Signing the wrong contract

By Dr Sudhirendar Sharma

Many states in India are promoting contract farming, ostensibly to allow "technology transfer, capital inflow and an assured market" for crops. This means letting retailers and global corporations enter into profitable agreements that are detrimental to the farmer. By ignoring the better option of cooperative farming, which has proved beneficial to farmers, the government is placing Indian agriculture and food production at great risk

Maharashtra will soon join the ranks of Andhra Pradesh, Gujarat, Karnataka, Punjab and Tamil Nadu in promoting contract farming. This move is ostensibly aimed at bailing out the farming community from its distress, manifested in the number of unprecedented farmer suicides in the state in recent months. The state government has proposed an amendment to the Maharashtra Agriculture Produce Marketing Act to allow corporations, retailers or food processing companies to directly enter into agreements with farmers to market their produce.

The corporate sector has been the first to rejoice, much before the farmers who are the supposed beneficiaries of the new Act. Multinational giants like Metro Cash & Carry, Cargill Foods, Hypercity, Shoprite and Wal-Mart have signalled their intention to get into agreements with Maharashtra's farmers. Even the Minister for Marketing, Harshvardhan Patil, could not hide the truth when he said, "The decision will be a boost for the food industry and retail chain majors."

The stakes are high in the emerging market. Big Indian companies are also rushing into agriculture. India has fertile land and tropical fruit, rice and spices that are considered among the best in the world. For example, Reliance Industries has been luring farmers in Haryana to part with their lands.

India's peasant-led agrarian economy is therefore at a crossroads. The peasants who fought the European opium and indigo planters during the historic Champaran Satyagraha of 1917 are up against neo-imperialist forces that are once again out to establish their dominance over Indian agriculture. But this time around, they do not enjoy the support of powerful people within the country.

After the satyagraha of 1917, a radical reform in agrarian relations was advocated. Without reforms, the problems of poverty would not be solved. The Congress then had emphatically declared, "The final solution to this problem involves the removal of British imperialistic exploitation and a radical change in the antiquated and repressive land tenure and revenue systems."

A case for cooperative farming was made at that time. Peasant proprietorship was not questioned, but they said, "Progressive agriculture as well as the creation of new social values and incentives may require some system of cooperative farming suited to local conditions." Experimental farms were talked about to demonstrate the virtues of cooperative farming.

The post-independence years saw a dramatic shift in the pro-poor agrarian policy. It had faced stiff resistance from the bureaucracy, politicians and the land-owning lobby. Consequently, from the early-1960s, Indian agriculture has implicitly promoted corporate farming and global integration of agribusinesses.

Much of this has been at the cost of the poor and marginal farmers. Rising input costs and falling output prices are threatening the viability of cultivation. The government has failed to protect farmers against competition from highly subsidised production in the developed world. It has opened up the farm sector and allowed private traders to tap its resources for their own profit.

The results have been evident in increasing suicides by farmers, large-scale migration and a decline in output from peasant-driven decentralised agriculture. Prof. Amartya Sen has expressed great disquiet at this growing distress: "Our vision of India cannot be one that is half California and half-sub Saharan Africa."

But the Indian government's National Agriculture Policy continues to promote the private sector in agriculture. The policy envisages that "private sector participation, through contract farming and land leasing arrangements, will allow accelerated technology transfer, capital inflow and an assured market for crop production, especially of oilseeds, cotton and horticultural crops."

The world of corporate farming is thus growing in India. Its seeds have been systematically sown to justify bringing our decentralised agrarian economy under the centralised control of corporate agriculture. As the corporate takeover spreads, it is critical to assess its impact on the lives of farmers.

Corporate farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers and buyers. It is a commitment made by the cultivator to provide an agricultural commodity of a certain type, and in the quantity required by a committed buyer, typically a large company. The farmer is required to plant the contractor's crop on his land and harvest and deliver a certain amount of produce based upon anticipated yield and contracted acreage.

The terms of the contract may differ according to variations in the nature of crops to be grown and the conditions levied by both the company and the farmers. What is certain is that farmers lose their sovereign rights over what to grow and how to grow. The trading companies control the prices and the market. This is also known as 'forced commercialisation'.

In Punjab, contract farming has only helped corporations to control farm operations and make profits. The Amarinder Singh government's obsession with diversification of crops has exposed farmers to the vagaries of corporate interests in the state. The idea that excess water-reliant crops like wheat and paddy would get replaced through contract farming has not worked because much of the recent corporate interest in Punjab is in basmati, which is a water-guzzler. Growing incidents of pre-determined prices being reduced on the pretext of inferior quality of the grain or crop, are adding to the farmers' problems.

Diversification-which is sustainable and helps conserve resources like soil and water-could have been more effectively encouraged by a relative pricing policy and a support system of public agricultural extension services. In reality, the decline of such services has allowed the easy entry of private traders. The states that are encouraging contract farming are in fact easing the pressure on state finances by eliminating subsidies and farm support prices.

In Andhra Pradesh, about Rs 964 lakh was invested to pilot contract farming on 200 acres of land in Kuppam, the then Chief Minister Chandrababu Naidu's constituency. The place has become a laboratory of technological options at the cost of the farmers' interests. Corporatisation of farming has had a similar impact in the US, where consumer expenditure on food has grown without concurrent gains in farm receipts and with a long-term enriching of the corporations.

Wherever contract farming has been practiced in India, similar experiences have surfaced. Skewed investment outlays, misdirected subsidies and faulty procurement policies have been the outcomes of the fallacious assumption that corporate agriculture can pull the sector out of its slump.

While corporate farming has gained political patronage in developing countries, agriculture cooperatives hold the dominant market share in the European Union. Between 60-75% of the market share in the grain trade is held by agricultural cooperatives in Denmark, France, Ireland, Austria and Sweden. Cooperatives also play a major role in trading dairy products, fruits, vegetables and meat in the EU and the US-as much as, for example, 90-100% of the share in dairy products in Denmark, Finland, UK and Ireland.

Even at the peak of the corporate engagement in agriculture in the US, agricultural cooperatives have been able to slice out a 38% share of the market in trading grains. Cooperatives have an edge over corporate farming in channelling profits to the producers. They signify the value of 'farmer-owned firms' as opposed to an 'investor-owned system'.

Agricultural economists have studied the cooperative inter-dependence of farm production and marketing since the early-1930s, but the commodity-driven agro-industrialisation model has often led to the vertical integration of markets at the farm level. Now economists have begun to re-position cooperative coordination ahead of market coordination: it gives farmers the voice and choice to be part of a 'service at cost' principle that makes members liable to incur profits or losses.

The push to liberalise and privatise in countries such as India during the 1990s may have forced food systems researchers to bypass the cooperative model. Growing corporate influences have underplayed the significance of cooperatives. The same corporate interests are now eyeing the milk cooperatives of Gujarat.

Collective response

The small size of holdings is a key factor in unproductive harvests. About 2,400 small farmers of Thrissur in Kerala have demonstrated the virtues of cooperative farming. The Adat Farmers Cooperative Bank (AFCB) is supporting their experiment in cooperative organic paddy cultivation.

The shrinking size of landholdings due to family divisions meant a shift to crops other than paddy, as cultivation became less remunerative. Kerala was sourcing about 75% of its annual requirements of 40 lakh tonnes from other states. The AFCB cooperative venture has proved that small plots can be assets if jointly cultivated.

In a farming cooperative, the members pool their holdings. They jointly cultivate the land, using improved practices and receiving wages for their daily labour. When the produce is sold at the end of the season, members get a dividend in proportion to the area of land contributed by them, and a share of the income from the produce proportionate to the labour that was contributed.

Cooperative farming eases pressure on its members by making joint purchases of seeds, fertilisers or equipment and by undertaking land improvement work. The Bank had constituted nine farmers' committees to undertake the cultivation, from pumping out the water from the paddy fields to harvesting the crop. AFCB distributed Rs 1.5 crore to the farmers as interest-free loans of Rs 6,000 each. It purchased seeds and all other inputs. The total cost after harvesting was Rs 2.10 crore. The sales will generate about Rs 5.10 crore. The balance of Rs 3 crore will be distributed among the farmers proportionate to their land holding. This could be a model worth emulating.

With an average landholding of below 0.1 hectare, cooperative farming in India could pull subsistence farming out of the current abyss. Ignoring such options, Haryana is on the verge of amending its Agriculture Market Produce Act in favour of contract farming, whereas Chhattisgarh has enacted the Land Lease Act 2005 to facilitate the transfer of land to corporations. Maharashtra is only the latest to encourage contract farming and serve corporate interests.

No lessons seem to have been learnt from past experiences and the experiences of the EU. A shift in policy in favour of farm cooperatives, along with the complementary support of inputs from public institutions and a reliable system of credit at reasonable rates of interest, is imperative. Without such changes, agriculture in India will slide further into an abyss.

(Sudhirendar Sharma is a development analyst at The Ecological Foundation in Delhi.)

InfoChange News & Features, October 2006