1.0  INTRODUCTION

Arguably,
informal contracts and its multifunctionality for food security, rural
household development, and global poverty reduction have implication for
economic growth.

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In
absence of institutional credits, informal
contracts allow farmers and
retailers to overcome the investment difficulty of starting a farm or food
business. Informal contract as a widespread concept in agriculture leads to a strong linkage of sponsors to the
supplier function (&farmers).  

In
a couple of decades, contracts in farming and food sectors are amongst the pathways for sustainable rural growth. Despite smallholders’
inability to compete the large-scale producers;
informal contracts provide to rural households
serves as conduits for poverty alleviation. Farmers form cooperatives to access
public credits in developing countries. Largely, in informal sectors, companies and farmers have seasonal
informal production contracts for fresh vegetables, tropical fruits and cash
crops (Eaton & Shepherd, 2001 pp 52).

Typically,
in informal contracts, the farmer agrees with the purchaser to provide quantities of specific
volumes of quality standards agricultural
products at a delivery schedule and often, at predetermined price. The purchaser
commits to supports production through land preparation, the supplying inputs, and providing technical advice. In this case,
farmers are linked with a large farm or processing plant which supports
production planning, input supply, extension advice, and transport. Certainly, the informal contracts in farming lead to the
production of a wide variety of agricultural products (FAO, 2008).

For
sponsors, the seasonal contracts represent collateral. Whereas the likelihood of
the tendency of contract sponsor to purchase all products within quality and volume parameters is higher, sponsors
offer cheap credits and supply inputs to farmers seasonally on credits due to
the free-riding problem (Gibbon, 2001 pp
352).

Bolton
& Dewatripont 2005, however, explain
that informal contracts (also called parole) are neither signed under seal nor
under record and the problem of asymmetric information abound (hidden actions
or moral hazards occur as sponsors or farmers default).  Olomola, 2007, is
in agreement that informal contracts in agricultural production are ordinary
agreements between buyers and farmers,
which establish the production and marketing conditions for farm products. Such
an agreement may be oral or written.

Though
very discrete, the untenable asymmetric
information challenge is not a new phenomenon
in the informal sector, rural households enter into informal contracts. Despite farmers
and food processors decision to acquire informal credits, low- input production
occurs. As Governments and regulatory bodies seem lost in their role, farmers
seemingly push their voluntary plan to stay in production. These matters in
contracts are indicative of the compelling need for relevant institutions and
standards in the credit market.

Moreover,
different contracts potentially have relatively distinct issues which come
about from farming inefficiencies. Farming problems are undeniably unfavorable for rural livelihood and market share.
Attending to these inefficiencies to ensure appropriateness requires
contemporary assessment of informal contracts in agriculture as it inextricably
links food security ().

Understanding
these crucial development implications of informal contracts in farming and
food sectors are fundamental components of sustainable growth as it entails
high potential to increase rural incomes in developing countries.

Notwithstanding
kinds of literature on contracts in farming, the study uses existing literature
to critically highlight informal contracts
and its distinctive implication on farming and food sectors. To this
demonstration, the study shows insightful
empirical analysis/scenarios to assess the impacts of informal contracts on farmers.

Drawing
upon rural development reports and analyzing contracts in farming models, this paper sets out:

·        
To investigate the
extent to which informal contracts becomes
a prerequisite condition for effective rural economic growth.

·        
To
investigate the extent to which informal
contracts might reduce vulnerability.

·        
To
analyze the general factors influencing farmers’
in informal contracts.

·        
To
investigate how institutions regulate informal
contract schemes in the informal sector.

·        
To generally, examine informal contracts roles
in farming and food sectors.

Besides this background information on the study, the paper is organized into
five further chapters. In chapter two is the brief literature review; addresses
contract farming and informal contract models. 
Chapter three is a theoretical framework of
the study; espousing the need for this
study.  Chapter four is the empirical
model used. Chapters five and chapter six are discussions and conclusions of
the study respectively.

 

 

 

 

 

 

2.0  LITERATURE
REVIEW

2.1 Meaning of Contract Theory in Farming

Contracts in agricultural production are forwarding
agreement between farmers and processing or marketing firms for frequent supply
of agricultural products at predetermined prices (Strohm and Hoeffler, 2006). Roy,
1972 emphasizes that the agreement may be written or oral. Different contracts
in farming make its discussion more demanding. 
Notwithstanding this, there are basically five models accepted globally.
These include centralized model, nucleus estate model, multipartite model, and
the informal model (FAO, 2008).  For the
purpose of this research, the focus is only on the informal model.

2.1.1
Meaning of Informal Contract Model in Farming

Basically, this model is run by
individual entrepreneurs that make simple, informal production contracts with
farmers on a seasonal basis. Usually, the produce from these contracts require
only a minimal amount of processing and packaging for the retail outlet or
local markets. Perhaps, the most speculative of all contracts in farming
models, with a high risk of promoter or farmer default.

2.1.2
Effects of Contracts to farmers and Sponsors

The benefits of contract in farming
for farmers include; improved access to local markets, assured markets and
prices (lower risks) especially for non-traditional crops, thus, assured higher
returns. Farmer access to production inputs, mechanization, transport services,
and extension advice are enhanced. Local infrastructures
(roads and irrigation facilities) are improved.
Moreover, sponsors have assured
quality and timeliness of delivery of
farmers’ products, production is more reliable than open market purchases and
the sponsor faces less risk not being responsible for production (Agila,
Monohara and Asokha, 2008).

2.1.5
Constraints of Farmers in Contract Farming

Despite the aforementioned merits
of contract farming, there are several limitations including; Farmers become
indebted in diverting inputs supplies on credit to other uses and this cause
production problem, The staff of sponsoring organization may be corrupt,
especially in the allocation of quotas, thus, sponsoring companies are many at
times unreliable or exploit from a monopoly position, There are land
constraints due to lack of security of tenure and this endanger sustainable
operations. There are at times no effective “buyback”
arrangements between farmers and organization.

 

3.0
THEORETICAL FRAMEWORK

Poverty,
unemployment and migration in the informal
sector remain the bane of economic
development of rural households. As a result, stakeholders continue to find
alternate paths of improving incomes of the rural people in developing
countries. Notably, developing countries farmers lack funds to invest into
farming and have difficulty in contacting potential buyers for their produce.
However, in dealing with this problem of farmers, the informal contract is a possibility
identified with a potential of improving livelihoods of farmers.

It
is therefore imperative and a common approach to scrutinize informal contracts
in farming or the food sector to
explain why and strengthen logic by burrowing perspectives from other
literature which encourage an alternative explanation on how informal contracts impact farming
and food sector.  

For
firmness to espouse the role of informal
contracts in farming globally, the study uses two models to provide explanations. 

First, a
formal model analyzing and unveiling the rationale
for . We use a descriptive table in this
analysis.

 

 

 

 

 

 

 

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