Session 16:

Understanding Contract Farming and Appraisal

CAPACITY BUILDING OF SMALL FARMERS IN ENTREPRENEURSHIP DEVELOPMENT AND MARKET ACCESS TCP/PHI/3402

What is contract farming? Contract farming happens when individual or a group of farmers enter into formal agreement (written) informal (verbal) arrangements with buyers for marketing of their products.

Contract farming is an agricultural production carried out according to an agreement between a buyer and a farmer, which establishes conditions for the production and marketing of farm products

Some successful contract growing in the Philippines

•Chicken (broiler) production – with poultry integrators

•Chicken egg production – with poultry integrators

•Hog production – with feed millers and meat processors

•Pineapple production – with big pineapple processors

•Banana production – with banana exporters •Cassava production – with ethanol and feed processors

Advantages of contract farming

1. Encourage small-scale producers to diversify into new enterprises

2. Can lead to improved supply of production inputs provided by the contractors

3. May help farmers to get credit

4. Potential buyers can provide extension

5. Offers opportunities to reach new markets (even export market)

6. Can help farmers learn new production methods and technical skills, improving productivity and profitability

Challenges of contract farming

1. Changes in weather, pest and diseases might make it difficult to supply the amount and quality of output agreed in the contract

2. If contract requires more-capital-intensive production, the famers may be required to barrow money

3. An individual farmer may find it difficult to supply the quantity required by the buyers on his own, and other farmers may not want to join

4. The farmer is not free to run his farm as he wants. He must farm according to the terms of the contract.

5. The farmers might not able to sell all their produce if it does not meet the quality standards set in the contract

Tips to overcome the challenges of contact growing

1. Small scale farmers can work/group together in order to increase their power to negotiate the terms and conditions

2. Farmers can work/group together to supply larger quantities of produce (compact farming)

3. Groups are likely to find it easier to share the machinery for production, hence reducing the need to borrow

4. Farmer groups can get grants and loans than individual farmers

5. Farmer group can help farmers in the group if they are struggling to keep up with the terms of contact

Contract details:

Components Description

1. Contract duration

2. Quality standards

3. Production limits

4. Cultivation practices

5. Product delivery arrangements

6. Pricing arrangement

7. Payment procedures

8. Arbitration terms

9. Insurance arrangements

Contract Appraisal

-evaluation, reviewed or assessment of the contract to determine the its strengths and weaknesses.

Negotiating Contracts

•Negotiation is a process whereby two parties discuss the issue an arrive at an agreement.

•Negotiation usually requires both parties to compromise, where each will give up something and hold on to something in order to come to an agreement

Tips for successful negotiation

1. Things you need to know•Range of buyers available •Demand and supply of crops•Market prices and conditions •Break-even and cost of production•Marketing costs•Lowest price for products

Tips for successful negotiation

2. Skills and abilities you need to have

•Ability to say “No”•Listening skills •Focus on the end goal•Self control

Thank you and God bless you more.