[1] The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the quality standards and delivery requirements of the purchaser.
The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with land preparation, providing production advice and transporting produce to its premises.
[3] Although contract farming must first and foremost be considered as a commercial proposition, it has also come to be viewed as an effective approach to help solve many of the market access and input supply problems faced by small farmers.
Under the centralized model a company provides support to smallholder production, purchases the crop, and then processes or markets it, closely controlling its quality.
Under the Nucleus Estate model, the company also manages a plantation in order to supplement smallholder production and provide minimum throughput for the processing plant.
Finally, the Informal model involves small and medium enterprises who make simple contracts with farmers on a seasonal basis.
It is also important to protect them from risks that may occur during contractual execution, such as abuse of power by the stronger bargaining party or breach of contract.
[8] A “Legal Guide on Contract Farming” was developed in 2013–15 by the International Institute for the Unification of Private Law (UNIDROIT) in partnership with FAO.
FAO's Guiding Principle for Responsible Contract Farming Operations [12] provides concise advice on how to maximise the chances of success for both companies and farmers.
[16] A set of papers on the role of contract farming in promoting inclusive market access, published by FAO in 2013,[17] covers contractual arrangements in Argentina, Bangladesh, Brazil, China, Honduras, South Africa, Tanzania and Thailand.
The editors also identify potential roles for third parties in providing independent quality certification and in certifying contracting companies in order to reduce the risk for farmers.
In considering the subject of “side selling” the FAO publication[17] advocates a combination of favourable incentives and explicit penalties for farmers.
However, it also concludes that in certain cases the lack of such an environment is not necessarily a binding constraint to contract farming, particularly where flexibility and non-conventional contractual clauses can be used.
Although an enabling environment is important, the editors caution against government incentives and subsidies to promote inclusion as these may give a misleading impression of profitability and jeopardize sustainability.
Although their study finds that contract farming may substantially increase farmer income, Ton et al. argue that such figures need to take publication and survivor bias into account.
In other words, such estimates need to be revised downwards to accept that studies that show negative or no 'impact' are less likely to be published, and that the calculation of the impact of contract farming may neglect schemes that do not improve incomes for smallholders and collapse and thus are not available for evaluation.
[21] To avoid making large investments in farm equipment, farmers often hire the services of contractors to carry out activities such as land preparation, seeding, fertilization and harvesting.
As implemented in the United Kingdom, this model is based on a contractor carrying out all farming activities, receiving a fixed fee to cover its costs, together with a share of the eventual profits.
[22] A 2015 episode of the US television show Last Week Tonight with John Oliver documented contract farming for poultry in the US, arguing that many of the farmers were below the poverty line.