Published On: October 14, 2021 at 14:27 IST
As we know that agriculture is an old tradition and it is also the main means of living for a very large population of our country India. And it is because of globalisation and liberalism that have greatly affected the poor through their influence on the agricultural sector in terms of trade, availability and cost of inputs and new investments in the agribusiness sector.
Contract Farming on the other hand is not new to India but had prevailed during the British Rule. It was cash crops like indigo, cotton, opium, tobacco and tea which was grown through this system. This was there for almost two decades but a nationwide act for Contract Farming was formed in September 2020.
Though it has grown dramatically during the last few years but has also given rise to small issues such as farmers, soil fertility, women, local markets and so on.
What is Contract Farming?
This type of farming is a system of production in which there is an agreement and company or buyer or sponsor and a farmer enters into this agreement with a motive of the production of various products of fixed quantity. The production will be on farmer’s land and he has a duty to harvest and deliver the same to the company.
For farming the inputs that are required are like land preparation, technical advice and market facilities which are all supplied by company. On the other hand, the farmer provides for land and labour to work upon. As the Contract Farming promotes participation in the domestic firms and MNCs in farming.
It also promotes new investment as an aspect of globalisation. In this contract many parties like the corporate, governmental agencies, entrepreneurs, NGO’s and other parties like the retailers, wholesalers and traders could be a partner with a farmer. This type of agreement as mostly written and a registered contract. Three main elements are necessary for a contract farming:
- Pre-agreed price
- Pre-agreed quantity
- Pre-agreed quality
Objectives of a Contract Farming
Contract Farming has brought a great change in the agricultural industry as it has some objectives. These are:
- This contract is to increase the investment in the private sector and the creation of new markets.
- It is to generate the permanent source of income for the farmer.
- By adhering to this contract, it brings price stability for the farmer as the company cannot change the price of the product after harvesting.
- This allows the entry of modern technology and regular supply.
- This also reduce migration from rural to the urban areas and generates employment.
- It is to ensure quality standards of the product and achieve the diversification in terms of size, shape and colour.
Different types of Contract Farming
As depending upon various factors i.e. product and resources of the company Contract Farming has five types. These are:
- Centralized Model
In this model the buyer’s investment ranges from minimal input to full control over all output and there is also the allocation of the farmer’s quota where the quality and quantity of the product is strictly controlled.
Here the processor is mainly used in growing and buying products like cotton, tea, coffee, rubber, tobacco, dairy and poultry from a large number of small farmers in a single project. Adding to this here the Corporate Sector provides with the inputs on credits and the Farmers provide the produce back to the Corporate. This in itself is a cycle of give and take.
- Nucleus state Model
This is a modified version of centralized model where the company sources or the buyer both form their own plantations. This model asks for the investment into the land, staff, machine and management by the buyer.
This model consists of:
- It assures the regular supply and sale of the good and also allows cost-efficient utilization of the installed system.
- This estate land can be used for the production and breeding for collection and storage point for the demonstrating purposes.
- It makes farmers specialized with the new technologies and management techniques which is further used by them for growing crops. And this is termed as “Satellite Farmers”.
- Multipartite Model
This model came up from the nuclear estate mode and it usually involves joint participation with the government and other private companies with the farmers. This model comprises of:
- It incorporates the number of institutions including the private companies and other financial institutions.
- It has different departments for the production, management, marketing and processing.
- Under this model farmers could be provided with the Equity Share Scheme.
- Informal Model
Where both the buyer and promoter are at default, this model is the vaguest, uncertain and speculative of all the contract farming models. This type of model is mostly adopted b y the individual entrepreneurs or small companies who usually enter into simple and informal production of contracts for growing crops like fruits and vegetables based upon seasons.
Crops usually doesn’t requires much inputs which are provided by the company. And those things are the fertilizers, seeds and technical advice. There id always a contractual risk but understanding independence makes it a better alternative for the corporate.
- Intermediary Model
In this type of model the buyer acts as an intermediary that can be a collector or any farmer organization who acts as an employ of the buyer and provides with the inputs, advice and technology to the farmer on behalf of the crops.
This type of model is the combination of both the central and informal models. But in this there can be a negative impact too as the company might loose control over the process of production which may quality of the product and chance of loosing the advance payment made to the farmers.
Advantages for Farmers to use Contract Farming
Advantages to the farmers are as follows:
- Access to technology
This Contract helps farmers to have access to the new technologies, strategies or techniques which are important to increase the productivity.
- Input and production service
Contract Farming provides farmers with an access to different agricultural inputs such as seeds, fertilizers and different methods of production.
- Capital Advancement
This allows the small farmers to get capital for their production which they otherwise would not have get.
- Reduce Migration
This helps to reduce the migration from rural to urban areas by strengthening the rural areas.
- New Markets
This gives the farmers the assurance to produce consistently as they have a reliable and trustful buyers.
- Risk Decreased
In case of any problem farmers get satisfaction from sharing risk to get satisfaction.
- Prefixed price of the pre decided crops
Through this contract the farmers get to know the demand of the market before sowing the seeds band they also help to get the security in advance to the prefixed price of the agreement.
Advantages for Sponsors to use Contract Farming
Advantages to the sponsors are as follows:
- Regular Supply
This allows the regular supply of the product and raw material which is according to the quality as decided by company.
- Promotion of farm inputs
The buyer provides with the inputs like fertilizers, seeds etc as most of the farmers remain unknown with different inputs of agriculture.
The sponsor has to only provide the farmer with all the inputs and the rest is to be done or managed by the farmers. Hence it is cost efficient for the sponsor as he doesn’t need to pay for the labour and production cost.
- Long term supplier base
This helps the corporate to have the dissatisfaction in the growth of production and this also allows to have a long-term supplier base.
- Overcoming land constraints
This allows the company to use a large land without owning it for the growing purpose on a contract.
Disadvantages for Farmers
With all the advantages that come up with the Contract Farming there are also disadvantages relating to this type of farming. These are:
- Great Risk
There can be the higher return risk if there emerges the sudden changes in the term of the effect of fertilization, pest or lack of care which can result in lower yield and the farmer will be unable completes the agreement by giving the crop.
- Loan Repayment
There is a certain possibility that the farmer would not be able to pay back the loan which he took to meet the needs of production and quality and die with those debts.
- Loss of Employment
The installation of the new technologies for the better production could result in the loss of employment for many as most of the work then will be depended upon various machines.
- Over Dependence
If once the farmer depends upon one company for the selling and production of crops he may then have to depend on that company for many many more years.
- No selling of Crops
The farmer will not be able to sell the crop if it doesn’t match the particular size and quality which was agreed upon at the time of making the contract.
Farmers could be exploited by the staff of sponsors who are responsible for the supply of inputs and buying of crops, ones who take advantage to their position and indulge in the corrupt activities.
Disadvantages for Sponsors
- Farmers against contract
The farmers sometimes sell the products outside the terms of the contract without letting the sponsor know about it which can reduce the quantity fixed for processing the crop at the time of agreement.
- Farmer’s discontent
Ill-mannered management, lack of proper consultation and incompetent extension services may lead to the disgruntlement of farmers and can affect the relationship between sponsors and farmers.
- Social and Cultural Constraints
Going away the conventional manner of farming may create the regional issues for the farmers that may affect their ability to produce the crop upto the standard quality or sometimes breach of contract.
- Governmental reforms
It is sometimes because of the farmer’s favoured governmental reforms that the sponsors may have to bear the cost in case of the farmer’s default.
Challenges Faced by the Indian Women
It is because of the Privatization that transferred the major responsibility on the shoulders of female and created their mark in agriculture. Women from all over the world who have from the very starting have always lived behind the blinds now after privatization and globalisation have got chance to experience the new opportunities in agriculture to form an open window. But along with this many women of India have to face some serious challenges:
- As in rural areas illiteracy can create a big issue for the females because there are many women there who could not even write their names who may get entangled in the provisions of the contract.
- Women didn’t have a chance to be owner because of the inheritance system in a patriarchal kind of society.
- The majority part of the women population does not possess the land. If they do so some aren’t aware and act only as owners and others made it just to enjoy the benefits given by governmental policies.
- Women at this point might have to face many social constraints like the gender, humiliation, discrimination and because of this big companies take advantage as they pay a lesser price than as agreed upon by the contract.
- Women might not be able to repay the expenses and become the victim of exploitation as because of their less experience and less credits.
- Women also on the other hand perform un-mechanized agricultural work which adds a burden on them.
- As women earn less than the male members , they are excluded from making the decision making process.
Analysis with Women of Other Countries
It is as according to the 2017 report of the females in USA that they have started dominating the agricultural sector. They constituted 36% of the total agricultural population with 56% of the farm having at least one women producer and 38% have a primary female producer. But the thing is that even after the growth of females in agricultural sector they earn 40% less than as compared to the male farmers. Hence is considered to be the most unequal profession in USA.
Although the female farmers in USA have a better recognition than the female farmers in India but then also they have to face many barriers like the gender discrimination in taking inputs on credits, issuing of farm loans and also pressure from big male farmers to stick to the growth of a single crop only. There were many organizations like USDA and other social welfare programs that took an initiative to solve the problems of women.
Similarly in North Africa the total agriculture involvement of women in the agriculture population has constantly increased from about 30% in 1980 to 43% in 2020.
- V.M.T. Spinning Company Ltd Vs State of H.P. And Ors.[i]
The Secretary of the Committee shall be the authority to grant registration certificate with the prior approval of the Committee
It was held that every person who in respect of notified agricultural produce, desires to operate in the market area as a trader, commission agent, weigh man, hamal, surveyor, ware houseman, contract farming sponsor, owner or occupier of the processing factory or any other market functionary shall apply to the Secretary of the Committee for registration or renewal of registration in such manner and within such period as maybe prescribed.
- Vijay Industries Vs The State of Karnataka[ii]
The State saw the Necessity to Introduce Different Rates for Different Market Players
It was held that the third proviso categorically and specifically deals with the rate of market fee payable by a buyer in a spot exchange or by the licence under a direct purchase licence and the contract forming sponsors buying from a contract farming producers.
- Vibha Agrotech Limited Vs Assessee[iii]
The method of Contract Farming does not take away the Character of the Basic Operations Carried out by the Assessee Company
It was held that only for the reason that the Basic Seeds are sown in the leasehold land and the manpower required are arranged through contract farming, it does not mean that the operations carried out by the assesse company are not agricultural operations. As a matter of fact, it is to be seen that the assesse company has carried out basic as well as secondary agricultural operations. Therefore, without any fear of contradiction, it is possible for us to hold that entire such income of the assesse is agricultural in nature which is to be excluded from the nature of total income.
- Harminder Singh Arora Vs Union of India[iv]
Negotiations with the Contractor
It was held that as pasteurization is concerned, milk has to be repasteurized as delivery timings of units in the station are different. Hence Military Farms Contracts were concluded through a panel of officers which may hold negotiations with the contractor where the reasonable and recommended and necessary rates to the higher authorities. They are however requested to inimate the period of supply for which they desire to tender their rated to enable the undersigned to send them the required tender form.
- Excise Commissioner Uttar Pradesh Vs Prem Jeet Singh Gujral And Ors.[v]
Two Important Considerations are to be held in mind while Contract Farming
It was held that care should be taken to exclude bids obviously in excess of fair- market value of the licence or farm or which are the result of speculation and this precaution is particularly necessary in farming contracts. Secondly, it is necessary to guard against the acceptance of bids which may have the effects of constituting an ever or cover monopoly and against the acceptance as licence holders of undesirable person or persons of doubtful solvency.
Hence Contract Farming is the typical way if farming which is held with farmers to get introduced to the modern technology, inputs, technical advice, management techniques and connectivity to the various markets. It got nationwide importance in September 2020 and now will act as an elevator to tackle with the problems faced in farming and move upwards to growth, development and recognition.
Introduction of this contract will affect the small margin farmers and will benefit them in a larger ways. But what should be taken to considerations that the involvement of corporations should be regulated and supervised by the government so that the entire privatisation of agriculture can be controlled.
Edited by: Aashima Kakkar, Associate Editor, Law Insider
- Impact of Contract farming in India on Women and Children – Research Gate
- Status of contract farming in India – Blogipleaders
[i] V.M.T. Spinning Company Ltd Vs State of H.P. And Ors. on 19 November, 2007 [2008(1) ShimLC 145]
[ii] Vijay Industries Vs The State of Karnataka on 25 April, 2017 [W.P. No. 109226/ 2015]
[iii] Vibha Agrotech Limited Vs Assessee on 7 March, 2014 [ITA No. 1799/Hyd/2012]
[iv] Harminder Singh Arora Vs Union of India on 9 May, 1986 [1990 SCALE (1) 145]
[v] Excise Commissioner Uttar Pradesh Vs Prem Jeet Singh Gujral And Ors. on 10 August, 1983 [AIR 1983 SC 1056]