Decoding Contract Farming in India

If you think contract farming is a recent concept introduced in India, then, believe me, you are wrong. Contract farming has a history in India. Introduced by Britishers, contract farming has evolved over the years. Starting informally and passing through various government amendments and eventually becoming an act, there were many changes made to the concept of contract farming. All the changes reflect that Indian agriculture, just from being a way of livelihood for farmers, is gradually becoming a profitable business. According to one study, the average revenue of a contract farm is about 11% higher than an average non-contract farm. Even there is even a difference in the cost of production. The per-hectare cost of production is 13% lower than the non-contract farm. This is the reason behind the sudden inclination of everyone in the agriculture ecosystem towards contract farming. In this article, we will be looking at how the concept was introduced to India, how it got recognition by various companies and government, discuss various acts passed by central and state governments, and finally will see whether the farm bill passed in 2020 is good for contract farming or not. So read till the end.
Before diving deep into history, let us quickly understand the contract farming concept.

Understanding the Contract Farming:

Contract Farming is a forward deal between a grower and the buyer for the agriculture goods grown by the grower. The price, quantity, and quality requirements are decided well before the season starts and documented in the agreement which is then signed by the farmer and the buyer if both agree to the terms and conditions. The farmer has full rights to claim the money from the buyer if the harvested produce is not bought by the buyer as per the agreement. Similarly, a buyer has the full right to reject the product if it is not according to the quality requirement as mentioned in the agreement.

It all started here. In the 1850s and 60s, the British used to deal directly with the farmers. They used to buy the produce from the farmers and export it to other countries. However, there was a major problem here. Farmers were forced to grow the commodity that Britishers wanted. Moreover, farmers were not offered the real price of the commodity and paid very little money by the British. Moreover, farmers have to pay the agriculture tax. This was total exploitation done by British to Indian farmers. But this is how contract farming in India introduces.

If you are interested in knowing more about contract farming and the different models which are practiced then click here.

Now, let’s Decode Contract Farming in India!

British Exploited Indian Farmers

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The farmers were forced to grow Indigo, Opium by the Britishers. Indigo and opium are the commodities farmers were never happy to grow as these commodities can not be consumed like wheat and rice was grown and consumed. Commodities like Tea, Cotton, and Coffee were also grown by farmers, and Britishers exported them getting the best prices in the international market.
Though the farmers were exploited by the British, the concept they used to procure the agricultural commodity was something similar to contract farming.

PepsiCo’s entry

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In 1989, PepsiCo set up a Tomato processing plant in Hoshiarpur, Punjab. The company planned to make packed tomato ketchup and for that, they required good-quality tomatoes. When the company executive researched the Indian tomato market, they found that it is challenging to get their required homogeneous quality of tomatoes from the market as every farmer grows a different variety and quality of tomatoes at the farm.

To solve this problem, PepsiCo planned to deal directly with the farmers. They went to the farmer and formed a contract of guarantee buying tomatoes from them after the quality is matched. To help farmers grow the best quality tomatoes, the company helped farmers adopt new agriculture technology and introduced farmers to updated agriculture knowledge.

PepsiCo helped farmers by teaching them a new transplanting technique by which the farmer’s cost of production decreased. Moreover, due to the support, the tomato yield increased from 7.5 tons per hectare to 20 tons per hectare.

This was the first instance when Indian farmers benefited from contract farming and the concept got recognition in the mainstream.

At a later stage, PepsiCo sold the processing plant to Hindustan Unilever Limited (HUL) and then Hindustan Lever Limited (HLL). And PepsiCo started contract farming of potatoes for their brand Lays and Uncle Chips.

APMC act 2013

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In 2003, the Indian government gave first-time official recognition to contract farming and included it in the APMC Act 2003. The act was about making a specialized market where farmers can come and sell their produce. According to the act the states were told to make specific infrastructure and set up APMCs region-wise. A farmer from a particular region will sell his product in the APMC of that particular region. This regulation was an invitation to competition less market which eventually is not good for farmers as it created cartelization of the agents in APMC.

For the first time, the government included contract farming in the act. According to the act, the government allowed contract farming. This means that farmers can deal with the companies directly, form contracts with them and sell them. However, the important thing is, all the contracts will happen via APMC. This simply means that any company if wants to have a contract with a farmer of some particular place, then that company has to register itself in the APMC coming under the same region. Also, the company has to pay tax and market fees to APMC for conducting the contract. Though contract farming was introduced officially by the government of India, it had few barriers. Moreover, the dispute settlement was under APMC.

Punjab Contract Farming act 2013

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In 2013, Punjab became the first state to pass a separate contract farming act in India. This was a historic act in the history of contract farming. Though the central government passed the APMC act in 2003 and mentioned contract farming it was not that widely accepted as Agriculture is a state sector and the state has the power to accept or reject the agriculture-related decision by the central government.

Some of the salient features of the Punjab Contract Farming act 2013 are as follows:

A separate contract farming commission was set up to facilitate contract farming in Punjab state.
The buyer company has to register itself to the contract to contract farming commission and pay tax and market fees to conduct the contract farming.
There was no provision to involve the civil court in case of a dispute. This means that both the parties involved in the contract cannot take the help of the judiciary and the dispute will be solved by the contract farming commission.
The duration of the contract farming will be 1 cropping cycle or 3 years.
108 crops were selected under the act for contract farming
Farmers will be liable to imprisonment and penalty of up to 5 lakhs in case of default

Though Punjab introduced the separate act the farmers of Punjab were not that happy. In Punjab, contract farming was practiced for a long time. There was a time between 2003 till 2011 when Punjab farmers widely adopted the concept, they tried, tested, and failed to run it successfully. The reason behind the failure was the lack of financial support from the state government and the lack of synergy between state and center as well as politics.

Model Contract Farming act 2018

After Punjab introduced a separate contract farming bill, in 2018 the central government introduced the Model Contract Farming Act 2018. The name of the act was The State/UT Agricultural Produce & Livestock Contract Farming and Services (Promotion & Facilitation) Act, 2018.

If you have observed, the name of the act contains two important words. the words are, “Promotion & Facilitation”. This can be interpreted as the government will not be a regulatory but only a promoting and facilitating body.

The model act was an extension of the Punjab Act. However, there were a few differences. The following are the features of the act:
Contract farming was out of the APMC act and the first time the central government passed a separate bill for contract farming in India.
In this act, farmers were considered a weaker section among both parties involved in the contract. This means that the government set the policy pro-farmers. One of the examples could be, in the Punjab Act, the farmers were liable to imprisonment and up to 5 lakhs of penalty in case of default. However, in the act passed by the center, there was no mention of the imprisonment of farmers.
A special contract farming facilitation group (CFFG) was formed to felicitate the contracts between buyer and seller.
The facilitation board will charge a maximum of 0.3% charge on the contract value.
The act was facilitative and promotional and not regulatory. This shows that government would just be a facilitative and promotional body rather than a regulatory authority.
A dispute management authority was set to resolve the disputes between the buyer and seller.
In this act also, there was no provision to visit the judiciary system. Only dispute management authority is liable to solve any dispute.

From the act, it is visible that though the act was a major change in the contract farming system which can benefit the farmers and buyer company, however, it is also clearly visible the government’s intention to decrease their say in the system. Hence, that is the reason behind making this act facilitative and promotional rather than regulatory.

Farm Bill 2020

Among the three bills, the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act 2020 was specifically for contract farming. Experts believe that in the presence of the model contract farming act 2018, there was no need for a new bill for contract farming. Instead of passing a new bill, the old bill’s results could have been analyzed and the necessary gaps should be filled.

However, the 2020 contract farming act has some modifications as compared to the 2018 Act. Let us see some of the modifications in the act:
Contract farming was made independent of the regulatory body. This means that the buyer company need not register itself under any regulatory body formed by the government for contracts
The companies were freed from paying tax/charges to the contract farming facilitation bodies.
The farmers were still not given the provision to go to civil court in case of a dispute. However, according to this act, Sub Divisional Magistrate (SDM) will be liable to solve any disputes.
A special mention of the land protection of farmers was mentioned. It was described that no company has the right to construct/build any structure at farmer’s fields and cannot claim or lease the land. However, the company executives have permission to enter to farmer’s field and inspect the crops.
The duration of the contract was a minimum of 1 year and a maximum of 5 years.

Why are farmers against it?

There are three main reasons why farmers are against the contract farming bill.

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1). Farmers believe that if they don’t have access to the judicial system in case of dispute, they would be exploited as they don’t consider SDM to be an appropriate authority to solve the dispute and give them justice.

2). Punjab farmers have already tried and tested the contract farming system and they have not witnessed much success in this model in their state. Hence they don’t expect anything miraculous with this act too.

3). As it is visible, over the years, the government has changed its role from a regulatory body to just a facilitative and promoting body. This shows decreased interest in the government having its say in the system. Farmers are beware of getting exploited by private entities.

Is Contract Farming good or bad?

Contract Farming If well practiced, then it is a massive boon to Indian farmers. Almost 86% of the Indian farmers are small and marginal. Contract farming brings these farmers together and gives them a chance to produce a specific quality of agricultural commodity in which they get a guarantee to buy back from the company. Some of the benefits of contract farming are listed below:

Guarantee buyback of the agri produce by the buyer if the commodity is under the required quality specification
Farmers with access to a wide range of managerial, technical, and extension services that otherwise may be unobtainable
Technology Adoption by even small and marginal farmer
Risk-free farming and all the risks are covered under crop insurance and guaranteed to buy back
Skillset and knowledge transfer, making agriculture more scientific
Eventually, farmer’s income increases and they can be socio-economically uplifted.

What are few concerns?

As it is said, there are always two sides to a coin. With all the benefits of contract farming highlighted, it is essential to highlight a few of the concerns.

Farmers have to choose the company to form contracts very carefully. Many companies form contracts with farmers but break them by not buying back the commodity. Farmers should be taught how to check the credibility of the company
It is often observed that farmers come under contract with the companies and become liable to grow such commodity which is out of their expertise. It is crucial to select the crop according to their expertise.
The government’s involvement in the contract farming ecosystem has gradually reduced. It is a threat to farmers as they might be exploited by private entities
Farmers should be aware of the importance of intellectual property rights. We cannot forget the dispute between PepsiCo and Gujarat farmers due to a lack of knowledge of patented variety by farmers.

So far these were the major historical events that occurred in India regarding contract farming. As it was mentioned in the initial part, the contract-based farming system has evolved over the years. Gradually farmers and private companies are getting accustomed to it. This just the beginning of the organized farming system in India, as the agriculture sector of our country is very unorganized. We hope in the upcoming days, we will be seeing an India, where agriculture has been changed, and farmers have been uplifted which will eventually increase agriculture share in India’s GDP.

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