Contract Farming in Practice: An Overview

Impersonal and open-market transactions between actors in traditional agro-food systems based on price signals are replaced by rather controlled impersonal vertical coordination such as contract farming, because of the changes in market structure, consumer preferences and attitudes, technological improvements, and food safety issues. Recent sophisticated ideas like environmentally sound, sustainable agriculture, standards and regulations related to environment and health care are among the forces behind the fast growing of contractual relationship. Contract farming displays great variety in practice. The form it takes, attitudes and approaches of the partners are affected mainly by availability of other alternatives and the political, economic, and social structures at the local and national level, along with the specifications of the product. When evaluating contract farming applications and their outcomes in practice, it will be more illustrative to consider contractual arrangements in two main types as private contract arrangements and contract farming schemes. While the aims and the structure are almost similar, there are some important differences in detail. There are national and regional differences that have to be considered in related analysis and evaluations. Even though contractual relationship of the advanced agro-food system has many advantages, it also has inherent and implementation problems. The main problem is the weak position of the farmers in the contractual arrangements both in developed and developing world that is called as bargaining problem. Contract farming is not a panacea to solve all related problems of agricultural production and marketing systems. However, this way of coordination could be evaluated as a way of providing easier access production inputs and product market for the small-scale farmers. Contract farming also contributes to the development of a sound food industry. It might also be seen as a way toward or as a part of rural development and can be promoted to improve agricultural performance, especially in the Third World Countries. Contractual relationships are not only a distinctive feature of highly industrialized agro-food systems, but also a way of establishing an industrialized and developed structure. But, to obtain the advantages of contract farming, the necessary measures must be taken to trade off those disadvantages, such as the exploitation of small farmers and natural resources by domestic and foreign corporations and multinationals.