Contract farming: opportunities and risks.
Agri-food production and distribution systems are rapidly changing. One of the momentous forces driving this is world population growth. World population is expected to reach 9 billion by 2050 and fertile farmland is increasingly becoming an attractive asset.
In many countries small farmer landholdings are quickly fragmenting. In India, the average size of a farm was 2.2 hectares in 1970. Today it is only one hectare. On the other end of the food chain, organized retail is expanding and consolidating.
For governments and technical agencies, such as ITC, one of the challenges is to identify income generating activities to improve the livelihood of small producers holding ever smaller patches of land, and to provide other needed services such as access to credit, technological know-how and market information.
One possible avenue for establishing farm-firm linkages is contract farming. It is not new but raises serious questions, both for farmers and policymakers, in the context of recurring food crises and land shortages. Farmers will increasingly be invited to sign these contracts, which offer both benefits and disadvantages. Contract farming often needs to be properly regulated by governments, and farmers should be advised on its advantages and risks.
A farm-firm arrangement
Contract farming (also called 'production contract') has been defined as a fixed-term arrangement between a farmer and a contractor, entered into before production begins, under which the farmer agrees to sell or deliver to the contractor a designated crop on identified acres in a specified manner, and the contractor agrees to pay the farmer a price according to a specified method and at an agreed time. Contract farming is not exclusively a development model, but farmers should be informed and educated on such contracts as they become more prevalent. Tomatoes, cucumbers and poultry are typically produced via contract farming.
Advantages and risks
Contract farming provides farmers with production inputs (such as seeds and fertilizers), quality control, and advice on new production methods. Prices are fixed in advance and credit facilities may be associated with the contract. Above all, contract farming can make agriculture remunerative.
However, farmers make a long-term investment, for example by building a special drainage system, over a short term contract. Early termination of the contract by the contractor will translate into a loss. If payment is made after the crop is harvested the farmer depends entirely on the contractor's trustworthiness. If the crop is lost, the risk falls on the farmer and often no compensation is provided.
For investors and contractors, contract farming overcomes land constraints and is more politically acceptable. Quality is controlled by the investor and crop risks are shared with the farmers. However, investments in training and know-how, farmer discontent and disputes, extra-contractual marketing by the farmers, and diversion by farmers of inputs supplied to them, all are risks to be supported by the contractor.
Mitigating the legal risks of contract farming
Given increasing use by private companies of production contract arrangements with farmers, governments should consider regulating contract farming to protect smallholder farmers by specifying a number of obligatory contractual requirements, These could include a minimum contract duration of three to five years, clarifying the status of the farmer (independent contractor or employee), payment and contract termination conditions.
Another commonly neglected aspect is the absence of accessible dispute resolution mechanisms, not only regarding termination of contracts but on recurring issues such as payment, scales and measures, quality and quantity. Commercial arbitration and mediation centres established in most countries seldom offer rapid and inexpensive hands-on services directed to small farmers.
Lastly, farmers need legal advice on various contractual arrangements. This is not a traditional area of expertise for most lawyers in developing economies. ITC offers support in this regard with its model contract templates and its specialized training and advisory services. To reach the farm-field, advice can be best offered through agri-hubs or centres of knowledge-transfer for smatlholder organizations.
For more reformation contact Jean. Francois Bourque at firstname.lastname@example.org
Senior Adviser, Trade Law and Arbitration, Business Environment Section
AVERAGE SIZE OF A FARM IN INDIA 2.2 HECTARES IN 1970 1 HECTARE