What Is Contract Farming Agreement

Marketing contracts and production contracts contributed to the same production value in 2019. Production contracts, commonly used on livestock farms, accounted for the majority of production on poultry/egg, pig and cattle farms. On the other hand, marketing contracts were often used on arable farms. About 72 per cent of production on groundnut farms and 68 per cent of production on tobacco farms was under marketing contracts, and almost half of production on fruit farms was under marketing contracts. Only 10 to 15 percent of corn, soybean and wheat production was produced under a marketing contract in 2019. As with any contract, there are a number of risks associated with contract farming. The most common problems include farmers selling to a buyer other than the one with whom they have contracted (known as parallel selling, non-contractual marketing or “pole vaulting” in the Philippines) or the use of inputs provided by the company for purposes other than those intended. On the other hand, it happens that a company does not buy products at the agreed prices or in the agreed quantities or arbitrarily reduces the quality of production. Contracts can potentially bring benefits to manufacturers and contractors. Farmers receive a guaranteed outlet for their production with known compensation, while entrepreneurs receive a secure supply of goods with certain characteristics that are delivered on time. A series of articles on the role of contract culture in promoting inclusive market access, published by FAO in 2013[16], address contractual arrangements in Argentina, Bangladesh, Brazil, China, Honduras, South Africa, Tanzania and Thailand.

The drafters conclude that, despite a preference for sourcing large farmers, factors other than farm size contribute to a company`s decision and that contract farming will therefore not necessarily result in the exclusion of smallholder farmers from supply chains. Geographical factors are important, both in terms of impact on production and in terms of factors such as land rights, gender and ethnic relations. The drafters note a gradual convergence of the terms and conditions used in contracts and note that the two most common contractual provisions, which include technical assistance and pre-financing of inputs, can be essential for the participation of smallholder farmers. The publication deals with the role of third parties, such as . B NGOs, in the coordination of farmers. Publishers also identify potential roles for third parties in providing independent quality certifications and certifying contractors to reduce risks for farmers. The existence of an adequate legal framework is therefore crucial for the successful implementation and long-term sustainability of contracted farms. A legal system is essential to help farmers and their buyers negotiate and draft contracts. It is also important to protect them from risks that may arise during the performance of the contract, such as. B abuse of power by the strongest negotiating party or breach of contract.

Strengthening farmers` organisations to improve their negotiating skills can dispel the risk of further misunderstandings. [7] Various countries have adopted policies and laws to ensure fair contracting practices and provide remedies for dispute resolution. [8] A “Legal Guide on Contract Farming” was developed in 2013-2015 by the International Institute for the Unification of Private Law (UNIDROIT) in collaboration with the faO. [9] [10] Marketing agreement. Ownership of the goods remains the property of the farmer during production. The contract sets a price (or price formula), quantities and qualities of products, and a planning agreement. The involvement of the entrepreneur in the production is minimal and the farmer provides all the inputs. For crops, the contract is concluded before harvest. For farm animals, the contract is concluded before the animals are ready for marketing. Eaton and Shepherd[2] identify five different models of contract farming. Under the centralized model, a company supports smallholder production, buys the crop, and then processes it, tightly controlling quality. This model is used for crops such as tobacco, cotton, sugar cane, banana, tea and rubber.

As part of the Nucleus Estate model, the Company also manages a plantation to complement smallholder production and provide minimal throughput to the processing plant. This approach is mainly used for tree crops such as oil palms and rubber. The tiered model typically involves a partnership between government agencies, private companies, and farmers. At a lower level of sophistication, the intermediate model may involve outsourcing by companies to intermediaries that have their own (informal) agreements with farmers. Finally, the informal model includes small and medium-sized enterprises that enter into simple seasonal contracts with farmers. Although these are usually only seasonal agreements, they are often repeated every year and usually depend on the proximity of the buyer to the seller for their success. Many studies have been conducted on contracted agricultural enterprises, and many are listed in the Food and Agriculture Organization of the United Nations (FAO) Contract Agricultural Resource Centre. [1] The Asian Development Bank Institute (ADBI) in Tokyo conducted a series of case studies in selected Asian countries to assess the conditions of the benefits of marginal rice farmers. In the Lao People`s Democratic Republic, research has suggested that contract farmers make significantly higher profits than contract farmers.

This has facilitated the transition of subsistence farmers to commercial agriculture and has offered the opportunity to reduce rural poverty. [14] A study in Cambodia on organic rice for export assessed the impact of contract farming on farmers` performance. This suggested that younger, better-educated farmers with larger, less wealthy families were more likely to join the contract. However, farmers with access to good road communication have often left the contract, suggesting that contract farming has helped them become independent farmers. [15] Prowse (2012) provides an accessible and comprehensive overview of current contract cultivation issues in developing countries. [17] Several studies convey a positive message about the inclusion of smallholder farmers and the benefits they derive from their participation. In a study published in 2014, for example, Wang, Wang and Delgado review a large number of empirical studies on contract farming. They conclude that contract farming has had a significant impact on improving farm efficiency and productivity and farmers` incomes. [18] In a synthetic review of econometric studies, Minot and Ronchi (2015) suggest that participants` incomes increase by 25-75%.

[19] A more moderate approach is taken in the systematic review of contract farming by Ton et al. (2017). Although their study notes that contract farming can significantly increase farmers` incomes, Ton et al. argue that such figures must take into account the publication and bias of survivors. In other words, these estimates need to be revised downwards to accept that studies that show negative or no “impact” are less likely to be published and that calculating the impact of contract farming may overlook systems that do not improve and reduce the incomes of smallholder farmers and are therefore not available for evaluation. [20] While contract farming must first and foremost be seen as a commercial enterprise, it is also seen as an effective approach to addressing many of the market access and input supply problems faced by smallholder farmers. [4] A guide published by GIZ in 2013 aims to provide information on how contract farming can be developed to maximise this benefit for smallholder farmers in developing countries. [5] Effective links between businesses and thousands of farmers often require the participation of formal farmers` associations or cooperatives, or at least informal farmers` groups. However, empirical evidence of how best to achieve this is not yet available.

[6] Even apparently successful contracts may encounter other difficulties from a legal point of view. For example, family relationships may be threatened. The work for contracts is often done by women, but the contracts are invariably in the name of the man who also receives the payment. .