Overview of Smallholder Contract Farming in Developing Countries

Market liberalisation raises a number of issues from a poverty alleviation standpoint. It is clear that changes in patterns of agricultural production are occurring on a global basis in terms of composition of production. However, it is not clear who will benefit from these changes. There is a risk that smallholders in developing countries are becoming more marginalised and being left out of the increases in wealth arising from liberalisation of domestic and international markets.

The focus of this paper is contract farming, which it argues can bring potential benefits to smallholders by providing access to new markets and by providing opportunities for employing underutilised resources, particularly labour. However, such benefits may bypass smaller farmers as contracts flow to larger farmers and, in addition, there may be undesirable second-round effects from such contracting through impacts in local markets for food and farm inputs. This paper aims to understand how contract farming may alleviate poverty amongst smallholders.

Direct benefits from contracting accrue to smallholders from improved access to markets, improved technology, better management of risk and opportunities for employment of family members. Indirect benefits occur from empowerment of women and increased commercial acumen on the part of smallholders. Contract farming has the potential to improve the welfare of smallholders however it is not a sufficient condition for such improvement. Smaller farmers can be excluded from contracts because of selection bias by agribusiness firms awarding contracts to larger farms, be adversely affected by the second-round effects of contracts on incomes and prices and suffer from narrowing of markets that lie outside of contracts. Institutional developments that might ameliorate this type of exclusion are anti-trust legislation, policies to directly improve the contracting environment, policies to address specific problems smallholders face in entering contracts and participation by NGOs in contract facilitation.

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