Contract Farming System in Thailand

Author(s): Sukhpal Singh

Source: Economic and Political Weekly, Vol. 40, No. 53 (Dec. 31, 2005 - Jan. 6, 2006), pp.
5578-5586
Published by: Economic and Political Weekly
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 Contract Farming System in Thailand
Thailand is one of the pioneers in contract farming in Asia. The Thai state has actively
promoted this mechanism of agricultural production and marketing coordination since the
mid-1980s. This paper examines the nature of contracts and their performance,
explores the role of the Thai state in contract farming, and traces the dynamics and implications
of contract farming for the farmers and the local economy.

SUKHPAL SINGH

contract production by multinational corporations (MNCs),

Introduction writes:

Mediation by a government department, as in Taiwan and Thailand,

C ontract farming is an arrangement between the primary
may be needed for equitable pricing and quality determination
producer/s and the agribusiness firm in order for the latter
(p 73).
to procure a certain pre-agreed, quantity and quality of
produce at a particular price and time from the primary producers. Finally, in the case of Thailand, there is some evidence to
It can be only a pure procurement transaction, extending into believe that contract farming has been implemented and managed
supply of inputs or even beyond. This is happening as good differently, which has resulted in better overall agricultural growth,
quality, sufficient, timely, and cost effective raw material is aand developmental effects through the shift to high value crops
prerequisite for any successful agribusiness firm, whether op-[Burch 1996; Benziger 1996]. Many recent studies recommend
erating in the domestic or international market. A review of the replication of contract farming projects [Benziger 1996].
literature in the context of African and Latin American countries But, it is argued by others that the contract farming system
reveals that contract farming has led to many ill-effects in thehas not operated well due to the default by farmers or companies
spheres of livelihoods of producers, community organisationsand that many companies are withdrawing altogether or reducing
and other institutions, environment, and gender [Porter and their dependence on contract procurement to address problems
Phillips-Howard 1997; Burch et al 1996; Morvaridi 1995; Watts of quality and general control. Some others had to even close
1992; Korovkin 1992; Glover and Kusterer 1990]. Though the their operations altogether due to raw material supply problems.
contract system leads to better incomes and employment in Even the prevailing contract farming system in the north-east
the beginning [Williams and Karen 1985; Leisinger 1987; region is "loose" and creates many practical problems [Saenjan
Benziger 1996], the relations between firms and farmers worsen 1998:162, 166]. A FAO report on the Royal Project [IMC 1996]
over time and the system results in ecological and economic also states: "However, this method (contract farming) has not
degradation of local production systems. Most of the studies findyet been successfully implemented by the industries in general.
contracts inequitable, short-term, and ambiguous. However, itOnly in a few cases in Thailand has contract farming been
is important to recognise the role of the state in encouraging or implemented smoothly and successfully" (p 14).
discouraging the agribusiness firms and in protecting the pro- In this context, the paper explores and analyses the nature of
ducers in contract situations [Asano-Tamanoi 1988; Christensen contracts across types of farmers and companies in terms of
1992a; Benziger 1996]. specific provisions and their implications. It examines the farmer' s
This paper examines the contract farming system in Thailand.and firm's perceptions of the working of the contract system and
problems; critically looks at the role of the state and its mode
There were many reasons for taking up a study of contract farming
in Thailand: First, of participation in the contract system promotion and monitoring;
Of all the countries in Asia, Thailand probably has the most and explores the effect of the contract system on the local
economy. The case studies of contract farming in potato and sweet
extensive experience with contract farming, in the widest range
of crops. It also has the highest degree of private sector involvementcorn have been conducted in the Chiang Mai (CM) province in
in CF and the highest concentration of foreign direct investment north Thailand. This province has seen contracting in high value
in agriculture and agro-industry. Contract farming is a key element
fruit and vegetable crops. The contract agreements of the four
of the Thai government's development plan, reflecting a strategy companies, two each in potato (Frito Lay Thailand (FLT) and
of "private-led integrated agricultural development" [Glover
Berli Jucker Foods (BJF) each working with 3,000 growers
1992:4].
largely through brokers, farmer groups, a cooperative Potato
Secondly, an adequate analysis of the role of the state in contract
Growers' Cooperative (PGC) and local companies across 15-20
farming has not been attempted, as Burch (1994) points out:districts of five to seven provinces) and sweet corn (River Kwai
This issue (the role of the state in promoting contract farming)International (RKI), a major producer and exporter of sweet corn)
is seldom analysed in a literature which usually focuses on theand K C Chiang Mai Food Processing Company (K C Foods),
relationship between the agribusiness companies, the main pro- working with 5,000 and 1,000 growers respectively through
ponents of contract farming, and those farmers who producebrokers), are analysed on various aspects. Case studies of firms,
commodities under contract (p 163). brokers and farmers have been carried out in the districts of
Thirdly, there has been "state mediation" of contract situationsSan Sai, Doi Saket and Mae Rim, based on interviews with
of which Abbott (1993), in the context of monopolisation ofcontract farmers and brokers and discussions with the state

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agency officials (DOAE and BAAC) and company officials. in this area grow three to four different crops every year. Contract
Besides, discussions and interviews with various stakeholders farming of potatoes on a larger scale started in San Sai in 1988
in the system were held. and in 1994-95, 80-90 per cent of the farmers grew potatoes in
this district [Ornberg 1996]. Today, there are more than half a
II dozen companies in potato contracting and processing. The
Contract Farming in Thailand companies have four alternatives to ensure a supply of potatoes
for processing: buy it on the open market an option which is
In Thailand, only 20 per cent of farm land is irrigated with not available, import fresh potatoes which are too few and too
maximum area (45 per cent) in the central region and minimum costly, have own plantations which is costly and difficult, or use
(8 per cent) in the north-east region. Now, there are more than contract farmers which is ideal for various reasons like cost, crop
half a million contract growers across crops of vegetables, sweet care/quality, area choice, supervision and local experience.
corn, sugar, chicken, swine and rice. Major failures of the contract In terms of regional distribution of maize (sweet corn) pro-
farming system have been in asparagus, pineapple, cotton and duction, in 2000-01, the northern region accounted for 50 per
oil palm. On the other hand, successes have been in sunflower, cent of the total followed by the central and the north-east regions
wheat, barley, cashewnut, sugar, mushroom, rice, chicken, swine, with 25 per cent each. Within the northern region, maize is widely
shrimp, seed, corn, gherkins and vegetables. The contract farming distributed across many provinces [OAE 2001].
system emerged more than three decades ago, first with poultry,
sugar cane, tobacco, pineapple and vegetables. In poultry, the Brokers
system of contracting was put in place by the Charoen Pokphand
(CP) group first in the early 1970s and they introduced wage Right from its inception, the Thai contract farming system has
and price guarantee contracts for growers in 1976. The CP group been dominated by middlemen who work between companies
also tried contract faming in shrimp production through inde- and farmers (see the figure). It is in evidence everywhere today
pendent growers and cooperatives in the mid- 1980s, with support and has been documented by many other recent studies [Ornberg
from the Bank for Agriculture and Agricultural Cooperatives 1996, 1999; Thavornyutikam 1998]. A recent study looks at the
(BAAC) but, since farmers were opposed to the fixed price middleman system as the four way relationship in contract farming
contracts, the cooperatives broke down. Thus, CP no longer on the ground, where roles of the four actors (farmers, companies,
practises contract farming system in shrimp and procures from state, and small business interests - middlemen or brokers) -
open auctions markets and its own farms [Goss et al 2000]. It are negotiated and contested, though they fluctuate through
also tried contract farming in rice in the early 1980s and then time and space [Rigg and Nattapoolwat 2001:951]. A manager
again in 1986, failing both times [Christensen 1992b]. of one of the companies acknowledges the problems of using
middlemen in the contract system as follows: "First, we have
Case Studies of Potato and Sweet Corn to find out who actually signs the contract with the factory. Are
they really farmers? In fact, only a few contracts feature
CM, one of the 76 provinces of Thailand, has 27 districts and
real farmers. Most of the contractual parties are produce com-
its main crops are longon, rice, onion and potato. CM, where
pilers (middlemen). This leaves a gap - communication gap -
24 per cent farmland is irrigated, accounted for morebetween
than 90 the produce buyers (companies) and the farmers"
per cent of onion production of Thailand with the highest yield
[Chunhawong, nd].
in 2000-01. The average size of holding here is only 9.8 rai (one procurement, in north Thailand, some companies
In potato
rai equals 0.16 hectares or 2.4 acres), which is the lowest in the
prefer to employ a broker instead of working with farmer groups.
country. In fact, the northern region itself has the second
Thelowest
term "broker", rather than "middleman", is used by com-
average size of holdings (23.1 rai) after the south (22.3panies,
rai), the
but there is little difference between a broker and a
national average being 24.4 rai [OAE 2001]. Contract traditional
farming middleman, apart from the fact that a broker usually
is so popular here that even for a crop like rice, a significant
works with only one of the companies. He is more like an
proportion is contract farmed. Many farmers no longer producethan an independent entrepreneur. The broker, who
employee
rice for home consumption and buy rice from the market is for this
often a former member of the Potato Growers' Cooperative
purpose [Rigg and Nattapoolwat 2001]. (and a skilled potato farmer), is the only contact between farmers
North Thailand has traditionally been a major production
andcentre
companies, and like the traditional middleman, he may give
for potatoes besides onion, tomato, soybean, and rice, credit
which tois the farmers. Some companies have chosen to deal
a major crop. In the 1970s and 1980s, it accounted for exclusively
as much with brokers. In San Sai, there is little room for
as 80 per cent of total potato production as well as area under of farmers as competition between middlemen is
exploitation
potato in the country [Scott 1987] and now it accountshigh
for and
100 information about prices is spread among the farmers
per cent of the country's potato production. Within the north 1996:9]. This is corroborated by our case studies of
[Ornberg
region, Chiang Mai and Tak are noted for potato production
the brokers of potato firms as well.
accounting for 53 per cent and 37 per cent respectively and may work for more than one company in different
A broker
together making for 90 per cent of potato production incrops
Thailand
at the same time, as was the case with the FLT potato broker
[OAE 2001]. In fact, in the upper north, farmers take two
who crops
worked with 100 small farmers and got a commission of
of potato in a year compared with only one crop in one the baht
lower perkg of potato delivered. Similarly, a BJF broker works
region. There were more than 100 fruit and vegetable processing
with 130 farmers who grow 2-20 rai under contract. He maintains
units in north Thailand during the mid-1990s with 36aof listthem
of BJF growers working under him which contains names,
located in CM alone. Within CM province, San Sai district,code
where numbers, seed quantity supplied, seed price, and assured
the PGC is located, is known for potato production and farmers contract price, besides bank account number or house number

Economic and Political Weekly December 31, 2005 5579

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 Figure: Contract Farming System in Thailand months, then corn for three months, and finally, paddy for four
Seed/Inputs/ months (June-September). They only get seed from companies
Seed/lnputs/ Payments/Commission
Payments through brokers and pay for them at the time of the delivery of
produce to the company. Contract terms are the same for all

'.,G-_'roup
,armer ' Cooperative/
growers and they now have an experience of two to three years

J ' Local Company

Farme Verbal/ Broker/Collector/ ritten/Company
with the present companies. The major aspects of the contracts
are quality and quantity of produce, price, and monitoring of crop
by the companies. The payment is made within two weeks in
(Direct contract)
cash or through bank accounts and there is no crop insurance.
\ Produce ^ ^ _ ^Produce / The farmers borrow from banks (refinanced by BAAC) for their
input needs. Companies recommend only input types for con-
tracted crop and not brands of inputs. They have not faced any
situation of crop failure so far under contracting. Produce re-
Credit and \ / Coordination and jection is not very large and rejected produce is bought at a lower
Extension \ / Facilitation
price. The market price has been only marginally above contract
price. They rate contracting performance as very good and want
/ State (BAAC and \ to continue contracting with companies. This is corroborated by
another study in the area in the mid-1990s which notes,
Most farmers in San Sai want to grow potatoes, but to grow for
fresh consumption is not an option for the majority of the farmers
because of a limited supply of imported seed. It is reasonable to
or ID card copy given or not, as evidence for each farmer. Thebelieve that farmers choose to grow potatoes on contract because
company takes a copy of any of these documents. The broker it is the next best alternative to Spunta (the variety for fresh
monitors these growers though they are contracted by the com- consumption). Farmers have no access to seed for potatoes for
pany. He has a written seasonal (three month - December to processing, hence it is not possible for them to grow these varieties
February) contract with the company and maintains a copy of without a contract [Ornberg 1996:6].
it. As a broker, he gets a commission of 10 stang (0.10 baht) The potato contract prices were 5.50 baht/kg in 1993-94, 5.90
per kg of produce delivered as his monitoring charges. In this
baht/kg in 1994-95 and 8 baht/kg in 2002 for superior grades
district (Doi Saket), he is the only broker for the company though(A and B) and only 3 baht/kg for small size potatoes (grade C).
his neighbour is working for another company (FLT) in the same There has been tax free but controlled import of potato seed tubers
crop (potato). He is working mainly for the commission he gets(thru ministry of commerce) and heavy taxation on import of
for brokering with farmers on behalf of the company. The broker-fresh potatoes for maintaining domestic prices (Rs 25-30/kg).
cum-contract growers are more literate and larger growers, e g, There are quotas for fresh variety seed potato import for PGC
the FLT broker grows 12 rai potato for FLT on leased land. (which has monopoly rights and decides seed quota for members)
There are five to six sweet corn brokers in the area who work and the processing variety (with no restrictions) for companies
for different companies. The RKI has 100 brokers, each working who have to give a list of potential contract growers and the area
with about 50 growers, and KC has four brokers, each working for imports. Fresh potatoes are under the cooperative promotion
with 100-500 growers. The brokers are generally more literatedepartment and processing potatoes are under the department
than contract growers and some of the early growers have now of agricultural extension. Imported seed tubers cost about 30
become brokers. A broker generally monitors more than 100 baht/kg (100 kg for one rai) and can be resold for more than
farmers with 500 rai sweet corn. He only has an oral contract100 baht/kg.
with other growers. The broker's commission is 0.3 baht per kg.The crop is new for this district (Doi Saket) for all farmers
He may sometimes also have sub-contractors who help himwho have grown it only since the last four to five years. The
monitor farmers and he pays them a commission of 0.05-0.1 bahtbenefits of contracting are not only improved and more stable
per kg commission. He maintains a list of growers for the income but also better quality seeds. More important is the
company. These brokers also work for other companies in other
stability of the income, which was highly uncertain earlier. Potato
crops, such as Bunsi who also works for FLT in potato. His yield per rai is 4 tonnes and it gives 32,000 baht under contract.
contract with RKI is for 12 rai and he is also a broker for it. The working capital cost is about 18,000 baht and net income
His sub-growers are the same farmers who grow potato, i e, of 100
the grower about 14,000 baht. There have been problems of
farmers. The price is 3.75 baht per kg and he is happy with RKI's
lower yield and poor quality due to pest attack and disease or
performance and has had no problem so far. natural calamity but company waived only the seed cost in such
situations. Even when market prices are higher than contract
Growers prices, the companies stick to their prices. The growers and
brokers want the price to be more flexible and competitive in
BJF and FLT growers are only literate to the primarythelevelopen market. But, they cannot grow without contract as they
generally and are smallholders (10 rai), some are even landless
will not get seeds or will have marketing problems. Farmer's
and lease in land for contract production. They work with brokers
default as per company is 40 per cent with 20 per cent not
of the company generally and have only oral seasonal contracts. supplying at all and another 20 per cent supplying less than the
They grow only two to three rai under contract and growcommitted other quantity in case of FLT. Thus, the contract farmer
crops like conr, onion and rice in other seasons. The farmers in retention rate for the company is 60 per cent. In case of BJF,
this area grow three crops in a year starting with potato for five defaults are reported to be nominal.

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 The sweet corn growers under contract to the companies are sell it to the company and not accept produce of other persons
generally literate up to the primary level, marginal or small to sell to the company in the name of the farmer. If the farmer
landholders or even landless cultivators who grow corn under does any of the above, the farmer is well aware that he/she shall
contract on leased land. They grow two to six rai under contract be held liable to civil and criminal charges and the farmer agrees
and have been working with present companies for three to four to let the company take possession of potatoes that another person
consigns to him/her in his/her name without payment for those
years on the average, through brokers. Payment is made through
potatoes.
the broker within 1-1.5 months. Other crops of the farmers are
rice and onion, and for the latter there is an onion growers' It means proxy buying or selling is prohibited under the agreement
cooperative in the area. They are more loyal to brokers than to and is to be penalised. But, what about company using middlemen
companies as they change companies when brokers do. Whereas to procure potatoes and to supply seeds?
middlemen contracts are written and formal, individual contracts
are verbal. The companies only supply seed through brokers on BJF Contract
credit until harvest. A broker has to collect inputs from the
company office in his area. In case of crop failure, companies If the seed potatoes that the farmer receives from the company
replace seeds and in case of disease or pest attack, give a to cultivate are damaged due to the farmer's faults and/or there
discounted rate for sprayers. The seed cost is 450 baht (one kg)is no produce at all, hereinafter called, potatoes to be delivered
per rai and sweet corn price is 2.5 baht per kg for farmers and to the company, the farmer shall be responsible for compensation
to the company equivalent to cost of seed potatoes that the farmer
3.0-3.2 baht per kg for brokers which includes his "management
receives from the company.
fees". In the rainy season, prices are higher (by 0.5 baht per kg)
The farmer shall not distribute, sell or transfer to anyone or do
as it is risky to grow crop at that time. Though the crop is new
anything with potatoes grown from the company's seed potatoes.
for them, they have not faced crop failure so far. They have faced
Such an act is an offense against civil and criminal law. If the
no problems under contracts and rate company performance as farmer does as mentioned above, the farmer shall be responsible
good or very good. Due to better and more reliable income, they
for compensation to the company equivalent to potato weight
want to continue contracting, but, without a contract, they cannot
multiplied by purchasing price per kilogram plus 1.50 percent per
think of growing the crop as they will face marketing problems. month (one baht and five satang) interest until the farmer settles
The farmers feel that the government should monitor contractsall the compensation.
for seed quality, payment schedule and better price. But, there is no clause in the contract for the farmers to pursue
The RKI reported 10 per cent broker default. It was moving
in case the company fails to buy the produce.
to corporate farming for quality reasons. On the other hand, KC
faced a 20 per cent default. The small growers defaulted due
KC Foods Contract
to small volumes and sold in the local market, whereas brokers/
large growers defaulted between companies. If there is default on delivery, the company can legal action,
but nothing is specified in case the company does not buy from
Nature of Contracts the farmer.

The contracts are mostly one-sided, i e, pro-company in case

Standard
of most companies as will be clear from the following paragraphs: Contract Used by RKI
The standard CF agreement (Appendix 1) recommended by
FLT Contract the Thai state (department of internal trade) lacked not only teeth
but was also poor in design. But, it has some good aspects lik
If the produce value is less than the cost of seed and other inputs,
Section 3 which states:
the farmer shall pay the missing cost of seed and inputs to the
company in 15 days upon receiving a notice from the company. As soon as the buyer accepts the produce as stated in Section 2
and checks that everything is correct, the buyer shall pay the seller
Late payment will be subject to a fine of ....... per cent or Bt........
per day on the amount due." right away in line with the terms of payment in No 1 of Appendix 3
The farmer agrees to sell the produce grown from the company'sattached to the Agreement. In case the buyer does not pay the seller
seed potatoes to the company only. If the farmer distributes, sells, at once as stated in the first paragraph, the buyer shall issue an
transfers or does anything with the produce grown from theevidence of acceptance of the produce from the seller. The said
company's seed potatoes to other persons, the farmer agrees to evidence shall at least feature the name of the produce, seller's
compensate the company at ...... times of the value of produce name, buyer's name, quantity and weight, size, quality, price,
so distributed, sold or transferred to other persons. amount of money, date of delivery and date of payment by the
buyer. The buyer shall sign and affix the company seal on the
But, no liability is specified in case the company fails to buysaid evidence that the seller can use to receive payment from the
the produce. It is only stated that "In case a party breaks a sectionbuyer later in line with details in No 2 of Appendix 3 attached
in the Agreement, the other party is entitled to cancel the Agreementto the Agreement".
and demand compensation for damage at the actual cost of
Similarly, Section 4 states:
damage."
In its agreement with the potato growers' cooperative, it isIf a force majeure or uncontrollable incident specified in Appendix
stated in the additional agreement, which is part of the agreement,4 takes place, and the seller is unable to deliver the produce by
that: the schedule and at the point of delivery stated in Section 2, or
the buyer cannot accept part of or the entire produce, the party
The farmer agrees to sell all his/her produce to the company and affected shall notify the other party in writing of the force majeure
not sell his/her produce to another person or farmer in order to at once. Once the force majeure is over, both parties shall discuss

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 and reach an agreement as specified in Appendix 5 attached to The only departure of the seventh plan from the sixth p
the agreement, and both parties shall resume compliance with the seemed to be its emphasis on group contracting as against
said agreement. dividual farmer contracts. But, in the eighth and ninth plans, t
This is quite fair to both the parties. Further, Section 5 makes is no mention of anything related to contract farming. Tha
it clear that, a big change in policy papers quite suddenly, though on t
ground many things are happening which reflect the role of
In case the seller delivers the produce less than what's specified
state in contract farming or, rather, the lack of it. Though th
in Section 1 by .............. per cent ................... the buyer
may not accept the produce. But, if the buyer accepts the produce,
is no explicit mention of contract farming in the eighth and ni
the value of produce will be calculated proportionately and the national plans individual departments are still implementing
buyer is entitled to fine the seller for the missing quantity at on the ground. For example, a 1999 order of the departmen
Bt............. per kilogram. internal trade, which issues a standard contract farming ag
ment for companies and farmers (Appendix 1) not only says
There is also a provision for dispute resolution through a
this agreement should be used but also specifies that it w
committee at the district level with government representatives.
regulate contract compliance. It is a different matter that
These contract clauses are very similar to the contracts of the
standard agreement designed by it was used only by a cou
Thai Farming Company, which operated in Chiang Mai during
of companies even in 2002.
the 1970s [Laramee 1975]. But this standard contract, surpris-
The state not only provided coordination and support
ingly, has no clause on input supply and payment for inputs or
local authorities such as agricultural extension agents, l
other conditions regarding them, which are so crucial in the CF
administration officers, and the BAAC, it also reallocated a
arrangements. It is more of a buying and selling of the produce
million baht deposit in BAAC. The interest compensation
agreement between two parties.
the farmer participants in the programme (3.5 per cent pa)
made available to encourage more farmer participation an
III
reduce production cost. But later, farmers could obtain only
State and Contract Farming interest rate (5 per cent pa) loans instead of getting compensat
for interest charges.
Though contract farming was initiated in most cases by the
The MOAC, through its DOAE, still carries out training
private sector, the state soon came to play a major role in terms
contract farming for farmers and local officials which incl
of both setting broad policy directions for diversification as well
aspects like guidelines for contract farming implementat
as in underwriting private sector activity in a variety of ways
i e, types of products suitable for certain kind of contrac
through institutions like the Board of Investment (BOI), National
arrangements, familiarity with the system of contract farm
.Economic and Social Development Board (NESDB), and Agri-
supervision of contract arrangements, special financial assist
cultural Land Reform Office (ALRO). Though BOI - set up in
to companies undertaking contract farming, and proces
1954 and in its present form since 1977 - had no particular brief
implementation of the contract farming project in terms of
to promote contract farming, it has been an inevitable by-product
ordination between public and private sectors and choic
of its activities, given its involvement in sectors which use
relevant area and farmers. It even specifies requiremen
contract farming [Burch 1994:167-68]. Besides, there are two
before a contract farming projects is undertaken which
other wings of the state ministry of agriculture and cooperatives
farmer willingness and exposure to the concept of contr
(MOAC) and ministry of finance (MOF), which promote contract
farming, feasible standards of quality of produce, price flexibil
farming through their own agencies, i e, department of agricul-
and production and marketing plan. Discussing the fact
tural extension (DOAE) and BAAC respectively.
in the success of contract farming projects, it emphasises
It was only in the sixth plan that a lead role was given to
a clear understanding of the concept of contract farming
private agribusiness, including the contract farming system.
a felt need for it among project participants, besides phy
Analysing the production and sale of agricultural products,
proximity between producing and processing areas, stri
the sixth plan notes and recommends, "Contract farming has
adherence to quality standards and honesty and sincerity
proved viable and should be further promoted, on condition that
all parties involved. It assigns specific roles and responsibili
the provisions of such agreements are amended to be more
to farmers, farmer groups, companies, and government age
effective and beneficial to all parties concerned" [NESDB, nd:2 18].
in terms of dealing with each other for the project. It fin
The seventh plan carried this policy on contract farming
recommends suitable types of systems of contract farm
further by making an explicit mention of it and seeking its
for different types of commodities and advocates cont
promotion. It stated under the guidelines for agricultural
farming with farmer organisations instead of indivi
development,
farmers. It even goes on to advise in terms of having multi
Expand scope of agricultural credit and encourage contract farming outlets for produce, both contract and non-contract, in term
business by using the following measures: different grades of produce from the same group of farm
- (4) Encourage agribusinesses, with the government as co-[MOAC 2002].
ordinator among various agricultural groups to cooperate with
entrepreneurs in agriculture-related businesses to have opportu-
BAAC
nities for contract farming arrangements, and to have joint invest- and Contract Farming
ment to expand and increase the types of products of agro-
industries. BAAC started the contract farming system in the early 1980s
(5) Supervise contract arrangements between agricultural institu-with the CP group in which other commercial banks also
tions and business entrepreneurs to ensure fairness to all parties participated [Kusakabe and Higuchi 1992]. On the role of BAAC
[NESDB nd:36]. in the four-sector cooperation plan, an EU report on development

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and extension of fruit and vegetable production in the north-east of the agricultural sector, but, in general, the companies and the
has this to say, farmers do the job themselves" (p 2). The district office of
agricultural extension had a very active role as coordinator during
The loans are provided (to farmers in this EU project) through
the first years of contract farming expansion in San Sai district.
the Bank for Agriculture and Agricultural Cooperatives, a state
enterprise. However, the BAAC's interest rates were thought to Its role has diminished with the entry of new companies and when
be too high to encourage investments in horticulture, so project PepsiCo bought NS Farm in 1995, the extension offices lost all
funds were used to repay a portion of the interest for farmers whose control of the potato groups. When new companies arrived in
plantations meet basic technical standards ....... Groups were also San Sai, they started farmer-groups of their own (without the
necessary to meet the BAAC's requirements for joint liability loan help of officials) or took over the groups formed by NS Farm
security...... Nevertheless, the progress has been slower than had [Omberg 1999].
been hoped, partly because of difficulties in arranging loans. The On the policy response to the Thai agricultural crisis of the
BAAC takes many factors into consideration when reviewing loan 1980s, Siamwalla (1996) observes that the agricultural problem
applications, and some farmers who have wanted to join the project was defined as one of oversupply of some commodities and.
have failed to pass the bank's scrutiny [EU and MOAC nd:20-21].
implicitly, profitable opportunities in other areas. It attributes the
Joining a private firm to make market contracts with farmers planning mechanism approach of managing Thai agriculture
helped BAAC reduce its business risk, as the firm deducted the applied to contract farming practice as one of the two intellectual
loan and interest from farmers' sale receipts. At the same time, origins of failure and states,
the firm did not have to extend input credit itself and farmers There were some spectacularly successful examples of this prac-
were able to obtain credit they needed. All three parties were tice, notably in poultry, but there were also many failures. Im-
made more secure in this way. The BAAC gave credit, both in pressed more by the successes than the failures, the government
cash and kind, to farmers participating in a contract agreement initiated in 1987 a four-pronged programme to promote a coop-
with the firm, but farmers who actually joined the project, erative effort between the agribusiness and the farming sectors.
received special privileges. Those who joined a contract It is not difficult to demonstrate the futility of this planning
farming project were able to borrow double the amount (60,000 approach nor to adduce reasons for it. That various Thai govern-
baht in 1991) available ordinarily (30,000 baht), and that too ments had to resort to this approach for agriculture (of all sectors)
in the late 1980s and early 1990s (of all periods in history) showed
without collateral [Manarungsan and Suwanjidar 1992]. Since
the helplessness if not the desperation with which they tackled
1993 BAAC has no contract farming projects as part of the
the problems of agriculture (pp 8-9).
four sector plan but contract farmers take loans. from the bank
as individual or group guarantee loans. The CF project was On the effectiveness of contract farming for agricultural
operated only for four to five years. In fact, the bank abolished development, Siamwalla (1996) states,
its agribusiness section and has a new social and environment The priority for an agricultural sector policy will have to be in
section now (Interview with BAAC official in September 2002, the development of technology that will allow Thai farmers to
Bangkok). reduce their costs to compete effectively in the world market
without lowering their standard of living. In the past, the gov-
ernment has relied too much on the private sector to provide the
Effectiveness and Problems of State Promotion
new technology through contract farming. This can be successful
in some cases but not in all (p 10).
So far as the role of the state in monitoring and regulating
contract farming is concerned, it was reported in 1995 Commenting
that on the failure of the MBK Sirichai Cashewnut
Co's cashewnut contract farming project, Paopongsakorn et al
... the government regulation of the firm is minimal. The provincial
(1995)
officers and the district official interviewed in this aspect ofwrite
the on the role of the government in this failure "The
government who is supposed to protect the small farmers' in-
government regulation were unaware of the specific regulations
concerning the contract farming approvals. In addition,terest, does not do its job ....(after farmer protests) The gov-
since the
ernmentare
contracting agencies trying to create a formal infrastructure in early February 1995, agreed to reschedule their (farm-
ers') which
large firms, they have approval from the central government, debts" (p 165). This was a factor in the failure, in addition
the provincial governmentjust acknowledges. Thus, the provincial
to lack of commitment of the company and absence of risk
control and regulation, though exists, is minimal [Padmanabha
assessment of the crop in the project area by the company or
1995:66]. DOAE.
For the potato growers, the crops under contract wereThe remu-
main reasons for the failure of contract farming for fa
nerative, they had choice of alternative crops, and itwere the heavy reliance of companies on government su
was best
alternative to fresh variety due to the seed problem. There e g, provision
was of free seed for sunflower growers. The ri
competition among companies and middlemen and even offarmer
the term of contract, which was purposively set for
groups and the cooperative (it is a farmers sellers market). fairness to both the firms and farmers was another reason due
There
was high dissemination of information about prices to andwhich
otherthe firms lost flexibility in their management. The
terms of contracts but the prices were lower where functioning farmers needed time to adopt to new crops which usually came
farmer groups were absent or weak. Besides using farmer withgroups
new technology. When new crops did not provide desirable
for contract negotiation, they also had plenty of experience yield andinreturn, farmers were discouraged and shifted back to
potato crop and of dealing with companies ("experience their old crops. These contracted commodities required high
curve"
effects). inputs and exhibited great risk. The technological support and
Analysing potato contract farming in north Thailand, Ornberg delivery system (extension) could not cover all the project areas.
(1996) also writes, "The Thai state is, at least on paper, engaged On the performance of the four-sector cooperation plan, Burch
in the promotion of contract farming to speed up commercialisation (1996) concludes "The Thai farmers' experience of contract

Economic and Political Weekly December 31, 2005 5583

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farming has been very mixed, even where the state has been and upcoming corporate farming approach are farmer side of the
involved and committed to improving farmers' incomes by link- problems of contract farming.
ing peasant producers to agri-food companies" (p 334). In some In sweet corn, brokers and farmers reported that there is no
commodities, some farmers have prospered, though there is impact of sweet corn contract production on lease rates or on
considerable evidence to show that in general benefits have not food production. The lease cost per rai is about 1,000 baht for
been sustainable, farmers have been indebted and worse off due a season (three months) which is not affected much by the contract
to contract farming project failures, like in baby corn and cashew system. There has been no impact of corn on food supply as it
nuts, and many social and environmental consequences have been is not a substitute crop for rice. Labour is also not a problem
particularly serious, e g, in prawn aquaculture. Though Thai as there is a practice of exchange of labour in the village. That
owned companies have become strong and global players because there has been and still is a widespread practice of labour exchange
of state incentives and promotion of agribusiness, the farmers in rural Thailand, including in the north, where farm holdings
have not benefited, and in some cases, even lost [Burch 1996]. are small, is well documented in a recent study by Shigetomi
There could be many possible explanations of the role played (1998). But labour becomes a problem during harvest time as
by the state in contract farming so far, though studies of contract there is competition from longon harvesting and rice transplan-
farming, with the exception of Burch (1994), have not attempted tation and one rai harvest costs 500 baht.
to look at this issue. One, there has been a domination by Behaviour of firms: The companies have been using brokers,
agribusiness in the policy-making arena in Thailand especially defying any concern for the partnership with farmers which
in agriculture, as it has been an agro-exporting country for quite contracting is supposed to lead to. Their contracts, as pointe
some time. There is also found to be a gap between intent and out earlier, are also biased against the growers, and they have
practice of policies and programmes by the state agencies. This not used the DIT contract which is fair for both the parties. They
is further reinforced by a lack of effective farmer organisations also tend to prefer to work with larger growers which leave
which can exert pressure on policy and also monitor policy smaller ones out of the system of contracting and the opportunit
implementation and agribusiness operations on the ground. Finally, to benefit from it. Their prices are also lower than market prices
there is lack of commitment from agribusiness companies for most of the time, which makes farmers default. A manager of
rural development. one of the firms acknowledges that the prices offered by con-
tracting firms are not good enough for farmers to stick on wit
IV the companies as he says "normally the factory buying prices
Effects of Contracting on Local Economy are lower than the market prices. This is a weak point of buyin
raw materials by factories. Most farmers try to sell their produce
There is no doubt that even small and marginal or even landless to the market instead of the factories since they get higher price
farmers are participating in contract farming of potato and sweet and are not required to comply with the conditions specified by
corn, thus making the process all-inclusive. And the farmers are, factories" [Chunhawong nd]. The field study revealed a tota
by and large, happy with the system as it prevails today. The absence of farmer oganisations to deaf with contract situations
reasons for better performance of potato contracting in San Sai Environmental impact: Commenting on the non-rational
are several crop alternatives for farmers, competition among chemicalisation of production techniques, Trebuil (1995) writes
potato chips companies, potato growing skills of farmers, and about the environmental damage contract farming brings,
strong farmer groups and the PGC [Omberg 1996]. But the long- Contract production of cash crops - usually tacit in the local fashion
term consequences of this system for local economy is something rather than formalised - has led small farmers to use increasing
which has remained less explored. Some of these concerns are quantities of inputs in a system dictated by the demands and advice
as follows: of village intermediaries who work for commercial companies.
Effect on local economy: Though potato is not a new crop Thus, a typical input "kit" composed with total disregard for the
for this region and its farmers, its production has almost tripled environment or any serious technical reference, supplied to illi-
terate (in Thai) Mon and Karen cotton farmers in Kanchanaburi
in the last seven years according to the FLT broker - from 3,000
province in 1991, included seeds from high potential varieties,
tonnes to 10,000 tonnes per season due to contracting by
but susceptible to the main insect pests; a product for dry dusting
companies. The brokers and growers for both the companiestreatment (half of which does not adhere to the seeds and is lost
are of the opinion that potato contracting has no adverse to the environment); smart bottles for insecticides in small half
effect on food production as it is grown in a different season andlitre packs (consumption of 10-20 litres per hectare), with active
is not a substitute crop to other crops. Wage rate and leaseingredients that are usually highly toxic yet of doubtful effective-
rates have also not been affected by contracting as potato is only
ness, given the resistance that pests have acquired over recent years,
one of the three crops in a year and there is mutual exchange expensive compound fertilisers in granule form, even for leaf
of labour in the village. That this kind of labour exchange is applications (beneficial effects not proven); and herbicides. Some
prevalent in Thai villages is well documented by Shigetomipacks also include hormones and growth regulators (pp 79-80).
(1998). In north Thailand also, contract farming is leading to higher levels
The major problems of contract farming as perceived by the of chemical and pesticide use in contract crops as Ornberg (1996)
companies in potato include lower yields, default, competition, writes:
lack of state support and high cost of imported potato seed through
Potato growers in San Sai are not only facing competition from
state agencies. Groups/brokers is one mechanism used by the farmers in other areas, soil degradation has also made it harder
companies to control default but, there has also been rationalisation and more expensive to grow high quality potatoes in this district.
of the grower numbers of companies and preference for larger In the long run, it will be necessary to use more organic fertiliser
growers. The costly labour, as potato harvesting competes with (instead of chemical), to maintain and improve the structure of
longon harvesting, biased contracts, use of brokers by companies, the soil (p 12).

5584 Economic and Political Weekly December 31, 2005

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 But it is not that contract farming per se led to environmental (ii) Intra-household aspect of contract farming like wages and
degradation in Thai agriculture, it only contributed to the gender impact within household, sharing of contract income -
problem, as it also adopted green revolution production processes conflict and cooperation within the family.
prevalent in the sector. This can now come handy to rectify the (iii) Policy statement on contract farming (national plans) versus
situation as export-oriented firms, which need chemical free actual practice - gap, dynamics and reasons. rmEi
raw materials due to international market pressure, can make
contract growers switch to less environmentally harmful/more Email: sukhpal@iimahd.ernet.in
environmental-friendly production processes as they have the
resources, including technologies and markets, to promote this Appendix: Provisions of the DIT Standard
kind of farming. It makes both business as well as development Contract Farming Agreement, 1999
sense. These firms can also help farmers adopt Good Agricultural/
Farm Practice (GAP/GFP) similar to the concept of Good General Aspects
Manufacturing Practice (GMP) in industry, as the international
market is increasingly demanding this kind of system in agro (1) Documents like ID card/house registration/certificate of
products now. registration of the relevant party (farmer/group/cooperative/
company) required for signing the agreement.
V (2) Name and address of the buyer and the seller specified in
Conclusion the agreement.
(3) Agreement is between buyer (company) and seller (farmer).
It is found that though state policy has helped contracting to
take root in Thailand, it now works between farmers and Both com- parties agree to as follows:
panies more by way of a market mechanism and there are all
Sections 1 and 2: Both parties agree to respect agreement in terms
kinds of arrangements in place in the name of contracting. The
contracts are biased against the farmer and companies rely of buying
on and selling agreed quantity produce of agreed quality
brokers (middlemen) to work with farmers. State intervention at agreed price, and specified delivery schedule at specified
delivery point.
has helped the farm sector and its farmers only to the extent that
Section 3: Payment to be made immediately on delivery after
it has promoted competition that has been beneficial for growers,
checking all produce details as in agreement. If not immediate
like in the case of potato in northern Thailand, and led to the
payment, buyer to give seller the receipt of delivery and a note
pumping of capital in the farm sector through BAAC loans for
of payment with seal of buyer for later use, and the payment will
contract growers. But on most other counts, like making the
be made in seller's bank account. In case of an agricultural
system fair for farmers in terms of the nature of the contracts,
institution like a cooperative, the responsibility of further dis-
or helping farmer organisations in processing, marketing or even
bursing the payment to the farmers is that of the institution. If
in collective selling to companies, it has not really been effective.
payment is not made within specified time or in full amount,
Rather, it has only helped companies as they could rely on state
interest is to be paid to the seller at specified agreed rate.
money to fund farmers in contract farming projects. Contracting
Section 4: In case of force majeure like natural calamity, political
is also leading to certain adverse local level impacts like envi-
trouble, crop failure, factory closure, labour strike, or other
ronmental degradation. It is recommended that contracting need
unforeseen reasons on either side, each to inform the other and
not be promoted for all crops, farmers and regions, and the state
discuss details of solution of the problem after the force majeure
should now play more of a regulatory rather than promotional
is over.
role and farmers' organisations should be promoted by govern-
Section 5: If produce is less than agreed quantity (beyond
mental and non-governmental developmental agencies.
certain percentage), the buyer may not or may discount and
Lessons for the promotion of contract farming include:
penalise the seller for missing quantity at some agreed rate.
(i) reflecting on whether there is enough rationale for contract
farming in terms of market failure for the crop/variety/quality,
Section 6: Lower quality produce (beyond certain percentage)
may not be bought by the buyer.
(ii) the unique crop technology, (iii) ensuring the market for the
Section 7: If buyer does not buy agreed quantity fully, the buyer
produce/product, (iv) ensuring farmer benefits (yields/incomes),
is to compensate seller at the specific rate.
(v) selection of farmers to avoid an adverse selection problem,
Section 8: Claim on violation of contract to be reported to Dispute
and vi) building trust with farmers to avoid a moral hazard
Determination Committee (DDC which will have three govern-
problem. The role of the government should be enabling and
ment agency ex-officio nominees besides farmer and company
developmental in nature. Finally, it is important to remember
representatives) whose decision will be final and binding on both
that contract farming is situation/context specific and is a self-
the parties. If either party does not respect it, one party can cancel
liquidating process as market conditions improve. In terms of
the contract and fine the other party for the agreed quantity at
research issues, the following aspects of contracting in Thailand
some specified rate.
have not been addressed at all in studies of the system so far
Section 9: Main agreement to supersede the appendices in case
and they need to be examined carefully to make an exhaustive
of conflict of clause/s. Three copies of the agreement are to be
assessment of the various implications of contract farming and
signed in the presence of witnesses and one copy to be retained
to incorporate them into policy for making better use of contract
by each party and one for the department of internal trade.
farming as a tool for agricultural and rural development:
(i) Labour aspects of contract farming - conditions, wages, [I would like to thank all those friends and institutions that helped me in
workplace life, relative exploitation, gender aspects, child this study in various ways. I am grateful to the ASF for givifig me an
labour, etc. opportunity to carry out this research in Thailand.]

Economic and Political Weekly December 31, 2005 5585

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