Taking Forward Contract Farming

What is the issue?

The government recently came out with a Model Contract Farming Act, 2018.
Better Centre-State co-operation on land lease will ensure that both farmers and sponsors gain.

How is the growth scenario?

Agriculture growth is under stress at 3.4% in 2017-18 compared with 6.3% in 2016-17.
This is largely attributed to

declining soil fertility
fragmentation of landholdings
increasing restrictions to commercialisation and modernisation of farming and farm-related activities

What is contract farming?

It refers to a system in which bulk purchasers enter into contracts with farmers.
It includes agro-processing, exporting and trading units.
They purchase a specified quantity of any agricultural commodity at a pre-agreed price.
The contracting firm/company is also known as the sponsor.
As, it provides all production support to the contacted farmers.
This includes the extension services with full protection of land rights.

What are the benefits?

Income - The idea is to increase farmers’ income by creating an alternative market mechanism.
It would provide linkages between national and international markets.
Prior to this, several States have been hesitant to allow contract farming.
With the Act being notified, the focus has shifted to the operational aspects.

Middlemen - Agricultural markets invariably remain in the clutches of the middlemen.
The Act allows farmers and farmer producer organisations (FPOs) to directly link with companies.
It thus enhances market linkage and removes dependence on middlemen.
Price - 86% of total landholdings in the country belong to the small and marginal category.

The Act will have an indirect effect on farmers forming FPOs.
It helps pooling their land for a better say in determining the prices of their produce.
Cost - Farmers no longer have to transport their produce to the mandis.
As, sponsors usually collect the produce from the farm gate.
It thus reduces farmers’ cost and thereby translates into increased incomes.
Land - Fear of losing land has always inhibited farmers from embracing new policy.
The Act does well to insulate land ownership rights of the farmers.
It prevents them from any potential infringement from the sponsors or the buyers.
Market - Contract farming creates new markets for farmers’ produce.
It facilitates better access to technology, crop diversification, and extension services.
It can thus positively impact the production process.
Financing - Lack of formal financing mechanism and lower penetration of crop insurance are prime causes of farmer distress.
Contract farming facilitates financing and crop insurance as well.

What are the shortcomings?

Board - The Act mandates the formulation of a contract farming board.
This is to guide several aspects of the contract, including pricing of produce.
The intent is to provide a cushion against possible exploitation of the farmers.
However, if not exercised judiciously, the board may set high price, deterring sponsors.
Quality - The sponsor is mandated to buy the entire contracted amount of produce.
This is even if the quality parameters are not met, though at a lower price.
This affects the sponsors, as, they enter into agreement to procure a specific grade of produce.
Insurance - The spirit of providing insurance support to the farmer is good.
But the sponsor is burdened with this additional cost.
The government can instead consider covering this cost.

What lies ahead?

Cooperation - Being a State subject, operationalising agriculture reforms needs State cooperation.
Most often, these reforms fall victim to Centre-States political differences.
The need is for proactive support and guidance of the sponsors at the State level.
Leasing - The Model Agricultural Land Leasing Act, 2016, has not seen much uptake at the State level.
None of the States has adopted the Act in its entirety.
The Contract Farming Act has to be supplemented by well-balanced leasing laws at the State level.
This is essential to tap the full potential of contract farming.
Allowing leasing of land will help address the issue of fragmented landholdings.
It would encourage the private sector for bigger commitments in terms of technology and capital.
This will boost productivity, by benefiting from economies of scale.

Source: BusinessLine