Different types of contract farming

Andrew W. Shepherd

FAO, Rome

Types of Contract Farming linkages

1. large-scale processing soon after harvest

2. other export commodities involving processing (cotton)

3. agro-processing (fruits and vegetables)

4. dairy products

5. supermarket supply

6. fresh export

1. For immediate processing

• products requiring large-scale centralised processing (oil palm; sugar; tea; poultry)

• usually limited alternative marketing opportunities; side-selling not major problem

• transport, extension, inputs usually provided by company as monopoly buyer

• direct company-farmer relationships; company-formed groups; assocs or coops

• some protection for farmers required due to high “asset specificity”

• possible disputes over quality.

Transvaal Sugar Co.

• Medium-large growers plus 1000 emerging farmers in 32 groups

• Cane delivery agreement

• Price setting by S.A. Sugar Association

• For smallholders company finances land preparation, training, irrigation and fertilizer.

2. Other export commodities involving processing (e.g.

cotton)

• Side-selling can be major problem given ease for alternative buyers to operate

• Input support required from companies but no guarantee of buying crop

• Reserved zones for individual companies rarely politically acceptable

• Alternative approaches to resolving problem (e.g. cotton in Zambia)

Different approaches with cotton in Zambia

• Dunavant– Supplies inputs on

credit through independent distributors, who are also responsible for buying the crop and obtaining credit repayment

• Cargill– Supplies inputs on

credit through company staff. All farmers have number and production and repayment performance closely monitored through central computer

But neither method works well when there are competing buyers

3. Horticultural agro-processing

• contracts usually necessary for guaranteed supply and required quality

• may require significant “on-the-ground” presence of company staff or agents

• but can have high transaction costs in dealing with individual farmers

• can suffer from “side-selling” etc. when products have a local market

Reco Industries - Uganda

• 5000+ farmers supplying F & V• Work through local chiefs at sub-county level. Extension

workers in every sub-county, each with 4-5 informal groups. Invites farmers to pilot farm.

• But rapid rotation of farmers• Written contracts witnessed by local officials. No fixed

price but agreement to pay 5-15% more than market price

• Specifies varieties for all crops but only supplies tomato seeds

• Preference to work with assocs/coops but finds this impossible to organise

4. The Dairy industry

• Possibly the sector with least problems

• Alternative market limited to unprocessed village sales

• Sector where cooperatives tend to work well (e.g. Uganda) but direct company-farmer arrangements also common (e.g. Kenya)

• Quality control can be problematic

Brookside Dairies, Kenya

• More than 15,000 farmers• Formal supply contract with each,

indicating daily deliveries – important planning tool for company and guaranteed market for farmers

• Quality testing at collection centres• Company provides extension, artificial

insemination, veterinary drugs and feed on credit—deducted from milk deliveries

5. Supermarket supply

• Outside South Africa contract linkages fairly unsophisticated

• Lessons can be learnt from Asia where tending to procure through established wholesalers, dedicated wholesalers and other intermediaries such as coops and leading farmers

• Growing quality, safety and other requirements will dictate need for input provision and extension advice

Freshmark - Uganda

• Individual farmers provide samples and Freshmark visits farms. Works with just one or two “lead” farmers

• No contract, just agreement to buy certain quantities, determined weekly

• No input provision, extension support or credit

• Farmers must have bank a/c and be able to prepare invoices

Bimandiri, Indonesia – a specialist wholesaler

• supplier of vegetables and fruits mainly to Carrefour

• encourages farmers to cooperate in groups and works with those groups on the basis of agreed quantities

• supplies technical assistance and credit, in order to assure quality standards and consistent volumes

• transparent negotiated producer prices, shared information.

Approach using lead farmers Hortifruti, Honduras

• the specialized F & V wholesaler for Wal-Mart • after failures with coops, now identifies and builds the

capacity of farmers who can meet its needs• lead farmers receive larger orders as they perform and

invited to work with other farmers to meet demand• lead farmers provide access to technology, technical

assistance and market access to their neighbours • expansion of this model depends on the identification of

new lead farmers. • early results indicate that it is a low-cost, scaleable and

sustainable approach

6. Fresh horticultural exports

• smallholder involvement increasingly jeopardised by cost of GLOBALGAP and other standard compliance

• certification usually requires farmers to be in groups – donor support for certification is common

• input supply arrangements common, particularly where required inputs (e.g. for organics) not readily available

Blue Skies Co. - Ghana

• Fresh-chilled pineapple, mango and other fruit for export

• GLOBALGAP certification for all farmers and inputs supplied; costs recouped from farmer deliveries

• Individual relationships with farmers – technical training and extension advice

• Payment two weeks after delivery• Side-selling not major problem as prices higher

than market prices

Thank you!

http://www.fao.org/ag/ags/subjects/en/agmarket/agmarket.html

Andrew.Shepherd@fao.org