With globalization and large scale farming, the fate of a small holder farmer in the market economy is threatened. Yet, some agribusinesses face the challenge of a guaranteed and reliable source of supply of the quantity and quality of farm products they desire. The forward and backward market linkage of these two groups of persons is guaranteed in a well-structured contract farming arrangement. Contracting farming is ‘an agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.’ The core of these arrangements is a commitment by the farmer to deliver the predetermined specifications of the agribusiness and a commitment by the agribusiness to strengthen the farmer’s production and purchase the commodity.
Fairness and transparency are important principles that make this partnership sustainable. Exploitative terms can lead to farmer discontentment and jeopardize the arrangement. Reneging on supplies can also disrupt projected sales for the agribusiness. Some of the terms can be crafted in a simple deal or in a detailed agreement. Nevertheless, it must be in a form that the farmer clearly understands, especially in terms of requirements on quality standards, pricing and payment arrangements.
Benefits and Challenges
Contract farming has several advantages for both the farmer, the agribusiness and the system as a whole. The farmer is usually assisted in the production process with inputs and technologies that improve productivity. The price risk to be borne by the farmer is also usually reduced since prices are fixed in advance. Similarly, the agribusiness enjoys supply reliability than open market purchases. The quality of the supplies is also more consistent than is obtainable in buying from open market. The agricultural system benefits from a more assured production and market outlets. Engaging small holder farmers also alleviates the problem of their livelihood loss and land grabbing by large scale farmers.
Regardless of these advantages, some critics counter the favourable views on contract farming. They point to the existence of ‘imbalance of power and information in favour of the agribusiness’ that enables it to impose contract terms on the farmers, maneuver quality standards to cut down prices or renege on agreements to purchase if market conditions change. This exploitative, unreliable or monopolistic position is abusive and detrimental to the farmer’s livelihood. Farmers also risk being indebted because of production problems. On the other hand, the agribusiness may face threats of constrained market where farmers engage in extra- contractual sales (selling to persons outside the contract), divert inputs supplied for production or become constrained by social and cultural factors.
Examples from Developing countries
Although contract farming can facilitate integrating small-holder farmers into contemporary agricultural value chains, studies have shown that it is more beneficial for farmers of high-value crops like tea, oil palm, poultry and dairy products . For instance, the Kenya Tea Development Agency, a private agribusiness, contracts with over 500,000 small holder tea farmers. Successful cases of contract poultry farming have also been recorded in Bangladesh, India, Indonesia, and Thailand, where the agribusiness provides the chicks, feed, and other inputs to the farmers and commits to buying the chickens when grown.
Contract farming is also practiced in Nigeria. Milk production is currently organized by a dairy processor who contracts with small scale Fulani dairy producers in Oyo state, for the supply of freshly squeezed milk, helping to address the conflict between farmers and herdsmen. Tomato production is also commonly produced through contract farming with small holder farmers in Plateau state. Contract farming is however, not very common nor profitable for staple cereals, roots, and bean crops because consumers are less quality sensitive of these products. The exceptions to this are barley for largescale breweries and niche products such as organic rice.
Contract farming presents its parties with benefits that promote agricultural production and trade. However, signing a contract does not always mean that its terms will be complied with. The breach of the contractual terms and the dispute settlement mechanisms that have been put in place will be discussed in the next part.
Sokoajin Madey Aileku