Download: 2012 GO MS 133 Government of AP
Contract Farming (CF) is the new subject to be watched in the State. With the issuance of a GO recently, doors are open for the entry of Indian and foreign companies to have direct agreements with farmers to finance them, provide quality inputs and buy their produce at pre-decided prices. With this, the CF activity which has been at a low level so far is expected to go up, and as and when FDI gets into retail, it will pick up even more.
While governments, companies and economic reformers assure the CF will benefit Indian agriculture and farmers, critics warn of various harmful consequences. They demand legal protection to farmers which the companies and governments do not appear to be accepting. The Government of A P has given a 30-day deadline for all the concerned to react on its GO.
The Government of Andhra Pradesh has issued a GO recently to facilitate Contract Farming (CF) in the State. The order has put it plainly that the measure is being taken in the context of WTO and liberalization. Though the CF has not been totally absent so far, it is taken up at a marginal level confined to a few products and companies. For instance, we have Cadbury’s cocoa farming, State Bank of India’s paddy and groundnut in collaboration with Mahindra, and Cotton Corporation of India’s cotton farming deals. The reason for this marginal position of CF is not any opposition from the government but the existing rules and regulations.
Officials have said openly that they are for it; the late Chief Minister Y S Rajasekhar Reddy opposed direct corporate farming, but welcomed contract farming. It’s a different matter he could not go ahead with it in the face of strong resistance from some of the opposition parties. The AP Market Rules of 1966 do not permit companies to deal directly with farmers. Even local traders have to obtain pre- licences from the authorities to buy agricultural commodities from farmers. All that is supposedly to protect the interests of farmers, most of whom in the country fall under ‘small and marginal’ categories. They happen to be uneducated and innocent who cannot properly understand the stratagems and machinations of the market forces.
Even though this condition of farmers continues till date, the Government of India initiated a defining change in the farmer-market relations, under the influence of liberalization. Accordingly, the Centre formulated a ‘Model Act’ for CF a few years ago and forwarded it to the states for adoption. Now that the State has issued the GO and it is only a matter of time before the Act comes into effect. Once that happens, the level of commercial capital in the agriculture, in the form of crop investments and trade, is likely to go up. Introduction of advanced technology and farming/management methods will follow.
That being so, there has been a wide debate in the last few years over the very desirability of CF in the country. It began when the UPA Government in its Approach Paper to the 11th Plan in 2008 accorded priority to the CF. The debate covered issues like the failure of governments to uplift the agricultural sector and farmers, the likely harm or benefit from the CF, the possible ill effects of the entry of Indian and foreign companies into this area integrating the sector with international markets, loss of bio-diversity and possible threat to food-security. It may settle one way or the other only after several years, after taking stock of the net impact of this new phenomenon.
For now, the opinion is sharply divided. While companies, government officials and economists extol CF benefits to Indian agriculture and farmers, others debunk the whole argument. One may not agree with the CF kind of solution to the woes of Indian agriculture and farmers, but there is no denying the fact that agriculture needs a big push. For instance, while the GDP grew at a rate of 7.6 % during the 10th Plan period, the growth of agriculture declined to 2%. The reasons were low levels of investments, poor research, weak infrastructure, non-provision of adequate quality inputs and services to farmers and non-protection of their interests. In a country where about 70 % of farmers cultivate no more than two acres, these conditions naturally make the activity utterly unprofitable.
Now, as per the governments and experts, CF is the best solution to overcome this problem. Under this system, they suggest, irrespective of the size of land holding, farmers can have quality seeds, pesticides, insecticides, fertilizers, crop loans, advanced technology, management expertise and finally a guaranteed market for their produce. The prices will be the ones mutually agreed upon in advance. That way a great number of risks faced by farmers for all these years will be eliminated.
The entire process is done in a mutually agreed upon advance document form. In case of any disputes the Marketing Department will intervene. Agreements will also have provisions allowing farmers to sell their produce to other bidders. CF protagonists cite these advantages to push for contact farming in a big way with the tantalizing prospects of farm growth hitting 4 % as envisaged by the Centre.
They also point out, under the present system farmers are not only denied proper inputs, technologies and management advice but also compelled to sell their produce only to authorized traders at designated markets. This is giving scope for exploitation. Traders often form syndicates and decide prices arbitrarily. While officials look the other way, even the minimum support price (MSP) is not paid.
Apart from governments, various public and private sector organizations such as the Planning Commission, FICCI, CII, ASSOCHAM, NABARD and MARKFED and banks have been batting for this system.
However, critics, some of whom remind of the failure of Kuppam venture attempted by Chandrababu Naidu government with Israeli participation, warn that actually the CF is not as rosy as it looks on the paper. Even though certain benefits like better inputs, services and market guarantee do accrue to farmers, experience shows that companies often raise issues of quality of produce and tend to reduce prices like any normal trader in the market yard. Marketing Departments which have dispute redressal mechanism, generally side with companies. Records show that such problems are on the rise.
According to Dick Levens, agricultural economist of University of Minnesota, cautions, through CF the food systems of different countries will get under the control of MNCs. With everything from seeds to marketing managed by them one will become totally dependent on them and lose agricultural independence. P V Sateesh of Deccan Development Society, who studied CF of the USA, mentions a report which concluded that chicken farmers there were pauperised because of their lack of bargaining strength in dealing with corporations.
“Companies blacklist growers who try to organise resistance against unfair practices.” Similar have been experiences in several other countries, experts say. A report in the monthly newsletter (May 2008) of ICRISAT corroborates this view. There are several conditions that are to be in place to ensure its success. The ICRISAT article goes on to list them. However, in the Indian context, experts express doubts as to the role played by governments.
A special study done by Sukhpal Singh of IIM Ahmedabad on working of CF in different countries of the world and in India concluded the system has not benefited the farmers. That is not because the system itself is harmful but due to how it is practised in a given context, he says. The government is the culprit in this. At another level, “Contract farming, in political economy, is one mode of capitalist penetration of agriculture for capital accumulation and exploitation of farming sector by the agribusiness companies”, he warns. His suggestion is to form cooperatives for increasing the bargaining power of contract farmers. In fact, his opinion is echoed by some other experts too.
It remains to be seen whether the Government of Andhra Pradesh will make a study of the subject seriously and sincerely, by inviting expert opinions and organising discussions, or will leave things to the mercy of companies and other market forces.
What is Contract Farming?
Contract Farming (CF) is an agreement between farmers and marketing or processing companies. According to it the companies tell farmers in advance what crops to cultivate and how much. After harvesting is done the crops are sold to the contracting companies. Supply should be at the time specified. These are called forward agreements. This may happen in case of livestock also.
. Prices of the produce are determined before hand through mutual negotiations.
. The crop quality should be as per the specifications of the company. If not, the company may refuse to buy it. Or buy at reduced prices.
. Agreement may provide for input and technical advice support to farmers. Inputs may include financial loans, quality seeds, insecticides, fertilizers, required machinery etc. Technical advice is management of crops from land preparation and sowing to harvesting.
Terms and conditions of CF may differ depending on farming conditions, crops, farmers, companies, technologies etc.
The Agriculture & Cooperation Department of the State Government issued GO Ms. No. 133 on 30th June, 2012 on Contract Farming. It amends the A P (Agricultural Produce & Live Stock) Market Rules, 1969.
The GO says, “… in view of the changed scenario in the trading of agricultural commodities and with the advent of WTO, the Government of India have piloted a Model markets Act to all the States for adoption. As a part of liberalization, certain amendments have been made to the A P Market Rules, 1969. (Now) It is proposed to amend the Market Rules, 1969 suitably so as to make provisions for private marketing and contract farming.
The said amendment will be taken into consideration by the Government on or after the expiry of a period of 30 days from the date of publication of this Notification in the AP Gazette and any objections which may be received may be considered by the Government. The objections and suggestions may be sent to Special Chief Secretary (AM&C) Department.
Main amendment is: In Rule 73-A: The contract farming producer and contract farming buyer shall be at liberty to mutually decide the terms and conditions of the contract farming agreement, which shall not be contrary to the provisions of the Act and Rules and same shall be informed to the Market Committee/Asst Director.
The Model Agreement comprises 20 provisions. The essential ones among them are:
. It is hereby agreed by between the farmer and the company that the farmer agrees to cultivate and produce and deliver to the company, and the company agrees to buy from the farmer, the items of the quality and quantity at price mentioned in the agreement.
. The farmer shall supply the items to the company within the agreed time. After expiry of the time this agreement shall automatically come to an end.
. The farmer agrees to supply the quantity of produce agreed according to the quality mentioned in the agreement. If it has no such quality the company can refuse to buy it. In that case the farmer can sell it at reduced price with mutual negotiations.
. The farmer agrees to adopt instructions or practices in respect of the land preparation, nursery, fertilization, management, irrigation, harvesting and any other, as suggested by the company.
. The company agrees to provide following services to the farmer during the period of cultivation and post harvest management. (Services to be specified in the agreement).
. The company shall have no rights whatsoever as to the title ownership, possession of the land/property of the farmer, nor shall the company in any way alienate the property of the farmer particularly nor mortgage, lease, sub-lease or transfer the land in any way to any other person or institution during the continuance of this agreement.
. Dissolution, termination or cancellation of the agreement shall be with the consent of both the parties.
In the event of any dispute or differences between the two parties on any matter, that shall be resolved as per sub sections (3) and (4) of the section 11 A of the AP Market Act, 1966.
A fair proposition
We run the country’s largest contract farming operation in potato. We work with nearly 15,000 farmers. Through contract farming our total procurement is about 1,50,000 tons.We have pioneered something called direct seeding of the paddy, which does away with traditional transplantation in which fields are flooded. It saves 30 to 40% of water in paddy cultivation.
Since we grow a potato variety that is only consumed by us, the farmer is well aware that he will have to sell at a negotiated price to us. Although prices tend to move in tandem with market prices, the difficulty for a company is that when the market price falls below your contracted price with the farmer, you can’t reduce your price. But when it moves above the contracted price, you have to increase your price.
The government has from to time examined what should be the nature of contracts between the company and the farmer, and we’ve always advised them that look don’t make it legal, because no company can chase a farmer in a court of law, and vice versa. This is a matter of trust. Let the contract be recorded but don’t have a contract which is sanctified by the government where you introduce a whole lot of conditions. Because different markets, specifications, conditions operate in different crops.
So you can’t look at everything from a single prism. Leave it to the market. But certainly if there is a company which takes farmers for a ride and cheats them, I’m sure the law of the land has enough provisions to discourage and penalize them.
Makes farmer tenant
“When Y S Rajasekhar Reddy was the Chief Minister, he brought up the Contract Farming proposal which he withdrew when we strongly opposed. But now the present government has issued a GO to facilitate that. We will not accept this measure at all. Contract Farming means loss of the farmer-centric agriculture which will be replaced by a company-centric farming. In that situation the government will abdicate its responsibility towards farmers as well as agriculture.
Everything will be controlled by companies. So far when farmers needed inputs like seeds, loans etc they have been approaching the government. That cannot be the case in future. Also agriculturists will not be in a position to decide what to grow in their fields and all that. In effect he will become a tenant in his own land. So, we are strongly opposed to all this.”
CF companies in AP, India
Some of the MNCs, Indian companies, the States they are operating in and products handled by them are as follows:
PepsiCo (Punjab, Tamilnad-tomato, chillies, groundnut, basmati rice and seaweed). Rallis India (Punjab, UP, MP, Maharashtra ,Karnataka, TN- fruits, vegetables, basmati, wheat). Suguna Poultry Farm Ltd (AP, TN- broiler), Unicorn Agrotech (Karnataka- gherkin). Super Spinning Mills (TN-cotton), CG Herbals (Chattisgarh, Odisha-aromatic crops, veiver, patchouli). Sanjeevani Orchards (MP- Pomegranate). Hindustan Lever (MP- wheat). ICICI Bank (MP- wheat). State Bank of India (AP- paddy, groundnut, sunflower in Kurnool district in collaboration with Mahindra Shubh labh). Appachi Cotton Co (TN- cotton). Ugar Sugar Works (Karnataka- barley). Cotton Corporation of India ( AP, in Guntur and Adilabad districts, Maharashtra, Haryana- cotton). Field Fresh Foods of Sunil Mittal (Punjab, HP, J&K, UP,Haryana,Uttaranchal- fresh fruits) , Reliance (Gujarat- herbal gardens),Nader & Ebrahim Group (NEG) of Bahrain (MR- banana).
In furtherance to this, the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia, while on a visit to Oman some time ago, invited West Asian companies for CF in India. There were also reports that Cadbury India had identified areas in Andhra Pradesh and Tamil Nadu for cocoa farming. Already a project to supply mango pulp for making of soft drink Maza for Coca Cola Company has been inaugurated in Chittur district a week ago.
Farmers’ groups can help
Theoretically, contract farming helps to remove market imperfections in inputs like credit, land and labour and marketing of produce. It compliments current paradigms of economic growth, free markets and the private sector.Contract Farming is also controversial regarding its benefits for small land holders and that the peasantry is subjugated to increased control and exploitation, by capital. There is a link between the rise in Contract Farming to diminished role of state in agriculture in the absence of a proper and efficient set-up for marketing, credit and other infrastructure.
It is also argued that contract production leads to exploitation of the farm sector and the companies gain indirect control of land. Farmers may not have exit options in the event of reduced bargaining power as they become overly dependent on their contract crops. The Contract Farming system may also fail when yields stagnate, costs rise andthere are open market gluts.
South-East Asian experience shows the importance of government support for small farmers in enhancing the ability to negotiate favourable contracts. Indian experience shows mixed results that price uncertainty was removed; working capital and extension services provided; productivity of crops in contract farming have increased but cost of production not reduced much.
Contract Farming has been in vogue in Andhra Pradesh in seed production and sugarcane quite successfully. Oil palm, cocoa, vegetables, gherkins, baby corn, marigold, amla and broiler birds also shows that contracts are working well in oil palm and gherkins. But the experience of ‘Kuppam project’ has shown problems in sustainability of crop production and resources, informal nature of contracts without any legal protection, exclusion of small farmers, weak bargaining power of unorganized farmers vis-a-vis company.
Farmers groups could be formed and supported initially similar to IKP women’s groups. Though the amended Agricultural Produce Marketing Committees (APMC) Act contains some provisions to regulate Contract Farming, legal protection for contract growers as a group is essential.
Contract farming (CF) sounds interesting in the midst of chaotic and uncertain agricultural markets.
It is supposed to remove middlemen, vertically integrate buyer and producer and share the cooperative surplus. This also has other advantages when the buyer invests resources in the supply chain in terms of cold storages, transport and other infrastructure.Farmers can also be provided with some improved technology, information over quality, and help them with improved farm management practices to enhance the value added.
However, in practice, there are several apprehensions. In the received experience, there are occasions when the buyers often reneged their promises and refused to buy, forcing the farmers to go for a distress sale. We have extensive experience with seed production in our state. Companies do not prefer to have a prior agreement about the price and tend to purchase at the prevailing market price, which is low in the peak season.
However, one advantage with formal sector markets is that there is less cheating in measurement, less delay in payment etc.But when companies lose their forward markets, they rarely convey the information to the farmers and suspend purchases abruptly, leaving farmers in a lurch. Even if there are written contracts, legal enforceability has its own costs.
In the existing structure of agrarian markets with huge number of farmers competing among themselves presents a clear disadvantage to them. If they organise themselves into a farmers’ cooperative, then their bargaining power can substantially go up.
All in all, the benefits of Contract Farming is contingent upon several aspects such as the true intentions of the companies . As such the existing marking mechanisms have their own strengths and weaknesses. Weighment malpractices, delays in payments, depressing the price in the peak seasons through cartels are associated with present traditional markets. They also have some advantages such as they provide credit to the farmers. Hence it could be difficult to beat their dominance.