Q: What is contract farming?
A: Contract farming can be also known 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. Usually, the farmer agrees to provide agreed quantities of a specific agricultural product. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser. In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation and the provision of technical advice.
Q: Who benefits from contract farming?
A: Both partners who are respective sides of such a contract can benefit. Farmers have a guaranteed market buyout, reduce their uncertainty regarding prices and often are supplied with loans in kind, through the provision of farming inputs such as seeds and fertilizers. Purchasing firms benefit from having a guaranteed supply of agricultural products that meet their specifications regarding quality, quantity, and timing of delivery.
Q: Do farms and purchasing firms always benefit from engaging in contract farming?
A: As with any other form of contractual business agreements, there are also potential disadvantages and obstacles 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 company. One of the most prominent criticisms of contract farming arrangements is the uneven nature of the business relationship between farmers and their buyers. Buying firms, who are invariably more powerful than farmers, may use their bargaining clout to their short-term financial advantage, although in the long run, this would be counterproductive as farmers would cease to supply them. These 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.
Q: Is contracting farming recommended for all types of agriculture products?
A: In principle, there is no restriction to the types of agriculture products that can be the object of a contract. There are numerous examples of successful contract farming arrangements for most types of crops and livestock. Examples also exist for forestry, aquaculture, and fiber products, as well as for flowers and tobacco, to name a few. While the applicability is fairly general, there is evidence that the most successful schemes are associated with agricultural products that are high-valued or produced for processing and /or exports. Products for which there is high local demand may be more susceptible to side selling and thus may be less suitable for contract farming.