Contract farming is considered by da Silva (2005) as the most common value chain approach. Little and Watts (1994) define contract farming as the “forms of vertical coordination between growers and buyers-processors that directly shape production decisions through contractually specifying market obligations; provide specific inputs; and exercise some control at the point of production.” Furthermore, Vermeulen and Lorenzo (2010) describe contract farming as pre-agreed supply agreements between farmers and buyers that usually specify the purchase price, or how it will relate to prevailing market prices, and may also include terms on delivery dates, volumes and quality. In this context, according to Will (2013), the buyers normally provide embedded services such as upfront delivery of inputs (e.g., seeds, fertilizers, plant protection products), pre-financing of input delivery on credit (explicit rates not always charged; see insert) and other nonfinancial services (e.g., extension, training, transport and logistics). As a result, in many cases, buyers seem to substitute the role of financial institutions with agricultural credit providers.
Contract farming is not a new concept, as there is evidence of its use already in the nineteenth century in Asia and Latin America. In the twentieth century, the concept spread to the USA and Europe and was introduced in North and sub-Saharan Africa (Bijman 2008). Its development has been reported to be significant in many countries and sectors. For example, it accounts for 75 % of poultry production in Brazil, 90 % of cotton, 50 % of tea and 40 % of rice in Vietnam, 60 % of tea and sugar in Kenya and 100 % of cotton in Mozambique (UNCTAD 2009). Despite this wide use of contract farming in developing countries, its use in industrialized countries is not as common as could have been assumed, given its advantages over spot market conditions, mainly due to the lack of trust between potential business partners and the possibility to achieve similar prices through other distribution channels (Will 2013). The World Bank (2007) suggests that contract farming plays an important role in the integration of smallholders in agribusiness chains and includes it as one of its core recommendations to promote commercially orientated smallholder farming in order to “bring agriculture to the market” (Oya 2012).