| BENEFITS | DRAWBACKS | |
|---|---|---|
| Access to Markets | Access to High Value Markets: CF can link SSFs to high value markets where they can sell crops under favourable terms. | Monopsonistic Markets: Firms may exploit SSFs who are tied to a single purchaser (that is, extract increasing rents from farmers, charge high interest rates for input loans). Firms can also specify characteristics of contractors and exploit marginal producers. |
| Production and Marketing Costs | Farmers can receive inputs at lower costs and extension services. It may ease transportation costs. | Depending on contracted price, input and marketing costs may reduce farmer profit; farmers may have low bargaining power with contractors. |
| Improved Technology | Access to Agricultural Technology: Firms engaged in CF often provide necessary inputs, technical assistance and training to their smallholder partners in a timely fashion. Learning by doing may have spillover effects that increase productivity of non-contract crops. | Production Risk and Farmers Investment: New agricultural technologies may be riskier and risk may be borne by farmers. With input intensive (fertilisers, pesticide, herbicide, etc.) agriculture, serious health conditions and environmental pollution may result. |
| Price and Contract Risk | Reduce Price Fluctuation Risk: Contract Farming lowers the risk of price fluctuations if contract prices are pre-set. Furthermore, CF spreads production risk among the parties involved. |
Contract Enforcement: Lack of contract enforcement in many developing environments makes it easier for either party, farmers or companies, to break the terms of the agreement. Sideselling and Delays in payment or changes in contract terms. |
| Transaction Costs | Not applicable | Preference for Large Farms: Agricultural firms may prefer to arrange contracts with large farms to minimise transaction costs. Thus, CF could marginalise extremely poor SSFs. |
| Credit | Access to Credit: Contract Farming offers SSFs the opportunity to access capital from contract firms. | Not applicable |