Agricultural production and food
system have been subject to structural
changes including informal contracts with its multifunctionality for food
security, rural household development, and global poverty reduction.
In absence of institutional
credits, informal contracts allow farmers and retailers to overcome the
investment difficulty in starting farming or food business. Informal contracts
as a widespread concept in agriculture lead
to a strong linkage of sponsors to the supplier function (Rehber, 38-50).
For decades, contracts in farming
and food business are amongst pathways of
sustainable rural growth. Despite
smallholders’ inability to compete the large-scale
producers; informal contracts provide to
rural households serves as conduits for poverty alleviation. Largely, in
informal sectors, companies and farmers have
seasonal informal contracts for fresh vegetables, tropical fruits and cash
crops (Eaton & Shepherd, 2001 pp. 52).
Typically, in informal contracts,
the farmer agrees with the purchaser to
provide quantities of specific volumes of quality
standard agricultural products at a
delivery schedule and often, at predetermined
prices. The purchaser commits to production with land preparation, the
supplying inputs, and providing technical
advice. In this case, farmers are linked with a large farm or processing plant
which supports production planning, input supply, extension advice, and
transport. Certainly, the informal contracts
in farming lead to a production of a variety of agricultural products (FAO,
For sponsors, the seasonal contracts represent collateral. Whereas the tendency of contract sponsor to
purchase all products within quality and
volume parameters is higher, sponsors offer cheap credits and inputs to farmers
seasonally on credits due to the free-riding
problem (Gibbon, 2001 pp. 352). In a recent study in developing
countries, Fisher & Qaim, (2012b) showed that farmers form cooperatives in
agreeing to a contract to supply supermarkets with products. This collective
action reduces transaction cost and facilitates access to high-value output markets.
Bolton & Dewatripont 2005, however, explain that as
informal contracts (also called parole) are neither signed under seal nor
recorded and the problem of asymmetric information abound (hidden actions or
moral hazards occur as sponsors or farmers default). Olomola, 2007,
agrees that informal contracts in agricultural production are ordinary
agreements between buyers and farmers,
which establish the production and marketing conditions for farm products. Such
an agreement may be oral or written.
Though very discrete, the
untenable asymmetric information challenge
is an old phenomenon in the informal sector, rural households enter into informal contracts. Despite farmers
and food processors decision to acquire informal credits, low- input production
occurs. However, farmers seemingly push voluntary plans to stay in production.
Moreover, different contracts potentially have relatively distinct issues which
come about from farming inefficiencies. Farming inefficiencies are undeniably unfavorable for rural
livelihood. Smallholders constitute a large population of the undernourished
people worldwide. Analyzing these inefficiencies for appropriateness in
agriculture is imperative as farmers’ entrepreneurial skills jointly affect
supermarkets participation in food systems and household nutrition (Qaim, Chege
& Anderson, 2015 pp. 394-397).
In understanding these crucial
development implications of informal contracts in farming and food sectors requires
contemporary assessment for sustainable growth as it inextricably links food
security and entails high potential to increase rural peoples’ incomes in
Notwithstanding several studies
of informal contracts in farming, the study uses existing literature to highlight informal contracts and its
distinctive implication on farming and food sectors. To this demonstration, the
study insightfully shows empirical analysis/scenarios to assess the impact of
informal contracts on farmers.
Drawing upon development reports
and analyzing contracts in farming models, the study sets out:
investigate the extent to which informal
contracts reduce vulnerability.
To investigate how the participation in contract farming
affects area-under-cultivation(farm size) and input intensification.
analyze the general factors influencing
farmers’ participation in informal contracts.
examine the effectiveness of informal contract in farming and food sectors.
Besides this background information on the study, the paper is organized into
five further chapters. Chapter two is the brief literature review; addresses
contract farming and informal contract models.
Chapter three is a theoretical framework of
the study; espousing the need for this
study. Chapter four is an empirical
model used. Chapters five and chapter six are discussions and conclusions of
the study respectively.