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Agribusiness affected by absence of sanctity of contracts

Enforcement of agriculture contracts appear near impossible. Look at the experience of thousands of absentee landlords unable to get even their legitimate modest share of the produce for decades and selling off the property at distress prices.

The recent controversy over PepsiCo potato patent raises key questions including protection of IPR and sanctity of contracts.
PepsiCo sued nine Gujarati farmers for growing the company’s patented potato variety used in Lays chips. PepsiCo asked them to surrender existing stocks and give an undertaking they would not use the patented variety. The familiar arguments of David versus Goliath, were advanced. One could understand this with the politicians on either side of the divide baying for Pepsi’s blood in the thick of elections.

The potato revolution…

Let’s dip into history for a perspective. From 1.66mn tonnes in 1950 potato production shot to 46.61mn tonnes in 2017. Today India accounts roughly for an eighth of global production with Bengal, Bihar, Gujarat, MP and Punjab accounting for close to 90 per cent of total production. This phenomenal growth is courtesy the spectacular research work by the Central Potato Research Institute (CPRI) as also the techniques, extension work and management systems introduced by multinationals like PepsiCo.

PepsiCo entered India in 1988 with the promise to involve in agriculture development. It did great work in Punjab, providing quality seeds and a vast range of agronomy practices. The results were spectacular. In a short time production of potato and tomato recorded phenomenal increases. It was a double whammy for the company: it bank-rolled on the huge productivity increases of the produce, bought these cheap and added rich value through packaging and marketing. Look at the bonanza to the company and the farmer: the procurement price for potato of special varieties was around Rs 2 per kg. The potato chips were then marketed around Rs 200 per kg. In typical American marketing genius tomatoes were procured at around Rs 2 per kg and the sauce was sold at Rs 100 per kg. The farmers didn’t complain: the productivity increase took care of their revenues.

Average yields of around 5 tonnes per acre shot up to over 50 tonnes per acre. So the sheer volume growth took care of revenues and profits of the farmers. The system worked well in Punjab where average farm sizes were large and optimal for technology and management initiatives.

The efforts made by ITC and VST Natural Products in Andhra Pradesh provided the contrast. Anil Kumar Epur, a postgraduate from Cornell University, headed agriculture operations, introduced contract marketing in Andhra. He identified gherkins as a potential export product, laboured hard on finding varieties in great demand in export markets. It worked well in terms of reception by the farmers and the productivity growth was impressive. Epur felt that production would stabilise at high levels and entered into contracts for exports.
The farmers had other ideas: there was a demand from buyers in the open market with prices far higher than they contracted with VST. They didn’t have any compunction in selling it off. Epur and consequently VST found this an unequal world and opted to sell off the agricultural activities to an American multinational.

Need A Million farmer producers’ organisations…

R Gopalakrishnan, a former vice chairman of Hindustan Lever and former Director, Tata Sons, points to the unequal equation: the lengthy contract documents full of legalese and written in English are not intelligible to the average farmer owning small farms. He succeeds in making this unenforceable. Gopal feels the importance of scaling up the average size of farm business by agglomerating small landholdings to viable sizes (the reform advocated by IE for long).This will enable the induction of science, technology and modern management. Gopal suggests doing this through the formation of Farmer Producers Organisations (FPOs). Gopal mentions the need for a million FPOs across the country. All that NABARD has done so far is forming just around 3000! So, the impact is poor.

There is a formidable challenge in enforcing contracts. The constituency of farmers are invaluable for any political party. These will rally round opposing any attempted reform.

Let’s look at the economics: average potato yield is in the region of 20 tonnes per hectare. The high-end, PepsiCo assisted farmer can be expected to have yields at least 5 times the average, around 100 tonnes per ha. For a four-hectare owner it works to 400 tonnes; at an average price of Rs 5 per kg, the revenue for the farmer is Rs 20 lakh. Minus the expenses, his income works out to around Rs 15 lakh and is free from tax! He would certainly join the rank of other prosperous Patels! Still in the politician’s perception all agriculturists are perceived poor and need free-taxes and hefty government subsidies!

With highly fragmented farms that average a hectare in Tamil Nadu, there is urgent need to agglomerate these to viable sizes without alienating ownership. Such agglomeration should be attempted on a mission mode through contract farming permitting leasing of land over 15 years and more.

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