The ordinance on contract farming is part of the new legal framework for agricultural markets. It is in addition to the other two ordinances that amend the Essential Commodities Act and reduce the power of APMCs, with the aim of setting up a national market for food.
Called the Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance, it provides a framework for farmers to enter into direct contracts with those who wish to buy farm produce. So far, in most of the country, a farmer cannot directly sell his produce to consumers or food processing companies; he has to go through a licenced trader.
If a certain kind of potato was needed for potato chips, or a specific variety of oranges was more suited to making juice, or a restaurant chain needed a large quantity of mushrooms or asparagus, the company needed to go through a trader. It could not get into a contract with farmers to grow that particular item and buy it later at prices already agreed upon. This framework left the farmer at the mercy of the trader, who wanted to increase his own margins.
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Solving the problem of APMC laws
State governments have the power to regulate agricultural markets and fairs. However, most APMC laws stretch this definition by designating ‘market areas’. A market area can range from a block to an entire district, and a farmer in a market area is compelled, by law, to sell his produce in the designated APMC market. He is prohibited from going to even the next APMC in the next district, even if it is nearer.
Some states allow farmers to sell to licenced buyers without bringing the produce to the APMC market. However, even when the APMC’s services are not used, farmers/traders often have to pay service fees to the APMC. This leads to uncompetitive practices. Traders find it easy to form cartels in these markets and offer low prices to farmers. Farmers are also left to the vagaries of daily price changes.
The ordinance changes this. From now on, any farmer may enter into a contract with any person or company to sell his produce. The ordinance states that APMC market laws will only apply in the physical space of the market, and will not govern transactions outside the market. No taxes or fees associated with any APMC can be levied on such transactions.
Farmers can lock in prices and buyers for their produce even before the harvest, and intermediaries can be assured of supply and price at the time of harvest. It is a win-win solution for both parties.
While intermediaries play an essential role in meeting supply and demand, at present, the APMC law creates a monopoly profession which does not have to be competitive. This law removes the lack of competition from the intermediary/trader market. It does not prohibit intermediaries or discourage them in any manner. It does not do away with APMCs. However, from now on, they have to compete with other buyers to provide better services or prices.
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Boost for farmers
The law will allow farmers to contract with processors (or anyone) for quantity, quality and price. It can be a large processor like PepsiCo, or a single restaurant interested in a steady supply of vegetables and organic lentils.
Since the ordinance (in addition to other ordinance on the Essential Commodities Act) exempts intermediaries from stock limits for contract farming, it will give comfort to large organisations to participate in contract farming. It may also encourage smaller traders to expand capacity.
Attracting larger and more numerous buyers for farm produce will increase competition in favour of farmers. These steps will be critical to establishing a national market for agricultural commodities.
The idea of contract farming is not new; some states like Punjab have attempted to encourage it through state legislation. Even today, in spite of multiple legal hurdles, the small scale of contract farming in India is playing a positive role for farmers.
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.
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Potential for govt interference
While the ordinance is a positive move towards freedom of contracting, it leaves the potential for government interference in two areas: Executive adjudication and suo motu litigation. These need to re-evaluated when the ordinance is tabled in Parliament to become an act.
Instead of using the regular judiciary for dispute resolution between parties, 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.
The ordinance also creates a window for reintroducing government interference by giving the executive powers to adjudicate disputes through suo motu 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 1991 reforms saw a fundamental shift in the legal approach to industry and services. A whole host of laws of the licence, permit and inspection raj were withdrawn, and more freedom was given to the participants. Today, we can see the benefits of freedom.
Sadly, the agricultural sector did not get those freedoms. The participants in this sector still live in the old legal regime. The ordinances are a welcome step in giving freedom to farmers to sell their produce without restrictions.
Ila Patnaik is an economist and a professor at the National Institute of Public Finance and Policy.
Shubho Roy is a researcher at the University of Chicago.
Views are personal.
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Black marketing of the products should stop. Corruption should be be removed from everywhere.
The contract farming ordinance is an attempt to consolidate the fragmented land holdings in order to determine what to cultivate and how to cultivate, when to cultivate and finally where to sell at what price leaving behind the God of Rain who reigns the Supreme power of a deciding factor through a varied agroclimatic zones of India. First of all, policy makers must learn to recognize agriculture, not of industry type. The meaning of Agriculture is stripped out of culturing the Crops suited to various agroclimatic conditions. Now agriculture is termed as agribusiness. Ironically, the contract framing will pave the way for corporate farming pushing the small and marginal land owners to become agricultural workers on their own fields. Large farmers, intermediaries and corporations will emerge as rural origarchy thereby creating a tension between classes in the years to come. Moreover, Agricultural prices will become cost – determined with varying markups due to the vulnerability caused by the monsoon. The need of the day is to enter into contract with God of Rain, not into contract with farming…
Rubbish
we will oppose Contract farming, because agriculture is state issue as federal structure of India, MSP is now essential then MSP will be removed. It is very very harmful for us. We will strongly oppose such type of bill. Last time land bill also declare helpful for farmers.
Now the corporate vulture eyes on farmers. Roy you are toy who sponsored you to write this article.
किसानों को खत्म करने की चाल है याद रखना जब तक किसान है तो जिंदा है तभी तक इंसानियत जिंदा है
You are wrong, my friend. MSP will not be removed. Its clearly written in the bill. You can read it. Stop spreading your misleading half knowledge and try contributing good to the country.
MSP will not be removed yes It will be announced every year by Government but will the farmer be able to sell his produce on MSP,? You know 94% farmers are selling their produce below MSP. Politicians are liars and clever, They are playing with words, Why don’t they make a law that buying farmer produce from farmer below MSP will be a punishable crime. Try to understand the issue. I challenge that If you ask politicians that if they are so sure these laws will benefit farmers let these law come into effect with a condition that If these laws fail to increase farmer income the lawmakers will be imprisoned for 5 years. You will see they will not be ready for this clause .
Hs Ns
Farmers will be hit hard by the move. There is already contact farming in places. When MSP was 1750, farmers were selling at 1000 to contractors from whom they took money at the time of some crisis.
Please tell in 1000 case did the company helped farmers save there input cost or not
I think this is bookworm economist not even read any law till date as my knowledge along with Maharashtra farmer can sell his produce anywhere he wants but trader has some constrictions apmc are working for msp and protected interst of farmer in procurement getting payment within 24hrs it’s proving jobs to two cores people this act will destroy all and act only in favour of MNCs like jio no one will care for farmers if apmcs are dismay
Farmers are not bound to sell his produce in APMCs. A lot of states have changed this way back. I reside in Gujarat and am a farmer. Every Tehsil here has a APMC. I take reports from multiples APMC and sell my produce where I find returns are higher. APMC comes in play when I have issue with selling be it valuation, payment etc. Who am I going to complain when I ll sell it outside APMC. This discussions about middlemen is so cliched.
At least Modi is trying to level the field but too many crony Congress will make sure it won’t work
you are blinded by your political belief, Let your analytical mind do some work. These laws solely take care of corporate interest and small and marginal farmers will be out of agriculture and they will be forced to do labor in cities, This already happened in Gujrat. lakhs of small farmers doing labor in Gujrat.
No the farmer does not stand to benefit at all.His produce will be sold for a price decided by the buyer as MSP will become redundant
It is upto farmers whether they want to sell it to buyer or not.
If they doesn’t get fair price then they can go to APMC mandis.
What other governments have done for getting better prices by the farmers. Still age old practices which benefit only middlemen and brokers. Can some show alternative instead of passing silly comments.
There is a saying that far of hills look greenner , whether the greenery exists will be seen after a year , our PM has a pendency for the drama , all show no gas.
Under PMGSY Engineer diverted stream natural flow by constructing Retaining wall on Gram Panchayat Resolution. Destroying cannal fertile land PMGSY Rd. Elected members, PDO, Chairman use there misuse power they have no right in Land Revenue Even Engineer had no right. Written several letters to Thasildar D.C KRRDA Bangalore PMO office. No one is taking action.
It’s a useless Idea to create monopoly for big houses… Useless Idea that sounds good on paper.
The farmer needs to have the right to sell his produce anywhere in the country. What is the need for APMC licenced middle man. The APMC act was passed to benefit the corrupt. In yeshwantpur ~Bangalore, there will be police all the time to take bribes from lorry drivers . APMC yard is located here. I am sure the same is happening all over india. What’s the benefit of A PM any way? It is only to restrict moment of agriculture produce, causing inflation and higher perishablity.
Why did it take so long to make amendments.
Interested to know more about the details of this subject
Regards
D Selvaraju
which particular section in the ordinance authorizes the govt for the suo moto cognizance and settlement of the disputes?
These Economists probably have not looked into the experience. Potato chips experience of both farmers and processors in Gujarat and Rajasthan show that farmers are short changed, in whatever situation. This is not a win-win for farmer. It is more of a pin-win for farmers and large corporations. These ordinances help in building monopolies and monosponies. More, the writers do not even analyse the likelihood of problems because of these ordinances, except for repeating on-paper, theoretical assumptions of gains for the farmers.
This is a great initiative by the Govt, however, will this allow new intermediaries to play without any licencing ?