Themes > Current Issues
15.05.2007
Is Contract Farming Really the Solution for Indian Agriculture?
Jayati
Ghosh
Contract
farming is increasingly being presented as a solution for the problems
of Indian agriculture, by major international donor agencies, multinational
companies and even the government. It is argued that private sector participation
will be promoted through contract farming and land leasing arrangements
will allow accelerated technology transfer, capital inflow and assured
markets for crop production, especially of oilseeds, cotton and horticultural
crops.
The UPA government’s Approach Paper to the Eleventh Plan gave priority to the development of contract farming. Now, a Working Group set up by the National Development Council, under the leadership of then Punjab Chief Minister Amarinder Singh, has also made a set of proposals to promote contract farming. In addition to suggesting greater liberalisation of laws and rules for crop contracts, it has proposed tax rebates for food processing, duty-free imports of machinery and equipment, exemption of market fees, etc., and liberalised imports of seed varieties for contract farming programmes.
Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the cultivator to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer, typically a large company.
According to the contract, the farmer is required to plant the contractor’s crop on his land, and to harvest and deliver to the contractor a certain amount of produce, based upon anticipated yield and contracted acreage. This could be at a pre-agreed price, but need not always be so. The typical contract is one in which the contractor supplies all the material inputs and technical advice required for cultivation, while the farmer supplies land and labour.
This system has old historical resonances, such as the infamous contracts enforced by indigo planters in eastern India during the early colonial period. But the more recent pattern of contract farming has been developed especially in the United States, where corporate penetration of agriculture is probably the most advanced. Agricultural trade globally is dominated by transnational corporations, like Cargill, Archer Daniels Midland and Monsanto, which are increasingly involved at each stage of the agriculture system. These corporations achieve domination over the market through a combination of horizontal and vertical integration.
This has increased the margins for the procuring and processing firms while at the same time reducing farm incomes and increasing the prices for the consumers. This explains the rising spread between retail prices and the prices received by farmers and livestock breeders, which has been so marked in the US over the past two decades. It is not generally known that US farmers have not really gained from the continuing government subsidies to agriculture - instead large agribusinesses have made huge and increased profits.
US farmers are financially and politically much stronger than Indian cultivators, many of whom are already operating at the margin of subsistence. So it is important to be fully aware of the implications and the need for adequate regulation of contracts.
The recent spate of contract farming in India effectively began with the entry of Pepsi Foods Ltd (PepsiCo) in 1989 by installing a tomato processing plant in Hoshiarpur, Punjab. PepsiCo followed a method whereby the cultivator plants the company’s crops on his land, and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management.
Subsequently PepsiCo and other companies have used similar methods for the cultivation of food grains (Basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from other vegetable crops such as potato. Until recently, this model of contract farming was considered a success in terms of diversifying cultivation in Punjab and improving the incomes of farmers.
The Punjab government has argued that contract farming is the best means of crop diversification, in a region where there is a real question of ecological survival and sustaining natural resources like water and soil in a reasonably healthy state. However, since contract farming is based on private corporate interests that are inherently profit-driven, there is no reason why these should coincide with the ecological requirements of the region.
Indeed, much of the recent corporate interest in Punjab agriculture has been in basmati farming, which is one of the great water-guzzlers. Crop diversification can be more effectively encouraged through a system of changing the relative prices of crops accompanied by a supportive system of public agricultural extension services.
Farmers in Punjab have become increasingly resentful of a system that has put them under the total control of corporations, which will decide not only the crops grown but also the procurement price. The growing incidents of the pre-determined prices being reduced on the pretext of inferior quality of the grain or crop, have added to such resentment. The issue has became so critical, that several times in recent years, the state government agency that had designed the contract farming programme in the first place (Punjab Agro Foodgrains Corporation) has been forced to step in and buy basmati rice that was being rejected by the contracting companies.
Contract farming in Punjab has certainly led to more employment opportunities for some labour, since the labour intensity of most vegetable crops, except potato, is much higher than for traditional crops like wheat or paddy. However, wage levels have been pushed to subsistence levels by increased competition for work through migration. Also, male labour is being displaced by mechanisation while lower-paid women and children are increasingly employed for the more labour-intensive activities. The problem of finding alternative employment for displaced cultivators has become a serious concern.
The Punjab experience is generally considered to be among the more successful in India thus far, but even this shows that contract farming holds numerous problems for agriculture in developing countries like India. It tends to displace labour quite substantially; marginalises the direct cultivators who lose control over the production process and often even over their land; encourages more capital-intensive and often less sustainable patterns of cultivation; can result in greater insecurity and lower incomes for farmers because of use of quality measures to lower the effective output price being paid by contractors; can even deny farmers the benefits of higher prices which could be instead absorbed by corporate contractors with local monopsonistic power; propagates monoculture which reduces food security and the possibility of livelihood diversification through livestock; relies excessively on the use of lower paid women workers and child labour; and increases and accelerates the process of casualisation of labour.
Given these evident problems, why is contract farming still being promoted so assiduously? This is really because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis. What cultivators in rural India need most of all today is the following combination: a basic price support mechanism that ensures that costs are covered; efficient extension services that provide information about possible crops, new inputs and their implications and new agricultural practices relevant for the particular area; and the availability of reliable and assured credit at reasonable rates of interest.
There is no reason why this combination cannot be delivered by the public sector and by healthy and efficiently functioning marketing co-operatives. But the last decade has seen a collapse of agricultural extension services and the provision of agricultural credit, across rural India. The Minimum Support Price system is also being run down. And co-operatives have been shackled by over-regulation, bureaucratic control and political interference, so that they have also mostly not shown the desired results. However, private corporate firms will not necessarily deliver these requirements either, since their interest would be to maximise profits in the short-term rather than ensure the long-term sustainability of cultivation.
Of course, not all contract farming need be bad for farmers – in the best case scenario it can add to and diversify farmers’ incomes while creating sustainable cultivation practices. However, to promote this more desirable type requires active state involvement. If contract framing is to improve the condition of cultivators rather than intensify the ongoing agrarian crisis, it is important to have a system of state regulation, intermediation and monitoring of contract farming practices to ensure the interests of farmers.
The UPA government’s Approach Paper to the Eleventh Plan gave priority to the development of contract farming. Now, a Working Group set up by the National Development Council, under the leadership of then Punjab Chief Minister Amarinder Singh, has also made a set of proposals to promote contract farming. In addition to suggesting greater liberalisation of laws and rules for crop contracts, it has proposed tax rebates for food processing, duty-free imports of machinery and equipment, exemption of market fees, etc., and liberalised imports of seed varieties for contract farming programmes.
Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the cultivator to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer, typically a large company.
According to the contract, the farmer is required to plant the contractor’s crop on his land, and to harvest and deliver to the contractor a certain amount of produce, based upon anticipated yield and contracted acreage. This could be at a pre-agreed price, but need not always be so. The typical contract is one in which the contractor supplies all the material inputs and technical advice required for cultivation, while the farmer supplies land and labour.
This system has old historical resonances, such as the infamous contracts enforced by indigo planters in eastern India during the early colonial period. But the more recent pattern of contract farming has been developed especially in the United States, where corporate penetration of agriculture is probably the most advanced. Agricultural trade globally is dominated by transnational corporations, like Cargill, Archer Daniels Midland and Monsanto, which are increasingly involved at each stage of the agriculture system. These corporations achieve domination over the market through a combination of horizontal and vertical integration.
This has increased the margins for the procuring and processing firms while at the same time reducing farm incomes and increasing the prices for the consumers. This explains the rising spread between retail prices and the prices received by farmers and livestock breeders, which has been so marked in the US over the past two decades. It is not generally known that US farmers have not really gained from the continuing government subsidies to agriculture - instead large agribusinesses have made huge and increased profits.
US farmers are financially and politically much stronger than Indian cultivators, many of whom are already operating at the margin of subsistence. So it is important to be fully aware of the implications and the need for adequate regulation of contracts.
The recent spate of contract farming in India effectively began with the entry of Pepsi Foods Ltd (PepsiCo) in 1989 by installing a tomato processing plant in Hoshiarpur, Punjab. PepsiCo followed a method whereby the cultivator plants the company’s crops on his land, and the company provides selected inputs like seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management.
Subsequently PepsiCo and other companies have used similar methods for the cultivation of food grains (Basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from other vegetable crops such as potato. Until recently, this model of contract farming was considered a success in terms of diversifying cultivation in Punjab and improving the incomes of farmers.
The Punjab government has argued that contract farming is the best means of crop diversification, in a region where there is a real question of ecological survival and sustaining natural resources like water and soil in a reasonably healthy state. However, since contract farming is based on private corporate interests that are inherently profit-driven, there is no reason why these should coincide with the ecological requirements of the region.
Indeed, much of the recent corporate interest in Punjab agriculture has been in basmati farming, which is one of the great water-guzzlers. Crop diversification can be more effectively encouraged through a system of changing the relative prices of crops accompanied by a supportive system of public agricultural extension services.
Farmers in Punjab have become increasingly resentful of a system that has put them under the total control of corporations, which will decide not only the crops grown but also the procurement price. The growing incidents of the pre-determined prices being reduced on the pretext of inferior quality of the grain or crop, have added to such resentment. The issue has became so critical, that several times in recent years, the state government agency that had designed the contract farming programme in the first place (Punjab Agro Foodgrains Corporation) has been forced to step in and buy basmati rice that was being rejected by the contracting companies.
Contract farming in Punjab has certainly led to more employment opportunities for some labour, since the labour intensity of most vegetable crops, except potato, is much higher than for traditional crops like wheat or paddy. However, wage levels have been pushed to subsistence levels by increased competition for work through migration. Also, male labour is being displaced by mechanisation while lower-paid women and children are increasingly employed for the more labour-intensive activities. The problem of finding alternative employment for displaced cultivators has become a serious concern.
The Punjab experience is generally considered to be among the more successful in India thus far, but even this shows that contract farming holds numerous problems for agriculture in developing countries like India. It tends to displace labour quite substantially; marginalises the direct cultivators who lose control over the production process and often even over their land; encourages more capital-intensive and often less sustainable patterns of cultivation; can result in greater insecurity and lower incomes for farmers because of use of quality measures to lower the effective output price being paid by contractors; can even deny farmers the benefits of higher prices which could be instead absorbed by corporate contractors with local monopsonistic power; propagates monoculture which reduces food security and the possibility of livelihood diversification through livestock; relies excessively on the use of lower paid women workers and child labour; and increases and accelerates the process of casualisation of labour.
Given these evident problems, why is contract farming still being promoted so assiduously? This is really because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis. What cultivators in rural India need most of all today is the following combination: a basic price support mechanism that ensures that costs are covered; efficient extension services that provide information about possible crops, new inputs and their implications and new agricultural practices relevant for the particular area; and the availability of reliable and assured credit at reasonable rates of interest.
There is no reason why this combination cannot be delivered by the public sector and by healthy and efficiently functioning marketing co-operatives. But the last decade has seen a collapse of agricultural extension services and the provision of agricultural credit, across rural India. The Minimum Support Price system is also being run down. And co-operatives have been shackled by over-regulation, bureaucratic control and political interference, so that they have also mostly not shown the desired results. However, private corporate firms will not necessarily deliver these requirements either, since their interest would be to maximise profits in the short-term rather than ensure the long-term sustainability of cultivation.
Of course, not all contract farming need be bad for farmers – in the best case scenario it can add to and diversify farmers’ incomes while creating sustainable cultivation practices. However, to promote this more desirable type requires active state involvement. If contract framing is to improve the condition of cultivators rather than intensify the ongoing agrarian crisis, it is important to have a system of state regulation, intermediation and monitoring of contract farming practices to ensure the interests of farmers.
© MACROSCAN 2007