In an age of market liberalisation, globalisation and expanding agribusiness, there is a danger that small-scale farmers will find difficulty in fully participating in the market economy. In many countries, such farmers could become marginalised as larger farms become increasingly necessary for a profitable operation. A consequence of this will be a continuation of the drift of populations to urban areas that are being witnessed almost everywhere.
Attempts by governments and development agencies to arrest this drift have tended to emphasise the identification of “income generation” activities for rural people. Unfortunately, there is relatively little evidence that such attempts have borne fruit. This happens as the necessary backward and forward market linkages are rarely in place, that is, rural farmers and small-scale entrepreneurs lack both reliable and cost-efficient inputs such as extension advice, mechanisation services, seeds, fertilisers and credit, and guaranteed and profitable markets for their output.
Well-organised contract farming does, however, provide such linkages, and would appear to offer an important way in which smaller producers can farm commercially. Similarly, it also provides investors with the opportunity to guarantee a reliable source of supply, from the perspectives of both quantity and quality.
A Partnership Regime
Contract farming can be defined as an agreement between farmers and processing and marketing firms for the production and supply of agricultural products under forwarding agreements, frequently at predetermined prices. The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice.
The basis of such arrangements is a commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser and a commitment on the part of the company to support the farmer's production and to purchase the commodity.
The intensity of the contractual arrangement varies according to the depth and complexity of the provisions in each of the following three areas:
i. Market Provision: The grower and buyer agree to terms and conditions for the future sale and purchase of a crop or livestock product.
ii. Resource Provision: In conjunction with the marketing arrangements the buyer agrees to supply selected inputs, including on occasions land preparation and technical advice.
iii. Management Specifications: The grower agrees to follow recommended production methods, inputs regimes, and cultivation and harvesting specifications.
With effective management, contract farming can be a means to develop markets and to bring about the transfer of technical skills in a way that is profitable for both the sponsors and farmers. The approach is widely used, not only for tree and other cash crops but also for fruits and vegetables, poultry, pigs, dairy produce and even prawns and fish.
Contract farming is becoming an increasingly important aspect of agribusiness, whether the products are purchased by multinationals, smaller companies, government agencies, farmer cooperatives or individual entrepreneurs. As noted above, the approach would appear to have considerable potential in countries where small-scale agriculture continues to be widespread, as in many cases small-scale farmers can no longer be competitive without access to the services provided by contract farming companies.
It must be stressed, however, that the decision to use the contract farming modality must be a commercial one. It is not a development model to be tried by aid donors, governments or non-governmental organisations (NGOs) because other rural development approaches have failed. Projects that are primarily motivated by political and social concerns rather than economic and technical realities will inevitably fail.
Contractual arrangements can provide farmers with access to production services and credit as well as knowledge of new technology. Pricing arrangements can reduce risk and uncertainty. Some contract farming ventures allow farmers to diversify into new crops, which would not be possible without the processing and marketing facilities provided by the company. Offsetting these benefits, however, are the risks associated with the cultivation of a new crop, the fact that the company may fail to honour its commitments and the danger of indebtedness if problems arise.
- RAJ KAMAL SILVANO
Source: Food and Agricultural Organisation (FAO)