The Mayawati government in Uttar Pradesh first proposed a policy change that would allow for contract farming in the state and then in the face of immense opposition from farmers and political opponents, revoked such plans.

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With contract farming already in existence in parts of Maharashtra and AP, the UP government was certainly not embarking on radical policies. So what do we make of this proposal?

Contract farming is a business deal between farmers and another party that allows for the other party (traders and business houses) to ask for specific produce from the farmer for a specific rate determined a priori. There are mainly three different kinds of contracts

–Where the other party will specify buy a specific fraction or specific amount of a certain crop that the farmer is asked to produce as per the contract.

–Where the other party will provide inputs to the process, perhaps tools and technology and the farmer will produce what the other party wants

–Where the other party defines not only what the farmer produces but also exactly how it is produced.

Often the contracts are some mixtures of the above. Sometimes the contract lists a guarantee sum and the farmer can sell to another trader if a better price is available (especially true in the first kind of contract).

As numerous experts and policy makers of the agro-industry have argued, it is a win-win situation for farmers and food processors and traders especially in the developing world. Farmers run a high risk venture and since this money is guaranteed, it is a good safety net for farmers. They do not have to search for markets. In addition, it provides tools, technology and capital – this is especially important since small farmers around the world find it difficult to get credit or access technology.

In addition, in the developing world, usually land is at a premium while labour is easily available. Such contracting can also be useful in making use of labour through a collective pool across contiguous farms.

For the traders or business houses, it is difficult to get large tracts of land in the developing world – the political dynamics today make it impossible. Experts suggest that this, then, is the best way that they can access large tracts of land to grow what markets need.

The Ministry of Agriculture, Government of India through the 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 organization, in a newsletter it produces, presents Pepsico as a successful example of such contract farming that has brought new investment, tools and technology into agriculture in Punjab, allowing for increase in produce, and increased returns to farmers as well as profits for Pepsico.

Maharashtra and AP have already promulgated policies allowing contract farming in certain districts. However, with growing numbers of farmer suicides, these policies are being presented as the primary reasons for the growing indebtedness of farmers. It is in this context that UP’s Mayawati government put together its plan for contract farming. It said from the very outset that its policies for contract farming were farmer sensitive and had learnt from the policies of the other states.

It argued that the policy only provided a choice to farmers to enter into a contract with another party (Reliance, Cargill, Rallis, ADM or any other group) if they chose – there was no pressure. “Neither would the mandi parishad’s markets be closed down nor would there be any change in the present government marketing system,” the chief minister had said. Under the new policy the farmers under an alternative system would get seeds, fertilisers and other farm inputs from the investors.

And yet, it faced immense opposition from farm groups and political opponents. Tthe Samajwadi Party and the BJP started attacking the government on the issue.

It would ruin 98 per cent farmers, farm labourers and small traders, former chief minister and SP president Mulayam Singh Yadav told journalists. BJP leader Hirday Narain Dixit also flayed the government on the policy. Interestingly, during the SP regime, a similar policy was mooted but could not be implemented. Former Prime Minister VP Singh has also opposed the policy.

But the policy also has its supporters from the agriculture sector. RB Singh of the National Commission on Farmers said, “We feel that such a farming contract is never detrimental to farmers.”

Professor Sushil Kumar, chairman of the Agriculture Management Center (AMC) of IIM-L, said, "We have been talking about the need to implement contract farming in the state, though with proper safeguards." An official of the agriculture department said, "There is a darker side to contract farming. Private companies don't go for any long-term agreement with farmers. Often companies flout the terms stated in the contract." 

But there were contrary views too. Deputy Director in Agriculture Department, Dr SS Rathore, recalled that Andhra Pradesh had introduced contract farming in the Cuppam area. The price of the crop produced in the contract farms slumped and the companies slashed the rate it was paying farmers.

After two weeks of posturing, the Mayawati government decided to withdraw the policy in face of immense opposition. The chief minister said that "intelligence reports gathered from 70 districts indicated that 60 per cent farmers were against it."

Given such a clear win-win situation for farmers and for investors, as presented by experts, the opposition seems rather illogical . While one could understand political opponents (who had once tried to implement such a policy in the past) opposing this for political points it seems unclear why farmers would oppose such a policy that seemed to bring in more capital and guaranteed money.

Farming (as most other economic ventures) depends on access to labor, to capital, to raw materials and to markets. In some instances (especially in large scale, capital intensive or export oriented agriculture) it also depends on technology. Farming in India is usually a labor intensive process – so labor is easily available. However, most rural farming communities do not have access to capital – loans are hard to get and when available they are at high interest rates and large collaterals. Markets are also becoming less accessible, especially with increased liberalization and global influences (with competition having access to large subsidies). In any case, many markets have moved far from the farmer so even physically, they are becoming inaccessible.

Contract farming helps the farmer access capital and markets. Technology also becomes available and farmers learn about new methods. However, the farmer becomes completely dependent on the contracting party. Crops being focused for non-local markets, the farmer has no local market. So the farmer is tied to the contractor. With higher capital borrowed from the contracting agent, the farmer is again tied to the contractor.

Large business houses have been able to get away with slashing prices (as Professor Sushil Kumar, chairman of the Agriculture Management Center (AMC) of IIM-L points out earlier) or not buying the crop they had promised based on the contract. In addition, fine print has been used to back out of predetermined prices. Despite experts presenting Pepsico as a successful case study in contract farming, all of these have made the Punjabi farmers quite resentful

The long term impact has been even more hostile to farmer interests. The business house has no reason to worry about the long term impact of the crops or the processes used. The farmer is impacted. Often these crops are water intensive – Punjab (one of the most fertile parts of India in the basin of major river systems) is seeing drop in water levels. Some estimates suggest up to 40 feet. High use of fertilizers and pesticides has also affected the health of farming communities – studies show high levels of pesticides in bloodstreams.

In addition, levels of indebtedness have shot up. Entire farming villages are up for sale – farmers cannot sustain themselves. Suicides are being reported among what was once a prosperous farming state. The government article (on Pepsico and its impact on Punjab farmers) does not describe these gory details.

Thus, in the long term, the farmer loses access to all bases of an economic activity; the farmer had little access to capital, or markets. Now even the land is lost.

One perspective might argue that business houses would in fact be wary of destroying the land – after all it is their source of raw materials. If the land is not able to produce, they would have nothing to process.

The opposite may actually be true. Business houses – as Rallis website points out – are not in the business of altruism. They will do what is of best interest to them. And their biggest interest is to acquire large tracts of land – thus they could control aspects of food production and processing. And this is exactly the situation they would like to precipitate.

Perhaps the greatest commentary on the exploitary nature of contract farming is this – despite being practiced in South America since the late 60s, there are no case studies of this method helping small farmers. The same is true in India as well. No wonder farmers are opposing these policies.

Recently, India Together reported that, Dr Sukhpal Singh of the Indian Institute of Management, Ahmedabad conducted a study, Contract Farming for Agricultural Development: Experience of the Indian Punjab and Northern Thailand. He observes in his study, "Contract farming, in a political economy, is one mode of capitalist penetration of agriculture for capital accumulation and exploitation of the farming sector by agribusiness companies."

"If contract farming becomes the norm, then we lose food security. They (the corporates) will tell us what crops to grow and they will give us the inputs as well. Except for labour and land, farmers don't have any role to play in contract farming," says Dr Kishan Bir Chaudhary of Bharat Krishak Samaj, which claims to represent around 5,000 farmers in the country. He continues, "One also has to understand that with about 70 per cent of the population dependent on agriculture, it is not just a trade in our country. It is a way of life. The government should seriously weigh the pros and cons, and involve the farmers in policy making."

Unless the UPA government backs off from implementation of these policies based on an understanding of these economic perspectives, these policies will result in continued suicides, growing unemployment and increased social and political volatility.

- Sanat Mohanty