Contract Farming in India

Questions covered in this topic

1) Examine the potential of contract farming in improving the condition of farmers and
discuss the recent measures taken by Government to promote the Contract farming in
India.

2) Contract farming is seen also a solution to various problems persisting in the Agriculture in
India". In this context examine the significance of Model Contract Farming Act, 2018.

3) What is meant by Contract farming? Critically Analyze its role in agricultural marketing in
India.

4) Examine the role of supermarkets in supply chain management of fruits, vegetables, and
food items. How do they eliminate number of intermediaries?

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 Contract Farming in India
With a motive to transform the Agriculture into a Sustainable Enterprise, Government of India,
Ministry of Agriculture & Farmers’ Welfare has recently taken a host of historical pro-
agriculture landmark initiatives towards the development of Aatmanirbhar Krishi in India.
The Centre’s plan is to bring in legal provisions to help farmers engage with processors,
aggregators, large retailers & exports. According to the Centre, this move will provide the much-
required impetus to contract farming.

Definition of Contract Farming

Contract farming refers to an agreement between farmers & marketing firms for the production
& supply of agricultural products under forward agreements, at predetermined prices. The
contract between farmers & buyers insulates them from price risk, helps them develop new
skills, & opens new markets.
Features
Data Facts
1. Creating New Markets
2. Efficiency & Economics of Scale • Agriculture sector accounts for 18 per
3. Ensuring Quality Standards cent of India’s GDP & provides
4. Facilitating Diffusion of Modern Technologies employment to 50 per cent of the
5. Minimizing' Transaction Costs workforce of the country.
6. Coping with Information Asymmetries • Small & marginal holdings (less than
7. Price Volatility two hectares) constitute 86.21 per cent
8. Sharing of Risk of the total land holdings in the country.
• As per 10th Agriculture Census,
Why contract farming is required? Marginal, small & medium land holdings
constitute the lion’s share of operated
• First, the biggest problem with Indian area – large land holdings account for
agriculture is lack of scale. This doesn’t only 9% of the total operational area.
allow farmers to have sufficient or • As per Economic Survey 2019, due to
sustainable income & is also very damaging wrong use of fertilizers, the Fertilizer
to overall productivity because smaller the Response Ratio is steadily declining in
farmer, lesser the capital, will to experiment India.
with crops, seeds, water-use, fertilizer, etc. • Almost 89 per cent of groundwater in
• Second big challenge is low productivity. India is extracted for irrigation,
Contract farming can prove revolutionary according to the Asian Water
here. Most Indian farmers are small & they Development Outlook, 2016.
don’t have know-how or resources to • The average farm size in India is 1.08ha
innovate in any area of production. which is way below the world average
Businesses have specific requirements of 5.5 ha
regarding for end products so, they will have
 skin in the game to invest in R&D of each aspect of production from seeds to harvest.
• Third major issue has been bad record in post-harvest value add. There has been a
constant demand from government to invest in cold storage chains, warehouses,
marketing reforms, etc. But government after government has failed at that.
o This is where contract farming comes into the picture. Big businesses will now
have an incentive to invest in agriculture infrastructure for storage & food
processing (maybe in partnership with other Agro-based industries).
o Backward & forward market linkages can be easily created. This will give a
big boost to agriculture & create many jobs as well in agri-related activities.
• Fourth, contract farming is effectively the biggest insurance scheme for farmers. As
the sale of produce is guaranteed at a pre-determined price, they don’t have to fret about
crash in prices in harvest season. It ends uncertainty in their incomes to a great extent.
• Fifth problem with Indian agriculture is lack of diversification in crops. There is too
much focus on food crops like wheat, paddy, etc. Contract farming can solve that as well.
As businesses contract with farmers, they can dictate their decisions on what to grow
based on the demand of the said produce in the market.
• Last, but not least, the biggest problem with Indian agriculture is that of disguised
unemployment & contract farming can solve it to a great extent. Once big corporations’
control most of agriculture production by pooling in lands of farmers where technology
replaces most labour work, a lot of people can move out of this unproductive profession.

Measures taken by Government

• In India, contract farming is regulated under the Indian Contract Act, 1872. The Act has
many provisions that are relevant to
contract farming, including the
formation of contracts, obligations
of parties, & consequences in case
of breach of contract.
• Model APMC (agricultural produce
market committee) Act, 2003
provides specific provisions for
contract farming, like compulsory
registration of contract farming
sponsors & dispute settlement.
• The Department of Agriculture &
Source: Economic Times
Farmers Welfare has now come out
with a draft Model Contract
Farming Act, 2018. The model contract farming Act proposes a state-level agency, the
Contract Farming Authority, which would put contract farming outside the ambit of the
APMC. The model Act requires the sponsor & the farmers to register the contracts with a
registering & agreement recording committee. (Tamil Nadu has become the first State to
enact a law on contract farming based on the lines of Model Contract Farming Act, 2018 of
the Central Government)
 • Recently, The Farmers’ (Empowerment & Protection) Agreement on Price
Assurance & Farm Services Ordinance, 2020 is enacted to provide a national
framework for contract farming by bringing uniformity in provisions of contract farming
under state regulation enacted under APMC Acts & the laws passed by some states on the
lines of model Act circulated in 2018. Basically, the Ordinance has three main features:
o Farmers may enter into a written agreement which can specify terms & conditions
of quality, grade, time of supply price & the extension services etc.
o The agreement could be for 1 to 5 years.
o The price or any variation of the same has to Win- Win Situation
be part of the agreement. For any additional
Hindustan Lever issued contracts to
amount over the agreed price, the prevailing
400 farmers in northern India to grow
price in APMC/electronic portal etc. will be
selected varieties of tomatoes for
the benchmark.
paste. A study of the project
Advantages of Contract Farming confirmed that production yields &
farmers' incomes increased as a
• It will reduce the load on the central & state level result of the use of hybrid seeds &
procurement system by increasing private sector the availability of an assured market.
investment in agriculture & related sector. An analysis of the yields & incomes of
• It will bring about a market focus in terms of crop the contracted farmers compared
selection by Indian farmers & promote processing with farmers who grew tomatoes for
& value addition of farm product. the open market showed that yields
• It will generate a steady source of income at the of the farmers under contract were
individual farmer level & gainful employment in 64 percent higher than those outside
rural communities particularly for the landless the project.
agricultural labour. Amul & National Dairy Development
• It will reduce migration from rural to urban Board (NDDB) are excellent examples
areas & promote rural self-reliance by pooling local of milk procurement & sugarcane
resources to meet the existing challenges. cooperative in Maharashtra.
• In the case of agri-processing level, it ensures a
consistent supply of agricultural produce with
quality, at the right time & lesser cost. Long term
planning of business by corporates is possible as they have a dedicated supplier base of
raw material.
• Contract farming can lead to reduction in farmers distress & can reduce farmers suicide.
Large surplus of food can be used under contract farming by MNCs will decrease the
wastage of food.

Challenges
• There are apprehensions on the part of farmers to enter into contracts as they are not
organised & are ill equipped for any legal battle with corporates.
 • Monopsony: Contract firms enter into an
agreement with farmers to grow Case Study
differentiated crops. This turns the firm into Only last year, a few Gujarat farmers
a sole buyer & farmers into price-takers. were sued for more than Rs 1 crore for
Firms can exploit this situation to their illegally growing & selling a potato
advantage by offering lower prices to variety registered by PepsiCo. On the
farmers. intervention of the state government,
• Information asymmetry: Contracting firms PepsiCo withdrew the cases but the
don’t have complete information on incidence left a question mark over the
productivity & land quality. This leads to a future of contract farming in which
situation where farmers produce below- resource-poor farmers were pitted
quality crops. On the other hand, farmers against a powerful multinational.
sometimes don’t understand contract
specifications like the quantity & quality to be produced, or the effect of price change.
Buyers may penalize farmers. Similarly, farmers may indulge in side-selling or leak the
technology provided by the contracting firm. Since contracts are mostly enforced by
MNCs, farmers are left with little or no bargaining power, due to their large reach.
• Seeds of generally modified crops to get maximum output are sold by the MNCs but
seeds once used (Terminator Seeds) can’t be regenerated as is the case of BT
cotton.Less surplus food grain availability to sell in market in case of small & marginal
farmers with small land holding.

Way forward
• First, the government will have to include provisions that will ensure security to the
growers. This would require buyers & users to enter into a long-term contract that will
ensure additional investments to help improve productivity & quality.
• Second, monopsony has to be avoided in contract farming since one company entering
into an agreement with a large number of farmers puts the growers at a disadvantage.
• Third, the contracts should cover farmers’ production risk. Earlier, the agreements
protected the company’s interests rather than the growers.
• Fourth, the Centre should have provisions for registration of contracts with an authorized
agency. The agency can check record of firms that enter into an agreement to ensure that
growers aren’t affected by companies that spring up overnight.
• Lastly, there is a need of better cooperation between centre & state as contract
farming is under the Concurrent List; however, Agriculture is under State list.

Conclusion
The government’s National Agricultural Policy envisages promotion of private participation via
contract farming & land leasing arrangements. Fast-track implementation of contract farming in
India could be the new ray of hope in the coming years for the agriculture industry. Once this is
executed, accelerated technology transfer & capital inflow is expected to penetrate & an assured
market for crop production will grow. It will safeguard the interest of small & marginal farmers,
which in turn, could lead to a complete makeover of the agriculture industry in India.