Conclusions and Recommendations

The combined effects of globalization, the rising demand for high-value crops, and the development of transport infrastructure in rural areas has opened up new opportunities for the rural poor to participate in the global marketplace, though including the poor in the market has some challenges. The public sector traditionally has not involved the poor enough in agriculture production and marketing efforts. The private sector has made great strides in bringing poorer farmers into the larger agricultural picture through including them in contract farming structures. Internationally, contract farming offers many benefits and is receiving increasing support from multinational firms.

Conclusions

Based on review of the literature, contract farming appears to be a promising institutional arrangement to facilitate farmers' access to an array of agricultural services from which they are typically excluded. Contract farming enhances the agricultural productivity and efficiency of poor farmers by introducing improved farming practices through the provision of inputs, transportation, extension services, and, most importantly, market access. It also brings investments and technical expertise to rural areas, facilitates cross-border quality control, contributes to employment, and fosters sustainable cooperation within the region.

Though this review focused primarily on GMS transition economies, the potential benefits of contract farming are relevant in the broader context of other developing countries. This review highlights the strong potential uses of contract farming in the following context:

1. As a development tool in facilitating the transition from subsistence production to commercial production.
2. In facilitating growth of the agro-processing industry to add value to primary products.
3. In facilitating crop diversification through transition from conventional, low-cash crops to high-value crops for niche market in domestic and export markets.
4. In fulfilling new stringent trade requirements for export market.

Although it appears that contract farming can potentially lead to large-scale rural poverty reduction, there are several concerns that need to be addressed by the public sector. The concerns are perhaps best discussed in the general context and also in the context of different stages of development.

While contract farming can be effective in introducing new technologies and providing external inputs to farmers, danger lies in firms extending technologies that bring financial benefits in the short-term but result in negative long-term health and environmental impacts. The public sector must make conscious efforts to ensure that sustainable production practices are being introduced through contract farming, particularly to poor farmers who are often illiterate and more prone to inappropriate use of agrotoxic chemicals.

Several concerns have been raised regarding the desirability of contract farming from a poverty and equity standpoint. The small economies of scale and the high transaction costs associated with smallholders mean that firms are likely to favor plantation-style contract farming or select farmers with larger land area and higher education for contract production, leaving poorer farmers behind. In addition, contract farming is not appropriate for all types of crops. To have a significant poverty impact, crops produced under contract farming should be labor-intensive rather than input-intensive and should be appropriate for production on small plots of land.

Although there is a tendency toward bias against small farms in contract farming, experiences suggest that contract farming of a labor-intensive or high-value crop for niche markets is more pro-poor and should be further promoted.

Many developing countries lack the laws and ensuing legal framework to support contractual agreements, and thus contracts may not be easily enforceable or legally binding. As a result, it is inevitable that distrust and the potential for opportunistic behavior exist between firms and farmers, undermining the viability of contracting.

In successful examples of contract farming, firms invested extensively to build trust among farmers, often incurring losses in the first year of the contract agreement. The success of contract farming may be dependent on sound managerial skills and the demonstration of corporate social responsibility and cultural understanding on the part of the firm.

Recommendations

To ensure that contract farming is inclusive of smallholders, production systems in which smallholders have comparative advantages should be promoted. With limited land and excess labor, smallholders typically can only compete effectively with crops in which intensive labor is required. To take further advantage of the relatively less contaminated environment in newly-opened production areas in GMS transition countries and other developing countries, however, production systems such as organic agriculture should be further explored and supported.

Firms are discouraged from engaging in unsustainable agricultural practices involving the use of high levels of chemicals. Areas in developing countries where current practices are already low-input or “organic by default” are likely to be attractive for firms wishing to produce and market safe food. Contract farming of organic food, where the supply gap is substantial in particular, is recommended as a pro-poor development strategy.

In this context, the public sector should take a strategy of encouraging more than one firm to operate in the same area to promote competition among firms. As much as possible, the public sector should avoid establishing bureaucratic requirements for firms or farmers' organizations in order to prevent officials from seeking personal gain from private firms.

The public sector can play an important role in the development of farmers' groups. Local governments may want to develop an information disclosure system on contract farming for farmers as well as firms. Using a “name and shame” strategy based on local values, the opportunistic behaviors could be mitigated. As a long-term strategy, as legal systems and enforcement capacity improve, specific laws and regulations should be formulated for contract farming arrangements. Finally, public support for technical, social, and economic research and development, particularly empirical research, will be essential for effective policy formulation.

With regard to regional cooperation, contract farming represents a promising way of creating or promoting market linkages in the Asian region. Countries with well-established market linkages that are more experienced in contract farming but are now facing land and labor constraints would have it in their interest to partner with countries where such factors or production are readily available. The example of the ACMECS initiative highlighting contract farming as the single most important institutional arrangement for regional cooperation could be a consideration for other regional cooperations in Asia and the Pacific region.

The ACMACS initiative is clearly a step in the right direction, and it seems logical for these countries to capitalize on such regional initiatives, including ADB's GMS project, which further builds capacities in this area. Apart from the poverty reduction benefits, the governments of partner countries also benefit from bringing informal border trading into the formal sector through contract farming.

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