Benefits to Firms and Public Sector

A. Cost Efficiency for Firms

Contract farming allows agro-business firms to improve cost efficiency and minimize risk by avoiding the purchase of land or the hiring of labor (Hayami, 2003; Patrick, 2004). Furthermore, risks involved with agricultural production, including fluctuations in demand and supply, can be avoided through the procurement of produce from farmers.

B. Quality Consistency

With firms extending production and methods and monitoring farmers' practice, product quality consistency is improved under contract farming. The degree of effectiveness and cost associated with quality monitoring, however, may differ with types of crops. For example, large plantations are suited to banana crops since management tasks are clearly defined, frequently uniform, and do not require many judgment decisions or a great deal of initiative on the part of workers (Key and Runsten, 1999). In soybean contract farming in Thailand, acreage cultivated is limited to the farmers' ability to maintain quality levels. In contrast, nontraditional crops such as vegetables for export are unlikely to be successful in a plantation environment since they are technically more sophisticated and require worker initiative to achieve satisfactory yields and meet quality requirements (Glover and Kusterer, 1990; Hayami and Otsuka, 1993).

C. Facilitation of Trade Standard Requirements

One consequence of globalization and trade liberalization of the food business is the growth of multinational corporations sourcing food from developing countries where the cost of labor is low and natural resource endowments are more favorable. In response to the increasing demand for food with specific attributes by consumers in high-income countries and in response to the new stringent food safety, social, and environmental standards, and also requirements under international trade agreements, multinational corporations are opting for contract farming arrangements to maintain control over all inputs throughout all stages of production and processing.

In recent years, consumer concerns surrounding food safety has led to an influx of food traceability systems. Consumers are increasingly insisting on information related to country of origin, inputs, and food production processes. The public sector in importing countries is responding to consumer demands and public health concerns by requiring formal documentation of the food traceability system of the whole supply chain for imported food. Contract farming allows firms to impose greater control on inputs and processes and is therefore poised to fulfill traceability requirements. The relative ease of implementing traceability systems through contract farming is another factor increasing its importance within the agricultural sector both in developed and developing countries.

D. Political Acceptability and Reduced Fiscal Burden

Aside from economic aspects, contract farming is more politically acceptable than plantation schemes operated by multinational firms (Eaton and Shepherd, 2001). Upon economic restructuring, many African governments have promoted contract farming as an alternative to private, corporate, and state-owned plantations (Baumann, 2000).

Beyond its political acceptability, contract farming can also significantly reduce the fiscal burden of promoting agricultural development, particularly in countries that face chronic budget deficits. These benefits to government include the following:

• Savings on research and development
• Effective extension system and traceability system
• Financial intermediation

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