Contract Farming in India

Introduction

Agriculture in India suffers from structural weaknesses such as small holding size, fragmentation, production uncertainties and market unpredictability. This makes agriculture risky and inefficient in respect of both input and output management. These challenges need to be addressed in order for the income of farmers to be increased by way of realising higher productivity, cost effective production and efficient monetisation of the produce[1].

On June 5, 2020, the Indian government issued 3 (three) ordinances with respect to (i) permitting trade in agricultural produce outside the physical boundaries of the agricultural produce market committees (APMCs); (ii) easing restrictions under the Essential Commodities Act, 1955; and (iii) facilitating contract farming. This article discusses the ordinance promulgated for facilitating contract farming, i.e. the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 (“Ordinance”).

What is Contract Farming?

Contract farming is a concept where a farmer and a third party enter into a written agreement, wherein the farmer agrees to produce and sell certain agricultural produce, in exchange for consideration. This type of agreement is called a contract farming agreement and is typically executed between farmers and agri-business firms, processors, wholesalers, exporters, and/or large retailers. The objective of such an agreement is to ensure that the farmer is protected and gets adequate remuneration in exchange for sale of agricultural produce.

The Ordinance

The Ordinance originates from the State / UT Agricultural Produce Contract Farming (Promotion and Facilitation) Act, 2018 (“Model Act”) circulated by the Union Ministry of Agriculture. It provides a legal basis to the existing practice of contract farming in India’s agriculture and allied sectors[2]. The primary objective of the Ordinance is to provide a national framework on farming agreements[3] (“Farming Agreements”), to protect and empower farmers[4] (“Farmers”) who engage with various entities for farm services[5] (“Farm Services”) and sale of future farming produce[6] (“Farming Produce”) at a mutually agreed remunerative price framework, and in a fair and transparent manner. The broad strokes of the Ordinance are:

• Provision of terms to be included in Farming Agreements, such as term, quality, price, delivery, prohibition of sale / transfer / lease / mortgage, alteration / termination; and
• Provision of a conciliation process to resolve the disputes that arise between the Farmer and the sponsor[7], or any third party.

The Ordinance requires the registration of all Farming Agreements with the State level authority to be set up by State Governments[8]. In addition, there are several other safeguards for Farmers, to ensure that they are not being taken advantage of by large retailers who are looking to ensure their profits are met, such as : (i) a guaranteed price being paid to the Farmer for the Farming Produce[9]; (ii) ensuring payment by the sponsors to the Farmers in a timely manner[10]; (iii) a conciliation process for dispute settlement[11]; and (iv) prohibition of any transfer, sale, lease, mortgage of the Farmer’s land by the sponsor[12].

Why Do Farmers Need This Ordinance?

While the Ordinance provides for certain safeguards, it is imperative to analyse whether this information is relevant for a farmer or not. When a farmer is executing a Farming Agreement, it is unlikely that he will be able to negotiate a balanced and fair deal for himself, for several reasons such as a difference in bargaining power. Individual Farmers might not find themselves equipped or powerful enough to negotiate with corporates or big-pocket sponsors to ensure a fair price for their produce[13]. 

An incident from 2019 is a prime example of why Farmers may be unwilling to place any trust with a Sponsor. In this instance, PepsiCo sued 4 (four) farmers from Sabarkantha district in Gujarat for growing a variety of potatoes which were patented by PepsiCo. They also demanded damages of Rs 1.05 Crore from each farmer. On the intervention of the State Government, PepsiCo withdrew the cases, but this left a question mark over the future of contract farming in which resource-poor farmers were pitted against a powerful multinational[14].

While the Ordinance may not directly assist Farmers in negotiating a better deal for themselves, at the very least, it provides basic safeguards to ensure that the farmer is protected and ensures a fair and transparent parameter under which the Farming Agreement can operate.

Further, Section 3 (4) of the Ordinance states that the Central Government may issue necessary guidelines along with model Farming Agreements, which should provide further clarity on the nuances of the provisions of the Farming Agreement envisaged while drafting this Ordinance.

Conclusion  

Theoretically, farmers in India stand to gain from Farming Agreements that provide assured markets and better allocation of risks[15], which is exactly what this Ordinance intends to achieve. However, realistically, the Sponsors do have the advantage of more assured supplies, and reasonable control over quality and other specifications. Thus, these practical problems that emerge in contract farming that can result in losses to both farmers and firms[16].

Having said that, the prominent concern is the disparity in bargaining power. Due to the drastic difference in bargaining power between a farmer and a Sponsor, it would seem almost natural that a contract farming agreement would be biased towards the Sponsor. This underlying issue remains to be addressed. While the Ordinance attempts to regulate and provide a fair and transparent framework and offers ways for farmers to protect themselves, it does not resolve the underlying issue of a difference in bargaining power of the parties.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1]Preface to the Model Contract Farming and Services Act, 2018

[2] Siraj Hussain, Will India's Contract Farming Ordinance Be a Corporate Lifeline for Agriculture?, June 16, 2020 , available at https://thewire.in/agriculture/india-contract-farming-ordinance-corporate-lifeline

[3] Section 2 (h) of the Ordinance

[4] Section 2 (f) of the Ordinance

[5] Section 2 (e) of the Ordinance

[6] Section 2 (a) of the Ordinance

[7] Section 2 (o) of the Ordinance

[8] Section 12 of the Ordinance

[9] Section 5 of the Ordinance

[10] Section 4 of the Ordinance

[11] Chapter III of the Ordinance

[12] Section 8 of the Ordinance

[13] Nikhit Kumar Agarwal, Some Key Questions That Need to Be Answered About the Three Agriculture Ordinance, June 24, 2020 available at https://thewire.in/agriculture/agriculture-ordinances-key-questions

[14] Siraj Hussain, Will India's Contract Farming Ordinance Be a Corporate Lifeline for Agriculture?, June 16, 2020 , available at

https://thewire.in/agriculture/india-contract-farming-ordinance-corporate-lifeline [15] Ashok Gulati, P.K. Joshi, Maurice Landes, Contract Farming in India: An Introduction, available at

https://www.ncap.res.in/contract_%20farming/Resources/1.Introduction.pdf" [16] Ashok Gulati, P.K. Joshi, Maurice Landes, Contract Farming in India: An Introduction, available at https://www.ncap.res.in/contract_%20farming/Resources/1.Introduction.pdf"