Session 10: Contract Farming
Presentation: Kurt Sartorious
Goal of the study
Potential of agribusiness to link smallholder farmers (SF) to markets. Focus was to
initiate action based project, suggesting suitable policy to expand SF opportunities with
agribusiness partners (AP) partner. Long term opportunities-partnerships are the ones of
interest.
Trends in modern agriculture resulted in modernized agriculture supply chain, preferring
larger producers. So, there is a dilemma, how to include the SF in these chains. There is a
real danger that SF still don’t have access to markets and AP chains.
Some form of contract arrangement is needed to link the SF to AP. There are many types
of contracts and several types of structures. Models of contract farming (CF) in
developing countries are different from those in developed countries. In developing
countries CF is used as an institution to promote SF. In this case “equity” is important.
Overview of CF in 3 countries in the study
One of the interesting factors is that there are common denominators in all three
countries. No policy exists for CF per se. In all countries AP are reluctant to do business
with SF. This is because high level of transaction costs, mistrust, exploitation.
Wide range of commodities produced in the 3 countries. In SA there is experience in
several crops: sugarcane, timber, tea, cotton. In Malawi and Zambia also long history of
involvement: tobacco, sugarcane, paprika, cotton, coffee, tea
In general these are commodities suited to production by SF.
Also, there is emerging supply of high quality fruit and vegetables to retailers. SF are
supplying high quality fruits and vegetables in SAF.
This study has a final focus in terms of who exactly is going to be the prime partner to
expand SF CF. In term of the role of AP developing SF is important to understand the
advantages and disadvantages they have when dealing with SF. In developing countries,
this relationship involves political economy issues. In developed country the relationship
is mainly economic (???). In developing countries the main problem is transaction costs:
organizing a large number of producers. More interaction per hectare between AP and
SF. Even with farmer associations transaction costs are important. This is why AP is
reluctant to get involved in this kind of transaction with SF.
Potential role of AP
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The author tried to estimate the potential of AP to expand SF settlements. This was based
mainly done from a SAF perspective. There are 2228 AP manufacturing food products.
Alongside the industry we have 240000 small scale farmers.
He then focused on the table on page 9 of the paper. They did a telephone survey to
understand plans and current projects of supply chains. Less than 10% of all commodities
are supplied by SF production. It was estimated that SF supply 3.6% of fresh fruits and
vegetables that are processed. It was also estimated that just in the fruit and veg sector
this percentage was increased to 10% there is potential to incorporate 11000 new SF. The
red meet industry in SAF has invested to incorporate SF. If we consider that there are 3-4
million heads under small scale farming, the potential is enormous.
Conclusion: AP has incredible potential to take the focus role for expanding SF supply.
Issues and constraints
These might prevent AP to play this role. As far as raw commodities are concerned there
are general and commodity specific barriers of entry to produce these commodities. He
went through several general factors that are considered constraints: historical legacy,
regulatory issues (land tenure, property rights, and enforcement issues), complex nature
of supply.
One thing new is the complex nature of demand-supply relationship with the AP. The
process is also complicated with intermediaries, importers, other processors. SF supply
relationships need to be sophisticated enough to deal with these factors.
The way forward
There had to be within each of the countries a common vision with respect to the role of
CF and the transformation of the farming sector. First, we need to explain Gov that is a
win-win situation for them. The Gov does not trust AP. These complain that they are the
only investing in SF. Gov should use the carrot-stick approach. It needs to promote AP
investment. If some time of relief can be given to AP, it must be given to incentive there
linkage to SF. Common policy with respect to CF. Conclusion: AP can play an enormous
role expanding SF supply.
END OF PRESENTATION
The arrangement in Malawi (in tobacco) is like in times of tenant system, where the
farmer was exploited.
Our concern is that in the past we had an organization in Zambia doing contracts in
tobacco, other also in cotton. But liberalization of the economy changed things. Cotton
production is under the firm who supply inputs and determine the price. The same
happens in tobacco, where they supply inputs and determine price. If we move away from
the supply of inputs and determined price this will mean sustainability for the SF. There
should be mutual understanding from the beginning between SF and the AP. How the SF
is going to benefit (pre-determine the price).
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SF in Zambia organized themselves to go into CF. There is no policy in CF. Each
promoter defines its relationship with SF. The good farmers get penalized because there
cannot be penalties to defaulters. SF need to negotiate for their inputs and the price. SF
fight against each other and undermine each other. If Gov wants to assist SF needs to put
good policies into plays and strengthen farmer organizations. AP make up for transaction
costs by reducing benefits for the farmers. The ability to enforce regulations is the other
big problem in CF. Another problem is that the supply of the chain always fails. Also, SF
have the potential to product high quality products, although there must be some risk
shares with Gov, for instance, when investment cannot be recovered.
Case study in sugarcane in Malawi which reinforces what has been said so far. The final
paper should include information from other countries to present the whole problematic
in the region.
What may be lacking are the enforcement mechanisms needed to access success. What
are the objectives of contracting? Unless we get this right, it is very difficult to intervene.
The AP provide SF with inputs to seek a market for them and come together. The
question is how to make that contract equal in terms of opportunities and outputs. The
only way to make this work is to arrange the contract beforehand, so the farmer feels that
there is something to be gained in the contract.
In Zambia from a Gov perspective. When issues has come by, the Ministry acted in a
manner consistent in trying to help the SF to engage in contracts. The Gov can act as a
third party, a referee to control the relationship. Gov representatives sit with farmers and
AP and finds out what the problem is. SF needs capacity building to better negotiate.
Some are already corrupted.
We need to consider that the AP also risks in the deal (international prices). Some of the
best practices need to be documented to guide SF in contracts (example of growers in
Kenya).
Concept of trust is key. Example: AP go to individuals and pay them service fee if
farmers deliver the cotton. Those farmers or traders, they choose the farmers. The
distributor has an incentive to build good relationship with farmers because he needs to
be paid.
Apparently the previous experience did not work because promised price when
contracting was different from final price.
How is risk shared? Same case as before. This is another key issue. Distributors were
able to increase payments to farmers, although there are still these problems with prices.
Default needs to be punished. More work needs to be done in terms of policy.
Policy recommendation: risk should not be bared only by SF.
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RECOMMENDATIONS
Capacity building of the organization handling SF. AP need to deal with one farmer,
meaning, organization of farmers is essential.
Look at financial models and development of a larger and better financial support. Spot
and forward prices can be used to compensate buyers from shifts in prices, and there are
other financial options.
Farmers need strengthening several areas: farmers need to understand concept of
contracting. They need to understand risks involved, expectations and so on. Farmer
contract interface need to be developed and FANRPAN can help on this.
Side selling by farmers is another problem from the farmer’s side. This undermines the
relationship.
Example in the US. One of the failures of coops comes from side selling. The law was
modified to have new generation coops that have the right to exclude certain members.
Gov came in and played a role modifying the rules.
SF when asking for credit they go “underneath”. At the time of harvest money becomes
sweet, and the producer budgets prioritizing the family and not re-paying the credit.
Service providers and the farmer should endorse a contract. Associations have the
responsibility to enforce fellow farmers to comply with contracts, in order not to “kill the
goose that lays golden eggs”. If SF is borrowing, needs to have cash collateral with the
bank and then goes and ask for the loan. When SF defaults, there is cash to cover the
losses. This is what is being tried in Zambia.
In Mauritius: contract farming in sugarcane. There is an arbitration instance that takes all
problems. In tobacco, there are planters, factory and board. The board allocates the quota
and guaranties the price and provides inputs.
Final comment Sartorius: he got the feeling that there were a lot of suggestions;
discussion about inequality between SF and AP resulted in the importance of farmer
organization and farmer representation. In successful supply situations, communities
have organized themselves to achieve an economic and social success (Gruyere cheese
producers in Switzerland). Closure: CF per se is not the absolute panacea. The biggest
complaint of farmers is loss of autonomy. We shouldn’t sell this as the solution of all
problems. SF can gain, but they give up autonomy.
END
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