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Since the 1960s, agricultural production has moved towards contract farming in an attempt to lower both costs and risks of production while increasing quantities and both farmers and buyers’ profits. The authors of this paper have sought to determine and analyse the effect this move has had on the efficiency and returns enjoyed by both contract and non-contract or traditional farmers, and the conditions in which both processes are best practised.

Generally speaking, their findings indicate that both contract and traditional farmers are better off when contract farmers are growing high value agricultural products, while non-contract farmers continue to grow traditional, lower value agricultural products.

There are, however, a number of factors which impact upon this general conclusion, including the effect on local markets and the disparity in earnings between traditional farmers and contract farmers.

Contract farming in developing economies refers to the agricultural practice whereby participating farmers produce goods according to an ex ante agreement between a buying firm and farmers. There are three types of contract farming agreement:

  1. Market-Specification Contracts, where buyers commit to providing a market outlet for farmers under pre-established conditions, usually relating to price, sales quantity, quality and timing, while the contract farmer makes all operating decisions affecting production;
  2. Production-Management Contracts, where the buyer has more direct control over production management decisions such as land preparation, planting dates, seedlings planted, use of fertilisers and post-harvest management practices; and
  3. Resource-Providing Contracts where the buyer not only provides a market outlet, but also delivers important inputs such as seeds and plant-protection chemicals as well as technical assistance in using these inputs, and takes on major control and decision-making over production.

In this study, the authors concentrated on the Production-Management and Resource-Providing models of contract farming, both of which have been successfully utilised in the production of high value agricultural products in many developing economies around the world.

Their research found that contract farming does not necessarily lead to the exclusion of small farms from supply chains, despite some contract farming programs preferring to procure goods from large and low-cost farms. Importantly, it appears that productivity tends to increase throughout the whole supply chain when contract farming is introduced into it.

The authors have also sought to identify the type of farmers ie., whether those with high or low production efficiency – that are likely to join a contract farming program, and how this is likely to affect the position of the buyer and the farmers in it.

Clearly, the provision of technical assistance to contract farmers reduces the production costs of high value agricultural products, increases production efficiency and reduces risk for all concerned. However, with increasing numbers of farmers producing high value agricultural products (such as tomatoes, peppers and grapes) with a corresponding decrease in the production of lower value agricultural products (such as wheat, cereals and rice), the local cost of these staples tends to rise.

While this can benefit traditional farmers at the expense of their local customers, it can also attract farmers who had taken up production contracts, back into farming traditional goods, thereby causing uncertainty and increased risk for the market.

The authors have sought to analyse the economic effect of this by examining how the process operates within the context of both seasonal and continuous production models.

Seasonal production affords only a single opportunity for farmers to produce goods in any given period. This is usually due to annual climatic constraints.

Continuous production (such as livestock breeding and poultry rearing) is not climate sensitive and therefore enables outputs to be produced multiple times in the course of a year.

This paper draws upon previous academic studies concerning both agricultural economics and socially responsible agricultural operations. It is a useful and timely study which advances the understanding of an area of considerable importance in the context of feeding a rapidly growing world population.