30 July 2015
A new legal guide developed by the International Institute for the Unification of Private Law (UNIDROIT), the Food and Agriculture Organization of the United Nations (FAO), and IFAD aims to help growers and buyers establish 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 contract farming – an expanding practice in which farmers produce agricultural goods for specific buyers in set quantities at prearranged prices.
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.
As with any contractual relationship, however, there are potential pitfalls, and farmers can sometimes find themselves on the losing side of the deal.
Smallholder farmers in the developing world, some of whom are currently working under contract and some who are not yet, can be particularly vulnerable.
For everyone to benefit fairly, sound and transparent contracts are needed, supported by an adequate legal framework.
"Contract farming is one of the most promising models for alleviating global rural poverty," said Gerard Sanders, IFAD’s General Counsel.
"The legal guide promises to improve contract farming arrangements by narrowing the information gap between the parties and promoting best practices," said Sanders, speaking at the launch event for the guide in Rome.
Diverse team of legal experts
The legal guide is the result of a multi-year process spearheaded by UNIDROIT in collaboration with the FAO and IFAD.
Together the three organizations gathered inputs from legal scholars, agricultural experts, producers and traders on ways to ensure contract farming relationships are sustainable.
In a best case scenario, contract farming arrangements help buyers gain a stronger hand in the 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.
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 to avoid such opportunistic behaviour.
The new legal guide 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.
Reaching out to smallholder farmers
For the guide to become a widely used legal tool, outreach to farmers, buyers and institutions promoting farmer-to-market linkages will be essential.
IFAD has already funded successful projects related to contract farming in the past.
One example is the West Noubaria Rural Development Project in Egypt, which helped farmers and their associations to enter into contractual arrangements with private-sector companies, enabling them to increase their export of food crops, benefitting about 27,000 households.
Another example is the ongoing Northern Rural Growth Programme in Ghana, which has been setting up contract farming arrangements between private partners and smallholder farmers, directly benefitting about 45,000 households.
According to Sanders, IFAD's in-house experts are looking forward to being able to use the legal guide to increase the level of expertise and sophistication of IFAD-funded projects.
To further these and other dissemination goals, IFAD is providing FAO and UNIDROIT with a grant to produce 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, including farmers themselves.
Professionals working to promote farmer-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.
"Well-earned congratulations to all the parties involved for a truly outstanding product," he said. (Source: http://www.ifad.org/)
- Press release
- Download the pdf version or order your copy
- Contract Farming Webpage