The proposed law on contract farming can only be a part of the solution. Farmers need wider options
Sreelatha Menon | October 26, 2017
Wherever you look, the red fruit can be seen growing in large patches. In fact, the red is the green in Rayalseema, the southern part of Andhra Pradesh. But tomato growers here are mostly in a dilemma when it comes to the price it will fetch each year and each season.
They have not many options. One is the local market run by the agricultural produce marketing committee (APMC), where they sell paying a 10 percent commission to agents. The other is contract farming. Many farmers have had a taste of this and for most of them it has not been a sweet one.
Tomato paste manufacturing companies have been signing contracts with many farmers, offering them seeds and some inputs and the guarantee to buy the tomatoes for Rs 4.50 a kg in March when prices are as low as Rs 2 in the market.
Srini Foods, an Andhra Pradesh-based company, was procuring tomatoes from many of them for the past three seasons, but has made a sudden exit this year. The move points at some of the reasons why contract farming has not succeeded, at least in tomatoes, across the country.
Subramanyam Reddy grows tomatoes in most of his farm in Karidimadugu, a village in Chittoor district. He gets a good market rate of about Rs 10 a kg from June, but during February-April, the prices hit rock bottom at Rs 2, which is as much as he spends to grow the tomatoes. Reddy and many others in his village had signed up for contract farming with Srini Foods. He was to earn Rs 1,20,000 for his 40 tonnes of tomatoes. After counting his production cost, he would have still earned about Rs 90,000.
But this year the market price in February was Rs 7. He and many like him yielded to the temptation and started selling the tomatoes in the market, thus defaulting on the contract. Come March, the prices went down to Rs 2, and the farmers rushed to Srini Foods to sell their stuff. But the company, peeved at the betrayal, refused to buy.
“They wanted to teach us a lesson. Harvesting it would cost us the money we would get from the market. So I let it rot and did not harvest it. Most farmers – even those who had no contracts – did the same,” Reddy says. “I had about 50 tonnes of tomatoes. But there was no buyer. It made no sense to sell it in the market at Rs 2.”
Srini Foods executive director Ravi N Subramanyam said that the losses suffered by the company were substantial, forcing them to withdraw from contract farming after procuring for three seasons. “We now procure from the open market in Karnataka,” says the executive director, who handles agriculture procurement for Srini Foods.
A Germany-funded NGO called AP Mahila Abhivruddhi Society had mediated between the farmers and the company. Jaganmohan Reddy, project manager, APMAS, says tomato farmers in AP are not ready for contract farming. “They don’t understand the contract system. They all wanted the company to offer them a higher price. But the company is competing with Chinese paste imports, which are very cheap and hence could not have offered any more,” he says.
So what went wrong with contract farming in AP? Why did Srini Foods decide to source their tomatoes from open market in neighbouring Karnataka instead?
The reason, Subramanyam thinks, was that the company was finding cheaper and better tomatoes in Karnataka. Also, the AP tomatoes are more suited to the fresh market rather than for ketchups, he says. So in AP, when prices fall, tomatoes are just left unharvested. This year tomatoes worth Rs 350 crore in 70,000 acres just rotted. In Karnataka, where farmers have been trained to produce tomatoes for the processing industry, all of their produce gets procured by companies from the open market and partially through the contract system, he says.
Prof Sukhpal Singh of the Centre for Management in Agriculture at IIM Ahmedabad says that the case highlights a common malady that afflicts contract farming everywhere. A contract farming venture can succeed if contracts are between groups of farmers and companies, with an NGO mediating, says Singh. Also, the company should have an efficient plan for the use of the procured tomatoes. They can’t put all tomatoes in one basket. They should procure some for paste, some for export, some for fresh market and so on, he says.
That was the strategy adopted by Pepsi Foods in Punjab when it pioneered contract farming of tomatoes in the late 1980s, he says. They used to divide the procured tomatoes into four grades. While one was for export into market for fresh produce, one for paste, one for domestic supply in fresh market and one for institutions like the hotel industry.
Srini Foods had only one plan: to use the tomatoes for paste.
The legal tangle
The government buys produce from farmers through the APMC markets and makes payments meant for farmers to APMC commission agents who are also called ‘arhatiyas’. The agents are expected to represent farmers but have become very powerful as lobbies and some often hold farmers at ransom. Many have become moneylenders for stressed farmers, and hand over payments to them only after extracting their share of the loan. Though this is illegal, governments have been patronising agents and not putting an end to the moneylending business by agents.
In some states like Punjab, arhatiya lobbies are very powerful, says Prof Singh – to the extent that the state government recently “requested” agents to lower their interest rate from 18 percent to 16 percent! In Haryana arhatiya lobbies have opposed e-trading as they think it will close their opportunity to make a killing through lending.
The APMC Act limits the number of buyers who can have access to the market. Which means contract farming is not allowed. Some states have amended this law to allow multiple buyers. Karnataka has amended it to allow e-trading, which is now allowed in most states. Madhya Pradesh is the only state where commission agents have been totally weeded out and only the government buys from cooperatives or farmer producer companies, says Singh.
The central government feels that a new law for contract farming will fix all problems. The NITI Aayog is working on a model law which is expected to be replicated by all states. Singh calls this an escape route. The centre knows well that contract farming can work if the APMC Act is reformed. The government can’t bell the cat, as it would require asking all states to reform their APMC laws. So it has decided to float a new law. “How can that be a solution?” he asks.
When the parties signing a contract for farming default on the agreement, they are supposed to take the matter to the local APMC authorities. But at present APMCs in most states are steeped in corruption and malpractices. So to expect them to come to the rescue of farmers is asking for too much, says Singh.
Mekhala Krishnamurthy, an associate professor of the department of sociology at Shiv Nadar University, points out that contract farming – with or without a law – can work only for certain commodities, where the seller has made a lot of investment and where the buyer has special specifications and needs. Tomato, she feels, is not an ideal candidate as it is available in the open market in plenty. She cites the example of gherkins, which are doing well in contract farming. Farmers have nowhere else to sell vast quantities of it and companies need them for exports. So these deals are working in some states, she points out.
“It is unrealistic to expect contracts to happen in cotton, unless it is a special kind of cotton like organic cotton. Similarly, in case a certain size of potato is required for chips and fries, the seller and the buyer have to be in contact. These are also doing well,” she says. “If they did contract farming in wheat or rice, then the seller will always sell it whenever he gets a better price. He won’t be bound by contracts.”
Studies on gherkin contract farming in Karnataka echo what Krishnamurthy says. Gherkin cultivation in India is driven largely by contract farming and Karnataka contributes nearly 80 percent of the country’s gherkin production. About 90 percent of it is exported, says a study by the Indian Agricultural Research Institute (IARI) done in 2016.
Nearly one lakh small and marginal farmers are involved in gherkin farming and the state produced 2.65 lakh tones of gherkin in 50,000 hectares of land in 2010-11. The lack of domestic marketing is one of the reasons for the success of gherkin contract farming. Contract farming offers advantages of reduced capital investment, reduced risk of price fluctuation, guaranteed returns and provision of technical assistance has enabled the farmers to continue the contracts, the study says. The study does not talk of any defaults by either party.
Whether a law on contract farming would minimise the problems of default by companies and farmers is not clear. Krishnamurthy says it will depend on the framework of the law.
Contract farming is very meagre compared to the large quantity of procurement done in the country, most of which is done through APMC mandis. “Some states have amended APMC Acts to allow contract farming. Bihar has repealed its APMC Act, but is it flooded with companies signing contracts with farmers?” she asks. The truth is that no company will sign contracts with individual farmers, she says, suggesting that mediation by farmer groups and NGOs are necessary. This has happened in Karnataka where the farmer groups have signed contracts with companies like Global Green Contracting and Reitzil in Tumkur district, where the IARI study was conducted.
Prof Singh points out the model followed in Thailand, involving four players in a contract: the government, which provides inputs to farmers, the bank, which funds the inputs, the farmer, who grows the crop, and the buyer, who buys the produce.
The gherkin example points to the fact that contract farming is becoming more and more specialised, withdrawing from many commodities like tomatoes. The handful of products which are popular among companies are potato, basmati rice, maize and gherkins.
Citing a case of default, Prof Singh recalls the fate of mint farmers who signed contracts which had to be abandoned as the demand fell in the global market, leading to closure of mint oil plants in India.
Contracts are doing well in potatoes, he says. Pepsi has contracts with farmers in Gujarat, Maharashtra and Punjab while McCain has contracts in Gujarat, with Amul likely to step in soon.
As for tomatoes, it has seen failures from the start – in the first mega venture in tomatoes initiated by Pepsi in Punjab in the 1980s. They set up a huge processing plant and started exports but had to shut down the plant and withdrew from tomato contract farming in 2008 as demand fell down in East Asia. Later Heinz bought the tomato plant, resold it and now it is abandoned totally. Kissan is sourcing tomatoes mostly from the open market now, abandoning contract farming as a sole strategy.
So contract farming will continue to be a good option where the buyer and seller stand to benefit mutually, points out Singh.
But for farmers to do well in general, including in contract farming, the APMC Act in states have to be reformed. Yet there is no single bullet solution for anything, including contract farming. Bihar is a case in point: the state does not have an APMC Act or any restriction on contract farming, but it is still waiting for companies to get in touch with their farmers.
(The article appears in the October 31, 2017 issue)
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