There are those who look at things the way they are, and ask why... I dream of things that never were, and ask why not?’ — Robert Kennedy
The most obvious downside to contract farming is the potential for the buyer/contractor to take advantage of the growers and impose lopsided conditions in the contract. Without competition from other buyers, without alternative land uses, and farmers always not having enough information, this is bound to happen.
However, contract growing is an established business arrangement in Europe and North America. Therefore the polemic of big business exploiting the small must not be entirely true. Otherwise, this manner of doing business would not have lasted. In these more "mature” farming environments, the biased power relations against the growers have been tempered by the realities of the market as well as the long-term self-interest of the contractors.
For example food giant Del Monte in the United States does not own farms. All of its tomatoes, green beans, sweet corn, peaches, apricot, pears and many others, are supplied by contract growers. In theory, the farmers can sell to other buyers/processors and/or switch to other crops. But they don’t because Del Monte makes sure the contract terms are attractive to make the growers loyal to the company. So much so that among the contract growers in California are third-generation tomato suppliers.
There are many examples as well of successful contract growing schemes in developing countries involving a wide range of commodities and many variations of contract terms. Case studies have been conducted on these contract growing schemes and the broad conclusion had been that contract farmers attained higher levels of productivity per hectare or per unit of effort, got better prices for their produce, and hence higher net incomes compared with their independent grower counterparts.
Thus, the bugaboo of exploitation by big business of small farmers is exaggerated and could be managed.
Exclusion of Small Marginal Farmers
The second downside to contract growing is the tendency of buyers/contractors to prefer the bigger, better endowed farmers as suppliers, to the exclusion of small marginal farmers. This is generally true but not always.
Farm size is an important factor in the selection of growers but there are other considerations: 1) farm location i.e. nearness to the processing plant; 2) easy access by way of farm-to-market roads; 3) agro-climatic specificities like soil type, elevation, availability of irrigation; and 4) competence/training of individual farmers; 5) availability of other farm assets, and 6) membership in a cooperative. The fact that the farmers are already organized is a big plus factor since the transaction costs to the contractor will be much less.
In a recent study by Roehlano Briones of the Philippine Institute for Development Studies (PIDS) on tobacco contract growing in Ilocos, participation was positively correlated with farm assets and negatively correlated with farm size. This observation refutes the common apprehension that small farmers will be discriminated against. In fact in certain kinds of farm operations requiring intensive day-to-day management, small farms using family labor may have an advantage over bigger farms using hired labor.
Side-selling or pole vaulting
The third downside to contract growing is side-selling by farmers of committed produce to third parties, referred to locally as pole vaulting. A number of contract growing schemes have failed because of these contract breaches. And this had been a deterrent to many companies entering into long-term contracts.
There are applicable laws on the enforcement of contracts but many corporations find them impractical because very often the cost of litigation is far more than the value of products lost. Likewise, the public perception of the corporation bullying small farmers weigh heavily against the use of legal enforcement measures. Thus, the offending growers are usually just blacklisted and quietly dropped from the roster of cooperators.
On the other hand, many contractors have learned to live with the usually tolerable levels of side-selling and simply treated the losses as part of the cost of doing business.
Some proactive contractors realizing that the most common reasons for pole vaulting are higher prices and immediate need for cash, have resorted to daily adjustment of buying prices especially during periods when supply is scarce and immediate cash payments.
Many contractors find that social pressure and informal sanctions work better than legal measures. Hence, the preference to deal with cooperatives and organized groups of farmers who have ways of exacting discipline on their members. Non-government organizations (NGOs) who help organize and lead farmers groups are very useful as mediators/intercessors in discouraging misbehavior among their members.
Contract farming as a component of integrated rural development strategy
We know what farmers need to become more productive, more competitive in the marketplace and earn more income for their families. Obviously, we are nowhere close to providing the desired enabling conditions since many of our farmers remain unproductive and poor.
In the rural development agenda of many developing countries, contract farming is being increasingly recognized as one way of providing small farmers access to credit, to inputs and to technical knowhow but most importantly access to markets, particularly to the more profitable but stringent modern trade and export markets.
Among our neighbors Thailand is far ahead in exploiting the benefits of contract farming. And they have demonstrated that contract farming could be made to apply over practically all tradable commodities.
We do have some notable success ourselves with banana, pineapple, papaya, broilers and tobacco.
If many more of our farmers were to benefit from this business model, government must take a deliberate decision to promote contract farming and take proactive measures to move the process along. Crucial would be persuading agribusiness to secure their supply chains by contracting small growers not only to comply with their corporate social responsibility commitments but also steeling them for the intense regional competition ahead.
***
Dr. Emil Q. Javier is a Member of the National Academy of Science and Technology (NAST) and also Chair of the Coalition for Agriculture Modernization in the Philippines (CAMP). For any feedback, email eqjavier@yahoo.com.
