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.

FARMERS

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

INVESTOR

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