1.0 or moral hazards seen through sponsors and

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
the 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 the informal sectors, small 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 in agreement with the purchaser, provide quantities of specific
volumes agricultural products that meet the quality standards and
delivery schedule. Additionally, the
purchaser commits to buy the products, often at a predetermined price.  The purchaser also 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 are used for 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 known as parole) are neither signed under seal
nor under record and the problem of asymmetric information abound (hidden actions
or moral hazards seen through sponsors and farmers default).  Olomola, 2007, is
in agreement that informal contracts in agricultural production are
ordinary agreements between buyers and
farmers, which establish the conditions for the production and marketing of
farm products. Such an agreement may be oral or written.

Though,
very discrete, despite the untenable asymmetric
information challenge, it is not a new phenomenon
in the informal sector where rural
households enter into informal contracts.
Even as farmers and food processors decide to acquire informal credit, low-
input production occurs. As Governments and regulatory bodies seem lost in their
role, farmers and the stakeholders of the
food sector 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 extremely unfavorable for rural livelihoods 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 is a fundamental
component of growth as it entails high potential to increase rural incomes in developing
countries.

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

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

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

·        
To
investigate to what extent informal contracts might
reduce vulnerability.

·        
To
analyze the general factors influencing farmers’
participation in informal contract
scheme.

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

·        
To generally, examine the role of informal
contracts in farming and food sectors.

Besides this background information on the topic, 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 the theoretical framework of this paper; espousing the
need for this study.  Chapter four is the
empirical model used. Chapters five and chapter six are the discussions and
conclusions of this study respectively.

 

 

2.0  LITERATURE
REVIEW

2.1 Meaning of Contract Theory in Farming

Contracts in agricultural production is a forwarding
agreement between the farmer 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 types of
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 models (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 who make simple, informal production contracts with
farmers on a seasonal basis. The crops usually require only a minimal amount of
processing and packaging for the retail outlet or local markets. Perhaps, this
is the most speculative of all contracts in farming models, with a high risk of
promoter and 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, Assured and often
higher returns, Farmer access to production inputs, mechanization, transport
services, and extension advice are enhanced and improved local infrastructures, such as roads and irrigation
facilities. 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 also a lot of 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, Sponsoring companies may be unreliable
or exploit a monopoly position, There are land constraints due to lack of
security of tenure and this endanger sustainable operation and 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 the
economic development of rural households. As a result, stakeholders continue to
find ways of improving incomes of the rural people. Farmers in developing
countries complain of lack of funds to invest into farming and also the
difficulty in contacting potential buyers for their produce. However, to help
ease the problem of farmers, the informal
contract is one possibility identified
with a potential of improving livelihoods of farmers.

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

For
a firmness to understand the role of
informal contracts in farming globally, this
study uses two models to provide
an explanation of the main issues in this paper. 

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

The second model, which is more quantitative, uses brief descriptive
coefficients in a summarized data set to test the actual relationship
between  To do this, empirical evidence
using secondary data obtained from research document allowing a descriptive
statistic approach base on the data collection
including;