Contract Farming
Baljit Dhaka

Contract Farming

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Contract Farming:

Why in the news?

Tamil Nadu has become the first state to enact a law on contract farming based on the lines of the Model Contract Farming Act, 2018 of the Central Government.

This piece of legislation passed by the state of TN would go a long way in protecting the farmer’s interests and enhancing their income.

Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a preharvest agreement (or forward contracts) between the buyers (such as food processing units and exporters) and producers (farmers or farmer organizations).

The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement.

Prevalence: Contract farming has been prevalent for many years in potato growing regions. PepsiCo works with 24,000 farmers and provides them with seeds, chemical fertilizers, and insurance facilities 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.

It is under the Concurrent List; however, Agriculture is under the State list.

What are the benefits associated with Contract Farming?

Protects farmer’s interests: It reduces farmers’ risks by creating an assured market for their produce and protecting them from fluctuating market prices.

Predetermined prices provide an opportunity to cover post-harvest losses if any.

Private participation in Agriculture: As envisaged by the National Agricultural Policy, it encourages the private sector investment in agriculture to promote new farming technology, developing infrastructure, etc.

Improving Farmers’ Productivity: It enhances productivity and efficiency of the farming sector, by improving access to better inputs, scientific practices, and credit facilities, leading to increased farmer incomes, new employment opportunities, and food security at large.

Better Price discovery: It breaks the monopoly of APMCs and makes farming an organized activity thereby improving the quality and quantity of production.

Increasing Export: It encourages farmers to grow crops required by the food-processing industry and link Indian farmers to global supply chains, particularly in high-value horticulture produce and reduce food wastage significantly.

Consumers benefit: Increasing marketing efficiency gains, elimination of intermediaries, reduction in regulatory compliances, etc. can significantly reduce artificial shortages of produce and control food price inflation. 

Potential Problems related to Contract Farming: 

Lack of uniformity or homogeneity among states law regarding kinds of produce, conditions, etc. which is needed for allowing contract farming. States have been reluctant to carry forward reform for the fear of loss of revenue.

Promote Regional Inequality: Currently, it is practiced in agriculturally developed states (Punjab, TN, etc.) while States with the highest concentration of small and marginal farmers are not able to reap their benefit.

Landholding Pattern: Buyers have no incentive for contract farming with a large number of small and marginal farmers due to high transactions and marketing costs, creating socio-economic distortions and preference for large farmers. 

As per the Agriculture census 2015-16, 86% of landholdings are small and marginal and the average size of landholdings in India was 1.08 hectares.

It increases the dependency of farmers on corporate for inputs, making them vulnerable.

Predetermined prices can deny farmers the benefits of higher prices prevailing in the market for the produce.

The capital-intensive and less sustainable pattern of cultivation: It promotes increased use of fertilizers and pesticides which have a detrimental impact on natural resources, environment, humans, and animals.

Encourages Monoculture Farming: This will not only impact soil health but also possesses the risk of food security and import of food grains.  

What is the existing regulatory structure for contract farming?

Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in a 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. 

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.

 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 the leasing of agricultural land. It is to be noted that the response of the state governments for the adoption of the Model Agricultural Land Leasing Act, 2016 has been quite poor. 

Hence, there is a need to facilitate agricultural land leasing to ensure greater benefits of contract farming.