Types of Contract Farming In Asia

Contract farming initiatives in Asia can be classified into two broad categories: a) based on motivations and goals of contractors and b) based on structure and scale of operation.

A. Based on Motivation and Goals of Contractors

Contract farming schemes have been initiated by a range of drivers in pursuit of different goals or objectives. NGOs and government use contract farming to promote poverty reduction and environmental protection while private agribusiness firms are involved in contract farming for purely commercial reasons. International agribusinesses, on the other hand, adopt contract farming to demonstrate corporate social responsibility in international trade.

1. Socially Motivated Contract Farming

The modernization of the agriculture sector has been characterized by the increased use of agro-chemicals. At its very worst, agriculture modernization has contributed to an increase in poverty in many rural areas. Many of the grassroots organizations and NGOs turned to contract farming to promote alternative agriculture systems, such Japan's teikei system, capable of protecting the environment and improving the welfare of farmers.

2. NGOs' Use of Contract Farming to Promote Alternative or Community Supported Agriculture

These alternative agriculture and CSA schemes are predominantly small-scale and mainly target the domestic market. Products are either distributed through consumer cooperatives or sold through farmers' markets. In some instances, however, the schemes have been initiated by foreign NGOs or Fair Trade organizations acting as sponsors for contract farming in poor areas of developing countries. For example, the Japanese International Volunteer Center has been long involved in promoting contract farming of organic crops as part of its sustainable rural community in Thailand (Furusawa, 2005).

With multiple goals of achieving health and environmental objectives along with maintaining fair distribution of profit among stakeholders involved, the NGO-based contract farming is often limited in scale of operation.

3. Contract Farming Promoted by Local Government

The second stream of contract farming involves a multipartite arrangement initiated by government, usually in pursuit of broader development or poverty objectives. The arrangement typically involves a government agency, such as that of the Lao PDR, and a private company jointly participating with farmers.

4. Purely Commercial Contract Farming

The third stream of contract farming in Asia is characterized by its purely commercial or business orientation. Initiated by private agribusiness firms, this second type of contract farming is becoming increasingly important for the agriculture sector in Asia. In countries such as the People's Republic of China (PRC) and Thailand, private-sector-led contract farming is extensively used for the production of non-traditional, high-value agricultural products for export.

Interest in promoting private-sector-sponsored contract farming has likewise gained momentum in other Asian countries such as Viet Nam, the Lao PDR, and Cambodia. In the case of such transitional economies, however, government has played a more central role by facilitating agribusiness firms' access to land and financing.

Unlike socially motivated contract farming, contract farming for profit is not limited to crops produced under alternative agriculture systems. As such, while this type of contract farming can potentially help improve farmers' incomes, its non-income dimensions of poverty, such as issues of health and environmental sustainability, are open to question.

5. Contract Farming for Socially Responsible International Trade

The fourth stream of contract farming is somewhat of a cross between the two types described previously. With consumer choice increasingly being influenced by food safety, health, social, and environmental concerns, private agribusiness firms in developed countries are no longer just expected to deliver quality products, they are also expected to deliver quality products in a socially responsible way. In this regard, agribusiness firms in developed countries—Japan in particular—are increasingly adopting contract farming of safe food in developing countries to lower production costs as well as to demonstrate corporate social responsibility. Of the types of contract farming, this last stream seems to be the most promising in terms of its potential contribution to large-scale poverty reduction in developing countries.

B. Based on Structure and Scale of Operation

The choice of structure and scale of operation are dictated by a number of considerations, including: a) type of crop; b) degree of processing; c) size of investment; and d) relative importance of labor to capital (Eaton and Shepherd, 2001).

Based on these considerations, contract farming ventures can opt to follow the large-scale, centralized model or the small-scale, decentralized model.

1. Large-Scale, Centralized Model

In general, large-scale, centralized model is preferred for crops that are subject to stringent processing standards, that require a high-level of experience from farmers, that entail frequent changes in farm technology, and that involve significant long-term investment (Eaton and Shepherd, 2001). This model is preferred for crops that require more capital than labor input.

2. Small-Scale, Decentralized Model

The small-scale, decentralized model is preferred for crops that do not require a significant degree of processing, such as fresh vegetables, fruits, or horticultural products that only need to be graded and packaged for resale. Production typically involves minimal short-term investment (Eaton and Shepherd, 2001). This model is preferred for products that are laborinstead of capital-intensive.

In developed countries, small-scale, decentralized contract farming is mainly characterized by direct supply contracts between large retailers and smallholders for fresh produce. Due to increasing vertical integration and consolidation in the food industry, direct supply contracts are also becoming more common in developing countries.

In Asia, however, small-scale and decentralized contract farming is still largely characterized by the subcontracting of crop production through intermediaries. Such brokers are emerging as the preferred arrangement for contract farming in less developed areas. In this type of arrangement, agribusiness firms purchase crops from intermediaries who in turn make their own (typically informal) arrangements with farmers.

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