Pros and cons of contract farming

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Posted on 4th October 2010 by Swapnil Waikar in Uncategorized

Farmers in India are all set to see a sea-change in agriculture sector soon, thanks to contract farming.

Winds of change are blowing across the Indian agricultural landscape with the advancement of contract farming. While earlier it was limited to a certain small initiatives by the corporate sector, it is likely to become a norm rather than exception, thanks to the entry of business giants like Reliance and ITC and also because of the encouraging change in the government policies.

The size of agreements for contract farming with the farmers is also increasing manifold. The central government is so serious about the issue that it is mulling a contract farming policy for India.

Recently, Union Agriculture Minister Sharad Pawar said contract farming is emerging as an important institutional arrangement in India that promotes coordination between production and marketing activities.

“The main issue is to upscale contract farming. This will require both public and private sector investments in roads, cold chains, electrification and processing,” he pointed out. The minister added that the government’s main concern is that smallholders are not left out in the process. He also asked agro-business firms to integrate farmers on their supply chains through institutions like cooperatives, producers’ associations and contract farming.

Pawar made it clear that the contract farming model that to be implemented in India will ensure that land is permanently owned and cultivated only by farmers. “We are not encouraging a model of leasing land and allowing the private sector to acquire it for cultivation,” he said. He also disclosed that the Centre is encouraging farmers to form grass-root level associations or informal cooperatives owned and managed by farmers themselves or producer companies.

While the corporates will have us believe that contract farming is the panacea for all the ills affecting the agriculture sector in the country today, it remains to be seen whether it really turns out to be so.

Contract farming involves a pre-agreed price between the company and the farmer. The agreement is defined by the commitment of the farmer to provide an agricultural commodity of a certain type at a time and a price and in the quantity required by a committed buyer, mostly a large company.

It is clear why the business sector is gunning for contract farming. They seek to integrate the supply chain to ensure timely availability of quality and quantity of raw material. Significantly, it also reduces the procurement cost for them by doing away with the middlemen. It leads to significant gains for them, as not only do they get the raw material as per their specific demands, the cost is also much less.

It is also believed that the participation of the corporate sector in the farming segment will play a crucial role in technology transfer, capital inflow as well as lead to assured markets for crop production.

PepsiCo was the first company in India to start contract farming of tomatoes in Hoshiarpur district of Punjab. Reliance Life Sciences, ITC (agri-business division) and McDonalds are some of the prominent business giants, which have either started contract farming projects already or are in the process of actively discussing them with various state governments. PepsiCo and other companies have used the contract system for the cultivation of Basmati rice, chilli and groundnut, as well as for vegetable crops such as potato.

“PepsiCo’s involvement in Indian agriculture stems from its vision of creating a cost-effective, localised agri-base in India by leveraging its access to world class agricultural practices,” PepsiCo spokesperson said.

Till today, PepsiCo India’s project with the Punjab Agro Industries Corporation and Punjab Agriculture University remains one of the most ambitious contracts farming projects in the country. “The programme focuses on evolving agricultural practices to help Punjab farmers produce crops that would make Indian products internationally competitive,” says the spokesperson.

What has been of crucial help to the business houses venturing into contract farming is the amendment of the Agriculture Produce Marketing Committee Act in 14 states, which allows farmers to sell their produce in open markets. This has opened the gates for the companies to enter this segment.

The United Progressive Alliance government’s ‘approach paper’ to the Eleventh Plan gives clear priority to the development of contract farming. A working group set up by the National Development Council has also made a set of proposals to promote contract farming. The group suggests greater liberalisation of laws and rules for crop contracts. It has also proposed tax rebates for food processing, duty-free imports of machinery and equipment and liberalised imports of seed varieties for contract farming.

The model which is most popular in the country today is the one in which the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contracts vary according to the crops grown, the agencies involved, the farmers themselves and technologies and the context in which contract farming is taken up. Generally, a farmer’s participation is limited to production in the fields.

However, in the present context, contract farming is clearly a win-win situation for both the corporates and the farmers. Agriculture sector is facing a number of problems in the country and farmers actually don’t have many options in the matter of deciding whether or not to go in for contract farming.

With rising debt and soaring seed and fertiliser costs, contract farming seems to be the only choice left open to them. This is mainly because the company provides all the material including seeds as well as technical know-how and there is also a guarantee of purchase of the produce after harvest. In most cases, the minimum price of the produce is fixed in advance. In the present scenario, the increasing number of farmers’ suicides is seen as a reflection of the fact that agriculture is no longer seen as a profitable venture.

This makes the economic security offered by the contract farming very attractive. The detractors of the contract farming believe that far from being a panacea for agriculture sector, contract farming is likely to increase the problems.

The main concern is that the land, which is currently used to grow staple crops like wheat and rice, will be used to grow crops required by the food-processing industry, which also has a significant overseas market. The switch to contract farming, therefore, leads to a rise in exports.

In fact, many corporates enter contract farming to fulfil their export obligations. It is believed that contract farming would double agriculture exports from India to $20 billion by 2010. Many believe that the rampant increase in contract farming will eventually lead to loss of food security of the country, implying that the country might become dependent on imports.

“We are bound to lose food security considering the way the government is supporting contract farming without thinking of farmers. The main thing is that farmers don’t have any role to play in contract farming except providing the corporates with labour and land. The government should also take into account that the situation is very different in our country as compared to other countries.
About 70 per cent of the population is dependent on agriculture. The government should involve the farmers in policy making otherwise their concerns are likely to be left out,” says Dr Kishan Bir Chaudhary of Bharat Krishak Samaj, which claims to represent around 5,000 farmers in the country.

There is also a belief that it might also lead to the loss of natural seeds. Many times, the crop required by the company is not recommended for that particular area. This can also have negative implications on the quality of soil.

There have been numerous studies to examine the impact of contract farming on farmers. Recently, Dr Sukhpal Singh of Indian Institute of Management, Ahmedabad , conducted a study – ‘Contract Farming for Agricultural Development: Experience of the Indian Punjab and Northern Thailand’. He observes in his study, “Contract farming, in a political economy, is one mode of capitalist penetration of agriculture for capital accumulation and exploitation of the farming sector by agri-business companies.”

But for farmers, this is a matter of survival. It is also because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis.

“Farming was hardly a profit making venture but thanks to the company people we also can afford to have some self-respect now. Of course, there are problems associated with companies also like if a crop doesn’t meet their requirements they will not take it. For instance, if they want chilli, it has to be a particular variety and it’s not like anything will do,” says Shirish Mane, who owns a 3-acre farm at Loni Khand village, about 20 kms from Pune.

Certainly, not all contract farming is bad for farmers. It can lead to sustainable cultivation practices. However, there is a need for the government to step in and monitor the contract farming practices.

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