Introduction

The Millennium Development Goals, the blueprint for development intervention adopted by UN member countries, highlights global partnership in development as one of the main goals toward poverty reduction. Among the recent consequences of globalization is the increased coordination of food production. With a majority of the world’s rural poor engaging in agriculture, agricultural globalization is arguably the single most important global partnership for poverty alleviation.

In emerging economies in the Greater Mekong Sub-Region (GMS) such as Cambodia, the Lao PDR, and Myanmar, close to 90% of the poor are smallholders who depend on agriculture for their livelihood. With the rapid development of rural transport infrastructure, new market opportunities for higher-value crops are expanding in these countries. In order for the rural poor to successfully participate in a market economy and to benefit from globalization, backward and forward market linkages need to be established. These linkages include the provision of information on market demand, technical support, rural credit, improved farm inputs, product accreditation, and markets for the produce.

Beyond initial linkages to local markets, with market liberalization, the rural poor in these countries must also respond to worldwide competition governed by international trade agreements and food safety standards requirements. Without assistance to cope with the changes brought about through international trade agreements, the poor could be further marginalized from the markets.

While the development of market linkages for farmers is traditionally viewed as a public sector responsibility, the establishment of necessary agro-services for a large number of small, unorganized farmers requires a tremendous amount of public sector resources. Given the limited government and donor resources available, private sector generation of pro-poor growth may be key to large-scale poverty reduction.

In recent years, in the less developed GMS countries, contract farming¹ has been expanding rapidly. The practice of contract farming entails the contractor² providing farmers with improved seed, technical advice, in-kind credit, and market services. Farmers produce a specified quantity and quality of crop that is sold exclusively to the contractor, usually at a pre-determined price. This promising arrangement includes the poor in the market economy.

Contract farming is global, with both positive and negative impacts. The widespread emergence of contract farming in the emerging GMS countries has prompted the need to revisit such issues associated with contract farming in the globalized environment. This discussion paper is the first in the series of the ADBI research project on “Making Globalization Work for the Poor through Contract Farming.”

This paper begins by defining contract farming and examining its theoretical evolution. The subsequent section discusses the importance of contract farming as an institution for facilitating exchange and accelerating the transition from subsistence to commercial production. Sections IV and V review the advantages and concerns surrounding contract farming. Section VI examines strategies for mitigating contract farming challenges. Section VII looks at the different types of Asian contract farming schemes, while Section VIII discusses how contract farming can be a viable means of promoting regional cooperation. The final Section summarizes recommendations for the successful promotion of contract farming as a strategy for poverty alleviation in the context of agricultural globalization.

Definition of Contract Farming

Contract farming is a contract between a farmer and a purchaser established in advance of the growing season for a specific quantity, quality, and date of delivery of an agricultural output at a price or price formula fixed in advance. The contract provides the farmer with the assured sale of the crop and at times provides for technical assistance, credit, services, or inputs from the purchaser (Binswanger et al., 1995). The purchaser gets a guaranteed, steady supply of produce.

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