Contract Farming in Africa: an Application of the New Institutional Economics

Contract farming is characterized by a contract between a farmer and a firm that will process and/or market the farmer's crop. It is a growing phenomenon in Africa; it has been a component of some of the most successful income generating projects for smallholder farmers; it has been a component of various schemes involving parastatal processing firms and the terms of the contracts between smallholders and parastatals have major consequences for the financial viability of the parastatals and, hence, for the macro balance picture in African economies. This paper reviews the role of contract farming. First, we provide background information on its nature and scope. Second, we use the New Institutional Economics to discuss ways in which contracting overcomes market failures common in African agriculture. We outline the conditions that make contracting the preferred form of market organization, as well as conditions under which it should not be encouraged. Third, we discuss Kenyan experience in light of the theories presented in the previous section. Finally, we discuss the policy implications. The paper draws on secondary sources to discuss contracting in Africa generally, and on a recent survey of contracted farmers in Kenya, where the most attention is focused.