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Contract Farming Assessment

Contract Farming System in Punjab: An Appraisal by B K Pattanaik, Kesar Singh, Sukhwinder Singh and Madan Mohan Singh

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Contract Farming Assessment

Parmod Kumar

T
here is a growing realisation that the current cropping pattern and the strategy of increasing production followed in Punjab is progressively becoming costlier in terms of a rising cost of production, overexploitation and degradation of land and water resources, and in general, polluting the environment of the state. The state government envisaged contract farming as a step towards achieving the objectives of crop diversification away from wheat and rice by providing farmers with better seeds and other inputs and improved marketing channel and technical know-how. To give a boost to the diversification of agriculture in the state, the Punjab government launched a multicrop, multi-year contract farming scheme in 2002. The Punjab Agro Foodgrains Corporation (PAFC) was designated as a nodal agency for promoting and coordinating the activities of diversification under contract farming in the state. The PAFC planned to bring about 10 lakh hectares of rice-wheat area under alternative crops through contract farming. In order to examine the PAFC scheme of contract farming, an appraisal project was funded to the Centre for Research in Rural and Industrial Development (CRRID), Chandigarh by PAFC and this book is the outcome of that project. The book comprises nine chapters. The first two chapters provide an introduction, the objectives, scope and methodology. The next four chapters set forth contract farming models being followed in Punjab, farmers covered, their socio-economic profile and dynamics of the economy of contract farming. The role of extension agencies is

Contract Farming System in Punjab: An Appraisal by B K Pattanaik, Kesar Singh, Sukhwinder Singh and Madan Mohan Singh (Chandigarh: Centre for Research in Rural and Industrial Development), 2008; pp 101, price not mentioned.

discussed in the seventh chapter and the eighth chapter provides brief examples of success stories of a few farmers. The last chapter presents the summary and conclusions. From riches to rags, how Punjab agriculture has moved from the early days of the green revolution to the present unsustainable wheat-rice cycle is discussed by the authors in the Introduction. The unsustainability of the wheat-rice cycle mounted pressure on the state government to make some serious efforts to bring in necessary diversification in the cropping system. The diversification of agriculture towards selective high value cash crops including fruits and off-season vegetables, oilseeds and other commercial crops has also been suggested by a number of scholars (Vyas 1996; Johl 2002). Swaminathan (2007) viewed that diversification to higher valued e nterprises like vegetables, fruits, other speciality crops, livestock products, fisheries, value added agricultural products, etc, was the new pathway for income growth in agriculture and rural sector.

Cropping Pattern

To bring the desired changes in the cropping pattern, the PAFC adopted the multiparty model involving three sets of players: (a) the farmer, (b) the PAFC, and

(c) the private enterprises, i e, the buyers, extension service providers and the quality

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seed providers. The modus operandi of the PAFC model is the following: In the case of crops for which the minimum support price (MSP) is declared by the government of India, the PAFC declares some premium

over the MSP, while for those crops in which the MSP is not declared, the PAFC declares a comfort price. The contracts cannot be signed below the average market price of the previous three years of the traditional variety of crops. In any case, the contract price cannot go below the comfort price, which acts as a benchmark. While choosing the crops to diversify, the wheat and rice area in different districts, and the local agro-climatic conditions are taken into account so that the crop potential is achieved to the maximum extent.

The contract farming model being followed by the PAFC is conspicuously different from the existing contract farming models being followed in any part of the world. The terms of contracts are ambiguous and open-ended. For example,

…the purchase price mechanism has been incorporated to protect farmers from price fluctuations by ensuring buy-back at the d eclared price and to motivate them by providing a premium over MSP. However, the farmers are not bound to sell their produce to the buyer or the extension service providers, if the market price is above the proposed purchase price, then the farmers are free to sell in the open market (p 9).

Similarly, on the buy-back question, private agencies on behalf of the PAFC and not the PAFC itself provide an assurance to purchase the farmers’ produce under the contract, and the authors observe that by-and-large, the private agencies fail to provide buy-back.

Evaluation Study

The evaluation study was conducted on a sample basis in all the 20 districts in P unjab for the six crops, namely, hyola,

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sunflower, maize, barley, basmati and d urum wheat. A total number of 1,625 contract farmers adopting various crops u nder the banner of the PAFC were selected from 60 blocks and 420 villages adopting multistage systematic random sampling method. The field survey included only those households which had adopted contract farming for at least one crop. The authors should have selected some noncontract farmers as well that would enable them to make a comparison with the baseline. A uthors have not indicated anywhere in the methodology the subject matter covered in the primary survey. Similarly, they have not given the reference period of the primary data collected; whether the data collected was for one reference year or multiple years; and whether the data collected was only for the contract crops or for all the crops grown by the households.1

There are two main reasons when farmers take up contract farming, (a) the introduction of new crops for which farmers do not have the technical know-how, high yielding seeds and a market for the final sale of their output, and (b) the coverage of risk (fully or partially) under the umbrella of contract farming, The analysis of Chapter 3 reveals that the number of farmers adopting contract farming in Punjab has either declined or fluctuated in the case of basmati, barley, sunflower, other pulses and durum wheat. Only in the case of h yola and maize has the number of contract farmers constantly increased but in their case also the growth rate of expansion has been declining. The implication is that the PAFC has failed in achieving both the objectives mentioned above. The reason is also clear from the studies in the literature that indicate nonavailability of procurement by the PAFC (or its designated firms) as well as nonprovision of technical know-how by the extension agencies designated by the PAFC (Kumar 2008).

Errors and Misquotes

The book is full of contradictions, ambiguities and false praise of the state-led contract farming which the authors themselves contradict in course of the discussion. The quotes from Chapter 5, “The contract farming programmes launched

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by the Punjab government in 2002 is aimed at taking away 10 lakh hectares from the wheat-paddy rotation over the next five years”. But as per the Punjab Statistcal Abstract 2007, the total area under paddy and wheat after seven years of launch of the programme does not show any indication of diversification.

Another quote,

During the year 2005-06 great stress was laid

on the contract farming system and a sub

stantial number of farmers in Punjab adopt

ed the system by growing crops like hyola,

sunflower, basmati and barley compared to

previous years. The percentage of farmers

adopting contract farming of various crops

increased from a nominal 2.03% in 2002-03

to 48% in 2005-06 as depicted in Table V.1

(p 45).

The table actually presents the total number of farmers who adopted contract farming. In 2002-03, this was only 33, it increased to 124 in 2003-04, 688 in 2004-05 and 780 in 2005-06. The 48% growth rate that authors have quoted above is actually the ratio of 780 farmers to the sum total number of farmers during the four years, that is, equal to 1,625. The general impression that one gets from this quote is that half of the paddy-wheat area has been diversified by the contract farming, whereas if one reads between the lines it indicates that only a minuscule 1,625 farmers adopted contract farming.

The authors pour full praise on the PAFC package (that includes buy-back guarantee, extension services, holding up of awareness camps) for motivating the farmers to switch over from paddy-wheat to other crops.

However, quoting from the authors findings (p 69), “of the total procurement of products of various crops from the contract farmers, only 19.4% is procured by the PAFC, a major percentage of 65.9% is sold in the open market and 14.7% of the produce is kept by the farmers for household self-consumption. Crop wise, 44% of hyola and basmati, 21% of sunflower, 35% of barley and only 2.1% of maize was procured by the PAFC”. On the input provision and extension services, authors quote (p 74).

In the case of barley, 64% farmers have purchased seed from the PAFC. The main seed supply agencies in the case of sunflower and maize are private shopkeepers. In the case of

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durum wheat, private shop and the PAFC are

the main seed suppliers.

At the aggregate, only 28% of the farmers purchased some seed from the PAFC and a majority of them (around 70%) purchased seed either from the private agencies or from private shops. Similarly, 98% of the farmers bought pesticides and fertilisers from the private agencies or private shops. On the question of extension visits by the contracted firms under PAFC, more than 50% of the farmers either d enied anybody visited their field or they visited only once or twice. Similarly, on the question of was there any demonstration given by any of the extension agencies, more than 82% of the farmers said no, indicating poor quality of extension services provided by the PAFC or its designated agencies.

The authors misquote a study by Kumar (2006) for providing evidence that extension services were quite effective and buyback guarantee was honoured (p 47). Whereas, the above study clearly indicates that the extension services provided as well as buy-back guarantee worked well only in the case of direct contract between the agribusiness firms and farmers, while state-led contract farming failed in both these aspects. Similarly, they have misquoted the same study again (p 72) stating that the PAFC tied up with Pepsi/Fritolay, HLL, Chambal Agritech and A M Todd to provide inputs and extension services to the farmers. The original paper quoted clearly indicates that these four firms provided better extension, but they were working directly with the farmers while the firms designated by the PAFC did not provide extension services satisfactorily.

In Chapter 8 the authors discuss four success stories of four farmers in four different crops and draw some lessons that are beyond anybody’s understanding. For instance, “According to the views of contract farmers, after fixing buy-back prices of crops by the PAFC under contract, the market price of maize, in particular went up in the open market. Presently, many farmers are selling maize in the open market, earlier it was not so”. The mechanism of such an increase in the market price – given the fact that PAFC procured only 2.1% of the produce –

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has not been discussed anywhere in the book.

This book fails completely in fulfilling the primary purpose of the objective assessment/evaluation of the contract farming programme being run by the Punjab Agro Foodgrains Corporation. If, in true sense, the contract farming programme of Punjab government has been so successful in diverting area under wheat and rice, then probably the problem of rice-wheat rotation should have been solved completely by now. However, the truth is that

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the problem is as severe today as it was a decade ago.

Parmod Kumar (pkumar@isec.ac.in) is with the Institute of Social and Economic Change, Bangalore.

Note

1 It has been advocated by the previous studies that only some proportion of the operated area is kept under contract farming while a major area still r emains under non-contract farming (see, e g, Kumar 2006).

References

Johl, S S (2002): Report of the Expert Committee on Diversification of Agriculture in Punjab,

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report submitted to the government of Punjab, C handigarh.

Kumar, Parmod (2006): “Contract Farming through Agribusiness Firms and State Corporation: A Case Study in Punjab”, Economic & Political Weekly, 30 December.

– (2008): “Diversification through Contract Farming: A Case Study of Punjab” in R S Deshpande (ed.), Contract Farming and Tenancy Reforms: Entangled without Tether (New Delhi: Concept Publishing Company).

Swaminathan, M S (ed.) (2007): Agriculture Cannot Wait: New Horizons in Indian Agriculture (New Delhi: Academic Foundation).

Vyas, S (1996): “Diversification in Agriculture: Concept, Rationale and Approaches”, Indian Journal of Agricultural Economics, Vol 51(4), October-December, p 636.

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