Contract Farming and Farmers’ Empowerment & Protection Bill 2020
By Braja Bandhu Swain
I. Introduction
Since the time India adopted economic liberalization, government policies have shifted from domestic-oriented to export/market-oriented strategies, focusing on the promotion of private sector participation (and investment) in the agriculture sector and the withdrawal of public investment.1 This change is guided by the misplaced notion of the latter ‘crowding out’, the former. Farmers who depend directly on agriculture as cultivators (more than 85 percent are small and marginal landholders who have less than 3 hectares of land) are placed at the bottom of the global value-chains. As a result, smallholders are unable to access input services and markets for their produce, especially in the case of fruits, vegetables and other high-value crops (cultivation of which involves higher risks). Improving smallholders’ access to the market, both locally and internationally, could be one of the important strategies which is needed to enhance agricultural productivity, farmers’ profit and to reduce poverty.
Three ordinances were passed in both houses of the Parliament in September in the midst of the COVID-19-lockdown. These are expected to enable farmers to sell their products in a competitive market on the one hand and to enhance the supply of food to the consumers, on the other. These three bills address different aspects of agricultural marketing – one bill relaxes the restrictions on governing procurement and the sale of farm produce; the second relaxes the restrictions for stocking of agricultural products under the Essential Commodities Act (ECA), 1955; and the third introduces a special legislation for facilitating the contract farming schemes. It is important to note here that the parliamentarians have failed to identify and highlight the potential implications of these bills and to redress their many limitations. While the bills have received presidential assent and are notified in the gazette on 27 September 2020, the actual effects of these ordinances can only be seen after the coming Kharif harvest. However, there is already much scepticism about the usefulness of these ordinances on various accounts.
The present article attempts to examine third bill2 – Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 – from the perspective of agro-processing firms/aggregators and farmers, especially smallholders, and how it may facilitate the smooth implementation of contract farming schemes and its implications for Indian agriculture.
II. Contract farming vs agricultural development
Before elaborating the details of this bill, let me provide an overview of the experience of contract farming in developing countries, specifically, in India. Contract farming is an institutional innovation in the agriculture sector that involves organising the agricultural production in a way that obliges farmers to supply their produce to agro-enterprises under a forward contract3 overcoming or at least reducing, the problems caused by market failures. Such contracting can increase the productivity of agriculture and the profits for farmers.4
There are two schools of thought on the impact of contract farming in developing countries—the Harvard Business School and the Food First Approach (Glover 1984). The Harvard Business School stresses that agriculture is an international system and small farmers could gain by participating in it and sees agribusiness as a means of developing rural areas in developing countries. The Food First Approach hold the opposite position. They argue that the internationalisation of agriculture hurts small farmers by exposing them to the dangers of an inadequate focus on nutritious food crops.
Reviews of earlier studies on contract farming in developing countries saw a mix of both positive and negative impacts (Clapp 1994; Little 1994; Payer 1980; Baumann 2000; Key and Rusten 1999; Glover and Kusterer 1990; Goldsmith 1985; Glover 1987; Simmons et al. 2005; White 1997; Opondo 2000; Morvaridi 1995; Porter and Howard 1997; Dubbert 2019; Mishra et al. 2018; Bidzakin et al. 2020).
The proponents of contract farming have analysed it by looking at income and employment that it generates in agriculture. In addition, they have assessed the efficiency in agriculture. The studies by Goldsmith (1985), Glover (1984) and Little (1994) noted that contract farming helped farmers in Africa by providing them with new technology, ready markets, secured inputs and prices. On the other side, opponents analyse it by looking at the environment, the welfare of farmers and the power structure involved (Morvaridi 1995; Opondo 2000; Little 1994). They argued that a contracting firm is not that concerned about the long-term impact on land productivity and local environment. As the firm has an upper hand, there are several disadvantages such as poor extension services, low returns to farmers due to haphazard pricing, an inherently higher risk to cultivators, and frequent delays in payment (Glover and Kusterer 1990; Grosh 1994). On top of this comes the weak bargaining power of farmers and their sole dependence on companies for inputs and credit, and all these could lead to a debt trap (Little 1994). Because of the low bargaining power of small farmers, companies try to take advantages of them either by rejecting the produce or by reducing the price (Glover 1984).
Studies on contract farming in the Indian context are sparse. Most studies have focused on the three sets of issues in contract farming – income, employment and farmer’s efficiency. The common empirical evidence indicates that there has been an increase in the incomes of contract farmers (Singh 2002, 2005; Dileep 2002; Asokan and Singh 2003; Kumar 2006; Dev and Rao 2005; Ramaswami et al. 2005; Kumar and Prakash 2008; Nagraj et al. 2008; Gulati et al. 2008; Swain 2011; Narayanan 2014).
Kumar et al. (2008) found that contract production gives much higher (almost three times) gross returns compared to traditional production. Singh (2002) and Dev et al. (2005) noticed that contract crops generated higher employment than non-contract ones. By studying the efficiency level of contract farmers, Kumar (2006), Ramaswami et al. (2005) and Swain (2016) observed that contract farmers are more efficient than non-contract ones. On the other hand, studies found that contracts are more likely with large farmers (Singh 2002; Dileep et al. 2002; Kumar 2006) to avoid the transaction costs involved in dealing with many small farmers. In addition, the problem of monopoly power of firms is also seen in some contract farming schemes (Singh 2002; Kumar 2006; Dileep 2002; Narayanan 2014).
III. Contract farming and Farmers Protection Bills 2020
Contract farming is not a new management practice between primary producers and agro-processors/aggregators in India. It was being practised during the colonial period when Indian farmers supplied agricultural products like cotton, indigo, and tobacco to English factories. This farming based on a contract agreement extended to sugarcane and seed cultivation in the early 1950s (Deshpande 2005). The dawn of modern contract farming in India, however, could be traced to the Pepsi Food Ltd. installing a tomato processing plant at Zahura in Hoshiarpur district, Punjab in 1989. In recent times, given the conducive policy changes, it has been extended to high-value crops, such as tomatoes, potatoes, gherkins, basmati rice and different type of seeds, including paddy. From the available studies, it is evident that contract farming existed in 100 different schemes for around 25 crops and livestock production. The contracted crops involved mostly annual crops both for the domestic market and exports. Contract farming is also found in a limited extent in perennial crops for industrial consumption (i.e. oil-palm, jatropa). The contract farming schemes are mostly in three organizational forms – multipartite, marketing contract and intermediary contract.5
The Government of India’s new bill, The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020, is aimed at the efficient implementation of contract farming. The aim of the ordinance is to provide a ‘national framework on farming agreements that protects and empowers farmers to engage with agri-business firms, processors, wholesalers, exporters or large retailers for farm services and sale of future farming produce at a mutually agreed-upon remunerative price framework and in a transparent manner’. It allows firms/sponsors to engage with farmers via written contracts, if they choose to use such a contract. In addition, the most important aspect of the bill is that it includes the provision of farm services, that is, the supply of quality seed, feed, fodder, agro-chemical, machinery and technology, advice, non-chemical agro-inputs and other such inputs. It seems that the proposed bill offers a lighter/flexible framework that permits contract farming with minimal obligations from firms and farmers. The bill explicitly excludes land leasing and forbids sponsors from erecting-built structures on farmland, which is very important. The bill also provides for timely payments by the sponsor to the farmer. In addition, it frees downstream players in the supply chain from the state Agricultural Produce Market Committee (APMC) regulations, enabling them to undertake written contracts freely across the country, outside the purview of any State Act or ECA (II.7.1 & 2).
The bill has given new hope for growth and promotion of contract farming and has indeed changed the rules of the game dramatically. However, the question that arises is whether the benefits would materialize or not? It seems that the outcomes of the optimistic bill are highly uncertain. The uncertainty is on account of some glaring lacunae in the bill, on one hand, and the lack of clarity in approach and the future of state intervention in agriculture, on the other.
The experience suggests that contract farming schemes be used only for a few niche commodities (high-value commodities) where competitive domestic/local market does not exist and in specific geographies. The agro-processing firms are highly selective of geographies to work in, often choosing areas with better infrastructure, skilled farmers and where highly productive land is available. In addition, the processing firms prefer to work with a few large farmers6 rather than a large number of small farmers to reduce the transaction costs (cost incurred in the collection of agricultural produce and provision of input services and advice). Many firms, therefore, prefer to contract with intermediaries/traders, who aggregate products from farmers or procure from APMC mandis themselves. Thus, smallholders are most likely to be outside the ambit of contract farming. For this group, the bill is unlikely to lead to an increase in the number of potential buyers. As Indian agriculture is dominated by small landholders, those who have less than three hectares of land and is marked by the lack of agri-infrastructure (cold storage, rural connectivity, irrigation facilities etc.). In rural areas, the bill is less likely to encourage the growth of contract farming. Therefore, it could be argued that the need of the hour is not to facilitate greater participation of the private sector by withdrawing active government intervention but to strengthen the existing public marketing infrastructure.
The bill suggests having a farming agreement for a minimum one crop season, or one production cycle of livestock production and a maximum for five years. Experience suggests that the processing firms do not allow a farmer to grow a crop in a particular land for more than three to four years due to the decline in soil quality and productivity. Regarding the environmental aspect of contract farming, the bill proposes to follow good farming practices, and standards for food safety, pesticide residue and social development. However, it is not clear who will monitor the day-to-day farming management under contract farming schemes. It is important to note here that generally, sponsors allow farmers to use high amounts of agro-chemicals to achieve higher land productivity and protect crops from insects. In our study on rice seed and gherkin cultivation in Telangana, we found that the sponsors shift from one farmer to the other when they observed the soil quality has declined. There are similar findings observed by Singh (2002) from Punjab.7
The clause 4(1) of the bill indicates that the parties entering into a farming agreement may identify and require as a condition for the performance of such agreement, compliance with mutually acceptable quality, grade and standards of farming produce. Contract farming agreement may be seen as a principal-agent model, where the firm (principal) works with the farmer (agent) to produce or grow a crop. Generally, the firm has an upper hand and so it chooses a farmer rather than the farmer choosing a firm and sets the contract terms and conditions. In addition, the firm initiates the contract, the farmer’s participation depends more on the firm’s criteria rather than any the farmer’s choice. A farmer’s interest to grow a crop under an agreement may be declined if the firm exercises its monopsony as well as monopoly power. Once the production begins, the firm uses its monopoly power by rationing the supply of specialized inputs, such as seed, pesticide and fertilizer. It is evident in most of these contract farming schemes, for example, tomato and potato farming in Punjab (Singh 2002; Kumar 2006; Rangi and Sidhu 2000), Oil palm and gherkin cultivation in Andhra Pradesh (Dev and Rao 2005; Swain 2011) that the quantity of the seed and fertilizer supplied to farmers are generally less than required for the agreed acreage. In addition, farmers sometimes face other problems like poor technical assistance, delay in payments, outright cheating in dealings, and the manipulation of norms by the firm. Prices specified in a contract are based on expectations about future market behaviour and if the market does not meet the firm’s expectation, it tries to renege the contract by reducing the price or by increasing the required quality of the produce. On the other hand, sometimes farmers sell their produce in the open market. Therefore, widespread breach of contracts by both farmers and firms have meant that only a few contract farming schemes survive beyond a few years.
The bill emphasizes the need for a written agreement, however, farmers in India are not interested in written contracts. It has been seen that farmers and aggregators rely more on trust and mutual understanding to sustain their relationship. Farmers often fear written contracts as they do not understand the terms of the agreement, and even if they do, they are unlikely to able to seek formal resolution. Very often, the contract agreement is written in English, not in the local language in which they can understand the terms of the agreement. Firms, on the other hand, like to have written agreements to assure their procurement as per the requirement (both in terms of quality and quantity) and to demonstrate the seriousness. Even though firms go for written contracts, experience tells us that it is unlikely to enforce the contract, except to sound a warning to the contract farmers. In a democratic country like India, a firm is unlikely to take a farmer to court due to the fear that it would jeopardize relations with all farmers and not just the one who has defaulted. Therefore, it discourages agri-business firms from procuring agricultural produce through an agreement.
Usually, a higher risk is associated with the contract crops because the crop is not the one that is customarily grown in the locality and familiar to the farmers. This runs a higher risk of crop failure compared to traditional crops, like rice or wheat. The bill allows farmers not to repay the cost of inputs to the firm, if the crop fails due to natural calamity. However, experience tells us that there are other reasons for crop failure, such as pest attack, bad weather, poor seed quality supplied by the firm, unknown virus attack etc. In such situations, there is no compensation mechanism that is addressed in the bill. Further, no liability of the firm specified in the bill if the crop fails due to the firm’s negligence (poor quality seed or poor coordination).
Another significant weakness of the bill is the dispute resolution mechanism. Though the bill has provided a mechanism for resolving the dispute that may arise in contract farming, it is weak and puts the onus, virtually, entirely on the farmers. It provides a two-layer dispute management system – first at the conciliation board8 and second, at the sub-district magistrate level. If the conciliation board fails to settle the dispute within a period of thirty days, any party can approach the Sub-Divisional Magistrate who has the authority to decide disputes under farming agreements. In this process, it is very likely that a farmer has to wait for more than sixty days to get his/her payment, stopped due to the dispute. On the other hand, if a dispute arises due to a firm’s mistake, it is very unlikely that a farmer will go to the sub-district magistrate level to resolve it.
IV. Conclusion
Contract-based farming is catching up in many developing countries, especially in India. To increase the private sector participation through contract farming, the Government of India has brought this new bill, which aims at providing a better ecosystem to both firms and farmers for entering into an agreement to grow agricultural produce in a fair and transparent manner. However, it raises various fundamental questions on agricultural development through participation of the private sector on the one hand and the withdrawal of public investment on the other. Developed countries have had a long history of contract farming which strengthens the supply chain system along with sophisticated technology, but the extent of state support to farmers in these countries has been increasing over the years. One should keep in the mind that Indian agriculture is led by smallholders who have less than three hectares of land. Therefore, a model that would work for India needs to focus on cooperative-led contract farming.
As pointed out here, only a section of farmers having better endowments would participate in contract farming. In the context of inclusive development, local self-government institutions (panchayats) ought to play an important role in the process of structuring contracts in a more fair and transparent manner. While contracts are essentially between two private parties, the role of the government in protecting the interest of farmers (especially the smallholders) should be emphasized.
The role of the state with respect to contract-farming is much more important than ever before. There are at least two ways in which the government can improve the functioning of contract farming schemes and its growth. First, the state could regulate the market to ensure that the contracting firms do not abuse their market power and it is crucial to have a regulatory framework for safeguarding farmers’ interests with appropriate checks and balances. Second, the state could encourage agribusiness firms to initiate new contracts with smallholders by providing various incentives, such as credit, insurance for crop, improvement of infrastructure facilities. The regulations on leasing land should be relaxed so that small farmers can enlarge their operational holdings. Two major factors have to be addressed—security of tenure for tenants during the period of contract and right of the landowner to repossess the land after the contract is over.
AUTHOR
Braja Bandhu Swain is working as Scientist (Livestock and Resource Economist) at International Livestock Research Institute (ILRI), South Asia Office, New Delhi since 2010. His area of research is contract farming, livestock economics and institutional economics.
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