Keith Mack
Contract farming involves agricultural production based on an agreement between a buyer and farm producers. The buyer can be a food processing unit or exporter, and the producer can be a farmer or farmer's organisation. The Model Contract Farming Act, 2018, was released by the Ministry of Agriculture to create a regulatory framework for contract farming. The Act seeks to address issues with the current structure, such as the role of Agricultural Produce Marketing Committees (APMCs) in registration and dispute settlement, stockholding limits, and poor publicity among farmers. The Model Act provides for establishing a state-level Contract Farming Authority to ensure implementation, levying and collecting facilitation fees, and publicising contract farming.
| Characteristics | Values |
|---|---|
| Registration | Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in a few states. |
| Contractual Agreements | Contractual agreements are recorded with the APMCs, which can also resolve disputes arising out of these contracts. |
| Market Fees and Levies | Market fees and levies are paid to the APMC to undertake contract farming. |
| Model APMC Act, 2003 | The Model APMC Act, 2003 provided for contract farming and was released to the states for reference in enacting their laws. |
| State Laws | As of 2016, 20 states amended their APMC Acts to include contract farming, while Punjab has separate legislation. |
| Rules and Notifications | Only 14 states notified rules related to contract farming as of October 2016. |
| Regulatory Authority | The draft Model Act proposes an independent regulatory authority to oversee contract farming, separate from APMCs. |
| Buyer Fees | Buyers will not have to pay market fees and commissions to APMCs under the draft Model Act. |
| State-level Authority | The draft Model Act establishes a state-level Contract Farming (Promotion and Facilitation) Authority to implement the Act and handle disputes. |
| Facilitation Fees | The state-level Authority will levy and collect facilitation fees. |
| Publicity | The Authority will publicise contract farming. |
| Agreement Recording | Every agreement should be registered with a Registering and Agreement Recording Committee, which can be set up at the district, taluka, or block levels. |
| Farmer Protection | The Model Act emphasises protecting the interests of farmers, considering them the weaker party in contracts. |
| Services Contracts | In addition to contract farming, services contracts for pre-production, production, and post-production are included. |
| Crop/Livestock Insurance | Contracted produce is to be covered by crop/livestock insurance. |
| Customizable Templates | The Model Agreement for Responsible Contract Farming offers customizable templates for specific crops. |
| Power Asymmetries | The Model Agreement aims to address power asymmetries and create more equitable business relationships. |
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What You'll Learn
The Model APMC Act, 2003
The Model Agricultural Produce Market Committee (APMC) Act of 2003 is a law designed to regulate the buying and selling of agricultural produce in India. This act serves as a framework for establishing market committees at the state level, known as APMCs, which oversee the functioning of agricultural markets. The Model APMC Act, 2003, provided farmers with the freedom to sell their produce. They could sell their produce directly to contract sponsors or in the market set up by private individuals, consumers, or producers. The Model Act also increases the competitiveness of the market for agricultural produce by allowing the common registration of market intermediaries.
The main objectives of the Act are to ensure fair trade practices, eliminate intermediaries, and provide a platform for farmers to directly sell their produce to buyers. APMCs are responsible for creating an organized marketplace where farmers can sell their crops, ensuring transparent transactions, and preventing exploitation. Under the Act, APMCs have the authority to license and regulate traders, commission agents, and other intermediaries involved in agricultural trade. They also provide facilities like market yards, auction platforms, and warehouses to facilitate the trade of agricultural commodities.
The Model APMC Act of 2003 makes provisions for the establishment of consumers' and farmers' markets to facilitate the direct sale of agricultural produce to consumers. The ultimate objective of this act is to attract private investment in constructing market yards and creating the post-harvest value chain, including cold stores, warehouses, and logistics infrastructure. The act also provides for contract farming and direct marketing by private players. Under the model APMC Act, the private sector and cooperatives can be licensed to set up markets.
The Model APMC Act of 2003 is a first attempt to bring reform to agricultural markets. It promotes and establishes public-private partnerships (PPP) in these markets. The act also addresses the monopoly of any trade (barring a few exceptions) by MNC corporations, governments, or any APMC. It deprives farmers of better customers and consumers from the original suppliers.
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Contract farming registration
Currently, contract farming registration requirements vary across Indian states. In some states, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC), while in others, registration is done through a state-level nodal agency. The Model APMC Act, 2003, provided a framework for contract farming registration, which was adopted and adapted by 20 states. However, as of October 2016, only 14 states had notified rules related to contract farming.
To address the inconsistencies and issues with the current structure, the draft Model Act proposes a standardised registration process. The Act recommends establishing a "Registering and Agreement Recording Committee" or designating an "Officer" for online registration and agreement recording at the district/block/taluka level. This committee would consist of officials from various departments, including agriculture, animal husbandry, marketing, and rural development.
The registration process is designed to safeguard the interests of both producers and buyers. By registering their agreement, parties can access legal support and dispute resolution mechanisms. The registering authority is responsible for verifying important details, such as the financial status of the buyer, to ensure fair and transparent transactions.
Additionally, the draft Model Act proposes that contract farming be moved outside the ambit of state APMCs. This means that buyers would no longer need to pay market fees and commission charges to APMCs to undertake contract farming. Instead, a state-level Contract Farming (Promotion and Facilitation) Authority would be established to oversee the implementation of the draft Model Act, levy and collect facilitation fees, and publicise contract farming.
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Contract farming disputes
To address these issues, the Committee of State Ministers on Agricultural Reforms recommended that a dispute redressal mechanism should be implemented at the block, district, or regional-level state authorities, rather than with an APMC. The Model APMC Act, 2003, provided for the registration of contract farming agreements by an APMC to safeguard the interests of both producers and buyers through legal support, including dispute resolution. However, the procedures for registration and recording of agreements vary across states, and only a few states have completely exempted market fees on purchases under contract agreements, while others have only partial exemptions.
The draft Model Contract Farming Act of 2018 proposed that contract farming be outside the scope of state APMCs, meaning buyers would not have to pay market fees and commission charges to these APMCs to undertake contract farming. Instead, the draft Model Act suggested establishing a state-level Contract Farming (Promotion and Facilitation) Authority to ensure the implementation of the draft Model Act. The functions of this Authority would include levying and collecting facilitation fees, disposing of appeals related to disputes, and publicising contract farming.
To assist in resolving disputes, the International Institute for Sustainable Development (IISD) and the Food and Agriculture Organization (FAO), in collaboration with UNIDROIT, developed the Model Agreement for Responsible Contract Farming. This agreement is a simple and practical legal tool that aims to improve business relations and promote responsible agricultural investment. It provides customizable template provisions that can be adapted to suit the specific needs of the parties involved.
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Contract farming fees
Contract farming is a commercial way to focus on farming professionally, providing a larger volume of work and income to help carry the costs of machinery and labour. It is a joint venture between two parties: the farmer (owner or tenant) and the contractor (typically a local farmer or business). The farmer instructs and engages the contractor to undertake the practical operations and management of a crop or other enterprise within the farmer's stated policies and for the farmer's business. The farmer remains responsible for the business and assumes the financial risk from the outcome of farming and is thus liable for compliance and records. The contractor provides labour, machinery, and any other services specified on an agreed basis for remuneration.
Contract farming agreements (CFAs) are well-established in the arable sector, but they can also work well on stock farms. The principles of CFAs are that the farmer continues in full control of the main agricultural business and is treated as a farmer for tax purposes. Livestock CFAs tend to be longer-term than arable agreements because of the time it takes to reach production goals with breeding animals. Many are set up to run for five years or more, although there is flexibility.
The fees in contract farming agreements vary. The farmer receives an initial fee, while the contractor receives a basic fee, usually on a per-hectare basis. The contractor's fee is included in the calculation of the return from the CFA. All income from livestock (finished, store, or breeding animals, wool, or milk) plus any subsidy income that is agreed to be included is totalled. From this total, all farming costs such as feed or bedding are subtracted. These costs include the contractor's basic fee, any first charge to the farmer, and any livestock hire charges.
In some states, market fees and levies are paid to the Agricultural Produce Marketing Committee (APMC) to undertake contract farming. However, the Committee of State Ministers on Agricultural Reforms has recommended that contract farming should be outside the scope of APMCs, meaning buyers would not need to pay market fees and commission charges to these committees. Instead, an independent regulatory authority would be responsible for contract farming, and a state-level Contract Farming (Promotion and Facilitation) Authority would be established to implement the draft Model Act. This Authority would be responsible for levying and collecting facilitation fees, among other functions.
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The Model Contract Farming Act, 2018
Under the draft Model Act, agricultural production, including livestock and poultry, can be based on pre-harvest agreements between buyers and producers. The producer can agree to sell agricultural produce at a specific future price to the buyer, reducing the risk of fluctuating market prices and demand. The buyer can support the producer in improving production through inputs such as technology and infrastructure, as specified in the agreement. However, the buyer cannot build permanent structures or acquire ownership rights to the producer's land.
The Act proposes establishing a state-level Contract Farming (Promotion and Facilitation) Authority to oversee its implementation. This Authority would levy and collect facilitation fees, handle disputes, and promote contract farming. It would disengage contract farming stakeholders from existing Agricultural Produce Marketing Committees (APMCs), which currently handle contract farming registration and dispute resolution in some states. Buyers would no longer pay market fees and commissions to APMCs under the new structure.
As of 2016, 20 Indian states had amended their APMC Acts to include provisions for contract farming, but only 14 had notified rules related to it. The Model Contract Farming Act, 2018, aims to address issues with the current system, including the role of APMCs, stockholding limits, and a lack of awareness among farmers about the benefits of contract farming. The Act includes services contracts for pre-production, production, and post-production, and requires contracted produce to be insured.
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Frequently asked questions
Contract farming involves agricultural production based on an agreement between a buyer and farm producers. Contracts may specify the quality and price of the product, and the farmer agrees to deliver by a future date.
The Model Contract Farming Act, 2018, is a draft act that seeks to address issues with the current structure of contract farming in India.
Expert bodies have identified issues related to the implementation of contract farming. For example, the Ministry of Agriculture and Farmers Welfare observed that producers may sell their produce to a different buyer, or a buyer may fail to purchase the product at the agreed price or quantity.
The Model Act proposes that contract farming should be outside the ambit of APMCs (Agricultural Produce Marketing Committees). Instead, an independent regulatory authority will oversee contract farming. Buyers will not have to pay market fees and commission charges to APMCs.
Contract farming can help solve market access and input supply problems faced by small farmers. It can also lower labour and machinery costs, as contractors can benefit from economies of scale.
