Contract farming is agricultural production in accordance with an agreement between buyer and farmer.  The farmer agrees to provide a specific quantity, quality standard, and delivery schedule.  The buyer agrees to purchase the product at a pre-determined price and often supports production.

In Indonesia, contract farming has proven to be very useful for small farms for a number of reasons.  For example, it is often very difficult for smallholders to access crucial market information.  By contracting with a large agribusiness firm, they put themselves in the mix of market characteristics.  Also, large firms have more access to new technology and are eager to share the knowledge to achieve a more efficient process.  In rural areas of Indonesia, gaining market access independently is very much a struggle.

In this scenario, a contractual agreement is mutually beneficial.  It is a way to spread production and marketing risks between agribusiness and smallholders.  In this way, producers can focus on effectively producing the product and the larger firms will take care of the marketing and exports.  By connecting rural economies to the international market, contract farming leads to substantial improvements to the broader economy.

http://aciar.gov.au/sites/aciar/files/node/533/tr54.pdf