As part of the third tranche of the stimulus package, the Finance Minister on May 15 announced a set of agriculture market reforms related to farm produce price and quality assurance.
A facilitative legal framework would be created to enable farmers to engage with processors, aggregators and large retailers for assured returns and quality standardisation, the Finance Minister asserted.
There are two parts to this proposition — price or return on investment, and quality. The first part envisages that farmers receive ‘assured returns’. This presupposes that the price of the harvest produce is agreed to in advance by both parties — sellers and buyers — and that the price reflects a reasonable return on investment for growers. When or at what point in time of the crop cycle the contract would be entered into can be mutually decided.
The government announces minimum support price (MSP) for as many as 23 crops from season to season. The term ‘assured returns’ presupposes that the price received by farmers should be not less than the MSP announced by the government, if the subject crop is covered by the MSP regime. In other words, the contracted price could be higher than the MSP, but not lower.
What if the subject crop is not covered by the MSP regime? It is reasonable to assume, sellers and buyers would be free to agree on a mutually acceptable price. Who will bargain from a position of strength and who would be vulnerable in this price negotiation is tough to say. It will depend on circumstances. The question is whether the agreed price would result in ‘assured return’ for the farmer based on his investment.
Quality of produce
The second aspect is standardisation of the produce quality. Buyers who would be processors, aggregators or large retailers would surely expect to receive uniform quality of produce from the growers. So, it is imperative that quality standards of the intended supplies are also agreed to in advance. Only then will the grower be able to use the right kind of inputs like seeds and carry out appropriate agronomic practices so as to be able to raise crop of agreed quality.
Because agricultural crops are natural products and subject to the vagaries of weather and other natural disturbances, there has to be tolerance built into the contract for quality. Premium or discount rates for quality variation must be pre-agreed in order to prevent dispute.
Engagement of farmers and processors need not cease with entering into an agreement, only to be revived when the crop is ready for harvest.
As someone who was associated with India’s first private sector initiative in contract farming in cotton way back in 2002-08, I would say, more than an agreement, farmers (or farmer organisations) and processors should actually work in a spirit of partnership.
The buyers can work closely with growers, help source inputs, monitor crop progress, provide professional agronomic guidance, and so on. It is critical that farmers and entrepreneurs gain each others’ trust.
As no time-frame has been specified, we will have to wait for details of the legal framework. While the Finance Minister did not specifically use the term ‘contract farming’, the intent seems to be to encourage growers (sellers of produce) and processors or aggregators (buyers of produce) to engage with each other in a contractual agreement in a way that the grower as primary producer receives assured returns on his investment.
Enforceability of contract
The most critical aspect is the enforceability of the contract between sellers (growers) and buyers (processors, aggregators or large retail). It is not uncommon for parties to repudiate the contract on flimsy grounds when market conditions turn adverse.
If the open market price rises higher than the contracted price, the farmer may be tempted to sell the produce to someone else for a higher price. On the other hand, if market prices were to fall below the contracted rate, the buyer may fail to honour the commitment. Disputes are bound to arise and need to be settled expeditiously.
Who will adjudicate? It would be advisable to make the District Administration (say District Collector) responsible for dispute resolution.
If boosting farmers’ income is a major objective of the proposed legal framework, the policymakers must consider introducing a variant of the options contract. The buyer in any case will have to pay the grower the agreed price, even if the market price is lower. However, if the market price is higher than the agreed price, the buyers must share a part of the price difference with the sellers.
It is necessary to remember that for growers agriculture is a livelihood issue and for processors and aggregators it is business. The government must take on board sensitivities of various stakeholders. So, it would be advisable for the government to organise a series of stakeholder consultations to understand the nuances, dimensions and various points of view of what it proposes to do.
The writer is a policy commentator and agribusiness specialist