For the agricultural sector’s turnaround, how about contract farming?

Private players taking over the agricultural sector, reeling from stagnant growth, could just be the solution.

Online grocery supermarket Big Basket has not just been about business expansion and revenue growth. Along the way it has done its bit for the society too.

Under its contract farming arrangement, implemented two years back, some 20, 000 farmers nationwide have been able to up their incomes by 15 to 20 percent. These farmers now supply fresh vegetables and fruits directly to the ecommerce giant sidestepping the notorious middlemen who offer them a pittance for their produce and then sell those at higher prices in the markets.

For those unfamiliar, this seemingly sound solution called contract farming refers to various formal and informal agreements between farmers and processors or buyers to produce certain crops. It could simply be a loose buying agreement with farmers producing a certain type of crop to supply to an organization – agro-industries, restaurants, grocery chains and others.

Or, it could be a more formal and elaborate arrangement in which production is closely monitored with input provision. In the of case of Alibaba-backed BigBasket, for example, the company also assists farmers with quality seeds and implements and advices them on what to grow and when.

In the same manner, international food giant PepsiCo works with 24, 000 farmers in West Bengal to procure potatoes for its potato chips. It not just buys from the farmers but also supplies them with special seeds, fertilizers and insurance facilities.

Such integration of farmers with industries holds a lot of potential. If done right and extensively, it will not only improve the plight of our poverty-stricken farmers but also help them prosper.

Its biggest advantage, and it goes without saying, is the higher prices that it can fetch. With farmers directly selling their produce to the buyers, there is absolutely no scope for middlemen to exploit them. Dedicated collection centres or other measures to collect fresh farm fruits and vegetables right from the source eliminates the need for people to connect the producers with their buyers.

Further, with prices being fixed at the start, farmers are insulated from price fluctuations, especially during a downtrend caused by supply glut. Contracts forged with private players give farmers a better visibility into demand and they produce accordingly.

Unlike other industries, where production is determined with respect to demand, agriculture in India is supply-driven. This is because of the substantial proportion of population dependent on it for a livelihood. Under the circumstance, the state and central governments are forced to bail them out by procuring their produce at a cut off rate known as the minimum support price. This puts a lot of burden on the government and many a times procurement mechanisms, prices offered, or terms and conditions are faulty.

Contract farming with its myriad benefits can help bring about the much-needed turnaround in the sector.

However, for reasons more than one, this kind of a win-win practice has seen limited uptake in India.

One of those is the private players’ unwillingness to sign supply deals with subsistence farmers owning land of two hectares or less as its not feasible for them. They mostly prefer mid-sized firms simply because it helps to better quality and quantity of crops. This means the large number of poverty-stricken people in our nation are not going to be benefitted by it unless they form cooperatives.  

Besides, given the disproportionate number of people dependent on agriculture for a livelihood, private companies may easily exploit them with rock-bottom rates. They can abruptly revoke contracts leaving farmers in the lurch or force them to cultivate the same crop year-round thereby ruining soil fertility.

To protect the interests of farmers in such cases, the Model Contract Farming Act 2018 was rolled out. It sets out to establish rules and regulations conducive to both parties – farmers and sponsors. Based on the same lines, Tamil Nadu has recently enacted a law on contract farming too. This makes it the first Indian state to do so. To safeguard farmers’ interests, it requires purchasers to register themselves with designated officers.

While such laws are meant to prevent misuse and exploitation of land, manpower and ensure things proceed smoothly, care must be taken so that they do not stifle the process by red tapism and harsh punitive measures.

Ultimately, the main challenge is to rope in more buyers and connect them with the producers. E-NAM (National Agricultural Market) is a great start in that direction. A pan-India electronic trading portal, it provides farmers access to 585 mandis and going forward plans to link another 22, 000 mandis with it. The system can prove to be an effective price discovery platform as well.