Model Contract Farming Act, 2018

In the last week of December, 2017, centre has come out with draft Model Contract Farming Act, 2018. Currently, ministry of agriculture has uploaded this draft on its website and invited comments from various stakeholders including contract farming / value chain promoters, farmers producer organizations and farmers.

What is Contract Farming?

Contract farming is a system in which companies enter into a contract with farmers to purchase a specific quantity of agricultural commodities at a pre-agreed price and quality. The rationale of contract farming was envisaged to ensure mutual benefits to the farmers as well as the companies on price risk and supply risk respectively. Under such type of farming, the farmers are given seeds, fertilizers, technical knowhow etc. so as to get a desired quality of agricultural produce. In turn it helps farmers in getting better price for their produce especially perishable commodities, avoid price volatility problems as well as reduce post-harvest losses. In turn the companies will get the desired quality of produce and reduces the risk of non-availability of raw material.

Thus, there can be at least two models of contract farming.

  • The company just provides the input and takes the produce according to the clauses of the agreement.
  • The company besides providing input gets more involved in the agricultural practices by giving schedules of planting, monitoring the growth of crops etc.

What are main issues / problems in contract farming?

The key issues faced in contract farming currently are as follows:

No homogeneity in act

At present, there is no uniform law in India for contract farming. Since agriculture is a state subject, each state has its own provisions regarding agricultural produce and conditions with respect to contract farming. Further, specific provisions with regard to contract farming have been enshrined only by few states. There has been a need to streamline the provisions and make them uniform across the States.

Small & marginal farmers are left out

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

Exploitation

Small farmers being poor and semi-literate have little bargaining power vis-à-vis big corporations and many a times, they have little chance to get fair price of their produce. Sometimes, the companies set very high standards of quality required which often farmers are not able to meet. This forces them to sell the produce at low price.

Monoculture

Sometimes the farmers are forced to produce a single type of crop year after year which leads to monoculture and hence depletion of the land.

Breach of contract

Many a times, farmer or company go back on the contract due to volatility in the prices. Generally, it is the farmer who suffers.

Salient Features of the Model Contract Farming Act

The Key features of the model law are as follows:

  • It ensures buying of entire pre-agreed quantity of contract farming produce as per contract in its framework for contract agreement.
  • It guides the contracting parties to fix pre-agreed price
  • It makes provisions to decide sale-purchase price in case of violent movement (upswing / downswing) of market price vis-à-vis pre-agreed price as a win-win framework
  • It provides for a contract farming facilitation group at village level to take quick and need based decision.
  • It provides to keep contract farming outside the ambit of APMC act
  • It creates a dispute settlement mechanism at the lowest possible level for quick disposal of disputes.
  • It sets up Contract Farming (Development and Promotion) Authority.
  • The produce will be insured under the existing agriculture insurance schemes.
  • The modal act also make provisions for making farmer producer organisations(FPOs) under which a sort of cooperatives of small and marginal farmers will be formed.
What are specific provisions for Contract Agreement?

The model act lays down a framework for determining the pre-agreed quantity, quality and price of farm produce between farmers and sponsoring companies. The Act also provides that inputs required for farming, technology and pre- and post-harvest infrastructure and services has to be provided by the sponsor of the contract, according to mutually agreed terms.  If any of the either party tries to breach the contract then the act provides for damages. It also mentioned that companies cannot call for the transfer of ownership of the land of the farmer to itself in any circumstances.

What is various bodies to be set up under this law?

All contract farming agreements in respective States should be registered with a State-level agency called Contract Farming (Development & Promotion) Authority. Besides there will be local-level recording committees to register these contracts and implement them effectively. The Act allows the authority to collect a fee from the sponsor of up to 0.3 per cent ad valorem on the contracted produce. Dispute relating to breach of contract, it will be settled at the local level.

What is the significance of the Model Act?

  • The act clearly make adequate provisions like penalty etc. to secure farmers from the risk of price volatility and any post harvest market unpredictability on the sponsor companies.
  • India has more than 70% of farmers as either with small or marginal land holdings due to which the companies were reluctant to approach them because of lack of economies of scale. Now, the making of FPOs will consolidate the small farmers and offset the disadvantages faced by them in terms of less negotiation capacity vis-à-vis companies.
  • Contract farming arrangements will benefit growers with access to better inputs, scientific practices and credit facilities that may be provided by the buyer, while their produce will be insured under existing agriculture insurance schemes.
  • Keeping contract farming out of APMC will incentivise companies to buy directly from farmers as it will free them up from the hassles of APMC regulations and also help save them 5-10 percent market fees paid to the APMCs.
  • Once the process will get streamline it has the potential to link Indian farmers to global supply chains especially horticulture sector.

What are key challenges?

This will be a model act from centre and effective laws based on this model act will be enacted by the states. The provision in the act to enable companies to purchase directly from the farmer will require an amendment in state’s APMC acts. So, it will be a challenge that the states do all this. In fact, APMC act is also pending to be implemented in many states. Further, farmers might be reluctant to sell the produce at the contracted price if prices rise sharply compared to the contracted price. Thirdly, it is a challenging task to ensure that the companies will get the quality standards they expect. Lastly, formulating of FPOs was also there in earlier model Act, however little or no progress is witnessed on this front because of the apprehensions faced in making cooperatives with other farmers.

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