Hello friends, welcome to Raj Matra IS Academy. My name is Deepak Thakur and in today's experience series, we are going to discuss contract farming in India. So, basically what is this contract farming and what is the status of contract farming in India, we will be discussing these things. But specifically in the context with the recent government, ordinance on the contract farming.
Basically, you know that the government has now introduced three ordinances in the context of agriculture reforms. One of them is related to contract farming. So, today we will learn about contract farming and also we will learn what is this ordinance is all about, what are the pros and cons, what are the details in this.
We will be discussing all and everything in this presentation and this video. Basically, you see what is contract farming. See, in the normal sense if you talk about contract farming, when you are coming into a contract with a person, means the producer, means the farmer, when you contract with him, who? buyer, it can be in the processing industry. So, when these two people come into contract, so we call it contract farming.
But there are some other parts in it. For example, the contract you sign, there can be three types of contracts in it. First of all, there is a loose buying agreement.
So, what happens in this is that you have done an agreement that you will be buying this produce of the farmer but you have a foundation that you have to buy it. Farmer is also open to sell out the plant but first preference will be given to the person with whom he has come into contract. Next is simple purchase agreement.
Simple purchase agreement is that I have made agreement with the farmer that I will provide you with this much of tomatoes after 3 months. So, this is just a quantity you have defined that you have to purchase this quantity in this agreement. So, this is the second type and third time what happens in this is a very interesting thing and very important that is supervised production with input provisions.
So, this supervised production means the contract you are doing for example a company has contracted to a farmer that we will give you the produce for example. We will buy tomatoes and potatoes from you. But we will tell you how you are producing these potatoes and how to produce them.
We will also supervise them. We will come to your farm every week and see which fertilizers you are using in your production. We will also see how you are farming it. We will also see the import.
We will provide you the seeds. You will also get the seeds. We will provide you the seeds of which variety you need to plant. We will also give you the facility to get a loan from us.
We will also see the risk coverage. Ultimately, the produce that comes out is good or bad, it is our responsibility. You just do the production in our way, supervision will remain ours.
So, there is risk coverage in this that there is no risk on the farmer, ultimately, how the variety of his crop comes out because The company has kept the supervision of the crop. So, it is responsible that the production has been done under their supervision. So, whatever production has come, the product that has been produced, whatever has come, they have to purchase.
Now, let's see more in this. There are three elements in this, the agreement signed by any contract farming. There are three things in it.
One is pre-agreed price, that at this price, the production is not going to be We will buy the product at a given rate and the quantity of the product is also written and quantity of the quantity we want from you or the area is defined that in this area you have to do this farming. We will be buying and when we will purchase it, it is defined by time. At the time of harvesting or at some time you have to keep the cold storage or the date is mentioned.
This is how the agreement is signed. So, most of the companies or big companies are preferring this model because why they are doing it, we will discuss it in detail later. So, finally, there is one more thing that is written. Now, these deals can be oral deals. These deals can be formal registered return.
Whether you are going to the notary or the tax officer to register the agreement properly or you are signing it on an oral paper, that is all contract farming. But the topic we are discussing today is regarding government ordinance. And the government's rules and regulations are governed in a formal structure.
So, here we will talk about the formal structure of the return agreements. contract farming in the entire ordinance. That is all about the written contracts. Now, we come to the point of why we need a contract farming. What is the need?
The farmer is producing, the market of APMC is made up of fields, we can take it there and sell it and if he gets money, then why does he have to make an agreement with any company for producing or for any quality assurance or for anything else. Because both have a benefit in this. It is beneficial for both the parties. The farmer who is producing, the farm producer, and the agro processing plant or any organization involved in it.
How? First, it guarantees buyback. The farmer has the benefit of growing whatever he has grown, be it wheat, barley, tomato, potato, vegetable, whatever he has grown. So, under this contract, he has a surety that the things he has grown, he will be able to see them.
You must have seen in the news channels that Many farmers leave the potatoes and onions on the road and go to the highway. They say that they are not getting the price and they are not going to sell. We do not have the cost of 1 rupee per kilo and we are dumping it. So, in such a situation, the farmer is saved because he has a guarantee that he has already been assigned a price that he will buy this quantity at this price. So, he gets this guarantee that whatever the agreed price is, he will buy it.
The company that has contracted with the farmer is getting the benefit of a standardized high quality agriculture produced. So, now this company does not need to go from pillar to post, there is no need to travel in different states. So, the company has already contracted with the farmer.
particular type of seed, a particular type of quality production, a process, so whatever production is finally available, it is with them. So, the buyer got the benefit of getting a standardized high quality product. Now, why is this necessary?
I will explain this further through a case study. So, you have to watch this video till the end so that you can get the gist of the thing that why do we need to do all these things in contract farming. And why the companies even prefer that they come into contract farming. So, this is a small scale, this makes small scale farming competitive.
The small farmers who have small farms, not big farms, they also benefit from this. How? Because they have access to technology.
Because the company said that we will do its supervision, we will provide you technology, we will provide you high quality seeds. And along with that, we will also give you the loan and credit facility. So, this is the benefit they are getting, the small farmer even. And the small farmer does not have any marketing channel, he has only one method, to go up, load on the truck and reach the APMC Mandi. Whatever rate you get, you have to come back with that rate, even if you have to sit there for 4-5 days to get that rate.
So, this is the benefit which a small farmer is getting, that he is getting the access to the technology, new upgraded technology. It is getting the loan facility. which is otherwise bank is hesitant to give the loan to the small farmer but these companies are able to provide this. And accordingly, as I told you, marketing channel and related information regarding how to produce, what should the process should be, when to harvest, when to sow. So, these are all the benefits which they are getting.
With this, it reduces the risk of production, price and marketing cost. So, I told you that all these benefits are also available for this. And along with this, financial support is also being provided in the form of loans and technical guidance which is more important to the farmers because otherwise they cannot afford the technology but the big companies like Amul, PepsiCo or the ITC companies which make biscuits and breads provide good technical guidance to the people. So, this is how they provide technical guidance, so quality, quantity and the price all is assured in this and accordingly this consistent supply of agriculture produced.
So, because the buyer, the company, the factory knows that the material has to come from here after two months, the price is safe, there is no price exhalation, so at this rate they will get the goods. So, this is again benefit which they are getting that they are getting the delivery or the at on time and plus at the lesser cost because whatever cost has been decided earlier, he will be going to buy according to the agreement. So, this is the benefit which they are getting. Now, before I move ahead, I would like to explain to you through a case study that basically how contract farming benefits companies.
We have a company here, this was a new company which wanted to manufacture beer, they wanted to produce beer in India. So, it is an international company, Saab Miller. India is a franchisee, basically an Indian subsidiary, which is producing different varieties of these beers in India. So, what did it do?
It produced a new variety of beer, just They required around 75 tons of barley. They needed 75 tons of barley but the thing is that in India, barley production was done for one purpose only that is for agriculture feed. It was used for animal feed.
Barley was used to feed cows or animals because farmers also know that there is no demand in the market but it is better to leave the field empty. the a So, this company has so many requirements and the farmer is not producing with so much interest because they know that there is not much value in its market. So, what option this company had? What was the option that the Saab Miller India had?
The Saab Miller India had the option that now it should go to the APMC market. APMC, which is the agriculture produce marketing committees. So, these are the committees which are made by district and block wise according to the APMC Act which is state wise defined. Now, what happens is that in the APMC Act, a territory is defined and all the farms that will come in this territory, all the production will have to be sold in a particular market. So, this is the market there, they have to bring all of them here and produce their produce and sell it all in one place.
So, here the problem is that, When the APMC saw the problem of the barley, they went to Rajasthan, Uttar Pradesh, Haryana and Uttarakhand. They procured the barley from big APMC mandis. But the problem was that they did not have uniformity of grain. They were not getting the size of the barley they needed. They were getting different varieties of barley.
The problem with this is that the machinery that you have ordered for beer production works in a particular customized way. If you use a variety of barley seeds or grains in it, it will not only spoil the quality but it will also increase the processing cost. So, this problem was coming to Saab India.
What solution did they come up with? Now they came up with a solution to start directly purchasing from farmers. But the problem was that under the APMC Act, the producer is not allowed to directly purchase from the farmer. If the farmer wants to sell his produce, he will have to go to APMC Mandi first and then then this Sabindia will be able to purchase.
So this was the problem which they were facing. So they came up with an innovative solution to bypass this. That even now there are restrictions like APMC, ATTO, etc. so we cannot do this. But what we can do, we can provide high quality certified seeds. We will provide the seeds and we will give the training to the farmer on how to grow this seed and how its productivity can be increased.
And the extensive services. Extensive services, for example, transportation and marketing costs, they will all be done by themselves. So, further storage requirements, the requirement to reach the godown, all will be done by them. So, this is the way out which they formulated because APMC was putting a restriction that all the items will be delivered first.
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We will discuss this later. We will discuss this later. We will discuss this later. But this Act is not being reformed and the requirement is not being fulfilled for the contract farming.
Due to which the processing or the chain is not being able to be built or we are not able to bypass it. So for this, basically, this ordinance came. Now what is the name of this ordinance?
As I told you, three ordinance managers came from which agriculture produced three ordinances related to agriculture and agriculture production. Among them, this is an ordinance related to contract farming, Farmers Empowerment and Protection Agreement for price assurance and farm services. So, this is the name of the ordinance that the government has issued for specifically contract farming.
What was provided in this ordinance? First of all, it provided a framework for farmer to directly contract with those wishes to buy the farm produce. So, the first thing that was mentioned here is that you can directly contract with the buyer, you do not need to come to APMC.
And after that, what used to happen before this, most of the country cannot, most of the farmer were barred from this thing that they cannot directly sell, they are produced to the customer or the company processing whatever it is. If they have to do it from outside. If they want to sell their produce directly to the APMC without taking it to the APMC, but who will do that?
It will sell its produce to the licensed trader, who will sell the same trader, even if the licensed trader is affiliated with the APMC. APMC committee has issued a license to the company and only then it can work here. Now what happened here, you tried to surpass APMC, so the same government has changed it that now you can do direct lab, you don't need a license trader. If any individual wants to purchase, if there is a processing plant, if there is a company, if there is an individual or even a resident, if that resident also wants to go directly.
contract with the farmer for supply of the goods. For example, McDonald's wants a burger with tikkis and I directly agree with them, the local nearby farmers, that I want this quality of potato for my tikkis. So, this can be done now. Now this can be done which was not earlier possible because you needed to be a licensed trader. Even if you are not sending APMC, you can still sell it to the licensed trader.
under APMC Act. So, this was one thing. Now, this ordinance has basically removed this thing, changed this thing and what other changes it has done and how it has been done with this ordinance and along with this, the two ordinances that were there, we also help in this direction, essential community acts and reduce the power of APMC.
So, the power of APMC was... So, basically, they have to go and sell it. So, that has been restricted now.
Okay, so this is the benefit which this ordinance provides. And after this, we basically, now I will discuss that what benefits we have got in this ordinance or what changes have been brought specifically. Before that, we will see that the structure till now, the value chain or food processing chain, what was that? So, what was the first thing that happened in this? area is defined.
As I told you earlier that a specific area is defined. This whole district can also be there. This whole district can also have a block in it. That all the farms and farmers in this block will bring their produce in this particular APMC. Now what is the problem in this?
For example, this is a district. Now the APMC of that district is here and these are all the farmers. Now this farmer has to take his goods till here. So, he has to take this. But if the APMC is located in the other district, then it cannot sell it here.
Because the market area has been defined that you have to take it here, even if you have to go to the other APMC, Mandi, which is nearby. So this was the problem. This is the situation earlier, the market area was defined, it has to be sold there. So this has blocked the entire district and accordingly this compelled.
by law to sell the produce in the designated APMC market. So, this was the problem which was there and next what is next, some states provide allow farmers to sell licensed produce without going to the APMC market. But if some states like I told you that Punjab allowed and similarly Tamil Nadu also allowed that the produce can be directly sold to the APMC market.
to the processing unit or the company without going to the APMC. But the condition is that the services that you are getting, otherwise you have to pay the service charge in APMC. When the farmer takes his stuff there, then APMC mandi charges him for the services, he has to pay the fees for it.
So, you will have to pay that fee even then, even if you are not coming to APMC mandi, you have directly sent the fees to the buyer, but still you have to pay. The service fees for the APMC. So, this was a problem.
So, farmer said, what will be the benefit for me when I directly went to the buyer to sell my goods. I did not use your facility. Still, why should I pay you service charge?
This was a problem. And the second thing is that now we have surpassed this thing that the farmer need not to pay this fees because now he will directly deal with the company. He can contact even if he is not a licensed trader.
Okay. Another aspect is that the APMC mandis are open because the government has kept them as it is. There is no problem there. They will work as it is. Those who want to sell their goods there, they will sell it there.
Those who want to buy goods from there, they can buy from the buyers. But this is for the farmer that they have been given an alternative option that they can directly contact their buyer or company. So, this is a benefit which they have been given.
Now, what happened in this? What are the changes? The first change is regarding the removal of the uncompetitive practice.
So, this is the main thing that what kind of uncompetitive practice is there? That is, what happens is that the traders in APMC Mandi are limited. 100-150 or for some specific community, there are some limited traders. They do a grouping, make a castle. And what happens by making a castle is that they say that they will buy at this price, they do not have to pay a rate above this.
So, they decided that we have to give this much per quintal rate, not more than this. So, everyone decided. Now, the problem for the farmer is that he is not getting what he is expecting because everyone decided and said that we will take at this rate which is called Earthyaz in some areas. These traders are called Earthyaz, who are middlemen. Now, what is the problem for the farmers here?
That he cannot go to anywhere as because here he has no option to go to any other APMC, no matter how close he is, so he has to sell it to him, this is the problem which they were facing. But now what has been changed that any person or company can sell their produce and along with this, the APMC Act has also been maintained, there is no such problem in that, those who are going to sell their goods there, they can sell there, otherwise those who want to sell outside, they can sell outside. So, this is the major change which has been done.
They have not given any fees to take you to APMC. They have also said that you can go and contact them from outside. Next change, quality assurance assures quality, quantity and price for both farmer and the buyer.
This is the benefit which they have got. which I was talking about, the quality and quantity is assured and the price is assured. Both parties benefit from it, the farmer and the buyer. So, this is the advantage of this gap. And here I will give you an example of PepsiCo.
PepsiCo is an example because it is one of the companies which took the first initiative in India regarding the contract farming. Specifically, not contract farming but they intended to go for the contract farming because 90, now all these The contract farming process starts after 2003 when we give leverage, we reform the APMC Act and we provide contract farming. But there was a limitation in the reform that you have to pay the fees of APMC etc. So, this was the condition otherwise. Because they wanted to make ketchup, they had to make ketchup in India.
You know that Lays company makes chips. So, they had to make ketchup. They had this problem that how will they make ketchup. Because they can't do the contract directly. The quantity they want cannot be in the contract.
So, what they did is that they planted their own processing plant in Punjab. They decided to plant processing plants and they did the same thing that Sab Miller India did. They planted their own processing plant of tomatoes and they said that they want this quality.
This was done in 1997. They took initiative in 1997 that we want this quality so we will plant our own processing plant and according to the production of the processing plant, that will be the quality of the tomatoes that will grow in that region, they can bring it to us and sell it. So, that was the benefit which they were giving. So, many of the farmers, surrounded farmers of Punjab, they opted for this, that they came from here and purchased it. So, their directly produced tomatoes started coming to them. Now, even if there is no contract here, this was another innovation which was done instead of which because contract farming was not available.
So, this innovation was done by Pepsi also. They installed their own processing plant and encouraged the nearby farmers to come and sell their own products. So, this is how they assured the quality and quantity. So, this was how they want. So, this will benefit these big companies that they can directly contract.
So, whether it is a big company like Pepsi or a restaurant, they can So, this is the other benefit which they are getting and which they are intent to get. Now, what did they do with this? Here, we have Assumption Intermediaries from Stock Limits. So, now what happens in the Essential Community Act, you have a stock limit and you cannot sell on it. So, this was the thing which was provided by this ordinance that the assumption was given from this stock limit.
If companies want to procure, they can do so. There is no essential commodity act which is going to apply on them, on the stock. So, what benefits will it give?
It will give the benefit that the large organizations can participate in contract farming. Their demand for the farmers will increase. When the buyers will increase, the farmers will also have the option to sell their goods to the good contract.
and small traders also get encouragement to expand their capacity, their storage, cold storage etc. and take the benefit of this. So, the fourth change that was done here is regarding increasing the competence in favour of the farmer. This audience is increasing the competence but in whose favour? It is doing this in the favour of the farmer.
How? Because now he has large and numerous buyers, he can choose from them who to sell his goods to and who is giving him a good deal. And it will also help that we can make a good market for agriculture committees at the national level. We don't have to mix it with E-NAM, we don't have to mix it with the national agriculture market. That is different because it deals with APMC only, it doesn't deal with outside.
But this is about the national market that these farmers can sell their produce anywhere to anyone. So, that is a benefit which they are getting and this is how they will create a national identity. A national market is created on its basis.
So, what is fifth here? Now, some concerns were raised here. Now, this can go in both directions, positive and negative also. So, the dispute resolution to the executive means, Earlier, if there was a dispute in a contract, you would go to court.
But what did this ordinance say? It says that if you have a dispute, you will go to the Sub-Divisional Magistrate, SDM, Executive. According to those rules, he is not bonded with the rules. He does not need to follow the rules and procedures of the court. he can do it on his own, whatever he likes, case by case, he can resolve the dispute.
So, that is the benefit which they are providing and this gives the government more power. But the problem is that the government has more power to dispute, that they can provide the resolution according to their wishes. The government has more power to dispute.
So, the requirement of jurisdiction is limited here. That is the other concern of this. So, the last change that has been done is regarding the executive power of the executive Dispute resolution is violated the fundamental principle of contract farming.
Now, in contract farming, you are providing a limitation that it will be out of court or the settlement will be done with the help of the subdivision. So, the privacy of contract signed is that the contract is between two individuals. But when you give power to the executive, they can interfere in the contract and that is a discouraging thing for the buyer and the seller both.
So, accordingly, we see that the government has taken this step in 2018 also for making changes in the contract for providing or encouraging contract farming. Thank you. The changes were that the government wanted to provide ISTRA facilities but there were limitations regarding that only notified communities were provided, not all the communities were allowed.
Now it is allowed for all the communities to have contract farming and the government rules and regulations have been relaxed. What else is there is that the agriculture produced leaves the pricing to the parties. All of the central e-registration of the contract, you just have to do e-registration and then you are open to do the business.
So, this is the benefit which is provided by this new ordinance. So, let us see how this goes and how much it is utilized because ultimately the responsibility of applying it is of the state government. So, let us see how the state government applies it. It is being opposed in many places, so we will see how this comes out to be in particular states.
All from this topic and I hope you liked this explanation which we have done to the whole audience. You like this thing and accordingly for other important topics be tuned to us so that we can come with new topics and you can get more insight about all those topics. This is Deepak Thakur signing off for today.