Contract farming (CF) is an agreement between agricultural producers and buyers in which both parties agree in advance on the terms and conditions for the production and/or marketing of agricultural products, usually, including the price to be paid, quantity and quality demanded and delivery conditions. The contract may include information or terms on production methods, inputs such as seeds and fertilizers, financial assistance, technical advice, and other support services to be provided by the buyer and/or by another party.

The decision whether to choose contract farming as a business model should be based on a thorough assessment of feasibility and suitability of the contract farming operation, which requires detailed consultations with the farmers and buyer. The buyer first evaluates various factors to determine whether CF is a profitable and feasible business model, and hence whether to adopt CF; then selects suitable candidates of farmers qualified for CF based on a set of selection criteria and consultations with farmers; and proposes them a set of terms of conditions or an initial contract for farmers to consider. Farmers evaluate whether the proposed CF scheme and terms of conditions are profitable and feasible for them. The terms of conditions are negotiated between the buyer and farmers to reach a final agreement with some or all farmers involved. The final agreement should be mutually beneficial to both parties. Once the contract agreed by both parties is signed, farmers must be prepared for contract farming. The buyer has to ensure proper management, monitoring and evaluation of contract farming. Finally, approaching the end of the contract, buyer may consider termination, renewal or upscaling contract farming.

The first question that needs to be answered is whether a contract farming arrangement is needed. As a rule of thumb, contract farming makes sense when there is a need for overcoming market failures and for mitigating risks. For example, market distortions that negatively affect farmers can be addressed through contract farming schemes that foresee the provision of inputs, services and new technologies, which in turn can result in increased quality and yields and a reduction of post-harvest losses, thus improving the livelihoods of smallholder producers.

Contract farming is also advisable when it is essential to source sustainable agrifood products. Issues such as preventing land grabbing, ensuring labour and environmental standards, as well as meeting food safety and quality standards are common drivers for the increased interest in contract farming schemes. Against the backdrop of climate change and the increasing scarcity of production assets, companies have started to intensify their relations with smallholder farmers in order to ensure sustainability. Contracted farmers can help to assure access to ever-scarcer resources such as land or affordable labour and help companies to remain competitive. The agribusiness sector is hence experiencing a shift towards creating a shared value for all involved parties.

The facilitators role is to facilitate, support, and promote contract farming. Depending on the case, the facilitator role can be played by different actors:

• government entities, extension services.
• producer organizations.
• nongovernmental organizations.
• development agencies.
• individuals (e.g. community leaders, lead farmers).

Facilitators may provide substantial support (legal and agribusiness) for contract development. Key steps in preparing for a facilitated contract farming operation are the development of a modal CF contract agreement and subsequent negotiations between the buyer and farmers to reach a final agreement. Farmers, in particular smallholders, can have difficulties in understanding contract terms, especially if they contain difficult technical or legal language. The presence of a trustworthy person who can help in understanding the contract can be of great help to the farmers. Facilitators may support negotiations to ensure fairness and transparency and overcome power imbalance. Facilitators may have a crucial role in providing support and advice to producers in the phase before signing the contract and at the time the contract is concluded, as they can enhance a trustful environment between buyers and producers and ensure that the contract terms are fully understood. Facilitators should certainly not make decisions for any of the parties but may have the mandate to represent either the buyer or the producer in negotiating with the other party and signing the contract. In the case of informal agreements, facilitators have the role of the witness of the conclusion of the agreement. Facilitators should consider some guiding principles for their role. As contract farming is a private sector activity firstly and an activity between producers and buyers, facilitators have to give space and priority for discussion to farmers and buyer as their contract partner as they are the ones investing in the contract farming project and as such they should be taking business decisions on their own. The appropriate methodology for facilitation is a business, participatory and bottom-up approach. Adequate resources and time should be planned in order to achieve a sustainable impact for developing inclusive CF scheme, however, facilitators should prepare and communicate a clear exit strategy from start in order to have the principal partners in the contract farming scheme developing sustainably their long term business relationship.Development organizations as facilitators are recommended to set up collaborative arrangements with the buyer and farmers and respect the buyer’s experience and knowledge, while establishing their own credibility regarding the competences for CF support. They should support producers’ capacity development to strengthen the competitiveness of the final products of the CF scheme.

Detailed feasibility assessment for the implementation of contract farming in the dry beans value chain is presented in a separate report of this project. It gives the overview of the value chain and its actors, opportunities and enabling environment for contract farming, capacities for contract farming, benefits, and risks. General recommendations for the dry beans value chain are presented in the mentioned report.

Feasibility assessment regards the enabling environment, the incentives to choose contract farming as a business model, and the capacities to implement contract farming. Enabling environment includes the legal environment: general contract laws and contract enforcement mechanisms, competition regulations, regulations on associations, and commodity-specific regulations; and agriculture and agrifood value chain development: relevant agricultural and trade policies, support policies (e.g. input subsidies), services (e.g. extension), research and development activities, functioning market mechanisms, food safety and standardization (e.g. grades and standards) and finance and risk mitigation mechanisms; and other relevant factors, policies and regulations in the country. To understand the incentives for contract farming, both advantages and benefits and disadvantages and costs must be analyzed. Only when there are more advantages than disadvantages and benefits are higher than the costs can it be considered that incentives for contract farming exist.

For the capacities for contract farming for the buyer, it is firstly important to have experience dealing with contracts and to have capacities for business management and marketing. Experience working with farmers and farmers’ groups is another important capacity for the buyer. In case the buyer opts to have a production contract with farmers it is especially valuable to have production expertise as assistance to farmers in production might be envisaged. Capacities to cover costs and investments for contract farming need to be thoroughly assessed: logistics, processing, and production capacity; infrastructure and facilities; financial resources; human resources.

Regarding producers, first and foremost required capacity is the production knowledge and experience for the agricultural product which would be the purpose of a contract farming agreement. This can include insights into productivity and product quality, but also the capacity to learn new skills and adopt new technologies. Experience in commercial production (e.g. supplying to processors or certain buyers) is a valuable capacity for producers entering contract farming. Management skills such as record-keeping and resource management are desirable for producers. Experience working in groups and with producer organizations can be helpful in the contract farming context. Depending on the product, capacities for post-harvest handling and primary processing might be needed. Finally, the availability of land, inputs, equipment, facilities and other productive resources can be a requisite for farmers starting contract farming arrangement.

Once the agribusiness company has decided that it is a good idea to enter into a contract farming arrangement, it should choose the model that best fits its case. It is advisable to adopt a gradual approach when piloting contract farming, starting with more straightforward CF to build trust and capacity for more advanced CF if suitable in the future. Less complex CF models are suitable for piloting CF such as the centralized CF model focusing on sales with a small number of producers, or the intermediate CF model with an effective producer organization.

Once the agribusiness company has chosen the model that best fit its needs, the time has come to select and prepare farmers wishing to enter into a contract farming arrangement. Companies should pay special attention to thoroughly select the right partners: the contracted farmers. For this, certain clear selection criteria should be kept in mind. For example, according to USAID (2009), farmers should:

• Own the land to avoid problems stemming from landlords/farmers disputes. If land is leased documentation must be clearly written and understood by all parties.
• Be personally involved in growing the crop / rearing livestock (i.e. be a real farmer).
• Having existing knowledge of the crop / livestock.
• Land must have appropriate soil and sufficient water for the crop to be planted.
• Be able to repay loans they receive.
• Respect the agreement and be trustworthy.
• Be able to implement advanced production practices (e.g. irrigation, etc.).
• Be a good listener and willing to follow company field agent and/or lead farmers’  suggestions/directives.
• Have the minimum amount of land and production capacity to produce crop(s) the company designates and in the correct context.
• Have the land that is contiguous with that of the other outgrowers (to facilitate monitoring, communication, equip-ment use, etc.).
• Be able and willing to keep records.
• Be pro-active and willing to invest in improved production practices.
• Be able and willing to comply with company infrastructural requirements (adequate storage, drying, cooling facilities, etc.

The selection process should be transparent and communicated to all participants. Companies should clearly communicate expectations, roles, responsibilities and other criteria during the selection process. This will help to find those farmers who are best able to meet the buyer’s requirements. Community leaders, other business partners, local governmental agri-services or existing farmers can be consulted for recommendations. Government extension services can provide support when building relationships with farmers, but companies should avoid to become dependent on them.

Upon selection, companies should further make sure that compensation mechanisms (such as fixed payments or participation in special training events) are clearly communicated and in line with expectations. The same applies to cases of contract breach and potential disputes.

Buyers should also communicate to farmers what functions they will fulfil, which may include but not be limited to the monitoring and identification of farmers, provision of technical support, assistance with input distribution and training activities as well as the provision of support in the preparation and implementation of procurement related activities. Regarding the latter point it is suggested that companies buy directly from individual farmers, not agents, or at least try to establish a strong direct relationship with the individual smallholders.

It is beneficial for CF to organize producers into groups and strengthen producer organizations, with the support from the public sector. When buyers contract with producers' organizations, they should check the legal status of the organization. The role of producers' organizations can be crucial for contract farming development, especially when they are strong for example in terms of capable and democratic governance structures, ownership by members, devoted leadership , and clear benefits for members.

Once the contract is signed, preparing farmers for contract farming pilot is an essential phase for success of the complete project. The buyer, eventually supported by facilitators, has to ensure that the farmers clearly understand their responsibilities. Depending on the knowledge and experience of farmers, training and preparations might be needed. Buyer can provide different types of training, especially for production contract, and when the buyer themselves are involved and experienced in production. Farmers might need support regarding agronomic practices, technologies, production process, especially if they are not very familiar with the contracted crop. Buyer can host farmers at the demonstration plots, organize field days, provide guided tours at the estate, establish farmer field schools. Production and business management skills such as record keeping, are very important for successful implementation of contract farming, and often lacking, hence support might be needed.

Working with organized farmers can be very beneficial for contract farming. For this purpose buyer might identify and work with lead farmers or establish working groups, and collaborate with producer organizations. Organized farmers can collectively pool resources, share equipment, and buy inputs in bulk. It is easier to organize meetings for learning and experience sharing, and coordinate communication and operation.