Contract farming

Farm Acts: Farmers’ freedom at stake

Print edition : October 23, 2020

Officials from the U.S.-based Organic Exchange inspecting a cotton field at Kalrayan Hills on the Salem-Villupuram borders in November 2006. The Coimbatore-based Super Spinning Mills tied up with Kalrayan Hill tribal people to raise organic cotton in contracted farms. Photo: THE HINDU ARCHIVES

Farmers harvesting potatoes in West Bengal’s Hooghly District, a file photograph. These Atlanta variety of potatoes are grown as part of a contract farming arrangement with Pepsico India Limited. Photo: Sushanta Patronobish

The new law on contract farming neither protects nor provides support to farmers, especially small farmers, to engage as free participants in production contracts.

One of the key pieces of legislation recently passed by Parliament, which is supposed to “free” Indian farmers, is the one on contract farming. It goes by the name of the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020. But it is commonly referred to as the Contract Farming Act, 2020.

Agricultural market reforms have been on the agenda of both the United Progressive Alliance (UPA) and the National Democratic Alliance (NDA) governments and were attempted in bits and pieces at the State level from 2003. These included contract farming which, along with land leasing, figured in the 2000 national agricultural policy. Until now, this was being attempted more through the persuasion of the States as agriculture is a State subject. But the present NDA government concluded that States could not be pushed beyond a point. Therefore, it took the ordinance route in this State domain—trade and commerce in farm produce (through what is popularly known as the “APMC bypass law”) and contract farming, which it attempted to facilitate (see “‘Reform’ by stealth”, Frontline, June 19, 2020). After parliamentary sanction, these ordinances are now Acts.

Rationale for the Central Acts and the debate

The stated purpose of the new Acts is to create “one nation-one market” and provide choice to farmers in selling their produce by better price “discovery”, besides attracting private investment in agricultural markets. The statement of the objects and reasons of the Contract Farming Bill, 2020, says: “It was felt that promotion of agreements for farming produce may strengthen the process of monetisation whose primary objective is to de-risk agriculture at various stages, enable scaling of investment by industry for production and processing of high value agriculture produces, give fillip to exports and help farmers to enjoy the additional benefits of operational efficiency” (emphasis added).

Contract farming was legal in most States under the Agricultural Produce Market Committee (APMC) or Agricultural Produce and Livestock Market Committee (APLMC) Acts. The latest piece of legislation allows contracting agencies to undertake it anywhere in India without seeking permission from the State, either under the provisions of the APMC Act or in terms of adhering to restrictions imposed under the Essential Commodities Act (ECA).

The new Acts have attracted serious opposition from farmer unions and many political parties, including some that had themselves proposed most of these reforms in their 2019 general election manifestos. One major break from the past that these Acts bring is that they are Central Acts in a domain (agricultural markets) that was a State subject until now. In order to sell the Acts better, the government has come out with full-page advertisements countering the “lies” of the opposition with what it calls “truth”. These “lies” pertain to issues relating to the Acts such as minimum support price (MSP) and government procurement; the allegation that the Acts are anti-farmer in nature; the perceived negative implications of contract farming and the fear that farmers’ land may be taken away by corporates in the name of contract farming; and the perception that the new laws will benefit only corporates. One advertisement claims that MSP and the mandi (APMC) system will continue as earlier, and that the Acts give freedom to the farmer to sell to any buyer for a better price. It also asserts that the farmer’s ownership of land under contract farming, which has apparently been seen to benefit them in reality, will remain protected. The government claims that the protection of the farmer’s ownership of his land is ensured by the fact that leasing, selling or mortgaging contract farmers’ land are completely prohibited and that the agreement will be for crops, not for land.

Claim that the farmer is free to pull back from contract at any time not true

The government advertisement also claims that the farmer will be free to withdraw from the agreement at any stage without incurring any penalty. This is not true, and indeed such a clause cannot be part of the arrangement if contract farming is to succeed. In fact, the Act does not provide the farmer the freedom to move away from a contract. It only says: “At any time after entering into a farming contract, the parties to such agreement may, with mutual consent, alter or terminate such agreement for any reasonable cause.”

The Contract Farming Act, 2020, is all the more controversial as it goes beyond the mandi (sale of farm produce) and takes the mandi to the farm where the farmer produces for the buyer (contracting agency) according to the buyer’s requirements. This will influence farm practices, yields, costs of production, production risk, and farm management. Therefore, it is important to examine the larger and long-term implications of the Act and of the practice of contract farming for farmer livelihood from the perspective of India’s small producers (who constitute 85 per cent of the farming community).

It is important to recognise that contract faming has been in practice in India since the 1960s in the seed sector, and in other farm produce in States such as Punjab and Haryana since the 1990s, with Pespico undertaking tomato and potato contract farming.

Different models of contract are being practised by different players in the sector, which range from bipartite to multipartite and intermediary-based. It is interesting to note that given the diversity of the rural and agricultural landscape in India, a single contracting agency (Frito Lay) follows five different models in different States for the same crop (chip potatoes). Most of the crops covered under contract farming are those with some market failure either in terms of farmer involvement or the market signals. Most of these are high-value crops that require new and higher investments for producing for the market. Therefore, they need risk coverage —both production risk as well as market risk, especially the latter.

Further, contact farming has been permitted in most States as per the Model APMC Act, 2003, of the Ministry of Agriculture and Farmer Welfare and later under the Model Agricultural Produce and Livestock Produce Marketing (Promotion and Facilitation) (APLM (P&F)) Act, 2017. Tamil Nadu was the first State to pass a separate contract farming Act in 2019 under the Model Agricultural Produce and Livestock Contract Farming and Services (Promotion and Facilitation) (APLCF&S (P&F)) Act, 2018; Odisha has recently done the same.

Punjab made a departure from the norm in 2013 when it framed a separate Act on contract farming instead of providing for it under the APMC Act, which it had not amended until 2017. However, a separate contract farming Act was not needed. Many other States amended their APMC Acts to provide for contract farming.

Of course, Punjab never operationalised the Act, but the Union government picked up the idea of a separate law on contract farming from Punjab, which had used it to protect the APMC system (since the APMC Act was not amended). This channel of contract farming was permitted under APMC regulation across many States, and there has been some practice of contract farming across States and crops across India. The Model APLCF&S (P&F) Act, 2018, was brought in supposedly to remove a conflict of interest between contracting agencies and the APMC market as the APMC, which was supposed to permit contract farming in its area, would not like to allow it as it would take produce away from the mandi.

But, there is an even bigger conflict of interest in permitting private wholesale markets under the Model APLM (P&F) Act, 2017, and before that under the Model APMC Act, 2003. Such a private market would compete directly with the APMC market and have an impact on its arrivals and therefore revenues for various stakeholders. Yet that arrangement stands under the APLM (P&F) Act even today.

Contract farming basically involves five things: pre-agreed price, predefined quality of produce, acreage (minimum/maximum), place of delivery and time of delivery/supply. It is generally undertaken when there is market failure arising from the perishability of produce, lack of availability and adequate quality of produce, and technical challenges of producing a new/different crop or produce. In fact, contract farming can be described as a halfway house between independent farm production and corporate/captive farming.

For buyers, contract farming is a better coordination option for raw material procurement as it is better than open or spot market transactions as well as complete in-house production of farm produce. Whereas open market procurement may not meet a buyer’s concerns about quality and timing of delivery or assured availability of produce, corporate or captive farming can be costlier, riskier and difficult to reverse. Corporate farming is not viable or simply not available as an option in India because of the Ceiling on Land Holdings Act under which non-agriculturists cannot own agricultural land. Under the Land Leasing Act, non-agriculturists cannot even take agricultural land on lease. Both Acts are at the State level. But, in the very context of India, it is also argued that contract farming can lead to a land grab of a different kind and other problems with social and institutional implications.

Contract farming has also been attempted/used in many situations by the state as a mechanism to bring about crop diversification for improving farm incomes and employment; for instance, this was done in Punjab during the 1990s and the early 2000s. Contract farming is also seen as a way to reduce costs of cultivation as it can provide access to better inputs and more efficient production methods. The increasing cost of cultivation was the reason for the emergence of contract farming in Japan and Spain in the 1950s. Contract farming is also seen as a way to make small-scale farming competitive as the services provided by contracting agencies cannot be provided by any other agency.

farmer perspective

There is no doubt that contract farming generally benefits farmers, who can undertake farming activity through this arrangement, compared with selling in the existing open market (wholesale) or direct purchase channels, though it involves higher cost of production and higher investments generally. But, the exclusion of small land holders remains a key challenge as contracting agencies prefer larger farmers to reduce their transaction costs, with a few exceptions in some regions and for some crops. Sometimes, small farmers also opt out when large farmers are part of the contract farming programme.

There are dozens of studies that show this exclusion. Further, the studies have revealed that larger farm size had significant positive impact on the participation of farmers in contract farming. This bias in favour of large/medium farmers is perpetuating the practice of reverse tenancy in regions like Punjab where resourceful medium and large farmers lease land from marginal and small farmers for engaging in contract production.

It is not incidental that most of the contract farming projects are in the States of Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Tamil Nadu: most or some regions of these States are agriculturally advanced. On the other hand, vast areas in Bihar, Jharkhand, Chhattisgarh, Odisha, Uttarakhand, Himachal Pradesh, Kerala and Jammu and Kashmir and the entire north-eastern region have been bypassed by contract farming projects.

Contract farmers in various parts of India have faced many problems. Undue quality cut on produce by contracting firms or no procurement of produce, delayed deliveries at the factory, delayed payments, low price, poor-quality inputs, no compensation for crop failure or higher cost of production and even stagnation of contract prices over time, known as “agribusiness normalisation”, are some of the problems.

Firms also manipulate provisions of the contracts in practice. For example, in the case of broiler chickens in Tamil Nadu, they are known to have picked up the birds before due date or delayed the pick-up depending on demand, which resulted in losses for growers. But growers were locked into these contracts because of the firm-specific fixed investments they had made. In fact, broiler chicken farming is akin to “putting out work” or “wage labour contracting” as the contracting agency provides all the inputs ranging from day-old chicks to feed and vaccination, and the contract grower just provides labour and supervision, and land is not a major factor.

That the practice of contract farming has been problematic is borne out by many studies of its nature and impact on local economies and farmers. That contracts are generally one-sided and against the farmer’s interest is also known. It is for this reason that for some time now, the Food and Agriculture Organisation (FAO) has been designing and propagating responsible contracts and contract-farming practices. Therefore, it is important to examine the implications of the new Act and the very channel of contract farming itself in the context of India’s small landholdings.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020, is a badly framed piece of legislation. It states that its mandate is “to provide for a national framework on farming agreements that protects and empowers farmers to engage with agribusiness firms, processors, wholesalers, exporters or large retailers for farm services and sale of future farming produce at a mutually agreed remunerative price framework in a fair and transparent manner”. The use of the term “farming agreement” is itself unusual as it is being confused with other arrangements like sharecropping or land-leasing agreements. Contract farming is about contract first. Farming is a part of the contract, but it is not just about farming.

The biggest perception problem is that it is being confused with corporate farming (corporates doing their own farming on leased or owned land). This is definitely not so, as land leasing and land ceiling laws at the State level are still intact, although they may not remain so for long, going by what governments in Karnataka and Punjab are doing on this front. The new Act clearly says that the contracting agency cannot lay any claims on farmer’s land and cannot sell, lease or mortgage it. Even the chapter on dispute settlement mechanism says that no action for recovery of any amount due shall be initiated against the agricultural land of the farmer.

Secondly, contract farming is confused with direct purchase by corporates from farmers, which has been legal along with contract farming since the 2003 Model APMC Act. Many large corporates in India, especially supermarket players selling fresh produce, have been using this channel of direct purchase to buy a part of their requirement of fresh vegetables and fruits with collection centres in local growing areas.

The ITC’s e-choupal, in fact, was the first project to buy non-perishable produce directly from farmers in the private sector. The National Dairy Development Board’s (NDDB) Safal project in Delhi has been using this channel since 1995 to procure vegetables and fruits from across States. Neither e-choupal nor Safal is a case of contract farming. Contract farming requires a pre-agreed arrangement under which a farmer grows crop according to the requirements of the buyer, who promises to buy at harvest with price, quality, place and time of delivery or pick-up specified in advance. None of the direct buyers asks the farmers to grow any crop. They go to already known growing areas and procure at prices agreed just before purchase every day or every time they want to buy. Neither party is bound to buy or sell, and they are free to sell to/buy from other channels if it makes business sense. Similarly, ITC’s e-choupal does not commit to purchase any produce in advance. It only displays its prices and quality standards at the e-choupal level run by a sanchalak (co-ordinator) whenever it wants to buy, and then the farmer is free to sell if she/he finds the price attractive and can meet the quality parameters. Incidentally, e-choupal has a sanyojak (aggregator) also, and the sanchalak and sanyojak are local traders and commission agents who have been re-intermediated into the project instead of being removed from the value chain altogether.

Thirdly, the “production agreement” is defined in the new Act as: “Where the sponsor agrees to provide farm services, either fully or partially and to bear the risk of output, but agrees to make payment to the farmer for the services rendered by such farmer.” How can this be a case of contract farming where a farmer is paid for the services rendered, not for her produce? How can a sponsor bear the risk of output when it is produced by the farmer? The sponsor can only mitigate the farmer’s market risk as it agrees to buy in advance at a pre-agreed price. The Act defines “farming produce” narrowly and excludes many important crops that are already being cultivated under contract farming in India, for instance, medicinal plants, stevia, castor oilseed, mint/mentha, and the like. It also includes FPOs (Farmer Producer Organisations) under the definition of “farmer”. This is completely undesirable as these entities themselves undertake contract farming in many parts of India and are never involved in production and therefore cannot be called “farmer”.

The Act introduces a new “farm service provider” or an “aggregator” as a person who could be an FPO as well and acts as an intermediary between a farmer or a group of farmers and the sponsor, and can be a party to the contract with a clearly specified role. This was completely unnecessary as service provision can be a part of the contract farming arrangement itself. Perhaps what is being referred to here are agro-input companies and other professional service agencies that undertake contract farming for other buyers and not for their own needs. This has been the practice in India across many crops and States where agro-input companies have organised contract farming projects for processors and exporters under the amended APMC Acts. There was no need to separate this set of players as they also undertake contract farming activity.

Further, some of these players would end up becoming intermediaries in contract farming between farmers and contracting companies, as is seen in the experience of Thailand and of Punjab in India. In Punjab, there were brokers, intermediaries and even franchisees and sub-franchisees, which led to a long and complex chain of intermediaries, defeating the very purpose of contract farming as a direct arrangement between farmers and agribusiness entities. In fact, many of them pocketed even State subsidies in the name of providing extension services to contract growers when the State attempted to use contract farming for crop diversification.

The very basic aspects of contract farming, such as acreage, quantity, and time of delivery, are not specified in the new law. Such specification should be part of any law regulating contract farming as these are mandatory aspects of such an arrangement, whether with regard to supply of inputs or otherwise. These were very clearly stated in the Model APMC Act, 2003.

In fact, the contract farming provisions under the Model APMC Act, 2003, were much better. There were mandatory and optional clauses; a model agreement was provided as a part of the Act, which was to be followed by contracting agencies after its approval by the State marketing board or department. Only after such approval could it be taken to farmers.

Unlike the “APMC Bypass Act” (as the Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, is popularly referred to), which imposes penalties on buyers for violation of the Act, the contract farming Act specifies penalties only for late or non-payment of any pending amount, up to a maximum of one and a half times of the amount due from the sponsor, and only up to the actual cost of inputs and other costs incurred by the sponsor from the farmer in case of a dispute, as part of the dispute settlement by the Sub-Divisional Magistrate (SDM).

The Act specifically mentions that in case of seed contract farming, the sponsor will make payment of not less than two-thirds of the agreed amount at the time of delivery and the remaining after due certification but not later than 30 days of delivery. In seed contract farming, it is well known that many a time, standing crops are asked to be ploughed down by the sponsor if quality seed is not expected to be produced from a given plot of land. The compensation in such cases has been a big issue for farmers. It remains unaddressed in the Act.

It also leaves out many sophisticated aspects of modern contract farming practice such as contract cancellation clauses, delayed deliveries or purchase, and damages thereof, and “tournaments” in contract farming where farmers are made to compete with each other and paid as per their relative performance with reference to the best farmer, a practice that is banned in many countries.

But the Act specifically mentions that quality, grade and standards for pesticide residue, food safety, good farming practices and labour and social development standards may also be adopted in the farming agreement. It even goes to the extent of specifying third-party assayers to monitor this and to ensure impartiality and fairness. It is sad that the social and labour aspects are only suggested and not made mandatory, given the fact that child labour and labour exploitation in wages and work conditions are widely prevalent in contract farming of seed and many other crops in India. It is also affecting India’s exports and reputation in global markets for fair trade and ethical products besides being exploitative of farm workers, especially women and female children. There are also serious violations of various laws governing child labour, minimum wages, gender disparity in wages and unfair wages. These are only broadly addressed through a mention of various market-based standards, but not in terms of the laws of the land.

It is rather unfortunate that the Act links bonus or premium price under contract arrangement over and above the guaranteed or pre-agreed price with APMC mandi price or electronic market price, or any such benchmark, which has to be part of the contract agreement if the price is not fixed in advance and is subject to variation. This goes against the very spirit of contract farming. The price, like many other basic aspects of contract, ought to be left to the parties to negotiate and cannot be tied to any other channel, especially, the APMC price, as the very rationale of this law was to provide alternative channels to farmers and create competition for APMC markets because they were seen as not discovering the prices efficiently. Now, going back to the same mandi does not speak very well of the Act.

This Act is more about facilitation and promotion of the contract farming mechanism, rather than its regulation. That the Act goes all the way to facilitate contract farming is clear from the fact that it mentions that the stock limits law (ECA, 2020) would not apply to contract-farmed produce. Why should this provision of another Act be specifically mentioned in a law that has nothing to do with it directly? Perhaps it reveals that the new Acts are part of a package of freedom for corporate buyers in the name of freedom for farmers.

The aspects of farmer empowerment and protection mentioned in the title of the Act have been given a go-by in its contents. The proof of any law is in its implementation. As far as farmer interest protection is concerned, however, this Act leaves much to be desired.

Professor Sukhpal Singh teaches at the Indian Institute of Management Ahmedabad. The views expressed in this article are personal.

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