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Can Responsible Contracts Help Improve Farmer Incomes and Productivity?

Publication Overview

Can Responsible Contracts Help Improve Farmer Incomes and Productivity?

Learning from farmer experiences in Central and Southeast Asia

In late October, I met with rice farmers from the Philippines and Kyrgyzstan; coffee farmers from Lao People’s Democratic Republic (PDR) and Vietnam; and sugarcane and fruit growers from Cambodia. They spoke about the challenges they face in farming and the opportunities they see for the future. The challenges varied depending on the country and crop involved, but almost all farmers shared common concerns about securing sufficiently high prices for their crops, accessing markets, and improving the quality and quantity of their produce.

The farmers are part of the Asian Farmers Association (AFA), and they participated in a joint workshop with the International Institute for Sustainable Development (IISD), AFA and the Food and Agriculture Organization of the United Nations (FAO) on the legal and policy aspects of contract farming in Bangkok, Thailand. AFA is an Asian alliance of national farmers’ organizations composed of small-scale family farmers (women and men), fishers, Indigenous Peoples, forest users, herders and pastoralists. The farmers are all involved in contract farming and requested the training to help address existing problems and maximize benefits. 

Among the main items for discussion was the Model Agreement for Responsible Contract Farming that IISD and FAO developed to help farmers and buyers address power asymmetries, create more equitable and sustainable business relationships, and support a transparent business environment for contract farming schemes.

First, what is contract farming?

Contract farming refers to an arrangement in which buyers and farmers agree to the terms of their business relationship before agricultural production begins. The agreement can include how the price will be set, access to credit, the quantity and quality of production, relevant certification schemes, and access to markets. Contract farming has grown in prominence in recent years to secure production for global value chains. But, in many cases, it has come with an exacerbation of historical power asymmetries between buyers and farmers.

The goal of the workshop was to find solutions to address the problems through more responsible contracts. But the contract is not an end in itself; it is the starting point for more sustainable business relations where benefits are shared more equitably. “Just because there is a contract, doesn’t mean there is a win–win partnership,” said Eva Gálvez-Nogales, Agricultural Officer at the FAO Regional Office for Asia and the Pacific. “We are promoting responsible contract farming relationships that improve farmer incomes and livelihoods in the long run.”

Prices, prices, prices

Most of the farmers described the challenges they face in getting sufficiently high prices for their crops. The reasons varied. For some, it was their dependence on a single buyer turning them into price takers rather than price makers. For others, the problem was volatile market prices. Still others had to accept lower prices because they were unable to process or add value to their primary production before selling.

“The most important thing for me is the price I receive for my rice,” said Aitbu Ernazarov, a farmer from the Beyli Agricultural Cooperative in Kyrgyzstan. “If I can find a way to process and package my rice, I can get a 25 per cent premium in the market, but for now I cannot afford or access the equipment needed.”

“We also face a lot of challenges and problems in contract farming,” said Alar-Laa Joy Cagata, another rice farmer who is a member of the Patanom Credit Cooperative in the Philippines. “We have 1,000 members, but the price is very volatile in the market and our buyers are local traders who dictate and manipulate the price.” She also highlighted other challenges that are common in her sector and country, ranging from weather-related issues to a new law to change the rice tariff, which has put farmers in her region at greater risk and reduced their income prospects.

There was no shortage of ideas for how to address these challenges. Sarou Meach from the Aphiwat Srokyoeung Agricultural Cooperative in Cambodia suggested that the farmers organize themselves into networks of cooperatives. This would enable them to pool production and build economies of scale to process or add value to agricultural goods for access to higher prices and better margins. In his experience, a cooperative has enabled him to negotiate better prices.

Other participants encouraged those with oral contracts to negotiate written contracts that are clear and simple, especially on the issue of price. In the Model Agreement for Responsible Contract Farming, we recommend that, where possible, the parties should negotiate fixed prices based on the cost of production, and they should ensure a living wage that can be adjusted to include a premium if market prices are higher at the time of sale. Collaboration with local, regional and national government authorities is also key in negotiating better terms with buyers.

For farmers in Lao PDR and Vietnam, improved access to information and communication technology has led to positive changes related to price, particularly thanks to mobile phones, the Internet and the increasing role of cooperatives.

“Most farmers in Lao PDR now have a mobile phone, and this has been hugely helpful to avoid more exploitative arrangements, because they can always check prices with their neighbours, relatives, friends, even with other farmers across the border,” said David Fullbrook, a consultant and expert on contract farming in Southeast Asia.

Using contracts to improve crop quality

The challenges involved in contract farming extend beyond ensuring farmers secure sufficiently high prices and incomes, to ensuring that these arrangements enable the production of high-quality products. “Any contract that is primarily focused on price is going to be a weak contract,” said David Fullbrook. “Contract farming should be much more about securing quality and quantity.”

Trinh Tan Vinh and Nguyen Thi Kim Lien, a husband and wife from the Sustainable Coffee Cooperative in Vietnam’s Di Linh district, espouse this notion. They produce a highly specialized variety of organic coffee. “In the past few years, we have negotiated three contracts with two partners in Ho Chi Minh and Luang Probang,” said Trinh Tan Vinh. “The biggest benefits are the faith of the customer in our coffee. When our products are well known to people and well promoted and marketed, then we get a lot of benefits,” he added.

Coffee farmers from Lao PDF and Vietnam gave their own perspectives on how the design of a contract can help or hinder this objective.  For Chounlamany Saybouakeo (nicknamed Nanglar), a young coffee farmer from the Jha Coffee Cooperative, contract farming has allowed her to access high-quality seeds and training. “There is one type of coffee that is hard to find on the market, and it is in high demand. In our contract farming scheme, the buyers provide the seeds for these high-quality varieties, and the cooperative provides training and sends us abroad to countries like Thailand and Timor Leste to learn new things about coffee,” she said. “This leads to a win–win arrangement.”      

A few other farmers shared their positive experiences, from diversifying into high-quality organic production. It has allowed them to get a premium price and to start accessing export markets. However, some warned that the process for getting crops certified as organic is expensive, and consumers do not always choose to pay the higher price when they have conventionally produced, cheaper options available.

Facilitating more gender-equitable arrangements

On the gender equality front, the situation is dire. Of the 11 farmers at the workshop, only one of the women had actually signed the contract for the scheme that she was part of, even though the women were doing as much or more work than their male family members. Often, it is the man who signs the contract, because the land title is in his name and he is the member of the cooperative. “I did not sign the contract because I am not the landowner,” said Nanglar. “But I work between 10 and 12 hours per day on the farm, and I work at the cooperative as a volunteer because there is not enough revenue to pay salaries.”

In general, contract farming has not been a positive tool to help to improve gender equality or women’s empowerment. In most cases, the contracts do not protect female farmers’ interests nor do they ensure that their voices are heard. Meanwhile, women do the bulk of the work on farms and also tend to produce subsistence crops for feeding the household, which are often displaced by crops grown to satisfy the demands of contract farming (see the recent IISD paper, The Farmer and her Husband: Legal Innovations for Women in Contract Farming).

Protection for women’s interests could—and should—be better built into contract farming schemes. In The Farmer and her Husband, we look at principles from the laws governing responsible lending, franchising and consumer protection to provide ideas for innovative legislative and contractual solutions that could be applied to contract farming—in particular, to better protect women’s interests. Ideally, these protections should be implemented through legislation or the use of model contracts so that they apply consistently and uniformly to all contract farming relationships.

Conclusions

But enough talking: the farmers want action. The workshop ended with each participant developing a plan for how to improve their contract farming schemes. A few farmers plan to review their existing contracts and renegotiate terms where necessary. Others want to strengthen the ability of their cooperatives to provide more and better access to services, equipment and inputs, and to develop broader networks of cooperatives. Still others wanted to diversify their markets through more direct sales to restaurants and coffee shops, diversifying into new crops and looking for new buyers. Finally, many of the farmers also decided to be more active in improving women’s empowerment and participation in cooperatives through revising contracts.