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INDIA MATTERS MAY 09 2019

How to make contract farming beneficial for Indian farmers

After the recent spat between the PepsiCo and a handful of potato farmers from Gujarat, the debate
surrounding contract farming has resurfaced.

Source: Wikipedia

CONTRACT FARMING INDIAN AGRICULTURE PEPSICO

After the recent spat between the PepsiCo and a handful of potato farmers from Gujarat, the debate
surrounding contract farming has resurfaced. Just because these small farmers were growing and
selling potato varieties that are reserved for and patented by the PepsiCo for the production of their
popular chips ‘Lays’, heavy fines of more than a crore of rupees each were going to be imposed on
them by the company. Following the activists’ fury and their invoking of India’s laws on farmers’
rights, Protection of Plant Variety and Farmers’ Right (PPVFR), the PepsiCo retracted its belligerent
step and has offered to take the farmers into its fold of contract farming and letting them produce and
sell potatoes of the special variety FC5 to PepsiCo itself.

After the recent spat between the PepsiCo and a handful of potato farmers from Gujarat, the
debate surrounding contract farming has resurfaced.
The contract farming has been prevalent for long years in potato growing regions, especially in West
Bengal, one of the most productive potato growing regions of India. The PepsiCo works with 24,000
farmers and provides them with seeds, chemical fertilisers and insurance facility to farmers and in
return they buy back the harvest at predetermined prices. It is a vertical coordination between farmers
and buyers. This success story and many others alike has led the Niti Ayog to advocate contract

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farming for all types of produce in India. A year ago, the Niti Ayog announced the Model Contract
Farming Code.

The PepsiCo works with 24,000 farmers and provides them with seeds, chemical fertilisers and
insurance facility to farmers and in return they buy back the harvest at predetermined prices. It
is a vertical coordination between farmers and buyers.
There are clear advantages for farmers in contract farming as it offers them with hassle free production
process for potatoes or any other produce. They do not have to bother about the sale of the crop
through mandis and make provisions for insurance against crop failures. It gives them a secure and
steady source of income. Many case studies of farmers under contract farming have pointed to the
farmers being satisfied with such contracts with big corporation as it leads to relatively risk-free
farming.

May be in the future, there will be more corporate contract farming in India and it is often viewed as a
panacea for farmers in some government quarters. They can have easy access to good quality inputs,
extension services, grading and sorting of produce as a result of which their productivity and incomes
can go up. With contract farming in practice, the farmers have not only become prosperous but they
also feel secure about their future.

There are clear advantages for farmers in contract farming as it offers them with hassle free
production process for potatoes or any other produce...May be in the future, there will be more
corporate contract farming in India and it is often viewed as a panacea for farmers in some
government quarters.
The opponents of contract farming point to the ecological damage this type of mono-culture has been
causing around the world as only one type of crop is grown over and over again. It can be vulnerable
to pest attacks and plant diseases that can devastate the entire crop production. Contract farming
across the world has also reduced biodiversity and has led to the destruction of forests and the support
for wildlife. Being profit driven, the big companies are not motivated to opt for organic farming, using
natural fertilizers and pesticides.

In India, contract farming is unlikely to touch the small and marginal farmers, including many women
farmers who need more help in accessing better inputs, technology and credit. Only mid-sized farms of
a certain acreage are roped in for contract farming. It will also not benefit millions of tenant farmers
who work on daily wages. Their plight of being landless labour with paltry wages continues and the
security of their tenancy depends on the implementation of legislative reforms like Model Agricultural
Land Leasing Act 2016 introduced by the central government. However, this legislation has to be
adopted by State governments to make them effective.

The opponents of contract farming point to the ecological damage this type of mono-culture has
been causing around the world as only one type of crop is grown over and over again. In India,
contract farming is unlikely to touch the small and marginal farmers, including many women
farmers who need more help in accessing better inputs, technology and credit. In India, contract
farming is unlikely to touch the small and marginal farmers, including many women farmers
who need more help in accessing better inputs, technology and credit.
Big corporations make mega profits through the sales of their products but the actual farmers who
produce the agricultural core base of the product are paid just their labour costs. For example, the
PepsiCo’s Lays has a veritable monopoly in the potato chips market. Likewise, big corporations have
been reaping profits in farming operations all over the world. Even in India, the share of corporate
profits in organised manufacturing has been rising in the net value added as compared to the share of
workers’ wage, because of the big gains the corporates have been making in recent years through
various tax exemptions and lax implementation of regulations.

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The big corporations also have money power which translates to bargaining power vis-à-vis the
farmers. In the beginning, they may agree to pay farmers according to their labour and other input
costs, but gradually they can start paying them less because the farmers have no other alternative. It
often turns out to be a monopsony situation in which one buyer deals with many sellers — an
arrangement which favours the buyer.

The big corporations also have money power which translates to bargaining power vis-à-vis the
farmers. In the beginning, they may agree to pay farmers according to their labour and other
input costs, but gradually they can start paying them less because the farmers have no other
alternative.
In case when there is rejection of the crop of contract farmers on the basis of quality of the produce or
because it does not match the specific requirements, the farmers face a difficult situation as they do
not have other outlets to sell the produce. Often the State government has to rescue them. On the
whole, it is an unequal relationship — the small farmer verses the giant corporation. Yet the security
and smoothness of contract farming operations are attractive for farmers against the idea of individual
farming based on much toil and sweat.

Contract farming is also restricted to few products which are in demand for the agri processing
industry and is well suited for perishable products. Farmers of such products are in much greater need
of help in the quick marketing of crops. Contract farming can help India save its fresh fruits and
vegetables through cold chain solutions that include refrigerated trucks for transportation.

Contract farming can help India save its fresh fruits and vegetables through cold chain solutions
that include refrigerated trucks for transportation.
Contract farming can also help in reducing the number of people dependent on agriculture. Many of
the problems in agriculture are due to the dependence of around half the population on it, but since
productivity is low, agriculture contributes only 15 percent of the GDP. Reducing dependence on
agriculture is a goal of the Government. In future, will India have only 2 to 4 percent population
dependent on agriculture with giant corporations owning the vast agricultural operations and trade? It
is possible if small farmers pool their land en masse in a cooperative for contract farming. In any
case, there is need for more effective regulation so that farmers’ rights are protected and land is not
transferred to corporations. If Farm Producers’ Organization (FPOs) could be involved in dealing with
big corporations, the farmers could operate from a position of strength and leverage.

The views expressed above belong to the author(s).

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