The Problem of Low Contract Compliance Rate in Grain Transactions in China

With China’s market development, contract farming has emerged between processors and farmers. However, the low contract compliance rate has become a serious problem because the trust in the partnership is often damaged by defaults, mostly from the farmers’ side. There are primarily two types of processors. One is the leading enterprise (LE) that establishes a grain production base and invites farmers into the base with their land, and then signs a purchase contract with them, providing free high-quality seeds and technical service for their grain production. The other is individual grain merchants (IGM) who are small in scale and have backward processing technology. There are a large number of IGMs in China who never sign contracts with farmers but purchase grain from farmers door-to-door at a price slightly higher than the contract price offered by the LEs so as to become a strong competitor. Thus, grain transactions are in fact a three-party game. This study shows that if the LE adopts a two-step settlement strategy—settling the account first according to a contract price and then giving farmers rebates depending on LE’s profits—most farmers comply with the contract.