Contract Farming REF#6186

22 Sep 2023 | Agribusiness Issue Tackled

Last modified date: 22 Sep 2023

Issue Description

Contract farming (CF), or contract-based agricultural production, has been around for decades in the agricultural sector and is also common in Cambodia, mostly in the form of informal contracting agreements between producers and buyers.

At the heart of contract-based agricultural production lies an agreement between farmers (producers) and buyers: both agree in advance on the terms and conditions for the production and marketing of farm products. These conditions usually specify the price to be paid to the farmer, the quantity and quality of the product demanded by the buyer, and the date for delivery to buyers. In some cases, the contract may also include more detailed information on how the production will be carried out or if inputs such as seeds, fertilisers, and technical advice will be provided by the buyer. Contract-based agricultural production is particularly suited for high-value crops, highly perishable crops, and technically difficult production. This makes it an ideal practice for the future development of Cambodian agriculture and its export diversification strategy towards rich markets such as the European Union.

Formal CF, in the form of a contractual relationship, offers advantages to both producers and buyers in terms of guaranteed prices, quantity and quality, inputs, credit, improved production technology, and extension, etc. On the other hand, informal CF based on verbal agreements will remain for the majority of producers and buyers in the foreseeable future unless entry into CF is made easier and more inclusive.

The RGC has for some time wished to move to a more formal system of contract-based agricultural production and issued a Sub-Decree on CF in 2011. The CF Sub-Decree set the legal framework for CF by designating an agricultural production contract (APC) as an agreement of agricultural production business (APB) conducted by two parties or more, which is legally binding and shall specify in advance any requirements demanded and accepted by contracting parties.

In terms of implementation, although the literature is scarce, there seem to have been a number of moderately successful cases of CF in Cambodia, in areas such as rice, pepper, rubber, sugarcane, and cassava. Pepper contract farmers, for example, were shown to enjoy higher revenues than non-contracting farmers in the sector.

However, there have also been some challenges to the implementation of CF. For example, some farmers have complained that the contracts are too technical and difficult to understand, that there are too many disputes with buyers regarding the interpretation of contracts, or that they have been unable to access the necessary inputs and supporting services to meet the requirements of the contracts.

Impact on business

The promotion of CF in Cambodia is increasingly necessary given the implicit risks of inaction or failure. Without contract farming, farmers may be less likely to adopt improved agricultural practices, which could lead to lower yields and incomes. Farmers who are unable to sell their crops at a fair price may be more likely to fall into poverty. If farmers are unable to produce enough food, it could lead to food insecurity, especially for the most vulnerable groups. Furthermore, if farmers are not incentivised to adopt sustainable agricultural practices, it could lead to environmental degradation, such as soil erosion and water pollution.

Recommendation

  • Strengthen contract farming by including specific provisions in the draft upcoming law on Contract Farming.

As we understand that a law on CF is currently under consideration, we respectfully recommend the following to the Ministry of Agriculture, Forestry and Fisheries:

  • That the law should specify the minimum requirements of an agricultural production agreement/contract, avoiding jargon and complicated legal terminology. The contract should be easy to understand by smallholder farmers. A template could be annexed;
  • That production contracts be legally binding. However, recourse in the courts in case of conflicts is costly, time-consuming, and beyond the capacity of most smallholder farmers. Alternative conflict resolution mechanisms should be considered, such as arbitration at the district level;
  • That the Contract-Based Agricultural Production Committee established under the Sub-Decree on CF should be expanded to include stronger private sector representation, for example, the Cambodian Rice Federation, the Cambodian Cashew Association, and smallholder farmer organisations.
  • That companies/buyers which wish to participate in CF should be registered with the relevant Ministries.
  • That in cases where the spouse of the producer has a substantial contribution to the production under contract, the spouse needs to be fully aware of and understand the contents of the contract and should be a co-signatory.
  • That tax incentives should be considered for an initial period to lower the “investment threshold” for smallholder farmers.

By ensuring that the above provisions are included in the draft law on contract farming, Cambodian farmers will benefit from a solid regulatory framework that reduces the chances of conflict between parties, encourages the adoption of sustainable farming practices, and combats poverty conditions in the countryside. Cambodian agriculture as a whole will benefit from a renewed emphasis on farm-to-fork principles in production, increasing the likelihood of export linkages to sustainably-minded markets such as the European Union.

Dialogue with

Royal government of Cambodia

Initiative from Eurocham: The issue has been raised by the Agribusiness Committee within The White Book edition 2024 in the Recommendation No. 22.

No response from the Royal Government of Cambodia

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