Guiding Principles for Responsible Contract Farming Operations This Text Has Been Prepared by Caterina Pultrone and Carlos A

Rural Infrastructure and Agro-Industries Division

Guiding principles for responsible contract farming operations This text has been prepared by Caterina Pultrone and Carlos A. da Silva, from the Rural Infrastructure and Agro-Industries Division (AGS) of FAO, and Andrew Shepherd, formerly with FAO and now with CTA, the Technical Centre for Agricultural and Rural Cooperation (ACP-EU). Comments by Doyle Baker (AGS) and the professionals from the Development Law Service of FAO are acknowledged with thanks. Contributions from the panel of international experts who kindly commented on the earlier draft are also recognized with appreciation.

Photo credits ©FAO/Olivier Asselin A farmer woman using a magnifying glass to check rice reeds for insects [cover] ©FAO/Rodger Bosch Cotton is widely grown in Africa by smallholders working under contracts that can have specifications regarding the provision of inputs by the product buyer ©Antonello Proto The fruit processing industry often contracts farmers to grow their raw materials under specific quality requirements. These should be clearly expressed in the contractual instruments ©F. Mattioli Timeliness of delivery is a common pre-requisite in contract farming operations. Clauses that deal with assignment of responsibilities for harvesting and product delivery issues are advisable to be included in the contracts ©FAO/Bay Ismoyo Food processing enterprises can be an important outlet for smallholder agricultural production. Well-designed contracts can be a mechanism to promote fairness in the relationship between small farmers and agro-processors ©J. Koelen Through the provision of technical assistance, contracting firms can promote improvements in agricultural productivity and farmer’s income

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Cotton is widely grown in Africa Background and promoting the social and by smallholders working under Contract farming can be defined economic development impacts contracts that can as an agricultural production of contracting in the agrifood have specifications system carried out according sector. regarding the to an agreement between a This document presents a provision of inputs by buyer and farmers, which set of guiding principles that the product buyer. establishes conditions for the are conducive to responsible production and marketing of contract farming operations. It a farm product or products. is intended to serve as guidance Typically, the farmer commits to for farmers and buyers engaged providing agreed quantities of in contractual relationships, in a specific agricultural product. order to promote good business This should meet the quality practices and maintain an standards of the buyer and be atmosphere of trust and respect supplied at the time that the that is essential if contract buyer determines. In turn, farming is to prove effective. the buyer agrees to purchase This brief is a complement the product at agreed pricing to other publications available conditions and, in some cases, on FAO’s Contract Farming to support production through, Resource Centre (www.fao. for example, the supply of farm org/ag/ags/contract-farming). inputs, land preparation and the must have the legal capacity provision of technical advice. to contract and provide free If the conditions that are Guiding principles and informed consent. In cases stipulated in a contract farming where a group/association agreement are detrimental to Common purpose enters into a contract, it the interests of either partner, Farmers and buyers should must be made clear whether be it for reasons of imbalances have a common purpose when responsibility lies with the in market power, opportunistic engaging in contract farming. individual member or with the behaviour or other unfair The arrangements should be group. This will depend on the practices, the relationship based on the principle that the type of association chosen for between buyer and farmer will contract will protect the parties the group and on the national most likely deteriorate. Under from risks that may occur legislation in force. such a scenario, contract farming during the fulfilment of duties Contracts should be operations will not be successful and facilitate the execution of concluded by the acceptance of and opportunities for the mutual contractual obligations. The aim an offer that one party (e.g. the benefits that can ensue from a is that the agreement should buyer) makes to the other (e.g. well coordinated buyer-seller promote agricultural production the farmer). relationship will be missed. and guarantee a secure market Contracts should Contract farming continues for the commodity, thereby clearly specify the parties’ to gain importance as a allowing farmers to earn responsibilities. In addition, mechanism for governing increased revenue and buyers contracts must be based on an transactions in agrifood to obtain a return on their “object” (i.e. the good or service supply chains and as a tool investments (the so-called that constitutes the obligation to promote the access of win-win situation). of farmer and buyer) such as the smallholder farmers to markets. sale of a designated crop by the It is therefore timely and Adherence to a legal farmer and the payment by the opportune to consider the framework buyer. Finally, the contract must various approaches available To regulate their agreements, be based on the detailing of the for minimizing the likelihood farmers and buyers should agree farmer’s and the buyer’s duties of conflict in contractual to enter into a contract. and responsibilities (the so-called relationships, with a view to To be valid, contracts must “cause” or “consideration” enhancing the potential of comply with a number of in legal terminology), which benefits for both partners essential requirements: parties includes the price and the

1 Guiding principles for responsible contract farming operations

method of payment. The and misunderstandings can and be transparent in all their “object” and the “cause/ easily arise if the terms of dealings. Contracts should consideration” of the contract the agreement are not clearly clearly indicate the quantity of should be lawful, i.e. they explained and understood. the commodity to be supplied should not be illegal, immoral or It would be advantageous if by the farmer over a period contrary to public policy. contracts were drafted in the of time, the quality standards language with which both required and the means of Clear documentation parties are mostly familiar. assessing these on delivery. Preferably, a contract should In cases where farmers are Other conditions to be set out be stated in writing, so as to illiterate, the text of the in the contract, if established by document the terms that the contract should be read aloud the buyer, may include the time parties have agreed to and the by a third party. when farmers should deliver right to obtain enforcement of or when buyers should collect their obligations, as outlined Due attention and review the commodity, as well as the in its terms. It is recommended Buyers should grant farmers responsibility for transportation. that written agreements be a sufficient period of time, Terms and conditions for the drawn up to provide clear depending on the case, to review eventual supply of production guidelines regarding agreed the draft contract and seek inputs to farmers should be quality of products, conditions legal or other advice before clearly outlined in the contract. regarding prices, payment signing. Contracts should be Criteria for product price and product delivery and to concluded well in advance determination, and their means prevent conflicts arising due of the commencement of an of verification, should also to misunderstandings. In cases agricultural season and farmers be specified unequivocally. where the parties make a verbal should not be pressured to agree Contracts should establish agreement, this should ideally to a contract without having first the contract duration and take place in the presence of taken necessary advice. Buyers conditions for termination, i.e. one or more witnesses who should also grant the right to a written notice of termination have no interest in the economic cancel the contract within a within a reasonable time period. relationship between the farmer designated period. Once the and the buyer. agreement is concluded, buyers Transparency in price should provide a copy of the determination Readability of contracts signed contract to farmers. Prices and payment constitute Contracts should be written in a key element of any contract, clear and coherent language, Disclosure and these points need to using a legible typeface and Farmers and buyers should be clearly understood and words that are understandable make full disclosure of all agreed upon by farmer and by a farmer of average education information necessary for the buyer. It is advisable that the and experience. Confusion conclusion of the agreement parties negotiate in order to

The fruit processing industry often contracts farmers to grow their raw materials under specific quality requirements. These should be clearly expressed in the contractual instruments.

2 Guiding principles for responsible contract farming operations

agree a price that is mutually satisfactory, and that both sides strictly honour this agreement. The price and payment methods should be carefully determined in the contract, including all necessary information to ensure clarity in the performance of contractual clauses. It is also important to specify when and where payments to farmers will be made. Contracts should ensure transparency in price determination and payment Timeliness of delivery is a common pre-requisite in contract procedures. They should farming operations. Clauses that deal with assignment of responsibilities for harvesting and product delivery issues avoid complex formulas or are advisable to be included in the contracts. measurements of quantity and quality unlikely to be fully understood by farmers. It is advisable that contracts should clearly disclose any charge or clean containers and water and Transparency and fairness deduction that may affect the protection of produce from in clauses related to input net amount paid to the farmer heat. Ideally, these expectations supply and use under the terms of the contract. should be expressed in the form The contract should stipulate Contracts should also provide of clear contractual clauses. which party will be responsible transparency on information It is advisable that contracts for supplying and applying regarding the costs of any inputs should indicate not just the farming inputs. Where contracts and services to be supplied. type of production process envisage the supply of inputs It is advisable that a contract recommended for farmers, but (i.e. pesticides, fertilizer, seeds, should allow provision for prices also the post-harvest handling fuel, veterinary inputs, feed, to be renegotiated in the event of materials to be used, specifying etc.), before the start of each unforeseen circumstances, such which party will supply them season all inputs should be as substantial changes in market and their price. After harvest, identified and ordered well in conditions leading to large farmers are expected to comply advance of farming operations differences in price with respect with the post-harvest handling such as sowing, transplanting or to the contracted terms. specifications needed to prevent livestock breeding. spoilage or other forms of Where farmers require inputs Transparency and fairness in product loss. for the crops under contract, clauses relating to quality Buyers should strictly the buyer could consider Contractors expect farmers adhere to agreed commodity supplying these and deducting to engage in production grades and should promote the cost upon delivery of the practices and procedures that fair and transparent ways of contracted product. If provided are conducive to producing assessing the quality of produce by buyers, inputs defined in the good quality products. Such delivered. Farmers and their contract should meet necessary practices include proper use representatives should have the quality standards at prices that of production inputs, which right to be present at the time are no higher than prevailing are recommended for the type of delivery and receive a full commercial prices. They of agricultural product to be explanation in the event of any should be delivered on time so grown or reared. Farmers are rejects or downgrading. Soon that farmers can use them to also expected to follow good after delivery, farmers should maximum effect. In cases where management practices, which receive a written report of the buyer undertakes to provide may include maintenance of quantities received and grades farmers with inputs and other hygienic conditions, use of applied to their produce. advances, farmers should not

3 Guiding principles for responsible contract farming operations

use these for purposes other or man-made disasters (war, such as by filing a complaint than those for which they were civil conflict, strikes), which can against a buyer’s perceived intended. be classified as force majeure, unlawful conduct. They should Farmers should also follow cause farmers or buyers to be not misrepresent contract terms recommended practices in unable to meet the conditions as an inducement to a farmer to order to meet specifications and of the contract, neither party sign the agreement. maximize returns from the use should be considered liable for Buyers should avoid of the buyer-supplied inputs the non-performance and, in situations that can lead to these circumstances, the contract farmer dissatisfaction, such as Fairness in risk sharing: should have a provision for discriminatory buying (unequal force majeure and renegotiation. Renegotiation treatment of farmers), late contractual flexibility should be based on the principle payments, inefficient services, Contracts should envisage the of equal sharing of the costs, or poor technical advice and possibility of renegotiation. benefits, arising from the event unreliable transportation for They should also specify the classified as force majeure. commodities. They should not issue of sharing of production The possibility of insurance change pre-agreed production and market risks among parties. programmes against crop or quotas in the event of changing In cases of controllable livestock losses should also be market conditions in an attempt plant or animal disease risks evaluated as a means of risk to avoid purchasing contracted that may impede production management. production. Additionally, they from reaching the contracted should not refuse delivery of agreement, distribution of Prevention of unfair practices goods when farmers are ready the resulting financial burden in buyer-farmer relations to supply them. In order to should be assigned in a way Contracts should not prohibit maintain trust and respect, they that is commensurate with each or discourage farmers from should ensure transparency party’s responsibility for the associating with other farmers to and fairness during the buying event. Problems caused, for compare contractual clauses or process. example, by inadequate inputs to address concerns or problems. or technical advice provided Moreover, they should not Honouring contractual terms by buyers should not result prohibit or discourage farmers Farmers and buyers should in financial losses for farmers. from discussing contracts with be loyal to each other. Mutual Conversely, problems caused by business partners or seeking trust and respect are important mismanagement, inadequate use professional, legal, financial or factors for the success of of inputs or failure to comply agricultural production advice contract farming operations. with the technical advice related to the contract’s terms, In order to avoid supplied by the buyer, should obligations, and responsibilities. disagreements, buyers should not penalize the buyer. Buyers should not engage ensure that farmers have all In cases where natural in retaliatory or discriminatory necessary information to enable disasters (weather related, non practices against farmers who them to plant, grow, harvest and controllable plagues or diseases) exercise their rights against them, deliver the required commodity,

Food processing enterprises can be an important outlet for smallholder agricultural production. Well-designed contracts can be a mechanism to promote fairness in the 4 relationship between small farmers and agro-processors. Guiding principles for responsible contract farming operations

Through the provision of technical assistance, contracting firms can promote improvements in agricultural productivity and farmer’s income.

and buyers should guarantee the buyer’s premises. In the management programme, clarify that they will purchase the event of product rejection, the duties of both parties as set product from farmers as buyers should notify farmers out in the contract and address scheduled. In turn, farmers of the reasons and offer them any emerging problems. should supply the produce, the chance to inspect the meeting the quality standards rejected consignment or have it Clear mechanisms specified in the contract. inspected by a third party. to settle disputes Farmers should respect Farmers and buyers should the commitment agreed in Open dialogue agree in the contract on a the contract to deliver items Dialogue between farmers or neutral third party to assist produced by using inputs their representatives and buyers them in the event of disputes. and financing supplied by is essential for the stability of When contractual disputes arise, the buyer exclusively to that contract farming operations. both parties should endeavour specific buyer, unless alternative Lack of communication to resolve them amicably. If arrangements are specified in the between them can lead to these attempts fail, it is advisable contract. They should not sell misunderstandings and conflict. that the parties seek mediation all or part of their production to Dialogue between the or arbitration before resorting a different buyer (“side-selling”) parties should be promoted to judicial proceedings. if the latter offers a higher price. on matters such as contractual If the buyer is the subsidiary For their part, buyers, in their terms and requirements for of a parent company, this parent turn, should not renege on land cultivation or livestock company should be liable to the contractual terms when market rearing, as well as to help rectify farmer for any debts and claims circumstances or government misunderstandings and resolve against the buyer. policy change. conflicts. If the farmers and buyers are It is advisable that farmers or It is also advisable that located in different countries, their representatives be present farmers and buyers should meet the contract should specify when the product is collected at the beginning of each season which country’s law should from the farm or delivered to so that buyers can explain their apply in the event of a dispute.

5 Guiding principles for responsible contract farming operations

Rural Infrastructure and Agro-Industries Division (AGS) Food and Agriculture Organization of the United Nations (FAO)

Viale delle Terme di Caracalla, 00153 Rome, Italy www.fao.org/ag/ags | [email protected] | fax: +39 06 57053057