Academic journal article China: An International Journal

The Problem of Low Contract Compliance Rate in Grain Transactions in China

Academic journal article China: An International Journal

The Problem of Low Contract Compliance Rate in Grain Transactions in China

Article excerpt

INTRODUCTION

Contract farming has emerged between processors and farmers in China since the 1990s. The Chinese government encourages partnership between leading enterprises (LE), the big agricultural commodity processing firms and farmers who are producers of such commodities. With the goal of increasing farmers' income and improving agricultural productivity through agricultural industrialisation, the government has helped to establish and promote contract farming systems through a mutually benefiting mechanism between LEs and farmers.

However, the lack of contract compliance has become a serious problem, as the partnerships often break down because of defaults mostly from the farmers' side. Living and operating in the small-scale agricultural economy, Chinese farmers are unfamiliar with modern agricultural systems and do not take contracts seriously. When the market price rises above the contract price, farmers tend to sell their contracted commodities to the market instead of their partners (i.e., the LEs); when the market price falls below the contract price, farmers may sell so much of their produce to the LEs that it exceeds their actual farm output through buying from the market. As a result, the LEs take on all the risk and their interests are often harmed.

This situation not only has a negative impact on the development of contract farming in China but also may impact national food security when the low contract compliance situation occurs in the grain supply chain. The leading food firms, including state-owned and big private food processing and trade enterprises, play an important role in food processing and marketing in China. When the relationship between farmers and LEs breaks down, food production fluctuates, challenging the already fragile food security situation.

This article addresses the problem of low contract compliance, a problem that is not unique to China. (1) The objectives here are to find the actual causes for the low contract compliance rate in China's grain supply chain and to provide some feasible measurements to raise it. Grain processors in China can be categorised into two groups. One group is the LEs, which establish their grain production bases by signing purchase contracts with large numbers of farmers who have farmlands. The LEs often provide free high-quality seeds and technical services to contracted farmers for production. The other group is individual grain merchants (IGM), whose scale is small and who often use backward processing technologies. There are a large number of IGMs in China who do not use contracts but depend on open markets instead, in the sense that during harvest season, they go to farmers' homes to offer a price slightly higher than the LEs' contract price. IGMs are strong competition for the LEs.

LITERATURE REVIEW

Previous research has concentrated mainly on the issues of contract compliance in developing countries or transition economies. In a case study of Mexico, Runsten concludes that contract design, choice of the contract parties and risk of funding arrangements are important factors attributing to contract compliance. Gow, Streeter and Swinnen (2) analysed the "self-enforcing" arrangements or "internal" private enforcement mechanisms using Juhocukor a. s., a Slovakian sugar processor, as a case study of an agri-business in a transition economy to demonstrate that "internal" private contract enforcement mechanisms can have a significant positive effect on output and efficiency for contract parties operating in an environment characterised by the absence of or ineffective public enforcement of institutions. Based on analyses of contract farming globally, especially in developing countries, Eaton and Shepherd (3) found that the success of contract farming depends on many factors such as reasonable contract design, provision of education and services, adequate law provisions and enforcement, and accessibility to agriculture technology and infrastructure. …

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