The role of Unidroit and the development of legal structures to support contract farming

Contract farming—defined in general terms as agricultural production in which there is a pre-harvest agreement between a producer and buyer—provides an alternative to post-harvest transactions on an open-market. As supply chains become increasingly complex and differentiated, the use of agricultural production contracts can assist in the timing of delivery along with assurances regarding production processes related to quality and safety. In more developed economies, adoption of agricultural production contracts can be seen as an outgrowth of agricultural industrialization and concentration. In many developing economies, often characterized by a large number of smallholder producers, contract farming is viewed as a means to facilitate engagement in otherwise inaccessible or inequitable markets and support rural development. Although there are clear benefits to agricultural production contracts, they may involve risks to the contracting parties and other adverse social effects. In an effort to capture the economic and structural transformation potential of these contractual arrangements, some governments have developed regulatory schemes to promote their use and mitigate potential adverse impacts. But this is far from universal, and parties generally remain free to structure their contracts to maximize their self-interests. Production contracts are an established mechanism for vertical coordination in the agricultural sector. The increasing globalization and rapid modernization of the agricultural supply chain, however, has heightened interest in this topic. Unidroit, in partnership with the Food and Agriculture Organization of the United Nations (FAO) and the International Fund for Agricultural Development (IFAD), recognized the need to identify emerging legal issues in this area and provide objective guidance, where appropriate, based on internationally accepted standards of practice in contracts. The objective was to encourage stable and balance contractual relationships in order to promote sustainable contract farming models. After providing additional background details regarding the implementation and economic impacts of agricultural production contracts, this chapter attempts to highlight key aspects of the Unidroit, FAO, IFA Legal Guide on Contract Farming, identify areas of continuing concern and suggest opportunities for future Unidroit, efforts in this critical area.