ENVIRON IMPACT ASSESS REV 1990;10:145-155 145

IMPACT ASSESSMENT IN NEWLY INDUSTRIALIZED COUNTRIES: ISSUES AND PLANNING FRAMEWORKS

CONTRACT FARMING AND RURAL SOCIAL CHANGE: SOME IMPLICATIONS OF THE AUSTRALIAN EXPERIENCE

DAVID BURCH,* ROY E. RICKSON,**

AND INARI THIEL***

Contract farming represents a significant change in the organization of farm pro- duction in both the developed and developing worlds. It integrates farmers and farm families into the wider national and global economy by separating land ownership from the power to make land-use decisions. These include cropping, use of chemicals (pesticides, herbicides, fertilizers), and harvesting decisions, and are no longer the exclusive province of farm owners and operators. The primary benefit for farmers of contract farming is a reduction of economic risk, while contractors are guaranteed a steady source of supply allowing investment in large- scale processing systems. The drawback is that farm families are increasingly marginalized by contract farming. Farmers lose power by dependence upon pro- cessing companies for "inputs" and know-how. The spread of contract farming has accelerated a narrowing of the genetic base of western agriculture, which has accompanied the development and widespread use of new crop varieties.

Introduction

Changes in the organization of farm production have fundamentally changed rural communities (Rogers et al. 1988). Contract farming is such a change and involves a form of vertical integration in which farmers contract with food

*Division of Science and Technology, Griffith University, Nathan, Brisbane, Queensland, Australia. **Division of Australian Environmental Studies, Griffith University, Nathan, Brisbane, Queensland, Australia. ***Department of Philosophy, University of Queensland, St Lucia, Brisbane, Queensland, Australia.

© 1990 Elsevier Science Publishing Co., Inc. 655 Avenue of the Americas, New York, NY 10010 0195-9255/90/$3.50

146 DAVID BURCH, ROY E. RICKSON. AND INARI THIEL

processors to deliver an agreed quantity of a specified crop for a guaranteed price. However, one outcome is that the contract system effectively separates land ownership by farmers and farm families from the power to make decisions about land use. It functions to coordinate supply, production, and processing under one management. Corporate executives and planners are therefore emerg- ing as the senior partners in contract farming systems. Although the corporation does not own farm land, the farmer is fully integrated into the industrial economy through contract farming and, to some extent, relinquishes traditional autonomy and assumes the role of an agribusiness employee (Lawrence 1987).

The Growth and Development of Contract Farming Contract farming has become a common system in both developed and developing countries. By 1971, 11 percent of the total agricultural output of Great Britain was covered by contract marketing schemes (Cmnd 5099 1972). Fat pigs, poultry, eggs, and fruit were the most important commodities under contracts; in vegetable processing, written contracts accounted for a significant proportion of peas (82 percent) carrots (17 percent), broad beans (71 percent), and runner beans (84 percent). In the United States some 23 percent of agricultural production in 1970 was either under contract or contract-like arrangements. In the vegetable sector, 95 percent of the total crop was produced under contract (Paarlberg 1980). Heffernan (1984) reports that over 95 percent of broiler poultry is raised under contract.

Contract farming has been widely adopted in developing countries, mainly as a consequence of actions initiated by Western agribusiness. In Latin America, for example, contract farming has been stimulated by US-based corporations which, when faced with a competitive home market, have turned to the less- developed countries for cheaper inputs of raw materials and lower processing costs. An example is the movement of Carnation Milk into the dairying industry of southern Peru. The Carnation plant was established in 1942, at which time milk production was closely linked with local small-scale cheesemaking. In the late 1970s Carnation Milk produced almost 90 percent of Peru's canned evap- orated milk, contracting with some 7000 farmers, of whom approximately 85 percent were smallholders with only small dairy herds (Burbach and Flynn 1980).

In Kenya, contract farming has been seen as an agent in increasing the pro- ductivity of small holdings, and it has been estimated that some 30 percent of the total marketed output from these small holdings is produced under contract (Hansen and Marcussen 1982). Kenya is now Africa's largest tea producer and supplies about 10 percent of the world market, with 40 percent of the Kenyan crop being grown by smallbolders under contract to the Kenya Tea Development Authority.

While most studies of the contract system have focused on the relationship betwccn corporations and the family farmer, the system goes beyond these two parties. For example, in developed countries large retailing chains and fast-food

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outlets are of increasing importance for marketing farm produce and setting production parameters. Large national and international corporations are also taking control of these activities and are increasingly incorporating underdevel- oped countries both as sources of supply and as new markets. Thus, companies such as McDonald's and Kentucky Fried Chicken are rapidly expanding into areas of Southeast and East Asia.

The Social Costs a n d Benefits of Contract Farming

Contract farming has been quick to spread because of the many advantages the system is said to offer in comparison to traditional arrangements. These include: (i) greater certainty and predictability to the farming community, which avoid the "boom-and-bust" syndrome associated with traditional farming; (ii) a greater knowledge and utilization of the latest technical advances, introduced to the farmer by the processing companies; (iii) the generation of new employment in rural areas as value-added processing operations are established close to centers of production; (iv) a guaranteed source of supply to the processing companies, enabling them to have a scale of production and a level of capital investment in transport, processing, and packaging technologies that would not have been possible under the old system; (v) guaranteed supplies of produce to supermarkets and fast-food chains, which are the main retail outlets of contract farming; and (vi) year-round supplies to the consumer of vegetables that might have previously been seasonal, are sold at prices that are more or less constant, and are bred and harvested under optimal conditions to a high level of quality.

A social cost of contract farming is that it implies a radically different role for the farmer, as Davis (1980, p. 142) has noted:

The contracting firm provides many of the production inputs (seeds, fertilizer, chicks, feed, etc.) while participating in many production decisions and holding full title to the contracted produce of the farmer's labor. Contract farming thus grants to the capitalist firm a degree of control over both the on-farm production process and off-farm exchange process. At its most extreme it may reduce the farmer to a wage earner on his own land---a piece worker who provides his own tools and works under supervision to produce commodities which he does not own. He sells his labour power instead of chickens, apples, beans, or beets.

Environmental impacts of contract farming are also important. One impact is the narrowing of the genetic base of western agriculture. Contract farming is most fully developed in those sectors in which there is the greatest reliance on only a few plant varieties. In the United States in the early 1970s, 96 percent of pea production was accounted for by only two varieties; 72 percent of potato production was accounted for by only four varieties. In addition, many new plant varieties require high levels of chemical applications and water use to maximize their output. Problems associated with high levels of chemical use by farmers include farm soil toxicity, nonpoint pollution, and dangers to health of farmers and nearby residents. High levels of chemical use by farmers are an

148 DAVID BURCH, ROY E. RICKSON, AND INARI TI-IIEL

integral part of intensive farming systems typified by contract production (Law- rence 1987).

While the contracting system has brought benefits to farmers, such as increased income security, it also involves a loss of autonomy and independence. The farmer can become little more than a "steward" who looks after a piece of land but makes no significant decisions regarding how the land is used. An example is the Peruvian dairy farmers who, though still technically owning their land and their cattle, have become so locked into the production of milk under contract to the Carnation Milk Company that they have effectively lost their autonomy without achieving any significant improvement in their standard of living (Bur- bach and Flynn 1980).

Over time contract farmers may be subject to a process of "de-skilling"-- dependent for inputs and "know-how" upon the processing company. Depen- dence is reinforced by the fact that once farmers enter a contractual relationship, it is extremely difficult for them (but not the processor) to move out of it. For example, vegetable varieties chosen by the processor for their suitability for processing and storing are not always suitable for sale in the open market. In the event of dispute, the farmer cannot decide to seek alternative outlets for his produce, and in the long term it would take much time and money for the producer to reorient production programs away from the processing companies.

In addition, the terms of the contractual relationship are influenced by the fact that there are usually only a few processing companies with which a farmer may deal, whereas a company can have many thousands of farmers to select from when seeking participants to a contract.

Dependence upon one major processing company means that income security, which is to the farmer a significant part of the contract system, may only be a short-term advantage, as processors seek to control costs by reducing or delaying payments. For instance, in June 1982, Grower magazine reported that farmers in the United Kingdom intending to contract with the Smedley/TKM canning factories were being offered 180-day bills of exchange instead of the standard 21- or 28-day terms of payment for their produce. Far from achieving a better level of income security, farmers had to look for an opportunity to discount the bill of exchange in order to obtain the money needed for immediate farm operating costs. Under these circumstances, the farmer was again uncertain of the ultimate level of return the crop might achieve.

Williams's (1961) study of nonwhite farmers in Louisiana also revealed wide- spread dissatisfaction with prices offered by processors, who did not generally consult with growers when establishing contract terms. Glover (1984) notes that contract farmers, or "outgrowers," are placed at a disadvantage, because contracts almost always specify that assessment of quality is the domain of the processor, so that the prices stated in the contract may not be the price actually received by the grower.

A counterresponse to the power of the processing firms has been the formation

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of farmer cooperatives to handle contract price negotiations. Such cooperatives can also be effective in negotiating better purchase prices for agricultural inputs for buying fertilizers, herbicides, and farm equipment in bulk and distributing them to members at less than retail price.

A cooperative regrouping is of obvious economic benefit to the farmer in obtaining better price terms, but such organization is effective only as long as the processing companies continue to find it profitable to operate around those prices. It has become obvious in the United States that in the quest for corporate profits the processors have little hesitation in moving their entire operation, or any particular part of it, to other countries where labor costs and produce prices are lower. George (1976) cites the example of Castle and Cook (Dole) and Del Monte, two processing conglomerates, which responded to the wage demands of Hawaiian cannery growers by moving their pineapple growing enterprises to Thailand, Kenya, and the Philippines to take advantage of cheap labor rates.

In short, the contract relationship is one in which the distribution of power between the producer and the processor shifted in favor of the latter, and the processor often uses this as a means of altering the terms of the contract between the two. In this, the processing companies are greatly strengthened by the fact that they are increasingly able to organize production and distribution on a global basis, and operate as transnational corporations that are able to use cheaper contract prices in one country as a means of reducing prices paid to farmers in another.

However, it is important to note that the processing company is often "squeezed" by other groups involved in the chain of relationships that stretches from the farm to the kitchen. Large retail chains, which in the developed countries act as outlets for processed foods (Coles and Woolworth's in Australia, Woolworth's and Safeway in the United States), operate at a scale (national or international) that places them in an extremely powerful position vis-a-vis the processors, particularly when it comes to negotiations on price and access to the market via these outlets. Their dominant position reflects, and is reinforced by, decisions made by many large chains to market produce under "own brand" or "generic" labels.~ These offer direct competition to the corporate brands of the major processors, who are nevertheless still expected to supply retailers with own brand products to a reasonable quality and at competitive prices.

IOwn brand and generic labels are a fairly recent retailing phenomenon, seen in Australia, for example, in Coles-Myer "Farmland" label (an own brand) and "Plain Wrap" (a generic label). In the case of vegetables, these products are usually supplied by the large processing companies that not only market premium products under their brand names (Heinz, Edgnll-Birds Eye), but also frequently supply second-grade or lower-quality produce packaged as supermarket own brand or a generic label as specified by the retailer. However, as with premium brand name goods, a certain percentage of retailers' own brand or generic label produce will come from overseas, especially where there is a significant price advantage. Thus Coles-Myer in Australia imports canned beets and green peas from Hungary, while Woolworth's imports canned green beans from New Zealand and canned corn from Taiwan. Cheap sources of supply can, of course, come to represent a significant threat to Australian growers of particular lines (Thiel 1985).

150 DAVID BURCH, ROY E. RICKSON, AND INARI THIEL

Given a growing interest in production, it is not difficult to envisage a situation in which, in the long term, the retail chains move away from simply marketing foods and enter the production process, initially by organizing production (for example, through contract farming) and eventually by assuming direct control. Seen in these terms, contract farming may well prove to be an intermediate step along the road to full vertical integration, or "corporate farming" (Davis 1980). As a spokesperson for the US Tenneco Corporation put it in 1970, "our goal in agriculture is integration from the seedling to the supermarket" (cited in Thiel 1985).

In the pursuit of this aim, it is clear that there will be profound social and economic impacts that impinge on the immediate participants and beyond. One of the economic effects of the contract system is the trend, now becoming evident in some areas of the United States, for an increase in the size and level of specialization of farms supplying vegetables for processing. (The New York Times, 20 January 1983). In this context Burbach and Flynn (1980) have pre- dicted the polarization of rural class structure in the United States, with the rise of an "agrarian bourgeoisie" distinct from the agribusiness corporations, but equally dependent on wage labor rather than the traditional family farm operation.

Together with a new capitalist class, Burbach and Flynn (1980) point to the emergence of a "semi-proletarian" class of part-time farmers, owners of small holdings who supplement their income by working for wages in regional centers or on larger "factory farms." An example is the farmers of Washington Parish, Louisiana, studied by Williams (1961), where approximately two-thirds of the growers supplemented their income with off-farm employment. Hansen and Marcussen (1982) saw no evidence of proletarianization in the case of the Kenyan tea growers at the time of their study, largely because these farmers devoted only a minor portion of their land to tea cultivation. However, they point out that the Kenyan sugar growers are more at risk because they often sign over effective control of their sugar-growing land to the processor for terms of up to six years, and they devote more of their land to the contract crop, thus leaving less for subsistence production and giving rise to the local saying, "sugar eats all."

Contract Farming in Australia The usual situation in Australia is for processing vegetables to be grown on family-owned farms of varying sizes, from the mixed-farming smallholders of the Lockyer and Fassifern Valleys in Queensland to the relatively large holdings of Western Australia. The most important vegetable crop in Australia (and also the most significant in terms of contract production) is the potato, with over one million metric tons, valued at A$272 million, being produced in 1986-1987 (Australian Bureau of Statistics 1988a, 1988b). About 40 percent of production was destined for the processing sector.

Pricing arrangements between growers and processors vary somewhat from

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state to state, but in most cases processor and ~ower representatives meet annually to negotiate contract conditions. With one or two exceptions, there are no government requirements for uniformity of contracts within each state, and there seems to be little or no formal coordination between states.

The processing sector is highly concentrated, and by 1986 two companies--- Edgell-Birds Eye (a subsidiary of Petersville Sleigh, owned in turn by Adsteam) and McCain Foods (a wholly-owned subsidiary of a large Canadian food pro- cessor) accounted for 100 percent of frozen potato production and some 90 percent of frozen pea production (Industries Assistance Commission 1986).

However, the degree of concentration in the processing sector has been qual- ified in recent years by a policy of tariff reduction, which has made imports more competitive. This, combined with the influence of the major retail outlets (expressed in terms of the scale of their purchasing power and control over market access), suggests that despite the processing companies' near monopoly, they are subject to strong outside influence. For example, McDonald's alone accounts for five percent of all frozen french fries sold in Australia, and the company is not only able to influence the price it pays to processors by the use of its market power, but it also has determined the type of potato to be cultivated. Similarly, supermarkets in Australia are able to exert considerable influence over the terms of the retailer-processor relationship in a variety of ways--by demands for cash discounts, through reductions in stockholdings, by limiting the amount of shelf space available to branded product lines produced by the processor, and by expanding on the sale of generic or own brand products (especially if overseas sourcing of supplies is possible).

The Social and Economic Impacts of Contract Farming in Australia A complex and highly competitive situation has emerged in agricultural pro- duction and marketing in Australia (as elsewhere). Increasingly, the production process is dominated by the processors on the one hand and the retailers on the other, operating in a competitive environment in which there is constant pressure to reduce costs and increase short-term productivity. Pressure inevitably bears down on the remaining link in the chain of production---the farmer. Under current conditions the size of the processing and retailing companies, along with their structural location in the national and global system of production and marketing, means that the farmer is in a structurally weak position and will usually be called upon to bear a disproportionate share of production "efficiencies," as both pro- cessors and retailers attempt to improve or maintain their position. Such pro- duction efflciencies involve reducing the on-farm costs of production or im- proving productivity. Either way, the immediate costs are borne mostly by farmers.

In the case of vegetable production in the Lockyer Valley in Queensland, for

152 DAVID BURCH, ROY E. R1CKSON, AND INARI THIEL

example, the early gains to growers noted by Thiel (1985) appear to have been eroded in recent years by a number of developments, some of which have their origins in policies pursued in the retailing and/or processing sectors. Certainly, growers in this sector have been squeezed by increased costs, which have not been reflected in increased prices paid by processors. For example, according to the Queensland Department of Industry (1981 and 1983) a pea producer with a midrange yield of 4000 kg per hectare, and a crop graded at point 3 on a 6- point scale of quality could, in 1981, expect a return of $486 per hectare (before allowing for depreciation of certain fixed capital inputs such as buildings and machinery at an appropriate rate). By 1983, however, the growers variable cost had risen 39 percent, while the price paid by the processor had increased between 5.3 percent and 11.7 percent, giving only a return between $459 and $553 per hectare. Even if we accept the higher figure, it is clear that the grower was probably worse off by 1983, and faced a reduction in real income generated by this activity.

The situation for pea growers worsened in subsequent years as well. It was in 1984 that Edgell-Birds Eye (the largest processor operating in the Lockyer Valley) attempted to reduce prices paid to pea producers, when it sent a circular to all pea growers with whom it had contract arrangements, advising them of the need to delete some marginal growers and to avoid any significant increases in the prices paid to producers. Edgell-Birds Eye claimed that increased com- petition from foreign imports made such a move necessary, as the major super- market chains took full advantage of the agreement on closer economic rela- tionships signed by Australia and New Zealand in 1982, and greatly increased imports of frozen peas from the latter source. In addition, large increases in imports from the United States and elsewhere were registered (Thiel 1985). As a consequence, Edgell-Birds Eye was able to negotiate a reduction of ten percent in the contract price agreed with pea growers in April 1985.

These developments carded negative implications for other growers in Queens- land and in the other states. Once accepted there, it became impossible for farmers elsewhere to resist the pressure for price reductions. In the same year Tasmanian producers also accepted an average price reduction of 18-20 percent on the price paid in the previous year (Tasmanian Department of Agriculture 1986). Improved prices were negotiated subsequently, but an increase of 22 percent in 1986-1987 only succeeded in restoring the price to its 1984-1985 level.

It is arguable, of course, that companies like Edgell-Birds Eye were them- selves only responding to external factors beyond their control, and that any action on their part would inevitably harm the growers. On the other hand, the fact remains that the policies of the processors and of the retail outlets impact most significantly at the farm level and inevitably result in the growers being squeezed and smaller, marginal farmers' being forced out of production.

A similar process of restructuring is currently underway in the potato sector.

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For the past twelve or more years, McDonald's french fries have been supplied by the Edgell-Birds Eye company, which contracts with farmers in Tasmania for the production of Russet Burbank potatoes. However, in recent years, McCain has been attempting to break into this lucrative market by encouraging the production of the Russet Burbank variety in the Ballarat area of Victoria. The area has for a long time grown potatoes under contract for processing, although production there has been based on the Kennebec variety. In 1985 McCain informed growers that the company wanted increases on contracts, but only for Russet Burbank varieties. However, the Russet Burbank does not grow well in Central Victoria. Yields are lower than for the Kennebec variety, and production of the Russet Burbank is more costly and time-consuming. According to farmers in the region, the Russet Burbank requires different fertilizer applications, more water, greater protection against blight, and constant attention. As one grower put it, it was not possible to get away on Saturdays or Sundays "because the Russet Burbank needs you" (Thiel 1985).

While encouraging the increased production of a variety requiring greater inputs of capital and labor, McCain was not prepared to pay a price that would cover increased inputs. The company argued that to do this would make the Victorian potatoes uncompetitive against the Tasmanian product. The apparent failure to cultivate successfully the Russet Burbank in Victoria led to McCain' opening a new potato processing plant at Smithton in Tasmania in 1987. It has a capacity of 50,000 metric tons and will result in the cultivation of a further 1000 hectares under potato.

Such developments accelerate the decline of Victorian potato production, al- though the impact at the farm level is as yet unclear. It will depend in part upon the extent of the commitment of Victorian farmers to potatoes, and whether they re- main sufficiently diversified to withstand the inevitable losses they would incur. The implications for Tasmanian farmers are not entirely clear either. Of course, in the short term they might be expected to benefit from the opportunity to expand production under relatively favorable conditions. However, this is by no means assured, since retailers and fast food outlets still have the option of importing raw materials if local growers are unable to produce on terms acceptable to major out- lets. This possibility was greatly enhanced in May 1987, when the Australian gov- ernment reduced the tariff on imported frozen fries and potato flakes as a way of encouraging local potato growers to become more "efficient."

The goals and interests of large retailers and fast-food chains (assisted by a government pursuing a market-oriented philosophy of economic management) have come to set the parameters for some farming sectors. The location of control over production decisions has shifted away from the farmer and towards the processor or retailer. Whatever the outcome of the complex and intense com- petitive struggle currently occurring within and between the processing and retailing sectors, it seems clear that growers find themselves in a structurally subordinate position.

154 DAVID BURCH, ROY E. RICKSON, AND INARI THIEL

Conclusions

Contract farming will undoubtedly continue to become more widespread, and will be applied to a wider range of agricultural products. As this occurs, the family farm will be substantially affected, not perhaps in terms of land ownership, but by loss of power in decision making about farm operations. Ultimately, processes of vertical integration may lead to a unified system of production and marketing, as large corporations come to organize the total process from the farm to the kitchen.

Such developments will undoubtedly cause significant social changes in the developed countries, as the economic base of much of traditional rural life continues to be eroded. Applied to the Third World, contract farming based on consumption in developed country markets will only serve to intensify the process by which land used for locally consumed foodcrops is transformed into land use for export crops. Some in the Third World may benefit, but it is reasonable to assume that contract farming organized by Western agribusiness is likely to add to the many burdens already carried by the poor of these countries.

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