Contract Farming

Contract farming is farming under an agreement made between producers (farmers) and buyers. Rather than making all their decisions independently (albeit informed by the market and past observed behavior), as farmers did by default for thousands of years, in a contract farming situation, the farm is hired to produce a specific quantity of agricultural product, meeting certain specifications (fruit of a particular quality, for instance, or eggs of a certain size, though often the specifications will be much more specific than this). Often an acceptable time range of delivery is specified. In return, the buyer commits to purchasing the product and may pay some part of the price up front or commit to providing other support, such as technical information or advice in meeting the required specifications. An agricultural corporation may want carrots of a certain sweetness level or may provide contract farmers with information on the planting and care of their new hybrid crop. The contract may stipulate other requirements such as acceptable and unacceptable pesticides and other practices, organic certification, and so on. More involved than the relationship between producer and purchaser, the relationship between the contract farmer [Page 100]and the purchaser can be like that between a nanny and a parent. Contract farming is used for all types of agricultural products, including both those that will be sold as is and those that will be processed in some way.

Ideally, both parties benefit from a contract farming arrangement, which guarantees (barring calamities like natural disaster or bankruptcy) that supply and demand will be met at prices amenable to both. This provides a predictability to an industry that depends on historically unpredictable factors like crop yields. The assurance of the contract reduces risk for both parties, with the comparatively minor trade-off that one might miss out on an unusual opportunity—the farmer may harvest his crop at a time of scarcity, when he could have sold it for more than was agreed on, or the purchaser may pay at a time of plenty, when he could have found the same goods elsewhere for a much lower price. So long as the price agreed on is fair and profits both parties, the predictability and assurance offsets this risk, much as the security of low-risk investments offsets the lost opportunity of high returns.

Contract farming has become a common arrangement between farmers in developing nations or in poor areas of developed nations and buyers in developed nations. There are various benefits to both sides. The buyer may find that his dollar will go farther in developing nations than in developed ones—more than offsetting the cost of transport and the transaction fees of overseas business. The farmer benefits from improvements that the contract brings about, ranging from better irrigation facilities and other equipment to infrastructure improvements to the community, as the buyer builds or funds the building of new roads to accommodate transporting the crops. There are further transaction costs and expenses that are also reduced for a farmer who can deal in volume—selling mainly to one buyer, or to a handful of buyers, instead of to smaller local stores or directly to consumers.

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