Contract farming

Contract farming involves agricultural production being carried out on the basis of an agreement between the buyer and farm producers. Sometimes it involves the buyer specifying the quality required and the price, with the farmer agreeing to deliver at a future date. More commonly, however, contracts outline conditions for the production of farm products and for their delivery to the buyer’s premises. The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality standards and delivery requirements of the purchaser. In return, the buyer, usually a company, agrees to buy the product, often at a price that is established in advance. The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with land preparation, providing production advice and transporting produce to its premises. The term "outgrower scheme" is sometimes used synonymously with contract farming, most commonly in Eastern and Southern Africa. Contract farming can be used for many agricultural products, although in developing countries it is less common for staple crops such as rice and maize.

Contract farming has been used for agricultural production for decades but its popularity appears to have been increasing in recent years. The use of contracts has become attractive to many farmers because the arrangement can offer both an assured market and access to production support. Contract farming is also of interest to buyers, who seek supplies of products for sale further along the value chain or for processing. Processors constitute the main users of contracts, as the guaranteed supply enables them to maximise utilization of their processing capacity. Contracts with farmers can also reduce risk from disease or weather and facilitate certification, which is being increasingly demanded by advanced markets. There are also potential benefits for national economies as contract farming leads to economies of scale, which, as Collier and Dercon argue, are "bound to provide for a more dynamic agricultural sector.

Although contract farming must first and foremost be considered as a commercial proposition, it has also come to be viewed as an effective approach to help solve many of the market access and input supply problems faced by small farmers. A guide published by GIZ in 2013 seeks to advise on ways in which contract farming can be developed to maximise such benefits for smallholders in developing countries. Effective linkages between companies and thousands of farmers often require the involvement of formal farmer associations or cooperatives or, at least, informal farmer groups. However, empirical evidence of the best way of achieving this is not yet available.

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Wikipedia