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Potential Disincentives for Contract Farming

By Iorwuese Tyopev:

A tractor operator tilling a farm land

Although there are a lot of benefits in contract farming (CF), it is by no means a panacea to agricultural commercialization and poverty reduction. Several concerns have been raised regarding the desirability of contract farming, foremost of which involves the opportunistic nature of designed CF arrangements, in-transparent relations and deceptive practices. The major concerns are discussed in this section.

A. Monopsony Control

Contract farming as a development tool has been criticized for the exploitative effects of monopsony market power, whereby farmers are tied to one purchaser. The firms generally possess more information, resources, and organizational ability than small farm holders. Their strong bargaining position enables them to potentially extract significant rents from smallholders, leaving them only marginally better off.

B. Household Food security 

The transition from subsistence farming to cash crop production has the potential to render households vulnerable to food shortages and nutritional loss. Many contract farming arrangements are based on mono-cropping of a non-traditional crop, causing farmers to become reliant on income from the sole cash crop. If the firm does not live up to its contractual obligations, farming households may thus be vulnerable since they no longer grow a variety of edible crops and lack the funds to purchase food. C. The Burden of Labor ManagementAlthough contract farming may reduce the cost of labor management for the agro-business firm, the act of purchasing directly from farmers rather than hiring wage workers shifts the burden of labor recruitment and control onto the poor farmers. In this respect, although agro-business firms may benefit from reductions in labor management and land cost, such practices may also lead to exploitation since family labor is inclusive of women and children who are the vulnerable.

C. Contract Enforcement

In many developing countries the absence of an effective legal system and the lack of collateral held by small farmers can result in considerable risks for agro-business firms. In the absence of enforceable or legally binding contracts, opportunism may result as firms can suffer from the effects of extra-contractual sales of outputs. When alternative markets develop and competing buyers offer competitive prices, farmers are given the incentive to break their contracts, often failing to repay input credit to the contractor as a result of poaching by competitors and side-selling by farmers leading to undersupply of firms’ capacities/ needs. An issue involving input diversion occurs when farmers are tempted to use inputs supplied by the firm for non-intended purposes. This is one of the reasons for the sub-optimal performance of the CBN Anchor Borrowers’ Scheme in Nigeria. D. Bias Toward Large FarmsOne criticism of private-led contract farming is that agro-business firms may be motivated to seek contracts with larger farmers to reduce transaction costs and allow for the procurement of more uniform products, and thus, negating the development target of inclusiveness of the poor in the production value chain. Agro-business firms prefer limited land size to ensure easier maintenance and greater quality control over a given crop as is the case with Olams and paddy rice  farming in Nassarawa state, Nigeria.

E. Requirement for Increased Management Skills 

Contract farming requires high-level managerial skills on the part of the agro-business firms. Poor management and a lack of communication among contractual parties may lead to farmer dissatisfaction and a breakdown in contractual agreements. By employing local staff or traditional/community leaders in managing farmers, contracting firms can improve their conflict resolution management and avoid cultural challenges as practiced by Labana Rice Mills, Birnin Kebbi, Nigeria.

F. Increased Production and Investment Risk

Firms are required to bear increased risk in contract farming. Most contracts stipulate that the firm will purchase all the produce, usually at a price higher than the prevailing market price. The firm may bear the price risk as well as the risk of crop failure due to poor management or seasonal factors. To ease potential losses, the firm may maintain tight control over management and offer seasonal or annual contracts so as to exclude unproductive farmers from the future contracts. Farmers also face greater production risk in the case of newly introduced crops which may take time to adapt to new growing environment and required new growing techniques which are new to farmers.

G. Increased environmental and health risk

In countries where contract farming has been practiced over a few decades, experiences indicate that poverty reduction impacts should be assessed in a holistic framework. In situations where contract farming of cash crops (mono-cropping) were undertaken with a heavy reliance on agro-chemicals, yields generally increased substantially during the initial period. As a result, household incomes were greatly improved during the first decade, but yields tended to stagnate or decline as soil conditions deteriorated due to excessive use of agro-chemicals. Many of the pesticides that are banned or strictly controlled in the developed nations have been introduced to farmers in developing countries through contract farming, resulting, for example, in negative health impacts on farmers.

However, the above compilation of disincentives is a mere theoretical review, while the real disincentives depend on the CF arrangement, on contract terms, on the commitment of co-contractors, on their business attitudes and last but not least on the trust or mistrust which governs the behaviour of the contracting parties.

Tyopev is an Agribusiness Consultant and PhD candidate for International Trade & Development Economics.

Tel: 07036950021

E-mail: tyopev@yahoo.com

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