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6.2 Interlinked Contract-Farming

The dominant type of VCF is that of contract-farming, in which the provision of credit is linked to a purchasing agreement for agricultural produce. This was also the dominant type of state-controlled VCF: seasonal credit and input provisions to farmers by (para)-state processing units and government marketing boards in return for supplies of primary produce.

Also, private-sector VCF mostly includes the provision of cash credit or agricultural inputs directly to farmers for which payment is accounted for at the time of delivery of the product. These basic forms of VCF have been studied in the development literature on interlinked market transactions[1] and have been described as transactions in which credit and output markets are interlinked (e.g. Bardhan, 1989; Bell and Srinivasan, 1989). They are also the essence of various outgrower schemes, which are widely documented (see e.g. Table 1).

However, much more complex forms of contract-farming and VCF are emerging. Apart from transactions in credit and output markets, contract-farming increasingly also includes the provision of extension services, technical and managerial assistance, quality control, transport, and specialized storage services to farmers. Moreover, several food companies, such as in Eastern Europe and the former Soviet Union, provide medium-term investment loans, investment assistance programs, and machinery procurement systems to farmers (Dries et al., 2009).

6.3 Loan Guarantee Programs

Triangular structures were used by processors and retailers in Eastern Europe to draw on in financial institutions, resources, and administrative capacities. Examples of this are processor or retailers who provide loan guarantees to financial institutions for loans to their suppliers (farmers). The underwriting is for specific loans, related to the contract, and restricted for contracting suppliers. Loan guarantee programs within triangular contracting structures were implemented, for example, by sugar processors in Slovakia (Gow et al., 2000), by retailers in Croatia for fruit and vegetable supplier investments in greenhouses and irrigation (Reardon et al., 2003), and by dairy processors in several countries (Dries and Swinnen, 2004).

  • [1] Bell and Srinivasan (1989) define interlinked market transactions as a transaction in which the parties trade in at least two markets on the conditions that the terms of all trade between them are jointly determined. Interlinked market transactions always include an element of credit as they involve exchange of current for future claims. Apart from interlinked credit and output transactions, interlinked transactions also exists in land markets (landlord who provide tenants working capital) and in labor market (employers who give advances to laborers in return for a claim on their labor in peak labor demand periods).
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