Contract farming involves farmers supplying state intervention agencies with a certain quantity of a product on a certain date. The contract not only defines the type and quantity of the product to be supplied but also often lays down quality standards and guaranteed agricultural practices. The state agency, for its part, undertakes to buy the product at a previously agreed price and organises the sale of the product.
Before commencing contract farming, particularly under longer-term contracts, farmers need to carry out an in-depth analysis of production processes and costs and of sales opportunities for the product. Contract farming is particularly attractive to farmers in times of strongly fluctuating prices. In situations in which prices are relatively stable and producers have free access to the market, a good relationship with their customers and sufficient financial reserves, contract farming is not necessary.
Some countries operate state purchase programmes on the domestic market to improve food and nutrition security. In such cases, highly nutritional food is grown under contract to supply vulnerable groups of people in the short and medium term.
- Regulated and legally protected payment structures
- Monitoring and control system for the agricultural production processes supported
- Regulatory framework
- Constant market surveying and forecasting
- Clear and coherent political strategy and targets for policy-makers and public authorities
- Compatible regional and world trade law (WTO conformity)
- State intervention agency to buy the products
- Close cooperation and knowledge sharing with farmers' organisations
- Logistics and storage facilities
- Skilled / specialised personnel to man the respective institutions / provide the respective services
Possible Negative Effects
- If prices rise, farmers are unable to benefit as their prices are dictated in the contracts (risk of development of a black market and side-selling)
- If prices fall, the state incurs extra costs (risk of government debt)
- Discriminates against larger farms
- Restricts farmers’ entrepreneurial freedom of choice
- Limited sanction mechanisms when agreements are broken
- Loss of sales markets when contract expires