MACRO ECONOMICS

CONTRACT FARMING ACT

Introduction:

The Contract farming is an pre-production season agreement between farmers

(either individually or collectively) and sponsor`s, which transfer the risk of post-harvest market
unpredictability from the farmer to the sponsor as he/she agrees buy the produce at a pre-
agreed price.

It also enjoys the benefit of greater partnership between the two parties, whereby,
the sponsor agrees to professionally manage inputs, extension education, technology, pre and
post-harvest infrastructure and services, etc. as per mutually agreed terms.

The small and marginal farmers thereby gets to enjoying additional benefits of
operational efficiency.

What is Contract Farming?

It is a system in which the companies can enter into a contract with the farmers to
purchase a specific quantity of agricultural commodities at a pre-agreed price and quality. The
aim and goal of contract farming was to ensure a mutual benefits to the farmers as well as the
companies on the supply risk and price risk respectively. Then coming to under this type of
farming, the farmers can give fertilizers, seeds and technical knowhow etc so for to get a
desired quality of agricultural produce. So that it can help farmers for getting of better price for
their produce like especially perishable commodities and avoid the price volatility problems and
as well as to reduce the post-harvest losses.so that the companies in return they will get a
desired quality of produce and also reduces the risk of the non-availability of raw material.

Then there will be the two models of contract farming.

 In first model according to the clauses of the agreement the company just provides the
inputs and takes the produce.
 Then according to second model the company can besides providing inputs and gets
more involved in the agricultural practices by giving schedules of planting and
monitoring the growth of crops etc…
Issues and challenges of Contract farming:

ISSUES:

The main and key issues faced in Contract farming currently are.

No Homogeneity in act:

In India at present there is no uniform law for Contract farming. Then according to
agriculture, since the agriculture is a state subject and each state has its own provisions for
regarding agricultural produce and conditions with the respect of contract farming. for only few
states have a specific provisions with regard to contract farming and have been enshrined. Then
across the states there is need to streamline the provision and make them uniform.

Small and Marginal farmers are left out;

Then according to small land holdings the small and marginal farmers are not roped
in by the companies as they do not give them economies of scale on small landholdings.

Exploitation:

The small farmers are being very poor and also the semi-literate have a little
bargaining power of big corporations and many of times they also have a little chance to get a
fair price for their produce. Then for sometimes the companies aslo set a very high standards of
quality required which often farmers are not able to meet. So that according to this forces the
farmers sell their produce at very low price.

Monoculture:

According to some conditions the farmers are forced for to produce a single type of
crop year after year and that which leads to monoculture and also depletion of the land.

Breach of contract:

Sometimes the company and farmers go back on the contract because due to
volatility in the prices. So that the farmers who generally suffers.

Challenges:

According to from the centre and also the effective laws that based in this model act
will be enacted by the states. The provision in this act is to enable the companies to purchase
directly from the farmer will require an amendment in the states APMC acts. So that it will be a
challenge that all the states do all this. In fact according to many states the APMC act is also in
pending for implementation. Then the farmers might be reluctant for to sell their produce at
the contracted price that if prices rise sharply then compared to the contracted price. It is a
challenging task for companies for to ensure that they will get the quality standards as they
expect. And finally by formulating of FPOs is also there in the earlier act and how ever little or
no progress is witnessed on this front because of the apprehensions that faced in making the
cooperatives with other farmers.

BENEFITS:

Contract farming can provide some important benefits to farmers.

Such as;

Income: The impact on income by this contract farming act the farmers income will increase
because of this act creates an alternative mechanism under this alternate market mechanism
there will be a link between national and international market so also there will be bulk
production and there will be a agreement, so under that agreement the prices will be pre
determined so the farmers get fair prices for their commodities. So that the income of the
farmers definitely increase.

Middlemen: The farmer will be saved from the clutches of the middlemen, usually what
happen is that the farmers will give their produce to the middlemen and then the supply chain
continues so many middlemen are involved and finally when it reaches the consumer the prices
will be increased and this will lead to food inflation in the economy. So under this act what
happen is that the agreement is between the sponsors and the farmer so the middlemen will be
eliminated and this will lead to easy supply chain. So there is a direct link between the farmers
and the sponsors. and this will enhance the market link so price will come under control and we
can definitely regulate the food inflation in the economy which is a major consent.

Landholdings: Usually in India majority of the farmers have small and marginal land or
fragmented landholdings under this act we spoke about the farmer producer organization or
the farmer producer companies. The responsibility of FPOS are to mobilize small or marginal
farmers so the fragmented landholdings can brought together and this will help in pulling of
landholdings and this will result in large agriculture areas cultivation and this will increase the
production. So land holding will also be put in the maximum utilization.

Cost: earlier what happen with the farmers that they will have to bear the cost of bringing the
commodity to the market. So there is a transportation cost, logistic cost for the farmers and
because of this cost farmers will get lesser profits because they have to bear some cost. This
will reduce the profit margins of the farmers. But under the contract farming act the sponsors
take care of the transportation, logistics etc.so the sponsor will collect the agricultural
commodities from the farm or agricultural land. So this will increase the profit margins of the
farmers also this will reduce the transportation cost and logistics cost for the farmers.

Land: The farmers under this contract farming act has no fear of loosing land. Why because the
land ownership rights are given to the farmers. So the sponsors does not have ownership or
title of the land therefore the farmers have the title or right of the land.

Market: The contract farming act creates new market this will increase the better access to
technology, crop diversification, extension services etc. and there is a direct link between the
sponsors and farmers so this creates a new market.

Financing: The contract farming act facilitate financing and cropping insurance therefore the
concern of finance and insurance is also not there for the farmers .

Some other benefits:

 By reducing the income risks.

 By making the easier access to credit
 By making high prices for the products with a special attributes.
 By providing the pre-agreement that the farmers is assured of return on his produce and
also as he has an assured buyer.
 Then according to buyers they will be worry free and also assured of a quality produce.
 Then coming to company if the contracting party is a big company so that the small and
marginal farmers are set to get benefits from the expertise of these companies. So due
to this they may get some advance payment for to start the farm, land improvement,
technological inputs, fertilizer utilization and suggestions on high yielding seeds etc.

Risks:

Political risk: In India political risk is the biggest threat to the contract farming like restriction on
stock movement by state government, stock limit, changes in mandi-taxes etc will change the
price discovery factors and whole market structure. If this will happens that either of the
contract bound to loose because of the no default of his/her. So that this will lead to the unfair
business environment .

In contract farming cost of operation and risk management and dispute of resolution will
decide success.

The contracts can deliver their products with a desired qualities so that can reduce processing
costs and also fulfill the consumer demand. But sometimes the use of agricultural contracts
may also carry the costs. And they stop the farmers by decision making freedom because of due
to this may lead farmers to exchange the price risks in the market for unexpected contract risks.
Finally we can also observed that the contracts may allow the buyers with a better
understanding and also the better bargaining powers in the agricultural commodities that
exploit the market power and also reduces the prices that paid to farmers.

My Views:

So we have keep all these fallowing points in our mind while for developing a framework for the
contract farming act.

 Contract farming will dominates in the sugar, poultry, tobacco markets, paper, cocoa,
tea, coffee, flowers, milk, soybean, seeds and similar products world over.
 Sometimes the contracts are also more likely to be used by the large producers and for
the products with special attributes like perish-ability, and also mandatory processing
before consumption or specific parameters to deliver the special quality.
 It is also not found suitable for the general purpose crops like pulses, wheat, vegetables
and fruits etc.
 Producers may also contract mainly for to secure higher prices for to delivering the
products with a desired attributes. So this may needs a better regulatory and tax regime
which can encourages the farm extension service.
 One of the major benefit of contracts is that they often offers a higher price than the
farmers could receive in a spot markets. So that in an inflationary economy like in India
this assumption may also go wrong.
 The contracts can be designed for to greatly reducing the growers risks from the price
fluctuations and this can be also used as a hedging tool in the absence of a hedging
points.
 For increasing productivity we have to use well-designed contracts for either by cutting
the production or aslo processing costs with only secondary attention to risks.
 Then according to contract term, the contract term may also allows the buyers to
impose the lower prices on producers under the some market and the quality conditions
and some example like the lower prices if the oil content is low or the fiber length is less
and moisture is high.
 So the contracts can enhance the productivity and also response to consumer demand.
 It is also very important to identify the contract terms that can extend the bargaining
power to farmers without reducing efficiency.
 Finally we have to study the future markets price discovery and their relevance in spot
market and that should understand the price discovery mechanism.
So for to propose the contract farming act we must be considered with an open mind . So that
the farmers will only benefit so if the buyers find that the contract farming act is useful for
them. Then the contract farming act must give the comfort to the buyers so that they are
encouraged to come forward of the contract farming arrangement.

Thank you…