Magazine article International Trade Forum

Contract Farming: Opportunities and Risks

Magazine article International Trade Forum

Contract Farming: Opportunities and Risks

Article excerpt

Agri-food production and distribution systems are rapidly changing. One of the momentous forces driving this is world population growth. World population is expected to reach 9 billion by 2050 and fertile farmland is increasingly becoming an attractive asset.

In many countries small farmer landholdings are quickly fragmenting. In India, the average size of a farm was 2.2 hectares in 1970. Today it is only one hectare. On the other end of the food chain, organized retail is expanding and consolidating.

For governments and technical agencies, such as ITC, one of the challenges is to identify income generating activities to improve the livelihood of small producers holding ever smaller patches of land, and to provide other needed services such as access to credit, technological know-how and market information.

One possible avenue for establishing farm-firm linkages is contract farming. It is not new but raises serious questions, both for farmers and policymakers, in the context of recurring food crises and land shortages. Farmers will increasingly be invited to sign these contracts, which offer both benefits and disadvantages. Contract farming often needs to be properly regulated by governments, and farmers should be advised on its advantages and risks.

A farm-firm arrangement

Contract farming (also called 'production contract') has been defined as a fixed-term arrangement between a farmer and a contractor, entered into before production begins, under which the farmer agrees to sell or deliver to the contractor a designated crop on identified acres in a specified manner, and the contractor agrees to pay the farmer a price according to a specified method and at an agreed time. Contract farming is not exclusively a development model, but farmers should be informed and educated on such contracts as they become more prevalent. Tomatoes, cucumbers and poultry are typically produced via contract farming.

Advantages and risks

Contract farming provides farmers with production inputs (such as seeds and fertilizers), quality control, and advice on new production methods. Prices are fixed in advance and credit facilities may be associated with the contract. Above all, contract farming can make agriculture remunerative.

However, farmers make a long-term investment, for example by building a special drainage system, over a short term contract. …

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