What is Contract Farming, and What Are The Benefits?

 

Contract farming, when done correctly, is an efficient method of coordinating and promoting agricultural output and commercialization. To be sure, there are agreements in place that benefit those with more financial clout and those with less: corporations and farmers with less clout. However, it's a strategy that may help farmers make more money and sponsors make more money. For both parties, a well-managed contract farming arrangement decreases risk and uncertainty, as opposed to the open market. 

Contract farming's detractors point out the relationship's imbalance and the sponsors' superior position relative to the producers. If you think at it from the sponsor's point of view, contract farming is a win-win situation for everyone. However, data shows that contract farming is becoming more popular in many nations, since it reduces the risk for all parties involved. Furthermore, a partnership in which the rewards are unequally allocated between sponsors and farmers would be difficult to sustain. 

Contract farming's benefits, drawbacks, and issues will change depending on the physical, social, and market circumstances. It is important to note that the way risks are shared depends on a variety of variables, including the kind of markets for raw materials and processed goods available to farmers, as well as the amount to which farmers are given with essential technical knowledge. These variables, as well as the distribution of hazards, are subject to alter throughout time. 

Benefits of Contract Farming

As a result of a contractual arrangement, farmers may rest certain that the sponsor will guarantee to buy all of their crops provided they meet certain quality and quantity requirements. A broad variety of administrative, technical, and extension services may also be obtained via contracts that would otherwise be unavailable. With the agreement as security, farmers may get financing from a commercial bank so they can purchase inputs. 

Supplying raw materials and providing manufacturing services 

In addition to basic inputs like seed and fertilizer, many contractual agreements call for substantial production assistance. There may also be free training and extension services provided by sponsors. Crop husbandry methods must be strictly adhered to in order to attain the anticipated yields and desired quality. It's possible that these agreements may lead to the farmer being just a laborer on his or her own property. 

Outside of contract farming, small-scale farmers generally have difficulty getting access to supplies. Structural adjustment measures have disturbed fertilizer distribution systems, particularly in Africa, and the private sector has yet to properly fill the hole caused by parastatal agency closures.

Obtaining credit 

For the most part, finance for production inputs is difficult to come by for smallholder growers. There has been an increase in challenges for farmers as several agricultural development banks collapsed or were restructured and many export crop marketing boards (especially in Africa) were shut down, rather than diminished. 

The financing of production inputs is often made possible by farmers via the use of contract farming. Sponsors are often the ones who advance funds by way of their supervisors. Crop liens, which use the contract as collateral and are guaranteed by the sponsor, may be used to make agreements with commercial banks or government bodies. Banks often won't extend financing to farmers for large projects like packing or grading buildings, tobacco barns, or heavy equipment without assurances from the sponsor. 

Incorporation of suitable technologies 

Agricultural products with high quality requirements typically need the use of new procedures. New methods of manufacturing are often required in order to boost output while also guaranteeing that the product fits the needs of the market. Because of the dangers and expenses associated with new technology, small-scale farmers are sometimes unwilling to use them in their operations. When they can depend on external resources for material and technical inputs, they are more inclined to embrace new techniques. However, unless the agricultural business is well-managed and controlled, the adoption of new technologies will not be a success.