By Iorwuese Tyopev :
Contract farming is the current best practice in agricultural development. It is a contract between a farmer and a purchaser established in advance of the growing season for a specific quantity, quality, and date of delivery of an agricultural output at a price or price formula fixed in advance. The contract provides the farmer with the assured sale of the crop and at times provides for technical assistance, credit services or inputs from the purchaser. The purchaser gets a guaranteed, steady supply of produce.
The benefits of contract farming to farmers are enormous. I will identify and discuss some of these key benefits. One of the principal motives for smallholders to enter into a contract farming arrangement is the promise of a steady and increased income from having an assured market. Market access can also result in the expansion of cultivated areas. Two, contract farming promotes farming of nontraditional crops that are sold for a higher price and may be grown without significant extra effort.
Three, increased income in contract farming is generally accompanied with lowering price risk for farmers. In agriculture, prices can fluctuate drastically from region to region and within a growing season. Smallholders have little access to information and face the risk of losing substantial income if prices fluctuate downward. In contract farming, however, a predetermined price for the crop is generally established during contract negotiations at the onset of the growing season.
Four, contract farming arrangements also facilitate risk sharing in the case of production failure due to uncontrollable circumstances including poor weather or disease. Where production problems are widespread as a result of uncontrollable events, firms will often defer the repayment of production advances until the following season.
Five, formal credit markets in rural areas of developing countries seldom exist, and where they do exist, banks are reluctant to lend to smallholders. Even in areas where micro finance institutions exist, these institutions tend to offer loans to micro enterprises and not to agriculture production. Firms are in a better position to provide credit than banks since they usually possess greater ability to monitor and enforce credit and therefore overcome problems caused by financial market imperfections.
Six, embedded services provided to smallholders by agribusiness often includes training and assistance in crop production, soil and water management, bookkeeping of inputs and outputs, and at times even gender-awareness training. Farmers can become astute on how markets work, how to manage accounts, and how to run their farm as a business. The value-added benefits of the skills passed on to farmers continue after agreements have expired.
Seven, traditionally, small-scale farmers are often reluctant to adopt new technologies and diversify from traditional crops due to risks and costs involved. Through contract farming, firms can provide the support needed for smallholders to shift from subsistence agriculture to market-oriented production.
On the other hand, also, the benefits of contract farming to firms and the public sector are plenteous. Among the many benefits are: One, contract farming allows agribusiness firms to improve cost efficiency and minimize risk by avoiding the purchase of land or the hiring of labor. It also allows agrofirms to avoid risks involved with agricultural production, including fluctuations in demand and supply, through the procurement of produce from farmers.
Two, with firms extending technical support and supervision over farming practices, product quality consistency is improved under contract farming. The degree of effectiveness and cost associated with quality monitoring, however, may differ with types of crops.
Three, one consequence of a globalizing agritrade is the growth of multinational corporations (MNCs) (for example Olams in Nigeria) sourcing food from developing countries, where labor cost is low and natural resource endowments are favorable. In order to satisfy stricter food safety, social, and environmental standards; specific consumer demands in importing countries; as well as requirements under international trade agreements, MNCs opt for contract farming arrangements to maintain control over inputs throughout all stages of production and processing.
Five, contract farming arrangements serve to link farmers to distant markets where the demand for and price of crops are often more favorable. For instance, on the current Yam export initiative by the federal government, contractual arrangements will facilitate the introduction of new production techniques and measures that serve to upgrade quality of yams in Nigeria.
In conclusion, however, given the limited government and donor resources available, private sector generation of pro-poor growth may be a key to large-scale poverty reduction. While governments figure largely in contract farming initiatives, it is essentially a private sector-led initiative.
Iorwuese Tyopev, is an Agribusiness Consultant/Trainer and a doctorate research scholar on International Trade and Development Economics, BSU, Makurdi.