Evolution of the Brazilian poultry industry

Once considered a luxury food item, chicken is today a major source of animal protein in the diets of the Brazilian population. Indeed, per-capita consumption of chicken meat in Brazil grew at an average rate of 4.8 percent a year between 1990 and 2015 – a jump from 14.2kg to 43.3kg per person, according to the Brazilian Association of Animal Protein (ABPA). The country is the fourth largest consumer of chicken meat in the world.
Despite this high level of domestic consumption, about one third of the national production is exported to some 150 countries, in all continents, with export revenues reaching US$7.2 billion dollars in 2015. Between 1990 and 2015, exports have risen at an impressive average rate of 11.7 percent per year, as illustrated in Figure 1. Today Brazil ranks first in global exports, with a market share of about 40 percent. This means that for each 11 kg of chicken meat traded internationally, about 4 kg are originated in the country.

Figure 1: Exports of Brazilian poultry (1000 MT)

The growth of the chicken industry has generated important benefits for the Brazilian economy. The sector involves about 180 000 farmers, generates about 3.5 million jobs along the chain, occupying 5 percent of the total labour force, and responds for about 1.5 percent of the agribusiness gross domestic product.

The strong competitiveness of the Brazilian chicken industry is driven by many factors, chief of which are the technical efficiency advances achieved at all segments of the chain and, importantly, the efficient chain governance mechanism that predominates in this sector.  Through a combination of efficient genetics, nutrition and management, in roughly 40 years the sector has managed to reduce the growing cycle from 49 days to about 40 days and the feed conversion ratio from 2.15kg/kg to 1.7kg/kg. This has allowed a substantial reduction in production costs. Chain governance, on the other hand, is achieved by usage of closely coordinated contracts (contract farming, CF) between growers and the processing industry: about 75 percent of all chicken grown in Brazil are produced under these types of contracts. Coordination among production, processing and distribution are thus optimized, generating further cost efficiencies in the sector.

The case of “Pif Paf Alimentos” – State of Minas Gerais

Established in 1970, Pif Paf Alimentos is one of Brazil’s ten largest food processing companies operating in the chicken and hog sectors. With five industrial units, most of which located in the State of Minas Gerais (MG), the company employs about 8000 people. It produces a diversified line of more than 300 products for both the domestic and export markets, including frozen chicken (entire and in parts), sausages, chicken nuggets and a variety of ready-to-eat meals.
Pif Paf’s processes chicken in two facilities, respectively in the municipalities of Visconde do Rio Branco (VRB), in South-eastern MG, where it sources from 324 small and mid-sized farmers, and Patrocínio, in Central Western MG, where it works with 46 large farmers. In both cases, the company works with farmers under closely coordinated contracts. In 2016 the company was slaughtering 152 000 birds per day in VRB and 125 000 birds per day in Patrocínio.
Originally the company worked in the VRB region primarily with small farmers housing 6 000 to 12000 birds per growing cycle. More recently, farmers are being required to upgrade their facilities to a minimum size of 30450 birds per cycle. As a consequence, the number of farmers in the VRB supply chain was reduced by about 40 percent over the last five years, reflecting the overall concentration trend observed in the Brazilian chicken sector.

Although the CF model followed by Pif Paf has been evolving over the years, its original concern of incentivizing production performance remains as the cornerstone. Through the contracts, farmers have incentives to continuously improve their technical efficiency and are closely monitored in that respect.

How the contracts work

PifPaf provides farmers with one-day chicks, veterinary inputs and feed, the latter responding for about 65 percent of the production costs. It offers as well technical assistance by a team of field technicians who visit production facilities at least once every week during the growing cycle. Farmers, in turn, invest in the production facilities and respond for production costs in items such as labour and energy.

PifPaf guarantees the purchase of all chicken grown under the contracts, under a pre-agreed price determination system. The price received by farmers is established at the end of the cycle through a scoring system, which takes into account the following variables:

The death rate, established as the percentage of live birds delivered in relation to the total number of chicks supplied at the beginning of the cycle.

The feed conversion ratio, calculated by the tonnage of feed supplied divided by the total weight of birds delivered at the end of the cycle.

The daily weight gain, which is the average gain of weight during the period of the growing cycle.

The quality of management, established by the field technicians by their assessment of how well farmers observe their guidance on production and facility management.

For each of these variables, the contract establishes a scoring system as illustrated in the tables below.

The remuneration received by farmers by kg of chicken delivered is determined by the total score assigned to their production in each cycle multiplied by a base price per kg, which is negotiated in a yearly basis.

Clearly, under such a system farmers are incentivized to minimize the death rate, maximize the feed conversion rate and follow the technical advice that will result in an optimized daily weight gain, all of which leading to an overall high efficiency performance.

The base price mentioned above is established through a negotiation between the company and the farmer’s association. An interesting feature of this process is the fact that the base price is totally independent of the market value of chickens. It is based solely on both the company’s and the farmers’ costs of production. In this way, farmers are assured to recover their costs and have an acceptable profit margin, being shielded from price volatilities in the chicken market. Moreover, although established for an entire year the base price may be adjusted if cost items vary abnormally. A negotiation channel is always open for renegotiation, in cases of extreme changes of circumstances.

Main benefits for farmers

A strong indication of the interest of farmers in being part of Pif Paf’s chicken supply chain is the “waiting list” of some hundred potential entrants, as informed by company managers. In fact, farmers are attracted to this system by a number of reasons, including:

Access to pre-financed inputs, thus reducing working capital and the associated financing needs.

Access to technical assistance, allowing individualized guidance on nutrition, animal health, facility management, etc.

Assurance of a guaranteed market. On-farm use of chicken manure, which farmers apply in their crops.

Increased credit worthiness, including the ability to use the contracts as collateral to guarantee bank loans for on-farm investments.

Insurance for “force majeure” events, which is provided by the company.

Critical success factors

The chicken CF operations of Pif Paf have been active in the VRB region for more than 40 years. By itself, this long-lasting duration is a strong indication of the success of the company’s supply chain governance model, which can be attributed, inter alia, to the following critical factors:

The firm negotiates prices and discusses the score assignment tables with the producer’s association. The firm is rigid with regard to non-performance. Non-performing farmers are eventually replaced, especially in cases where opportunistic behaviour is identified. If inputs such as feed are diverted, for instance, farmers are initially suspended. If the problem persists, they are terminated and their facilities will never be contracted again by Pif Paf, even if sold to others.

The firm provides incentives for improved technical efficiency, via the payment system. The better one performs, the higher their compensation. Trust has been built over the years. Farmers can rely on the company and vice versa.

Resources

http://www.revistadoavisite.com.br/web/pub/avisite/index2/index.jsp?ipg=170947.

http://www.pifpaf.com.br/

http://abpa-br.com.br/

A rubber nucleus estate with smallholder outgrowers

Ghana Rubber Estate Limited (GREL) is the rubber production company that owns the largest industrial rubber plantation of the country, controlling 98 percent of the domestic rubber market. It holds a 36-year concession on 15 000 ha, of which 9034 ha are under tapping (of 13377 ha are planted). GREL’s processing plant produces 15 MT dry rubber content (DRC) of rubber per annum with 5 TM DRC coming from outgrowers. It is a typical case of a nucleus estate with smallholder outgrowers. This case study explains why GREL and the Government of Ghana (GoG) decided to launch an outgrower scheme.

A bit of history…

Rubber was introduced in Ghana in 1898 as an ornamental tree in the botanical garden in Aburi, near Accra. In 1930 some trial plantations were established in the Western region and in the 1950s the first industrial plantation was set up there via a joint-venture with a Danish firm.

A few years later (1968), GREL was born as a joint venture between the GoG and the American-based Firestone Tyre Company (45-55 percent, respectively). According to the agreement, the firm built a tyre factory and the GoG established a rubber plantation. However, the agreement with Firestone was withdrawn in 1981and GREL became a State enterprise.

In 1988 GREL rehabilitated the first 3000 ha and built a new processing plant. Four years later, it established the Rubber Outgrower Purchases Unit (ROPU) to buy rubber from “external growers” to whom it provided technical assistance and production inputs. In 1997, GREL became a private company.

A tripartite outgrower scheme

In 1995, the first outgrower scheme called the Rubber Outgrowers’ Plantation Project (ROPP) was launched in order to increase GREL’s supply of raw material. The scheme had the support of the GoG (including the Ministry of Food and Agriculture [MOFA] and a State bank called the Agricultural Development Bank of Ghana [ADB]) and development partners, such as the French Development Agency (AFD), Germany’s Reconstruction Credit Institute (KfW) and the World Bank.

The ROPP scheme includes 5 450 farmers with a total planted surface of about 21 500 ha. It has a tripartite structure that includes:

• The buyer (GREL);
• Organized producers: the Rubber Outgrowers Agents Association (ROOA); and
• The bank, ADB, which grants individual farmers long-term loans for rehabilitating their rubber plantations.

The ADB/GREL/ROOA agreement has a duration of 15 years, which is the same duration of the financing loan provided by ADB.

Obligations of the parties

The contract stipulates that farmers participating in the outgrower scheme with GREL:

• need to prove tenure rights on the land (at least over four hectares)
• agree to deliver the rubber twice a month;
• have to cultivate the rubber plantation in accordance with GREL technical advice;
• should allow representatives of GREL and ADB to inspect the plantation;
• have to repay the loan to ADB with interests;
• have to pay in full for the planting materials to GREL, using part of their loan package.
• are encouraged to look for alternative income sources either on-farm or off-farm to avoid side-selling and jeopardizing the investment, by for instance intercropping the rubber trees with food crops following GREL’s technical advice;
• are not allowed to dispose of the plantation without prior consent of GREL and ADB.

GREL’s obligations include:

• providing inputs such as high quality seedlings, fertilizers, chemicals and tapping tools,
• offering technical assistance for the application of inputs, integrated soil management techniques and cropping patterns options (cassava and peppers).
• purchasing rubber at the established price: 64 percent of the prevailing monthly average price indexed on the Singapore Commodity Exchange (SICOM). Farmers’ representatives are engaged in annual price negotiations with GREL.
• paying for the sourced materials by bank transfer or checks. From these weekly payments, GREL deducts extension services and planting materials provided to the farmers, a part of loan repayment and transport if provided.

Finally, the contract states that ADB:

• provides long-term loans to outgrowers as well as cash advances, if needed, to maintain the plantation before it becomes productive (at seven years);
• is engaged in the selection of farmers jointly with GREL; and
• offers financial training to farmers in the form of record keeping, farm budgeting and cost analysis.
  

Benefits of the scheme for the parties

The scheme offers several benefits for the farmers and the buyer. Farmers have access to a guaranteed market, credit, high quality seedlings and training on input use and new production techniques to improve production levels. As a result of the adoption of improved agricultural and management practices and access to improved planting materials and efficient assistance, farmers’ yields increased from 0.8 to 2 tonnes. Additionally, GREL provides social infrastructure, such as school and village clinics to the neighbouring local communities.

On the other hand, thanks to the scheme, GREL was able to benefit from a steady supply of raw materials of the desired quality for its processing plant, thus bringing down the unitary production cost, without investing in setting up or rehabilitating plantations. It was also the best way to access land, as land acquisition is very difficult in Ghana.

One measure of success of the ROPP scheme was the respect of contractual terms. The prevalence of side-selling was significantly reduced due to the fact that:

Keeping a long-term business relationship made sense for farmers because they managed to increase both the yields and the quality of the rubber produced and sold to GREL.

Farmers had an adequate cash-flow as a result of prompt payments made by GREL and sound access to finance via ADB (both long-term loan and cash advances).

The company provided technical assistance and regular monitoring, with the collaboration of ROOA (the outgrower organization).

References

FAOSTAT available at http://faostat.fao.org/

Ghana Rubber Estate Limited website available at http://grelgh.com/

FAO. 2013. Paglietti L. and Sabrie Roble. Review of smallholder linkages for inclusive agribusiness development. Available at: http://www.fao.org/docrep/019/i3404e/i3404e.pdf

Ruf F. and Schroth G. 2015. Economics and Ecology of Diversification: The Case of Tropical Tree Crops, Springer. Available at: http://www.springer.com/us/book/9789401772938

A bit of history…

Potato has its origin in the border between Peru and Bolivia, and it became the main food staple in the Andes and in southern Chile. By the end of the 16th century, potatoes were introduced in several European countries and from there arrived to India in the early 17th century. Potato cultivation prospered in colonial home gardens of northern Indian, particularly in the Shimla and Nilgiri hills (Singh and Rana, 2014).

However, until 1941, potato production did not reach a prosperous growth in India due to:

• the unsuitability of potato varieties;
• inadequate storage that did not preserved the quality of the product during the hot Indian summers; and the fast degeneration of seed stocks caused by virus accumulation that contributed to low yields.

In the late 1990s, globalization brought significant changes to potato production and marketing in India, which became the second largest potato producer in the world, after China.

Contract farming for potato seed production in India

In India, a large number of small-scale farmers grow potatoes for self-consumption, rather than as a business. Potato cultivation requires intensive capital and inputs, which in most cases are not available to smallholder farmers. Potatoes are often produced in low productive areas with soil problems. Moreover, production inputs, such as fertilizers and agrochemicals, are expensive, so farmers tend to use inferior quality input, particularly inferior potato seeds (Singh and Rana, 2014).

Contract farming can help overcoming the unavailability of inputs and capital, especially when the buyer provides inputs to farmers (notably good quality seeds), credit and technical assistance, as a means to ensure a steady supply of good quality products. This way, farmers can produce more for self-consumption, but also to sell to local or foreign buyers.

The present case study analyses the contract (see Annex, pp. 5 and ff.) used in a contract farming operation between an international processing company and individual growers in northern India for the multiplication of potato seeds [for producing chips], whose names have been kept anonymous.

However, this contract is not the best example of a sound and fair contract farming agreement. It rather highlights how power unbalance between farmer and buyer can, sometimes, translate into uneven contractual obligations.

Obligation of the parties

The contract shows that growers have many responsibilities, but fewer rights compared to the buyer, which does not provide significant support in the production process.

Among other things, growers are responsible for:

Selling the chip grade multiplied potatoes to the company [2.5; 4.3 ii); 4.4] according to the quality and quantity requirements specified [Annexures A and B], such as size, colour, potatoes defects, as well as the expected yield in relation to the delivered planting materials [2.1];

1. Using the planting materials provided by the company only for the purposes of the contract (i.e. they cannot use or sell them or use them for other purposes) and paying for them before they are delivered [1.1; 1.2];
2. All farming activities, including land preparation, irrigation, planting, plant protection measures and harvesting [2.1];
3. Buying and using all other production inputs including agrochemicals and water. [2.2; 2.7];
4. Strictly following the contractor’s technical instructions [2.3] and allowing supervision at all times by the buyer’s representatives [2.4] to ensure the production and delivery of the agreed quality and quantity of multiplied potatoes;
5. Ensuring adequate land titling and paying all taxes and levies related to the land where the production activity takes place [4.1; 4.2].
6. The activity carried out by their working force (i.e. the contract clearly states that the grower’s working force are not considered direct employees of the company) [4.5].

On the other hand, the buyer is responsible for:

• Buying the product (chip grade multiplied potatoes) from the producers [2.5; 3.2];
• Paying a fix price plus an incentive when applicable, according to the contract annexes [3.3; 3.4]
• Supplying potato planting materials to the growers [1.1];

Evidence of power imbalance in the contract

By signing the contract farming agreement, growers have an assured market for their production, but on the other hand, the uneven contractual conditions do not provide adequate protection to them as it does to the company. This is exemplified by the following:

1) The buyer requires exclusivity (growers have to sell 100 percent of their production to the company and if they wish to enter into an agreement with another party, they are obliged to receive prior consent by the company [2.5; 4.3.i)]) and can supervise and monitor at its sole discretion all farming activities, but does not finance any input. Only planting materials of the variety required by the company are provided, but only after the farmer has settled the payment [1.1; 1.2].

2) The fact that the payment of the planting materials delivered by the company must be settled before their actual delivery, for instance, expose growers to the following risks:

A late delivery may negatively affect the production process and thus the money they receive (in terms of volumes and grades).

Should the inputs provided by the company be defective, e.g. infected seeds, the grower still is requested to meet the quality and quantity requirements stipulated in the contract. Conversely, rejections of multiplied potatoes delivered by growers would be on their account [2.5].

It appears that the price of the planting materials provided to the growers is unilaterally determined by the company.

3) As mentioned in 1), the company has the right to visit the production site and monitor all farming activities, which means that growers have to agree to the broad control over production that the company exercises, without gaining much in exchange [2.3; 2.4]. In contract farming operations such instructions normally come with certain correlated obligations, such as providing inputs, technical assistance and training on safe input use, record keeping and complying with administrative obligations, among others; but not in this case. This broad control over the production seems to diminish growers’ independence and make them and their working force de facto employees of the contractor, rather than an independent party, contrary to what stated in the contract [4.5] (UNIDROIT, FAO and IFAD, 2015).

4) Agricultural activity normally takes place over a certain portion of land that growers have actual ownership over or right to use. In some cases, the grower may lease the land from a private or public entity. There are also situations where individuals or communities do not hold any formal title on land under customary forms of tenure (ibid). Because of the risk related to secure tenure rights, the company considers the grower responsible for any damage that the company suffers with respect to inadequate land titling [4.1; 4.2].

5) The contract indicates the cases where the company is entitled to terminate the contract, but this right is not foreseen for the grower in case of company default. 

References

FAO. 2017. Contract Farming Resource Centre available at www.fao.org/contract-farming

FAOSTAT available at http://faostat.fao.org/

Singh, BP and Rana, Rajesh K. 2014. History of Potato and its Emerging Problems in India. Central Potato Research Institute, Shimla, India.

UNIDROIT/FAO/IFAD. 2015. Legal Guide on Contract Farming. Available at http://www.fao.org/3/a-i4756e.pdf   

The vanilla global market...

The vanilla market has always been a complex one. Vanilla prices tend to be very volatile due to the alternation of product abundancy and scarcity (the product is very sensitive to weather conditions). In the periods of abundancy farmers have to sell the product at very low unitary price/kg and this force them, in some cases, to abandon their plantations. This in turn causes price increases due to lack of supply. High prices slow the demand causing a reduction in consumption. In 2000, vanilla prices were so low that certain countries became disinterested in vanilla production.

Nevertheless, the production kept growing over the years, thanks also to the emergence of new consumer markets (especially in China) which placed an additional strain on the market. Between 1961 and 2016 world production rose from 1 300 tonnes to over 8 000 tonnes.

However, price fluctuations remain an issue: between 2014 and 2016 demand outgrew supply, leading to further volatility and the price of vanilla pods had increased by 400 percent.

…and the major players

As shown in the table below, Madagascar is the largest world’s producer of vanilla, with a share of more than 50 percent of the global output (according to FAO data for 2014). It is followed by Indonesia and Papua New Guinea. Tonga ranks eight with a total production of 186 tonnes in 2014, or 2 percent of the total output.

The vanilla war in Tonga

In Tonga, one major company (from now on: Company 1) has been present in the country for more than ten years. The company runs its own farm, producing 5 tonnes/year, but buys some beans also from other farmers. It produces a diversified line of beans, extracts, syrups, paste and sugar, among others.

In 2013, another company entered the market (from now on: Company 2). According to Company 2, the Tongan Government had encouraged them to enter the market to revive the vanilla industry, in view of the abandoned growing areas that resulted from past market downturns.

Company 2 offered contracts for vanilla growing to 257 farmers (270 in 2016), paying them T$3 (about US$1.3) upfront per plant, and dispensing a total of US$364 000. It also provided additional payments during the long production cycle (i.e. trimming, pollination, harvest), to give farmers some income during that period. In addition, it provided technical assistance and certification (organic and Fairtrade in 2016). The contract fixed the price for five years at T$13/kg. This operation attracted many farmers, the majority of whom were not in the vanilla production previously, reviving 95 percent of the then almost dormant Tongan vanilla industry.

At this point, Company 1 started offering to buy beans at a much higher price (T$25/kg) than that proposed by Company 2. Company 2 went to the national radio saying that they would have taken to court any farmer who signed a contract with them and would have sold vanilla beans to Company 1. The Government, on its own, admonished Company 1 for paying farmers too much and threatened it with legal actions. Company 1, in turn, argued it had the right to buy the beans from whoever wanted to sell to them.

For other information, please see in the Annex the contract used by Company 2 to engage in contract farming with vanilla growers.

References

Fairtrade (Website). 2016. Vanilla farmers first to bring Fairtrade certification to Tonga. Available at http://fairtrade.org.nz/en-nz/news/news/archive/vanilla-farmers-first-to-bring-fairtrade-certification-to-tonga  

FAOSTAT available at: http://faostat.fao.org/

Stuff (Web news site). 2013. No sweetness in Anzac vanilla war. Available at:  http://www.stuff.co.nz/business/9217911/No-sweetness-in-Anzac-vanilla-war  

Other sources used

METAROM Group, available at: http://www.metarom.com  

Vanipro Group, available at: http://www.vanipro.com  

Background

In Albania contract farming schemes are most commonly used for fruits, vegetables and dairy. One of the characteristics of the domestic agrifood sector is that the majority of producing farms are small. This in turn means supply chains are short as Albania possesses a developed and growing network of collection and storage centres. Furthermore, the majority of collectors operate in separate territorial zones. As a consequence, they only maintain contractual relationships with farmers in the same region. On the other hand, farmers might experience difficulties shifting their business relations to buyers that are located in a different area of the country. These factors indicate a certain level of buyer dominance on the relevant markets, especially at the regional level.

Albania does not have laws specifically covering contract farming. Like in most European Union countries, there are no explicit regulations on formalized, written agricultural contracts in place. Each country is hence free to decide under their national contract law whether the use of written contracts should be implemented on a compulsory basis or not.
In Albania the Civil Code constitutes the main legal instrument covering the contractual relation between producers and buyers. The current framework has only been in place since 1994, a short period for contract law to be established and strengthened.

The Civil Code enables the producer and the buyer to conclude a contract for the purpose of transferring property without restrictions. This is only a recent development as previously, under the socialist regime, property could not be owned in the vast majority of cases. So-called “socialist property” was defined by law as “state property and the property of agricultural cooperatives”.[1] Rural farmers and workers were able to form agricultural cooperatives and jointly own property. However, due to the restrictive nature of such regulations the sale of goods and capital was not allowed and sale contracts were redundant.

Competition Law
The Competition Law dictates regulations in order to support the achievement of fair contract conditions and avoid abuse of dominant positions. Market competitiveness can result in unfair behaviour under certain circumstances. Buyers can abuse their dominant positions through aggressive negotiations or the request of unsuitable production standards which can result in disadvantages for the farmers via decreased producer prices and restricted competition due to output limitation. Another major competition concern relates to the activity of farmers organizations in contract negotiations. With regards to the bargaining power of the buyer, farmers should be enabled to profit from fairer distribution along the supply chain. The Competition Law does not directly regulate the contract, but it can affect the contract relationship as a whole. It can prevent both contractors and producers from acting in ways that can limit competition. Especially with regards to buyer power, competition law tries to address the issues by prohibiting unfair prices, limitations of production, dissimilar conditions to equivalent transactions and unreasonably connecting the contract to supplementary obligations. These measurements are instrumental as buyer power may also manifest at the regional level, not necessarily only at the national. On the other hand, the Competition Law rules prohibit producer organizations from jointly negotiating prices on behalf of their members without exceptions. Such regulations are not yet needed in practice due to the lack of large agroprocessors and retailers, but they could become useful for future developments.

Mediation Law
Arbitration and mediation are alternative possibilities to settle disputes outside of courts. Arbitration is similar to an informal court trial with parties giving evidence where the dispute is submitted to a neutral arbitrator whose decision is binding. Mediation is an extrajudicial process that involves a third neutral party and does not settle the dispute until both parties agree.

A Law on Arbitration has been recently drafted but has not been passed. As a result, the few cases which have ended up in arbitration have been adjudicated by international arbitration courts outside Albania and domestic arbitration is just inexistent. In fact, the Centre for Mediation and Commercial Arbitration, established in 2002, has handled just a small amount of cases due to the fact that parties have preferred to settle cases in international arbitration courts instead. Additionally, the lack of a solid domestic Arbitration Law reduces the efficiency of business related mediation processes.
Mediation is regulated by a Civil Code section on Mediation in Dispute Resolution, and a specific Law on Mediation. In case of conflict, the specific Mediation Law prevails over the general regulations stated in the Civil Code. The Mediation Law provides that, through the assistance of a third neutral party that is part of the Register of Mediators, an agreement should be developed which is in line with the law and the acceptable to both parties. Once a solution is established an act-agreement is signed by all the parties involved. The resolution is binding and equally enforceable as arbitration decisions. This regulation makes the implementation of mediation mechanisms conditional to arbitration processes, but as explained earlier there is a regulatory gap regarding arbitration in Albania. As a result, the uptake of these mechanisms is extremely low.

Next steps
The three areas of laws described above have a strong influence on the enabling environment for contract farming schemes in Albania. The constitution of the Civil Code or the elimination of certain laws that limited farmers to own property only collectively have supported the establishment and improvement of business relations between producers and buyers in the food sector. Nevertheless, the relatively young legislative framework offers room for improvement with regards to agribusiness related matters. 

The Albanian law does not specifically deal with issues of contractual breaches, associated economic damages or unfair contractual terms relating to agribusiness supplies. As the domestic civil law is not fully developed yet, fair legal protection cannot always be ensured. This is particularly important for the weaker party, which is often the farmers’ side. Furthermore, regulations regarding arbitration or mediation mechanisms are much needed in order to boost the national economy and provide safety for producers and buyers.

It is hoped that the cooperation between the Albanian government, the FAO and GIZ may lead to legislative changes in the future to address the gaps identified.

The above explains why laws dealing with contractual obligations, especially in the area of contract farming, are still relatively underdeveloped. In order to improve the understanding and to support further development of the contract farming environment in Albania, FAO and GIZ are working together with the government of Albania to analyze the regulatory framework for contract farming together with the socio-economic arrangements taking place in the country. The regulatory assessment includes carrying out a mapping of the legal framework and a gap analysis. The following section provides a brief overview of the preliminary findings.
________________________________________
[1] See Article 17 of the Socialist Constitution.

The three main mechanisms for regulating contract farming in Albania are:
1. the Civil Code,
2. the Competition Law and
3. the Mediation Law.

In default of a specific legal framework, contractual arrangements between agrifood producers and buyers are governed chiefly by the Albanian Civil Code. This Code offers three main types of rules: general obligations applicable to all contracts, rules relating to sale contracts and measures to counteract the abuse of dominant buyer power, which are further regulated by the Albanian Competition Law.

1. The general obligations are applicable to all types of contracts. The main legal aspects consider the formation of a contract in good faith and essential clauses the content is based on, including the termination of the contract and remedies in order to enforce contractual obligations.  In particular, the essential terms required in the Albanian Civil Code must include clarifications regarding the price, quality and quantity of goods with regards to contract farming. In case of unbalanced professional knowledge, the more skillful party has the obligation to provide information, instructions and/or technical assistance in good faith to the other party. Regarding the applicable law, the Civil Code only relates to contractual agreements where the parties, the production site and the processing site are all located in Albania. If these legal elements are linked to more than one country, the parties are not limited to the Albanian law and have the freedom of choice.[1] In cases where the applicable law has not been explicitly stated in the contractual agreement, the legal framework of the country where the seller has his or her residence shall be chosen.[2]
2. The provisions related to contracts of sale of goods are essential to contract farming in Albania. A contract farming agreement often, but not always, resembles a contract for the sale of future goods. The Civil Code provides primary obligations for both parties with regards to the sale of goods. Sellers are obliged to supply the goods, while buyers have the goods delivered and to pay for them. The Code further clarifies rules related to setting and paying the price as well as specific remedies for the buyer/contractor.
________________________________________
[1] Article 45 of Law No 10428/2011.
[2] Article 46 (1) (a) of Law No 10428/2011 transposing Article 4 of Rome I Regulation.

References

FAO. Unpublished. The Legal Framework of Contract Farming in Albania by M. Maci.

Background

Contract farming is a long-standing coordination mechanism in Brazilian agribusiness. Contracts are widely adopted for several commodities, including poultry, hogs, citrus and tobacco, among others. They often involve large numbers of small- and medium-sized farmers.

From the legal standpoint, the practice of contract farming in the country has been covered by the general provisions on contractual matters of the Civil Code, but it also observes norms of other typified contract legislations, when appropriate.

The new law was enacted on May, 2016, following a process of discussions and negotiations in parliament that started in April, 1998. The motivation behind its proposal was mostly to protect the interests of farmers involved in agricultural contracts.

The Brazilian Law on Contract Farming: relevant aspects
The Brazilian Law No. 13.288 of 16th May 2016:
 “…deals with vertical integration contracts in agriculture, livestock, forestry and aquaculture,
 …establishes general obligations and responsibilities for integrated producers and integrating companies,
institutes transparency mechanisms in contractual relations, and
creates national (contractual) integration forums and Commissions to Monitor, Develop and Conciliate (contractual) Integration, respecting already existing structures”.

The Law explicitly excludes contracts already regulated by legislation on cooperatives and does not cover simple forward delivery contracts under pre-agreed prices. It applies more directly to contracts whereby inputs and services are provided to farmers by the contracting firm (resource provision). It also makes it clear that contract farming does not constitute a labour relation between farmers and/or their employees and buyers, as this issue has been a frequent source of judicial disputes.

The law mandates contractors to prepare detailed pre-contractual information documents that should be presented to farmers interested in joining a contract farming operation. It also requires that all contracts are written and requires contractual clarity in all clauses.

What's new?
In general, most of the clauses and principles of this Law are not very new. However, two relevant innovations can be identified:

• The mandatory establishment of farmer-buyer ¨monitoring, development and conciliation” commissions in each contract farming operation (the CADECs);
• The creation of national integration fora (the FONIAGROs) for each of the different agrifood chains where contract farming is practiced. These, in particular, will have among their attributions to establish methodologies for the calculation of “reference values for the remuneration of farmers” in the different agrifood chains, which in turn should be adopted by the CADECs.

Actual impact
What will be the actual impact of this Law remains still an open issue. Contract farming practitioners believe that the law will mostly have a neutral effect on the way agrifood contractual relations function, as the Law essentially prescribes good practices that are already adopted by most contract farming operations in the country. Regarding CADECs, though they may not exist in the same format and modus operandi prescribed by the Law, instances for farmer representatives and company managers to regularly meet, negotiate and resolve eventual grievances are not uncommon.

Skepticism remains also on FONIAGRO’s task to create methodologies for the calculation of reference values for farmers’ remuneration as this seems to be of difficult implementation in practice because:
There is wide heterogeneity between contractual agreements;
Under the principle of freedom to contract, remuneration conditions can be freely established among parties.

In sum, actual impacts of the new Brazilian contract farming Law will depend on the way the operational aspects are regulated by the Brazilian Congress.

References

Presidência da República do Brasil. 2016. Lei nº 13.288, de 16 de Maio de 2016 - Sobre os contratos de integração vertical nas atividades agrossilvipastoris. Available at the Community of Practice on Contract Farming: http://www.unidroit.org/english/documents/2016/study80a/regulations/brazil-lei13288-16052016.pdf