In rural areas of developing countries, markets are often poorly serviced. Smallholder farmers are unable to take advantage of market opportunities and must pay high costs to overcome market imperfections. Farmers often have trouble accessing credit, obtaining information on market opportunities or new technologies, purchasing certain inputs and accessing product markets. When markets are accessible, farmers may be subject to price fluctuations or inequitable prices. Such difficulties are barriers to their development and represent a ‘bottleneck’ in the development process.
For smallholders, contract farming is potentially a way of overcoming market imperfections, minimising transaction costs and gaining market access. This approach has been implemented in several developing countries and deserves priority in development research.
A detailed study Contract farming in Indonesia: Smallholders and agribusiness working together (Ian Patrick, Australian Center for International Agricultural Research, 2003) gives recommendations:
- to agribusiness (and smallholders): on considerations that need to be included when developing contracts;
- to policy makers (in Indonesia): on actions that could be taken to expand the benefits of contracting and improve the ability of farmer groups to work with multi-nationals
Note: There is a copy of the report at Scribd: Contract farming in Indonesia: Smallholders and agribusiness working together.