The
agricultural sector has been slow in assimilating the process of
liberalisation. Domestic reforms in the sector are limping and the
resultant distress signals are there for all to see even in relatively
promising areas. The news of farmers’ distress in regions like Punjab,
Haryana, Andhra Pradesh, Karnataka and Maharashtra has become sore
issues for policy makers. If we look into the causes of distress
that have been identified by the experts in the country, they fall
into two broad groups: Causes that are beyond the farmers’ control
and those that could be averted through proper policy interventions.
The major problems faced by farmers require intervention at four
important points: Price assurance, assurance about product marketability,
elimination of intermediaries in the market (product factor and
land markets) and timely availability of production credit. Supply
of these four factors could make the farmers’ lives much easier
and prepare them to face the uncertainties due to climatic factors,
imperfect markets, fluctuating prices and the presence of a large
number of intermediaries in different markets.
A
Promising Alternative
Contract farming is a promising trend, which has emerged only
recently, showing promise of adaptability to Indian conditions with
scope for maximum benefit to farmers. Contract farming is being
practised in Punjab, Haryana, Madhya Pradesh, Maharashtra, Andhra
Pradesh and Karnataka with fairly good results. Essentially, it
eliminates market intermediaries, assures a pre-determined price
and provides technological know-how and the required investment.
Various types of contracts have entered the field like purchase
contracts, procurement contracts, production-cum- purchase contracts
and finally, full contracts. The Purchase Contract embodies an assured
purchase from a specific supplier irrespective of whether the supplier
grows the commodity or not. In other words, this is another variant
of future markets. The Procurement Contract involves the purchase
of a commodity by providing the supplier with technical know-how
and the production process details. The price and quality of the
products to be purchased in future and the time of harvest are pre-decided,
well before the purchase date. There are Partial Production-cum-
Purchase Contracts in which risk sharing between the purchaser and
the producer is the major component. Finally, the Full Contract
provides the purchaser with an opportunity to monitor as well as
participate in the production process, where the supplier produces
the commodity under strict and day-to-day monitoring by the purchaser.
Nevertheless these categories are not exhaustive and there can be
variations in the terms of a contract, depending upon the commodity
in question, the region, as well as the farmers’ perception of risk
and price expectations.
Contract
farming, like any other intervening institution, has its positive
as well as negative aspects, some of which are recorded in Box-1.
As regards the positive aspects, one need not provide any explanation,
as these are obvious whereas, the negative aspects need to be dealt
with while drawing the contract between purchaser and seller. Further,
how to reduce aberrations at the point of conflict would depend
upon the experience of the parties. Many of these problems could
be resolved, in due course, through mutual dialogue.
Potential
Problems for Growers
Producers usually face a number of difficulties during production
and delivery of contracted commodities. These need to be understood
before an internalisation process can be taken up. They face the
manipulation of inspection standards and stringent quality norms,
the probability of low prices in case of excess production and at
times, poor technical support. These can be guarded against while
drawing up the contract, however, the chain of contracts (through
various sub-contracts or contracting intermediaries) linking different
levels of producers is difficult to control. Generally, a contract
system can act as a beneficial contract system only if a number
of producers are brought together to produce a particular commodity
under a formal or informal producers’ organisation. There have been
quite a few success stories across the country and lessons could
be drawn from these. Contract farming thus offers a large number
of advantages to producers, of which assured prices and elimination
of market imperfections are the major ones. Transaction costs are
minimised and easy credit facilities, linked to production efficiency,
can be generated. Similarly, technology associated transaction costs
are eliminated and the system enhances the risk- bearing capacity
of the farmers.
Problem
of Design
While designing contract- farming programmes, a large number
of questions crop up and these need to be handled with careful reference
to the situation in which they arise. First of all, the quantity
and quality of the product need to be decided between purchaser
and producer. This also has a bearing on the type of inputs, the
suppliers of inputs, the technology to be provided by the purchaser
or generated by the producer. All these questions need to be addressed
while designing the contract. Providing production credit is an
essential component of the contract, so also the fixation of price
(which may be associated with the quality of the product) and production
management. All these issues need to be attended to at the time
of drawing up the contract. However, one needs to underline the
fact that a contract must satisfy the producer as well as the purchaser
and should be drawn up keeping in view the commodity transacted.
It will not be difficult to make a generalised format for farm contracts,
keeping in view the positive and negative experiences faced during
different experiments.
| Positive
and Negative Aspects |
|
Positive
Aspects
|
Negative
Aspects
|
| Advance
price fixation or assured prices |
Over-
exploitation of family labour |
| Technical
know-how/ technology transfer |
Tendency
towards monoculture |
| Availability
of needed investment |
Food
dependency on market increases |
| Vertical
integration |
Asymmetry
in information between contractor and contractee |
| Credit
and other input facilities |
Monopoly in input market and monopsony in output market |
| Economies
of scale |
Possible
litigation between the parties |
| Enhancement
of human capital |
Ability
to withstand competition due to scale and technology |
Issues
for Policy-makers
If contract farming has to be successful in India, then the
government has to be prepared to manoeuvre on the policy front.
The first issue before the policy makers is the need to ensure legal
sanctity to the process of contracting and the institution of farm
contracts. The present legal framework and contract laws do not
completely protect the interest of the farmer and therefore one
needs to look into the legal aspect more closely. In order to achieve
better prices as well as quality, the contracting parties should
keep in view the international trade in the products involved and
the best place among the world markets. This will ultimately benefit
the producer as well as the purchaser and thus enable the small
farmer to adapt to crops, which are undergoing rapid technological
changes. It is possible to establish a two-tier regulatory authority
for contract farming, which can be quasi- judicial in nature. In
addition to taking these institutional steps, it is necessary to
encourage contract farming by building up proper safety-net programmes
and technical support from the state agricultural departments and
universities. A new era may begin in the agricultural sector if
this institution works to the benefit of the farmers.
The
author is the Head, Agricultural Progress and Rural Transformation
Unit, Institute
for Social and Economic Change, Bangalore.
