Contract farming is one of many issues that may seem obviously sensible to some, but truly controversial to others. It may or may not fall within ‘inclusive business’ depending on context.
This agriculture group can act as a forum for debate and a way to get a new perspective on common projects and problems. So we want to share a debate started at our team meeting in Dhaka, when Nisha Dutt (BIF Country Manager in India) and I discussed contract farming.
Contract Farming is defined by the FAO “as 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”. For further details visit the Contract Farming Resource Centre at http://www.fao.org/ag/ags/contract-farming/index_cf/en/
In Malawi, Contract Farming is largely seen as beneficial to the smallholder. As this report on Contract Farming in Malawi shows it “enables smallholder farmers to sustainably access inputs, technologies, information, agronomy support and markets, resulting in higher farming returns and contributing significantly to GDP and export growth.”
BIF is supporting a local biscuit manufacturer in Malawi who is seeking to purchase raw materials directly from smallholders in the local area. It is likely that a contract farming mechanism will be put in place to facilitate this process. The farmer stands to gain a market for their crop, improved productivity through extension services and the provision of inputs, as well as a guaranteed price for their produce according to quality specification.
It seems an example of a win-win: overcoming some of the biggest challenges for farmers (investment costs, access to inputs, market uncertainty) and some of the biggest challenges for agro-processors (uncertain quantity and quality of supply).
Despite the positives that Contract Farming in Malawi displays, the BIF team in India have found evidence against the use of Contract Farming as a mechanism with which to engage smallholders. Nisha tells us more below.
“Contract Farming as a practice in developing nations, no doubt has its place as it provides economic security to smallholder farmers. The prevalence of this practice can also be attributed to the fact that debts are soaring, fertilisers and input costs are rising and agriculture is more and more seen as an unviable venture.
But on the flip side, one problem is that the smallholder and marginal farmers that need to benefit are the very ones being left out. It has been observed that there is a bias towards contract farming arrangements with medium/large farms. Some of the reasons for not working with smallholders are that the transaction costs for corporates are high, quality standards cannot be assured, leading to high rates of product rejections. Despite the promise of the contract farming model, it does not solve these constraints. Also, the smaller farms are often fragmented and not organised in any legal structure making it difficult for the larger firms to contract with them and means there is no legal recourse. As a result, the small/marginal farmers often get integrated in the formal agri-value chains through informal contracts with large/medium farms, that usually intermediate between the large corporate and the small farmers.
What happens when small/marginal farmers do integrate into contract farming arrangements? Several studies suggest that even then, they are only marginally better off in the long run. Since smallholders and marginal farmers have lower bargaining power to begin with, they are from the start vulnerable to the coercive practices and a bad deal. Additionally, once farmer makes the investment in technology, new crop practices etc. to fulfill the contractual requirements, it becomes a captive model to certain extent, whereby the cost of switching is too high.
In conclusion, there is a lot that needs to be done by government/regulators to bring discipline in these markets and in ensuring that the benefits of Contract Farming are well-realized and it is mutually beneficial to both the parties. Prima facie, there is a merit in the model, but is this the panacea for most problems related to agriculture? The jury is still out on the overall benefits and long term impacts of this model.”