Contract Farming Law

Context: The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 is an important legislative landmark in the context of Indian agricultural policy.

• The dramatic repeal of the three controversial farm laws in November 2021 provided a unique opportunity for policymakers to critically examine the calls for reforming India’s agricultural marketing regulatory framework from a stakeholder point of view.
• A study critically examines the various provisions contained in the act to assess its potential in mitigating the key concerns of adopting the CF practice in India.

About contract farming:

• Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products.
• Typically, the farmer agrees to provide agreed quantities of a specific agricultural product. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser.

Regulatory structure on contract farming in India:

• Initially, contract farming regulated under the Indian Contract Act, 1872.
• The Model APMC (Agricultural Produce Market Committee) Act, 2003 provides specific provisions for contract farming, like compulsory registration of contract farming sponsors and dispute settlement.
  • However, due to resistance from commission agents, States were lukewarm towards promoting Contract farming.
• In 2004, the MS Swaminathan-headed National Commission on Farmers (NCF) recommended the design and implementation of a comprehensive code of conduct on contract farming.
• The National Policy for Farmers 2007, based on the recommendations of NCF, also encouraged Contract farming practices and promised to prepare a code of conduct for contract farming.
• In February 2018, Ministry of Agriculture came out with a draft Model Contract Farming Act, 2018. The draft Model Act seeks to create a regulatory and policy framework for contract farming. Based on this draft Model Act, legislatures of states can enact a law on contract farming
• Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in few states. This means that contractual agreements are recorded with the APMCs which can also resolve disputes arising out of these contracts.

Benefits of Contract farming:

Contract farming is looking towards the benefits both for the farm-producers as well as to the agro-processing firms. The key advantages are the

• Crop diversification;
• Higher crop yield;
• Reduction in price uncertainty;
• Better price and assured market for farmers;
• Increase in profit and income of farmers;
• Supply of quality farm inputs,
• Including farm credit technology and scientific know-how to farmers;
• Reduction in transportation costs;
• Growth of food processing industry;
• Integration of farmers into the industry and global market.

Disadvantages of Contract farming:

Some of the key disadvantages of Contract farming practices are:

• Neglect of small and marginal (S&M) farmers by firms,
• Dominant role by firms in price fixation,
• Delay in making payments to farmers,
• Non-purchase of contracted produce on quality and other grounds,
• Manipulation of grading standards,
• Breaking away from contracts by either party,
• Difficulty of legal enforcement of contracts,
• Lower long-term commitment among corporates for rural development.

Challenges:

• Contract farming arrangements are often criticized for being biased in favour of firms or large farmers, while exploiting the poor bargaining power of small farmers.
• Problems faced by growers like undue quality cut on produce by firms, delayed deliveries at the factory, delayed payments, low price and pest attack on the contract crop which raised the cost of production.
• Contracting agreements are often verbal or informal in nature, and even written contracts often do not provide the legal protection in India that may be observed in other countries.
• Lack of enforceability of contractual provisions can result in breach of contracts by either party.
• Single Buyer – Multiple Sellers (Monopsony).
• Adverse gender effects – Women have less access to contract farming than men.

Stakeholders views on contract farming:

• In the CF system, firms largely ignore smallholders to achieve economies of scale and reduce transaction costs.
  • Therefore, the CF Act has opened the avenue for collective engagement among farmers with a provision to engage aggregators, including FPOs (Farmer Producer Organisations), in CF.
• A predominant section of the stakeholders surveyed, including three-fourths of the farmers, believed that the collectivisation of farmers through FPOs would help smallholders adopt CF.
• Three-fourths of the stakeholders supported the inclusion of these quality-related provisions in the CF legislation.
  • However, farmers suggested arranging quality inspection in their presence and a scheme for educating them on quality standards.
• There are fears that the firms will exploit farmers in many ways, such as denying a say in price fixation, grabbing farmers’ land, and treating farmers as bonded labourers.
  • The CF Act stipulates that farmers can opt for a contract for one crop season or a mutually agreeable period. This provides freedom for farmers to change their choice of firms.
• Over half of the respondents, including farmers, agreed that a shorter contract period would enable farmers to escape exploitation by the firms.
  • The CF Act stipulates that the prices may be determined in advance and indicated in the contract. If prices fluctuate, the agreement must include a guaranteed and reference/benchmark price.
• Compulsory registration would encourage written agreements and the entry of only serious players.
• Another suggestion supported by three-fourths of the stakeholders was the levy of a small facilitation fee on the firms and establishing a dedicated official agency to oversee and facilitate the working of the CF Act.
• The agency was expected to handhold the farmers through training and capacity-building programmes using the fee proceeds and bridge the trust deficit between farmers and firms.

Way Forward:

• The contract farming seeks to provide alternative marketing channels and better price realisation to farmers.
  • It has been observed that if the market price rises higher than the contracted price, the farmers are tempted to sell the produce to someone else for a higher price.
  • On the other hand, if market prices were to fall below the contracted rate, the buyer often fails to honour the commitment.
• It is also necessary to remember that for growers agriculture is a livelihood issue and for processors and aggregators it is business.

Hence the Government should play the role of a facilitator to promote as well as to develop a healthy system of farmer-corporate relationship for mutual benefit and development of the agriculture sector in India.

Source:  The Hindu