Punjab’s experiments with diversification and Contract Farming.

Image credit- Sandeep Singh. @Punyaab

The new bills have given an opportunity to lot of people to mudsling Punjab & it’s farmers based on half baked articles coming out of RW eco-system. The truth is that Punjab wants reforms & has had its time with diversification & Contract Farming both. It is very important to understand that these new bills are not ‘ground breaking’ but the same policies that have failed in Indian agriculture time & again.

In 2002, Johl committee was formed to attempt diversification. The Johl committee recommended what it had recommended in 1986. The Johl committee recommended that 10lac hectares of rice & wheat be replaced with Oilseeds and Pulses. It suggested a crop adjustment program as well

It is important to understand that switch requires shift of money. Johl suggested that money spent in procurement of wheat & paddy be used to provide a safety net to farmers switching to crops. Only 10% farmers were unwilling to make switch.

The cost incurred was 12800crore, way less than the cost incurred to buy, store & handle wheat & paddy. Govt never started on this program citing lack of agricultural expertise around the high nutrition crops and legume.

Experiment with Sunflower

Sunflower, a minor agricultural item in 1980s turned out to be major oilseed crop of 1990s, it accounted for more than 50% of the area under oil seeds and more than 60% total oilseed production of the state. Anyone who has watched the movies of 90s can recall the sunflower fields in Punjab.

But, soon the importance of sunflower declined due to lower returns as compared to wheat, lack of quality seeds, high water requirements, weather sensitivity and the adverse effects on crops of the next season Similarly, floriculture suffered from high risk of production, lack of weed control, high incidence of insects and pests, non-availability of good quality planting material and problems of seed collection [Garg and Sharma 1999]. It was also recognised quite early that it is important to move farmers with investible surpluses from agriculture to the industrial sector but, that was never attempted [Gill 1988]. On the other hand, private agribusiness firms were thought to be harbingers of change since the late 1980s. The econo- mic logic behind the promotion of processing and marketing activities was that to bring dynamism to the agricultural sector, either the cost of cultivation had to be lowered, by raising productivity or cutting costs directly, or returns to the producers had to be raised by value addition or diversification.

Contract farming arrangements between growers and private processing interests were to achieve both these objectives by providing the former will better seeds, inputs and improved markets and prices. Contract farming can be defined as a system for the production and supply of agricultural produce by growers under advance contracts. The essence of such contracts is the commitment to provide an agricultural commodity of a type, at a time and a price, and in the quantity required by a known buyer (agribusiness firm). It basically involves four things: pre-agreed price, quality, quantity or acreage (minimum/maximum) and time.

Pepsi led Contract Farming System

The Pepsi project, approved in 1988 by the government of India, was to initiate a second agricultural revolution in Punjab where the first green revolution had reached the plateau in terms of yield level of major crops.

The project which was a joint venture between PepsiCo, Voltas and Punjab Agro Industries Corporation (PAIC) was aimed to bring a horticultural revolution by moving Punjab’s farmers from monoculture of wheat & Paddy to Fruits, vegetables and potatoes. The project when started was branded as the project that will not only double the production of vegetables in Punjab but will also double the income of the farmers.

The first high power committee formed to power PepsiCo project said that the area under horticultural crops be raised from 2% to 6% by the year 2000. The committee that submitted its report in May 1986 had also said that infrastructure be increased to tap in the aspired growth.

Since Pepsi found the local varieties of fruits and vegetables unfit for processing, it wanted to promote the new varieties and the proposal for an agro research centre with an outlay of 20Million Rupees was made. Pepsi used contract farming to procure the vegetables and fruits.

It is not that Punjab had not seen contract farming before Pepsi. It was very widely used in seed and timber production in 1980s and even in perishables like mustard leaves. Markfed, for example had been procuring the mustard from growers to process into ‘Sarso Ka saag’, But the practice never got any policy or institutional attention from govt.

Coming back to Pepsi, within 3yrs of its operations it was able to raise the yield of tomatoes from mere 7.5tonnes per acre to 20tonnes per acre. It also used the winter cultivation of tomatoes for the first time in Punjab under the greenhouse project. Further the harvesting season of tomatoes was extended from 25 to 70 days with company’s efforts. Pepsi was not at all profiting in all this but the growers and processors were making good money.

Contract farming in Punjab was in place in early 90s with the entry of PepsiCo using its two local subsidiaries PepsiCo foods for tomatoes and Chillies, whereas Nijjer Agro foods dealt with Tomatoes and Potatoes specifically. Contract farming became rooted with Pepsi selling its tomato processing plant to HLL Hindustan Lever (subsidiary of Unilever). The HLL plant set up in Punjab by Pepsi was the biggest one in Asia with capacity to process 650million tonnes of tomatoes per day. HLL worked with around 400 contract growers during the late 1990. Pepsi which had been working with hundreds of growers later had only few dozens contracts in chillies and potatoes.

Fall of PepsiCo

The PepsiCo project had disillusioned all of its stakeholders, be it the political party in Punjab SAD, PAIC, BKU and Voltas. There were only 16 Farmer Unions and all of them were against the PepsiCo project. Pepsi had promised seven bottling plants in Punjab but only one had been set up. Therefore even the non farmers who were keen on industrialisation of Punjab were unhappy about PepsiCo’s disappointing work.

A perusal of contract agreement suggested that there was hardly any incentives for growers to stay with the company as they bore the entire responsibility and risk while it was the company that had insurance against produce. Other than supply of seedlings, and procurement of only specified quantity of produce company’s contract offered nothing to the growers. This can be seen in 2020’s farm laws as well. How is that the concerns of the farmers are not genuine if they have experienced it more than once?

While the contract gave the company a right of refusal to pick up contracted produce, the growers were penalised if they defaulted from their commitments. And in case the company did not buy their produce even if it met all specifications, they were to agree to sell it in the open markets. The contracts so loaded against the growers saw farmers giving up on the contracts.

The company started sub contracting out its procurement from remaining large farmers who were in turn procuring it from small farmers. The growers defaulted because of multiple chained network and company too defaulted in procurement leading to open market sale at low prices than the contract prices.

The companies HLL, Pepsi, Nijjer started looking out for large growers for contract production to avoid the multiple small growers. In fact more than 1/3rd of Pepsi’s contract growers were farmers with more than 10acres of land under tomato cultivation. How does this fit into the narrative today that large farmers don’t want contract farming if they were the ones who were last standing hope for contract farming in Punjab?

The average size of the operational holding of MNC (Pepsi and HLL) growers was 72 acres, of local firm growers 22 acres, with the average for all growers being 61 acres. Even under Pepsi ownership earlier, most of the tomato contract growers were medium or large farmers. There was no MNC grower with less than 15 acres of operational land holding, which is much above the average size of the operational holding in the state (8.9 acres).

Another study of contract farming of two tomato processing firms (HLL and Nijjer) in the state also found that 96 per cent of the growers owned tractors, with some having more than one tractor, and 82 per cent had tube wells for irrigation [Rangi and Sidhu 2000a]. These farmers have been major beneficiaries of the green revolution in Punjab in the 1970s or have foreign remittances from family members based abroad. Even the average acreage under contract for MNC (14.3 acres) and for all contract growers (12.33 acres) was much above the average operational holding in the state. In fact, there have been growers (under Pepsi) who cultivated only tomato on their entire land (as much as 45 hectares) in 1995 and chillies on about 13 hectares in 1996.

The HLL contract growers did not appreciate the company selling seedlings to non-contract farmers when it had a surplus because of the commercial consideration of additional seedling production. But, perhaps, the company wanted to create a larger base for procurement and contracts in the longer term and a market surplus to keep down prices. Farmers were generally happy with contracting, though they did face some day-to-day problems, which had implications for their incomes and livelihoods. Growers found the multinational company better to deal with than the local one, as far as farmer treatment was concerned as many of them had contracted with more than one company each. The Pepsi farmers found the potato seed supplied by the company generally less than adequate for the acreage to be sown under contract and pesticides recommended by the company as poor and costly. Two- thirds of HLL farmers, three-fourths of Nijjer growers and about half of Pepsi potato growers reported lower yields as a result of crop failure, with another 12 per cent of HLL and 7 per cent of Nijjer growers reporting total crop failure. Some Pepsi growers also reported poor quality of produce. The farmers reported problems like poor coordination of activities, interior technical assistance, delayed payments, outright cheating in dealings, and manipulation of norms by the firms. Contract production of tomato brought a big employment boom in these areas as the mechanisation of sowing and harvesting operations of paddy and wheat crops had reduced manual work to a negligible level. That contracting has led to more and better employment opportunities for labour, especially women, was acknowledged by the labourers.

The area under the contract crop (tomato) increased in pockets of the region where the practice of contract farming existed. Each pocket had a few hundred acres under tomato, which, in some areas, was not grown at all earlier. In all, the area under tomato in Punjab in 1999 was reported to be 15,000 acres and total production of the crop was 93,000 tonnes, which increased to be 2.5 lakh tonnes in 2001. But, at the same time, no increase in the area under horticultural crops was evident, as the production increase under contracting had come largely from the yield factor and not expansion of area.

The fruit and vegetable crops in the state still remained less than 2 per cent. Also, there might have been an area shift within fruit and vegetable crops due to contracting. There might have been only a marginal shift from paddy, wheat and cotton to tomato partly because of the better economics of a tomato crop under contract, explained to prospective contract growers by company officials, and partly because of the constant failure of cotton in some of these regions in the past few years.

Though many studies recommend contract farming to promote Punjab agriculture [Rangi and Sidhu 2000a; Sidhu 2002], it is
likely to solve the state’s farming crisis only partly and in the short-term, as it is leading to higher incomes but also high chemical input intensity and water use [Singh 2002]. These be at the root of the sustainability crisis in the state’s farming sector.
Of the four firms operating in the state, two were multinational subsidiaries and, were therefore, globally oriented in their opera-
tions. Both are expanding their operations in the food sector as part of their global strategies, and therefore are likely to stay in
this business but may not restrict themselves to Punjab alone, as is already evident in HLL’s move into Haryana and Rajasthan
for its procurement. Also, Pepsi Foods’ limited procurement of potato (10 per cent of total requirement) from contract growers
leaves much to be desired. But the HLL tomato processing plant
in Punjab was shut. Similarly,
Pepsi gave up tomato, chillies and even potato contract farming by and large and moved into basmati rice, groundnut
and garlic contract farming since 1998 [Prabhu 2004]
. It has acquired a paddy processing plant in Haryana which only means perpetuation of paddy cultivation in the region (Punjab and Haryana), though the MNC was granted entry into Punjab to
prevent precisely this. On the other hand, locally oriented firms( Nijjer and Markfed) are small in their operations and find it
difficult to grow on their own. Nijjer has already become a sub- contractor to Nestle so far as contract production of tomato and
processing of tomato into paste is concerned. The firm procures from farmers, processes the tomatoes into paste and supplies the
same in bulk to Nestle. Thus, it is operating as an intermediary between farmers and the MNC. By doing so, it not only avoids
the risk of farm production by contracting but also market risk by selling in bulk to Nestle. Thus, practically, it is operating as
a subsidiary of a MNC and, therefore, all benefits for the local economy are being reduced to that extent. The cooperative firm
(Markfed) is tradition bound, non-aggressive and only a procurement agency. It has not really shown any major dynamism in
the field of processing and marketing for the last three decades.
The contracts of all the firms were anti-farmer, short-term, and costly and perpetuated the existing problems of the farm sector like high chemical input intensity and social differentiation,
although contracting led to higher farm incomes and more employment for labour, these were not likely to sustain due to various reasons that are inherent in the nature of the contract system itself. There seemed to be an inherent contradiction in the objectives of the contracting parties and that of the local economy [Singh 2002].

It is very important to understand that the current laws that government has passed also help in creation of these subsidiaries that will eventually turn out to be pawns of bigger players. This will result in inflow and increase in labour upto some point But will harm the farmer benefiting only few. Better contracts framed in consideration of soil, water requirements, declining water table, safety net of farmers will succeed. It is immature to judge farmers by ignorant takes that Punjab has had no experience with contract farming.

Let’s take a look at State introduced Contract Farming in Punjab

Punjab government in October 2002 launched a contract farming programme aimed at Rabi season. The programme aimed at reducing 10lac hectares under wheat-paddy rotation in 5yrs. In 2002-03 a total of 29,000 acres was covered under this programme of which 20,000acre was brought under hybrid rapeseed mustard (hyola), 7000acres under maize, 1000 under barley and 1000under various vegetables. The programme was implemented jointly by department of agriculture, Punjab Agro Foodgrains corporation (PAFC, which is subsidiary of PAIC) and private companies.

PAFC provides seeds purchased from companies like Adventa India and Pro Agro, it also provides extension to contract growers, it also agreed to buy back the produce at pre agreed prices through a tripartite agreement involving the seed company, through its dealer and farmer. The agreement had PAFC in it as

The tripartite agreement specified the fixed price and bonus to be paid by PAFC to the farmer for produce. The bonus was applicable only if PAFC was able to sell the produce at higher price, type and quantity of the seed supplied by the seed company at specified price for the specified acreage, farmers responsibility of delivering the quality produce at a specific place, payment by PAFC within two days of delivery and; PAFC being the sole authority in deciding the weight of the produce and the only arbitrator in case of the dispute between any parties involved. The contract was signed by all three parties in presence of two witnesses for the farmer. These contracts were largely confidence boosting for the farmer with the involvement of PAFC in it.

This program looked very good on paper but by the time of the harvesting season it ran into rough weather. This is important while studying the current laws as well. The contracted winter maize crop completely failed due to rains. The contract green peas growers were forced to dump their produce in the open market after being rejected by PAIC on grounds of fungus development due to bad weather. An area of 500acres under contract production of peas in Patiala and Fatehgarh was affected. Some farmers blamed the fungicide supplied by the contracted company. The dumping of produce in open market led to sale at rs3 per Kg instead of 5/- promised by PAIC. The program could not achieve its stated goal in most areas and crops. Not only did it fall short in actual contracted crop area, the contracted farmers did not plant the contract crops in the entire contracted areas.

Except the oilseed crops (hyola and sunflower), net returns from contract produce was found to be lower than what farmers would have got from wheat. Most of the problems farmers faced related to production and quality (of seed and extension) and not marketing of produce (except peas) as the open market could take care of contract produce. Due tothis experience, a large majority (60 per cent) were not willing to enter into contract farming arrangements again.

Though contract farming has existed in Punjab for more than two decades now, this was the first time that the state government became the intermediary between companies and farmers. It was part of a larger project on crop adjustment (diversification) to be implemented during 2002-07 and it failed miserably.

Some more failures In Contract Farming

As more agriculture business oriented companies came into play new sort of agreements came into existence. A notable example is that of MSSL (Mahindra Shubh Labh Services). The company’s experiments in Madhurai and TamilNadu were good. In Punjab it supplied farmers with quality seeds, fertilisers, pesticides etc to raise yields. It played an important role and link between farmer and the banks. The company followed a consortium approach with banks and seed supplying agencies under it.

The marriage of so many parties with all good intention didn’t last long in Punjab. MSSL ran into trouble due to dispute resolution between the farmers and banks, the farmers and the processor market. MSSL’s strategy on paper looked very good but failed to convert more than 3% of total area to contracted area in Punjab

Conclusion and lessons on Contract Farming.

Punjab has been doing Contract Farming and has experimented with all sorts of models on it. It is sort of intellectual dishonesty and lethargy to blame Punjab for not being open to experiment with the contract farming. While you are reading this, the contract farming is going on in Punjab. If there is anything one can learn from the models that Punjab has experimented with, it becomes clear that the new laws don’t bring anything new to Punjab. It is the same old contracts wrapped in new clauses that have ambiguities. Let’s admit this that Centre wants to do away with the MSP regime and let’s be honest about it, the fact is that new contracts will endorse and encourage that. The easy PAN card registration of traders will spring up a new breed of middlemen that will sooner or later exploit farmers. Nothing in the new laws aims at diversification of crops in Punjab. The new laws aim at creating lesser accountability for the centre govt. The state procurement models are tired out and devoid of money to enter the contract agreements that they used to, the ones we discussed already.

Sources
1. Singh, L and S Singh (2002): ‘Deceleration of Economic Growth in Punjab
Evidence, Explanation and A Way Out’,

2. Gill, S S (1988): ‘Contradictions of Punjab Model of Growth and Search
for an Alternative’,
3. Subramaniam, A (2002): ‘Field Day in Store for Farmers’ in http:/ Gill, S S and J S Brar (1996): ‘Global Market and Competitiveness.

One thought on “Punjab’s experiments with diversification and Contract Farming.

  1. Great piece and well-research. A long one but worth the read.
    A question that comes into mind is whether farmers themselves can form companies (farmers contribute capital and thus own a piece of the capital share) and engage in large-scale farming practices that can lower costs and with broader expertise in play.
    Also, it is without second doubt that a shift from wheat and paddy is much needed in the medium to long-run in Punjab. Given your research into the topic, any big picture ideas of how that could work out in a sustainable manner?

    Appreciate your time and effort in writing this piece once again!

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