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Nov 11th

How Does A Contract Farming Agreement Work

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«It is very important to think about the realism of these budgets. We often combine the gross margins of contractors for yield, production and variable costs to be comparable,» says Means. WHAT ARE THE BENEFITS TO THE FARMER? The immediate benefit for most is a reduction in the capital invested in the farm, with most of the machines in surplus and sold, which significantly reduces production costs. As with any contract, there are a number of risks associated with contract farming. Common problems are farmers who sell to a buyer other than the one with whom they contract (known as ancillary sales, out-of-contract marketing or, in the Philippines, «perch jumping»), or the use of inputs provided by the company for purposes other than those intended. On the other hand, a company sometimes fails to buy products at agreed prices or in agreed quantities, or to arbitrarily degrade the quality of the product. These agreements allow a farmer to reduce his physical inputs while still living on the farm and running the business. Some may want to free up capital to pursue other business or investment ideas. Prowse (2012) provides an accessible and comprehensive overview of current agricultural issues under contract in developing countries.

[17] Several studies have given a positive message about the inclusion of small farmers and the benefits they bring to participation. For example, in a study published in 2014, Wang, Wang and Delgado study a large number of empirical studies on contract agriculture. They conclude that controlled agriculture has had a significant impact on improving the efficiency and productivity of farms and farmers` incomes. [18] In a summary review of econometric studies, Minot and Ronchi (2015) indicate that participants` incomes increase by 25-75%. [19] A more specific approach is being adopted as part of the systematic review of contract agriculture by Ton et al. (2017). Although their study concludes that contract farming can significantly increase farmers` incomes, Ton et al. say these figures must take into account the bias of the publication and survivors. In other words, such estimates need to be revised downwards to accept that studies that show negative or no effects are less likely to be published and that the calculation of the impact of contract farming may neglect systems that do not improve or collapse the incomes of small farmers and are therefore not available for evaluation. [20] Agricultural contracts are most often three years, with each party paying a payment or first tax, although it is important to understand that the only guaranteed payment is that of the contractor, says Councillor Richard Means of Strutt-Parker.

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