Contract farming is agricultural production carried out according to an agreement between farmers and a buyer, which places conditions on the production and marketing of the commodity.
Contract farming (CF) is defined as forward agreements specifying the obligations of farmers and buyers as partners in business. Legally, farming contracts entail the sellers’ (farmers’) obligation to supply the volumes and qualities as specified, and the buyers’ (processors’/ traders’) obligation to off-take the goods and realize payments as agreed.
Furthermore, the buyers normally provide embedded services such as: upfront delivery of inputs (e.g. seeds, fertilizers, plant protection products); pre-financing of input delivery on credit (explicit rates not always charged; see insert); and other non-financial services (e.g. extension, training, transport and logistics).
Types of contract farming
Several types of contracts are distinguished according to the sharing of risks and specification of contract terms. From the management view point, two types of contracts are determined.
• Market specification contract where contract is a pre-harvest arrangement that binds the firm and grower to a particular set of conditions governing the sale of the crop. These conditions often specify price, quality and timing of delivery of the produce.
• Resource providing contract where the contract oblige the contracting firms to supply production inputs, extension or credit in exchange for a marketing arrangement.
• Management and income guaranteeing contract where contract includes the production and marketing stipulations of the former two types. In addition, market and price risks were transferred from farmers to firm and the farmer is assured of a certain level of revenue. But the contracting firms take a substantial part of the managerial responsibility of the farmer.
• Easy access to inputs by farmers and assured access to commodities by contract companies.
• Guaranteed market for farmers. This gives farmers the comfort level to be able to focus on what they are good at (farming).
• Farmer access to cutting-edge production knowledge from contract companies. In order to get good quality commodities, contract companies provide the best varieties or breeds and advisory services from production all the way to marketing.
• Enormous opportunities for farmers to transfer good agricultural practices to other commodities outside contract arrangements. Contract farming inculcates a certain level of attention to detail.
• Rural employment creation through supporting the industrialisation of growth points.
• Farmers’ price risk is often reduced as many contracts specify prices in advance
• Contract farming can open up new markets which would otherwise be unavailable to small farmers
• While contract farming tends to guarantee a market, contractors keep prices very low in order to maximise profit.
• Contract companies have the final say on quality and can reject ‘sub-standard’ commodities which they can allocate a lower grade. Farmers will just accept because there is nothing to compare with.
• Contract arrangements reinforce a dependency syndrome. It is not easy for farmers to get out contract arrangements.
• Most contract arrangements promote monoculture.