Managing Agribusiness

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Contract farming
Partnerships for growth

FAO AGRICULTURAL SERVICES BULLETIN

145

Inside front cover

Contract farming
Partnerships for growth

FAO AGRICULTURAL SERVICES BULLETIN

145

A guide

by Charles Eaton and Andrew W. Shepherd

Rome, 2001

© FAO 2001

iii

Preface

Contract farming has been in existence for many years as a means of organizing the commercial agricultural production of both large-scale and small-scale farmers. Interest in it continues to expand, particularly in countries that previously followed a central planning policy and in those countries that have liberalized marketing through the closing down of marketing boards. Changes in consumption habits, such as the increasing number of fast-food outlets, the growing role played by supermarkets in many countries, and the continued expansion of world trade in fresh and processed products, have also provided the impetus for further development of this mode of production. The purpose of this guide is not to replicate past socio-economic studies on the subject of contract farming. Rather, the aim is to provide advice: first, to management of existing contract farming companies on how to improve their operations; second, to companies that are considering starting such ventures on the preconditions and management actions necessary for success; and, last but not least, to government officials seeking to promote new contract farming operations or monitor existing operations. The guide describes in detail the general modus operandi, internal functions and monitoring mechanisms of contract farming. It emphasizes that sustainable contract farming arrangements are only possible when the various parties see themselves involved in a longterm partnership.

v

Contents

Preface Acknowledgements and references Introduction Chapter 1 ADVANTAGES AND PROBLEMS OF CONTRACT FARMING Advantages for farmers Problems faced by farmers Advantages for sponsors Problems faced by sponsors Chapter 2 KEY PRECONDITIONS FOR SUCCESSFUL CONTRACT FARMING A profitable market The physical and social environments Government support Inventories of preconditions Chapter 3 TYPES OF CONTRACT FARMING The centralized model The nucleus estate model The multipartite model The informal model The intermediary model

iii ix 1

7 10 14 18 22

27 30 31 36 40

43 47 50 50 52 54

vi

Contents,

continued

Chapter 4 CONTRACTS AND THEIR SPECIFICATIONS The legal framework The formula The format The specifications Chapter 5 MANAGING THE PROJECT Coordinating production Managing the agronomy Farmer-management relations Chapter 6 MONITORING PERFORMANCE Monitoring quality and yields Monitoring human resources Protecting the environment Annexes Glossary References and further reading

57 61 62 66 68

83 86 94 100

105 108 115 117 119 149 153

vii

Figures

1 2 3

A contract farming framework The centralized model The multipartite model – A joint-venture contract farming project in China

4 49 51

Boxes

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Technology transfer by diffusion Effect of assured markets – Tomato production in India Analysing the physical and social environment Culture versus commercialism Sugar-cane production by contract farming in Thailand Individual developers – The informal model Intermediaries in Thailand “Acts of God” clauses in contracts Land tenure for contract farming Transient verbal contracts An example of grading specifications for fresh tobacco leaf The role of farmer groups in Colombia Growers’ Association in Kenya Management and technology transfer in India Monitoring milk production in Croatia

13 14 33 35 48 53 55 63 65 67 70 90 91 96 110

viii

Tables
1a 1b 2 3 4 5 6 Example of an inventory of preconditions for contract farming – Socio-political assessment Example of an inventory of preconditions for contract farming – Physical and social assessment Characteristics of contract farming...
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