From Wikipedia, the free encyclopedia - View original article
Contract farming involves agricultural production being carried out on the basis of an agreement between the buyer and farm producers. Sometimes it involves the buyer specifying the quality required and the price, with the farmer agreeing to deliver at a future date. More commonly, however, contracts outline conditions for the production of farm products and for their delivery to the buyer’s premises. The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality standards and delivery requirements of the purchaser. In return, the buyer, usually a company, agrees to buy the product, often at a price that is established in advance. The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with land preparation, providing production advice and transporting produce to its premises. The term, “outgrower scheme”, is sometimes used synonymously with contract farming, most commonly in Eastern and Southern Africa. Contract farming can be used for many agricultural products, although in developing countries it is presently less common for staple crops such as rice and maize.
Contract farming has been used for agricultural production for decades but its popularity appears to have been increasing in recent years, The use of contracts has become attractive to many farmers because the arrangement can offer both an assured market and access to production support. Contract farming is also of interest to buyers, who seek supplies of products for sale further along the chain or for processing. Processors constitute the main users of contracts, as the guaranteed supply enables them to maximise utilization of their processing capacity.  Contracts with farmers can also reduce risk from disease or weather and facilitate certification, which is being increasingly demanded by advanced markets.
Although contract farming must first and foremost be considered as a commercial proposition, it has also come to be viewed as an effective approach to help solve many of the market access and input supply problems faced by small farmers.  A guide published by GIZ in 2013 seeks to advise on ways in which contract farming can be developed to maximise such benefits for smallholders in developing countries.  Effective linkages between companies and thousands of farmers often require the involvement of formal farmer associations or cooperatives or, at least, informal farmer groups. However, empirical evidence of the best way of achieving this is not yet available. 
Eaton and Shepherd  identify five different contract farming models. Under the Centralized model a company provides support to smallholder production, purchases the crop, and then processes it, closely controlling its quality. This model is used for crops such as tobacco, cotton, sugar cane, banana, tea, and rubber. Under the Nucleus Estate model, the company also manages a plantation in order to supplement smallholder production and provide minimum throughput for the processing plant. This approach is mainly used for tree crops such as oil palm and rubber. The Multipartite model usually involves a partnership between government bodies, private companies and farmers. At a lower level of sophistication, the Intermediary model can involve subcontracting by companies to intermediaries who have their own (informal) arrangements with farmers. Finally, the Informal model involves small and medium enterprises who make simple contracts with farmers on a seasonal basis. Although these are usually just seasonal arrangements they are often repeated annually and usually rely for their success on the proximity of the buyer to the seller.
Numerous studies have been conducted on contract farming ventures and many are listed in FAO’s Contract Farming Resource Centre. The Asian Development Bank Institute (ADBI) in Tokyo has conducted a series of case studies in selected Asian countries to assess the conditions for benefits to be achieved by marginal rice farmers. In Lao PDR, the research suggested that contracted farmers earned significantly higher profits than non-contracted farmers. This facilitated the transition of subsistence farmers to commercial agriculture, offering potential to reduce rural poverty. A study in Cambodia on organic rice for export assessed the effect of contract farming on farmers’ performance. This suggested that younger and more educated farmers with larger families and fewer assets were more likely to join the contract. However, farmers with access to good road communications often left the contract, indicating that contract farming had helped them to develop into independent farmers.
As with any contract, there are a number of risks associated with contract farming. Common problems include farmers selling to a buyer other than the one with whom they hold a contract (known as side selling, extra-contractual marketing or, in the Philippines, “pole vaulting”), or using inputs supplied by the company for purposes other than intended. From the other side, a company sometimes fails to buy products at the agreed prices or in the agreed quantities, or arbitrarily downgrades produce quality.
The existence of an adequate legal framework is thus crucial for the successful implementation and long-term sustainability of contract farming operations. A system of law is essential to assist farmers and their buyers in the negotiation and drafting of contracts. It is also important to protect them from risks that may occur during contractual execution, such as abuse of power by the stronger bargaining party or breach of contract. Strengthening farmer organisations to improve their contract negotiating skills can redress the potential for subsequent misunderstandings.  Different countries have enacted policies and legislation to ensure fair contractual practices and offer remedies for dispute resolution. A “Legal Guide on Contract Farming” is being developed in 2013-14 by the International Institute for the Unification of Private Law (UNIDROIT) in partnership with FAO.
Even apparently successful contracts from a legal point of view can face other difficulties. For example, family relationships can be threatened. Work for contracts is often done by women but the contracts are invariably in the name of the man who also receives the payment. Men attend meetings and training courses but women often get no training. Land used by women for food crops or commercial production may be taken over for contract production.  This can affect not only food production but also the status of the women. Contracts can break down because of poor management by the company or as a result of unrealistic expectations about the capacity of farmers or about the yields that can be achieved. This has been a particular problem with recent attempts to promote contract farming for biofuel crops. 
Contract farming has to be commercially viable. To maximise profitability companies need to choose the best available farmers. Once suitable farmers have been identified it is then necessary to develop trust, as contracts will only work when both parties believe they are better off by engaging in them. To achieve this requires a willingness to collaborate and share information. Disagreements over product grading, for example, can be avoided by providing clear, simple specifications in a contract and by ensuring that farmers or their representatives are present when the produce is graded. Late payment can immediately cause a breakdown of trust and must be avoided. Contracts should be flexible to take into account the possibility of extreme events such as high open market prices or bad weather. Finally, however hard the parties try, disagreements are inevitable. Contracts should ideally make provision for arbitration by someone acceptable to both the company and the farmers.