Today, the agriculture is expanding rapidly, and small farmers are having more and more difficulties with accessing the market and fully achieving profitability. In the same time, larger companies involved in crop supply or food processing, are in great need of a reliable source of crops for further sale or for processing.
In order for both sides to obtain some sort of benefit, they often establish a relationship, in the form of a written contract, where each side has to fulfill certain conditions. For a contract to be successful, it requires a long-term commitment from both sides. This common practice is called contract farming.
Farmers must sign a contract to sell their harvest to the sourcing company in exchange for inputs, technical assistance, and financial help
Contract farming can be viewed as a partnership between farmers and processing companies or cooperatives, where the farmer is obligated to supply the agreed quantity and quality of crops, in a specific time period. In return, the processing company agrees to buy off the crops from the farmers, at a prearranged price.
Farmers must sign a contract to sell their harvest directly to the sourcing company, and in exchange, they get support in the form of agricultural inputs, technical assistance, and financial help. Contracts will only work if both parties meet the required conditions and if they believe that by signing the contract, they are creating a win-win situation for themselves.
The Basic Formula for a Good Contract
As we heard many times before, the health of a supply chain is the health of the company. Many stakeholders in the agricultural value chain (e.g., retail chains, wholesale traders, cooperatives) source crops from farmers and they all have two final goals in mind—achieving sustainability and profitability.
But like we discussed in our previous blogs, successfully managing networks of farmers, regardless of their size, can often be challenging work and if they're not managed properly, the crop sourcing company can face financial setbacks and losses.
A transparent contract and compliance with the agreed terms is a precondition for the successful long-term sustainability of contract farming
Therefore, a long-term partnership with the growers is achieved by creating a transparent and commercially viable contract, that will be satisfactory to both parties. First and foremost, contracts should be flexible and provide clear, simple specifications regarding three key areas:
- Quantity; specifying the amount of the desired product (crop)
- Quality; agreeing what quality levels and standards the product needs to meet
- Price; stating a specific price for the crops, set by the farmers
Secondly, it should also have a defined risk management strategy in case of extreme events such as high market prices or bad weather.
By creating the contract, a processing company wants to ensure contract execution that meets their targets. If the farmers fulfill the desired targets stated in the contract and comply with the agreed conditions, then the crop sourcing company can be sure that the supply chain is healthy and prosperous.
Contracts should be flexible and provide clear and simple specifications
Signing a Contract Doesn't Always Mean Compliance
Like in any business deal, there are a number of risks associated with contract farming. Common problems include farmers selling to another crop sourcing company, or using inputs supplied by the company for other purposes. From the other side, a company sometimes doesn't buy products at the agreed prices or in the agreed quantities.
If farmers don't deliver the contracted quantity and quality level of the product, the sourcing company is forced to purchase outside their usual network of growers at a more expensive price, and that greatly affects the company's budget.
This type of conduct is called breach of contract, and as a result, the trust between farmers and the sourcing company is broken, so future business activity is no longer possible.
This being said, it is obvious that a clear, transparent contract and compliance with the agreed terms is a precondition for the successful long-term sustainability of contract farming.
Managing a network of farmers can be quite a handful, but one agricultural software has a perfect solution—Agrivi farm management software. It provides sustainable growing practices and better collaboration with the farmers, which ultimately improves the benefit for both growers and sourcing company.
If you have difficulties with managing your farmer network, don't hesitate to contact our Sales team and explore different Agrivi industry-focused solutions.
Text sources: FAO