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Contract Farming.Pdf Zwick Center for Food and Resource Policy Research Report No.7 Contract Farming in Practice: An Overview Erkan REHBER Charles J. Zwick Center for Food and Resource Policy Department of Agricultural and Resource Economics College of Agriculture and Natural Resources 1376 Storrs Road, Unit 4021 Storrs, CT 06269-4021 Phone: (860) 486-2836 Fax: (860) 486-1932 [email protected] www.zwickcenter.uconn.edu Contract Farming in Practice: An Overview1 Erkan REHBER2 ABSTRACT Impersonal and open-market transactions between actors in traditional agro-food systems based on price signals are replaced by rather controlled impersonal vertical coordination such as contract farming, because of the changes in market structure, consumer preferences and attitudes, technological improvements, and food safety issues. Recent sophisticated ideas like environmentally sound, sustainable agriculture, standards and regulations related to environment and health care are among the forces behind the fast growing of contractual relationship. Contract farming displays great variety in practice. The form it takes, attitudes and approaches of the partners are affected mainly by availability of other alternatives and the political, economic, and social structures at the local and national level, along with the specifications of the product. When evaluating contract farming applications and their outcomes in practice, it will be more illustrative to consider contractual arrangements in two main types as private contract arrangements and contract farming schemes. While the aims and the structure are almost similar, there are some important differences in detail. There are national and regional differences that have to be considered in related analysis and evaluations. Even though contractual relationship of the advanced agro-food system has many advantages, it also has inherent and implementation problems. The main problem is the weak position of the farmers in the contractual arrangements both in developed and developing world that is called as bargaining problem. Contract farming is not a panacea to solve all related problems of agricultural production and marketing systems. However, this way of coordination could be evaluated as a way of providing easier access production inputs and product market for the small-scale farmers. Contract farming also contributes to the development of a sound food industry. It might also be seen as a way toward or as a part of rural development and can be promoted to improve agricultural performance, especially in the Third World Countries. Contractual relationships are not only a distinctive feature of highly industrialized agro-food systems, but also a way of establishing an industrialized and developed structure. But, to obtain the advantages of contract farming, the necessary measures must be taken to trade off those disadvantages, such as the exploitation of small farmers and natural resources by domestic and foreign corporations and multinationals. Keyword: Food industry, contract farming, vertical coordination, bargaining problem 1 Copyright 2019 by Erkan REHBER; All rights reserved. Readers may make verbatim copies of this document for non- commercial purposes by any means, provided that this copyright notice appears on all such copies. This working paper is a consolidated and updated version of the author’s publications presented below. Vertical Integration in Agriculture and Contract Farming, Working Paper #46, May 1998, A Joint USDA Land Grant University Research Project, Food Marketing Policy Center, University of Connecticut, USA. Vertical Coordination in the Agro-Food Industry and Contract Farming: A Comparative Study of Turkey and The USA, Food Marketing Policy Center, Connecticut, USA, Research Report No. 52, February Vertical Integration in the Food Industry and Contract Farming: The Case of Turkey, Outlook on Agriculture, Vol.33.No.2. 2004, P. 85-93. Contract Farming: Theory and Practice, the ICFA University Press, First Edition, Hyderabad, India, 174 p. Vertical Integration in the Food Industry and Contract Farming: The Case of Turkey, (In “Contract Farming - International Experiences edited by S. Mohanty and B.V.S Prasad), ICFAI University Press, pp.139-157 A Global Overview of Contract Farming, (In “Contract Farming - International Experiences edited by S. Mohanty and B.V.S Prasad), ICFAI University Press, pp.3-39 2 Prof. Dr. Erkan REHBER is an economist and author who was formerly a member of the NE-165 that was the project name of the Food Marketing Policy Center, Connecticut, USA ([email protected]) 1. INTRODUCTION Vertical coordination and contract farming as a widely used way of it have been a major interest to scientists from different disciplines such as economists, anthropologists, political economists, sociologists and even geographers. Contract relationship is not new in agriculture dated back to the last quarter of 19thcentury. Theoretical approaches to contract farming and its implementation world-wide in practice have caused to appear different terms and connotations regarding contract farming in related literature. Contract farming displays great variety in practice. The form it takes, and attitudes and approaches of the partners are affected mainly by availability of other alternatives and the political, economic, and social structures at the local and national level, along with the specifications of the product (Minot 1993). When evaluating contract farming applications and their outcomes in practice, it will be more illustrative to consider contractual arrangements classification as private contract arrangements and contract farming schemes (Rehber 2007b). There are some important differences in detail. While the aims and the structure of contract farming are almost similar and rather definite in the private contract farming system, the contracting schemes have hybrid structures and multiple objectives (Glover 1987). In this paper, generally producer/grower terms are used for the farmer and buyer, contractor or integrators terms for the other party of the contracts. Private contract arrangements refer to the contracts between rather commercialized big or in some cases small farmers and the integrators (processors, wholesaler, exporter etc.) while the contracting schemes are mostly concerned with multi parties: governments, farmers, integrators, and development or donor agencies. It can be argued that, contract schemes are organized generally in the developing and less developed countries, while the private ones are formed mainly between individual or a group of farmers and private companies in the developed world. In particular, the nature of the crops and the technology in use for its production are the most crucial determinants of the implementation ways and characteristics of the contract farming in practice. For instance, basic grains that are not perishable and do not require strict quality control or prompt harvesting and processing do not generally require contractual arrangements (Andrews et al. 1994). Some products that require concentrated production and careful scheduling because of their perishability and bulkiness are generally subject to contractual relationships. For the commodities, for which supplies of both inputs and outputs are inelastic and shifting cost is very high such as broiler production, contract farming is rather common. Recent development in quality control approaches and production alternatives have also affected contractual implementations. For example, some practices such as organic farming, demands of non-GMO crops and traceability are the important factors behind not only changing structure but also the increase of implementations of contractual arrangements. The reasons of the contracting are so different. One of the main initiatives of contract farming for developed countries is the provision of steady and safe flow of the raw material to the marketing or processing industry with certain quality standards. In developed countries, sophisticated market structure, high technology level, farming structure, attitudes of the governments, etc. create a rather suitable environment for private contracting arrangements which depend on the product features. However, in the less developed world, contract farming was initiated by complementing, occasionally competing with and partially replacing plantation and estate agriculture or by organizing the independent farmers and sometimes newly settled families under state or private schemes to produce a variety of products for domestic consumption and especially for export (Watts 1994). Development of agriculture from a traditional to a market-oriented structure is the major challenge for developing, less developed countries and economies in transition. The main struggle is to decrease the rate of population engaged in agriculture to a certain amount through creating new employment opportunities either in non-agricultural sectors or agriculture-based industries such as food processing. For these countries, it is generally agreed that food processing is a key industry which should receive high priority both at national and international levels. The food-processing industry is important for economic growth and health of people. Development of food industry promotes development in other sectors through forward and backward linkages. 1 Developing countries need to develop their food resources more extensively not only to provide new job opportunities and increase national income via accruing value
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