Contract farming is premised on a contract signed between a farmer and a firm with an agreement between the two parties that the firm will purchase the farmer’s products in order to market them or process them. In return the farmers will access the much-needed seed and other related inputs. Contract farming can potentially provide farmers with so many benefits SUCH AS:
- the provision of markets,
- access to input loans,
- access to credit,
- provision of extension and technical advice,
- use of appropriate technology which ironically has emerged as a conspicuous missing link for sustainable agriculture in developing economies.
Contract farming schemes can take numerous forms. Contract farming can be categorized either by the intensity of contractual arrangement or the schemes of organizational structures (the organization of stakeholders within the scheme). Looking from the objective perspectives, contract could be drafted to transfer decisions – rights and transfer of risk. The three typologies of contracts then are used, including:
- market provision typology,
- resource provision typology and,
- production management specification typology.
Contracting is rare for basic staple foods produced for local consumption and more common for industrial crops (e.g. sugarcane, tobacco, and tea), poultry, dairy, and horticulture, particularly when destined for high-income consumers willing to pay a premium for quality and food safety. The schemes of contract organizational structures depend on the nature of the product, resources of the processors and the intensity of the relationship between farmers and processors.
With effective management contract farming can be a means to develop markets and to bring about the transfer of technical skills in a way that is profitable to both the sponsors and farmers. The approach is widely used, not only for tree and other cash crops but, increasingly, for fruits and vegetables, poultry, pigs, diary produce and even prawns and fish. Indeed contract farming is characterized by its enormous diversity not only with regard to the products contracted but also in relation to the many different ways in which it can be carried out
Under key minimum requirements for appropriate contract farming schemes, the contract farming scheme project must:
- not result in farmers’ overspecialization in certain crops to the detriment of building resilience and contributing to local food security;
- promote sustainable farming practices and not promote reliance on chemicals or expensive seeds, or lead to excessive debts;
- lead to higher incomes for farmers than they would otherwise earn, and compared to alternative models;
- substantially include women farmers and promote their rights;
- promote the land rights of farmers;
- apply free, prior and informed consent of those affected in terms of project design and implementation.
More so, in relation to contractual terms, the project should:
- be negotiated transparently and fairly among the parties, providing adequate information at all times on the financial aspects of the project and the risks and likely impacts;
- consider alternative contract farming models;
- be regulated by a written contract spelling out the details and obligations of both the company and the out-growers, and which must be written in a clear and understandable way with out-growers given sufficient time to review it;
- be transparent about how the price is determined, the duration of the project and how production inputs and other services are to be supplied and used by farmers;
- build in a clause for the renegotiation of the contract at agreed intervals, and specify the sharing of production and market risks among the parties;
- track and communicate performance to affected stakeholders to build accountability at the operational level;
- prevent unfair practices in buyer-farmer relations, and not prohibit or discourage farmers from associating with other farmers to compare contractual clauses or to address concerns or problems;
• have clear mechanisms for settling disputes.