A recently ratified proclamation by Parliament, six years in the making, has led to regulation for contract farming, seeking to reduce past failings in production and supply chain risks. The new rule will delineate buyers’ and producers’ responsibilities and rights, marking a new era for the agriculture sector.

Girma Amentie (PhD), minister of Agriculture, has yet to send the draft regulation to the Council of Ministers for approval.

Before the proclamation, the sector was fraught with contractual disputes between investors and farmers. It was common for exporters to allege substandard production as grounds for contract breaches, while farmers cited a lack of necessary technical support and input for poor yield quality.

According to Dereje Abebe, investment director at the Ministry of Agriculture, such issues arise when farmers engage in side-selling, retain goods for personal consumption or when buyers with insufficient funds enter such agreements. The contract farming proclamation is seen as a step forward to streamline this process, addressing past failures and future-proofing the sector.

This new edict stipulates conditions for contract termination; if a farmer fails to deliver the agreed product or a buyer fails to furnish the required technical and input aid in the designated timeframe, termination may be justifiable.

The legislation sets out four modalities, with variations in the number of parties and production methods depending on the contract type. The centralized and out-grower modalities are deals between buyers and sellers, while multipartite and intermediary contract farming arrangements allow for third-party involvement. In the latter, the contractor enters into an agreement with another entity, such as a cooperative or union, acting on behalf of the producer.

Officials at the Ministry have conducted consultative meetings with stakeholders in the value chain for additional input during the legislative process. According to Sultan Mohammed, head of the contract farming desk at the Ministry, future meetings will include representatives from the regional and zonal levels.

Over a million smallholder farmers are engaged in contract farming arrangements. Yet, only 88 investors were active until last year due to the absence of a legal framework.

“The recent ratification of the bill, however, is set to double that number as foreign investors are now vying to enter,” Mohammed told Fortune.

Incentives for prospective investors following the regulation include duty-free privileges, easier access to finance, land provision, and increased access to inputs such as fertilizers and chemicals.

Incorporated in 2000, Tega & Tula Coffee Farm Agro-industry Plc has been sourcing coffee from nearly 700 smallholder farmers through contract farming arrangements for the past 12 years. The company illustrates the potential for sufficiently regulated contract farming.

The farm, a 400hct land between the villages of Tega and Tula in the Kaffa Zone, South West Regional State, primarily exports to Europe, the US and Dubai, with an average annual yield of 1,200qntl of coffee. Amare Teshome, the operation manager, said quality has been below the standard, impeding the estimated supply they were supposed to get annually.