Agricultural Risk Management Through Contract Farming Ventures: An Exploration of Cross-Country Evidences

Agricultural Risk Management Through Contract Farming Ventures: An Exploration of Cross-Country Evidences

Isha Gole (Gokhale Institute of Politics and Economics, India) and Neha Sharma (Gokhale Institute of Politics and Economics, India)
Copyright: © 2019 |Pages: 21
DOI: 10.4018/978-1-5225-7208-4.ch013

Abstract

To build an agrarian economy that guarantees sustenance and food security to a vast populace, raw material for its growing industrial base, surpluses for exports, and a just, even-handed, and reasonable rewarding system for the farming community, “commitment-driven” contract farming is undoubtedly a feasible unconventional farming model that offers a reliable and consistent input service to farmers and delivers preferred farm produce to the contracting firms. Contract farming is used as a risk management tool. Facilitation of contract farming requires support in terms of flexibility in legislation, offering effective mechanism to resolve conflicts between contracting parties, having an arbitration body for resolving conflicts and providing quality checking facilities. Proper design of the contract is critical in making contract farming more successful. Education and training in connection with contract farming should be provided extensively to companies and other government agencies. Governments should endeavor to encourage contract farming by means of appropriate legislation and facilitation, through a demand-driven approach. The chapter aims to examine contract farming as a risk mitigation tool for farmers in general and small farmers in particular by considering diverse cases of successes/failures in developed and developing countries. While doing so, the authors have also delved into the historical evolution of contract farming, types of contracts, benefits, and apprehensions of the contracting parties, and they offer solutions to make contract farming successful.
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Background

In many of the developed countries, contract farming arrangements have now become quite common. It is now seen as the primary driver of competition in the market, which ultimately has resulted in creating a deeply coordinated system (Wang, Wang, & Delgado, 2014). With the development in technology, agriculture in developed countries has experienced significant developments in vertical coordination. This shift has led to decline in the spot markets, which are replaced by contracts, strategic alliances, franchisees and joint ventures. There are several factors that have affected the movement of agriculture away from traditional spot markets. Some of them include the advancement in agricultural biotechnology, advancements in information technology, environmental pressures, credit and risk issues, etc. All of these factors, escalate the relative costs incurred in spot market transactions making them economically unviable (Young and Hobbs, 2002). Contract farming also seems to be preferred due to the contractor’s (or the contracting party’s) willingness to market the farmers’ produce collectively, reducing market risk, even if it leads to reduced control of the farmers on their own crops (Prowse, 2012). The ever-increasing consumer demand for better quality and differentiated products has encouraged the distribution system to be more specialized and integrated.

Key Terms in this Chapter

Mau Mau: A war in the British Kenya Colony (1920–1963).

Vertical Coordination: A process where each stage of production is managed and interrelated to the next stage so as to make decisions on what and how much to produce.

Harmonization: Adoption of a consistent set of international technical standards.

Parastatal: Having some political authority and serving the state indirectly.

Swynnerton Plan: A policy aiming to increase and intensify the development of agricultural practice in Kenya.

Unassailable: Unable to be attacked, questioned, or defeated.

Dakadaka: An irrigated sugarcane scheme in South Africa.

Apartheid: A policy/system in South Africa where segregation or discrimination occurs on grounds of race.

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