Note: This is a follow-up post  based on previous ideas expressed by this group. This post focuses on what the Priavte Sector can do to contribute to food security. 

The private sector has a special role to play in food security, especially in rural areas. Through a process of vertical coordination in the rural agriculture sector, large agro processing firms can enhance the efficiency of farm operations, drive income growth in these regions and, therefore, augment the food security of rural dwellers.  The literature suggests very strongly that increased income is positively correlated to improved food and nutritional security,

Contract farming, a tenet of what experts call the “industrialization of agriculture”, is regarded as a production arrangement with the potential to yield tremendous benefits for farmers.

Under a contractual arrangement, the contractor (agro processing firm, in this case) and farmer share the risk of agricultural production, and work together to mitigate these risks. For instance, contracted farmers are assured of a definite buyer for their produce and, maybe a fixed price, whereas an independent farmer  are confronted by market vagaries such as low market access, as well as fluctuating prices.

Additionally, contractors can help farmers enhance their production techniques by providing them with extension services and technology which, if they (farmers) were independent, they might not be able to afford.  Usually, because of lack of knowledge and concomitant risk averseness, farmers are hesitant to adopt new production techniques. Under contractual stipulations, however, and with ‘goading’ from the contractor, farmers are more likely to adopt modern agricultural techniques.

Through vertical coordination, agro processing firms help to correct the common issue of there not being credit markets that serve rural farmers. Whether as a result of uncertain land tenure, information asymmetry and monitoring costs, banks usually set high collateral requirements and interest rates which the independent farmer cannot afford. Because contractors set a standard for the output they contract independent farmers to produce, they have a more “hands-on” approach when dealing with farmers and to this end, contractors often supply inputs to farmers on credit.

However, vertical coordination does not automatically translate to improved incomes and greater food security for farmers. Large corporations (contractors) have been accused of underpaying farmers for their produce, as well as engaging in agriculture techniques which, while commercially favorable, are environmentally devastating. There has been, though, increased activism by NGOs, farmers rights groups, governments and international organizations, has strengthened the bargaining position of farmers and led to them receiving better terms under contracts.