Contract farming has been in existence for decades and although not yet widely used in the coffee and cocoa sectors in recent years its use has increased in popularity. But it can have advantages as well as disadvantages that both parties to an agreement need to understand
With contract farming growing in popularity, particularly in developing countries, the International Institute for Sustainable Development (IISD) and Food and Agriculture Organization (FAO) have launched a new tool to address challenges faced by farmers and the parties that buy what they grow.
The Model Agreement for Responsible Contract Farming developed by IISD and the FAO is designed to help ensure that contract farming works for farmers and buyers, reduce the risk of potential problems and provide a basis for resolution of potential disputes. A generic template for contract farming for coffee has been developed that focuses on agricultural production contracts between small coffee producers and their direct buyers.
A range of model contracts exists for the international sale of coffee in both physical and futures markets. The most widely used coffee contracts for physical markets are the Green Coffee Association contract aimed at the US market and the European Contract for Coffee of the European Coffee Federation aimed at the European market (IISD, 2004). However, small coffee producers rarely sell direct to these buyers. They more commonly sell to co- operatives or domestic traders, especially for the specialty coffee market.
Transparent value chains
There are exceptions, however, particularly in the Fair Trade and organic movements, where coffee roasters contract directly with producers. For example, a co-operative of independent roasters from the US uses the GCA terms and conditions in their contracts with producers, which are made publicly available. The IISD and the International Trade Center also published guides to developing coffee contracts for the sale of coffee.
Speaking exclusively to C&CI, Sarah Brewin, an agriculture and investment advisor at IISD noted that, although coffee and cocoa are two agricultural sectors in which contract farming remains relatively uncommon, in favour of arms-length purchases between buyers and intermediaries, we may see greater prevalence of contract farming for these commodities as consumer demand for more transparent value chains increases.
Ms Brewin highlighted the example of a contract farming project in Honduras for organic cocoa for a Swiss supermarket chain. Another example is Nespresso’s contract farming operations in Zimbabwe.
In response to the changing market trends, Chocolats Halba, a division of Coop, one of the largest retailers in Switzerland, launched a project that embraced its corporate philosophy of working with a supplier base it calls ‘partners’ as opposed to unknown suppliers in developing countries. It went on to develop a collaborative relationship with about 500 organic cocoa producers in Honduras, who came under a contract scheme where they were supported in production and certification aspects, given access to credit and paid a fair price for their product.
Nestle’s Nespresso recently unveiled a plan to buy nearly all of Zimbabwe’s high-end coffee from small farmers and help the beleaguered industry there get back on its feet. In an announcement issued at the time, the company said it expected to buy more than 95 per cent of high-quality coffee produced by Zimbabwean smallholders and make the coffee will be available to consumers in 2019.
Terms and conditions need to be understood
The IISD noted that contract farming overall is becoming a more attractive business model for many governments because it helps promote investment in agriculture. It is also attractive for investors who want to avoid the significant human rights and land rights problems associated with large-scale land acquisitions.
Put simply, contract farming is an agreement between a farmer and a buyer, often an agribusiness, to grow produce with set terms and conditions for things like price, quantity, quality and inputs. But for many farmers in the developed world formal contracts are a challenge to understand.
“Sometimes you’re desperate for inputs, so you just sign on the dotted line…” a young woman farmer in a contract farming scheme in Zimbabwe told the IISD.
The young farmer was speaking at an event hosted by IISD, the FAO and the Sam Moyo Africa Institute of Agrarian Studies in Harare in November. The event brought together young farmers, agribusinesses, producer organizations, civil society and international organizations to discuss the opportunities and challenges posed by contract farming.
This diverse group grappled with questions such as:
- Is contract farming inclusive?
- How can the power imbalances between farmers and agribusiness be addressed?
- Can contract farming help address the agricultural investment gap? Farmers shared their experiences in contract farming schemes and highlighted some of the key challenges, including:
- They aren’t given enough time to study the contracts, which use confusing legal jargon.
- Sometimes they aren’t given a written contract at all.
- Contracts only give rights to buyers and obligations to farmers.
- Buyers delay giving promised inputs like seeds or give inputs that are low quality.
“Ultimately, the quality of the produce is determined by the buyer, and they can manipulate this to drive down prices,” said the IISD.
Contract farming is a growth market
The more recent growth of contract farming is largely linked to transformations in food and agriculture systems, with increasingly integrated global supply chains. Contract farming has gained prominence in the last few years as an alternative business model to large-scale farmland investments (or ‘land grabs’) that have proven so controversial.
Globalization has brought the world closer together and the demand for agricultural products has increased dramatically. Food markets have become more competitive as consumers in many countries demand products that are not only safe to eat but are also produced in a way that does not damage the environment or harm the workers involved in their production.
“In this new context, the buyers of agricultural products need to work more closely with their partners in the supply chain so that they can source enough good quality raw materials directly from farmers to meet the demand for food products from their own customers, such as supermarkets, restaurants, hotels, schools and hospitals,” said the IISD. “Companies that process agricultural products are particularly interested in contracting with farmers, in order to secure a regular supply of raw materials that meet their needs in terms of quality and quantity.”
Connecting smallholders and buyers
Contract farming can help to connect smallholder farmers to buyers, something that has become particularly important in the specialty coffee sector. It gives farmers the possibility of knowing in advance when, to whom and at what price they will sell their products. This helps to reduce the unpredictability of agriculture and allows them to better plan their production. It reduces the risks associated with fluctuating prices and can also help protect farmers against losses associated with natural disasters and climate change as these risks can be shared with the buyer under a contract. When buyers also provide access to inputs including finance and technical assistance, contract farming can lead to significantly increased yields and profits.
At the heart of contract farming is an agreement between farmers and buyers: both partners agree in advance on the terms and conditions for the production and marketing of farm products. These conditions usually specify the price to be paid to the farmer, the quantity and quality of the product demanded by the buyer, and the date for delivery to buyers. The contract may also include more detailed information on how the production will be carried out or if any inputs such as seeds, fertilizers and technical advice will be provided by the buyer.
The IISD noted that many countries have adopted contract farming schemes for different products with successful results in terms of net profits for farmers, increased yields, and more efficient use of inputs. It suggests that the increase in contracting occurring around the world seems to indicate that the positive aspects tend to outweigh the negative ones.
“In the context of these discussions, we shared a new tool to help farmers and responsible buyers to address these challenges,” said the IISD. “The Model Agreement for Responsible Contract Farming developed by IISD and the FAO is a simple and practical legal tool to address power asymmetries, create more equitable and sustainable business relationships and support a transparent business environment for contract farming schemes. It provides simple, customizable template provisions, which can be adapted by the parties to suit the commodity, context and parties’ specific needs.”
Farmers and buyers at the event in Harare recognized that the Model Agreement isn’t a silver bullet to address all the challenges of contract farming. But it is a practical tool to help contract farming make a positive contribution to responsible investment in agriculture, support rural livelihoods and connect farmers to markets on fairer terms.
Developed by the IISD and the FAO in collaboration with UNIDROIT, drawing from the principles of the UNIDROIT/FAO/ IFAD Legal Guide on Contract Farming, the Model Agreement is intended a simple and practical legal tool for buyers and producers to improve their business relations and to help make responsible agricultural investment a reality.
The IISD and FAO believe it can help address power asymmetries, create more equitable and sustainable business relationships and support a transparent business environment for contract farming schemes. It also provides simple, customizable template provisions that can be adapted by the parties to suit the commodity, context and parties’ specific needs.■ C&CI
This article first appeared in the January ’19 issue of C&CI, click on subscribe now if you wish to read other informative articles in the January and future issues of C&CI.