Importance of contract farming

agreement between farmers and a buyer which establishes conditions for the production and marketing of a farm product.
And to be binding and enforceable, such agreements depend not only on good contractual design, but also on the existence of an adequate legal framework.

Very often, contractual agreements have degenerated into contractual disputes that have seen farmers and their contractors trading accusations and even seeking legal recourse – each party blaming the other for not honouring their part.
In fact, there seems to be a general tendency for farmers and their contractors to ignore some basic principles of their contracts creating risks for the contractual relationship.

Naturally, contracts should be written to be binding. If the agreement between the farmers and contractors is only verbal, then it will invariably make them legally unbinding for the parties concerned.
Contracts must be written to be enforceable in a court of law and should elaborately define the parties (seller-buyer, producer-processor and supplier-purchaser) while at the same time clearly specifying the product under consideration (quality and quantity).

The other thing contracts should do is state the time of delivery, clearly establish the prices, payment obligations and other financial issues.
In this case the parties involved should determine the price to be paid for the product transacted or establish the rules for its determination, including the price adjustments for variation of quantity, quality and timing of payment where applicable.

Contracts should also outline the mutual obligations, specifying the roles of both parties and should also give an indication of their duration while at the same time establishing a legal instance to govern the contract (provincial state, country) where the parties are located in different areas.
But they can only choose one law to be applied. This will be critical in the event of a dispute arising. And while addressing a dispute the parties should refer to a dispute settlement mechanism or to an arbitrator for help.

There should be a signature clause to allow either party to commit themselves and feel obliged to honour their obligations.
It is crucial for the parties to realise that a contract is a mutual assent manifested by an offer and an acceptance upon a legal consideration to meet some commitments or to abstain from doing some acts that damage the relationship.

The exchange process between buyer and seller is not always an easy thing.
This is the stage at which a facilitation process becomes vital to eliminate or minimise transaction risks. Rules or principles for dispute resolution should be agreed upon.
Early this year, 300 farmers from Guruve found themselves embroiled in a bitter dispute with a contractor who had contracted them to produce dark air-cured tobacco but had reportedly not clearly stated his terms to them.

The farmers say they did not know that they were signing contracts at the time of the signing but thought they were registering for inputs. This means that the farmers did not understand the contractual terms and when the contractor bought their produce, he did not give them what they expected.
This was the beginning of a protracted dispute that had to be finally settled through the intervention of the Tobacco Industry and Marketing Board that requested Boka Tobacco Auction Floors to buy the tobacco from the farmers and later sell to other buyers.

Similarly, a group of farmers from Centenary, Mashonaland Central, recently lost their case at the civil court after a transporter they hired to ferry their tobacco to the floors allegedly left it uncovered and was damaged by rains.
The farmers argued that the transporter had reneged on his promise to take care of the produce until it was auctioned.
The transporter, however, argued that such an arrangement was impossible as he had to go and ferry more tobacco for other farmers and cover it using the same tent that the farmers wanted to have covering their produce.

The third such example is the recent case involving the Zimbabwe Commercial Farmers’ Union and some of its members who wanted to grow soyabeans under contract.
According to the farmers, the ZCFU asked them to pay an amount of US$235 for joining, inspection and administration fees so that they could be registered for contract farming as well as be eligible to secure loans from ZB Bank. The union would assist them, it is alleged.

The farmers allege that ZCFU had suddenly made an about-turn and told them to approach the banks on their own while the inputs they were supposed to get under the contract arrangement are also yet to come.
In both instances, the farmers are victims of trust. They trusted their would-be partners and left their destiny in partners’ hands but did not have anything tangible to prove it.

Legally, one party’s failure to comply with the contract’s mutual obligations is known as a breach of contract and when this happens, one or both parties might wish to enforce the agreement on its terms.
But the reality on the ground is that in several contracts there is no legal obligation for contractors to share with the farmers the risk associated with the vagaries of such factors as weather or the incidence of pests and diseases.

In most cases growers alone are left to absorb the cost of agricultural production insurance giving credence to the assumption that risk sharing is always uneven, unfairly penalising the weakest player in the contractual transaction who happens to be the farmer in this instance.
The success of most contract farming schemes usually depends on the degree of trust that is cultivated between the contracting partners.

Where there is trust, the contract can be very simple but where there is no trust complexity is likely to develop and more clauses therefore become necessary for safeguarding the interests of both parties.

It is always logical that a legally binding instrument exists to govern this commercial relationship and this instrument also needs to be backed by an appropriate legislative framework that ensures its validity and enforcement.

Generally, most farmers enter contracts to reduce transaction costs of accessing new markets, borrowing, managing risk, acquiring information or creating more employment opportunities.
This means that contracts need to increase farm profits and reduce risk exposure for farmers.

And with the current liquidity challenges the economy is facing, taking the contract route has become a viable option for many farmers willing to produce but unable to fund the operations from their savings.

Literally, the distrust that has of late surfaced between the farmers and contractors will not work in favour of enhanced productivity as there will be less farmers signing up for contracts that translates into a shrinking hectarage of crops.

The effects will soon be telling on the rate of the recovery of the sector and consequently the economy.
Generally, there should be a situation in which both the farmers and the contractors feel safe doing business with the other and have a clearly spelt out modus operandi – one that leaves all partners

aware of any new developments in the arrangement.
Contracts allow farmers access to product markets where transaction costs are high and effectively prevent smallholders easy access.

But in some cases the marketing clauses that contracts come with chase farmers away leaving them vulnerable to unscrupulous buyers or they even go out looking for them because they will be offering better prices than the contractor’s.
In recent years side marketing has become rampant and contentious and has seen some contractors funding crops that were never sold to them after private buyers dangled more attractive carrots to the farmers than theirs.

This development has seen more contractors feeling comfortable contracting groups of farmers instead of individuals who can easily make snap decisions that may not prevail in a group situation.
The sense of belonging to a group has been known to cultivate some restraint in many people as there is a shared responsibility with some group members coming is as the conscience for those who sometimes act on impulse.

Sometimes it is even easier for farmers to seek contractual arrangements as groups. Groups encourage adoption of new technology and adjustment to changed market conditions and spread risk at the same time.

There are also slim chances of default among groups as such actions have a strong bearing on their social standing.
But the key issue remains that both contractors and farmers need to understand what a contract is and how it is carried out for both sides to score positive results at the end of the day.