In the latest State of Agricultural Commodity Markets (SOCO 2020) flagship publication by FAO, contract farming is presented as one of the business models for sustainable growth providing an approach for smallholder farmers integration into the modern and global value chains, hence being an important tool for sustainable agrifood value chain development.

Contract farming can provide smallholder farmers with improved access to markets though there remains potential inequitable access for contract farming schemes with a high rate of exit. Sixty-one percent of contract farming participants had larger farms compared to non-contracted farmers. However, contract farming presents many advantages given farmer participation and time for the investments in contract farming to generate its benefits. Nevertheless, contract farming still presents many advantages for smallholder farmers.

Study provides empirical evidence of contract farming discussing CF cases which cover different countries (Madagascar, Senegal, Viet Nam, China, Nicaragua, Senegal, Benin, India) and various commodities and value chains (beans, peanuts, vegetables, fruit, dairy, rice and poultry). Summary of the studies discussed is in Table 3.1 on page 80-81. 

A study in Madagascar showed that contract farming for the surveyed 1,200 farm households resulted in an estimated 6 percent increase in the household total income and supported food security by reducing an estimated 8 days on average in hunger season. The same study also suggested that experienced farmers were more likely to participate in contract farming and female-headed households were less likely to secure contracts with the firms.

Other studies analysed the impact of contract farming practices in Benin, Senegal, China, India, Vietnam and Nicaragua. These studies demonstrated that the participation in contract farming has a positive impact on household income for the sampled households, specifically, 29 percent increase in the household income in Senegal, 37 percent increase in Vietnam, and 22 to 45 percent in China. A study on contract farming in India examined how contract farming resulted in increase in profitability per hectare. For example, a 123 percent increase in profitability was shown in poultry contract farming while a 47 percent increase was found in papaya contract farming. The study on contract farming in Senegal indicated that it was not necessarily farm size or household assets that drove participation in contract farming, but the participation was based on whether contract farming scheme would require a lot of investment from the farmers in crop production.   

Overall, only two out of the 26 contract farming schemes analysed in various studies have shown adverse effects of contract farming on farm income. This suggests that contract farming is most likely beneficial for smallholder farmers in improving their livelihoods. In addition, Participation in contract farming schemes is also subject to spillover and trade‑off effects, such as knowledge and technology obtained by participation in a contract that can possibly affect non‑contracted crops.

The publication also discussed several other case studies on inclusive contract farming models that bundle inputs and services and respond to market failures, in particular the insurance schemes and guaranteed prices. An example of contract farming project from Indica, with PepsiCo contracting farmers for potato production outlines the case of bundling insurance in contract farming schemes. Providing insurance played an important role in the set of services for smallholders that included: high‑quality seed; fertilizers, pesticides and other agro-chemical inputs; technical support on production practices; fixed purchase price and incentives from the beginning of the season; and weather information and advice through mobile phone short messaging. Adding voluntary weather index-based insurance to the contract farming package  helped PepsiCo establish long‑term relationships with farmers and also reduce the risk in its supply chain.

Innovation in product quality differentiation using contract farming is presented with a case featuring a coffee roaster from Chicago implementing a direct trade model for coffee purchasing. The company structures their direct trade contracts with farmers for purchasing micro lots of high quality coffee, but also other grades of coffee, with fixed-price terms. The contracts are designed to create persistent incentives for quality and to remove the price volatility enabling growers to project earnings at least one year ahead, which is an advantage for the roaster to sustain and retain growers. The contract requires farmers to separate their beans into lots according to quality, and rewards growers for the fforts to produce the highest quality possible. Innovations implementing quality differentiation requirements in contract farming can promote “de‑commodifing” of smallholder agriculture, so the producers can move away from single‑grade bulk production to graded‑scale production with higher prices and better revenues. 

More about the complete SOCO 2020 publication can be found in recent news on CFRC (link). 

Publication is available in the CFRC library (link). 

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