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Farm production contracts should be encouraged

Update: January, 11/2012 - 09:27

Luu Duc Khai, head of the Central Institute for Economic Management's Department on Rural Economic Development Policies, spoke to Viet Nam News about boosting agriculture production under contracts.

What are the forms of contracts signed between farmers and enterprises?

With an agricultural production contract, farmers and enterprises reach an agreement on the allocation of values, risks and rights to make decisions.

A successful contract is one in which these three factors are allocated equally, following the principle of mutual benefit and fair risk sharing among parties.

Contracts are not the only way to ensure the success of agricultural production and supply to processors. Farmers can sell their products directly to enterprises without contracts, or enterprises can set up their own farms. However, the cost enterprises must pay for farm leases, supervision and training and the risk of crop loss needs to be taken into account.

In my opinion, an agricultural production contract works only if it helps farmers and enterprises spend less than the other options.

Agricultural production contracts vary in form. Farmers can agree to sell their crops to enterprises after harvesting or they might agree to feed and care for livestock or poultry owned by an enterprise on a farmer's land.

Under a contract, farmers and enterprises could also agree on specific standards of cultivation or livestock raising must be complied with certain required standards.

What are the benefits and risks involved in agricultural production contracts?

The advantages are that farmers will be supported in their production by enterprises; for example with grain, seed, livestock and poultry, advanced farming techniques and access to bank loans.

Also, the sale and purchase of their products is fixed and thus their income is guaranteed.

The main risks to farmers are, firstly, that the market price of the product increases above the contract price; secondly, farmers must meet quantity and quality standards or be penalised, regardless of crop yield; thirdly farmers may depend on enterprises for their capital.

Enterprises benefit by having a secure supply of agricultural material, which might reduce their business risks. Also, supervision of farmers improves cultivation and breeding quality.

However, enterprises need to keep a close watch on whether farmers comply with contract provisions and to prevent them from selling their crops to outsiders at higher prices.

After nine years, the percentage of contracts implemented remains low – for example rice 2 per cent, tea 9 per cent, coffee 2.5 per cent, fruit and vegetables 0.9 per cent. Why is this?

Contracts cannot be applied to all agriculture production. Different types of contracts apply to different agricultural products and production methods.

So, detailed provisions are important for both parties to avoid problems.

What should the Government do to encourage farmers and enterprises to enter into such contracts?

The Government must be flexible in selecting forms of contracts to be applied, based on the kinds of products, the difficulty of cultivation and the Government's policies for the sector's development.

Besides, policies on land, investment support, credit, taxes, technology transfer and trade promotion must be checked and outlined in detail together with regulations on interest and risk sharing mechanisms, violations and dispute resolution. — VNS

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