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 more

stable incomes

Reduced risk of product price volatility

Facilitated access to finance (in-kind or

via bank)

Inputs can be provided

Services can be provided

(mechanization, transportation...)

Technological assistance can be

provided

Improvement in the production and

management skills

Diversification toward higher value

crops

Advantages of contract farming for

agribusiness firms:

Cost efficiencies in farm product

sourcing

Increased access to land

Stability in the supply of agricultural

products

Improved raw material quality and

safety Improved conformity to trade

and safety standards

Contract 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 Sherzad

2

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 parties

The 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 Sherzad

3

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 Sherzad

4

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 company´s 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 should

share similar goals when

entering into a contract.

• Legal framework -

contracts should comply

with essential legal

requirements.

• Clear documentation -

contracts should be in

written form, so as to

promote in a transparent

manner, the terms of the

agreement and the means of

their 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 FAO’s Contract Farming

Resource Centre).

• Readability of contracts-contracts

should be written in a clear and coherent

language, using a legible typeface and

words that are farmers can easily

understand.

• Due attention and review -buyers

should grant farmers a sufficient period

of time, depending on the case, to review

the draft contract and seek legal or other

advice before signing.

• Disclosure - farmers and buyers make

available, all information necessary for

the conclusion of the agreement and be

transparent in all their dealings.

• Transparency in price determination -

prices and payment constitute a key

element of any contract. These points

need to be clearly understood and agreed

upon by farmer and buyer.

• Transparency and fairness in clauses

relating 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 clauses

related 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 majeure

and 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 Sherzad

6

• Prevention of unfair practices in

buyer - farmer relations - contracts

should not prohibit or discourage

farmers from associating with other

farmers to compare contractual

clauses or to address concerns or

problems.

• Honouring contractual terms -

farmers and buyers are expected to be

loyal to each other. Mutual trust and

respect are important factors for the

success of contract farming

operations.

• Open dialogue - dialogue between

farmers or their representatives and

buyers is essential for the stability of

contract farming operations.

• Clear mechanisms to settle

disputes - farmers and buyers agree

in the contract on a neutral third party

to assist them in the event of

disputes.

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 Sherzad

Photo © FAO/Shukrullah Sherzad

7

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 training

materials in local

languages. (such as

briefs, leaflets and other

communication

materials). FAO has

materials that can be

drawn upon for this

purpose.

Engage trusted, respected

farm community leaders

in awareness raising

activities.

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. FAO´s 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 Sherzad

In 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.).

http://www.fao.org/ag/ags/contract-farming/index-cf/en/

FAO (2012): Guiding principles for responsible contract farming operations.

http://www.fao.org/docrep/016/i2858e/i2858e.pdf

FAO (2013): Contract farming for inclusive market access. http://www.fao.org/3/a-i3526e.pdf FAO (2015):

Inclusive business models. Guidelines for improving linkages between producer groups and buyers of

agricultural produce. http://www.fao.org/3/a-i5068e.pdf

FAO Sub-regional office for the Caribbean (2016):Technical brief # 17: Contract Farming for Improved

Farmer-to-Market Linkages

GIZ (2013): Contract farming handbook. A practical guide for linking small-scale producers and buyers through

business model innovation: https://www.giz.de/fachexpertise/downloads/giz2013-en-contract-farming-

manual.pdf

UNIDROIT/FAO/IFAD (2015): Legal Guide on Contract Farming. http://www.fao.org/3/a-i4756e.pdf

i This technical and policy brief has been developed by Shukrullah Sherzad (FAO SAP Agribusiness Value Chain Specialist) in

contribution with Carlos A Da Silva (Contract Farming Specialist). November 2016.

© F

AO

, 201

6

I66

00

EN/1

/12

.16