Contract farming refers to an agreement between farmers and marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.
Advantages of Contract Farming:
(a) Advantages for Farmers:
- The contract between farmers and buyers insulates farmers from price risk, helps them develop new skills, and opens new markets.
- Inputs and production services are often supplied by the sponsor. This is usually done on credit through advances from the sponsor.
- Contract farming can open up new markets which would otherwise be unavailable to small farmers.
- Contract farming often introduces new technology and also enables farmers to learn new skills.
- Farmers’ price risk is often reduced as many contracts specify prices in advance.
(b) Advantages for sponsors:
- Contract farming with small farmers is more politically acceptable than, for example, production on estates.
- Working with small farmers overcomes land constraints.
- Production is more reliable than open-market purchases and the sponsoring company faces less risk by not being responsible for production.
- More consistent quality can be obtained than if purchases were made on the open market.
Pros of Draft Model Contract Farming Act:
(i) The model Act makes a good move in the direction of promoting contract farming. Many private companies have said that they face a lot of difficulties when they approach the State for contract farming license. This Act attempts to smoothen this process.
(ii) Role of Agricultural Produce Marketing Committees/Marketing Boards:
- As per the draft Model Act, contract farming will be outside the ambit of the state APMCs. This implies that buyers need not pay market fee and commission charges to these APMCs to undertake contract farming.
- Further, the draft Model Act provides for establishing a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the draft Model Act.
- Further, the sale and purchase of contracted produce is out of the ambit of regulation of the respective state/UT Agricultural Marketing Act.
(iii) Under the draft Model Act, in case of disputes between a producer and a buyer, they can:
- reach a mutually acceptable solution through negotiation or conciliation;
- refer the dispute to a dispute settlement officer designated by the state government;
- appeal to the Contract Farming (Promotion and Facilitation) Authority (to be established in each state) in case they are not satisfied by the decision of the dispute settlement officer.
(iv) Under the draft Model Act, limits of stockholding of agricultural produce will not be applicable on produce purchased under contract farming.
Cons of Draft Model Contract Farming Act:
(i) The model Act requires the sponsor and the farmers to register the contracts with a registering and agreement recording committee. Registration imposes additional procedures and costs on the parties, and small and medium farmers cannot easily afford these costs.
(ii) The Act also proposes price protection for farmers by determining a pre-agreed price. This will be counter-productive.
(iii) The entire premise of the model contract Act seems to be aimed at creating a legal infrastructure to ensure that both parties honour the contract. This approach is flawed.
(iv) The Act is aimed at helping agri-businesses to rake in profits. It promotes an unequal arrangement where farmers’ products would be available cheaply to these companies.
(v) It also has a provision to allow companies to buy produce at lower than contracted prices citing inferior quality.
(i) The government needs to create market-based incentives for both farmers and buyers.
(ii) Government should improve farmers connectivity to spot markets and mandis across the country. E-NAM (National Agricultural Market) is a great initiative in that direction.
(iii) The government should maintain an information repository of farmers and contracting firms. The repository can provide details about farmers or farmer producer organizations with regard to land availability, default rate, and performance standards.
(iv) Encourage softer means for enforcement: Incorporating risk-sharing mechanisms in contracts, incentive schemes, repeated contracting and renegotiation options, and simplified and transparent contract terms would help in contract enforcement. The government can educate farmers and make them more aware about contract farming and model contracts.
(iv) Other measures includes:
- allowing direct sale of produce by farmers.
- removing fruits and vegetables out of the ambit of APMCs.
- setting-up of farmer-consumer markets.
The need of hour is to remove the loopholes and Implementing a farmer friendly law and contracts to ensure that the policy addresses agrarian crisis and contribute to Prime Minister’s vision to Double Farmers Income by 2022.