What is Contract Farming ?
How can small farmers benefit
from Contract Farming ?
- Small
farmers in India are generally capital starved and cannot make major
investment in land improvement and modern inputs.
- Contract
farming can fill up this gap by providing the farmers with quality inputs,
technical guidance and management skills.
- Although
the company deals only with the contract crop, the farmers' overall
management skill may improve, thereby helping him to raise the yields of
both contract and non-contract crops.
- From
the standpoint of corporate bodies, farming reduces the supply risk, while
the farmers enter into contractual arrangements with companies in order to
minimize price risks.
- The
company and the farmers enter into contracts to supply or purchase a
specified quantum of the commodity at agreed prices.
- The
agreed contract may be either formal or informal and may cover supply of
inputs and marketing of output.
- By
entering into contract, the company reduces the risk of non-availability
of raw material and the farmer reduces the risk of market demand and
prices of his produce.
- The
inputs and services supplied by firms may include seeds, fertilizers,
pesticides, credit, farm machinery, technical advice, extension etc., or
may involve only the supply of hybrid seeds and marketing of produce.
APMC Act and Contract
Farming ?
- The
Model Agricultural Produce Marketing (Regulation) Act circulated by the
Central Government to the States in 2003 for implementing marketing
reforms has provisions for the registration of contract farming sponsors
and recording of contract farming agreements with the Agricultural Produce
Marketing Committee (APMC) or a prescribed authority under the Act,
protection of title or rights of the farmers over the land under such
contracts, dispute settlement mechanism and a model draft agreement
suggesting various terms and conditions. To help States in the formulation
of Rules in this regard, the Ministry of Agriculture has also circulated a
set of Model APMC Rules to them for adoption.
By now, relevant provisions have been made by several State
Governments/ UTs in their respective APMC Acts for providing a legal framework
to contract farming.
Success Stories of Contract
farming in India ?
Contract farming is becoming an increasingly important aspect of
agribusiness, whether products are purchased by multinationals or by smaller
companies.
- There
are few success stories on contract farming such as Pepsico India
in respect of potato, tomato, groundnut and chili in Punjab, Safflower in
Madhya Pradesh, oil palm in Andhra Pradesh, seed production contracts for
hybrids seed companies etc. which helped the growers in realization of
better returns for their produce.
- Other
success stories of contract farming are Amul and NDDB for milk
procurement, sugarcane cooperative in Maharashtra, and prawn-acqua culture
in Andhra Pradesh.
In our country this approach has considerable potential where
small and marginal farmers can no longer be competitive without access to
modern technologies and support. The contractual agreement with the farmer
provides access to production services and credit as well as knowledge of new
technology. Pricing arrangements can significantly reduce the risk
and uncertainty of market place
ISSUES WITH CONTRACT FARMING IN INDIA?
- Studies have highlighted a significant problem in some
cases wherein : both firms and farmers breached contracts when market
conditions provided arbitrage opportunities. Firms rejected more
contracted produce on quality grounds when market prices dipped below
contracted prices and farmers engaged in side-selling in open markets when
market prices rose higher than contract prices.
- Companies prefer medium and large farmers because of
transaction costs. They want farmers to dedicate a minimum acreage, say,
five acres [one acre is 0.4 hectare] of land, to the contract crop. In India, 85 per cent of the farmers are marginal or
small, operating less than two acres. In fact, 66 per cent operate less
than one acre each. How many will have such land to give for contract
crops?
Contract farming can work if there is a collectivisation of small farmers. For instance, 10 to 15 farmers get together, form a group, and
sign a group contract. It brings down the transaction costs, the farmers are
better protected, and it is essentially a win-win situation for both the farmer
and the corporate. It has been successful in Thailand. In fact, the Thai
government planned it out and made it a part of the country’s national
development plans.
How can contract farming be successful?
- It
will work if the farmers have better bargaining power.
- They
have to be legally protected.
- Furthermore,
in contract farming, it is extremely important to understand the
contracting operations.
- The
terms and conditions of the contract are crucial.
- It
has been found that quite often the farmer had not even seen the
contract and did not know what the terms and conditions were.
- The
contracts need to be more transparent.
When and how did this form of farming evolve in India, where
agriculture practices have largely been traditional?
- Contract
farming has been there since the 1960s in seed production, in both private
and public sectors.
- Also,
since the Land Ceiling Act does not permit non-farmers to own land, there
is no other way to get specified produce than through contract
farming.
- So
as market demand changed in the 1980s and 1990s, contract farming became
more common, starting with Pepsi in Punjab in tomatoes and potatoes in the
mid-1990s as a first case of perishable-produce contract farming, other
than a few other cases in some other crops elsewhere in India.
- Further,
the amendments to the APMC [Agricultural Produce Marketing Committee] Act
at the State levels in the last decade, which made contract farming legal,
led to its widespread adoption across crops and regions and companies.
What are the risks and benefits the farmer
faces in contract
farming?
There are different types of contract farming, and each type of
contract farming will have its own set of pros and cons.
1. One is simple procurement;
2. In the second, the buyer provides some
inputs and takes the crop according to the terms and conditions of the
contract; and
3. In the third, the buyer provides inputs
and planting schedules and is more involved in the agricultural process. The
last one carries the most liability for the company.
The pros are the high yields and fixed prices. The cons,
however, are there as both production risk and market risk. Production costs in
contract farming are higher as the standard expected is higher. No company
offers protection for crop failure. No crop insurance is given and thus
production risk is not covered most of the time. As said earlier, many
companies take advantage of the clauses in the contract in case the harvest
does not meet their requirement; they tend to buy it at a lower price or reject
it altogether. Thus, market risk is also not covered fully, especially when the
contract prices are based on market prices, as we know that the market prices
vary substantially during the season or even during the day. If your contract
document is not fair, how can your practice be fair?
Can CORPORATE farming be a reality in India ?
- Legally, corporate farming cannot exist in
India.
- A non-farming entity is not allowed to own
land.
- The Land Ceiling Act does not permit
it.
- It has not been viable most of the
time.
- There have been some companies that have
attempted to lease land and cultivate crops but have not met with as great
a reward as expected.
- Some States have leased out so-called
wastelands to some companies for corporate farming but owing to local
opposition, this has stopped now.
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Contract farming can help curb inflation: RBI
The Reserve Bank of India (RBI) wants the government to facilitate contract farming in India and to exempt fruits and vegetables from agri procurement laws to improve food productivity. The central bank has also called for better supply chain logistics by setting up cold chains and processing facilities to reduce wastage.
Highlighting data that show rising incomes affecting consumption patterns, Deepak Mohanty, executive director at RBI, said that increased consumption of proteins and vegetables was one of the factors driving up costs of these items. Mohanty was delivering the annual Lalit Doshi Memorial Lecture at St Xavier's College here on Monday.
"Another factor is the cost of cultivation. The dominant part of the cost of cultivation is labour. This is particularly so in our set-up with the preponderance of small holdings, which are less amenable to mechanization. There are several explanations why rural wages have increased. One explanation is that socially inclusive public policy such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has set a floor to rural wages and increased the bargaining power of the work force," said Mohanty, adding that even after factoring inflation real wages have grown.
