A Tool For Doubling Of Farmers’ Income??

Prof. V.P. Gupta


Rau’s IAS Study Circle, New Delhi – Jaipur – Bengaluru

Tamil Nadu became the first State in India to enact a law on contract farming, based on the lines of a model legislation put out by the Ministry of Agriculture & Farmers’ Welfare. This piece of legislation passed by the state would go a long away in protecting the farmers’ interests and enhancing their income. In this regard, let us understand in detail about Contract Farming and how it can emerge as the key tool for doubling farmers’ income in India.

What is Contract Farming?

Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a pre-harvest agreement between buyers (such as food processing units and exporters) and producers (farmers or farmer organisations).  The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement.  This benefits both the producers as well as the buyers. The producer can get support from the buyer for improving production through inputs (such as technology, pre-harvest and post-harvest infrastructure) as per the agreement.  The producer can also reduce the risk of fluctuating market price and demand. On the other hand, the buyer can reduce the risk of non-availability of quality produce.

Prevalence: The contract farming has been prevalent for long years in potato growing regions. The PepsiCo works with 24,000 farmers and provides them with seeds, chemical fertilisers and insurance facility to farmers and in return they buy back the harvest at predetermined prices. This success story has led the Niti Aayog to advocate contract farming for all types of produce in India.

What are the benefits associated with Contract Farming?

for Farmers:

Improved Supply Chain: The supply chain in the agricultural marketing has come to be dominated by large number of intermediaries and middlemen because of which the farmers receive only 25-40% of the prices paid by the consumers. Contract farming streamlines the supply chain, connects the farmers directly with the buyers and hence reduces the dependence of the farmers on the middlemen.

Enhancement of Incomes: Contract farming integrates the farmers with bulk purchasers such as exporters and food processing industries leading to increase in the prices received by them. This can go a long way in the doubling of farmers’ income as envisaged by the Government.

Access to Inputs: The small and marginal farmers who account for almost 86% of farming community faces a number of challenges such as lack of credit, poor marketing, etc. Hence, contract farming would benefit the farmers by providing them with better access to technology, extension services, financing and crop insurance.

Promotes higher Investment: The lack of price uncertainty of the agricultural produce dissuades the farmers from undertaking investment. Since, contract farming provides price certainty to the farmers, it would encourage higher investment by the farmers leading to increase in the agricultural production.

Addresses Rural Indebtedness: Presently, the small and marginal farmers are dependent on informal sources such as moneylenders for meeting their credit needs leading to higher levels of rural indebtedness. The contract farming provides for assured inputs including credit to the farmers by the buyers and hence critical for reducing the rural indebtedness.

Reduced Input Costs: Farmers need not transport their produce to the mandis, as buyers would collect the produce from the farm gate. This reduces farmers’ cost and hence translates into increased incomes.

for Food Processing Industries:

Direct Procurement: Presently, the requirement for the exporters and food processing industries to procure the agricultural produce through the APMCs goes against their interests. Hence, contract farming benefits the buyers by enabling them to procure the good quality produce directly from the farmers at lower prices.

Boost to Food Processing: The Food Processing
Industry is considered as a sunrise sector with more than 10% annual growth. This sector has the ability to create large number of employment opportunities. The contract farming would address one of the biggest constraints of the food processing Industry with respect to the lack of access to good quality raw materials and hence provide greater fillip to the sector.

Price Protection: The contract farming would enable the food processing Industry to withstand price fluctuations in the agricultural commodities.

Potential Problems related to Contract Farming

Exclusionary in Nature:  The buyers of the agricultural produce typically rely on economies of scale to achieve
profit maximisation and therefore often exclude small-scale farmers. This would be untenable in the Indian context as a majority of Indian farmers are small and marginal with lower surplus of agricultural produce. Hence, in order to ensure greater benefits to the small and marginal farmers, they have to be organised into Farmer producer organisations (FPOs).

Exploitation of Farmers: There is a greater probability that the disparate bargaining power between farmers and buyers could also lead to exploitative contracts for farmers. Hence, there is a need to set up an authority to record these contracts and ensure that the farmers are not exploited by the buyers.

May Lead to Monoculture Farming: The Corporate entities may be more interested to buy a particular agricultural product such as potato from a specific region of a country. This can lead to promotion of monoculture farming and hence would end up adversely affecting the associated agricultural biodiversity within the region.

What is the existing regulatory structure for Contract Farming?

Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in few states.  This means that contractual agreements are recorded with the APMCs which can also resolve disputes arising out of these contracts.  Further, market fees and levies are paid to the APMC to undertake contract farming.

The Central Government has formulated Model Agriculture Produce and Livestock Contract Farming and Services (Promotion & Facilitation) Act, 2018 which provides for contract farming. Accordingly, the Central Government has asked the states to use this as reference while enacting their respective laws.

What are the issues with the current structure, and how does the draft Model Act seek to address them?

Role of Agricultural Produce Marketing Committees (APMCs):  The NITI Aayog has observed that market fees and other levies are paid to the APMC for contract framing when no services such as market facilities and infrastructure are rendered by them.  In this context, the Committee of State Ministers on Agricultural Reforms recommended that contract farming should be out of the ambit of APMCs.  Instead, an independent regulatory authority must be brought in to disengage contract farming stakeholders from the existing APMCs.

In this regard, as per the draft Model Act, contract farming will be outside the ambit of the state APMCs.  This implies that buyers need not pay market fee and commission charges to these APMCs to undertake contract farming.  Further, the draft Model Act provides for establishing a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the draft Model Act. Functions of the Authority include (i) levying and collecting facilitation fees, (ii) disposing appeals related to disputes under the draft Model Act, and (iii) publicising contract farming.  Further, the sale and purchase of contracted produce is out of the ambit of regulation of the respective state/UT Agricultural Marketing Act.

Registration and agreement recording:  Under the draft Model Act, every contractual agreement should be registered with a Registering and Agreement Recording Committee, which will be set up consisting of officials from departments such as agriculture, animal husbandry, marketing, and rural development.  Such a Committee can be set up at the district, taluka or block levels.

Disputes between the producer and the buyer:  The Ministry of Agriculture and Farmers Welfare observed certain risks related to upholding the contract farming agreement.  For example, producers may sell their produce to a buyer other than the one with whom they hold a contract.  On the other side, a buyer may fail to buy products at the agreed prices or in the agreed quantities. The Committee of State Ministers on Agricultural Reforms recommended that dispute redressal mechanism should be at block, district or regional-level state authorities and not with an APMC.

Under the draft Model Act, in case of disputes between a producer and a buyer, they can: (i) reach a mutually acceptable solution through negotiation or conciliation, (ii) refer the dispute to a dispute settlement officer designated by the state government, and (iii) appeal to the Contract Farming (Promotion and Facilitation) Authority (to be established in each state) in case they are not satisfied by the decision of the dispute settlement officer.

Stockholdings limits on contracted produce:  Stockholding limits are imposed through control orders as per the Essential Commodities Act, 1955.  Such provisions of stockholding limits can be restrictive and discourage buyers to enter into contracts.  It was recommended that the buyers can be exempted from stock limits up to six months of their requirement in the interest of trade.  Under the draft Model Act, limits of stockholding of agricultural produce will not be applicable on produce purchased under contract farming.

Other recommendations:  While contract farming seeks to provide alternative marketing channels and better price realisation to farmers, several other marketing reforms have been suggested by experts in this regard. These include:
(i) allowing direct sale of produce by farmers, (ii) removing fruits and vegetables out of the ambit of APMCs, and
(iii) setting-up of farmer-consumer markets, (iv) electronic trading, and (v) joining electronic National Agricultural Market for the sale of produce.

Way Forward

The agriculture is a state subject and hence the success of contract farming would ultimately depend on the political will of the states to bring in reforms in their agricultural policies. Hence, the states must be incentivised to formulate separate law on contract farming on the lines of law formulated by the Government of Tamil Nadu.

On similar lines, the success of contract farming also hinges on the policies to consolidate the fragmented land holdings in India. Hence, the state governments must allow for leasing of agricultural land. It is to be noted that the response of the state governments for the adoption of Model Agricultural Land Leasing Act, 2016 has been quite poor. Hence, the there is a need to facilitate the agricultural land leasing in order to ensure greater benefits of contract farming.

Ultimately, the government has to realise that the contract farming has the potential to alleviate the present agrarian distress.

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