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6 Evaluation of Contract Farming 6 Evaluation of contract farming 6.1 Introduction Postwar agrarian practice has encountered a sustainability problem, namely the loss of biological diversity (agrobiodiversity). Farmers exploit nearly one-third of the world’s land for food production and tend to plant fewer crop varieties on a larger scale. Today, about 80 to 90 percent of the world’s food comes from between 10 and 20 percent of the cultivated plant species. Traditional and regional crops are threatened with extinction because they are no longer used in agriculture (Heller and Keoleian 2003). Agrobiodiversity is more than crop diversity. It is an umbrella concept, covering all organisms living on farmland (CBD decision III/11 1996). In a recent policy document (LNV 2002), the Dutch government identified three dimensions of agrobiodiversity: 1. genetic resources of crops and livestock; 2. biodiversity with a life-support function, e.g. natural enemies of pests and diseases; 3. biodiversity with a landscape-ecological function, such as meadow birds and hedgerows. A country with a large share – about 69 percent – of its land under cultivation is the Netherlands (Berkhout & Van Bruchem, 2003). Highlighting the Dutch situation, this paper investigates various means to reverse the loss of biodiversity in a country with a large, innovative, export-oriented agricultural industry. The loss of agrobiodiversity is seen as a second-order problem (Wolff, 2006). In other words, it is partly caused by solutions to other problems. Specifically, in an effort to prevent food scarcity – as experienced during the Second World War – the Dutch turned to large-scale agricultural industrialization. And one consequence of commercial agriculture is the loss of agrobiodiversity (FAO, 1997). Agrobiodiversity loss is a public problem. Yet no systematic investigation has been conducted on the capacity of the food supply chain to resolve it. Industry self-regulation as a governance mechanism is said to have an advantage over public intervention: being more flexible, it can anticipate technological changes within the supply chain. Standards can be more clear-cut, detailed and cost-effective than standards in public regulation (Gunningham and Grabosky, 1998). A widespread approach to self-regulation in commercial agriculture is contract farming. Rather than a means to stimulate sustainable agriculture, this approach is a type of vertical integration in the food supply chain – a means to optimize the production process. Contract farming is grounded in a legally binding agreement between a grower/seller and a buyer (most often a processor). The contract regulates in advance the supply of a grower’s harvest to the processor, frequently at predetermined prices (Eaton and Shephard, 2001). By signing, a grower agrees to provide a specific commodity, produced in accordance with the qualitative and quantitative demands of the purchaser. The company supports the grower’s production by providing a supply of inputs or technical assistance and by purchasing the commodity. Eaton and Shephard distinguish three areas addressed in contract schemes: 101 • Market provisions: The agreement contains terms and conditions for future sale of a crop, such as prices and production quota. • Resource provisions: Under the contract scheme, the company supplies inputs such as seeds, pesticides, and technical advice. • Management specifications: The contract prescribes the production methods, input regimes, and cultivation and harvesting specifications of the grower (e.g., a timetable with dates for planting). Although the contract binds two parties who are unequal in terms of scale – namely, “the small farmer and the big business” (Glover and Kusterer, 1990) – both benefit from the agreement. Food processing companies often engage in contract farming because their processing plants have high fixed costs. These companies have an interest in inflows of raw materials that are constant, uniformly shaped and of excellent quality, and in correspondence with the plant’s capacity (Porter and Phillips-Howard, 1997; Little and Watts, 1994). Contract farming is advantageous to the grower because it allows him to explore reliable new markets that would not necessarily be accessible otherwise. Growers will not cultivate new crops unless they know they can sell them. Processors, in turn, will not invest unless they are sure they can produce the required commodity at the required quality. Both parties derive assurances from contract farming. In addition, contract farming lowers the growers’ price risk because prices are set in advance. These fixed prices may be higher than on the open market. Growers also benefit from contract farming because inputs like seeds and fertilizer are often supplied by the company, sometimes on credit. Access to technical assistance from agronomists is another advantage. These fieldworkers teach the growers the skills they will need to introduce new technologies – and all at the company’s expense. (Eaton and Shephard, 2001). The extent to which contract farming can help achieve public goals is controversial. Some companies are already writing sustainability into their business strategies and supplier contracts (e.g. IUCN et al., 1996; GRI, 2002). The Dutch division of Friends of the Earth even sees contract farming as a precondition for sustainable agriculture, arguing that long-term relationships between a grower and a company create opportunities for sustainable development (Milieudefensie, 2003). Others emphasize disadvantages. Contract farming has been blamed (Burch et al., 1990) to threat agrobiodiversity, for example by narrowing the genetic resource base. They point out that contract farming is most fully developed in those sectors with the greatest reliance on just a few plant varieties. Contract farming of monocultures require high levels of chemicals and water, which has a negative effect on the biodiversity in farmlands. Thus, both positive and negative impacts of contract farming on agrobiodiversity have been identified. In light of the strengths and weaknesses of several contracts, this paper examines the potential contribution of contract farming to agrobiodiversity. In the following, we refer to a food processor as the “company” and a farmer as the “grower”. 6.2 Framework of analysis We have developed an analytical framework to evaluate the potential contribution of contract farming to the promotion of agrobiodiversity. While we compare different contracts, it is not our purpose to judge which one is the best. Instead, we try to ascertain which contractual 102 arrangements have a positive effect on agrobiodiversity. These characteristics are elicited through the following analytical framework, which cites four research criteria that enable a contract to promote agrobiodiversity. The regulatory process goes through three stages: planning, implementation, and output (Coglianese and Lazer 2003). The four research criteria of the framework refer to these stages. The first one refers to the planning stage; the second to both the planning and the implementation stage; the third to the implementation stage; while the fourth one concerns the outcome stage. The four research criteria are as follows: 1. Agrobiodiversity performance standards must be part of the contract; 2. Contractual guarantees assure that the parties abide by the contract; 3. The grower has to comply with the agrobiodiversity performance standards in the contract; 4. The impact on the physical environment of the farmland is monitored; the contracting parties get feedback on the results. Regarding the first research criterion, we examine how contracts specify measures for agrobiodiversity-friendly management. To that end, we use the agrobiodiversity management yardstick (AMY) as drawn up by Van Amstel et al. (2007a). This tool classifies agrobiodiversity management in ten farming activities. The standards set forth in the contracts are compared with these categories, and the agrobiodiversity performance standards are grouped in these categories. This classification allows us to compare how different contracts promote agrobiodiversity. AMY is also used to determine whether the standards in the contract schemes are obligatory, optional, or voluntary. The second research criterion concerns procedural guarantees that give the weakest party in an asymmetric relationship a firmer position when faced with the use or abuse of power by the strongest party. Inequality creates an opportunity for the dominant party to pursue private gains that conflict the formal contract. The dominant party can force the weaker one to bow to these private motives instead of complying with the contract scheme. If these private interests supersede the contract as the informal guidelines for agricultural production, it is no longer possible to assess whether the standards in the contract schemes are effective, simply because they are not carried out. A discipline that has given some insight into the rule of law is legal philosophy. Its practitioners often mention the principles of separation of powers, transparency, and participation as means to diminish asymmetry through regulation (Van Schooten-van der Meer 1997; Vos 2005). These principles are also referred to as principles of Corporate Governance (OECD, 2004). In the following, we consider whether these principles also apply to contract farming. The third research criterion addresses the growers’ compliance with the agrobiodiversity performance standards in the contract. We use the methodology developed
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