Contract Farming Integrating Small Farmers into Productive Value ...

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Contract Farming 
 
Integrating Small Farmers into Productive Value Chains 
 

SEEP Annual Conference / Oct 2006

 

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What is Contract Farming?  

Contract farming can be defined as an agreement between farmers and companies for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.  
The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice.  

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Basis of Arrangements 

Commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser  
Commitment on the part of the company to support the farmer00 production and to purchase the commodity  

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What are the different types 
of contract farming?  

Centralized Model Intermediary Model   

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The centralized model 
 

Involves a centralized company contracting directly with large number of individual farmers  
Is typically used for high value export crops, tree crops, poultry, and dairy.  
Products often require a high degree of quality and need to meet international specifications  

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Company 

Contract Farmer 

Contract Farmer 

Contract Farmer 

Contract Farmer 

Contract Farmer 

Centralized Model

 

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The intermediary model 
    

Company contracts with lead farmers (intermediaries) who in turn contract with individual farmers  

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Company 

Lead Farmer 

Lead Farmer 

Lead Farmer 

Contract Farmers (10-20) 

Contract Farmers (10-20) 

Contract Farmers (10-20) 
 

Intermediary Model

 

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Choice depends on:

the product the resources of the company, and the intensity of the relationship between farmer and company that is necessary  

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What are different strategies that companies can use to set purchase prices with contract farmers?  

Fixed prices Spot market pricing Split pricing  

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Fixed prices 
 

Price specified in the contract at the beginning of the season  
Different rates for different grades can be specified  

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Prices determined on 
spot- market price 
 

Determined by a price fixing committee at specific times after the harvests  
In many cases the price that is fixed is slightly higher than the market price  

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Split pricing 
 

An agreed base price is paid at the time of purchase  
Final price is calculated (and paid) once the commodity is sold by the company  

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CONTRACT FARMING APPROACH

(from agribusiness company perspective) 
 
 

Ready market/need for targeted product(s)  Selection of geographic area Selection of contract farmers   Signing of agreements with contract farmers Distribution of inputs Technical assistance + monitoring of production Procurement of production Payment Storage and Shipment  

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Panelist Cases 

Bill Grant 00Tanzania (paprika)  
Frank Lusby 00Bangladesh (groundnuts, chilies, potatoes)  

Contract Farming Case Study 

DAI PESA Project 

 

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What is Paprika?

 

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Tanzania Spices Limited, Iringa 

Spanish buying company established in 2001, based in Iringa Works with smallholder and commercial farmers in Iringa, Mbeya, Tabora, Ruvuma Buys all paprika output for processing in Spain Grade A: Tsh. 1,020/kg Grade B: Tsh.    580/kg Grade C: Tsh.    130/kg High profitability under good management practices Income/ha: 2,000 kgs x Tsh. 850/kg = Tsh. 1.7million Production costs/ha: Tsh. 720,000 Profit/ha: Tsh. 1million  

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DAI PESA Paprika Activities 

Following subsector study, project activities began in Iringa (October 2003) and Ruvuma (March 2004)  
Iringa Rural District 9 village level associations (1,415 MSEs - 34% women) Association of Iringa High Quality Farmers Products Company Limited Roles of apex company: marketing, advocacy, address member needs  
Songea Rural & Namtumbo Districts 19 village level associations (2,707 MSEs 0017% women) 2 apex companies: Association of Songea/Namtumbo High Quality Farmers Products  

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DAI PESA Paprika Activities, Contd. 

Business and technical training: Business awareness, cash management/budgeting, record keeping, SACCOS sensitization Technical training on pre- and post harvest TSL provides training and limited extension services  
Market linkages All paprika sold to TSL (3 grades) Seeds provided by TSL, initially on credit, now for cash Farmers linked to RPMS (Rural Participatory Microfinance Scheme) to finance inputs, production  

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DP Farmer Association Model, Iringa

 

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Quantitative Indicators 

In Iringa 1,415 farmers produced 315 tons in 2005 Average yield per farmer: 568kgs/hectare Average income per farmer: Tsh. 403,000/hectare  
In Ruvuma, 2,707 farmers produced 305 tons in 2005 Average yield per farmer: 348kgs/hectare Average income per farmer: Tsh. 247,000/hectare  
% of different grades sold (A/B/C) Target: 70/20/10 Achieved 2005: 55/20/25  

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Well-Maintained Smallholder Farm 

Smallholder Farm, Iringa

 

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Poorly-Maintained Smallholder Farm 

Smallholder Farm, Songea

 

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Commercial Farm 

Selous Farming, Iringa

 

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Promotion of Contract Farming in Bangladesh 

Katalyst Project 00large market development project in Bangladesh (AFE is subcontractor)  
After value chain analysis - identified large buyers in three sectors with significant backward linkages to small scale farmers  / interest in direct procurement with small-scale farmers  

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Company profiles: Company A 00Largest domestic producer/distributor of snack foods (also exports) Company B 00Chili based spices for domestic / export market Company C 00Potatoes for export  
All companies interested in expanding local sourcing to reduce imports, control quality/content, develop secured source of production  

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Project worked with company to narrow down products and geographic locations for contract farming production MOUs were signed with companies and project in early 2006 after several months of negotiation Work plans/ implementation Currently in the first season with each crop  

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Company Development of Chili Seeds for CF Operations

 

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Choosing the best seed

 

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Company reps signing agreement with lead farmers

 

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Company Orientation with 
Contract Farmers

 

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What contract farming models were used in the cases? 
How were operations structured between the companies and the farmers?

 

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What were advantages and 
disadvantages of these models for the agribusiness companies? 

 

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Advantages and disadvantages of the different models  

Centralized model provides greater control over the production process but is more expensive to implement  
Intermediary model is less expensive and entails less investment and financial risk but ability to control quality and production is less (also difficult to control what goes on with the individual farmers)  

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How were  lead farmers or individual contract farmers identified?  
What criteria were used? 

Illustrative Selection Criteria for Contract Farmers:

Practical experience on the targeted crop Resources to cultivate selected crop Residence in the target area  Suitability of land for targeted crop Good reputation in the community  

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Contract farmers must have their own land or acceptable leasing arrangement (not arrangement where farmer must give percentage of production to owner) Not involved with competing companies for targeted crop Have time to devote to contract farming activities  

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What inputs / services were provided or facilitated by the companies to participating farmers?  

 

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What were the advantages of contract farming for farmers?  

Advantages for contract farmers:

Inputs often supplied by the sponsor Introduces new technology and varieties (resulting in improved yields and income) Enables farmers to learn new skills (that can be also be applied to other crops) Price risk reduced Assured market Opens up new markets which would otherwise be unavailable to small farmers  

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Risk of market failure and production problems  
Inefficient management from sponsor company or changes in markets can result in manipulation of quotas  
Sponsoring companies may be unreliable or exploit a monopoly position  
Staff of sponsoring organizations may be corrupt  
Farmers may become indebted because of production problems and excessive advances  

What were the potential risks

facing contract farmers?

 

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What were the advantages for  
the agribusiness companies? 

More consistent quality can be obtained than if purchases were made on the open market  
More reliable source of supply than with open-market purchases or imports  
Working with farmers overcomes land constraints  
Production risk is shared with the contract farmers  
Contract farming with small farmers can be more politically acceptable than estate farming  

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What were the potential risks for agribusiness companies? 

Farmers may sell outside the contract  
Farmers may divert inputs supplied on credit to other purposes, thereby reducing yields  
Poor management and lack of consultation with farmers may lead to farmer discontent and jeopardize the CF operations  
Contracted farmers without control of the land may run into problems with landowners that can affect sales to the company  

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What did the development project learn about facilitating contract farming relationships?

 

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Thank-you 

Ken Smarzik / Emerging Markets Group

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