Explained : The Contract Farming Amendment

Imagine this: You are a company in India that makes potato chips. To get the best and unique taste, you want potatoes that are large, firm, little moist, non-sprouted and have a high starch content. If you went to APMCs or “mandi”, you had to procure the potatoes through a trader or sometimes multiple traders. This led to a lot of inconsistency in the potatoes and the chips did not have the uniform taste that you wanted. At this point, one may wonder what the fuss is all about. What’s the big deal if the potatoes are not uniform? Turns out, the difference is huge and is one of the competitive advantages McDonald's has over many other fast-food brands. McDonald's French fries are thought of as the “perfect” fries - they’re uniformly golden, crispy on the outside and soft on the inside. This is only possible when all the potatoes have the same texture and require the same amount of time to get fried. “Consistency” is one of their hallmarks.

 

Contract Farming

 

To achieve this consistency, McDonald's started “contract farming”, basically an agreement (oral or written) between the farmers and the buyers (buyers can be seed companies, exporters, food processing units, big FMCG firms etc.) specifying conditions of production and marketing of agricultural produce (including livestock and poultry). The farmer can sell the produce at a pre-decided price in the future. Contract farming is beneficial to both parties. Farmers can reduce the risk of fluctuations in demand and thus market prices. On the other hand, the buyers can reduce the risk of non-availability of quality produce and can also ensure a steady supply that meets their specific requirements (size of the potatoes in our example). As per the agreement, the buyer (firms) can share farm inputs, technical guidance, pre and post-harvest infrastructure and support as well as land preparation advice. The title ownership and rights of land remain with the farmer.

 

Contract farming has several advantages. It helps especially small farmers with technology, marketing, information and credit with lower transaction costs. It reduces the risk of fluctuating marketing costs and prices thus providing psychological relief to the farmers. It opens new markets, which, the farmers wouldn’t otherwise have access to. Most importantly, it gives an assurance to the farmers that their produce will be procured from their doorstep and they don’t have to worry about any marketing or other costs. In doing all this, the buyers create infrastructures such as cold storages and processing units and also ensure quality and food safety. Thus a direct investment in agriculture activities takes place which is a much-needed development in the country. The biggest advantage though, in my opinion, is that several new markets of customisations can be opened. Imagine cosmetic agriculture, cinnamon hazelnut coffee, honeydew orange tea, black roses, fields full of ashwagandha and tulsi blends….the opportunities of such specialisations are huge and can really make agriculture hot! People today are turning away from agriculture as a career, but the opening of such markets can really turn this around. Some examples of success stories of contract farming in India include PepsiCo’s tomato production in Punjab (Heinz tomato ketchup), Appachi’s Cotton cultivation in Tamil Nadu and Ugar Sugar in Karnataka.

 

Are there no cons?

 

Well, there are. Contract farming is criticised by several agricultural economists and farmers because the contracting agreements do not provide strong legal protection in India as it does in other countries. There have been instances where a lack of enforceability of the contractual provisions was observed, negatively affecting farmers. In my interactions with farmers, they have lamented that they have no control over rains and because of natural fluctuations the end crop might be slightly different than what was agreed to in the contract. In situations like these, companies have been known to reject entire crop citing “inferior quality”. Thus it can be said that contract farming tends to be biased towards the buyers and large farmers and that the sellers (farmers) have lower bargaining power. There is also a debate on whether it would lead to crop diversification or promote monocropping. I’d like to cite an incident here – In 2019, PepsiCo filed a civil suit against four farmers from Sabarkantha district arguing that they were growing its patented FC-5 variety of potatoes (used in Lays chips) and demanded damages of Rs 1 crore from each farmer. They later withdrew the complaint because of severe public backlash. It is a traditional practice in India to save and re-sow seeds and is also considered legal. We do not have laws like the USA where no farmers can grow patented seeds. Incidences like these make farmers apprehensive about entering into contracts because farmers are not equipped for legal battles with corporates. Thus the legal recourse is never a practical choice.

 

What does the government policy have to say on this?

 

The Contract Farming Amendment was which was announced in the third tranche of the economic package under Atmanirbhar Bharat Abhiyan is still a work in progress. It provides a framework for farmers to enter into direct contracts with those who wish to buy farm produce. Until recently, a farmer could not directly sell his produce to consumers or food processing companies; s/he had to go through a licenced trader in the mandis. This ordinance changes this. Any farmer can now enter into a contract with a buyer to sell their produce without paying additional APMC fees. Contract farming is not something new but it is also not common. Companies like McDonald's have practised contract farming for more than a decade in India but the fact is, only 15 companies till now have entered into contract farming in limited states and especially for cotton and barley. This is because there did not exist any uniform provisions and it was inadequate. Many states had also not declared rules governing contract farming. The 2020 ordinance attempts to bridge the gap by providing a national framework.

 

The ordinance does seem to have a number of salient features such as the requirements that contracts should promote sustainable farming practices and not resilience on chemicals and expensive seeds; contract farming should lead to an increase in income of the farmers compared to mandis; promote land rights of the farmers and that the contract should be negotiated transparently and fairly. However, there are a number of downsides too. When the ordinance was announced, several farmers protested because, in their opinion, it allowed the entry of corporate capital without any safeguards for farmers. They also see this as a systematic dismantling of APMCs and thus removing state ensured guaranteed return on their crops. The debate rages on. All said and done, there is still a lot more clarity required on various aspects such as how states would set up regulations governing the registration of contracts.

 

Do the pros of Contract Farming overshadow the cons? Let me know your thoughts in the comments. J

Illustration: Riya Shah