With supermarket direct sourcing on the rise, a group of intergovernmental organizations has released a legal guide to help farmers and buyers forge more equitable and sustainable contracts.

Spearheaded by the International Institute for the Unification of Private Law (UNIDROIT), in collaboration with the Food and Agriculture Organization of the United Nations (FAO) and the International Fund for Agricultural Development (IFAD), the guide is the result of a process that has taken many years.

"Contract farming in principle can improve farmers' access to markets and boost their incomes while ensuring that agribusinesses have a stable supply of produce that meets their quality standards," the groups said in a release.

"But as with any contractual relationship, there are potential pitfalls, and farmers can sometimes find themselves on the losing side of the deal. For example, a company might not pay the agreed price for the produce delivered, asserting that its quality was substandard, while the contract does not include any dispute resolution mechanism.

"For everyone to benefit fairly, sound and transparent contracts are needed, supported by an adequate legal framework."

The groups highlighted how millions of farmers worldwide were producing under some form of contract, with many industries in a range of countries embracing contract farming as their main form of production.

"Changes in the world's agrifood systems and consumer preferences have been a key driver of this trend. As food demand has risen both in developed and developing countries, processors and marketers need a steady and high volume stream of supplies, which they are not always able to meet buying on open commodities markets.

"At the same time, more exacting commercial and consumer standards regarding freshness, quality, origin and appearance are leading buyers to seek more control over the process of production to ensure consistent quality – including requiring in contracts that farmers use new technologies they may not be able to access on their own."

The groups said that in a best case scenario, contract farming arrangements could help buyers gain stronger hands in production, quality control and pricing, while farmers would benefit from guaranteed income and market access.

"They may also acquire new productive assets – under some contract types, buyers commit to supporting growers by providing farm inputs, equipment, and technical advice.

"Where sound contracts are not in place, however, buying firms – invariably more powerful than farmers – may use their bargaining clout to their short-term financial advantage. Farmers often have limited legal recourse to settle disputes..

"Buyers, on the other hand, risk that farmers engage in side-selling – selling goods produced under contract to another purchaser for a higher price. This might lead them to opt not to buy from small-holders in order to avoid such opportunistic behaviour."

The FAO said it would produce dissemination materials in English, Spanish and French that will provide a "distilled, layman’s version of what the guide has to offer in order to make it accessible to a wide range of people".

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