imf-wb spring meetings contract farming as a...

Author

www.fao.org/ag/ags

Rural Infrastructure and Agro-Industries Division (AGS)

IMF-WB SPRING MEETINGS

Contract Farming as a Tool for

Economic and Social Development

CREATING AN ENABLING ENVIRONMENT FOR INCLUSIVE CONTRACT FARMING OPERATIONS

Eva Gálvez

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Contents

• Why an enabling environment is important for the success of CF operations?

• Understanding the nature of the EE for CF

• Rationale for government intervention to improve the EE for CF: examples from developing countries

• The evolving environment for CF

• Concluding remarks

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Importance of creating an enabling

environment for CF

• Potentially, there are strong benefits and risks for the parties involved in contract arrangements, especially for smallholder farmers.

• The actual realization of benefits and risk reduction objectives of CF will largely depend on the business environment.

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Multidimensional environment

Enabling environment for CF

Public goods & services

Policy framework

Regulatory framework

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Enabling needs for inclusive CF

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Why governments seek to create an EE for CF?

Efficiency• Mexico’s

national support scheme for CF

Inclusiveness

• Brazilian biodiesel

• Bangladesh -poultry

• Pakistan – State Bank guidelines for CF

Fairness• Dispute

resolution…

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Trends observed

1. ‘Fix what is broken' approach vs. ad hoc regulations and policies on CF.

2. Regulatory/policy/public good elements bundled up together to form a comprehensive CF initiative.

3. CF as a key ingredient of policies and regulations linked to:

▫ agro-territorial planning (e.g. agricultural growth corridors, clusters and agro-industrial parks).

▫ public-private partnerships (PPPs) for agricultural development.

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

CF being promoted in agribusiness PPPs

• 57% of PPPs for agricultural development analyzed by FAO (out of 70 cases) were devoted to value chain development: they all have CF as their cornerstone.

• CF’s key role also in PPPs for agricultural R&D (e.g. development and marketing of seeds)

PPP

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

CF in agricultural

growth corridors

CF operations

Market

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

CF operations btw park tenants & farmers

• India: The IFFCO KISAN agropark fosters CF operations between park firms & farmers that bring their raw materials to the park.

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Concluding remarks

• Similarities in clauses and policy conditions even across different EE contexts (“Guiding principles for responsible contracting farming” of FAO), e.g. policies regarding pricing mechanisms & side-selling (Philippines)

• Institutional quality, although difficult to measure, is essential for fostering EE for CF.

• Even under non-ideal business climates, farmers and buyers will find ways to make contracts work market opportunity is attractive enough but higher transaction costs and risks & potential for exclusion (India; Ethiopia)

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Concluding remarks (cont.)

• A favourable business climate can be outweighed by other factors influencing CF such as market structure (Russia).

• Pro-smallholder CF policies are needed in the face of structural changes. Government incentives for firms to integrate smallholders into their supply chains through contracts: improve financial benefits + offset eventual added costs associated with inclusiveness.

• But they may introduce vulnerability risks.

• Policy-makers still need to ascertain the real cost to companies of smallholder inclusion in CF schemes

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

UNIDROIT/FAO/IFAD Legal Guide on CF

Guide to help address enabling environment issues•Define CF from a legal stand point (typify CF contracts)•Identify essential elements of CF contracts•Promote good contractual practices for CF•Present options for Govts to support/enhance/regulate CF

Caveats•Avoid over-protection of farmers/excessive regulation of firms

▫ Can act as a disincentive for companies to participate in CF

•Potential for negative impact on farmers’ access to finance, technical advice and markets •Guide should promote trust building rather than confrontation

Rural Infrastructure and Agro-Industries Division (AGS)

www.fao.org/ag/ags

Community of Practice

legal & business matters

www.fao.org/ag/ags/contract-farming