28 July 2015, Rome - Contract farming – an expanding practice in which farmers produce agricultural goods for specific buyers in set quantities at prearranged prices – is getting a new tool to guide growers and buyers in establishing sound contracts and conflict resolution procedures.
The UNIDROIT/ FAO/ IFAD Legal Guide on Contract Farming released today fills a need for a comprehensive legal tool to guide this longstanding practice, addressing the needs of a broad range of users.
Contract farming in principle can improve farmers' access to markets and boost their incomes while ensuring that agribusinesses have a stable supply of produce that meets their quality standards.
But as with any contractual relationship, there are potential pitfalls, and farmers can sometimes find themselves on the losing side of the deal. For example, a company might not pay the agreed price for the produce delivered, asserting that its quality was substandard, while the contract does not include any dispute resolution mechanism.
For everyone to benefit fairly, sound and transparent contracts are needed, supported by an adequate legal framework.
The legal guide is the result of a multi-year process spearheaded by the International Institute for the Unification of Private Law (UNIDROIT) in collaboration with the Food and Agriculture Organization of the United Nations (FAO) and the International Fund for Agricultural Development (IFAD) that gathered inputs from legal scholars, agricultural experts, producers and traders on ways to ensure contract farming relationships are sustainable.
Contract farming today
Today millions of farmers worldwide are producing under some form of contract and a number of industries in a range of producing countries have embraced it as their main mode of production.
Changes in the world's agrifood systems and consumer preferences have been a key driver of this trend. As food demand has risen both in developed and developing countries, processors and marketers need a steady and high volume stream of supplies, which they are not always able to meet buying on open commodities markets.
At the same time, more exacting commercial and consumer standards regarding freshness, quality, origin and appearance are leading buyers to seek more control over the process of production to ensure consistent quality – including requiring in contracts that farmers use new technologies they may not be able to access on their own.
In a best case scenario, contract farming arrangements help buyers gain a stronger hand in production, quality control and pricing, while farmers benefit from guaranteed income and market access. They may also acquire new productive assets – under some contract types, buyers commit to supporting growers by providing farm inputs, equipment, and technical advice.
Sound contracts key
Where sound contracts are not in place, however, buying firms – invariably more powerful than farmers – may use their bargaining clout to their short-term financial advantage. Farmers often have limited legal recourse to settle disputes.
Buyers, on the other hand, risk that farmers engage in side-selling – selling goods produced under contract to another purchaser for a higher price. This might lead them to opt not to buy from small-holders in order to avoid such opportunistic behaviour.
The 250-page legal guide released today aims to address these and other potential issues by providing advice on sound contract design, from negotiation to conclusion, including concrete clauses on allocation of risks as well as recourses for non-performance and conflict resolution.
It also includes a description of common contract terms and examines legal issues and problems that may arise under various practical situations, illustrating how they might be treated under different legal systems. The guide also has a section on alternative forms of dispute resolution that don’t require the involvements of courts.
Outreach
In order for the guide to become a widely used legal tool, outreach to farmers, buyers and institutions promoting farmer-to-market linkages is essential. FAO, with financial support from IFAD and in collaboration with UNIDROIT, will produce dissemination materials in English, French and Spanish that provide a distilled, layman’s version of what the guide has to offer in order to make it accessible to a wide range of people.
Professionals working to promote famer-to-market access will be trained to become trainers themselves, familiarizing producer groups and buyers with the best practices outlined in the guide.
FAO’s web-based Contract Farming Resource Centre will also be revamped to introduce e-learning courses and an online community of practice.