Farming is a risky business. Even after putting in months of hard labour, a farmer has no control over how his crop will turn out and how much he will earn from it. From farm-specific factors like seed quality to natural factors like climate change, to indirect events such as global political upheavals (leading to supply chain and market disruptions), many factors can affect a small farm business.

There is a way to circumvent these problems to a certain extent, especially for new or small-scale farmers, through contract farming. Contract farming is a written agreement between a large company or government body, known as sponsors, and small-scale farmers, who often struggle to compete with large-scale farmers in the open market. The sponsor contracts farmers to cultivate a specific quantity of a particular crop for a predefined sum of money and exclusivity to that yield. Globally, contract farming has enabled farmers to boost crop production with high-quality seeds and increase their income substantially, resulting in a win-win situation for both parties.

But how does this arrangement actually work? And is it as good as it sounds for a small-scale farmer? Let’s find out.

How Does Contract Farming Work?

A resource-rich company and a local farmer with a small piece of farmland might sound like unequal partners. However, therein lies the beauty of contract farming – both parties bring something to the table. The sponsor purchases all the produce grown by the farmer if it meets the contract specifications for quality and quantity. This helps the farmer sell his produce easily, without the hassles of haggling in the open market to get the right price. At the same time, the sponsor is assured of a specific yield at a specified rate without having to comb through the markets for the raw materials of their choice.

What the Sponsor Brings to the Table

A new or small-scale farm business often struggles to access high-quality seeds and affordable farm equipment. They also face challenges in selling their produce at a fair price in the open market, which is often dominated by large farmers and established brands. Furthermore, obtaining credit or financial aid from banks or other financial institutions is no easy task, as the risk in farming makes it an undesirable business to invest in. 

This is where a sponsor can be your trump card:

1. Access to farm inputs and equipment: With better economic and technological resources at their disposal, a sponsor can provide a small-scale farmer with high-quality seeds and the equipment needed to cultivate the crop they require. 
2. Gaining knowledge: They can also provide training on increasing crop yields through proper pest control, fertilization, and irrigation, helping farmers learn about agriculture without incurring education costs. This training and knowledge can then be applied by the farmer to any other subsistence or cash crops he cultivates, thus increasing his income. 
3. Access to financial aid: The sponsor’s credibility enables small-scale farmers to obtain loans from commercial banks. Sometimes, the sponsors themselves advance credit through their managers.
4. Fixed price for produce: A well-designed contract ensures that the sponsor buys the produce of the contracted farmer at a fixed price (pre-determined or calculated in accordance with market standards), subject to quality checks. If satisfactory, this takes the burden of selling all its produce in the open market off the farmer’s shoulders. 

What the Farmer Brings to the Table

If a sponsor’s support benefits the farmer, the same is true the other way around. From an administrative and operational perspective, working with farm owners is more efficient and affordable than buying land and hiring workers to do it. There are other benefits too:

1. Ready availability of farmland: Acquiring land for ownership is a costly affair, even for a big company. By partnering with small-scale farmers, the sponsor gains access to fertile farmland and willing farmers at a lower cost than buying large tracts of land outright.
2. Reliability: The supply of a certain quantity and quality of crops is essential for the sponsor to go to the next step of production. Sourcing such crops becomes easier and more reliable through contract farming, as the sponsor does not have to look for the required produce in open markets.
3. Consistency in quality: The farmer is the expert at understanding what is required for the crop to grow well and how to tend to maximize output. This expertise, combined with the sponsor’s seeds, ensures consistent crop quality.

Problems With Contract Farming 

Despite the mutually beneficial nature of contract farming, several key considerations should be weighed before entering into a contract with a sponsor. There should be transparency and clarity between the two parties regarding the scope of work and risk-sharing, particularly if crop yields fail or the contract is terminated for any reason. The farmer should ensure that the entire burden of the failed crop does not fall onto his shoulders. Additionally, it is crucial to verify the sponsor’s credibility before signing a contract. Sometimes, the management of the sponsor could be corrupt or exploitative when it comes to fixing a fair price for the produce, posing a threat to the small-scale farmer’s income. 

How A Business Advisor Can Help Safeguard Your Interests

Contract farming can be a completely new experience for new or small-scale farmers. Hence, predicting potential problems and navigating the deal to safeguard your farm business prospects requires an experienced advisor. Not only are they good at asking the right questions to a potential sponsor, but they also have many resources and contacts at their disposal to check the credibility of the sponsor before you sign on the dotted line. The advisor can act as your representative and negotiate a deal that legally, economically, and socially protects your farm and its yield.

The efficient implementation of contract farming can be a boon to both farmers and sponsors. A skilled business consultant can help you make your venture a success.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You Start Contract Farming

A skilled business consultant can help you find the right sponsor, negotiate the best terms, and work out the numbers to ensure you generate profit from the price quoted in the contract. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and business advisory expertise, contact us online or by telephone at 905-517-2297.