The advantages of contract farming can be significant for both producers and buyers, with specific benefits depending on the contractual arrangements and context. For a comprehensive explanation of the benefits, please refer to Module 1 of our contract farming course available in the Contract Farming Resource Centre. In general, here are some key benefits:

Potential benefits for producers:

• access to reliable markets and potentially new market channels;
• access to farming inputs such as seeds, fertilizers, and modern technologies, as well as technical, financial and other services;
• the opportunity to grow new crops;
• improved production planning and risk management;
• capacity development through training, extension services and experiential learning;
• more stable or enhanced income through guaranteed pricing, higher productivity, reduced risks, etc.;
• increased commercialization of agricultural activities.

Potential benefits for buyers: 

• better control over production with a more reliable and efficient supply of agricultural products that meet desirable quality, quantity and other requirements;
• overcoming constraints related to productive resources;
• gains in efficiency and competitiveness;
• reduced production and supply risks;
• lower transaction and operational costs;
• enhanced reputation and public relations.

Yes, small-scale farmers can participate in contract farming. In fact, if properly implemented, contract farming can be particularly beneficial for small-scale farmers as it offers them access to markets and buyers that they might not be able to reach on their own. By participating in a contract farming scheme, small-scale farmers can also benefit from minimum guaranteed price, access to inputs and finance, and technical assistance.

However, it is important to note that the terms of the contract should be fair and transparent, and the farmers should be able to negotiate favorable terms. They should also have the necessary skills and knowledge to meet the quality and quantity requirements specified in the contract, and these capacities should be assessed in a prefeasibility study before starting the contract farming project. In addition, there should be mechanisms in place to address any disputes or breaches of contract that may arise.

As with any contractual relationship, contract farming carries potential disadvantages and risks. For a more in-depth explanation, please refer to Module 1 of our contract farming course.

Potential disadvantages for producers:

• reduced selling options especially with exclusive sales contracts;
• power imbalances favouring buyers;
• mismanagement and exploitative behaviour from the buyers;
• possible indebtedness and dependency due to factors like unsuccessful production, insufficient technical advice and market fluctuations;
• possible delays in payments and input deliveries;
• increased costs and investments for contract farming practices;
• risks associated with growing new crops, monocropping and specialization;
• risk of being excluded due to lack of capacities, land or other resources.

Potential disadvantages for buyers:

• risk of producers selling outputs to different buyers (side selling);
• risk of producers diverting inputs to other purposes or side-selling them;
• challenges related to non‑compliance and dealing with less competent producers;
• increased competition when more competitors are attracted to the area where contract farming is implemented;
• additional costs related to initiating and managing contract farming operations;
• reduced flexibility to seek alternative supply sources;
• risk of undermining the corporate reputation if issues arise and are not resolved well;
• the need to navigate an enabling environment that may not be favorable for establishing contract farming operations.

There is no restriction to the types of agriculture products that can be the purpose of the contract, but certain products are more suited for contract farming practices than others. Generally, high-value crops that are produced for processing or export tend to be the most suitable for contract farming.For example, coffee, cocoa, tea, and sugar have been successfully produced under contract farming arrangements, as they have a high market value and are often produced for export. Other crops such as fruits and vegetables, tobacco, and cotton have also been successfully produced under contract farming, as they require specific quality standards and are often produced for processing. On the other hand, products that have a high local demand may be less suitable for contract farming, as there may be at risk of side-selling, where producers sell their products outside of the contract, leading to a breach of contract.

While details of each contract are different, there are key clauses that are good to be included in all contracts. FAO has prepared helpful tools to make sure your contract has all the necessary clauses, and these can be found in the toolkit available in the Contract Farming Resource Centre.  

In summary, the contract should contain clauses on: 1) the parties; 2) the purpose; 3) the production site; 4) the core obligations on product, delivery, price and payment; 5) excuses for non-performance; 6) remedies; 7) rules for dispute resolution; 8) duration, renewal and termination; as well as 9) signature.  

Appropriate regulatory frameworks for contract farming help to recognize and protect people’s rights. They provide legal security to contractual relations and help to prevent and solve disputes.   

While legislation can affect all sections of a contract, particularly interesting is the way legislation can support price determination, by simultaneously enabling flexibility for the parties to agree on an appropriate pricing scheme, while protecting against the stronger party from unilaterally imposing a bad deal. In a similar way, legislation can support dispute resolution, by mandating or promoting the use of alternative dispute resolution, such as mediation and arbitration that can lead to fairer, faster and cheaper resolution of disputes. A final example is how legislation can provide guidance on how an exceptional event threatening contract performance – think of how disruptive a flood, hail, disease outbreak, social disturbance etc. – can be mitigated and overcome.  

These kind of rules can either be in specific contract farming legislation or included elsewhere in the regulatory framework. There is no universal need for specific legislation on contract farming and there is no one regulatory approach that can be recommended as best for all countries.

Good contract farming agreements are negotiated in negotiations that are fair, transparent, done in good faith and aimed at building trust between the parties. Producers should be involved from the beginning in the negotiations. This will help them to understand the contract and better protect their interests and rights. While direct negotiations between the producer and the buyer can and do often work, it is also possible to involve a trusted facilitator – such as government extension officer, representative of a local NGO or a producer organization – to help producers find an equal footing with the buyer.  

You should always consider having your agreement in writing. Written agreements offer greater clarity in showing exactly what was agreed, and what are the rights and obligations of both parties. This helps in ensuring that both parties are well aware on what is expected from them. Writing a contract also helps making sure that all the important clauses are included, which may be easy to forget when a contract is just done verbally. Written contracts should be short, simple and in a language well-understood by the producer.

At first sight of trouble, before things truly have gone wrong, it is important that the parties openly communicate with each other. This allows them to commonly look for options on how to fix any problems that may have arisen, potentially bringing in a trusted facilitator to help in the talks. If the parties cannot agree, they may need to resort to mediation. In mediation an independent mediator will help the parties to find common ground, but the mediator cannot impose a solution. If mediation proves unhelpful as well, parties may wish to take their dispute to a local arbitration body or to courts. What is important, is for the parties to look for solutions that would still allow the beneficial relationship to continue, and fairly allocate the costs between the parties.

You came to the right place. FAO has developed this resource centre for the dissemination of information on contract farming. Here you will find FAO publications and case studies, plus a large number of bibliographical references. You will also find many sample contracts and the contact addresses of FAO officers who have been working on this subject