In an age of market liberalization, globalization 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 marginalized 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 is being witnessed almost everywhere.
Attempts by governments and development agencies to arrest this drift have tended to emphasize the identification of "income generation" activities for rural people. Unfortunately there is relatively little evidence that such attempts have borne fruit. This is largely because the necessary backward and forward market linkages are rarely in place, i.e. rural farmers and small-scale entrepreneurs lack both reliable and cost-efficient inputs such as extension advice, mechanization services, seeds, fertilizers and credit, and guaranteed and profitable markets for their output. Well-organized contract farming does, however, provide such linkages, and would appear to offer an important way in which smaller producers can farm in a commercial manner. Similarly, it also provides investors with the opportunity to guarantee a reliable source of supply, from the perspectives of both quantity and quality.
The contracting of crops has existed from time immemorial. In ancient Greece the practice was widespread, with specified percentages of particular crops being a means of paying tithes, rents and debts.1 During the first century, China also recorded various forms of sharecropping. In the United States as recently as the end of the nineteenth century, sharecropping agreements allowed for between one-third and one-half of the crop to be deducted for rent payment to the landowner. These practices were, of course, a form of serfdom and usually promoted permanent farmer indebtedness. In the first decades of the twentieth century, formal farmer-corporate agreements were established in colonies controlled by European powers. For example, at Gezira in central Sudan, farmers were contracted to grow cotton as part of a larger land tenancy agreement. This project served as a model from which many smallholder contract farming projects subsequently evolved.
Contract farming can be defined as an agreement between farmers and processing and/or marketing firms for the production and supply of agricultural products under forward 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:
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, increasingly, for fruits and vegetables, poultry, pigs, dairy produce and even prawns and fish. Indeed, contract farming is characterized by its "enormous diversity"2 not only with regard to the products contracted but also in relation to the many different ways in which it can be carried out.
The contract farming system should be seen as a partnership between agribusiness and farmers. To be successful it requires a long-term commitment from both parties. Exploitative arrangements by managers are likely to have only a limited duration and can jeopardize agribusiness investments. Similarly, farmers need to consider that honouring contractual arrangements is likely to be to their long-term benefit.
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 organizations (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.
Figure 1 shows diagrammatically a hypothetical contract farming framework. It sets out those aspects that must be considered when planning and implementing a venture. These are discussed in detail in the following chapters. Chapter 1 initially reviews both the major advantages of contract farming and the problems associated with it. From the point of view of farmers, contractual arrangements can provide them 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 give farmers the opportunity to diversify into new crops, which would not be possible without the processing and/or 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. From the point of view of the sponsoring companies, contract farming may in many cases be more efficient than plantation production, and will certainly be more politically acceptable. It can give them access to land that would not otherwise be available and the opportunity to organize a reliable supply of products of the desired quality, which probably could not be obtained on the open market. On the other hand, from the companies' perspective contract farming is not without difficulties. On occasion farmers may sell their outputs to outsiders, even though they were produced using company-supplied inputs. Conflicts can also arise because the rigid farming calendar required under the contract often interferes with social and cultural obligations.
A contract farming framework
Source: based on Eaton, C.S., 1998b: 274
Chapter 2 examines the preconditions for successful contract farming. The essential precondition is that there must be a market for the product that will ensure profitability of the venture. To justify investments it must be clear that the market will be profitable in the long as well as short run. The potential profitability for the sponsor must be calculated on the basis of assumptions about payments to farmers that will assure them consistent and attractive financial benefits. There is a range of other factors that affect the success of contract farming ventures. These include the physical, social and cultural environments; the suitability of utilities and communications; the availability of land; and the availability of needed inputs. An essential precondition is that management must have the necessary competence and structure to handle a project involving many small-scale farmers. Without this no investment can succeed. Another important requirement is government support. Contracts need to be backed up by law and by an efficient legal system. Existing laws may have to be reviewed to ensure that they do not constrain agribusiness and contract farming development and to minimize red tape.
There is a wide range of organizational structures that are embraced by the term "contract farming". The choice of the most appropriate one to use depends on the product, the resources of the company, the social and physical environments, the needs of the farmers and the local farming system. Chapter 3 describes the five basic models, which are defined as the centralized model, the nucleus estate model, the multipartite model, the informal or individual developer model and the intermediary model. Any crop or livestock product can theoretically be contracted out using any of the models, though certain products can be said to favour certain approaches.
Chapter 4 considers the question of how contracts are framed and what specifications are included. Although it is rare that legal action is taken in the case of breach of contract, it is nevertheless usually important that the terms of the agreement are fully spelled out in the form of a contract or other legal agreement. The specifications of a contract can vary from the relatively simple, where the sponsor may only specify the quality standards applicable, to a detailed contract, which lays out input supply and cultivation arrangements, quality standards, and pricing and payment arrangements. Hitherto, many companies have failed to give sufficient importance to both the drafting of suitable contracts and explaining those contracts in a manner that farmers can understand.
Chapter 5 stresses the importance of good management and describes the many activities that must be carried out in order to manage the operations of the contract. It reviews the steps necessary to plan, organize, coordinate and manage production, including the identification of suitable land and farmers, the organization of farmers into working groups, the supply of inputs, the transfer of technology and the provision of extension services. It emphasizes the importance of developing harmonious management-farmer relationships and suggests ways of achieving this. This chapter also highlights the fact that contract farming, if managed badly, can often be a catalyst for antagonism between men and women, with men receiving the benefits while women do the major share of the work.
Promoters and sponsors of contract farming need to place particular importance on the monitoring of production. Quantity shortfalls, through the failure of farmers to meet their quotas, can reduce processing efficiency and jeopardize markets, as can the failure of farmers to produce the required qualities. Excessive production can lead to unpopular quota reductions. Techniques for monitoring yields and quality are discussed in Chapter 6. Companies should also monitor the performance of their employees, particularly those in close contact with the farmers. Chapter 6 concludes by stressing the obligation of all those involved in contract farming to address the impact of their activities on the physical environment.
1 This system was known as hektemoroi or "sixth partners".
2 Jackson, J.C. and Cheater, A.P., 1994.