CONTRACT FARMING IN INDIA

WHAT IS CONTRACT FARMING?

Contract farming is a relationship between farmers and processing companies or cooperatives in which the farmer is required to supply the agreed-upon amount and quality of crops within a certain time frame. The processing firm offers to buy the crops from the farmers at a predetermined price in exchange.

Farmers must sign a contract agreeing to sell their crop directly to the procurement company in return for agricultural inputs, technological assistance, and financial aid. Contracts can only succeed if all parties agree to the terms and believe that by signing the contract, they are putting themselves in a win-win situation[1].

WHY CONTRACT FARMING?

For millions of Indians, farming is a traditional source of income. Farmers have had to throw away their produce on occasion due to a lack of buyers. This is one of the coin’s two sides. The agro-based and food industries, on the other hand, depend on timely and sufficient inputs of high-quality agricultural produce. This inherent paradox of India’s agricultural situation has given rise to the idea of contract farming that promises to establish a proper connection between the farm and the sector[2]. Farmers require a stable market. Agro-based and food industries also require high-quality agricultural inputs. Contract farming can help to link the farm and the industry. Another explanation for contract farming’s introduction:

• The central and state governments’ financial burdens would be reduced.
• Agriculture would see a rise in private investment.
• In rural areas, contract farming can create gainful jobs. Labour migration from rural to urban areas would be reduced as a result of contract farming.
• At the individual farmer stage, contract farming can provide a steady stream of income.

DIFFERENT TYPES OF CONTRACT FARMING[3]

Eaton and Shepherd[4] described five forms of contract farming (CF) models, which Bijman[5] elaborated on. Models are typically classified according to the degree of vertical coordination, the type of product, and the number of key actors involved. The five forms of contract farming models are listed below.

1. Centralized Model: The contracting company assists smallholder farmers in the cultivation of the crop, purchases the crop from the farmers, and then produces, bundles, and markets the commodity, all while maintaining strict quality control. Tobacco, coffee, barley, sugarcane, hemp, banana, tea, cocoa, and rubber will all benefit from this. Thousands of farmers may be affected. The contracting company’s level of involvement in production support can vary.
2. Nucleus Estate Model: This is a Contrast to the centralized model. The promoter also owns and operates an estate plantation (usually near a processing plant), which is typically very large in order to provide further level of throughput guarantee for the plant. It is mostly used for tree crops, but it can also be used for fresh produce for export, such as vegetables and fruits.
3. Multipartite Model: The multipartite model typically includes the participation of the government, regulatory bodies, and private companies, as well as local farmers. Separate entities may be responsible for credit provision, manufacturing, distribution, marketing, and management of the produce under the model.
4. Informal Model: This model is primarily operated by individual entrepreneurs or small businesses that enter into easy, informal seasonal production contracts with farmers. As with vegetables, watermelons, and fruits, the crops typically need only a limited amount of processing or packaging for resale to the retail trade or local markets. Typically, financial investment is small. This is probably the most speculative of all contract farming models, with both the promoter and the farmer at risk of default.
5. Intermediary Model: Companies formal subcontract to intermediaries (collectors, farmer parties, NGOs) in this model, and the intermediaries have their own (informal) agreements with farmers. The main drawback of this model is that it breaks the bond between the company and the farmer.

GOVERNMENT’S ROLE IN CONTRACT FARMING

The Contract Farming (Development and Facilitation) Authority, a state-level agency proposed in the concept contract farming Act, will place contract farming outside the APMC’s purview. The sponsor and the farmers must register the contracts with a registering and agreement recording committee, according to the model Act. The parties must go through additional processes and pay additional fees as a result of registration, which small and medium farmers cannot easily afford. The Act also proposes to protect farmers’ prices by establishing a pre-determined price. The model contract Act’s whole premise seems to be to provide a regulatory framework to ensure that all parties honour the contract[6]. Among the possible steps are:

1. Encourage further rivalry: Both farmers and buyers require market-based opportunities, which the government must provide. Farmers’ access to spot markets and mandis should be improved across the region. E-NAM (Electronic National Agricultural Market) is a fantastic step in the right direction. This will incentivize contracting sponsors to increase their bids and compete for farmers’ enrolment in order to obtain input supplies. Sponsors will be motivated to provide better terms and services to farmers as a result of the rivalry.
2. Providing public goods: Farmers and contracting companies should be able to access information from the government. Land availability, default cost, and performance criteria can all be found in the repository for farmers or farmer producer organizations. Sponsor information may also include services rendered, crop specifications, and the default cost. This would make it easier for farmers and sponsors to assess each other before entering into contracts. In addition, the government will assist in the establishment and implementation of crop standards. This will help to clarify the contract crop’s expectations.
3. Encourage the use of gentler enforcement methods: Contract compliance may be aided by incorporating risk-sharing mechanisms, reward programs, repeated contracting and renegotiation opportunities, and simplified and transparent contract terms. Farmers can be trained and made more conscious of contract farming and model contracts by the government.

WHAT CAN BE CONCLUDED?

To summarize, contract farming has the ability to assist small and marginal farmers in upgrading their operations and integrating them into agricultural value chains. By stating the aim to encourage contract farming, the Model Contract Farming Act of 2018 is a positive step in the right direction. The bureaucratic barriers erected in the form of a new regulator to oversee contract compliance between farmers and buyers, on the other hand, are counterproductive. Farmers should be covered, and buyers should be encouraged to freely contract with one another. The government should concentrate on creating a favourable climate. This can be accomplished by establishing market infrastructure, educating farmers, and bridging knowledge gaps between farmers and buyers. There is little reason to assume that the new Model Act would support contract farming unless this environment is created.

Author(s) Name: Rakshit Gupta (Symbiosis Law School, Pune)

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References:

[1] https://blog.agrivi.com/post/contract-farming-a-way-to-sustainable-agriculture_february2018.

[2] https://theprint.in/ilanomics/why-modi-govts-contract-farming-ordinance-is-a-win-win-for-farmers-buyers-even-traders/448757/.

[3] http://www.fao.org/3/y0937e/y0937e05.htm.

[4] C. EATON / A.W. SHEPHERD, Contract farming Partnerships for growth, Food and Agriculture Organization of the United Nations (2001).

[5] J. BIJMAN, Contract farming in developing countries: an overview, Working paper, Wageningen University (the Netherlands) (2008).

[6] https://www.livemint.com/Opinion/oqHoahbLsnFSa74cuuqIIP/The-governments-role-in-contract-farming.html.