Four ways to make contract farming work for the very poor

Value Chains

Four ways to make contract farming work for the very poor

Will contract farming, done right, serve as the missing link between small farmers and markets?

Contract farming, an agreement between a farmer and a buyer, can offer many benefits to smallholder farmers. They guarantee a buyer and often provide extra perks like better access to yield-boosting inputs.

Anti-poverty organizations, as well as large grocery-store chains, are looking to contracts as a “win-win” solution that fights poverty while guaranteeing a reliable, year-round flow of organic and niche produce to national and international markets.

Here's the potential problem: Contract farming, in itself, doesn’t directly reach or benefit the farmers who need help most.

Corporations view farmers at the bottom of the income bracket as liabilities—likely to fail in meeting obligations. According to a study last year by AgWater Solutions (pdf), contract farming “is unlikely to reach the poorest farmers… Schemes tend to select better-off farmers who can bear risks or pay an initial commitment fee."

Additionally, poor farmers are smallholder farmers. Corporations are less likely to enter a contract with farmers who own small tracts of land and who are scattered and isolated geographically—the transportation costs are too high and the communication too unpredictable and difficult.

Then there’s the issue of power inequality and “information asymmetry.” Small farmers who aren’t members of a cooperative or farmer’s association lack the bargaining power, lawyers and sophisticated technology of big buyers.

Here’s the beginning of a solution: The Rural Livelihoods Development Programme, and AgWater Solutions are two great examples of organizations trying to find ways of using contract farming to fight rural poverty. RLDC's most recent annual report (pdf) and AgWater's website both offer guidelines for how investors and antipoverty organizations can ensure both the small farmer and the corporation fully realize the “win-win” of contract farming:

  • Offer legal education and institutional frameworks that let both the smallholder farmer and the corporation understand the terms of the contract and any local legal resources available.
  • Support farmer organizations' and cooperatives' efforts to understand the risks and benefits of contract farming in general.
  • Ensure poor farmers can participate in contract farming. An example: buyers and processors could issue micro-loans, crop insurance and agricultural inputs as a term of contract with poorer farmers.
  • Identify some sort of incentive for companies to invest in poor smallholder farmers.

Contract farming offers a way for smallholder farmers to enter the marketplace. It can link an isolated rural economy to a globe full of potential buyers. But contracts aren’t a silver bullet. A contract between vulnerable farmers and powerful agribusinesses is inherently risky for farmers, so it’s crucial they have access to education and legal services. It’s also essential that contract farming is encouraged alongside established farmer cooperatives or another association that has access to market information.

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