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Chapter 3

Types of contract farming

Contract farming usually follows one of five broad models,
depending on the product, the resources of the sponsor
and the intensity of the relationship between farmer
and sponsor that is necessary.

The centralized model

  • Involves a centralized processor and/or packer buying from a large number of small farmers
  • Is used for tree crops, annual crops, poultry, dairy. Products often require a high degree of processing, such as tea or vegetables for canning or freezing
  • Is vertically coordinated, with quota allocation and tight quality control
  • Sponsors' involvement in production varies from minimal input provision to the opposite extreme where the sponsor takes control of most production aspects

The nucleus estate model

  • Is a variation of the centralized model where the sponsor also manages a central estate or plantation
  • The central estate is usually used to guarantee throughput for the processing plant but is sometimes used only for research or breeding purposes
  • Is often used with resettlement or transmigration schemes
  • Involves a significant provision of material and management inputs

The multipartite model

  • May involve a variety of organizations, frequently including statutory bodies
  • Can develop from the centralized or nucleus estate models, e.g. through the organization of farmers into cooperatives or the involvement of a financial institution

The informal model

  • Is characterized by individual entrepreneurs or small companies
  • Involves informal production contracts, usually on a seasonal basis
  • Often requires government support services such as research and extension
  • Involves greater risk of extra-contractual marketing

The intermediary model

  • Involves sponsor in subcontracting linkages with farmers to intermediaries
  • There is a danger that the sponsor loses control of production and quality as well as prices received by farmers


Multinational corporations, smaller private companies, parastatals, individual entrepreneurs and, in some cases, farmer cooperatives can all act as sponsors and financial investors for contract farming activities. In nearly all instances, the sponsors are also responsible for management of the venture.

Contract farming can be structured in a variety of ways depending on the crop, the objectives and resources of the sponsor and the experience of the farmers. Contracting out production is a commercial decision to facilitate an adequate supply within a designated period and at an economic price. Any crop or livestock product can theoretically be contracted out using any of the models; however, certain products favour specific approaches. Broadly speaking, contract farming arrangements fall into one of five models:

  1. The centralized model.
  2. The nucleus estate model.
  3. The multipartite model.
  4. The informal model.
  5. The intermediary model.

Decisions by sponsors on the type of model to follow should be made on the basis of market demand, production and processing requirements and the economic and social viability of plantation versus smallholder production. Where market requirements necessitate frequent changes to the farm technology with fairly intensive farm-level support from the sponsor, the permanent organization and maintenance of a production chain under a centralized model is vital. Organizations that require stringent processing standards rely largely on the centralized model. For crops such as tea, sugar and oil palm, with which farmers may have had little or no experience, sponsors are more likely to follow, where possible, the nucleus estate approach. Such crops require a significant long-term investment and, generally, immediate processing after harvest. However, the lack of adequate land or political opposition to estate development may dictate a centralized rather than nucleus estate approach. Where quality control is not the predominant concern, the informal model may suffice. In some examples, sponsors use third parties or intermediaries to subcontract production out to farmers.

If the sponsor considers that a field trial is warranted prior to the introduction of a crop to farmers or that a guaranteed minimum throughput is required for the processing facility, a nucleus estate model is often most appropriate. Where capital investment in processing facilities is considerable and the number of contract farmers is high, either the centralized or the nucleus estate structures can be used, accompanied by strong managerial inputs and backed by formal contracts. The informal model, which may become more widespread in the future, is characterized by seasonal, short-term crops with only minimal material support to farmers.

Often, the operational structure of projects changes over time. For example, the distinctions between the centralized model and the informal model are sometimes blurred. Successful individual informal developers may expand their operations into activities that eventually evolve into the centralized category. One successful small-scale developer in Indonesia started a small operation in 1970 with a few greenhouses. By 1996 the company had grown into a $US6.4 million business supplying fresh vegetables to local supermarkets and frozen vegetables for export, with the produce originating from hundreds of contracted farmers.


This is a vertically coordinated model where the sponsor purchases the crop from farmers and processes or packages and markets the product (Figure 2). Except in a limited number of cases, farmer quotas are normally distributed at the beginning of each growing season and quality is tightly controlled. A sponsor may purchase from tens of thousands of small-scale farmers within a single project. The centralized scheme is generally associated with tobacco, cotton, sugar cane and bananas and with tree crops such as coffee, tea, cocoa and rubber, but can also be used for poultry, pork and dairy production. Where fresh vegetables and fruits are grown under contract, the term "processing" may include grading, sorting and packaging as well as the provision of cool storage facilities.

In Africa, the contracting out of crops to farmers under centralized structures is common. These are often called "outgrower" schemes. For example, in Zambia the multinational corporation, Lonhro, considered the system preferable to growing cotton on a plantation basis. In the late 1980s it initiated a smallholder project where over 15 000 farmers grew cotton under contract for the company's ginnery.17

Box 5
Sugar-cane production by contract farming in Thailand

Contract farming under the centralized processing and marketing model is common throughout the Thai sugar industry. Forty-six individually owned sugar mills in the country produced 4 080000 tonnes of sugar in the 1997/1998 season, of which 57 percent was exported. Over 200 000 farmers grow sugar cane for these mills, on approximately 9 14 000 hectares. There are also many farmers who grow crops for large-scale farmers through agreements with intermediaries. In theory, the Thai Government closely regulates prices, issues quotas and monitors the operations of the private sugar-milling companies. The Government has introduced a net revenue sharing system under which growers receive 70 percent and the millers 30 percent of total net revenue. The Government also promotes and manages technical research centres and encourages growers' associations.18

The level of involvement of the sponsor in production can vary from a minimum where, perhaps, only the correct type of seed is provided, to the opposite extreme where the company provides land preparation, seedlings, agrochemicals and even harvesting services. The extent of the sponsor's involvement in production is rarely fixed and may depend on its requirements at a particular time or its financial circumstances. In India, a tomato processing factory in the Punjab was transferred in 1997 from one multinational company to another. The previous owners had supplied seed, supervised production and harvesting operations and provided technical advice when needed, but the new owners only provided seeds. In the Philippines, a vegetable canning company operating close to Manila decided to cease advancing fertilizer and chemicals to its contract farmers because these were being diverted to other crops and farmers were also making extra-contractual sales. The company changed to a policy of supplying only seeds unless it was convinced of the farmer's honesty.

Figure 2
The centralized model


Nucleus estates are a variation of the centralized model. In this case the sponsor of the project also owns and manages an estate plantation, which is usually close to the processing plant. The estate is often fairly large in order to provide some guarantee of throughput for the plant, but on occasion it can be relatively small, primarily serving as a trial and demonstration farm. The British-based Commonwealth Development Corporation (CDC) was a pioneer of the nucleus estate model although it no longer develops such estates. A common approach is for the sponsors to commence with a pilot estate then, after a trial period, introduce to farmers (sometimes called "satellite" growers) the technology and management techniques of the particular crop. Nucleus estates have often been used in connection with resettlement or transmigration schemes, such as in Indonesia and Papua New Guinea, for oil palm and other crops. While mainly used for tree crops, there are examples of the nucleus estate concept with other products. Indonesia, for example, has seen the operation of dairy nucleus estates, with the central estate being primarily used for the rearing of "parent stock".


The multipartite model usually involves statutory bodies and private companies jointly participating with farmers. Multipartite contract farming may have separate organizations responsible for credit provision, production, management, processing and marketing. In Mexico, Kenya, and West Africa, among other countries, governments have actively invested in contract farming through joint ventures with the private sector.19 Multipartite structures are common in China where government departments as well as township committees and, at times, foreign companies have jointly entered into contracts with village committees and, since the early 1980s, individual farmers.

Figure 3 outlines a multipartite project in China. In this particular case, the county branches, through their agronomists and field technicians, were responsible for implementing and maintaining the terms and specifications of the agreement. There were formal contracts between the joint venture and the branches, and written contracts between the counties and the village committees, but only a verbal understanding between farmers and their respective committees. In theory, farmers were expected to carry out cultivation as specified by the joint venture. In practice, however, county officials only followed instructions from the joint venture if to do so was in the county branch's immediate economic interest, irrespective of quality standards and long-term production objectives. The lack of coordination between the joint venture and the county management, village cadres and farmers eventually resulted in the collapse of the venture.

Figure 3
The multipartite model
- A joint-venture contract farming project in China

In Colombia, a company started buying passion fruit in 1987, using the centralized model. The company ran into difficulties, however, because it proved impossible to control extra-contractual marketing. It therefore developed a multipartite model in which all farmers were expected to belong to associations or cooperatives, and public institutions became involved as providers of credit and extension. This arrangement significantly reduced both the risk of extra-contractual marketing and the company's costs of dealing with individual farmers, while being generally welcomed by farmers. Problems remained, however, most notably in relation to the lack of management skills on the part of the farmer associations and cooperatives.


This model applies to individual entrepreneurs or small companies who normally make simple, informal production contracts with farmers on a seasonal basis, particularly for crops such as fresh vegetables, watermelons and tropical fruits. Crops usually require only a minimal amount of processing. Material inputs are often restricted to the provision of seeds and basic fertilizers, with technical advice limited to grading and quality control matters.

A common example of the informal model is where the sponsor, after purchasing the crop, simply grades and packages it for resale to the retail trade. Supermarkets frequently purchase fresh produce through individual developers and, in some cases, directly from farmers. Financial investment by such developers is usually minimal. This is the most transient and speculative of all contract farming models, with a risk of default by both the promoter and the farmer. Nevertheless, in many developing countries such developers are long established and in numerous cases they have proved an alternative to the corporate or state agency approach. Three examples of the informal model are presented in Box 6.

The success of informal initiatives depends on the availability of supporting services, which, in most cases, are likely to be provided by government agencies. For example, while companies following the centralized model will probably employ their own extension staff, individual developers usually have to depend on government extension services. In addition, individual developers often have limited funds to finance inputs for farmers and therefore may have to develop arrangements whereby financial institutions provide loans to farmers against the security of an agreement with the developer (an informal multipartite arrangement). Furthermore, while nucleus estates and centralized developers frequently purchase products for which there is no other market (oil palm, tea and sugar, which depend on the availability of nearby processing facilities, or fruits and vegetables for export), individual developers often purchase crops for which there are numerous other market outlets. It is therefore important that agreements reached between the developers and farmers are backed up by law even if, in many countries, the slowness and inefficiency of the legal system make the threat of legal action over small sums a rather empty one.

In some parts of the world traders, who may not own processing or packaging facilities themselves, purchase crops for onwards sale to processors and packers. In some cases such traders provide seeds and fertilizer to the farmers with whom they deal. These are usually very informal arrangements with a high risk of default by farmers. However, in many countries, particularly in Africa, liberalization of the export market sector has led to a breakdown of input supply arrangements in recent years and further development of such informal contractual arrangements would thus appear to merit encouragement.21


Throughout Southeast Asia the formal subcontracting of crops to intermediaries is a common practice. In Thailand, for example, large food processing companies and fresh vegetable entrepreneurs purchase crops from individual "collectors" or from farmer committees, who have their own informal arrangements with farmers. In Indonesia, this practice is widespread and is termed plasma.

Box 6
Individual developers - The informal model

  1. In the early 1990s firms in Sri Lanka were encouraged by the Government to participate in the production of gherkins. Under "production contracts" companies provided material and agronomic inputs, particularly advice on postharvest and packing practices, to over 15 000 rural households. The production of gherkins, grown in individual plots of around 0.1 hectare, rose dramatically from nothing in the late 1980s to 12 000 tonnes, valued at $US7 million, in 1993. Because some of the firms were not agriculturally orientated, they used the services of local "agents" to organize and manage the farmers' crops.20
  2. In the South Pacific there has been a history of individual expatriate and local entrepreneurs who organized farmers to grow bananas, squash and papaya for export. In virtually all cases farmers worked under verbal contracts and were given free seed and basic technical advice, but little else in the form of material inputs. The success and durability of these developers has been marginal.
  3. In the northern provinces of Thailand farmers grow chrysanthemums and fresh vegetables for the Chiangmai and Bangkok markets, under verbal agreements with individual developers. No technical inputs are provided but in most cases the developers advance credit for seed, fertilizer and plastic sheeting. All agronomic advice to farmers is given by government agencies that also organize training courses for the growers. Farmers expressed a preference for growing chrysanthemums as this was more profitable and they thought there was also less risk that the developer would abscond, as had happened in the fresh vegetable trade.

The use of intermediaries must always be approached with caution because of the danger of sponsors losing control over production and over prices paid to farmers by middlemen. In addition, the technical policies and management inputs of the sponsors can become diluted and production data distorted. In short, subcontracting disconnects the direct link between the sponsor and farmer. This can result in lower income for the farmer, poorer quality standards and irregular production.

Box 7
Intermediaries in Thailand

In the snap-frozen vegetable industry in Northern Thailand, two companies directly contract out to middlemen, or "collectors", who organize over 30 000 farmers to grow soybeans, green beans and baby corn, primarily for the Japanese market. Each collector normally controls and supervises from 200 to 250 farmers.

Collectors are responsible for all field activities from sowing to harvesting. They are paid a commission based on the total production of the farmers they supervise. The sponsors' agronomists dictate the varieties and fertilizer to be used as well as the sowing programmes and crop husbandry methods. The companies also employ field officers to provide technical support to the collectors and their subcontracted farmers.

Table 2
Characteristics of contract farming structures





Private corporate sector State development agencies

Directed contract farming. Popular in many developing countries for high-value crops. Commitment to provide material and management inputs to farmers.

Nucleus estate

State development agencies Private/public plantations Private corporate sector

Directed contract farming. Recommended for tree crops, e.g. oil palm, where technical transfer through demonstration is required. Popular for resettlement schemes. Commitment to provide material and management inputs to farmers.


Sponsorship by various organizations, e.g.
-State development agencies
-State marketing authorities
-Private corporate sector
- Landowners
- Farmer cooperatives


Common joint-venture approach. Unless excellent coordination between sponsors,internal management difficulties likely. Usually, contract commitment to provide material and management inputs to farmers.

Informal developer

Small companies
Farmer cooperatives

Not usually directed farming. Common for short-term crops; i.e. fresh vegetables to wholesalers or supermarkets. Normally minimal processing and few inputs to farmers. Contracts on an informal registration or verbal basis. Transitory in nature.

Intermediary (tripartite)

Private corporate sector State development agencies

Sponsors are usually from the private sector. Sponsor control of material and technical inputs varies widely. At time sponsors are unaware of the practice when illegally carried out by large-scale farmers. Can have negative consequences.

17 Springfellow, R., 1996: 8.

18 CSI, 1999: 6-19, 32, 55.

19 Little, P.D. and Watts, M.J., eds., 1994: 8.

20 Dunham, D., 1995.

21 Shepherd, A.W. and Farolfi, S., 1999: 74-75.

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