Contract Farming Contract Farming (CF) refers to an ?· Box 1: What is contract farming? Contract Farming…

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Box 1: What is contract farming? Contract Farming (CF) refers to an agreement between a buyer and farmers for a specific quantity, quality, and date of delivery of agricultural products at agreed pricing conditions. Under farming CF agreement, farmers commit to provide agreed quantities of a specific agricultural product to the buyer, with the required quality standards on a agreed time. In return, the buyer agrees to purchase the product at agreed pricing conditions. In some cases, the buyer supports producers in land preparation or other farming operations, provides farm inputs and offers technology advice. Advantages of contract farming for farmers: Guarantee of a market outlet Promotion of increased and morestable incomes Reduced risk of product price volatility Facilitated access to finance (in-kind orvia bank) Inputs can be provided Services can be provided(mechanization, transportation...) Technological assistance can beprovided Improvement in the production andmanagement skills Diversification toward higher valuecropsAdvantages of contract farming for agribusiness firms: Cost efficiencies in farm productsourcing Increased access to land Stability in the supply of agriculturalproducts Improved raw material quality andsafety Improved conformity to tradeand safety standardsContract Farming For improved access to market and resources Contract Farming in the Pacific Islands Countries Globalization, urbanization, growing population pressure and technological developments have reshaped agri-food systems throughout the Pacific Island Countries (PICs). Households have changed their diet patterns toward less expensive imported and convenience foods. Imported foods with high sugar, salt and saturated fat content, have been linked to an increasing incidence of obesity, diabetes and other non-communicable diseases.Despite a growing number of commercial funds run by private investors, agriculture is largely reliant on small family farms. Small farmers typically have access to less than two hectares of land and depend on labour supplied by household members, using few other farm inputs. Smallholder production strategies characteristically comprise a mixture of root crops, vegetables, fruit and livestock for household consumption, surplus sales and gifts, supplemented by income from cash crops such as copra, cocoa, coffee and vanilla. Photo FAO/Shukrullah Sherzad2 Box 2: Potential pitfalls of contract farming: Breach of contracts by either partner Side-selling by farmers Delays in agreed payments to farmers and, Unequal power balance between partiesThe challenges of disadvantaged economic geography (including small market size and large distances between internal and export markets), poor marketing infrastructure, limited domestic value-adding opportunities and the increasingly high product quality requirements of supermarkets, inter alia, have reduced the competitiveness of PICs small farmers in domestic and niche export markets. Commercial Farm (La Lata Plantation), in Savaii, Samoa: During Contract Farming one-on-one infield training. Limited access to improved inputs (such as improved planting materials and labor saving machinery), the high cost of land and labour and the limited access to needed agricultural services (such as extension, finance and transport) further make small farmers vulnerable and exposed to the risk of exclusion from the more remunerative value chains. Photo FAO/Shukrullah Sherzad3 BOX 3: South Sea Orchids (SSO) Fiji South Sea Orchid assists village women to generate income through floriculture. SSO is a commercial orchid growing business in Fiji. The vision of the company is Fiji can develop a world class floriculture industry that could make a significant contribution to the livelihoods of our people. Growth in flower demand led the company to develop this Contract Farming operation, which in 2009 involved 270 women farmers working under contracts from their homes, which minimizes their production costs. SSO offers training to village women, assists them in seeking loans to start their businesses (shade houses and planting materials), seeks donor funds to help set growers in business and commits to buy 100 percent of the flowers produced, with payments to growers made monthly. This operation has been working successfully ongoing for several years. Source: Contract Farming workshop, Samoa, 2015- training materials/case study prepared by Carlos. A Da Silva (FAO Senior Economist) Close collaboration between farmers and buyers under win-win Contract Farming agreements (Box 1) can address some of the agriculture and food security challenges in PICs, addressing many of the production and marketing problems faced by small farmers and agribusiness firms. Contract Farming is a proven, workable mechanism for the coordination of transactions in agri-food supply chains. It is also a tool to promote the access of smallholder farmers to markets. Through CF, local farmers and food processors could improve the efficiency of their operations and thus contribute to increase the share of domestic markets for fresh and processed fruits, vegetables, coconut, cocoa, meat, dairy and staple foods, and could help PICs in import substitutions and food self-sufficiency (Box 3 and 4).Constraints such as unequal power relations between small farmers and large companies; side selling by farmers and the lack of legal enforcement mechanisms, can cause contracts to fail (Box 2). The FAO Guiding Principles for Responsible Contract Farming Operations can help ensure that contract farming works for the benefit of all partners and society at large. FAO stands ready to assist partners in the region in promoting contract farming (Box 4). Photo FAO/Shukrullah Sherzad4 BOX-4: Coconut Contract Farming Samoa Krissy Company Ltd (KCL) a subsidiary of Ah Liki Investment Limited is using CF with coconut growers in Savaii to produce coconut cream (Savaii popo, light cream, Fairtrade certified) and Palusami. The vision of the company is income generation and equality for the farmers and communities of Savaii. The motivation for KCL to sign CF was to have access to quality produces (organic and better cream), consistency in supply, and help the Savaii farmers in income generation and better livelihoods. The motivation for farmers to be involved in CF was improved access to market, regular income, better price for their produces (minimum prices + premium prices), access to equipment, access to transportation facilities and capacity building trainings. The formal CF agreement was signed with 30 coconut growers in 2012, in 2016 the number reached 122 in which 40% are women growers. KCL is looking in the long-term to include 100 more growers in CF agreement by 2017. All the coconut growers are small farmers (2-3 acres land) and produce only organic and Fairtrade certified coconuts. Under a simply designed CF contract, the company collects 1 000 coconuts fortnightly from the farmers, they need to meet the quality requirements (minimum size, not cracked, organic and Fairtrade certified) mentioned in the contract. Selling of part of the production to other buyers is allowed, in order for farmers to meet some of their daily household expenses. The company provides capacity building, transportation, a guaranteed market, better prices and on-time payment. Eventual break downs of the companys equipment, leading to interruptions in purchases, and difficulties by farmers to meet quality requirements are some of the challenges of this CF operation. To better organize, monitor quality, and avoid potential pitfalls of the CF agreement, the farmers are grouped in an association called Savaii Coconut Farmers Association. Source: Shukrullah Sherzad (FAO SAP Agribusiness value chain specialist), interview with general manager of Ah Liki Investment Ltd and Manager of KCL, 2016 -GUIDING PRINCIPLES: Based on analytical studies from around the world, FAO has compiled a set of 14 guiding principles that are conducive to responsible contract farming operations (FAO 2012). Discussed at FAO workshops and training sessions on contract farming in the Pacific, held in Fiji and Samoa in 2015 and 2016, the principles assist producers and buyers engaged in contractual relationships to promote good business practices and maintain an atmosphere of trust and respect. These principles are essential if contract farming is to prove effective and beneficial for both sides. These guiding principles include: Common purpose -farmers and buyers shouldshare similar goals whenentering into a contract. Legal framework -contracts should complywith essential legalrequirements. Clear documentation -contracts should be inwritten form, so as topromote in a transparentmanner, the terms of theagreement and the means oftheir enforcement.5 Box 5: How FAO can help At the policy level, advocacy for enabling policies and guiding decision-makers to establish a conducive and supporting environment, including the enforcement of laws and the development of appropriate regulatory frameworks Build a contract farming component into value chain projects Promote inclusive business models for the integration of smallholders into markets Function as a facilitator of contractual linkages between farmers and buyers Conduct training for government extension, service providers and NGOs in contract design, negotiation and mediation Provide access to a knowledge platform to disseminate experiences, success cases, lessons learned and contract samples or templates (see FAOs Contract Farming Resource Centre). Readability of contracts-contractsshould be written in a clear and coherentlanguage, using a legible typeface andwords that are farmers can easilyunderstand. Due attention and review -buyersshould grant farmers a sufficient periodof time, depending on the case, to reviewthe draft contract and seek legal or otheradvice before signing. Disclosure - farmers and buyers makeavailable, all information necessary forthe conclusion of the agreement and betransparent in all their dealings. Transparency in price determination -prices and payment constitute a keyelement of any contract. These pointsneed to be clearly understood and agreedupon by farmer and buyer. Transparency and fairness in clausesrelating to quality - contractors expect farmers to engage in production practices and procedures that are conducive to producing good quality products and following established standards. These should be clear and well understood by farmers. Transparency and fairness in clausesrelated to input supply and use - the contract should clearly stipulate which party will be responsible for supplying and applying farming inputs and may specify the timing of input applications. Fairness in risk sharing: force majeureand contractual flexibility- contracts should envisage the possibility of renegotiation in exceptional circumstances. They should also follow a principle of fair sharing of production and market risks among parties. Photo FAO/Shukrullah Sherzad6 Prevention of unfair practices inbuyer - farmer relations - contractsshould not prohibit or discouragefarmers from associating with otherfarmers to compare contractualclauses or to address concerns orproblems. Honouring contractual terms -farmers and buyers are expected to beloyal to each other. Mutual trust andrespect are important factors for thesuccess of contract farmingoperations. Open dialogue - dialogue betweenfarmers or their representatives andbuyers is essential for the stability ofcontract farming operations. Clear mechanisms to settledisputes - farmers and buyers agreein the contract on a neutral third partyto assist them in the event ofdisputes.FAO work on Contract Farming in the Pacific: FAO has been promoting responsible Contract Farming in the PICs through capacity building and direct technical advice. Trainings workshops targeting policy makers and key stakeholders were organized in Fiji and Samoa. Following the trainings workshops, in-field trainings for farmers and agro-processors were organized in the mentioned countries. Direct technical support has also been provided to a number of agro- processors and farmer groups in Samoa. Photo FAO/Shukrullah SherzadPhoto FAO/Shukrullah Sherzad7 RECOMMENDATIONS: 1 - Stronger focus on outreach efforts targeting farmers Specific initiatives are needed in order to better convey information on CF to this key group of stakeholders. CF dissemination roles already played in some PICs by the private sector, development organizations and NGOs will need to be expanded to target farmers more directly. This calls for: Preparation of trainingmaterials in locallanguages. (such asbriefs, leaflets and othercommunicationmaterials). FAO hasmaterials that can bedrawn upon for thispurpose. Engage trusted, respectedfarm community leadersin awareness raisingactivities.Commercial Farm in Samoa: Chinese cabbage/bok choy production 2 - Inclusion of CF as a subject in the curriculum of academic programs on agriculture and legal issues: It is important to engage with the local universities and technical schools that could develop context specific CF training materials and eventually organize seminars, guest lectures and related events, to the students. Legal professionals can benefit from information on agricultural contracts. FAOs publications on CF are freely available for use by these institutions. Some of these publications specifically target the legal profession. They can be made available to the local law schools and to the legal community, through their professional associations. 3 - Promote improvements in the legal and regulatory framework affecting CF: Agribusiness companies engaged in CF and those planning to do it equally have to deal with incomplete information on aspects of the legal and regulatory framework that may affect their contractual relationships with farmers. Uncertainties about contract enforcement mechanisms, dispute resolution, applicable law, remedies for contractual breach, excuses for non-performance, force majeure clauses in contracts and other related legal aspects are known to exist. Needless to say, farmers also have to deal with this same kind of uncertainties. Photo FAO/Shukrullah SherzadIn order to bridge this knowledge gap, an analysis of the legal and regulatory framework for CF in PICs needs to be developed. FAO, through its Development Law Service, could in principle offer technical assistance for this type of study. Since FAO has been an active partner in the preparation of the Legal Guide on Contract Farming", it is very well positioned not only to support the development of such an analysis, but also to work with legislators and policy makers in improving the enabling environment for CF in the region. 4 - Improve the coordination of efforts among FAO work on CF and ongoing agribusiness development initiatives in the region: Agribusiness development programmes and projects under execution by a range of NGOs and international development agencies in PICs encompass, among others, activities aiming at the promotion of smallholder access to markets, agri-food value chain upgrading, agro-tourism value chains development, institutional strengthening and agricultural productivity enhancement. All have in principle interfaces with the work of FAO in the promotion of CF as an agri-food chain coordination mechanism. Information sharing among key actors of these initiatives will thus be essential to promote the types of synergies that can further help CF adoption in the region. 5 - Identify national champions to promote CF: National champions from the public and private sector will be instrumental if CF is to be effectively promoted at the country level. It is important that CF becomes a visible, permanent theme within the agenda of agri-food chain organizations and in this respect the role of concerned professionals the CF champions is fundamental. For example: champions can establish a CF Interest Group, or similar arrangement, within their organizations. These interest groups could monitor CF developments nationally and globally and act both as advocates and references for dialogue as well as knowledge and information exchange. References and resources FAO Contract Farming Resource Center, CFRC, (search -contract examples, publication and manuals, etc.). FAO (2012): Guiding principles for responsible contract farming operations. FAO (2013): Contract farming for inclusive market access. FAO (2015):Inclusive business models. Guidelines for improving linkages between producer groups and buyers ofagricultural produce. FAO Sub-regional office for the Caribbean (2016):Technical brief # 17: Contract Farming for ImprovedFarmer-to-Market Linkages GIZ (2013): Contract farming handbook. A practical guide for linking small-scale producers and buyers throughbusiness model innovation: UNIDROIT/FAO/IFAD (2015): Legal Guide on Contract Farming. This technical and policy brief has been developed by Shukrullah Sherzad (FAO SAP Agribusiness Value Chain Specialist) incontribution with Carlos A Da Silva (Contract Farming Specialist). November 2016. FAO, 2016 I6600EN/1/12.16


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