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Taking Forward Contract Farming

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June 26, 2018

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
  1. declining soil fertility
  2. fragmentation of landholdings
  3. 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

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