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Contract farming: Moving towards a fairer market

Contract Farming

By Vihan Rawat

Since independence, agriculture in India has transformed phenomenally. Various policy initiatives have been taken in order to institutionalize the system and wipe out the uncertainty in the market of agricultural products regarding the prices and marketing of output. One such initiative is Contract Farming.

Contract farming is a system for production and supply of agricultural/horticultural produce under forward contracts between producers/suppliers and buyers (Haque, 2000). It recently rose to prominence because of its potential benefits, providing farmers access to national and international market.

Contract farming in India: An ideal partnership

However, to harness the plethora of opportunities available and to protect the interests of both the parties, there is an urgent need to institutionalize the whole agreement.

Contract farming ventures have a very successful history in India. Many big MNC’s including TATA, Hindustan Uniliver Ltd., ICICI and Reliance are involved in successful contract farming ventures. To facilitate this, some state governments have also taken initiatives. State led contract farming in Punjab was a huge success. In this case, the Department of Agriculture and Punjab Agro Foodgrains Corporation became an intermediary between companies and farmers, thus facilitating the contracts.

Contract farming

Model Law on Contract farming is on cards | Photo Courtesy: Business Standard

Currently, contract farming is regulated as per the Model Agriculture Produce Market Committee (APMC) Act of 2003. However, to harness the plethora of opportunities available and to protect the interests of both the parties, there is an urgent need to institutionalize the whole agreement. Hence, a separate legal framework is the need of the hour. In this regard, through the Budget 2017, government aims to prepare a Model Law on contract farming and share it with the states.

Institutionalising contract farming: Making of a model law

The aforementioned model law must take care of these guiding principles which form the basis of contract farming laws in many countries and International agencies like Food and Agriculture Organization (FAO) of United Nations.

Firstly, the contract must comply with the number of essential requirements, namely, clear allocation of responsibility, clear specification of the parties involved, and proper description of the land on which production will take place. Secondly, clear documentation is necessary so as to obtain better legal enforcement of the obligations. Quality and quantity requirements must be explicitly defined in the contract.

Moreover, it should ideally prescribe a provision of independent third party appointment for quality control purposes.

Along with this, conditions regarding the price, payment, product delivery and transportation must be described in detail in order to prevent any kind of trouble. Thirdly, it is advisable that the contract specify which party is responsible for the supply of production input and agro-chemical inputs that satisfy buyer and market needs.

Fourthly, the contract should also allow provisions for prices to be negotiated in the event of unforeseen circumstances such as natural calamities, crop failure, or substantial changes in the market conditions leading to large difference in prices. Clause regarding contract termination should also be also included. It is pertinent to specify the situations in which each party is entitled to terminate the contract. This may include negligent or no performance, disobeying the contract rules, etc.

Also, an open dialogue between farmers and buyers is appreciated so as to ensure the stability of contract farming.

Finally, transparency in price determination is the key to free and fair contracts. It should clearly disclose the associated transaction costs that may affect the net amount paid to the farmer. Also, an open dialogue between farmers and buyers is appreciated so as to ensure the stability of contract farming. Dispute redressal mechanism must be clearly mentioned to settle contract disputes, whether through judicial proceedings, arbitration or meditation.

Education of farmers – key to fair play

Most farmers in rural areas are uneducated and lack both knowledge and access to information about contracts. The government can be instrumental in ensuring fair contract practices and providing services to educate the farmers about the contracts. Training should be imparted to them in basic concepts of contract laws. It is imperative to ensure that farmers are better prepared to negotiate and perform the terms of their agreement.

In order to enjoy the gains from contract farming, it is important to promote good business practices.

This needs to be done while maintaining an atmosphere of trust and respect between buyers and farmers. To quote B.C. Forbes: “The bargain that yields mutual satisfaction is the only one that is apt to be repeated”.


Featured Image Credits: Green Agro
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