic firm. Pepsi Co. required a minimum of 40,000 tonnes of tomatoes while the total Punjab tomato crop was 28,000 tons, available over a 25-28 day period. Through intense region-specific research, assistance, and inspection, Pepsi Co. was successful in increasing the production capacity of the Punjab farmers. Inspired by the feat, a similar contract farming model was followed in the production of Basmati rice, chillies, groundnuts and potato. Agriculture being a state subject, several State governments — Punjab, Karnataka, Tamil Nadu — had enacted their own systems to materialize contract farming.

Nevertheless, it is not an all-glorious story. The case of 11 farmers who were sued for about 20 lakhs to 1 crore for growing a variety of potato on which PepsiCo had intellectual property rights had garnered much attention. Though the case was withdrawn after subsequent government intervention, the event had caused deep wounds in the confidence of the farmers.

Another example is that of green peas cultivation in Punjab which was affected by a fungal infection due to unexpected rain and high temperature. The produce was rejected by the State’s Punjab Agro Foodgrains Corporation on the ground of poor quality. The produce was dumped in the local market, and consequently, the market price fell to Rs 3 per kg over the promised rate by PAFC of Rs.5 per kg. 

A history of mixed evidence justifies the apprehensions of the farmers. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance provides a framework for contract farming where farmers can enter into direct contracts with buyers without having to go through any licensed trader or even the APMC. With the middlemen being removed and greater opportunities being opened up for the farmers, the Act is propagandized to benefit the farmers. Nevertheless, the government has not guaranteed to prevent the uprising of a new set of middlemen. New forms of exploitation could arise constraining the farmers further.

Farmers are likely to be on the weaker side in terms of negotiation. Furthermore, the sponsors would have an edge over information and they could use it to the disadvantage of the farmers. Sponsors feel less incentivized to deal with a large number of small farmers as it increases their cost of organizing and coordination. But about 82% of the farmers fall under the category of small and marginal farmers, hence the outcome is questionable. 

From past experience, the other problems contract farmers faced included an unwarranted quality cut on produce by firms, delayed payments, low price, pest attack on crops which raised the cost of production, poor-quality inputs, and denial of compensation for crop failure. The contracts have been breached in some cases, for instance in the manipulation of contracts in Tamil Nadu for broiler chickens. The firms rescheduled the pick-up of chickens depending on the demand and this posed a challenge to the growers. However, bound to the contract due to the firm-specific fixed investments made the farmers have no better alternative but to yield to the play of the firm. 

In the new Act, regarding contract farming in seed production, sponsors at many times ask the farmers to destroy crops if the sponsor expects under-quality seeds to be produced. The Act fails to address the compensation in such circumstances but offers a protocol regarding the payment which is to the benefit of the farmers. Moreover, by linking bonus price under contract to be above the guaranteed price of the APMC which has to be part of the contract agreement if the price is not fixed in advance and is subject to variation, the Act contradicts its basis from wanting to create alternative opportunities for the farmers. 

With such incidents in the background and new critical clauses being added, the farmers are skeptical about the outcome. The global experience calls for the need to embed a monitoring mechanism to ensure that the contract is aimed at the development of all pirates involved without any exclusion. The fear of the creation of an unequal playing field must be levelled through remodelling so that the community as a whole would have the utmost faith and would welcome a tool such as contract farming for the progression of the agricultural sector.

Gby Atee is a second-year Economics and Finance student at Ashoka University.

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