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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 The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations (FAO) concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. The mention of specific companies or products of manufacturers, whether or not these have been patented, does not imply that these have been endorsed or recommended by FAO in preference to others of a similar nature that are not mentioned. The views expressed in this information product are those of the author(s) and do not necessarily reflect the views of FAO. All rights reserved. FAO encourages the reproduction and dissemination of material in this information product. Non-commercial uses will be authorized free of charge, upon request. Reproduction for resale or other commercial purposes, including educational purposes, may incur fees. Applications for permis- sion to reproduce or disseminate FAO copyright materials, and all queries concerning rights and licences, should be addressed by e-mail to [email protected] or to the: Chief, Publishing Policy and Support Branch Office of Knowledge Exchange, Research and Extension FAO Viale delle Terme di Caracalla 00153 Rome, Italy © FAO 2012 Guiding principles for responsible contract farming operations 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
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