An Introduction to Contract Farming
Karl Marx predicted in his writings, about the uprising of the proletariat against the bourgeoisie, the struggle of the people who possess nothing against the few powerful, who do. The year 2020 bore witness to some of the biggest revolts in India, and the nationwide farmers’ protests were particularly notable. This cry for justice was made against the three Farm Acts which were enacted in the month of September, 2020. One of these Acts, namely the ‘Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020’ (“the Act”) pertains to the concept of ‘contract farming’, a multifaceted agricultural practice that has garnered affection and disaffection, alike. Earlier in 2018, the Ministry of Agriculture and Farmers’ Welfare prepared a Model Contract Farming Act, 2018 for contract farming as well.
Contract farming refers to a scenario in which agricultural or livestock production is carried out, while it has the backing and security of a pre-harvest purchase agreement. The buyers are generally food processing units, exporters, etc. The price is set as per the agreement and terms in the contract, and is not subject to change in most cases. This might give the dual effect of the parties having an increased risk appetite by providing protection from fluctuating market to farmer, and a security deposit of good-quality supply to the buyer. In some of the cases, even advanced quantum sums are given to the supplier in order to facilitate the growing process which further reduces the investment made by the farmer himself/herself.
Shortcomings in the System
The current system which shows a clear lack of enforceability of contractual provisions wherein both farmers and firms often don’t perform their obligations correctly due to fluctuating market prices, the rejection witnessed on flimsy grounds, often-seen delay in payments and a sense of hesitation which exists from the farmer’s end because they won’t be able to afford legal fee for adjudication in most cases. Verbal agreements make matters worse, since they are not very reliable. A situation of monopsony may also arise wherein one buyer exists against many sellers which gives the already uplifted corporates another economical advantage in bargaining terms. The present system allows companies to change prices according to their whims, resulting in farmers being victims and left at the mercy of big corporate houses.
Recently in a case, a company in Tamil Nadu delayed the picking of the produce of broiler chickens which resulted in deterioration of their quality and brought their prices down. This is an example that represents a larger underlying issue. In many states there exist restrictions by Agricultural Produce Market Committee (“APMC”) Acts to disallow contract farming, though this shall be nullified by the new Act under Section 24, which empowers the central government to pass orders in the Official Gazette which are deemed necessary to remove any hurdle in the implementation of the act. Neither is there a system for authorization and verification by the state nor is there any system for proper due-diligence to be done upon the parties. Small farmers may often be left out since firms would prefer bulk-buying to save cost and resources. There is also a clear absence of any marketing mechanism to spread awareness about the concept of contract farming which makes it hard for companies to find suitable sellers.
Farmers’ Protests of 2020 and Contract Farming
The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act, 2020 deals with contract farming, and is one of the three Farm Acts that brought farmers to the streets demanding greater rights and protection:
Section 3(3) provides that the minimum agreement will be for one production cycle, wherein the maximum period is set to be of five years unless, one full cycle takes more than 5 years which ensures stability of income which ensures economic security
To remove any economic burden or insecurity which a farmer may experience, Section 3(1)(b) provides that all responsibility for loss to produce, or any legal consequences will lie on the sponsor,
With the help of provision 14(2)(b)(ii), if the sponsor fails to take delivery of the goods harvested, farmers may sell the produce to the third party and claim the difference in between. The sub-divisional authority may also impose a fine of 1.5 times the claim on the sponsor. This shall protect the farmer from the mala fide intentions of some sponsors.
Under Section 8(b), sponsors are not allowed to make permanent changes on the fields of the farmers This shall ensure that the liberty of the farmers with respect to their land stays legally protected.
The Act that has received major backlash, not only from farmers, but also activists and academicians. By the virtue of Section 3(4), the Centre is empowered, for the purposes of “facilitating written farming agreements” to issue guidelines. The problem arises here when the government restricts the farmers in their working, claiming to know their best interests, while farmers argue that they are better suited to recognise their needs and need governmental intervention only in the form of economic and infrastructural support.
Under section 4(4), third party examiners have to be employed for setting quality standards, which leaves the door open for influential and big-pocketed buyers to influence the process. Under section 7, blanket exemption from any State Act and the Essential Commodities Act, 1955 has been granted. This might cause problems when disputes arise for adjudication as the strictly relevant laws will not even apply, and the farmers will have to resort to general contract law. For the latter, companies may end up buying produce from one cycle, more than what they need and keep it in storages wherein they remain in good shape. As a result, when the next cycle arrives, these companies have enough produce to have the upper hand in drafting of the contractual agreement, and dictate the prices since the demand from the company has reduced but the supply has not.
Section 16 enables the Central Government is empowered to give directions to state governments as it may deem necessary, which restricts the state governments since agriculture is a subject of state list in the first place.
Under Section 18, the government can protect itself and any other related authority from prosecution and by the provisions of Section 19, no civil court has any jurisdiction to adjudicate upon any dispute or grant any relief or injunctions. Both of these provisions are clear-cut obstruction, in the process of justice for the farmers.
Apart from that, there are no affirmative provisions for farmers during the drafting of the contract. The need for it arises because all high-end companies have huge bargaining powers unlike most of the farmers (86.2%) who have nearly less than 2 hectares of land, and account for about 47.3 percent of the operated area according to 10th agriculture census 2015-16. This also makes farmers extremely vulnerable to malpractices by profit-oriented corporate buyers.
Looking Forward: Steps Towards a Better System of Contract Farming
The widespread protests against the Farm Acts find root in deep seated problems. The protest against the Act stems from the fact that it merely enables the creation of a national framework for contract farming, but does not address the problems that arise out of this agricultural practice. The practical problems of “pro-contracting agency contract agreements, delayed payments, quality-based undue rejections and outright cheating” remain unaddressed by the Act, leaving the farmer vulnerable in front of major corporate bodies.
However, while the Act can be criticized for the dearth of consideration of provisions that protect farmers, the practice of contract farming should not completely be shed off or ignored, and be maneuvered in a way that best suits the farmers, as despite its many drawbacks, it provides a constant source of income.
Contract farming as an agricultural practice is often found to be limited to medium scale or large-scale farmers. For landless farmers to benefit from the practice, the implementation of the Model Agriculture and Land Leasing Act, 2016 by different states might prove to be beneficial, as it allows drawing of contracts between farmers and landowners for leasing agricultural land. The implementation of this Act would allow landless farmers to cultivate agricultural lands and enter into contract with corporate bodies, while also allowing protection to landowners who might ordinarily fear leasing their land because of possible unlawful occupation.
It is often understood that corporate contract farming leads to marginalization of small scale farmers who can be “crowded out” because of the prices set up by corporate bodies. A major chunk criticism of corporate farming is related to corporations setting up disproportionate prices in their contracts. To curb this, SBI Research suggested the creation of a Contract Farming Institution, which would have “the exclusive right to oversee price discovery”.
Such an institution could play the role of an independent regulatory body, which would bring contract farming outside the ambit of APMCs. The NITI Aayog has observed that farmers often pay market fees to APMCs, while the latter does not provide market facilities and infrastructure. The formation of an independent body regulating contract farming is also in consonance to the recommendations by the 2016 report of Committee of State Ministers on Agricultural Reforms, which had made such a suggestion to disconnect contract farming stakeholders from APMCs.
Further, the Model Contract Farming Act, 2018 had made notable recommendations in improving the system of contract farming. These included setting up Registering and Agreement Recording Committees which would be responsible for registering agreements between farmers and corporations. This suggestion is in contravention to the provisions of the Model APMC Act, 2003, which renders the responsibility of registering such contracts to APMCs. This would reduce the role of APMCs and bring greater independence in the contract farming frameworks. Other provisions like denotification of perishable food stuffs like fruits and vegetables, setting up of electronic trading, etc. might prove to be great steps in making contract farming a beneficial system.
Therefore, while the protests against the lack of provisions which empower the poor farmer against the exploits of contract farming are well grounded, the system of contract farming can be maneuvered in a way that best suits farmers. From such a restructured system, small-scale farmers should be able to reap benefits. The ultimate goal of the newly restructured system should be protecting small-scale farmers from any exploitation at the hands of corporations or APMCs.
This article has been authored by Khushali Mahajan, Junior Editor and Rakshit Sharma, Assistant Editor at RSRR. This blog is a part of our Editorial Series, ‘Agricultural Laws: Breaking New Ground for Sustainable Futures’.