Contract farming involves agricultural production being carried out on the basis of an agreement between the buyer and farm producers. Sometimes it involves the buyer specifying the quality required and the price, with the farmer agreeing to deliver at a future date. More commonly, however, contracts outline conditions for the production of farm products and for their delivery to the buyer's premises. [1] The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality standards and delivery requirements of the purchaser. In return, the buyer, usually a company, agrees to buy the product, often at a price that is established in advance. The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with land preparation, providing production advice and transporting produce to its premises. The term "outgrower scheme" is sometimes used synonymously with contract farming, most commonly in Eastern and Southern Africa. Contract farming can be used for many agricultural products, although in developing countries it is less common for staple crops such as rice and maize.
Contract farming has been used for agricultural production for decades but its popularity appears to have been increasing in recent years. The use of contracts has become attractive to many farmers because the arrangement can offer both an assured market and access to production support. Contract farming is also of interest to buyers, who seek supplies of products for sale further along the value chain or for processing. Processors constitute the main users of contracts, as the guaranteed supply enables them to maximise utilization of their processing capacity. [2] Contracts with farmers can also reduce risk from disease or weather and facilitate certification, which is being increasingly demanded by advanced markets. There are also potential benefits for national economies as contract farming leads to economies of scale, which, as Collier and Dercon argue, are "bound to provide for a more dynamic agricultural sector. [3]
Although contract farming must first and foremost be considered as a commercial proposition, it has also come to be viewed as an effective approach to help solve many of the market access and input supply problems faced by small farmers. [4] A guide published by GIZ in 2013 seeks to advise on ways in which contract farming can be developed to maximise such benefits for smallholders in developing countries. [5] Effective linkages between companies and thousands of farmers often require the involvement of formal farmer associations or cooperatives or, at least, informal farmer groups. However, empirical evidence of the best way of achieving this is not yet available. [6]
Eaton and Shepherd [2] identify five different contract farming models. Under the centralized model a company provides support to smallholder production, purchases the crop, and then processes or markets it, closely controlling its quality. This model is used for crops such as tobacco, cotton, sugar cane, banana, tea, and rubber. Under the Nucleus Estate model, the company also manages a plantation in order to supplement smallholder production and provide minimum throughput for the processing plant. This approach is mainly used for tree crops such as oil palm and rubber. The Multipartite model usually involves a partnership between government bodies, private companies and farmers. At a lower level of sophistication, the Intermediary model can involve subcontracting by companies to intermediaries, who either have formal arrangements with farmers, such as cooperatives, or less-formal arrangements, such as traders. Finally, the Informal model involves small and medium enterprises who make simple contracts with farmers on a seasonal basis. Although these are usually just seasonal arrangements they are often repeated annually and usually rely for their success on the proximity of the buyer to the seller.
As with any contract, there are a number of risks associated with contract farming. Common problems include farmers selling to a buyer other than the one with whom they hold a contract (known as side selling, extra-contractual marketing or, in the Philippines, “pole vaulting”), or using inputs supplied by the company for purposes other than intended. From the other side, a company sometimes fails to buy products at the agreed prices or in the agreed quantities, or arbitrarily downgrades produce quality.
The existence of an adequate legal framework is thus crucial for the successful implementation and long-term sustainability of contract farming operations. A system of law is essential to assist farmers and their buyers in the negotiation and drafting of contracts. It is also important to protect them from risks that may occur during contractual execution, such as abuse of power by the stronger bargaining party or breach of contract. Strengthening farmer organizations to improve their contract negotiating skills can redress the potential for subsequent misunderstandings. [7] Different countries have enacted policies and legislation to ensure fair contractual practices and offer remedies for dispute resolution. [8] A “Legal Guide on Contract Farming” was developed in 2013–15 by the International Institute for the Unification of Private Law (UNIDROIT) in partnership with FAO. [9] [10]
Even apparently successful contracts from a legal point of view can face other difficulties. For example, family relationships can be threatened. Work for contracts is often done by women but the contracts are invariably in the name of the man who also receives the payment. Men attend meetings and training courses but women often get no training. Land used by women for food crops or commercial production may be taken over for contract production. [6] This can affect not only food production but also the status of the women. Contracts can break down because of poor management by the company or as a result of unrealistic expectations about the capacity of farmers or about the yields that can be achieved. This has been a particular problem with attempts to promote contract farming for biofuel crops. [11]
Contract farming has to be commercially viable. To maximise profitability companies need to choose the best available farmers. Once suitable farmers have been identified it is then necessary to develop trust, as contracts will only work when both parties believe they are better off by engaging in them. To achieve this requires a willingness to collaborate and share information. Disagreements over product grading, for example, can be avoided by providing clear, simple specifications in a contract and by ensuring that farmers or their representatives are present when the produce is graded. Late payment can immediately cause a breakdown of trust and must be avoided. Contracts should be flexible to take into account the possibility of extreme events such as high open market prices or bad weather. Finally, however hard the parties try, disagreements are inevitable. Contracts should ideally make provision for arbitration by someone acceptable to both the company and the farmers. FAO's Guiding Principle for Responsible Contract Farming Operations [12] provides concise advice on how to maximise the chances of success for both companies and farmers. Of particular importance here is the role of producer organisations in bargaining for smallholders' interests. [13]
Numerous studies have been conducted on contract farming ventures and many are listed in the Food and Agriculture Organization's (FAO) Contract Farming Resource Centre. [1] The Asian Development Bank Institute (ADBI) in Tokyo has conducted a series of case studies in selected Asian countries to assess the conditions for benefits to be achieved by marginal rice farmers. In Lao PDR, the research suggested that contracted farmers earned significantly higher profits than non-contracted farmers. This facilitated the transition of subsistence farmers to commercial agriculture, offering potential to reduce rural poverty. [14] A study in Cambodia on organic rice for export assessed the effect of contract farming on farmers’ performance. This suggested that younger and more educated farmers with larger families and fewer assets were more likely to join the contract. However, farmers with access to good road communications often left the contract, indicating that contract farming had helped them to develop into independent farmers. [15] In India, a 2023 study by the Asian Development Bank shows that contract poultry farming boosts the livelihoods of small-scale farmers producing for Suguna Foods Private Limited, one of India's largest poultry producers. Contract poultry farming reduces the farmers' exposure to risks associated with price fluctuations, disease outbreaks, and feed price hikes. The study also provides evidence that contract farming with multinational companies can improve the livelihood of low- income segments. [16]
A set of papers on the role of contract farming in promoting inclusive market access, published by FAO in 2013, [17] covers contractual arrangements in Argentina, Bangladesh, Brazil, China, Honduras, South Africa, Tanzania and Thailand. The editors conclude that despite a preference for procurement from large farmers, factors other than farm size contribute to a company's decision and that contract farming will not, therefore, necessarily lead to the exclusion of small farmers from supply chains. Geographical factors are important, both in terms of how they impact on production and in terms of factors such as land rights, gender and ethnic relationships. The editors identify a gradual convergence in clauses and conditions used in contracts and note that the two most common contract provisions, those involving technical assistance and pre-financing of inputs, may be essential for small farmer inclusion. The publication considers the role of third parties, such as NGOs, in coordinating farmers. The editors also identify potential roles for third parties in providing independent quality certification and in certifying contracting companies in order to reduce the risk for farmers.
In considering the subject of “side selling” the FAO publication [17] advocates a combination of favourable incentives and explicit penalties for farmers. It also notes that in some circumstances the costs of full avoidance of contractual breaches can be much greater than losses from side-selling, and that companies may therefore learn to live with side-selling. This will depend on the size of the firm and the amount invested in farmers. Drawing in detail from the case studies, the publication reiterates the importance of a suitable enabling environment. However, it also concludes that in certain cases the lack of such an environment is not necessarily a binding constraint to contract farming, particularly where flexibility and non-conventional contractual clauses can be used. Although an enabling environment is important, the editors caution against government incentives and subsidies to promote inclusion as these may give a misleading impression of profitability and jeopardize sustainability. They also note that the costs to the firm of pursuing an inclusive strategy are rarely considered by proponents of the concept.
Prowse (2012) provides an accessible and comprehensive review of current issues in contract farming in developing countries. [18] Several studies offer a positive message on the inclusion of smallholders and the benefits they accrue from participation. For example, in a study published in 2014, Wang, Wang and Delgado review a large number of empirical studies of contract farming. They conclude that contract farming has had a significant impact on improving farm efficiency and productivity, and farmer incomes. [19] In a synthetic review of econometric studies, Minot and Ronchi (2015) suggest that participants’ incomes increase by 25-75%. [20] A more measured approach is taken in Ton et al.'s (2017) systematic review of contract farming. Although their study finds that contract farming may substantially increase farmer income, Ton et al. argue that such figures need to take publication and survivor bias into account. In other words, such estimates need to be revised downwards to accept that studies that show negative or no 'impact' are less likely to be published, and that the calculation of the impact of contract farming may neglect schemes that do not improve incomes for smallholders and collapse and thus are not available for evaluation. [21]
To avoid making large investments in farm equipment, farmers often hire the services of contractors to carry out activities such as land preparation, seeding, fertilization and harvesting. An alternative approach involves an agreement, or joint venture, between a landowner or tenant and a contractor to farm an area of land. As implemented in the United Kingdom, this model is based on a contractor carrying out all farming activities, receiving a fixed fee to cover its costs, together with a share of the eventual profits. The advantages of this arrangement for farmers should include lower labour and machinery costs, as contractors working on several farms can benefit from economies of scale denied to individual farmers. The profit-sharing nature of the agreement should also incentivise the contractor to be as efficient as possible. For contractors, the advantages are that they can farm large areas of land without having to buy it or enter into tenancy agreements. Contractors should also benefit from economies of scale by spreading machinery and labour over a larger area of land. [22]
A 2015 episode of the US television show Last Week Tonight with John Oliver documented contract farming for poultry in the US, arguing that many of the farmers were below the poverty line. [23]
Agriculture encompasses crop and livestock production, aquaculture, and forestry for food and non-food products. Agriculture was a key factor in the rise of sedentary human civilization, whereby farming of domesticated species created food surpluses that enabled people to live in cities. While humans started gathering grains at least 105,000 years ago, nascent farmers only began planting them around 11,500 years ago. Sheep, goats, pigs, and cattle were domesticated around 10,000 years ago. Plants were independently cultivated in at least 11 regions of the world. In the 20th century, industrial agriculture based on large-scale monocultures came to dominate agricultural output.
A farmer is a person engaged in agriculture, raising living organisms for food or raw materials. The term usually applies to people who do some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A farmer might own the farmland or might work as a laborer on land owned by others. In most developed economies, a "farmer" is usually a farm owner (landowner), while employees of the farm are known as farm workers. However, in other older definitions a farmer was a person who promotes or improves the growth of plants, land, or crops or raises animals by labor and attention.
A farm is an area of land that is devoted primarily to agricultural processes with the primary objective of producing food and other crops; it is the basic facility in food production. The name is used for specialized units such as arable farms, vegetable farms, fruit farms, dairy, pig and poultry farms, and land used for the production of natural fiber, biofuel, and other commodities. It includes ranches, feedlots, orchards, plantations and estates, smallholdings, and hobby farms, and includes the farmhouse and agricultural buildings as well as the land. In modern times, the term has been extended so as to include such industrial operations as wind farms and fish farms, both of which can operate on land or at sea.
Precision agriculture (PA) is a farming management strategy based on observing, measuring and responding to temporal and spatial variability to improve agricultural production sustainability. It is used in both crop and livestock production. Precision agriculture often employs technologies to automate agricultural operations, improving their diagnosis, decision-making or performing. The goal of precision agriculture research is to define a decision support system for whole farm management with the goal of optimizing returns on inputs while preserving resources.
Corporate farming is the practice of large-scale agriculture on farms owned or greatly influenced by large companies. This includes corporate ownership of farms and the sale of agricultural products, as well as the roles of these companies in influencing agricultural education, research, and public policy through funding initiatives and lobbying efforts.
Good agricultural practice (GAP) is a certification system for agriculture, specifying procedures that must be implemented to create food for consumers or further processing that is safe and wholesome, using sustainable methods. While there are numerous competing definitions of what methods constitute good agricultural practice, there are several broadly accepted schemes that producers can adhere too.
Subsistence agriculture occurs when farmers grow crops on smallholdings to meet the needs of themselves and their families. Subsistence agriculturalists target farm output for survival and for mostly local requirements. Planting decisions occur principally with an eye toward what the family will need during the coming year, and only secondarily toward market prices. Tony Waters, a professor of sociology, defines "subsistence peasants" as "people who grow what they eat, build their own houses, and live without regularly making purchases in the marketplace".
A market garden is the relatively small-scale production of fruits, vegetables and flowers as cash crops, frequently sold directly to consumers and restaurants. The diversity of crops grown on a small area of land, typically from under 0.40 hectares to some hectares, or sometimes in greenhouses, distinguishes it from other types of farming. A market garden is sometimes called a truck farm in the US.
Agribusiness is the industry, enterprises, and the field of study of value chains in agriculture and in the bio-economy, in which case it is also called bio-business or bio-enterprise. The primary goal of agribusiness is to maximize profit while satisfying the needs of consumers for products related to natural resources such as biotechnology, farms, food, forestry, fisheries, fuel, and fiber.
UNIDROIT is an intergovernmental organization whose objective is to harmonize private international law across countries through uniform rules, international conventions, and the production of model laws, sets of principles, guides and guidelines. Established in 1926 as part of the League of Nations, it was reestablished in 1940 following the League's dissolution through a multilateral agreement, the UNIDROIT Statute. As of 2023 UNIDROIT has 65 member states.
A smallholding or smallholder is a small farm operating under a small-scale agriculture model. Definitions vary widely for what constitutes a smallholder or small-scale farm, including factors such as size, food production technique or technology, involvement of family in labor and economic impact. There are an estimated 500 million smallholder farms in developing countries of the world alone, supporting almost two billion people. Smallholdings are usually farms supporting a single family with a mixture of cash crops and subsistence farming. As a country becomes more affluent, smallholdings may not be self-sufficient, but may be valued for providing supplemental sustenance, recreation, and general rural lifestyle appreciation. As the sustainable food and local food movements grow in affluent countries, some of these smallholdings are gaining increased economic viability in the developed world as well.
The history of agriculture in India dates back to the Neolithic period. India ranks second worldwide in farm outputs. As per the Indian economic survey 2020 -21, agriculture employed more than 50% of the Indian workforce and contributed 20.2% to the country's GDP.
Agriculture in the Philippines is a major sector of the economy, ranking third among the sectors in 2022 behind only Services and Industry. Its outputs include staples like rice and corn, but also export crops such as coffee, cavendish banana, pineapple and pineapple products, coconut, sugar, and mango. The sector continues to face challenges, however, due to the pressures of a growing population. As of 2022, the sector employs 24% of the Filipino workforce and it accounted for 8.9% of the total GDP.
Purchase for Progress (P4P) is an initiative of the United Nations World Food Programme (WFP), involving over 500 partnerships, including Bill & Melinda Gates Foundation, the Howard G. Buffett Foundation, FAO, ACDI/VOCA, TechnoServe and others. Launched in September 2008 as a five-year pilot, P4P sought to explore programming and procurement modalities with the greatest potential to stimulate agricultural and market development in ways that maximized benefits to smallholder farmers. The program, largely developed by the eleventh Executive Director of the WFP, Josette Sheeran, arose as the WFP desired to purchase food in a way that was part of the "solution to hunger". These efforts are aligned with recommendations issued by the UN Committee on Economic, Social and Cultural Rights that call for an establishment of programs in support of socially vulnerable groups. and to the Zero Hunger Challenge launched by the UN Secretary-General Ban Ki-moon. Special UN Reporter 2012–2014, Olivier De Schutter, claimed that public procurement systems favour economically strong bidders, thus excluding smallholder farmers. His conclusion was that public procurement schemes supportive of smallholders could have "powerful impacts on the reduction of rural poverty." P4P is built upon this very principle as it enables low-income farmers to supply food to the WFP's operations. Eventually, the transaction can be regulated by a forward contract, with the farmer agreeing to sell in the future a certain amount of output at a fixed price. Essentially, the P4P program aims to create a wide and sophisticated market for commodities in developing countries.
In the agricultural context, diversification can be regarded as the re-allocation of some of a farm's productive resources, such as land, capital, farm equipment and labour to other products and, particularly in richer countries, to non-farming activities such as restaurants and shops. Factors leading to decisions to diversify are many, but include: reducing risk, responding to changing consumer demands or changing government policy, responding to external shocks and, more recently, as a consequence of climate change.
Tobacco production in Malawi is one of the nation's largest sources of income. As of 2005, Malawi was the twelfth-largest producer of tobacco leaves and the 7th largest global supporter of tobacco leaves. As of 2010, Malawi was the world's leading producer of burley leaf tobacco. With the decline of tobacco farms in the West, interest in Malawi's low-grade, high-nicotine tobacco has increased. Today, Malawian tobacco is found in blends of nearly every cigarette smoked in industrialized nations including the popular and ubiquitous Camel and Marlboro brands. It is the world's most tobacco dependent economy. In 2013 Malawi produced about 133,000 tonnes of tobacco leaf, a reduction from a maximum of 208,000 tonnes in 2009 and although annual production was maintained at similar levels in 2014 and 2015, prices fell steadily from 2013 to 2017, in part because of weakening world demand but also because of declining quality.
Mozambique has a variety of regional cropping patterns; agro-climatic zones range from arid and semi-arid to the sub-humid zones to the humid highlands. The most fertile areas are in the northern and central provinces, which have high agro-ecological potential and generally produce agricultural surpluses. Southern provinces have poorer soils and scarce rainfall, and are subject to recurrent droughts and floods.
An agricultural value chain is the integrated range of goods and services necessary for an agricultural product to move from the producer to the final consumer. The concept has been used since the beginning of the millennium, primarily by those working in agricultural development in developing countries, although there is no universally accepted definition of the term.
Digital agriculture, sometimes known as smart farming or e-agriculture, is tools that digitally collect, store, analyze, and share electronic data and/or information in agriculture. The Food and Agriculture Organization of the United Nations has described the digitalization process of agriculture as the digital agricultural revolution. Other definitions, such as those from the United Nations Project Breakthrough, Cornell University, and Purdue University, also emphasize the role of digital technology in the optimization of food systems.
Index-based insurance, also known as index-linked insurance, weather-index insurance or, simply, index insurance, is primarily used in agriculture. Because of the high cost of assessing losses, traditional insurance based on paying indemnities for actual losses incurred is usually not viable, particularly for smallholders in developing countries. With index-based insurance, payouts are related to an “index” that is closely correlated to agricultural production losses, such as one based on rainfall, yield or vegetation levels. Payouts are made when the index exceeds a certain threshold, often referred to as a “trigger”. By making payouts according to an index instead of individual claims, providers can circumvent the transaction costs associated with claims assessments. Index-based insurance is therefore not designed to protect farmers against every peril, but only where there is a widespread risk that significantly influences a farmer’s livelihood. Many such indices now make use of satellite imagery.
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