They have shown that in recent years the agricultural landscape has been changing dramatically. In the current changes that affect the agricultural sector, Contract Farming has emerged as one of the significant models that try to establish the relationship between farmers and the companies which buy their products. In its broadest sense, contract farming involves a bargain where and when farmers commit to selling a specified amount and kind of produce at the agreed price, usually to agribusiness folks or food processing firms. This arrangement gives the farmers ready markets for their products and in turn the buyers are able to get supplies of raw materials. However, the practice is not devoid of certain difficulties, issues and advantages. As a result, within this blog post, we will focus on the business model as a contract farming, as well as its benefits and drawbacks, the ways it is implemented, and its implications for the sphere of agriculture.
A Beginner’s Guide to Contract Farming
In its broadest sense, contract farming is a form of commercial agriculture where farmers cultivate crops for a trader under an agreement. The specific aspects of the contract usually involve portions of the product that are to be delivered, the quality of the produce, and the cost and time of delivery. The buyer, who is usually an agribusiness, processing company or export firm, offers a structure for the production process in which they may contribute seeds, fertilizers, pesticides and, in some cases, technology in the form of cultivating tips.
The buyer may also subsidize other costs from the farmers, for example, by giving them credit for the purpose of acquiring the inputs. In return, the farmer commits to supply the company with the produced crops once harvested at an agreed price, regardless of market conditions. It offers rewards and guarantees to the two entities, namely that farmers and producers will receive financial security and stability while consumers, in turn, will acquire a constant and standardized supply of produce.
Contrary to its perception as a new business model of agricultural operations, contract production has its origin in the historical form of agricultural arrangements where producers and buyers agreed on certain modalities of production based on their self-interest. Post this phase, the process of contract farming rose to cover the domestic as well as international markets; however, it provided a more defined and professionally worked-out modality of farming agreements.
How Contract Farming Works?
Contract farming is done in several ways, which include arrangements known to differ with the crop produced, the buyer, and the zone of farming. The most common forms of contract farming are:
- Production Contracts: Here the farmer tries to grow a crop or a product for the buyer and in accordance with the specifications that the latter may wish to set. The buyer can supply the seeds, inputs and even technology while the farmer supplies the fruits at some agreed price at the time of production. Ideal for high value input crops including vegetables, fruits and flowers that should meet certain quality and standards.
- Marketing Contracts: earner plants crops that he or she wants to plant or based on the prevailing market forces but exercises a contractual obligation to sell to the buyer at a previously agreed price. The buyer may offer support towards the marketing of the product or offer support in the selling of the product in retail markets. Marketing contracts are much different from production contracts because they do not give the producer as much control over what they can produce by specifying the crops that they must grow.
- Integrated Contracts: They are more elaborate contracts in which the buyer, besides acquiring the produce, may also manipulate some factors of production. This could include factors of production, risk-bearing activities or even assurance of market for the final product at the time of harvest. Integrative contracts encourage farmer–buyer cooperation more than arm’s length contracts since the two parties get to work closely, leading to more effective cooperation.
- Outgrower Schemes: In outgrower arrangements, small farmers are contracted by larger firms to produce given crops or cultivate given acreage. A large firm may provide the necessary inputs and extend training to the farmers and in return expect the farmers to sell back their produce to the firm. This model is prevalent in most Developing countries particularly there is contract farming arrangements between agribusiness firms and smallholder farmers for production of export crops.
Advantages of Contract Farming
- Guaranteed Market for Produce: As a result of contract farming, farmers are in a position where they have a ready market for their produce, as the buyer will have agreed on earlier. As opposed to usual farming practices, through which farmers have no means of controlling their selling prices or the demand for crops, contract farming guarantees the sales of produce. This is especially important for smallholder farmers who may rarely be afforded direct access to markets or exposed to highly fluctuating market prices for their crops.
Furthermore, buyers give detailed information in regard to the quantity and quality of production needed hence helping the farmer to organize and schedule himself to meet the demands. Once farmers are assured of the demand in the market, they can improve on the fertility of the soils knowing that whatever they produce will find a market.
- Access to Credit and Inputs: They usually include financial assistance from the buyer to finance the production inputs by the contract farmer. Banks buy the produce from farmers and offer inputs such as seeds, fertilizers, and pesticide at a concede, hence explaining why costly capital is not a major issue for most farmers. This credit can be important to farmers who would not be able otherwise to afford these inputs.
Furthermore, buyer credit is also an option because buyers offer credit or advance to farmers to cater for various farming expenses such as labor, irrigation and equipment. This helps the farmers to feed many people and increase production of crops by avoiding the risk burdens to fully rest on them.
- Technical Support and Knowledge Transfer: Most buyers advise farmers on how to produce more and better crops technically. He provides counsel on various aspects of farming in the modern world, crop pests control and management, water use and application, and management of crops after their harvest. The knowledge transfer can go a long way to enhancing the yields and the quality of produce as well as income obtained by the farmers.
In some cases, agribusinesses also provide training programs that help farmers adopt new technologies, such as precision farming tools, climate-resilient crops, and efficient water management practices. Such training programs can improve farmers’ training and competitiveness in the national and international markets, respectively.
- Risk Mitigation: One of the largest threats addressed by farmers in the field of agriculture is still the price risk. It is possible for them to avoid such risk through contract farming, which determines the price of the produce to be provided by the farmers. Further, getting into alliances with large-scale agribusiness companies may hold some risks of market demand shifting off from farmers.
To buyers, contract farming gives them a constant supply of quality raw material hence they avoid issues of shortage of input or high priced inputs. For instance when  seasons are unfavourable, or there are other forms of natural disasters, the contract farmers may easily meet the demands of the buyers since they have quality seeds and inputs.
- Increased Income Potential: As contract farming provides assured markets and sometimes higher prices for quality produce, farmers’ income can be considerably enhanced. They also may gain economies of scale in the event they increase production under contract farming agreements with others. When building new relationships with buyers, and when the products that they offer meet certain quality standards, they may be able to ask for better terms or better prices for their products.
- Better Quality and Standards: Purchasers, in other words, consumers, normally expect a steady, satisfactory stream of their produce. Thus, farmers are motivated to upgrade their farming methodology according to the requirements specified in the considered contract. The outcome of this can be improved quality of the produce, which means new markets as well as export markets for the farmers.
Measurement attributes may include size, colour, ripeness or packaging which may be vital in marketing in high value markets especially for exports. At times farmers can also sell in premium markets, for instance the organic or fair trade certified market where there are higher returns since consumers are willing to purchase quality produce.
Summary
Thus, in the development of the contract farming system, its advantages for farmers and agribusiness firms can be a means of changing the livelihood of the farmers, their financing, and technology. However, for it to be most effective, one has to work hardest to ensure that the balance between the corporate crop farmer and the smallholder farmer is well achieved. Thus, further improvements in the results, such as reducing inequity, increasing transparency, and making the process more sustainable, could make contract farming one of the pillars of future agriculture.
