Banking Article, Banking Finance 2021, Banking Finance October 2021

Redefining Farmers Interest

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, 2020 was promulgated on June 5, 2020.  It provides a framework for the protection and empowerment of farmers with reference to the sale and purchase of farm products.  The provisions of the Ordinance will override all state APMC laws. National Agriculture Policy has recognized contract farming as an important aspect of agri-business and its significance for small farmers to allow accelerate technology transfer, capital inflow and assured market for crop production.

HISTORY OF CONTRACT FARMING IN INDIA

Contract farming in India was introduced in India in late19th century where Indian farmers produced Indigo under British Government. Mahatma Gandhi’s remarkable ‘Champaran Satyagraha’ had historical milestone in fair contract farming in India but the contract farming came to limelight in the late 1990s with the entry of PepsiCo. In 1997, it set up a tomato processing plant in Punjab and started tying up with local farmers to grow tomato varieties needed for ketchup.

In India, contract farming was regulated under Indian contract Act, 1872. The model APMC Act, 2003 provides specific provision for contract farming.The Department of Agriculture and Farmers Welfare had released Model Contract Farming Act, 2018. The key proposals of model contract farming act includes setting up a state-level agency called Contract Farming (Development and Promotion) Authority.

Explanation of Model I:

In this model the farmers are directly dealing with the buyer. This model can be implemented for small scale of operations. The price of the commodity is fixed with the mutual agreement with the farmer and buyer. Generally buyer is not providing any services unless and until it is agreed upon in the agreement.

Explanation of Model II:

In this model NGO or Government agency is involved as an intermediary between farmer and buyer. Extension services and other services are provided to the farmers at the discretion of the NGO/Government body or as agreed in the contract terms. There is no intention to make any profit hence this model is considered a transparent contract farming model.

 Explanation of model III:

In this model traditional channels like Arthiyas are working as an intermediaries. The scale of operations is comparatively large where arthiyas are providing extension services and other services like loans and other inputs as per the agreement terms. However there is lack transparency for price fixation and exploitation of farmers may possible.

Explanation of Model IV:

In this model the buyers are corporates and they appoint implementing agency to conduct the overall operations effectively. The operational cost is very high due to engagement of channel partner. Wide range of extension services and other inputs are being provided by the implementing agency to farmers as per the agreement terms. Farmers are availing financial services from the banks for creation of assets, getting asset insurance and life insurance (in case animal husbandry like dairy business).Contract farming practices followed by the corporates are quite standard however there is always a question of transparency as many times farmers interest is overlooked for earning the profit for corporate.

CURRENT ORDINANCE

Farming Agreement:The Ordinance provides for a farming agreement prior to the production or rearing of any farm produce, aimed at facilitating farmers in selling farm produces to sponsors.  A sponsor includes individuals, partnership firms, companies, limited liability groups and societies.  Such agreement may be between: (i) a farmer and a sponsor, or (ii) a farmer, a sponsor, and a third party.  The role and services of any third party, including aggregators (one who acts as an intermediary between farmer(s) and sponsor to provide aggregation related services), involved will have to be explicitly mentioned in the agreement.   State governments may establish a registration authority to provide for the electronic registry of farming agreements.

The farming agreement may stipulate the timely supply of inputs by the sponsor to the farmer before the start of cropping season to carry out farming operations, the farmer will supply the products at the farm gate or mutually agreed other place at agreed price.

Farming agreements can be agreements for purchase of future farming produce with risk of production remaining with the farmer or for payment of service charges to farmers where risk of production is borne by the sponsor/buyer. There can be a combination also. The sponsor may also agree to supply inputs or technology during the process of production.

Farming agreement usually specifies the price to be paid to the farmer, the quantity and quality of the product demanded by the Sponsor, and the date for delivery to buyers. The agreement may also include more detailed information on how the production will be carried out or if any inputs such as seeds, fertilizers and technical advice will be provided by the Sponsor to the farmer.

Duration of agreement: The minimum period of an agreement will be one crop season, or one production cycle of livestock.  The maximum period will be five years.  For production cycle beyond five years, the maximum period for the agreement will be mutually decided by the farmer and the sponsor.

Exemptions from existing laws: Farming produce under a farming agreement will be exempted from all state Acts aimed at regulating sale and purchase of farming produce.  These produce will be exempted from provisions of the Essential Commodities Act, 1955 and will not have any stock limit obligations.

Pricing of farming produce: The price to be paid for the purchase of a farming produce will be mentioned in the agreement.  In case of prices subjected to variations, the agreement must include: (i) a guaranteed price to be paid for such produce, and (ii) a clear reference for any additional amount over and above the guaranteed price, including bonus or premium.  The price references may be linked to the prevailing prices or any other suitable benchmark prices.  The method of determining any prices including guaranteed prices and additional amount will be provided in the farming agreement.

Delivery and payment: The Ordinance provides that the sponsor will be responsible for all preparations for the timely acceptance of deliveries and will take deliveries within the agreed time.  In case of seed production, the sponsor will pay at least two-third of the agreed amount at the time of delivery.  The remaining amount can be paid after due certification within 30 days from the date of delivery.  For all other cases, the entire agreed amount must be paid at the time of delivery and a receipt slip must be issued with the details of sales proceeds.   The state government will prescribe the payment modes.

Dispute Settlement: The Ordinance requires a farming agreement to provide for a conciliation board as well as a conciliation process for 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 Magistrate and Appellate Authority will be required to dispose a dispute within thirty days from the receipt of 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 farmer for recovery of any dues.

HOW IT IS DIFFERENT FROM EXISTING CONTRACT FARMING LAW 2018?

The agriculture ministry had released a model law to govern contract farming in 2018, but it was a little too prescriptive. It allowed contract farming, but only in notified commodities; the price was determined by government rules; and each contract had to be registered with a district authority. In contrast, the ordinance allows contract farming in any agricultural product, leaves pricing to the parties, and allows for a central e-registration of contracts.

HOW IT IS BENEFICIAL TO FARMERS?

Earlier, contract farming has been in existence for decades. However, the farming agreement is to be made popular because of its uniqueness with reference to i) Equity or inclusiveness (to attract more investments in the agriculture sector and promote inclusiveness) ii)Public Accountability (introducing system of e-registration and dispute resolution) and iii) Innovation (as both the market and inputs will be available to the farmer at farm gate level).

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020, enables farmers to mitigate the production risk and price risk by the farming agreement with the buyer before sowing stage. Farming agreements can be made between farmer and sponsor/buyerfor purchase of future farming produce with risk of production remaining with the farmer or with the payment of service charges to farmers where risk of production is borne by the sponsor/buyer. There can be a combination also as per mutually agreed terms between farmer and sponsor/buyer. The sponsor may also agree to supply inputs or technology during the process of production to ensure the quality aspects of the farm produce.

Farming agreement gives smalland marginal holding farmers the possibility of knowing in advance when, to whom and at what price they will sell their products. This helps to reduce the unpredictability of agriculture and allows them to better plan their production. When sponsor also provide access to inputs including technical assistance, farming agreement can lead to significantly increased yields and profits.

The farming contract gives win-win situation for farmers/FPO and sponsors. The farmers/FPO gets easier access to inputs, services and credit improved production and management skills, secure market, more stable income whereas the products purchased by sponsor from buyer conform to quality and safety standards. Under farming agreement niche product clusters can be developed. This ordinance safeguards farmers by providing fair trade practices, good dispute resolution mechanism, and provision of penalties for misconduct by buyers.

OPPORTUNITY FOR PRIVATE INVESTMENT

The existing legal framework of contract farming never gainsconfidence of private investors.This Ordinance provides a uniform framework for private investment in market, without challenging a farmer’s ownership right or right to cultivate which will provide farmers three benefits.

  1. Risk mitigation and greater predictability of income.Farmers will have the option to enter into agreement with buyers before sowing, securing the price for their sale. The farmers may able to enter into agreement that protect them from harvest losses as well as they can insure against output risk. In scenarios like crop output or market prices are highly variable, farmers can take a risk to grow the commercial crops where risk is more.
  2. Access to market intelligence.Due to lack of forward linkages farmers are unable to access the consumer demand trends at micro level and hence not able to optimize crop and varietal mix. This Ordinance will enable stronger linkage with both domestic and export markets.
  3. Access to better technology and knowledge for farm management.Private sector have a better framework and infrastructure to integrate the modern farming practices and hence they can engage expertise in farming as well as make direct technology investment like use of IoT, Artificial intelligence etc. for driving higher yield and promoting sustainable agriculture over long term.

CONCERNS

  1. Government interference challenges the Privity of Contract

The ordinance is a positive move towards freedom of contract farming in India, it leaves the scope for government interference particularly in sou moto litigation and Executive adjudication.

The ordinance creates a window for reintroducing government interference by giving the executive powers to adjudicate disputes through suo moto cases. These are cases where neither of the parties to a farming contract has raised a dispute, but the authority still can enter into the contract and make changes. This violates a fundamental principle of contract law: If the parties to a contract are not complaining, third parties should not interfere in the contractual relationship (called ‘privity of contract’). Violating this principle undermines the commercial relationship between the parties. If the government intervenes in contract farming agreements frequently, buyers may back out.

The ordinance delegates dispute resolution to the executive (Sub-Divisional Magistrate), who will not be bound by rules of procedure. This gives the government more powers than the parties in the case. That would not happen if disputes were required to go to the judiciary. Also it seems likely that individual farmers might not find themselves equipped or powerful enough to negotiate with big corporates or sponsors to ensure a fair price for their produce. Approaching the office of Sub-Divisional Magistrate might be a hurdle for millions of small and marginal farmers who might get into a farming agreement with a powerful entity.

  1. Ordinance could lead to disruption of ongoing practice of Informal Agreements.

Giving legal sanction to contract farming would help corporates enter the agriculture sector and may increase productivity. But would it help the tenant farmers and share croppers? The ordinance has little to offer to the millions of farmers who are currently engaged in contract farming through informal agreements.

Some form of registration of these tenant farmers without threatening landowners would have been a huge land reform waiting to happen. Instead, the new ordinance could lead to disruption in this ongoing practice of contract farming. The absentee landlord would now prefer to deal with written contracts of a company over the hassle of dealing with local tenants.

  1. Design of contract needs to relook

The farm-gate pick-up of produce by buyers has been made mandatory, which was unnecessary. The parties should be able to decide themselves whether the farmer will deliver the produce at factory gate, collection centre, or whether the buyer would pick up the produce from the farm.

The ordinance says that the quality parameters can be mutually decided by the two parties in the agreement. But the quality aspect will become crucial when a few corporates will try to usher in uniformity which might end up adversely impacting the already skewed agro-ecological diversity in the country.

In the event of a force majeure and/or the change in the policy of government, the affected party, to the extent of adverse impact, shall not be bound to honour the agreement and can accordingly alter the terms with mutual consent or terminate the agreement. However the Ordinance leaves out many sophisticated aspects of modern contract farming practices, like delayed deliveries or purchases, and damage therein.

  1. Inefficient price discovery as ordinance links the price with APMC mandi price

The ordinance links the contract price with the APMC mandi price or electronic market price, which is anti-contract farming in nature. The price, like many other basic aspects of contract, should be left to the parties to negotiate and shouldn’t be tied to any other channel, especially the APMC price, as the very rationale for bringing this law was to provide alternative channels to farmers and create competition in APMC markets, as price discovery was not efficient. Now, going back to the same mandi does not speak very well of the Ordinance.

CONCLUSION

This farming agreement Ordinance is bold step by the government towards agricultural development. By providing the legal framework tocontract farming enables to solve many agricultural related issues.This Ordinance provides a uniform framework for private investment in market, without challenging a farmer’s ownership right or right to cultivate. This reform has a great potential to improve farmers conditions and contribute to achieve our Prime Ministers ambitious target to double the farmers income by 2022. There are certain concerns in the ordinance in respect of dispute resolution and inefficient price discovery, however government is confident that the Ordinance definitely will bring new revolution in agriculture sector in coming years.

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