FAQ

We have prepared a list of "Frequently Asked Questions" on contract farming issues. Click on the question and you will be able to browse through the answers.

1. What is contract farming?

Contract farming can be defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide agreed quantities of a specific agricultural product. These should meet the quality standards of the purchaser and be supplied at the time determined by the purchaser. In turn, the buyer commits to purchase the product and, in some cases, to support production through, for example, the supply of farm inputs, land preparation and the provision of technical advice.

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2. Who benefits from contract farming?

Both partners engaged in contract farming can benefit. Farmers have a guaranteed market outlet, reduce their uncertainty regarding prices and often are supplied with loans in kind, through the provision of farming inputs such as seeds and fertilizers. Purchasing firms benefit from having a guaranteed supply of agricultural products that meet their specifications regarding quality, quantity and timing of delivery.

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3. Do farms and purchasing firms always benefit from engaging in contract farming?

As with any other form of contractual relationship, there are also potential disadvantages and risks associated with contract farming. If the terms of the contract are not respected by one of the contracting parties, then the affected party stands to lose. Common contractual problems include farmer sales to a different buyer (side selling or extra-contractual marketing), a company's refusal to buy products at the agreed prices, or the downgrading of produce quality by the company. A frequent criticism of contract farming arrangements is the uneven nature of the business relationship between farmers and their buyers. Buying firms, who are invariably more powerful than farmers, may use their bargaining clout to their short-term financial advantage, although in the long run this would be counterproductive as farmers would cease to supply them. These problems notwithstanding, the balance between advantages and disadvantages for both firms and farmers seems to be on the positive side: contractual arrangements are more and more frequently being used in agriculture worldwide.

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4. Is contracting farming recommended for all type of agriculture products?

In principle, there is no restriction to the types of agriculture products that can be the object of a contract. There are numerous examples of successful contract farming arrangements for most types of crops and livestock. Examples also exist for forestry, aquaculture and fibre products, as well as for flowers and tobacco, to name a few. While the applicability is fairly general, there is evidence that the most successful schemes are associated with agricultural products that are high-valued or produced for processing and /or exports. Products for which there is high local demand may be more susceptible to side selling and thus may be less suitable for contract farming.

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5. What are the typical clauses of a contract?

The most common clauses concern:

  • General reciprocal obligations: the overall responsibilities of the contracting partners.
  • Specification of the agricultural product to be produced / sold under the contractual obligation.
  • Production technology to be used, involving items such as seed variety, soil preparation and cultivation methods, plant or animal disease controls, transportation procedures, storage and quality standards, among others.
  • Conditions for purchase, payment obligations, timing and modality of delivery.
  • The system to determine the final prices to be paid to farmers, frequently considering effects of variations in product quality and any applicable loan repayments associated with the provision of inputs or services
  • Choice of a jurisdiction to govern the contract, from the legal standpoint. If the two parties are located in states or municipalities that are not in the same legal jurisdiction, then only one should be chosen to be applied.
  • Reference to a dispute settlement mechanism or to an arbitrator to resolve disagreements, which is always preferable to legal action.

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6. Is there a need for specific legislation regulating contract farming?

While there is specific legislation about contract farming in some countries, in many others general contract laws have sufficed. There might be a need to reconcile general contract laws with other types of legislation affecting agricultural production, agricultural marketing and / or land use, for instance.

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7. How can I learn more about contract farming?

You came to the right place. FAO has developed this resource centre for the dissemination of information on contract farming. Here you will find FAO publications and case studies, plus a large number of bibliographical references. You will also find many sample contracts and the contact addresses of FAO officers who have been working on this subject

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