Pros and Cons of Contract Farming that Kenyans Should be Aware of
Like other business owners, farmers have different skills, expertise, financial positions, and appetites for risk.
Reducing costs and risk through contracts allows a farmer to establish a steady income source that is attractive to traditional farm lenders.
Contract farming generally involves a pre-agreed price between the investor or company and the farmer. The agreement is defined by the commitment of the farmer to provide an agricultural commodity of a certain type at a time and a price and in the quantity required by a committed buyer, mostly a large company.
Because farms with limited means to improve or expand often seek off-farm income, contract production could be considered an emerging contributor to individual farm economic sustainability in Kenya.
Factors that form part of a successful arrangement are:
- Trust between parties and their representatives
- Good incentive for the contractor to share from his efforts and management skills
- Robust terms – carefully thought-out first charges and sharing arrangements allows the agreement to work in volatile times
- Flexibility and imaginative ideas to deal with longer term improvements
- Concise agreement – clear documents setting down the basic terms and all those tricky, but important issues, such as cross compliance, health and safety, and insurance, so everybody knows where they stand
- Regular meetings to communicate and discuss.
Contract farming has significant benefits for both the farmers and an Investor. However, with these advantages also come problems.
The below writeup considers both advantages and problems from the standpoint of farmer and an Investor.
Advantages for farmers
- Inputs and production services are often supplied by the Investor
- This is usually done on credit through advances from the Investor
- Contract farming often introduces new technology and also enables farmers to learn new skills
- Farmers’ price risk is often reduced as many contracts specify prices in advance
- Contract farming can open up new markets which would otherwise be unavailable to small farmers
Problems faced by farmers
- Particularly when growing new crops, farmers face the risks of both market failure and production problems
- Inefficient management or marketing problems can mean that quotas are manipulated so that not all contracted production is purchased
- Investing companies may be unreliable or exploit a monopoly position
- The staff of Investing organizations may be corrupt, particularly in the allocation of quotas
- Farmers may become indebted because of production problems and excessive advances
Advantages for Investors
- Contract farming with small farmers is more politically acceptable than, for example, production on estates
- Working with small farmers overcomes land constraints
- Production is more reliable than open-market purchases and the investing company faces less risk by not being responsible for production
- More consistent quality can be obtained than if purchases were made on the open market
Problems faced by Investors
- Contracted farmers may face land constraints due to a lack of security of tenure, thus jeopardizing sustainable long-term operations
- Social and cultural constraints may affect farmers’ ability to produce to managers’ specifications
- Poor management and lack of consultation with farmers may lead to farmer discontent
- Farmers may sell outside the contract (extra-contractual marketing) thereby reducing processing factory throughput
- Farmers may divert inputs supplied on credit to other purposes, thereby reducing yields
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