What's the future of Agriculture intermediaries?

Updated: Jan 21


With government announcing packages for agricultural sector both in budget and Atma Nirbar schemes in February and May respectively, advertising them as big bang reforms has become a hot topic in the related industries. So in this article, we have explained the nature of intermediary in agriculture sector and the effects of recent announcements related to them.


Brief explaination of APMC.

Agricultural Produce Market Committee (APMC) is a marketing board established by a state government in India to ensure farmers are safeguarded from exploitation by large retailers. How do they work? Basically, APMC’s geographically divide the state. They issue licenses to traders to operate within a market. Any trade relating to agriculture produce need to be done in APMC Mandis or market yards. Anything happening outside such market yards are considered illegal. Even procurement from FCI by government agencies is also made through these yards. Both traders and farmers get registered in these market yards for trade related activities. Any transaction that takes place should provide farmer the minimum support price set by the government.


The Atma Nirbhar Package announced by our Prime minister had things which were already budgeted for agriculture sector like central government has enabled e-trading, reforms related to fishing, animal husbandry etc. But there are two reforms which most media channels have reported as big bang reforms. So let’s find out the truth in such words.


Deregulation of Essential Commodities Act and Dilution of APMC Act.

Essential Commodities Act gave centre and state governments the power to regulate the production, supply, distribution and prices of commodities. The act came into being in 1955 when the economy was dealing with food shortage and famine. However, the act does not serve any purpose in the current situation.

The act has been considered a major impediment in the growth of agriculture sector as traders are scared to buy more on the fear of imposition of stock holding limits at any time. Investment in warehouses infrastructure has been slow and low as they could be raided by authorities for holding excess stock.


How will this deregulation work?

With such deregulation, there will now be no limit on the quantity of certain items like cereals, edible oils, oil seeds, pulses, onions and potato that traders can buy and hold as stock, Investments by private sectors in procurement, processing and storage facilities would increase, farm exports may see a rise, Interstate barriers constraints would diminish, markets would become competitive.

Also, there are some negatives as stated below,

  1. With dilution of APMC Act, the systems which regulate market cease to exist.

  2. Government now cannot regulate onion prices now. We know how speculative onion prices are. With government losing its power on stock holding of onions, control in future speculative situation is a real worry. 

  3. With no hording limits in place, private entities in want of profits may try to create demand pull inflation in the market by holding stocks.

  4. Markets may become oligopolic in nature where factors can be manipulated.


Contract Farming 

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.


Contract farming in India is regulated under the Indian Contract Act, 1872. 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.

There are clear advantages for farmers in contract farming as it offers them with hassle free production process for potatoes or any other produce. They do not have to bother about the sale of the crop through mandis and make provisions for insurance against crop failures. It gives them a secure and steady source of income. Many case studies of farmers under contract farming have pointed to the farmers being satisfied with such contracts with big corporation as it leads to relatively risk-free farming.


They can have easy access to good quality inputs, extension services, grading and sorting of produce as a result of which their productivity and incomes can go up. With contract farming in practice, the farmers have not only become prosperous but they also feel secure about their future.

There are also some negatives of contract farming:

  1. As contracts are made between a firm and few farmers. The firm may exploit farmers by offering lower prices.

  2. As the literacy rate in farmers is low in the country, there could be information asymmetry like firms make contracts relating to quality produce and if farmers produces below quality crops due to some external factors such production may get rejected by the firm. This will further escalate the tensions between the farmers and the firm.

  3. No risk-sharing mechanisms and incentives in contracts. To motivate farmers, firms should incorporate these things.

  4. Practical constraints in transparency of parties of contract.

  5. Third party involvement without any terms in the contract. For instance, farmers at present may have debts taken from private money lenders. After implementation of contract farming, farmers and firms enter into contract but the money which the farmer get will go into the hands of money lenders as interest of their previous loan.

  6. Misuse of intellectual property rights like farmers leaking the technology of the firm for money.

  7. Contract farming will reduce biodiversity by growing only one type of crop again and again, more usage of pesticides and fertilizers in the want of profits and many more.

  8. Less bargaining power of farmer when contracts are entered for mid or long term.

  9. As firms go for profits, they only produce profitable goods only.


 Model contract farming act, 2018

The government came up with this model act to eradicate the above said negatives. Following are some solutions which are provided by the act.

  1. Under the Model Act, the producer can get support from the buyer for improving production through inputs (such as technology, pre-harvest and post-harvest infrastructure) as per the agreement.  However, the buyer cannot raise a permanent structure on the producer’s land. Rights or title ownership of the producer’s land cannot be transferred to the buyer.

  2. Contract farming will be outside the ambit of the state APMCs. This implies that buyers need not pay market fee and commission charges to these APMCs to undertake contract farming. Further, the draft Model Act recommends states to establish a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the Model Act.

  3. Every agreement made should be registered with a Registering and Agreement Recording Committee, which will be set up consisting of officials from departments such as agriculture, animal husbandry, marketing, and rural development.  Such a Committee can be set up at the district, taluka or block levels.

  4. In case of disputes between a producer and a buyer, they can: (i) reach a mutually acceptable solution through negotiation or conciliation, (ii) refer the dispute to a dispute settlement officer designated by the state government, and (iii) appeal to the Contract Farming (Promotion and Facilitation) Authority (to be established in each state) in case they are not satisfied by the decision of the dispute settlement officer.

 Opinion: 

As the structure of agriculture is going to change in the country, we would recommend and request the following to both governments i.e.state and central and hope they will do them;

  1. to have a personal monitoring committee on timely basis so that any violation or misjudgment by regulator can be reversed as soon as possible;

  2. to promote sustainable farming practices and not promote reliance on chemicals or expensive seeds, or lead to excessive debts;

  3. to substantially include women farmers and promote their rights;

  4. to reduce third party involvement as much as they can;

  5. to ensure measures in increasing farmers bargaining power like pooling of land etc.

  6. to ensure the least involvement of unions and organisations as they could affect the growth of the sector;

  7. to take appropriate measures in increasing the literacy rate in farmers in terms of contracts, technology, insurance and any other related topics;

  8. to ensure smooth and fast implementation of disputes settlements inside or outside the court of law.


– ANJAN KUMAR, VISHAL SV, VAMSHI KRISHNA

(Opinion expressed by the author is his personal. The Generalist Insights take no responsibility of the opinion expressed.)