Contract farming improves farmers’ profit, says report

MANILA, Philippines - Small-scale farmers can boost their income if they can be linked to modern markets through favorable contract farming arrangements, said a newly released paper.

According to a discussion paper published by the Philippine Institute for Development Studies (PIDS), rural poverty can be reduced if more small farmers and farm workers can participate in contract farming, allowing them to be a part of value chains that connect to modern markets.

In contract farming, farmers sell directly to institutional buyers, often under a contract growing arrangement. “The buyers specify their preferred plant variety and management practice, and provide technical and other support such as farming inputs or cash,” said authors Roehlano Briones and Ivory Myka Galang.

The paper highlighted the results of a 2012 PIDS survey conducted among tobacco farmers in the Ilocos region. Most of the farmers sampled were engaged in contract farming and usually sold about three-fourths of their output to contract buyers.

Asked to rank a set of reasons for engaging in contract farming, most of the farmers pointed to favorable price and financial support.

“Farmers are given financial support in the form of cash advances,” the paper explained. “One reason for high prices is the premium quality of the planted crop, made possible by the input and extension support from the contract buyer.”

The survey results found that contract farmers had relatively higher net farm income per hectare than noncontract farmers. Contract farmers also had much higher tobacco yields and much lower costs per hectare than noncontract farmers.

“The combination of these factors leads to enormous difference in net tobacco farm income per hectare between contract farmers and noncontract farmers,” the paper stressed.

Noting how contract farming favored smaller farmers, the authors added: “Policies for promoting small farmers’ participation in value chains and for encouraging the private sector to shift to contract growing scheme are needed.”

The paper, titled “Linking Small Farmers to Modern Markets: The Role of Contract Farming,” also called for an enabling environment for the expansion of supply chains.

This, it said, could be done through improving the transport infrastructure in the rural areas and establishing institutional and regulatory framework that facilitates contract preparation, information, and enforcement.

“For the entire agriculture sector, it is important for the government to establish, together with key stakeholders, what is meant by ‘responsible contract farming.’ This will set the standards for fair treatment and accountability, buttress the mutual benefits from the scheme, and increasingly link small farmers to modern markets,” recommended the paper.