What Matters to Farmers: Contracts or Trust?

How much should agribusiness investors focus on the development of complex contractual arrangements with farmers when trying to implement a new product or innovation in the agricultural sector in developing countries? The analysis of the introduction of grape tomato production and processing in the state of Goiás, Brazil, provides interesting insights about the role of trust and contracts in the organization of new agri-food chains.

The introduction of grape tomato varieties was an innovation implemented in Goiás about 15 years ago. This innovation was first carried out by a tomato seed company, which proposed an integrated coordination system that involved the whole agri-food chain. The seed company played the coordination role and was responsible for brand and packaging development. The relationship with other chain actors to ensure the quality of the final product in the points of sale, the connection of packing houses with food retail chains and the definition of the contractual relationships in the chain.
The seed dealers were responsible for the provision of seeds, other inputs and the technical assistance to the grape tomato growers. These agents, in turn, had to follow the technical recommendations for the cultivation of the grape tomato in greenhouses, which should be part of the investment necessary to participate in the new chain. The growers had a purchase guarantee and supplied the grape tomato production to a specific packing house, which was authorized to pack and commercialize the grape tomato brand developed by the seed company. Contractual relationships involving the seed company, seed dealers, growers and packing houses were the chain governance form of this coordination system. Everything looks great, right? Well, not to the farmers.
Although this integrated coordination system sought to provide incentives and safeguards to the different chain stakeholders (especially to farmers), the central point of the system showed to be problematic – the contract. The proposed contract was not attractive for most of the farmers because the contract length was considered too long, farmers perceived pricing system as unfair and the contractual penalty was too high.

Thus, there was a clear mismatch between farmers’ desires and the contractual arrangement coordinated by the seed company. Consequently, the number of growers participating in the integrated coordination system decreased substantially after the innovation being implemented, which took about five years. Other grape tomato seed companies began entering the market and new grape tomato chains emerged based on different governance forms, in which trust is the core element.
The quite complex contractual arrangement adopted by the pioneering company was replaced by either verticalization (in scenarios of high uncertainty and lack of trust between farmers and packing houses) or by simple oral agreements (when these agents had sufficient trust in each other). In this later case, which is the main governance form currently found in the grape tomato chains in Goiás, flexibility is the mark of the governance arrangement. In fact, farmers prefer the flexibility of informal coordination rather than the guarantees of a signed contract. However, the good reputation of the participating agents is a prerequisite for the functioning of this system. Therefore, more than developing a complex contractual system full of formal incentives and safeguards, an agribusiness company willing to operating in such business environment should first and foremost focus on developing its image especially among farmers. After all, contracts are not always that import to farmers.

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