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Is corporate farming really the solution for Indian agriculture?

C. P. Chandrasekhar
Jayati Ghosh

Contract farming is increasingly being presented as the way out of the morass in which Indian agriculture now finds itself, and is being actively promoted by major international donor agencies, multinational companies and the Central Government. In this edition of Macroscan, C. P. Chandrasekhar and Jayati Ghosh consider the experience with contract farming internationally and recently in India, to see the effect upon farmers.

THE Government's National Agriculture Policy envisages that "private sector participation will be promoted through contract farming and land leasing arrangements to allow accelerated technology transfer, capital inflow and assured market for crop production, especially of oilseeds, cotton and horticultural crops".

The NDA Government at the Centre has already drafted a model law on agricultural marketing to provide, among other things, legal support to contract farming agreements.

Several State governments, in Andhra Pradesh, Gujarat, Karnataka, Punjab and Tamil Nadu, are actively promoting contract farming, changing laws to enable and support it, and providing companies interested in it with a variety of incentives, including lifting of land ceilings, subsidies and tax rebates. Other State governments, including in West Bengal, are under pressure to change their policy towards contract farming.

Contract farming is defined as a system for the production and supply of agricultural or horticultural products under forward contracts between producers/suppliers and buyers. The essence of such an arrangement is the commitment of the cultivator to provide an agricultural commodity of a certain type, at a time and a price, and in the quantity required by a known and committed buyer, typically a large company.

According to the contract, the farmer is required to plant the contractor's crop on his land, and to harvest and deliver to the contractor a certain amount of produce, based upon anticipated yield and contracted acreage. This could be at a pre-agreed price, but need not always be so. The typical contract is one in which the contractor supplies all the material inputs and technical advice required for cultivation, while the farmer supplies land and labour.

This system has old historical, but the more recent pattern of contract farming has been developed especially in the US, where corporate penetration of agriculture is probably the most advanced. Agricultural trade globally is dominated by transnational corporations, such as Cargill, Archer Daniels Midland and Monsanto, which are increasingly involved at each stage of the agriculture system. These corporations achieve domination over the market through a combination of horizontal and vertical integration.

This has increased the margins for the procuring and processing firms while at the same time reducing farm incomes and increasing the prices for the consumers. This explains the rising spread between the prices received by farmers and livestock breeders, and the retail prices, which has been so marked in the US over the past decade.

This can be gleaned from Chart 1, which shows index numbers of total food spending and farm receipts in the US, in terms of current US dollars. As evident from the chart, while total food spending has ballooned, farm receipts have barely risen even in current price terms, and the gap between them has increased most strikingly over the 1990s. So US farmers have not gained from the continuing government subsidies to agriculture, instead the large corporations have made more profits.

The adverse effects of such a policy on US farmers, who are already quite well off, and financially and politically strong, are now apparent. But this process is likely to be much more devastating in terms of its impact on Indian cultivators, many of whom are already operating at the margin of subsistence.

Contract farming in Punjab

The recent spate of contract farming in India effectively began with the case of Pepsi Foods Ltd (hereafter PepsiCo), which entered India in 1989 by installing a tomato processing plant in Hoshiarpur district of Punjab. PepsiCo followed the contract farming method described earlier, whereby the cultivator plants the company's crops on his land, and the company provides selected inputs such as seeds/saplings, agricultural practices, and regular inspection of the crop and advisory services on crop management.

Subsequently, PepsiCo and other companies have used similar methods for the cultivation of foodgrains (basmati rice), spices (chillies) and oilseeds (groundnut) as well, apart from other vegetable crops such as potato. Until recently, this model of contract farming was considered a success in terms of diversifying cultivation in Punjab and improving the incomes of farmers. However, recently there has been growing dissatisfaction among the farming community affected by these contracts, especially as lower market prices have led the company to effectively reduce the output prices through a variety of means such as quality control.

The Punjab Government has argued that contract farming is the best means of crop diversification, in a region where there is a real question of ecological survival and sustaining natural resources such as water and soil in a reasonably healthy state. However, since contract farming is based on private corporate interests that are inherently profit-driven, there is no reason why these should coincide with the ecological requirements of the region.

Indeed, much of the recent corporate interest in Punjab agriculture has been in basmati farming, which is one of the great water-guzzlers. Crop diversification can be more effectively encouraged through a system relative pricing policy accompanied by a supportive system of public agricultural extension services.

Already, more than 90,000 acres are under contract farming in the State, with both multinationals and domestic companies involved. The system that is increasingly in vogue involves a tie-up of a marketing company with an input producer (such as Rallis India, for example) with a bank (ICICI Bank or SBI, both of which have entered into such arrangements) which agrees to provide credit. However, the recent trends of lower prices have entailed default on loans by farmers, which in turn has created conflict among the various corporate partners about who will bear the consequent loss.

Farmers in Punjab are becoming increasingly resentful of a system that has put them under the total control of corporations, which will decide not only the crops grown but also the procurement price. The growing incidents of the pre-determined prices being reduced on the pretext of inferior quality of the grain or crop, have added to the resentment among farmers.

The issue has became so critical, that the State government agency that had designed the contract farming programme in the first place (Punjab Agro Foodgrains Corporation) has been forced to step in and buy basmati rice that was being rejected by the contracting companies. The PAFC has become the guarantor of last resort for buyers and farmers in case the transaction does not go off smoothly, which is increasingly the case.

The effect on employment also deserves more attention. Contract farming has led to more employment opportunities for labour, since the labour intensity of vegetable crops, except potato, is much higher than for traditional crops like wheat or paddy. This has created an employment boom for women workers especially, in the contract production areas of the State, especially as the mechanisation of sowing and harvesting operations of paddy and wheat crops has reduced manual work to almost nothing.

However, wage levels have been pushed to subsistence levels by increased competition for work through migration. At the same time, those in work have to deal with insecure employment and poor working conditions. There is much greater reliance in female labour: as Chart 2 shows, female labour is now a significant part of total labour used in the contract-farmed crops.

Child labour accounted for about 3-4 per cent of the total labour hours in vegetable crops, as part of family labour. However, a woman's wage is only between 60 and 75 per cent of a male worker's wage; and a child worker receives only half that of a male worker (when paid a daily wage rather than a piece rate wage).

It appears that male labour is being displaced by mechanisation while women and children are increasingly employed for the more labour-intensive activities.

The Kuppam project in Andhra Pradesh

The Kuppam Pilot Project in Chittoor district was conceived as one of the showpieces of the Chandrababu Naidu government, specially developed in the Chief Minister's constituency from 1997 as part of its new strategy for agricultural development in the State to promote new capital-intensive crops, using the latest technology and equipment, based on large-scale private corporate involvement through contract farming systems.

The total estimated cost of the project was around Rs 964 lakh, with a large part spent on costs of technology transfer from an Israeli company. The project was originally contemplated for about 200 acres, but the actual area covered is only 170 acres, thus bringing the cost per acre to Rs 5.668 lakh. This order of investment is at least ten times more than those of even rich farmers adopting the most modern intensive cultivation practices.

An independent team of scientists who visited the project (Dr Chowdry, Dr Prasada Rao, Dr Venkat and Dr Uma Shankari, under the auspices of the Andhra Pradesh Coalition for Diversity) came up with a report in 2002, severely criticising the project. It found that the Kuppam project was ill-designed, undemocratic, unsustainable in environmental terms, overly expensive, and had adverse effects on the local cultivating households.

The only positive feature was the introduction of Israeli drip technology, which was already a well-known technology and has been introduced at much lower cost (ranging from Rs 17,000 to Rs 20,000 per acre) in neighbouring regions sponsored by the Karnataka Government.

The lands taken over from the farmers were being managed by the corporate body ( BHC Agri India Pvt. Ltd.) at all stages, right from the planning to the development and management stages. Every farm operation, including marketing, was managed by the corporate body which had employed heavy mechanisation except for harvesting (which is mostly manual since it is a hand picking operation) and cleaning of the produce. Even weed control was done through intensive use of pesticides. The average cost of cultivation worked out to is about Rs 20,000 per acre.

The team found that the Kuppam project was not sustainable in net energy terms, and that there were problems with the full technology package. Deep ploughing, with or without turning the soil, was practiced before every cropping. Large amounts of expensive agro chemicals, both pesticides and weedicides, were applied for every crop. These tend to leave considerable residues in the soil, raising serious environmental concerns. No organic manures were applied. The irrigation system involved rapid depletion of groundwater with no provision for its recharge, or for any other rainwater harvesting measures.

The social impact of the project has been adverse. First, farmers tilling their lands have been driven out from their profession and only some are able to work as hired labourers on the demonstration farm. The benefit of subsidiary occupations like dairying with the use of crop residues, which is a by-product of mixed farming, has been lost.

Indeed, farmers who have tried to use some of the by-products for fodder, such as the leaves of cauliflower plants, have been punished, and there is strict policing of the labourers to prevent such "theft" from their won lands.

Foodgrain production has almost ceased in the project area. Only vegetables and other similar crops are being cultivated. This will adversely affect foodgrain supply to the people living in the area. The result is that the dependence of the local people on the market, which, in turn, is controlled by the corporate bodies, is total.

The problem of finding alternative employment for displaced cultivators has become a serious concern. While the total membership of the society comprised 167 heads of cultivating households, the project typically employed only 60-70 women and 7-10 male workers per day.

Thus, both subsistence and livelihood of the local people have been threatened by this "model" project.

Local farmers now want to revert to self-cultivation, and are hoping that the State government will intervene and help them to resume their cultivation as before. As in Punjab, this showpiece of contract farming, which has already been heavily subsidised by the State government, may have to be bailed out by further State intervention.

The spread of contract farming has had some very adverse effects on the labour process in agriculture in other areas of Andhra Pradesh as well. The most evident effects have been in the greater casualisation of labour as well as the greater use of female and child labour. Contract farm labour is generally casual labour, even though workers may be tied by advance loans on what is often their own land.

It is evident from the cases reported here, as well as other evidence, that contract farming holds numerous problems for agriculture in developing countries such as India. It tends to displace labour quite substantially; marginalises the direct cultivators who lose control over the production process and often even over their land; encourages more capital-intensive and less sustainable patterns of cultivation; can result in greater insecurity and lower incomes for farmers because of use of quality measures to lower the effective output price being paid by contractors; can even deny farmers the benefits of higher prices which could be instead absorbed by corporate contractors with local monopsonistic power; propagates monoculture which reduces food security and the possibility of livelihood diversification through livestock; relies excessively on the use of lower paid women workers and child labour; increases and accelerates the process of casualisation of labour.

Given these evident problems, it is surprising that contract farming is still being promoted so assiduously by various forces, including the Central Government, in India today.

The case for contract farming has emerged only because public institutions have failed to provide farmers with the essential protection and support required for viability on a sustained basis.

What cultivators in rural India need most of all today is the following combination: a basic price support mechanism that ensures that costs are covered; efficient extension services that provide information about possible crops, new inputs and their implications, new agricultural practices relevant for the particular area, and so on; and the availability of reliable and assured credit at reasonable rates of interest.

There is no reason why these cannot be delivered by the public sector. But the last decade has seen a collapse of agricultural extension services and the provision of agricultural credit across rural India. The minimum support price system is also being run down.

There is no reason to expect that private corporate firms will deliver these requirements, since their interest would be to maximise profits in the short-term and they are not necessarily interested in the long-term sustainability of cultivation.

Indeed, the experience thus far suggests that private corporate involvement tends to be unstable and has led to demands for the renewed involvement of the public institutions which had earlier reneged on their responsibility.

What is very clear is that contract framing is no solution to the current agrarian crisis in the country; instead, it is likely to intensify such a crisis.

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