Contract Farming: Why? What? How?
Organization CIRAD & University of Pretoria
Following the dismantling of international commodity agreements and the liberalisation of agricultural and agrifood
markets, agricultural markets have been restructured, becoming increasingly consumer-driven and vertically
integrated (Swinnen, 2007). In addition to this, smallholder farmers do not have the economies of size and the access
to technology that is required in order to be competitive, particularly in times and economies characterised by State
withdrawal and a decline in public support to agriculture. Both these trends have the potential to exclude small-scale
farmers from mainstream agro-food markets (Louw et al., 2008).
It is against this background that contract farming has now been recognised as a policy and planning priority, in order
to facilitate access to markets for small-scale farmers. As such, the 2008 World Development Report on agriculture
argues that contract farming is one of the ways for smallholders in developing countries to escape from poverty.
It is seen as a tool for fostering smallholder participation in restructured markets and value chains, increasing and
stabilising smallholder incomes (The Work Bank, 2007). Smallholders are often considered to be very efficient
producers in terms of labour intensity and labour-related transaction costs, but they also often suffer from capital and
liquidity difficulties, and lack of access and/or capacity to adopt technological innovations. There is a need to provide
guidance to the key economic players in agriculture who can exploit the potential of contract famring.