‘It excludes farmers’

Professor Sukhpal Singh, a faculty member of the Centre for Management of Agriculture at the Indian Institute of Management, Ahmedabad, has been researching and documenting the process of contract farming and food supply chains in India for more than a decade. He is of the view that the small farmer is being excluded in the method currently in place, which defeats the very purpose of improving Indian agriculture. Sukhpal Singh, who advises the Central government on agriculture policy, spoke to Frontline about some possible solutions.

You have researched and written extensively on contract farming. Could you give us your opinion on this aspect of farming?

Although I have written and spoken widely on contract farming, I am not against it. It is a modern system and a much needed one, especially on the technology front. But it should be implemented in the right way. The main issue is that it excludes farmers, particularly the small farmer who needs the most assistance.

Companies prefer medium and large farmers because of transaction costs. They want farmers to dedicate a minimum acreage, say, five acres [one acre is 0.4 hectare] of land, to the contract crop.

In India, 85 per cent of the farmers are marginal or small, operating less than two acres. In fact, 66 per cent operate less than one acre each. How many will have such land to give for contract crops?

I have been saying that contract farming can work if there is a collectivisation of small farmers. For instance, 10 to 15 farmers get together, form a group, and sign a group contract. It brings down the transaction costs, the farmers are better protected, and it is essentially a win-win situation for both the farmer and the corporate. It has been successful in Thailand. In fact, the Thai government planned it out and made it a part of the country’s national development plans.

There is no logic for contract farming if the open market is doing well as it is a response to situations of market failure which can be in the form of low quality, poor prices, inadequate availability, and so on. For example, ordinary wheat and paddy in India do not need to be contract-produced, unless it is about organic wheat or paddy or durum wheat which is not produced for the open market.

How can contract farming be successful?

It will work if the farmers have better bargaining power. They have to be legally protected. Furthermore, in contract farming, it is extremely important to understand the contracting operations. The terms and conditions of the contract are crucial. I found quite often the farmer had not even seen the contract and did not know what the terms and conditions were. The contracts need to be more transparent.

When and how did this form of farming evolve in India, where agriculture practices have largely been traditional?

Contract farming has been there since the 1960s in seed production, in both private and public sectors. Also, since the Land Ceiling Act does not permit non-farmers to own land, there is no other way to get specified produce than through contract farming. So as market demand changed in the 1980s and 1990s, contract farming became more common, starting with Pepsi in Punjab in tomatoes and potatoes in the mid-1990s as a first case of perishable-produce contract farming, other than a few other cases in some other crops elsewhere in India. Further, the amendments to the APMC [Agricultural Produce Marketing Committee] Act at the State levels in the last decade, which made contract farming legal, led to its widespread adoption across crops and regions and companies.

What are the risks and benefits the farmer faces in contract farming?

There are different types of contract farming, and each type of contract farming will have its own set of pros and cons. One is simple procurement; in the second, the buyer provides some inputs and takes the crop according to the terms and conditions of the contract; and in the third, the buyer provides inputs and planting schedules and is more involved in the agricultural process. The last one carries the most liability for the company.

The pros are the high yields and fixed prices. The cons, however, are there as both production risk and market risk. Production costs in contract farming are higher as the standard expected is higher. No company offers protection for crop failure. No crop insurance is given and thus production risk is not covered most of the time. As said earlier, many companies take advantage of the clauses in the contract in case the harvest does not meet their requirement; they tend to buy it at a lower price or reject it altogether. Thus, market risk is also not covered fully, especially when the contract prices are based on market prices, as we know that the market prices vary substantially during the season or even during the day. If your contract document is not fair, how can your practice be fair?

You say the small farmer is the most productive, yet needs the most assistance. Could you explain that? Can we say that if the small farmer issue is addressed, India will see less distress in agriculture?

The small farm may be small in acreage but produces more output than medium or large farms on a per unit area basis. Small farms are not inefficient. In fact, small farm viability should not be mixed up with small farmer viability. A small farm may produce more than any other category, but it may not provide adequately for a farming family’s needs. That is not the fault of the small farmer.

But, even though small farmers are more efficient, they are mistreated by markets. That is why we need to pursue the collectivisation route to deal with market interface.

Another option is producer companies. The idea is that 10 or more farmers come together to do business. The entity will be treated like a private company for legal purposes. It is essentially an improvement on the cooperative model. The only thing is they can’t go to the capital markets to raise money or mobilise equity.

This appears to be getting some encouragement as NABARD [National Bank for Agriculture and Rural Development] is giving loans to producer companies. Additionally, the Ministry of Agriculture has told State governments to treat these producer companies on a par with the cooperatives. Further, the annual Union budget has provided funds to the SFAC [Small Farmers Agribusiness Construction] to be disbursed as grants to these companies.

Recently, there has been a lot of discussion on corporate farming. Your comments.

Legally, corporate farming cannot exist in India. A non-farming entity is not allowed to own land. The Land Ceiling Act does not permit it. It has not been viable most of the time. There have been some companies that have attempted to lease land and cultivate crops but have not met with as great a reward as expected. Some States have leased out so-called wastelands to some companies for corporate farming but owing to local opposition, this has stopped now.