Contract Farming Resource Centre

The State of Agricultural Commodity Markets 2020 - Agricultural Markets and Sustainable Development: Global Value Chains, Smallholder Farmers and Digital Innovations

Organization FAO
Year 2020

In the latest State of Agricultural Commodity Markets (SOCO 2020) flagship publication by FAO, contract farming is presented as an approach to integrating farmers into modern and global value chains. Contract farming can provide smallholder farmers with improved access to markets though there remains potential inequitable access for contract farming schemes with a high rate of exit. Sixty-one percent of contract farming participants had larger farms compared to non-contracted farmers. However, contract farming presents many advantages given farmer participation and time for the investments in contract farming to generate its benefits. Nevertheless, contract farming still presents many advantages for smallholder farmers. Specifically, the impact of contract farming for smallholder producers is discussed. Selected studies (see summary in Table 3.1 on page 80-81) cover different countries, commodities and value chains. One study in Madagascar showed that contract farming for the surveyed 1,200 farm households resulted in an estimated 6 percent increase in the household total income, and supported food security by reducing an estimated 8 days on average in hunger season. The same study also suggested that experienced farmers were more likely to participate in contract farming and female-headed households were less likely to secure contracts with the firms. Other studies analysed the impact of contract farming practices in Benin, Senegal, China, India, Vietnam and Nicaragua. These studies demonstrated that the participation in contract farming has a positive impact on household income for the sampled households, specifically, 29 percent increase in the household income in Senegal, 37 percent increase in Vietnam, and 22 to 45 percent in China. A study on contract farming in India examined how contract farming resulted in increase in profitability per hectare. For example, a 123 percent increase in profitability was shown in poultry contract farming while a 47 percent increase was found in papaya contract farming. The study on contract farming in Senegal indicated that it was not necessarily farm size or household assets that drove participation in contract farming, but the participation was based on whether contract farming scheme would require a lot of investment from the farmers in crop production. Overall, only two out of the 26 contract farming schemes analysed in various studies have shown adverse effects of contract farming on farm income. This suggests that contract farming is most likely beneficial for smallholder farmers in improving their livelihoods. The publication also discussed several other case studies on inclusive contract farming models that bundle inputs and services and respond to market failures.