CONTRACT FARMING

Anurag Bhatnagar, IASDirector General, NIAM

Towards High Value Agriculture

There is a shift towards high value crops due to risingincome levels, urbanization and population growth,outward oriented trade policy, FDI, growing exports ofhigh value food, growth in retail food markets andgrowth in the food processing sector.

With shift to high value crops, contact farming hasemerged as a preferred (but not always successful)farmer buyer arrangement.

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Net gain in profit (%) from Contract Farming overnon Contract Farming:

Commodities Small farmers

Medium farmers

Large farmers

Milk 182.0 60.0 20.0Vegetables 97.6 57.0 53.5Broilers 7.3 10.4 16.0

(IFPRI, 2005)

Contract Farming Potential Contract Farming has the potential of addressing

most of the urgent and critical needs of the smallfarmers.

Only way to make small scale farming competitive -small farmers can access technology, credit,marketing channels and information while loweringtransaction costs.

Enables feasible and viable model of private sectorparticipation in agriculture on a massive scale.

CF is a platform for supply of reliable agriculturalproduce of specified quality for processing andexport sector

Present Contract Farming types ( in terms of intermediaries involved)

Type 1: Direct sponsoring company with farmers only planting materials The extension agency of the company does

registration and other issues of pre-production and production

No credit facility, into the hands of money lenders Niijjer Agro( tomato and chilly in Punjab), Tinna

oils( Soyabean in Maharashtra), Himalayan drugs Pvt Ltd( Ashwagandha, Karnataka), Pepsico( Basmati, Punjab)

Type-II Three tier model Between company and farmers a middle agency—

public or private body or a local NGO The implementing agency registers and conveys the

contract price The implementing agency may charge some minor

share of the value of the produce from the buyer and from the farmers as an extension charge.

“Ion Exchange Environ farms” in Maharashtra for organic produce

Type-III Similar to type-II Middle tier is traditional channel like artiyas Middle –helps in identifying farmers,

arranging for the cleaning & grading of the produce and also for procuring the produce

Company gives extension services directly to the farmers

United Brewries Ltd (Barley, Punjab), ITC-IBD(Soyabean, wheat, Madhya Pradesh)

Type-IV Most elaborate, all services under single umbrella Implementing agency could be an arm of the company,

coordinates with seed companies, input suppliers, banks, insurance companies etc.

Fee of implementing agency could be .5% to 1.5% of interest of bank and value of goods

Mahindra Subhlabh services ltd.( Basmati, Non basmati, Maize in PunJ, TN), Escorts Machinery group(Basmati in Punj.), Super Spinning Mills( Cotton, Tamil Nadu), Cargill India pvt ltd( Soyabean,wheat, maize in M.P and U.P), Appachi Cotton(Cotton, Tamil Nadu), Gherkin exporters of Karnataka

Problems Encountered in Contract Farming

Asymmetrical contract arrangements with smallfarmers.

Single Buyer – Multiple Sellers (Monopsony).

Enforceability of Contract.

Dispute Resolution – Breach of Contract.

Production portfolio may be detrimental.

RECOMMENDATIONS

1. A National Contract farming mission should be setup with a target of bringing at least 10 % smallfarmers under Contract Farming in 11th plan.

2. National and State level Contract Farming Policiesshould be framed.

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RECOMMENDATIONS

3. The states should amend their respective APMR Actsin the line of the Model Act of the Government of Indiaso as to permit contract farming, direct marketing,and facilitate the appointment of an authority fordispute redressal mechanism.

4. Different models of contract farming should beallowed to evolve as per the situation, instead ofstraitjacketing the models into a particular fixeddefinition

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RECOMMENDATIONS

5. The proposed contract crop should have adistinct advantage in terms of relative yieldand profit, which will provide higher incometo the contract farmers on stable basis.

6. The companies should preferably have afocused end use for the produce undercontract farming –either for processing,retailing or for export.

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RECOMMENDATIONS

7. Registration: There should be an institutionalarrangement for registration of sponsoringcompanies and recording of contract farmingagreements with some Government machinery.

The market committee should not beregistration authority for contract farming andthe Contract Farming Sponsor shall get thecontract farming agreement recorded with theSub-Divisional Magistrate, who, in turn, shallverify the credentials of the sponsoringcompany. (TOR 2)

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RECOMMENDATIONS

8. Dispute redressal: It is necessary to create adispute resolution mechanism which canquickly settle the disputes in a quasi-judicialmanner.

The dispute redressal authority should be at thesub-divisional level comprising a representativeof the sponsoring company, a farmers’representative and the Sub DivisionalMagistrate of the area.

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RECOMMENDATIONS

9. Purchase interference by a third party in a contractfarming program should be a cause fordisqualification from future contract farmingarrangements.

10. There should be legal binding on the of supply anda penalty /indemnification clause should beincluded in the agreement to avoid contractviolation by farmers and sponsors.

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RECOMMENDATIONS

11. It is necessary to prevent by law thedisplacement of farmers from their land as aconsequence of any contract farmingagreement.

12. The sponsoring company should ensure supplyof quality inputs and their timely delivery to thefarmers. The company should be made legallyliable for crop failure due to inputs of poor orspurious quality.

RECOMMENDATIONS

13.Eliminate red tape in import of varieties / hybridsfor contract farmers

14. In case of production loss due to trial of somenew technology, with which the farmer is totallyunfamiliar, e.g. say some genetically modifiedcrop, the sponsoring company should becommitted to bear the loss and compensate thefarmers. The company, of course, can always takean insurance coverage for this.

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RECOMMENDATIONS

15. Proper insurance products appropriate forcontract farming need to be developed .

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RECOMMENDATIONS

16. Contract farming tenures should be permitted for aperiod of 3-5 years or more, to encourage assetcreation for value addition by the sponsoringcompany.

Security of tenure for the sponsoring companieswill encourage them to go in for long terminvestment related to the production from thecontracted land.

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RECOMMENDATIONS

17. Incentives should be given to the sponsoringcompanies for disseminating technical knowledgeor introduction of new technology amongst thefarmers on the line of the Punjab Model of partialreimbursement of extension expenditure of thesponsoring companies.

This incentive should be scaled up to its full extentover a period of say three years; i.e. a company inits first year of contract farming will be gettinglesser incentive than a company in its third year ofoperation of the contract farming .

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RECOMMENDATIONS

18. Like Punjab and Maharashtra stategovernments, other state government shouldalso totally exempt levy of market fees inrespect of commodities procured under acontract framing agreement.

Abolish all fees, taxes, duties, levies onprocurement effected by a registered contractfarming program to encourage ContractFarming.

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RECOMMENDATIONS

19. Tax incentives should be given to foodprocessors involved in contract farming forinvestment in rural infrastructure related tocontract farming.

No taxes or duties should be charged onimport of agri equipment to be used in aregistered contract farming program.

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RECOMMENDATIONS

20. Encourage farmer associations and SHGs inthe contract farming chain.

They act as a peer pressure group andmonitor credit worthiness of the members,provide early alerts thereby minimizingdefaults both in terms of sale of produce toothers, as well as on payments.

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RECOMMENDATIONS

21. A longer period of contract for labor, in place of thepresent provision for six months only, will facilitatelong term investment of the companies in trainingand manpower development and lead to skilldevelopment.

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RECOMMENDATIONS

22. The best contract between parties is on the basisof trust and loyalty.

The sponsoring companies should dischargesome social responsibilities for the farmers inrespect of health, hygiene, education, and longterm training in good agricultural practices, goodhygiene practices, good marketing practices etc.

This would help in sustaining long termrelationship between the farmers and thesponsoring companies.

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RECOMMENDATIONS

23. There is need for creating widespreadawareness for contract farming throughcampaigns, media etc. among farmers.

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RECOMMENDATIONS

24. It has to be ensured through an appropriatestate agency that contract farming, which isgenerally commodity specific and tends topromote monoculture, does not grow beyondproportion to destroy bio-diversity andagricultural ecology.

It may be necessary to provide necessaryguidelines for land use planning in eachregion in order to prevent such eventualities.

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RECOMMENDATIONS25. State wise identification of agricultural

commodities suitable for contract farminghas been done by APEDA for exports.However, a detailed exercise needs to becarried out for processing and domesticmarket.

26. ICAR and University system provide regionspecific crop solutions – information shouldbe made part of public information domain.

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RECOMMENDATIONS

27.Research &Development and training centres tohelp the farmers to grow exportable producethrough contract farming should be set up.

MODEL APMR Act

Private market Promotion of contract farming, direct

marketing, grading and standardisation Rationalisation of market fees Market-led extension Setting up of bureaus for standards and

grading

Provisions for Contract Farming in the Model Act

Model agreement format Registration of contracts Dispute redressal mechanism Indemnity of farmer’s land Presently by Contract Act, not

adequate.

Thanks