Legal reforms can enhance contract farming benefits

Contract farming has been an area of rapid growth in agricultural investments in the Mekong region, with many benefits for smallholder farmers. But it is also mostly unregulated and informal, which can create problems both for farmers and investors. Representatives from key government institutions from Cambodia, Lao PDR and Vietnam recently shared challenges and experiences of developing a legal framework on contract farming in the Mekong Region.

In recent years, the Mekong countries have begun to move away from agricultural investments based on large-scale land concessions, due to poor economic performance and mounting environmental and social costs to communities. At the same time, contract farming has expanded in many locations, as an alternative means to large scale commercial production between smallholder farmers and agribusiness companies. While there are diverse models, contract farming refers to any advance-purchase arrangement between companies and farmers. Often, the part of the agreement provided by the company includes covering upfront costs for inputs and training farmers on production techniques. For farmers, entering a contract tends to mean that they must exclusively sell the harvest to the company, earning profits after paying back the upfront investment costs. Common crops include rice, maize, sugarcane, cassava, rubber and fruits. When managed effectively, contract farming offers major advantages for smallholder farmers compared to concession-based deals, allowing them to keep their land rights, and supporting upfront costs that are otherwise difficult for farmers to afford.

On 22 March 2022, Vietnam’s Institute for Policy and Strategy for Agriculture and Rural Development (IPSARD), AgroInfo and the Mekong Region Land Governance (MRLG) project organized the “Responsible Agricultural Investment (RAI) Government-to-Government Dialogue” in person in Hanoi, Phnom Penh, and Vientiane and online, linking three countries for sharing experiences and promoting contract farming legal reforms in Cambodia, Laos and Vietnam. The Dialogue included presentations from high-level government representatives from Cambodia, Laos and Vietnam, Mr. Ronald Tundang, an associate at the International Institute for Sustainable Development, and Dr. Danny Marks of Dublin City University.

“If an individual farmer is directly involved in contract farming without government intervention it will lead to many problems” according to Dr. Le Van Thinh, Director of the Department of Cooperatives and Rural Development, Ministry of Agriculture and Rural Development Vietnam.  This is particularly true when there is a breach of contract, such as side-selling or the contracting company failing to purchase farmers’ products, or when a dispute arises between farmers and companies. Dr. Marks, the author of MRLG research on the Contract Farming Promotion and Development Act (2017) of Thailand, shared that despite widespread benefits from contract farming, Thai farmers faced a range of problems in their contractual relationships with companies, and awareness of their rights under the law remained low.

Stronger contracts can avoid conflicts from the outset. There are, however, few standardized contracts in the Mekong region. “Even though we don’t have a standardized contract system in Laos, we have other forms of agreements between farmers and traders.  We haven’t had a dispute mechanism in place yet, we are interested in learning from other countries.  In terms of investment scale Laos is small comparing to our neighbouring countries, but we will adapt the mechanism to suit our context” said Dr. Phonesay Vilaysack, Director General of the Department of Evaluation at Lao PDR’s Ministry of Planning and Investment (MPI).

Cambodia faces similar challenges, where a contract farming law is currently under the draft, as explained by Mr. Siek Vichhay, Senior Officer of Department of Agro-Industry, Ministry of Agriculture, Forestry and Fisheries. The law aims to protect the rights and interests of all parties while establishing a clear mechanism for resolving disputes, helping to support smallholder livelihoods, and attracting more domestic and foreign investment in agribusiness.

Other challenges include lack of clear pricing and smallholders getting into unsustainable levels of debt. Their debts often arise from high input costs and low buying prices set by companies, as well as lack of crop insurances, and limited collective bargaining on the part of farmers. In all cases, stronger contracts could help, as well as representation of farmers by cooperatives.

Drawing on examples from sugarcane producers in Lao PDR, Mr. Sengthong Soukhathammavong, MRLG’s advisor to the Investment Promotion Department at MPI, suggested that more could be done to limit indebtedness of farmers by sharing risks more equitably, “In order to help the smallholder farmers, we need a clear template such of assistance from the government or the investors should share some responsibilities”  Further, according to Tundang “We need government intervention for the farmers’ indebtedness, like partnering with the local banks for low interest rates.” There are also examples where this has been supported by agribusiness companies.

Beyond the challenges above, gender inequality in CF remains a major but often unspoken issue. Dr. Nguyen Anh Phong, Director of AgroInfo Vietnam emphasised the importance of gender equality in contract farming which should be clearly referred to in related laws.

The Dialogue represents an important step forward in international cooperation for the reform of contract farming legislation across the region. However, more needs to be done. “Taken together, smallholder farmers represent by far the largest investors in the agricultural sector and thus the true engines of economic growth.” According to Dr. Micah Ingalls, Team Leader of MRLG. “However, development policies have commonly focused on creating attractive conditions for agribusiness companies, often at the expense of these smallholders. Policy reforms must create a favorable environment for both farmers and investors, implemented through transparent and accountable regulation and a rule of law framework.”

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