Unregulated contract farming

Recipe for crisis

Print edition : July 26, 2013

A young girl working in a cotton field in Kurnool district of Andhra Pradesh. Photo: Arunangsu Roy Chowdhury

Unregulated contract farming, combined with the state actors’ tendency to renege on their responsibilities, can aggravate the agrarian crisis.

THE United Progressive Alliance government’s touching faith in the power of private corporate activity appears to be undiminished despite large and indeed growing evidence to the contrary. As in so much else relating to the productive sectors of the economy, the Central government appears to believe that most of the problems in agriculture can be solved not through active public intervention but simply by letting large private corporations handle things. The National Agriculture Policy declares that “private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oilseeds, cotton and horticultural crops.”

Contract farming is a system of cultivation and supply of agricultural goods that is based on forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the cultivator to provide a certain quantity of a crop to a committed buyer (typically a large company). The contract usually requires the farmer to plant a specific crop on his or her land and to harvest and deliver to the contractor a certain amount of produce, on the basis of anticipated yield and contracted acreage. This could be at a pre-agreed price but need not always be so.

Quite often, the contractor supplies the farmer with selected inputs and technical advice. The typical contract is one in which the contractor supplies all the material inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crops to be grown, the agencies or companies concerned, the types of farmers, and the technologies and the context in which they are practised.

This system has historical roots. There are those who will find obvious analogies with the system of what became known as “forced commercialisation” under the aegis of the East India Company in the 18th and early 19th centuries, when indigo and opium cultivation was introduced by European planters into Bengal. However, modern contract farming has been developed in the United States, where corporate penetration of agriculture is now the most advanced as multinational companies have come to dominate the entire chain of agricultural production and distribution.

Pepsi foods and after

The recent spate of contract farming in India effectively began with the case of Pepsi Foods Ltd (hereafter PepsiCo), which entered India in 1989 by installing a tomato-processing plant at Zahura in Hoshiarpur district of Punjab. The company intended to produce aseptically packed tomato pastes and purees for the international market. However, before long, the company decided that the investment in agro-processing plants would not be viable unless the company also had greater control over the yields and the quality of the tomatoes produced locally. In consequence, PepsiCo followed the contract farming method described earlier, whereby the cultivator plants the company’s crops on his land, and the company provides selected inputs such as seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management.

As it happened, PepsiCo subsequently abandoned tomato procurement, and since then its contract farming model began to focus on potatoes for making processed potato chips. It currently has contracts with around 24,000 farmers, mainly in Punjab, and also in West Bengal, Gujarat, Uttar Pradesh, Maharashtra, Karnataka and Bihar.

However, PepsiCo’s involvement with contract farming has gone through many ups and downs. After an initial phase of much excitement when its model was considered a success in terms of diversifying cultivation in Punjab and improving the incomes of farmers, there was a lull and even decline in the 2000s. This reflected a growing dissatisfaction among the farming community affected by these contracts, especially when lower market prices led the company to effectively reduce the output prices through a variety of means such as quality control.

More recently, there has been a revival, with the amount of potato procurement by PepsiCo doubling to 240,000 tonnes in the past five years. Further, the company has once again declared its ambitious plans for expansion and extension to other crops such as foodgrains (basmati rice and oats), spices (chillies) and oilseeds (groundnut) as well, apart from other vegetable crops.

One major problem that was evident in the past is parties reneging on contracts depending on market conditions. Thus, when market prices are low, companies (not just PepsiCo, but others, too) have rejected the produce on the grounds of quality, forcing farmers to sell at lower prices to them or other buyers. It is also true that there have been instances of side-selling by farmers when market prices have been higher than those contracted.

It has been observed that the private companies that were to provide extension services in the contracted areas did not do their job properly. (This is after all a labour-intensive and expensive service to provide, with many positive externalities, which suggests that it would typically be underprovided by private suppliers in any case.) Issues such as proper agronomic practices, regular visits to farmers and the emphasising of the quality norms were inadequately addressed. In the non-traditional basmati areas, which were under contract farming, cultivators resorted to large-scale use of harvesting machines, which resulted in high percentages of broken grains. Contractors wanted to pay lower prices for such grains, which the farmers were not willing to accept.

When PAFC steps in

As a result, the State government agency that designed the contract farming programme in the first place (the Punjab Agro Foodgrains Corporation, or PAFC) has on several occasions been forced to step in and buy basmati rice that was being rejected by the contracting companies. The PAFC has become the guarantor of last resort for buyers and farmers in case the transaction does not go off smoothly, which is increasingly the case.

In Punjab, successive State governments have argued that contract farming is the best means of crop diversification, in a region where there is a real question of ecological survival and sustaining natural resources such as water and soil in a reasonably healthy state. Traditional crops such as wheat and the more recent paddy are seen as excessively reliant on water, so agronomists suggest reduction in the acreage of these crops by around 30 per cent. However, since contract farming is based on private corporate interests that are inherently profit-driven, there is no reason why these should coincide with the ecological requirements of the region. Indeed, much of the recent corporate interest in Punjab agriculture has been in basmati farming, which is one of the biggest water-guzzlers. Crop diversification can be more effectively encouraged through a system relative pricing policy accompanied by a supportive system of public agricultural extension services. It is the decline of such public services that has opened up the field for the entry of private corporations.

The Punjab government apparently feels that shifting to contract farming will ease the pressure on state finances by eliminating both subsidies and farm support prices. But it is likely to do so only at the more significant medium-term cost of corporatisation of agriculture and marginalisation of farmers. Already, around 100,000 acres (one acre is 0.4 hectare) is under contract farming in the State, with both multinationals and domestic companies involved. The system that is increasingly in vogue involves the tie-up of a marketing company with an input producer with a bank that agrees to provide credit.

The Government of Punjab is not alone in encouraging this greater corporate activity in agriculture. A 2006 study by Sukhpal Singh (“Corporate Farming in India: Is it Must for Agricultural Development?”, Indian Institute of Management Working Paper 2006-11-06, Ahmedabad) describes how governments in Gujarat, Madhya Pradesh, Andhra Pradesh, Karnataka and Maharashtra have allowed agribusiness firms to buy and operate large land holdings for research and development and export-oriented production purposes. Sometimes the explicit purpose is to encourage cultivation on wastelands. Thus, the governments of Maharashtra and Gujarat have also enacted laws to allow corporate farming on government wastelands by providing large tracts of these lands (up to 2,000 acres each) to agribusiness companies on a long term (20-year leases). The Chhattisgarh government has made available about 20 lakh ha of land for jatropha cultivation (the seeds of the plant are processed to produce biofuel). The Government of Gujarat has offered up to 2,000 acres of wasteland for horticulture and jatropha cultivation on a 20-year lease to big corporate houses and resourceful farmers at the rate of Rs.500-an-acre interest-free security deposit.

Quite apart from various concerns expressed about the rights over wastelands and the denial of such rights to local dwellers, including women, there are also concerns about common lands and pastures being classified as wastelands and handed over to corporations on that basis. An even bigger concern may relate to water rights. Since groundwater in India is effectively privatised (in that whoever can dig a deeper well can appropriate more of it), there are dangers of corporations taking the lions’ share of the water resources, affecting neighbouring cultivators and adversely impacting the water table in the area. Various studies of other experiments with contract farming (such as the famous “Kuppam” project which was implemented in Chittoor district of Andhra Pradesh in the electoral constituency of the then Chief Minister N. Chandrababu Naidu in the 1990s, and other instances in States such as Madhya Pradesh) have indicated that such schemes have at best mixed results and that they also lead over time to displacement of small farmers. Several problems relating to the sustainability of that pattern of production and the unsuitable ecological practices associated with such contracts have been noted.

A study, by D. Venkateshwarlu and Da Corta (2001), of contract farming of hybrid cottonseed in three districts of Andhra Pradesh found large-scale use of the labour of young girls, at the expense of employment of adults. Most of the cross-pollination work, which accounted for nearly 90 per cent of the labour time, was being done by young girls who worked daily from July to February. Generally, 10 to 15 children were hired for 100 to 150 days an acre of cottonseed production. Children as young as six years worked from 8-30 a.m. to 6.00-7.00 p.m. The cottonseed production calendar was standardised by companies for seed certification and marketing. This resulted in the regimentation of children’s work schedules so that they were continuously employed for six to nine months a year. Girls were preferred in cottonseed production because their wages were lower than those of adults, they worked longer hours and more intensively, and they were generally easier to control. It was reported that one girl could do the work of three adults. Though the agreements typically obliged these female children to work for only one season (six to nine months), in practice they tended to work for several years for the same contractor.

The case of Andhra Pradesh

The case of Andhra Pradesh may deserve some more elaboration because of the extreme agrarian crisis evident in that State after a period of systematic encouragement of private corporate agriculture and neglect of the conditions of viability of small farmer cultivation. The Commission on Farmer’s Welfare set up by the State government in 2004 (the report can be downloaded from http://www.macroscan.org/pol/apr05/pdf/Full_Report_Commission_Farmer_AP.pdf) found that the economic strategy of the previous decade at both Central and State government levels systematically reduced the protection afforded to farmers and exposed them to market volatility and private profiteering without adequate regulation; reduced critical forms of public expenditure; destroyed important public institutions; and did not adequately generate other non-agricultural economic activities. While this was a generalised rural crisis, the burden fell disproportionately on small and marginal farmers, tenant farmers and rural labourers, particularly those in dryer tracts. In these circumstances, farmers’ distress was reflected not only in extreme forms in suicides but also in loss of land by small owner-cultivators, migration and other related tendencies.

The Andhra Pradesh government did not play a central role in ensuring the provision of high-quality inputs at affordable prices at the right time to all cultivators both by direct intervention and by appropriate regulation. Nor did it provide sufficient extension services, such that most knowledge was effectively provided by private input suppliers with clear conflicts of interest. This was one of the reasons why farmers sought contractual relationships with buyers who also promised greater access to agricultural knowledge and inputs.

The report also found that the marketing of agricultural produce had become one of the critical areas where farmers were exploited, largely because of inadequate and sometimes faulty forms of public intervention. Thus, marketing infrastructure was found to be inadequate, and there were numerous procedural problems in the market yards. This is not an insurmountable problem: it is possible to provide adequate and non-exploitative arrangements in the market yards, especially using new technologies, which will reduce the exploitation of direct cultivators by private buyers. Similarly, timely and adequate procurement operations by Central and State government agencies could ensure remunerative prices to cultivators and arrest distress sales. Market Price Stabilisation Funds (along the lines proposed by the National Farmers’ Commission) will prevent excessive volatility of prices faced by cultivators and also reduce their need to enter into contracting arrangements, which promise dubious stability.

It is evident from the cases reported here, as well as from other evidence available, that contract farming holds numerous problems for agriculture in developing countries such as India. It tends to displace labour quite substantially; marginalises direct cultivators who lose control over the production process and, often, even over their land; encourages more capital-intensive and less sustainable patterns of cultivation; can result in greater insecurity and lower incomes for farmers because of the use of quality control measures to lower the effective output price being paid by contractors; can even deny farmers the benefits of higher prices, which could instead be absorbed by corporate contractors with local monopsonistic power; propagates monoculture, which reduces food security and the possibility of livelihood diversification through livestock; relies excessively on the use of lower-paid women workers and child labour; and increases and accelerates the process of casualisation of labour. Given these problems, it is surprising that contract farming is still being promoted so assiduously by various forces, including the government at the Centre.

The case for contract farming has emerged largely because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis. What cultivators in rural India need most today is the following combination: a basic price support mechanism that ensures that costs are covered; efficient extension services that provide information about possible crops, new inputs and their implications, new agricultural practices relevant for the particular area, and so on; and the availability of reliable and assured credit at reasonable rates of interest. These features were certainly planned for Indian agriculture, and in some regions they were also delivered in some periods. There is no reason why they cannot be delivered by the public sector.

This necessarily requires a revival of agricultural extension services and the provision of agricultural credit across rural India, as well as a rejuvenation and strengthening of the minimum support price system for important cash crops. There is no reason to expect that private corporate firms will deliver these requirements since their interest will be to maximise profits in the short term, and they are not necessarily interested in the long-term sustainability of cultivation. Indeed, if private corporate involvement is unstable, it will generate demands for the renewed involvement of public institutions.

The argument that the combination of price support, credit provision and extension services is no longer possible for State governments to deliver because of their current fiscal crunch and that is why they are forced to encourage contract farming is specious at best. If private corporations can borrow to undertake these activities, there is no reason why the government cannot do the same, especially when public involvement is likely to take a more socially desirable form. If State governments are prevented from undertaking such borrowing, then that is where the battle must be fought, by mobilising all the State governments to challenge the restraints placed by the Centre, rather than succumbing to pressures and looking for private-sector alternatives in an area with high-positive externalities such as this.

What is clear is that relying solely on contract framing to solve the current agrarian problems facing the country is futile. If contract farming is not properly controlled and regulated and if it adds to the tendency of state actors reneging on their responsibility, it is likely to intensify the agricultural crisis.

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