Synthesis Documents

Contract Farming for Inclusive Market Access, FAO, 2014

    Description
    This book analyses the extent to which contract farming (CF) is helping small farmers to access markets and meet increasingly stringent requirements – not only of “modern” food manufacturers, retailers, exporters and food service firms, but also in non-food sectors such as biofuels and forestry.

    In addition, the book seeks to clarify differences in the functionality of contracts depending on commodity, market, technology, public policies and country circumstances through nine diverse case study from developing regions.

    Summary of results
    The cases and conceptual work enable a number of key messages to be drawn regarding the role of CF as a tool to promote inclusive market access:

    - The expansion of CF as a chain governance mechanism will not necessarily lead to the exclusion of smallholders from agrifood supply chains. Evidence on the preference for procurement from larger and more wealthy farmers notwithstanding, variables other than farm size also play a role in a firm’s decision to select supply chain participants.

    - The territorial dimension should not be overlooked when considering CF as a tool for inclusive market access. In addition to the role of farmer location in decisions to include smallholders in CF operations, the relationship between local, social and cultural heritage and the type and scope of CF arrangements is pointed out as an issue of relevance (e.g.land access rights, gender and/or ethnic relationships in farming and trading, market relations and trust building in contractual relations).

    - Despite differences in contractual features as a function of product specificities and particularities of the enabling environment, it appears that a tendency towards a convergence in clauses and conditions does exist. The cases presented in this book provide further evidence to support the well- documented commodity-specific nature of CF agreements as evidenced by the similarities in design of contractual clauses within product groupings such as livestock and high-value horticultural products. However, even across the commodity and enabling environment contexts, similarities in clauses and conditions were found to exist, and many of these refer to contract design issues underscored in the FAO Guiding Principles for responsible contracting farming.

    - Promotion of technology uptake and pre-financing of inputs may be the essential requirement for inclusive market access.

    - Newer roles for third parties in contract farming operations may exist that can contribute to their inclusiveness and long-term sustainability (e.g. third party quality certification).

    - Even though market competition at the first-handler buying level is usually seen to be associated with opportunities for side-selling and, as such, a threat to the success of CF, it may also be a factor that contributes to strengthening the sustainability of CF operations.

    - While a conducive enabling environment is important for the successful implementation and sustainability of inclusive CF operations, innovative contractual design and operational modalities can be instrumental in over- coming legal and regulatory constraints.

    - Although very effective in principle, government incentives for companies to integrate smallholder farms into their supply chains through contracts may introduce vulnerability risks for farmers and companies alike. Even though public sector incentives can both improve the financial benefits and offset the eventual added costs associated with the inclusiveness goal, it is also a fact that the sustainability of a contractual operation may be compromised in the future, if the incentive policy that induced it in the first place is removed.

    - Caution is needed when considering the results of impact evaluations of CF schemes.

    - Further research is required in order to understand better the cost to companies of smallholder inclusion and how CF approaches can be better integrated into the emerging discussions on inclusive business models.