Contract farming

Contract farming is agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products. Typically, the farmer agrees to provide established quantities of a specific agricultural product, meeting the quality standards and delivery schedule set by the purchaser. In turn, the buyer commits to purchase the product, often at a pre-determined price. In some cases the buyer also commits to support production through, for example, supplying farm inputs, land preparation, providing technical advice and arranging transport of produce to the buyer’s premises. Another term often used to refer to contract farming operations is ‘out-grower schemes”, whereby farmers are linked with a large farm or processing plant which supports production planning, input supply, extension advice and transport. Contract farming is used for a wide variety of agricultural products.

Library Resources

resource title type year resource
Social Differentiation and the Politics of Land: Sugar Cane Outgrowing in Kilombero Tanzania Paper 2017

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The privatisation of formerly state-owned sugar cane estates and mills in the late 1990s led to the reconfiguration of the ownership structure and production of the Tanzanian sugar industry. This included the decentralisation of sugar cane production operations to outgrowers and their associations. Based on an investigation of sugar cane outgrowers of the Kilombero Sugar Company, this article explores the outcomes of this transformation and the dynamics of social differentiation, and the ways in which this is shaped by Tanzania’s institutional and legal framework governing the sugar industry. While increased sugar cane production has created jobs and income for some outgrower households, it has also been associated with several adverse impacts. Large-scale outgrowers have rapidly captured the most lucrative business opportunities and the land they require, marginalising smaller outgrowers. This is further exacerbated by heightened competition among farmers and patronage relations affecting the distribution of harvest quotas and cheap sugar imports. The outgrower model is central to national development initiatives such as the Southern Agriculture Growth Corridor of Tanzania and ‘Big Results Now’. Despite the grand ambitions of large-scale agricultural commercialisation, who wins and who loses out depends more on the local political economy, where the sugar industry, local business, political elites and local communities compete for the benefits of expanded sugar production.

Interlinking Product and Insurance Markets: Experimental Evidence from Contract Farming in Kenya Paper 2015 English (en)

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By requiring the upfront payment of the premium, standard agricultural insurance products introduce a transfer of income across periods. Enforcement limitations typically prevent insurers from offering contracts that only feature transfers across states. Using an RCT implemented in a contract farming scheme in Kenya, authors test a novel interlinked product in which the buyer of the crop offers insurance and deducts the premium from farmer revenues at harvest time. Take-up rates at actuarially fair levels are 71.6%, 67 percentage points higher than the equivalent standard contract. Authors argue that the insurance product jointly addresses multiple potential intertemporal distortions and behavioural biases. Evidence from a second experiment and survey data show that, by removing liquidity constraint concerns, the interlinked insurance achieves better targeting of poorer farmers.

Interlinking Product and Insurance Markets: Experimental Evidence from Contract Farming in Kenya  -  English (en)

Legal Guide on Contract Farming Training Guide 2015 English (en)

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This guide provides advice on the entire relationship, from negotiation to conclusion, including performance and possible breach or termination of farming contracts. Contract farming is an agreement between producers and buyers that supports the production of a wide range of agricultural commodities, which can help increase agricultural productivity and improve the livelihoods of the rural poor. The potential economic and social benefits of the contract farming explains the interest of many domestic policymakers and international organizations in promoting sustainable contract farming models as part of their efforts to achieve food security. The Guide aims to promote a better understanding of the legal implications of contract terms and practices.and more stable and balanced relationships between stakeholders. It provides assistance to parties in designing and implementing sound contracts, thereby generally contributing to building a conducive environment for contract farming.

Legal Guide on Contract Farming  -  English (en)

Guide juridique sur l'agriculture contractuelle Guideline 2015 French (fr)

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L’agriculture contractuelle, qui désigne généralement la production et la commercialisation de produits agricoles en vertu d’un accord préalable entre producteurs et acheteurs, est de plus en plus pratiquée dans de nombreux pays pour des denrées agricoles très variées.

L’agriculture contractuelle aide à accroître la productivité agricole, à améliorer les moyens de subsistance des populations rurales pauvres et peut contribuer à prévenir l’exode rural. Ces facteurs, couplés à d’autres avantages économiques et sociaux potentiels, expliquent l’intérêt de nombreux décideurs politiques nationaux et d’organisations internationales à promouvoir des modèles d’agriculture contractuelle durables dans le cadre des initiatives visant à assurer la sécurité alimentaire.

Conscients de l’importance de mieux faire connaître le régime juridique applicable aux opérations d’agriculture contractuelle, l’Institut international pour l’unification du droit privé (UNIDROIT), l’Organisation des Nations Unies pour l’alimentation et l’agriculture (FAO) et le Fonds international de développement agricole (FIDA) ont préparé ce Guide juridique sur l’agriculture contractuelle UNIDROIT/FAO/FIDA.

Ce Guide a été élaboré par un Groupe de travail constitué par UNIDROIT, regroupant des juristes de renommée internationale, des organisations multilatérales partenaires et des représentants des producteurs agricoles et du secteur agroalimentaire. Des représentants des secteurs intéressés, des fonctionnaires internationaux, des juristes praticiens et des universitaires de cultures juridiques et d’horizons différents ont contribué à l’élaboration du Guide. Les réunions de consultation qui se sont tenues en 2014 avec les parties prenantes à Buenos Aires (Argentine), Addis-Abeba (Ethiopie), Rome (Italie) et Bangkok (Thaïlande) ainsi que des consultations en ligne ont également apporté de précieuses contributions. Au terme de deux années de préparation, le Conseil de Direction d’UNIDROIT a examiné le Guide, et l’a adopté à sa 94ème session en mai 2015.

Le Guide juridique sur l’agriculture contractuelle UNIDROIT/FAO/FIDA tient compte des Principes pour un investissement responsable dans l’agriculture et les systèmes alimentaires, approuvés par le Comité de la sécurité alimentaire mondiale en octobre 2014. Comme les Principes, le Guide a pour objectif d’offrir un cadre auquel les parties prenantes peuvent se référer lors de l’élaboration de politiques nationales, de cadres règlementaires, de programmes de responsabilité sociale des entreprises, d’accords et contrats entre personnes privées, sur la base de processus participatifs et responsables.

Nous exprimons notre profonde reconnaissance aux membres du Groupe de travail pour leur travail, leur dévouement et leur enthousiasme. Nous remercions également tous ceux qui ont soumis des commentaires, fait des suggestions et ont contribué d’une façon ou d’une autre aux diverses étapes de l’élaboration du texte.

Nous sommes persuadés que le Guide constituera une référence utile pour tous les opérateurs qui pratiquent l’agriculture contractuelle ou qui sont engagés dans la mise en œuvre de politiques publiques, la recherche juridique et le renforcement des capacités. Nous espérons que le Guide contribuera à créer un environnement favorable, équitable et durable pour l’agriculture contractuelle. 

José Angelo Estrella Faria Secrétaire Général UNIDROIT

Antonio Tavares Conseiller juridique FAO

Gerard Sanders Conseiller juridique FIDA 

Lien vers la publication  -  French (fr)

Contract farming and out-grower schemes Appropriate development models to tackle poverty and hunger? Paper 2015 English (en)

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This briefing is a literature review of out-grower schemes and contract farming to inform ActionAid’s perspective.

Out-grower schemes (often referred to as contract farming in academic and other literature) are an important component of many current public-private partnerships (PPPs) in developing countries, including the G8’s New Alliance. Such schemes often appeal to farmers because the company often provides inputs and production services. In addition, farming incomes can rise and such schemes often open up new markets and provide new technology.

But they also present several major problems. Out-grower schemes and contract farming often exclude precisely the groups that ActionAid works with most: the poor, women, the landless, and marginal or subsistence farmers.

Contract farming and out-grower schemes  -  English (en)

Contract farming for inclusive market access Technical Note 2014 English (en)

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Recent transformations in agrifood systems have created new technical requirements and compliance costs that make it increasingly difficult for resource-poor farmers to access modern market channels. In this respect, the question of whether contract farming can be an effective institutional mechanism to address this issue stands out as one of special relevance.This book aims to typify the extent to which contract farming is helping small farmers to access markets and meet stringent requirements of manufacturers, retailers, exporters and service firms, from both food and non-food sectors such as biofuels and forestry. It seeks to clarify differences in the functionality of contracts depending on commodity, market, technology, public policies and country circumstances. Conceptual issues are discussed and real-world case study appraisals from developing regions are presented. The issues raised in the case studies and the key messages synthesized in the initial chapter bring new insights and contributions to further enrich knowledge on contract farming as a tool for inclusive market access in developing countries.

Contract farming for inclusive market access  -  English (en)

Manuel d‘agriculture contractuelle Guideline 2014 French (fr)

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Dans le contexte actuel, l’objectif de ce manuel est de mettre à la disposition des acteurs une approche pratique et tournée vers les processus, en vue d’une bonne planification et mise en œuvre des systèmes d’AC. Ce manuel, dont l’objectif est d’assister les acteurs à rendre opérationnels les arrangements d’affaires privées, apporte des réponses et propose des outils pour :

  • La spécification des rôles et responsabilités des producteurs et des acheteurs en tant que partenaires d’affaires ainsi que des partenaires gouvernementaux, non-gouvernementaux et des partenaires au développement en tant que facilitateurs tiers ;
  • L’esquisse de dispositions d’AC viables comme partie intégrante d’une innovation du modèle d’affaire urgemment requise à partir d’une évaluation rapide, mais solide, de la situation de départ ;
  • La mise en œuvre d’activités visant à créer la confiance et à renforcer les capacités, dans le but de soutenir les changements de comportement nécessaires et l’adoption de nouvelles technologies appropriées ; et
  • L’élaboration de systèmes de rapports et de suivi nécessaires pour la gestion des systèmes d’AC, le retour d’informations (« feedback ») sur la performance et le partage d’expériences acquises nécessaire pour la consolidation et l’expansion (« upscaling ») des systèmes d’AC.
Lien vers la publication  -  French (fr)

Plantations, Contract Farming and Commercial Farming Areas in Africa: A Comparative Review Paper 2013

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This paper considers the historical experience of three agribusiness approaches or farm systems that have figured in recent investments in sub-Saharan Africa plantations; contract farming; and commercial farming areas. This paper is based on a literature review and a comparative analysis of around fifty case studies - some concerning the same scheme- that were either published as stand-alone cases in the academic and grey literature or included in a larger publication. The focus is on sub-Saharan Africa, but developments in Latin America and Asia are considered. The review of the African material may be biased towards anglophone countries.

The paper begins by defining the three models and exploring how they have been understood from different theoretical perspectives. Chapter 4 charts the development of the three models in sub-Saharan Africa since the early twentieth century. An assessment of the diverse impacts of the three models is contained in Chapter 5. The paper ends by presenting some observations on the three models and suggesting six factors that are particularly influential in determining their outcomes for the rural poor.

Contract Farming Handbook. A practical guide for linking small-scale producers and buyers through business model innovation Book 2013 English (en)

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This guide has been developed to serve practitioners involved in starting up and managing or supporting the initiation and implementation of contract farming schemes: companies interested to develop networks of small-scale farmers as competent and reliable preferred suppliers; farmers’ organizations interested to service members; sector organizations to develop trade and exchange platforms or codes of conduct for contract farming; and third parties interested to promote CF as innovative business arrangement in a broader development context.

The handbook provides: the conceptual foundations of contract farming and its facilitation as basis for understanding the proposed phases and steps for contract farming development; a process-structure for CF development with three phases (initiate & plan, implement & learn, sustain & grow) and eight steps; a systematic description of the three phases and respective steps in a clearly structured and easy-to-capture format; specific guidance on selected key features of contract farming (e.g. contract terms, pricing mechanisms, causes of conflict and conflict resolution); and for each phase and step, references for literature on the subject.

Contract Farming Handbook. A practical guide for linking small-scale producers and buyers through business model innovation  -  English (en)

Preparation of a Legal Guide on Contract Farming: A preliminary outline of issues Guideline 2013 English (en)

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Objectives of the future UNIDROIT Guide on Contract Farming


The purpose of the envisaged UNIDROIT Guide would be: 

  • to spread knowledge with a view to providing all those who deal with contract farming, whether they be agricultural producers or market operators, lawyers, judges, arbitrators or scholars, with a tool for the better understanding of the possibilities it offers.
  • the future Guide could be of assistance to parties – and their legal counsels – in negotiating and drawing up contract farming arrangements by identifying the legal issues involved in those agreements, discussing possible approaches to the issues and where appropriate, suggesting solutions which parties may wish to consider. By furnishing comprehensive information the future Guide is aiming at filling the informational gap between the parties, which would otherwise have placed one of them at a disadvantage. It should therefore contribute to providing the parties with greater confidence in dealing with contract farming.
  • The future Guide could help identify solutions for drafting fair and commercially sound contracts serving as a guide to “good contracting practice”. As such, it could provide a useful tool in the context of dispute resolution mechanisms, in particular in alternative resolution proceedings, to supplement the existing legal framework when it proves insufficient. 
  • The future Guide could also serve as a reference document for law makers and public authorities dealing at a public policy level with contract farming. It could help in assessing the possible need for and content of a specific legislation on contract farming. It could be used as a reference in the context of legislative or regulatory reforms, also by contributing to a harmonized and fair approach to the legal regime of contract farming arrangements at a time when markets are increasingly global and integrated.
  • the future Guide could provide an additional tool available to international organisations and bilateral cooperation agencies as well as non- governmental organisations engaged in strategies and programs in support of contract farming in developing countries.
Preparation of a Legal Guide on Contract Farming: A preliminary outline of issues  -  English (en)

Ghana outgrower schemes: advantages of different business models for sustainable crop intensification. Technical Note 2012 English (en)

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The learning note focuses on a successful example of rubber production in Ghana’s Western Region and a less successful example of sorghum production in the Ashanti Region. These illustrate two organizational business models: a nucleus plantation with an out-grower scheme (rubber); and the use of lead farmers. The note seeks to highlight the constraints and potentials of the two models and to provide useful lessons and insights regarding their contribution to promoting sustainable crop intensification.

FAO Paper  -  English (en)

Outgrower Schemes: enhancing profitability Brief 2011

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This brief presents a synthesis of key findings from a review of global experiences in developing and manag-ing outgrower programmes. The purpose of the re-view, commissioned by IFAD, was to identify:

  • key factors (crop type, institutional arrangements, management structure, technology, geography, culture, regulatory environment etc.) that influence a programme‘s success or failure; and
  • how to design replicable, scalable outgrower programmes with broad impact.
  • The findings suggest that no universal approach guaran-tees success; rather, success depends on a range of factors. Chief among these are:
  • having direct access to a viable market (local, regional, global) for the end product;
  • maintaining a clear, transparent pricing mechanism, a price that is attractive to farmers, or both;
  • avoiding monocropping systems (especially low-value, high-volume annuals);
  • avoiding overreliance on credit to purchase inputs;
  • leveraging a competitive advantage in production, product attributes (e.g. brand, certifications) and/or proximity to the end market; 
  • building/sustaining credibility of the buyer and trust among farmers via regular direct interaction between the buyer and the farmers.

The evidence also suggests that ad hoc, opportunistic investments that do not pursue and sustain an integrat-ed and comprehensive farm-to-market approach are likely to fail.


Egypt: Smallholder contract farming for high-value and organic agricultural exports Paper 2009 English (en)

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The study finds that contract farming could be an effective way of including smallholders in the effort to supply the horticultural export value chain, particularly if farmers are organized into farmer associations. The study reveals that smallholder families could increase their incomes by as much as 63 per cent if they engage in the contract farming of organic horticultural produce, and by 43 per cent if they engage in conventional export crops.

It is estimated that if farmers would organize into farmer associations they could improve their incomes by curtailing the number of traders and selling their own production in village, governorate, and metropolitan wholesale markets, improving their household incomes by 7, 15 and 22 per cent, respectively, in these markets.

Egypt: Smallholder contract farming for high-value and organic agricultural exports  -  English (en)

L’agriculture contractuelle : Rôle, usage et raison d'être Paper 2009 French (fr)

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Le secteur agroalimentaire subit à l‟échelle mondiale une transformation remarquable. Ce processus s‟accompagne d‟un recours accru à la contractualisation, qui suscite des préoccupations concernant la transparence du marché, les conséquences possibles pour les acteurs de la filière agroalimentaire et le rôle qu‟un gouvernement devrait tenir dans cet environnement changeant. Le présent document a pour objet de proposer aux responsables de l‟élaboration des politiques un tour d‟horizon succinct des mutations structurelles du secteur et des principales incitations à développer la contractualisation, ainsi que de mettre en évidence certaines des questions de fond qui se font jour.

L‟analyse est étayée par les résultats de deux enquêtes entreprises par le Secrétariat. La première, destinée à recueillir le point de vue des associations de producteurs, a été menée en coopération étroite et avec le concours de la FIPA. La seconde avait pour objet d‟obtenir des données au niveau national auprès des pays membres. Malgré des taux de réponse relativement faibles, ces enquêtes ont apporté des éclaircissements et des informations nouvelles sur le recours aux contrats et le rôle potentiel des pouvoirs publics. 

Lien vers la publication  -  French (fr)

Linking Farmers to Markets through Contract Farming Document 2005

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This bulletin is published by Central Institute for Economic Management (CIEM) with the support of Asian Development Bank (ADB) and the Mekong Private Sector Development Facility (MPDF). The goal of the bulletin is to provide a forum for the discussion of issues arising from the research.

Contracts are an important mechanism to coordinate production, distribution, and retail arrangements between different players in the value chain. As the agriculture sector in Viet Nam modernizes and commercializes, value chains for agricultural products will become increasingly important, and as a part of this process, contracts will also become a more important and common feature of the agriculture sector in Viet Nam.

The key feature of farming contracts is that they provide a framework for developing a relationship between farmers and processors. Contracts tend to work better where markets are stable and greater demands for quality and coordination exist in the value chain. Contract farming is a relatively new development in Viet Nam. The concept of contract farming is strongly supported by the Government. This support includes decision on contract farming which regulates the mechanisms and policies for promoting the consumption of agricultural products through signed contracts between enterprises and farmers and which promotes cooperation between the “four houses” state, farmers, research and enterprises. This support for contract farming is linked with government support for the development of “new cooperatives” to organize smallholder production. As with any relatively new organizational system, contract farming systems have been both successful and unsuccessful.

Four of the key issues will have an impact on the success of contract farming systems in Viet Nam in the future.

  • Clear and strong relationships between participants are necessary for effective contract farming.
  • Participants in the contracting system should be well organized.
  • Contract farming is not suitable for all products and situations.
  • Contracts should be made in appropriate forms.

Contract farming will inevitably play an increasing role in the agriculture sector in Viet Nam. If the benefits of this development are to be fairly and equitably distributed between participants in contract farming systems, contracts should be based on strong relationships, effective organization, and suitable contract forms.

Contract farming should be voluntary and be driven by needs rather than by the idea that contract farming is the only viable system for linking farmers and processors. The form of linkage depends on the conditions of the people and the environment and the unique situation of the area.

The bulletin is also available in Vietnamese.

The growing role of contract farming in agri-food systems development: drivers, theory and practice Paper 2005

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The interest in contract farming as a mechanism to coordinate linkages between farmers and agribusiness firms has increased considerably in the recent past. This paper reviews the changes in agri-food systems that are leading to tighter coordination of supply chains and discusses the theoretical basis for contract farming as a chain governance strategy.

It is argued that the need to minimise transaction costs in light of increasing uncertainty, asset specificity and market failures associated with changes in agri-food systems will continue favouring the intensification of contracting in supply chain management in food and agriculture.

The international experience reviewed suggests that, under appropriate enabling environments, the potential advantages of contracting for farmers and agri-business firms tend to outweigh the potential disadvantages. Potential socio-economic benefits are a further incentive to the promotion of contracts as a component of agribusiness development strategies. Critical success factors for sustainable contract farming are pointed out and issues for additional reflection are suggested.

The paper begins with a discussion on the nature and extent of recent changes in agri-food systems. Within this it looks at the role and influence of population growth, urbanisation, income growth, trade liberalisation, mobility of capital flows, changes in transport and logistics, advances in information and communication technologies and biotechnology.

The paper then sets out the theoretical basis for contract farming before turning to the potential advantages and disadvantages of contracting for agri-food chain actors (farmers and agribusiness firms) as well as critical success factors (as mentioned above).

Author da Silva, Carlos Arthur B.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 38 pp.
Primary Language English (en)
Region / Country Global
Keywords Contract Farming, Contract-Farming Supply Chain, Agribusiness
Related Resources
Contract Farming and Poverty Reduction: A Case of Organic Rice Contract Farming in Thailand Report 2005 English (en)

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The purpose of this report is to document the results of the econometric analysis in evaluating the profitability and profit efficiency of organic rice contract farming using the Thai dataset as a comparative case.

The present study employs the profit frontier methodology to assess the profitability and profit efficiency of the sampled Thai rice farmers and to discern the key factors contributing to the differences in estimated efficiency. This study also attempts to account for selection bias using a two-stage switching regression model. The estimated models are used for subsequent “counterfactual” simulations of profit and profit efficiency. In particular, this study is set out to test the following two hypotheses:

  1. Contract rice farmers are more profitable than non-contract rice farmers for comparable scales of operation; and
  2. Contract rice farmers are more (profit) efficient than non-contract rice farmers for comparable scales of operation.
Contract Farming and Poverty Reduction: A Case of Organic Rice Contract Farming in Thailand  -  English (en)

Contract farming in Indonesia: Smallholders and agribusiness working together Case Study 2004

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Smallholders tend to lack the access to capital, marketing information and institutional support that producers with larger landholdings enjoy, and as a result, face a number of barriers to their development. One possible mechanism for improving the livelihood of rural smallholders and providing them with the benefits of economic liberalisation is contract farming. Contract farming is an intermediate production and marketing system that spreads the production and marketing risks between agribusiness and smallholders, reduces transaction costs overcomes market imperfections. Through contractual arrangements, agro-industry can assist smallholders to shift from subsistence or traditional agriculture to the production of diversified, export-oriented, higher-value products. This not only has the potential to increase the incomes of contracted smallholders but can also have multiplier effects for the wider rural economy.

Positive evaluations of contract farming generally indicate smallholders either benefit from contracts in terms of enhanced profits or leave them. Not only are there benefits in terms of improved access to markets, credit and technology, but contract participation can also provide improvements in risk management (as there are assurances their product will be purchased at harvest); increased family employment opportunities; and greater cooperation with government and agribusiness, which may lead to future beneficial partnerships and programmes. Also, indirectly, these contractual arrangements can lead to the empowerment of women and development of a successful commercial culture.

However, contract farming is not without its criticism, particularly as contractors tend to favour larger growers and hence poorer growers may be left out of the development process. There is also the potential for ‘capture’ of smallholders within contracts; the narrowing of local markets as contracted production squeezes out local food production; and deteriorating contract terms for smallholders.

This report presents the results of one Australian Centre for International Agricultural Research (ACIAR) sub-project in Lombok and Bali, Indonesia, which sought to identify opportunities for smallholder farmers to participate in contract farming, based on household surveys, and to determine policies to facilitate farmer entry into beneficial contractual relationships. The study concludes that there are a range of contractual types that can be mutually beneficial to both smallholders and agribusiness in Indonesia, and that more research in contracting is urgently needed. The commodity to be produced, the infrastructure and institutions available, and the capability of the smallholders influence the characteristics of a partnership arrangement. When developing contracts the following elements need to be included:

  1. Develop appropriate contractor groups (e.g. groups for seed rice, spatially diverse individuals for broiler chickens).
  2. Provide credit, inputs and technical and management advice in order to maximise productivity.
  3. Ensure smallholders repay loans to secure accountability and sustainability.
  4. Spread risk (price and yield) between smallholder and firm.
  5. Develop and implement quick and transparent payment systems.
  6. Allow contractors and contractees to come and go from the contract and allow the contract to evolve over time as capability, institutions and infrastructure develop.

Given the benefits of contracting in terms of greater returns to capital and increased demand for labour, policy makers in Indonesia should view these contractual relationships in a positive light and seek mechanisms to expand these types of interactions between multinational corporations and smallholders.

Author Patrick, I.
Publisher Australian Centre for International Agricultural Research (ACIAR)
Number of Pages 88 pp.
Primary Language English (en)
Region / Country Global, Asia, South-eastern Asia
Keywords Contract Farming, Risk Management, Supply Chain, Agribusiness Linkages
Related Resources
Overview of Smallholder Contract Farming in Developing Countries Paper 2002

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Market liberalisation raises a number of issues from a poverty alleviation standpoint. It is clear that changes in patterns of agricultural production are occurring on a global basis in terms of composition of production. However, it is not clear who will benefit from these changes. There is a risk that smallholders in developing countries are becoming more marginalised and being left out of the increases in wealth arising from liberalisation of domestic and international markets.

The focus of this paper is contract farming, which it argues can bring potential benefits to smallholders by providing access to new markets and by providing opportunities for employing underutilised resources, particularly labour. However, such benefits may bypass smaller farmers as contracts flow to larger farmers and, in addition, there may be undesirable second-round effects from such contracting through impacts in local markets for food and farm inputs. This paper aims to understand how contract farming may alleviate poverty amongst smallholders.

Direct benefits from contracting accrue to smallholders from improved access to markets, improved technology, better management of risk and opportunities for employment of family members. Indirect benefits occur from empowerment of women and increased commercial acumen on the part of smallholders. Contract farming has the potential to improve the welfare of smallholders however it is not a sufficient condition for such improvement. Smaller farmers can be excluded from contracts because of selection bias by agribusiness firms awarding contracts to larger farms, be adversely affected by the second-round effects of contracts on incomes and prices and suffer from narrowing of markets that lie outside of contracts. Institutional developments that might ameliorate this type of exclusion are anti-trust legislation, policies to directly improve the contracting environment, policies to address specific problems smallholders face in entering contracts and participation by NGOs in contract facilitation.

Linking Agribusiness and Small-Scale Farmers in Developing Countries: Is There a New Role for Contract Farming? Article 2002

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The premise underlying this article is that changes in the food and agriculture markets (the so-called industrialisation of agriculture) have influenced the need for higher levels of managed coordination and have led to issues for developing countries. For example, the need to control for high perishability and safe handling involves specialised production, packing techniques and also investment in research, development and marketing, which small and medium-sized enterprises cannot easily afford.

This article examines a new role for contract farming in developing countries in the light of the industrialisation of agriculture and the globalisation of world markets. It starts by reviewing the changing nature of agriculture and why it has paved the way for a ‘re-emergence’ of contract farming or contractual relations in developing country agriculture. It notes that in developed countries, contracts have almost become a standard feature of agriculture and are now once more a feature in developing countries.

The article also highlights the theoretical arguments for the introduction and growth of contract farming in developing countries since the early 1960s, and briefly summarises the experience with contract farming. A theoretical rationale for contracting in developing countries is developed on the basis of adopting new institutional economic theory for the purpose of matching governance forms to market failure problems and transaction characteristics.

The next section discusses the benefits and disadvantages for the various players of such contractual relations and, finally, the aspects of contractual relations that would require attention to ensure the success of future ventures between agribusiness (private or state sponsored) and smaller growers are discussed.

Author Kirsten, J and Sartorius, K
Publisher Carfax Publishing
Number of Pages 27 pp.
Primary Language English (en)
Region / Country Global
Keywords Agribusiness, Contract Farming, Agricultural Development
Related Resources
Contract farming: Partnerships for growth Book 2001

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Contract farming has been in existence for many years as a means of organizing the commercial agricultural production of both large-scale and small-scale farmers. Interest in it continues to expand, particularly in countries that previously followed a central planning policy and in those countries that have liberalized marketing through the closing down of marketing boards.

This guide describes in detail the general modus operandi, internal functions and monitoring mechanisms of contract farming. It aims to provide advice to managers of existing contract farming companies on how to improve their operations and to companies that are considering starting such ventures on the preconditions and management actions necessary for success. It also gives guidance to government officials seeking to promote new contract farming operations or monitor existing operations.

The advantages for farmers are clearly explained and also the problems they face. Different models of contractual arrangements are described, e.g., centralised, nucleus estate, multipartite, informal and intermediary, and contract formats and specifications are reviewed. Advice is also provided on coordinating production, managing the agronomy and farmer-management relations.

Equity and Efficiency in Contract Farming Schemes: The Experience of Agricultural tree Crops Paper 2000

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This paper reviews the experience of contract farming and outgrower schemes for five agricultural tree crops: cocoa, rubber, palm oil, coffee and tea. The primary objective of the paper is to draw lessons from this experience to inform similar schemes with tree crops. The paper asks two main questions: how does contract farming work and who benefits? The answers to these questions are based on a twenty-day review of the literature. They are therefore necessarily partial and intended to form the basis for further research.

Contract Farming Resource Centre Website English (en)

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Contract Farming Resource Centre  -  English (en)

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