The government’s role in contract farming

#News(AgriTech) [ via IoTForIndiaGroup ]

The bureaucratic hurdles instituted in the form of a new regulator to oversee contract enforcement will be counterproductive
The government has been making efforts to integrate farmers with agro-industries to ensure that they get better prices for their produce. This is why contract farming has come to be seen as a panacea. Contract farming refers to an agreement between farmers and marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices. The contract between farmers and buyers insulates farmers from price risk, helps them develop new skills, and opens new markets. Nevertheless, contract farming suffers from market failures.

Monopsony: Typically, contract firms enter into an agreement with farmers to grow differentiated crops. This turns the firm into a sole buyer and farmers into price-takers. Contracting firms can exploit this situation to their advantage by offering lower prices to farmers.

Information asymmetry: Contracting firms do not have complete information on productivity and land quality. This can lead to a situation where farmers produce below-quality crops. On the other hand, farmers sometimes do not understand contract specifications like the quantity and quality to be produced, or the effect of price change. These market failures lead to suboptimal outcomes. Buyers may penalize farmers. Similarly, farmers may indulge in side-selling or leak the technology provided by the contracting firm. Therefore, the question is: Is there a role for the government to intervene in the contract farming market, and what should it do to address market failures?

In India, contract farming is regulated under the Indian Contract Act, 1872. The Act has many general provisions that are relevant to contract farming, including the formation of contracts, obligations of parties, and consequences in case of breach of contract. In addition, the model APMC (agricultural produce market committee) Act, 2003 provides specific provisions for contract farming, like compulsory registration of contract farming sponsors and dispute settlement.

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