The agriculture ministry on 22nd May released the Model Contract Farming Act, 2018. Mr. Ashok Dalwai, CEO, National Rainfed Area Authority has chaired the committee that drafted the model law.
Contract Farming: Contract farming is a container concept that covers a wide range of contractual arrangements, which makes it difficult to draw overly general conclusions. Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a forward agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations) frequently at predetermined prices.
The Model APMC Act, 2003 provided for contract farming however, only 14 states notified rules related to contract farming, as of October 2016. Only Punjab has a separate law on contract farming. The NITI Aayog observed that market fees and other levies are paid to the APMC for contract framing when no services such as market facilities and infrastructure are rendered by them. In this context, the Committee of State Ministers on Agricultural Reforms recommended that contract farming should be out of the ambit of APMCs. Instead, an independent regulatory authority must be brought in to disengage contract farming stakeholders from the existing APMCs. (Reference)
Salient features of Model Contract Farming Act, 2018
1. In addition to contract farming, services contracts all along the value chain including pre-production, production and post-production have been included.
2. “Registering and Agreement Recording Committee” or an “Officer” for the purpose at district/block/ taluka level for online registration of sponsor and recording of agreement provided.
3. Contracted produce is to be covered under crop / livestock insurance in operation.
4. Contract framing to be outside the ambit of APMC Act 2003.
5. No permanent structure can be developed on farmers’ land/premises
6. No rights, title ownership or possession to be transferred or alienated or vested in the contract farming sponsor etc.
7. FPO/FPC can be a contracting party if so authorized by the farmers.
Policy Analysis by Experts:
1. As per Professor Sukhpal Singh of IIMAhmedabad: The new model Act 2018 opens up agricultural markets to contracting agencies without adequate safeguards for farmers.
2. Opinion Piece by Smriti Sharma, Policy Analyst with the National Institute of Public Finance and Policy on role of the government in Contract Farming Act
3. Opinion Piece by Jayshree Sengupta, Senior Fellow (Associate) with ORF's Economy and Development Programme on making contract farming suitable for Indian farmers.
Policy Analysis and Suggestions:
1. FPOs as aggregators: From the draft Model Act, it is not clear whether FPOs can also be contract farming sponsor. There may be a situation where FPOs would like to expand the cultivated area without increasing number of the farmers as members. The model law should clarify that how can FPO will be able to expand farming activities adhering to contract farming route.
2. Pro Farmer Policy: The Act lays special emphasis on protecting the interests of the farmers, considering them as weaker of the two parties entering into a contract and has been provided for reasonable protection to the weaker party to the contract, i.e., the producer, the pre-agreed price, category wise as under Section 18(2). Where no price premium exists, and a competitive price is paid on local markets, the intermediary role of FPOs may become more important for enabling higher income effects of the contract farming arrangement.
3. Capacity of State: The model contract farming Act proposes a state-level agency, the Contract Farming (Development and Facilitation) Authority, which would put contract farming outside the scope of the APMC. There is already acute shortage of extension services in Agriculture Department and current Act is proposing for an officer at the district/block/taluka level.
4. Corruption and Transaction Cost: More the responsibilities taken by the government staff, there is a higher chances of bribery for the online registration of sponsor and recording of agreement with a registering and agreement recording committee. Registration imposes extra procedure mechanism and costs on the parties, while small and marginal farmers cannot easily afford these transaction costs. Transaction costs embedded in contract farming need to be outweighed by the benefits, both for sponsoring corporates and farmer.
5. Monopoly, Fraud and& Settlement of disputes: Sponsoring agri business companies will exploit the monopoly position and similarly farmers will sell outside the contract (extra-contractual marketing) and divert inputs supplied on credit to other purposes, thereby reducing yields. There is no provision of budget for the establishment of body for dispute settlement mechanism at the lowest level possible required for quick disposal of disputes.
6. Insurance and Risk Management: Agricultural investments always involve risk. The five most likely reasons for investment failure in agriculture are poor crop management, climatic disasters, pest epidemics, market failure and price volatility. The standard approach in agribusiness to compensate the farmer against quantity shortfalls is crop insurance. The contracted produce will also be covered under crop/livestock insurance in operation. But the government-run crop insurance schemes are proving to be unsatisfactory
7. Price Discovery and Market: Normally, contract farming does not work in an ecosystem when either party is looking to fetch a better price without any product differentiation. This is where derivative market integration with farm sector can help. This will eventually lead to both party trying to get the best price from the market instead of the each other. Where there are fixed price contracts there is no apparent risk to farmers with regard to payment for their crops. If a market collapses, the sponsor should automatically shoulder the loss. However, if the sponsor becomes bankrupt, farmers could be permanently affected. Where contracts are on a flexible or spot-price basis the stability of farmers' incomes is always at risk.
8. Farm income varies between commodities: The costs associated with contracting is high hence, it tends to be limited to high-value commodities (including meat, milk, fish, fruits, vegetables, and cash crops) being grown for processors and exporters who sell into quality-sensitive markets. An apple grower benefit from higher yields (presumably due to technical assistance), while contract green onion growers receive higher prices (presumably due to better quality).
9. Establishment of Forum: A major feature for market to work is a "market matching" exercise. This can be done by organizing forums where agribusiness entrepreneurs could meet FPO/ farmers' representatives to discuss their requirements. The forums can be followed by more detailed discussions between individual sponsors and individual cooperatives or farmer organizations.
10. Literature Review: All studies report at least one case of contract farming that has a positive and statistical significant income effect. The lack of studies on ‘failed treatments’ leads to an overestimation of the effectiveness of contract farming. The practitioner-oriented literature indicated the high risk of failure in the first years and stressed the need for adaptive management and mechanisms to settle disputes. Apart from food security effects, the role of contract farming in rural development, such as (sector-wide) innovation, and livelihood resilience, will need more research.
Conclusion: Modest expectations and careful planning are needed for contract farming to be effective and sustainable. However, it is important for policymakers to be realistic about the potential scope of contract farming. Thus, policymakers should not think of contract farming as a solution to the problems of credit, information, and market access for all small and marginal farmers . Model Contract Farming Act should be a promoting and facilitating Act as is intended, and should not end up as a over-regulating act distorting the market for both players.
Contract Farming: Contract farming is a container concept that covers a wide range of contractual arrangements, which makes it difficult to draw overly general conclusions. Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a forward agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations) frequently at predetermined prices.
The Model APMC Act, 2003 provided for contract farming however, only 14 states notified rules related to contract farming, as of October 2016. Only Punjab has a separate law on contract farming. The NITI Aayog observed that market fees and other levies are paid to the APMC for contract framing when no services such as market facilities and infrastructure are rendered by them. In this context, the Committee of State Ministers on Agricultural Reforms recommended that contract farming should be out of the ambit of APMCs. Instead, an independent regulatory authority must be brought in to disengage contract farming stakeholders from the existing APMCs. (Reference)
Salient features of Model Contract Farming Act, 2018
1. In addition to contract farming, services contracts all along the value chain including pre-production, production and post-production have been included.
2. “Registering and Agreement Recording Committee” or an “Officer” for the purpose at district/block/ taluka level for online registration of sponsor and recording of agreement provided.
3. Contracted produce is to be covered under crop / livestock insurance in operation.
4. Contract framing to be outside the ambit of APMC Act 2003.
5. No permanent structure can be developed on farmers’ land/premises
6. No rights, title ownership or possession to be transferred or alienated or vested in the contract farming sponsor etc.
7. FPO/FPC can be a contracting party if so authorized by the farmers.
Policy Analysis by Experts:
1. As per Professor Sukhpal Singh of IIMAhmedabad: The new model Act 2018 opens up agricultural markets to contracting agencies without adequate safeguards for farmers.
2. Opinion Piece by Smriti Sharma, Policy Analyst with the National Institute of Public Finance and Policy on role of the government in Contract Farming Act
3. Opinion Piece by Jayshree Sengupta, Senior Fellow (Associate) with ORF's Economy and Development Programme on making contract farming suitable for Indian farmers.
Policy Analysis and Suggestions:
1. FPOs as aggregators: From the draft Model Act, it is not clear whether FPOs can also be contract farming sponsor. There may be a situation where FPOs would like to expand the cultivated area without increasing number of the farmers as members. The model law should clarify that how can FPO will be able to expand farming activities adhering to contract farming route.
2. Pro Farmer Policy: The Act lays special emphasis on protecting the interests of the farmers, considering them as weaker of the two parties entering into a contract and has been provided for reasonable protection to the weaker party to the contract, i.e., the producer, the pre-agreed price, category wise as under Section 18(2). Where no price premium exists, and a competitive price is paid on local markets, the intermediary role of FPOs may become more important for enabling higher income effects of the contract farming arrangement.
3. Capacity of State: The model contract farming Act proposes a state-level agency, the Contract Farming (Development and Facilitation) Authority, which would put contract farming outside the scope of the APMC. There is already acute shortage of extension services in Agriculture Department and current Act is proposing for an officer at the district/block/taluka level.
4. Corruption and Transaction Cost: More the responsibilities taken by the government staff, there is a higher chances of bribery for the online registration of sponsor and recording of agreement with a registering and agreement recording committee. Registration imposes extra procedure mechanism and costs on the parties, while small and marginal farmers cannot easily afford these transaction costs. Transaction costs embedded in contract farming need to be outweighed by the benefits, both for sponsoring corporates and farmer.
5. Monopoly, Fraud and& Settlement of disputes: Sponsoring agri business companies will exploit the monopoly position and similarly farmers will sell outside the contract (extra-contractual marketing) and divert inputs supplied on credit to other purposes, thereby reducing yields. There is no provision of budget for the establishment of body for dispute settlement mechanism at the lowest level possible required for quick disposal of disputes.
6. Insurance and Risk Management: Agricultural investments always involve risk. The five most likely reasons for investment failure in agriculture are poor crop management, climatic disasters, pest epidemics, market failure and price volatility. The standard approach in agribusiness to compensate the farmer against quantity shortfalls is crop insurance. The contracted produce will also be covered under crop/livestock insurance in operation. But the government-run crop insurance schemes are proving to be unsatisfactory
7. Price Discovery and Market: Normally, contract farming does not work in an ecosystem when either party is looking to fetch a better price without any product differentiation. This is where derivative market integration with farm sector can help. This will eventually lead to both party trying to get the best price from the market instead of the each other. Where there are fixed price contracts there is no apparent risk to farmers with regard to payment for their crops. If a market collapses, the sponsor should automatically shoulder the loss. However, if the sponsor becomes bankrupt, farmers could be permanently affected. Where contracts are on a flexible or spot-price basis the stability of farmers' incomes is always at risk.
8. Farm income varies between commodities: The costs associated with contracting is high hence, it tends to be limited to high-value commodities (including meat, milk, fish, fruits, vegetables, and cash crops) being grown for processors and exporters who sell into quality-sensitive markets. An apple grower benefit from higher yields (presumably due to technical assistance), while contract green onion growers receive higher prices (presumably due to better quality).
9. Establishment of Forum: A major feature for market to work is a "market matching" exercise. This can be done by organizing forums where agribusiness entrepreneurs could meet FPO/ farmers' representatives to discuss their requirements. The forums can be followed by more detailed discussions between individual sponsors and individual cooperatives or farmer organizations.
10. Literature Review: All studies report at least one case of contract farming that has a positive and statistical significant income effect. The lack of studies on ‘failed treatments’ leads to an overestimation of the effectiveness of contract farming. The practitioner-oriented literature indicated the high risk of failure in the first years and stressed the need for adaptive management and mechanisms to settle disputes. Apart from food security effects, the role of contract farming in rural development, such as (sector-wide) innovation, and livelihood resilience, will need more research.
Conclusion: Modest expectations and careful planning are needed for contract farming to be effective and sustainable. However, it is important for policymakers to be realistic about the potential scope of contract farming. Thus, policymakers should not think of contract farming as a solution to the problems of credit, information, and market access for all small and marginal farmers . Model Contract Farming Act should be a promoting and facilitating Act as is intended, and should not end up as a over-regulating act distorting the market for both players.
