Contract farming is centered around an agreement between farmers (producers) and buyers. The parties establish terms and conditions in advance for the production and marketing of agrifood products, defining each party’s rights and obligations.
Such agreements typically delineate details including price, quantity, quality standards, delivery schedule and payment methods. They often include provisions on remedies for contract breaches, excuses for non-performance (force majeure), dispute resolution, duration, renewal and termination. Additionally, agreements may specify production methods or stipulate the provision of resources or services, such as inputs like seeds and fertilizers, training, technical or logistic support. In some cases, third parties may be involved in the arrangement.
Why is contract farming gaining ground?
Contract farming is gaining momentum in developing countries driven by a complex interplay of dynamic factors that are reshaping the global agrifood systems. While not a new practice, it emerges as an adaptive and strategic response to both challenges and opportunities across agrifood value chains, linking producers, agribusinesses and value chain actors to meet the demands of modern markets.
🌍 Evolving market demand: Demographic shifts, rising incomes and urbanization have spurred demand for agrifood products not only abundant and diverse but also safe and convenient. Growing consumer awareness around environmental and social issues has heightened interest in sustainably and ethnically sourced goods. The agrifood systems are under increasing pressure to deliver more products and meet higher standards while ensuring traceability and sustainability.
🏢 Challenges and opportunities for companies: Companies navigating highly competitive, globalized markets face mounting pressure to improve efficiency, secure consistent high-quality supply and comply with stringent standards around food safety, sustainability and social responsibility. The rise of global value chains (GVCs) and deeper integration of international and regional markets have opened new avenues for access and value creation. This trend is evident in the growing midstream segments of value chains in emerging and developing economies, where localized value addition, enterprise development and vertical coordination are becoming strategically important.
Traditional procurement models such as open-market sourcing often fall short of delivering the consistency and compliance required, while vertically integrated production systems may be hindered by limited access to land, skilled labour or community support. Contract farming offers a more adaptable and scalable solution to these challenges.
🌱 Barriers and enablers for producers: Smallholder producers in developing countries face long-standing barriers to market participation. These include limited access to inputs, technology, finance and extension services, low productivity and high transaction costs, often stemming from small-scale, subsistence-oriented production. A lack of infrastructure, collective bargaining power and knowledge of commercial production and modern value chains further compound these constraints.
The rapid pace of change in agrifood systems risks marginalizing smallholders even further. Cultivating high-value commodities often requires resources, new technologies and specialized knowledge that many smallholders lack. Contract farming has the potential to bridge these gaps, facilitating more equitable access to markets and resources and supporting more inclusive agricultural commercialization.
🎯 Alignment with development goals: The growing interest in contract farming is also linked to broader sustainable development objectives. These include strengthened food security, poverty alleviation, improved resource use, enhanced compliance with labor and environmental standards, increased supply chain transparency, and the integration of smallholder producers and enterprises into modern markets, fostering rural livelihood and economic growth.
Overall, contract farming offers a potential pathway to create mutually beneficial relationships between producers and buyers to meet the demands of modern agrifood systems while promoting inclusive and sustainable development.