Contract farming | Daily News

Contract farming

Contract-farming is a production and marketing/procurement system wherein producers agree to grow a crop (produce) at a pre-agreed market price for procurement by another party, usually a public or private company/corporation. Both the producers and the buyers are bound by a written and signed contract agreement that specifies the terms and conditions of the relationship between the two parties, including, but not limited to, the procurement prices.

Developments in India

In late 2019 Tamil Nadu became the first Indian state to introduce a law governing contract farming practice in India. The law has been drafted based on the Model Contract Farming Act, namely “The … State/UT Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) Act 2018” released by the Centre in May 2018. The Model Act was circulated to the states for their implementation. Other states such as Goa, Karnataka, Odisha and Uttar Pradesh are reported to have started working on their contract farming laws.

Thanks to the support provided by the buyer as part of the contract, the system has the potential to solve problems faced by Indian farmers. They include low crop yield, price and market uncertainty, inadequate access to inputs, technology and credit, high transportation costs and low returns. Besides, the system aids the growth of the food processing industry and integration of farmers into the agricultural value chain.

Despite its worldwide acceptance, the practice is yet to gain higher acceptability in India. This is mainly due to the cautious approach of state governments. They are concerned about the negative fallout of adopting the system. The key concerns are exclusion of small and marginal farmers on the grounds of attaining economies of scale, dominance of buyers in decision-making, payment delays to farmers, rejection of produce for quality reasons, and uncertainty over honouring the contract and its legal enforcement. An ideal way to tackle these concerns is to put in place a practical regulatory framework aimed at safeguarding the interests of the farmers and buyers.

The release of the Model Act and TN’s follow-up action assumes greater significance in this context. The Act contains various provisions to address the concerns relating to the adoption of the contract farming system.

To start with, the Act proposes setting up an official agency for effective implementation of its various provisions. This is a welcome step as currently there is no formal mechanism to oversee and facilitate the system’s working.

Studies across the world, by and large, prove that contract farming practices improve farmers’ welfare. The Model Act provides a viable regulatory architecture for the hassle-free functioning of the system by balancing the interests of both farmers and buyers. Interestingly, many important provisions in the Act are in conformity with similar laws in countries such as the US, France, Spain, Belgium, Brazil, Argentina, Cambodia, Mozambique and Morocco.

The legislation allows protection to farmers to carry out transaction of their farm produce with a processing firm on the rate arrived at on the date of entering into the contract.

While there was contract farming of sugarcane and herbs besides poultry, there was no law to ensure the welfare of the farmers involved in it, and therefore the state government came up with such a legislation.

The legislation allows protection to farmers or related groups to carry out transaction of their farm or livestock produce with a processing firm on the rate arrived at on the date of entering into the contract.

This would provide them protection from price fluctuations, and also allow procuring firms or food processing industries to avail of quality produce from farmers or farmer groups, the release said.

The legislation also has provisions to penalise firms or the procurer for possible violation of contract and provide relief to farmers, it added.

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Different types of contract farming

Direct Procurement Model

Simple marketing agreements, risk sharing agreements, forward marketing and futures contracting, these are different models of farm-firm linkage.

In order to maintain their supply chain continuously, processors and retailers buy raw materials either from the government regulated market yards, small traders, or directly from farmers. They prefer to procure it directly because the transaction costs and quality problems which arise while procuring from government regulated markets is high.

In this arrangement, there is no contractual tie-up with the farmers and the producers are free to sell their produce after sorting it according to quality.

Open-Source Intermediation Model

Another variant of farm-firm linkage is open-source intermediation, in which information about market prices, crop and good cultivation practices are made known to farmers without any buy back guarantee.

The idea is not to create a backend supply line of a particular company, but to fill the knowledge and information gap in agriculture, and also supply inputs to farmers without any lock in agreement.

PPP Models

Rural business or “agri-hubs” led by public-private partnerships between panchayats and the private sector) provide input services for farmers and provide markets for their produce.

This is a type of the open-source model, where the companies and the farmers enter into a contract in which the companies provide a market for the produce as well as the inputs at the time of production.

Bi-Partite and Tri-Partite Models

This model paves way for a two-way contract between the company and the farmers.

It works two ways the company provides inputs such as seeds, fertilizers, pesticides, etc. on credit and in turn procures the final product at a fixed price.

In India Field Fresh, Pepsico and Nijjier have this kind of arrangement. This model becomes a tri-Partite model when a facilitator or middlemen is present between the farmer and the private firm, and plays a major role in the transaction.

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Advantages and problems of contract farming

Advantages for farmers

* Inputs and production services are often supplied by the sponsor

* This is usually done on credit through advances from the sponsor

* Contract farming often introduces new technology and also enables farmers to learn new skills

* Farmers’ price risk is often reduced as many contracts specify prices in advance

* Contract farming can open up new markets which would otherwise be unavailable to small farmers

Problems faced by farmers

* Particularly when growing new crops, farmers face the risks of both market failure and production problems

* Inefficient management or marketing problems can mean that quotas are manipulated so that not all contracted production is purchased

* Sponsoring companies may be unreliable or exploit a monopoly position

* The staff of sponsoring organisations may be corrupt, particularly in the allocation of quotas

* Farmers may become indebted because of production problems and excessive advances

Advantages for sponsors

* Contract farming with small farmers is more politically acceptable than, for example, production on estates

* Working with small farmers overcomes land constraints

* Production is more reliable than open-market purchases and the sponsoring company faces less risk by not being responsible for production

* More consistent quality can be obtained than if purchases were made on the open market

Problems faced by sponsors

* Contracted farmers may face land constraints due to a lack of security of tenure, thus jeopardizing sustainable long-term operations

* Social and cultural constraints may affect farmers’ ability to produce to managers’ specifications

* Poor management and lack of consultation with farmers may lead to farmer discontent

* Farmers may sell outside the contract (extra-contractual marketing) thereby reducing processing factory throughput

* Farmers may divert inputs supplied on credit to other purposes, thereby reducing yields 


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