Contract farming in Indonesia: Smallholders and agribusiness working together

As developing countries continue on the path of economic liberalisation, there is an urgent need to bring the benefits of new trade and market opportunities to rural areas. While producers with larger landholdings may have access to capital, marketing information and institutional support, smallholders often miss out and are more likely to be marginalised. One possible mechanism for improving the livelihood of rural smallholders and providing them with the benefits of economic liberalisation is contract farming. Through contractual arrangements, agro-industry can assist smallholders to shift from subsistence or traditional agriculture to the production of export-orientated, high-value products. This not only has the potential to increase incomes of contracting smallholders but also to have multiplicative effects in the rural and broader economy. Contract farming is an intermediate production and marketing system that spreads the production and marketing risks between agribusiness and smallholders. It can be regarded as a means of reducing high transaction costs that result from the failure of the market and/or government to provide the required inputs (e.g. credit, insurance, information, infrastructure and factors of production) and market institutions.