Agricultural markets are dynamic and not static. Having high reliance on the ever-changing weather patterns leaves the sector vulnerable to price risks. Contract farming is seen as a way of mitigating price risks. Unfortunately, most farmers don’t understand what contract farming is, its advantages and its disadvantages.
Contract farming is an agreement between farmers and processing and or marketing firms for the production and supply of agricultural products under forward agreements at predetermined prices and time.
Even though there is slow adoption of this model, some sectors like floriculture and horticulture are catching up with it. East Africa breweries and Keroche industries are some of the companies using this model to source barley and sorghum, a major raw material in their production.
How does contract farming work?
Farmers who are the primary producers agree with the buyer to produce for him a specific produce under a specific condition, quantity and quality. The buyer on the other hand may agree to offer support services and or some inputs and by the produce at a fixed price regardless of the prevailing market price.
How farmers benefit
- Findings from research show that farmers’ annual average incomes increase after joining contract farming which is linked to high yields and high prices offered by contract markets.
- Farmers’ price risk is often reduced as many contracts specify prices in advance.
- Contract farming introduces new technology and also enables farmers to learn a new skills.
- Farmers also benefit from extension services offered by buyers in maintaining quantity and quality.
More on proffesional farming
- Coriander”dhania” leaves farming-how to farm the easy money making crop
- What Consumer Consider When Buying Vegetables from Kabanda
- How to get profit in your farming; is your farming profitable?
Challenges farmers face with contract farming
- Farmers face both market failure and production problems, especially when growing a new crop.
- Buyers also tend to be very unreliable especially when the market prices are low due to oversupply. Farmers get frustrated are forced to sell their produce at throw away prices.
Must do
When signing a contract ensure you it is legal and binding. Agree on how to deal with any eventualities that may arise in the cause of production.
It’s also good to support the contract with crop insurance against price risks.
Start with a small scale as you expand. This way you minimize the risks.
Do enough market research on the product prices, changes and trends. This will help you to settle on a good price with a better profit margin.
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