Contract farming breaches: you cannot lay all the blame on farmers

Recently, some media reports claimed that in the implementation of contract farming, some farmers lack a spirit of contract and deliberately default, especially when the market price of agricultural products is higher than the agreed purchase price. This has made contract farming difficult to promote, which in turn harms both businesses and farmers, and the blame for the difficulties in developing contract farming has been pointed at farmers.

Contract farming is an important part of the development of agricultural industrialization. It is of great significance for forming a stable relationship between the supply and sale of agricultural products, solving the problem of unsalable and hard-to-sell agricultural products, stabilizing prices, protecting farmers' legitimate interests, and resisting market risks. The key to contract farming is that both farmers and enterprises honestly honor the agreement. If either side breaches it, the contract becomes a mere scrap of paper. In reality, the problems reflected in that report do indeed exist. However, this does not mean that all breaches in contract farming are caused by farmers, still less should farmers be blamed solely for lacking a spirit of contract.

First, we must recognize that in the actual implementation of contract farming, farmers are generally in a weak position lacking a voice. Enterprises and farmers are unequal in economic status, social status, and access to market information. Enterprises are often in a strong position, and the contracts signed tend to protect the interests of the enterprises. Moreover, enterprises mostly sign contracts directly with village committees and agricultural professional cooperatives, so farmers' demands are not fully reflected, which greatly reduces the effectiveness of implementing the orders.

Second, the spirit of contract among some enterprises and businesses is not without flaws either. When the prices of agricultural products plummet, many enterprises and businesses that have signed contracts with farmers also stop honoring the contracts in order to reduce their own economic losses. For example, last year the media reported that in Yanggaiban Village, Jinhe Town, Saihan District, Hohhot, Inner Mongolia, the colored pepper growers had a bumper harvest, but the contract enterprises played hide-and-seek. In recent years, similar incidents of buyers "running away and cheating farmers" have repeatedly appeared in the press. Some other enterprises, when agricultural product prices fall or products are unsalable, superficially "continue to perform the contract," but refuse to purchase farmers' agricultural products on the grounds that product quality does not meet standards.

It is not hard to see that the difficulties in developing contract farming have many causes. We cannot deny the phenomenon of farmers breaching contracts, and we cannot "cover up shortcomings." But when farmers are in a weak position and lack a voice, while enterprises in a strong position also frequently breach contracts, one-sidedly blaming farmers is clearly unfair and unjust.

The breach problem in the development of contract farming, whether it is farmers breaching contracts or enterprises breaching contracts, appears on the surface to be a lack of spirit of contract and short-term self-interested behavior. But the deeper reason is that contract farming is still at the primary stage of production-sales cooperation. It has not truly strengthened the link from field to market or optimized the organizational structure of agricultural production and sales, and the interest linkage mechanism between farmers and enterprises is still not sound enough. As an economic behavior, the smooth performance of contract farming cannot rest entirely on whether farmers and enterprises are highly moral. Instead, it must start from mechanisms such as risk-sharing, price negotiation, and enforcement constraints, so that the cooperative interests between farmers and enterprises become tighter and the mechanisms become more complete and mature. Only in this way can the breach risk of contract farming be effectively prevented and controlled.

In terms of risk-sharing mechanisms, most contract farming currently negotiates purchase prices at the sales stage of agricultural products. This helps farmers resist market risks to a certain extent, but this linkage mechanism is actually very loose, and it does not incorporate the natural risks of agricultural production into the interest linkage. Businesses and enterprises should intervene more deeply in the agricultural production stage, such as leading enterprises investing in the infrastructure construction of production bases, and farmers contributing land as equity, so as to make the interests of leading enterprises and farmers more consistent and deepen the interest linkage in the production stage.

In terms of price negotiation mechanisms, judging from the current situation, farmers' voice in price negotiations must be increased. At the same time, some institutional innovations in pricing can be tried, such as linking the negotiated price to the market purchase price to a certain extent, allowing it to fluctuate somewhat with the market, or implementing a "minimum purchase protective price." In short, the negotiated purchase price should as far as possible allow both farmers and enterprises to obtain relatively reasonable profits.

In terms of enforcement constraint mechanisms, whether farmers breach contracts or enterprises breach contracts, there is currently a lack of necessary constraint mechanisms. For example, if farmers breach contracts, enterprises face high costs in defending their rights against individual farming households, and forcing farmers to perform the contract also carries relatively high social risks; if enterprises breach contracts, because the agreements often favor the enterprises, they can be exempt from legal liability simply by giving up a small deposit. Therefore, mechanisms must be innovated. Consideration can be given to introducing a higher "performance deposit" and a "third party" institutional design to strengthen supervision and ensure the performance of contracts.

Of course, cultivating a sense of credit and contract among farmers and enterprises and strengthening the construction of the rural credit system are equally important. In short, to make contract farming develop better and more smoothly, the key is still to truly strengthen the link from field to market, so that contract farming is not merely a contract based on a simple price judgment, but rather makes the interest linkage mechanism between farmers and enterprises tighter, the operating system more complete, the distribution of interests and risks more fully fair, and better able to reflect changes in market supply and demand. Only then can contract farming escape the breach dilemma in its development.