Contract farming

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Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products.^[1] Typically, the farmer agrees to provide established quantities of a specific agricultural product, meeting the quality standards and delivery schedule set by the purchaser. In turn, the buyer commits to purchase the product, often at a pre-determined price. In some cases the buyer also commits to support production through, for example, supplying farm inputs, land preparation, providing technical advice and arranging transport of produce to the buyer’s premises. Another term often used to refer to contract farming operations is ‘out-grower schemes”, whereby farmers are linked with a large farm or processing plant which supports production planning, input supply, extension advice and transport. Contract farming is used for a wide variety of agricultural products.

[edit] The rationale for contract farming

Contract farming is one of the different governance mechanisms for transactions in agrifood chains. The use of contracts (either formal or informal) has become attractive to many agricultural producers worldwide because of benefits such as the assured market and access to support services. It is also a system of interest to buyers who are looking for assured supplies of produce for sale or for processing. Processors are among the most important users of contracts, as they wish to assure full utilisation of their plant processing capacity. A key feature of contract farming is that it facilitates backward and forward market linkages that are the cornerstone of market-led, commercial agriculture. Well managed contract farming is considered as an effective approach to help solve many of the market linkage and access problems for small farmers.

[edit] Key benefits of contract farming

The key benefits of contract farming for farmers can be summarized as follows: 1) improved access to local markets; 2) assured markets and prices (lower risks) especially for non traditional crops; 3) assured and often higher returns; 4) enhanced farmer access to production inputs, mechanization and transport services, and extension advice

Additional key benefits for contract partners and rural development often include: 1) assured quality and timeliness in delivery of farmers’ products; 2) improved local infrastructure, such as roads and irrigation facilities in sugar outgrower areas, tea roads, dairy coolers/collection centres, etc. 3) lower transport costs, as coordinated and larger loads are planned, an especially important feature in the case of more dispersed producers..

[edit] Issues of concern related to contract farming

As with any form of contractual relationship, there are potential disadvantages and risks associated with contract farming. If the terms of the contract are not respected by one of the contracting parties, then the affected party stands to lose. Common contractual problems include farmer sales to a different buyer (side selling or extra-contractual marketing), a company's refusal to buy products at the agreed prices, or the downgrading of produce quality by the buyer. Side selling by farmers to competing buyers is perhaps the greatest problem constraining the growth of contract farming. Contractors also may default by failing to pay agreed prices or by buying less than the pre-agreed quantities.

Another concern about contract farming arrangements is the potential for buyers to take advantage of farmers. Buying firms, which are invariably more powerful than farmers, may use their bargaining clout to their financial advantage. Indeed, if farmers are not well organised or where there are few alternative buyers for the crop or it is not easy to change the crop, there is a danger that farmers may have an unfair deal. Tactics sometimes used are changing pre-agreed standards, down grading crops on delivery so offering lower prices, or over-pricing for inputs and transport provided. Strengthening farmer organisations to better access appropriate services such as credit, extension services and market information and improving their contract negotiating skills can redress the issue of exploitation of farmers and poorly formulated contracts and their enforcement.

The above typical problems notwithstanding, the balance between advantages and disadvantages for both firms and farmers seems to be on the positive side: contractual arrangements are more and more frequently being used in agriculture worldwide.