Issues of Concern Related To Contract Farming
As with any form of contractual relationship, there are potential disadvantages and risks associated with contract farming. If the terms of the contract are not respected by one of the contracting parties, then the affected party stands to lose. Common contractual problems include farmer sales to a buyer other than the one to whom the farmer is contracted (side selling or extra-contractual marketing), a company's refusal to buy products at the agreed prices, or the downgrading of produce quality by the buyer. Side selling by farmers to competing buyers is perhaps the greatest problem constraining the growth of contract farming. Contractors also may default by failing to pay agreed prices or by buying less than the pre-agreed quantities.
The existence of an adequate legal framework is thus crucial for the successful implementation and long-term sustainability of contract farming operations. A system of law is essential to assist farmers and their buyers in the negotiation and drafting of contracts. It is also important to protect them from risks that may occur during contractual execution, such as abuse of power by the stronger bargaining party or breach of the contract. Different countries have enacted policies and legislation to ensure fair contractual practices and offer remedies for dispute resolution. A “Legal Guide on Contract Farming” is presently being developed by the International Institute for the Unification of Private Law (UNIDROIT), in partnership with FAO .
Another concern about contract farming arrangements is the potential for buyers to take advantage of farmers. Buying firms, which are invariably more powerful than farmers, may use their bargaining clout to their financial advantage. Indeed, if farmers are not well organised or where there are few alternative buyers for the crop or it is not easy to change the crop, there is a danger that farmers may have an unfair deal. Tactics sometimes used are changing pre-agreed standards, downgrading crops on delivery so offering lower prices, or over-pricing for inputs and transport provided. Strengthening farmer organisations to better access appropriate services such as credit, extension services and market information and improving their contract negotiating skills can redress the potential for exploitation of farmers and poorly formulated contracts and their enforcement. There are also proposals for some form of welfare system for contracted farmers akin to the benefits provided in most contractual employment.
Despite the typical problems listed above, contractual arrangements are gaining popularity as they are being used more frequently in agriculture worldwide.
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