Contract Farming:- A Comparative Analysis in the US, EU, and India

Last Updated at: Dec 16, 2020
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Contract Farming

Synopsis

  • Contract Farming – In Nutshell

  • The essence of Contract Farming

  • Comparative Study of Contract Farmer- US, EU, India

Contract Farming – In Nutshell

Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a pre-harvest agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations).  The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement. 

 Typically, the farmer agrees to provide agreed quantities of a specific agricultural product. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser. In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation, and the provision of technical advice.

Contract farming is a well-known mechanism to coordinate agricultural production and trade, and its use has increased noticeably in recent years. The growing interest in contract farming is associated with recent transformations in food and agricultural systems which make it increasingly difficult to meet consumer demands under more traditional, open market-based procurement strategies.

Contract farming may take several forms depending on many factors, from the perspective of the global environment and the particular conditions of the transaction involved. There are significant differences between the world’s regions and countries, and their level of economic development, which influences the structure of the agricultural sector and markets.

Contract Farming is intended to provide farmers with the assured sale of their crops and agro-business commercial firms with a steady supply of agricultural output required by the market. In its essence, Contract Farming is a commitment of a landowner or a farmer to provide to a known buyer a specified agricultural commodity, at a specified time, price and quantity. Usually, the buyer (the agro-business firm) will control the production process by adding additional provisions, such as technical support and credit.
Consequently, Contract Farming enables poor farmers to transform from outdated cultivation and management practices to market-oriented commercial production, resulting in generating employment and growing income

Comparative Study of Contract Farming: US EU and India

  • Contract Farming in India- Legislative History:

Model APMC Act, 2003


Under the Model APMC Act, 2003 also, contract farming was permitted and the Agricultural Produce Marketing Committees (APMCs) were given the responsibility to record the contracts. They were also mandated to resolve the disputes in such contracts. However, market fees and other levies/charges were payable to APMCs.

The State /UT Agricultural Produce Contract Farming (Promotion and Facilitation) Act, 2018: MODEL ACT:

Under the draft Model Act, the producer can get support from the buyer for improving production through inputs (such as technology, pre-harvest, and post-harvest infrastructure) as per the agreement.  However, the buyer cannot raise a permanent structure on the producer’s land.  Rights or title ownership of the producer’s land cannot be transferred to the buyer.

Over the years, expert bodies have identified issues related to the implementation of contract farming.  These include (i) role of APMCs which are designated as an authority for registration and dispute settlement in most states, (ii) provisions of stockholding limits on produce under contract farming, and (iii) poor publicity of contract farming among the farmers about its benefits.

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020:

  • The Farmers’ Produce Trade and Commerce (Promotion and Facilitation) Ordinance, 2020 allows intra-state and inter-state trade of farmers’ produce beyond the physical premises of APMC markets.  State governments are prohibited from levying any market fee, cess, or levy outside APMC areas.
  • The Farmers Agreement Ordinance creates a framework for contract farming through an agreement between a farmer and a buyer before the production or rearing of any farm produces.  It provides for a three-level dispute settlement mechanism: the conciliation board, Sub-Divisional Magistrate and Appellate Authority.
  • The Essential Commodities (Amendment) Ordinance, 2020 allows the central government to regulate the supply of certain food items only under extraordinary circumstances (such as war and famine).  Stock limits may be imposed on agricultural produce only if there is a steep price rise. 

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The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020

Farming agreement

The Ordinance provides for a farming agreement between a farmer and a buyer before the production or rearing of any farm produce.  The minimum period of an agreement will be one crop season or one production cycle of livestock.  The maximum period is five years unless the production cycle is more than five years.

Pricing of farming produces

The price of farming produce should be mentioned in the agreement.  For prices subject to variation, a guaranteed price for the product and a clear reference for any additional amount above the guaranteed price must be specified in the agreement.  Further, the process of price determination must be mentioned in the agreement.

Dispute Settlement

A farming agreement must provide for a conciliation board as well as a conciliation process for the settlement of disputes. The Board should have a fair and balanced representation of parties to the agreement. At first, all disputes must be referred to the board for resolution. If the dispute remains unresolved by the Board after thirty days, parties may approach the Sub-divisional Magistrate for resolution.

Parties will have a right to appeal to an Appellate Authority (presided by collector or additional collector) against decisions of the Magistrate.  Both the Magistrate and Appellate Authority will be required to dispose of a dispute within thirty days from the receipt of the application.  The Magistrate or the Appellate Authority may impose certain penalties on the party contravening the agreement.  However, no action can be taken against the agricultural land of farmers for the recovery of any dues.

TRENDS

The Indian farming market was worth INR 18,367 Billion in 2019. The farming sector constitutes one of the most important areas of the Indian economy. India currently represents the world’s largest producers of many fresh fruits and vegetables, major spices, selected fibrous crops such as jute, several staples such as millets, and castor oil seed. India is also the second-largest producer of wheat and rice, the world’s major food staples. Currently, India ranks within the world’s five largest producers of over 80% of agricultural items, including many cash crops such as coffee and cotton.

Crop yields in India have also increased significantly over the last several decades. Factors such as farm mechanization, increasing usage of fertilizers, improving irrigation techniques, better seeds and easy availability of credit can regard as the major drivers of the Indian farming industry. Looking forward, IMARC Group expects the Indian farming market to exhibit strong growth during 2020-2025.

According to the contract, the farmer requires to plant the contractor’s crop on his land and to harvest and deliver to the contractor a quantum of produce, upon anticipation yield and contract acreage. This could be at a pre-agreed price. Towards these ends, the contractor supplies the farmer with selected inputs, including the required technical advice. Thus, the contractor supplies all the inputs required for cultivation, while the farmer supplies land and labour. However, the terms and nature of the contract differ according to variations in the nature of crops to be grown, agencies, farmers, and technologies and the context in which they are practised.
Contract Farming is fast evolving as a mechanism of alternative marketing in the country. Punjab, Karnataka, Maharashtra, Madhya Pradesh, and Tamil Nadu have been the front runners in this regard. The experience of contract farming in India shows that there is a considerable saving in the consumption of inputs due to the introduction of improved technology and better extension services. Contract farming has usually allowed the farmers some form of credit to finance the use of production inputs

 For example, contract farming in wheat has practice in Madhya Pradesh by Hindustan Lever Ltd (HLL), Rallis, and ICICI. Under the system, Rallis supplies agri-inputs and know-how, and ICICI finances (farm credit) the farmers. HLL, the processing company, which requires the farm produce as raw material for its food processing industry, provides the buyback arrangement for the farm output.

In this arrangement, farmers benefit through the assured market for their produce in addition to timely, adequate, and quality input supply including free technical know-how; HLL benefits through supply-chain efficiency; while Rallis and ICICI benefit through assured clientele for their products and services. The consortium is also planning to rope in other specialist partners including insurance, equipment, and storage companies.
PERIOD TRENDS IN CONTRACT FARMING
The 1850s – 1860s Cotton exported to Britain after the disruption of US supplies.
1860s  Plantations for tea and coffee in the hills of the Northeast and the South, indigo and poppy cultivation in plains.
1910s Distress and unrest among indentured contract farmers. 
1930s 1948-50 Virginia tobacco contract farming in Andhra Pradesh Sugar co-operatives emerge in Maharashtra and milk cooperatives in Gujarat incorporating many elements of contract farming.
1950s  The emergence of seed business based on contract farming.
1980s  Poplar introduction through contract farming; also tomato contract farming.
1990s  Tomato was introduced in Punjab through contract farming. Numerous, mostly abortive, efforts at introducing contract farming in Horticulture
2000s.. Variants of contract farming introduced for wheat in MP and crop diversification in Punjab; the emergence of specialist contract farming firms
2003-04 Contract farming accepted in the new policy framework for agriculture reforms

TABLE: TRENDS IN CONTRACT FARMING IN INDIA

UNITED STATES:

Contracts widely use in the production and sale of U.S agricultural commodities. In 2017, 49 per cent of the value of livestock production that raises under contract agreements. Usually between farmers and processors—while contracts governed 21 per cent of the value of crop production. The share of crops produced under contract has declined in recent years as farmers turned to other methods for managing risks.

Contracts provide farmers with one tool for managing income risks; others include diversification, hedging through futures markets, and investing in storage. Farmers also use contracts to obtain compensation for higher product quality, create specific outlets for products, and assure for debt financing. Moreover, processors use contracts to maintain timely flows of products with desired attributes and greater control over the characteristics and consistency of the products they acquire.
Only 8.1% of U.S. farms use contracts. Small family farms—those with less than $350,000 in sales—accounted for 88.8 per cent of all U.S. farms in 2017 and 54.3 per cent of farms with contracts. Large-scale family farms, with at least $1 million in sales, amounted to 2.8% of U.S. farms and 14.6% of farms with contracts.

Several states in the United States of America have enacted specific laws regulating contract farming. Further, as an example, in 1990, Minnesota became the first State to enact legislation specifically and directly governing agricultural production contracts. Additionally, the law includes requirements on the language and form of the contract, contract formation, and review, and dispute resolution, among other topics.

In Morocco, the act covering contract farming provides a list of mandatory clauses that must be included in any contract farming agreement. These include, for example, price and payment, standards concerning minimum quality of the goods, delivery rules, the obligation of each party to keep records, and the nature of the assistance that contractors should provide to the producers.

European Union

Around half the EU’s land is farmed. This makes farming very important indeed for our natural environment. Farming has contributed over the centuries to creating and maintaining a variety of valuable semi-natural habitats. Further, today, these shape the many landscapes throughout the EU and are home to a rich variety of wildlife. Farming and nature influence each other. 

The Common Agricultural Policy is the link between an increasingly urbanise world and an increasingly strategic farming sector. Launched in 1962, the Common Agricultural Policy (CAP) is a partnership between agriculture and society, between Europe and its farmers. Its main aims are: To improve agricultural productivity so that consumers have a stable supply of affordable food. To ensure that EU farmers can make a reasonable living. This is why a new partnership between Europe and farmers based on a Common Agricultural Policy renewed as from 2013.

With the successive reforms of the CAP, our farming methods are becoming more environmentally-friendly. Today’s farmers, therefore, have two roles – producing our food and managing the countryside. In the second of these, they provide public goods. The whole of society – present and future – benefits from the countryside that carefully manages and well looked after. Further, it is only fair that farmers will reward by the CAP.

The EU has 500 million consumers and they all need a reliable supply of healthy and nutritious food at an affordable price. Moreover, the economic environment is set to remain uncertain and unpredictable. Moreover, there are many current and future challenges including global competition, economic and financial crises, climate change, and rising costs of inputs such as fuel and fertiliser. To meet these challenges the EU has created and implemented the common agricultural policy.

Its purpose is to set the conditions allowing farmers to fulfil their multiple functions in society – the first of which is to produce food. Thanks to the CAP, Europe’s citizens enjoy food security. We can be sure that our farmers produce the food we need. They provide an impressive variety of abundant, affordable, safe, and good-quality products. The EU is known throughout the world for its food and culinary traditions. Due to its exceptional agricultural resources, the EU could and should play a role in ensuring the food security of the world at large.

Many jobs in the countryside are linked to farming. Farmers need machinery, buildings, fuel, fertilisers, and healthcare for their animals. Many people have jobs in these ‘upstream’ sectors. Other people are busy in ‘downstream’ operations – such as preparing, processing and packaging food. Still, others will involve in food storage, transport and retailing.

 All in all, farming and food production are essential elements of our economy and society. With its 27 member states, the EU has some 14 million farmers with a further 4 million people working in the food sector. The farming and food sectors together provide 7% of all jobs and generate 6% of European gross domestic product.

CAP helps young people to get in farming with funds to buy land, machinery and equipment. It also provides grants to train both new entrants and established farmers in the latest technical production methods. In some parts of Europe, farming is particularly difficult – as in hilly, mountainous, and/or remote areas. It is important to keep communities alive in these regions. The CAP provides funds to ensure that rural communities in vulnerable areas remain in the good economic health and do not gradually disappear.

Conclusion

Contract farming in ancient Greece was the widespread practice with a specified percentage of particular crops. During the first century, China also recorded various farms of sharecropping. In the united state (US) as recently as the end of the nineteenth century, i.e. Further, in the first decades of the twentieth century, formal farmer corporate agreements established colonies controlled by the European power. For example, Gezira in central Sudan, farmers will contract to grow cotton as part of a larger land tenancy agreement. There are several benefits and risks to contract farming for the producer and the buyer.

The key benefits for the producer are increasing income through long-term and stable access to more remote. Further, lucrative markets and a transparent pricing mechanism, as well as access to new technologies. Additionally, improved inputs, technical assistance, and credit facilities. Importantly for the producer, contract farming, can allow them to obtain these benefits. 

The key benefits for the buyer are controlling commercial risks by agreeing on a price. Moreover, controlling production risks by securing a stable supply of agricultural produce in the required quantity and quality and often produced using a specified method. Further, access to land is also an important motivation for the buyer. Therefore, through contract farming, the buyer can indirectly access land. It is not available for purchase or lease for integrated production business models.

This article is written by Vandhana