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Supply Chain Risk

Decluttering the new farm laws (2)

The protests we are witnessing against the farm reforms are due to many reasons like lack of consensus building efforts by the government before bringing the laws, misinformation campaign being carried out by vested interests which is misleading the farmers, politicization of issue and resistance to change and reluctance of farmers, middlemen and state governments to move from their comfort zones. Many states have made tremendous progress with modification of their APMC laws in the last five years and they should find the new reforms as a logical extension of what they have been trying to do.

Let us try to understand the second of the two new Acts ( we may call it the Contract Farming Act) in greater detail which will help in moving forward.

Farmers (Empowerment & Protection) Agreement of Price Assurance & Farm Services Act 2020, makes it possible for the farmer to enter into forward contracts for his produce. This will facilitate contract farming.

This Act empowers farmers to engage with processors, wholesalers, aggregators, large retailers, exporters etc., on a level playing field. The contract gives minimum price assurance to farmers under Section 5 even before sowing of crops.

Transfers the risk of market unpredictability from the farmer to the sponsor (contractor). Farmers will be shielded from the rise and fall of market prices. Reduces cost of marketing for farmers and improves his  income since the Sponsor is to pick up the product from the farm gate as per Section 6(1) of the Act. The payment terms are specified under Section 6(3) of the Act.

The contracts can be linked to the flow of insurance and credit facilities for the farmer from financial institutions as per Section 9 of the Act. Very beneficial for the farmers.

The contracts have to be registered with a designated registration authority as per section 12 of the Act. This makes sure that all the sponsors are held responsible for the contracts they enter into and farmers are protected.

Quality specifications of the inputs to be used and the output to be produced would be described in the contract as per Section 4(2) of the Act.

Some concerns are expressed by the farmers of Punjab and Haryana. Here are the answers.

1. The contractors may not pay MSP for the produce: Mandating MSP will kill this initiative and will keep the private sector away. Sufficient price protection is provided under section 5 of the Act which prescribes that the guaranteed price has to be mentioned in the agreement, a bonus to be paid in case market price is higher than the guaranteed price and it should be benchmarked against the prevailing prices in the APMC Mandi.

2. Corporates will form price cartels and exploit the farmers: Private industry players have to compete with each other. Some of the crops can be grown only in some specific areas due to agro-climatic reasons. Farmers and FPOs will have sufficient bargaining power with different private players. Section 5 provides protection to the farmers.

3. Farmers are not equipped to deal with large private corporates: This is voluntary. There is no compulsion for farmers to enter into unequal agreements. FPOs will have adequate strength to negotiate contracts. States may set up a support mechanism for farmers and FPOs. Capacity building among farmers and FPOs through a large scale training effort in contract making, digital proficiency needed.

4. Corporates will take away farmers land: Section 8 of the Act specifically prohibits any transfer including sale, lease or mortgage of farmers land or premises under the contract.

5. Dispute Settlement mechanism is inadequate: An elaborate dispute settlement mechanism is described under Sections 13,14 and 15 in Chapter III. SDM & Appellate Authority (District Magistrate) are empowered to resolve disputes – no need to travel to courts and spend money.

6. Contract farming failed in the past and the farmers lost money: Bad experiences from past need not come in the way. There are many successful examples too. Seed industry has been successfully operating contract farming for last five decades to produce seeds with seed growing farmers. Companies like ITC have done successful models in MP and other places. There are many such examples. With the backing of the law and taking the help of the support systems being put in place the farmers and FPOs should be able to gain from contract farming. Production of value added products like organic foods,  nutrition fortified crops based foods, immunity boosting crops, etc have to be cultivated under contracts so that the identity preserved supply chain system can operate from farm to fork. Contract farming will improve farmers incomes.

Effective implementation of this Act will require some eco system support measures.

1. It is essential to get cooperation of each state in implementing this Act. Centre may reach out to all Chief Ministers and get their buy in. This is critically important.

2. Government will need a couple of years to frame the rules under this Act and to conduct broad based consultations before framing the rules. This time may be used to achieve the following.

a) Each state may position itself for attracting contract farming companies. States may identify the crops in which they would like their farmers to excel in contract farming and make them ‘ desired destinations’ for contract farming companies to come and invest in creating infrastructure and systems.

b) State governments may set up an Agri Business Office in each district which will advise the farmers with trading, making contracts, sharing commercial knowledge and information and other similar support activities.

c) Set up the designated authority, as per Section 12 of this Act, in each district for registration of all the contracts being entered into.

d) Launch a major public education campaign about the reforms and create an appreciation for the need for reforms among common people.

A few amendments to this Act are needed to make it more effective.

a) A regulatory body may be set up at national level to oversee the operation of the markets and to prevent any price cartelization by the private buyers in markets.

b) Dispute Settlement mechanism under sections 13,14 and 15 has to incorporate a right for the farmer to go to Civil Court if he is unhappy with the order of the SDM or the Appellate authority.

Conclusions.

Promotion of contract farming will increase private investments in infrastructure, local processing facilities and generate rural employment. Large corporates will depend on many small scale local players to bridge the last mile and provide services to the farmers and help the corporates in achieving the volumes they need. This will help in generating rural entrepreneurship and economic activity.

Contract farming will also bring modern technology to the farm and bridge the technology gap we have now. It will also promote crop diversification which will promote demand driven agriculture.

Many benefits of contract farming are to be harnessed by taking a positive step forward and building confidence among farmers and building support systems which will help the farmers.

Multiple stakeholders have to come together, understand the long term benefits of this Act and make it a success.



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Disclaimer

Views expressed above are the author’s own.



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