Contract Farming Integrating Small Farmers into Productive Value Chains

Contract FarmingContract Farming

Integrating Small Farmers into Integrating Small Farmers into Productive Value ChainsProductive Value Chains

SEEP Annual Conference / SEEP Annual Conference / Oct 2006Oct 2006

SEEP AGM 2006SEEP AGM 2006 22

What is Contract Farming?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.


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 farmer’s production and to purchase the commodity


What are the different typesWhat are the different typesof contract farming?of contract farming?

Centralized ModelCentralized Model Intermediary ModelIntermediary Model


The centralized modelThe centralized model

Involves a centralized company contracting Involves a centralized company contracting directly with large number of individual farmersdirectly with large number of individual farmers

Is typically used for high value export crops, tree Is typically used for high value export crops, tree crops, poultry, and dairy. crops, poultry, and dairy.

Products often require a high degree of quality Products often require a high degree of quality and need to meet international specificationsand need to meet international specifications


Company

Contract Farmer

Contract Farmer

Contract Farmer

Contract Farmer

Contract Farmer

Centralized ModelCentralized Model


The intermediary modelThe intermediary model

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


Company

Lead Farmer Lead Farmer Lead Farmer

Contract Farmers (10-20)



Intermediary ModelIntermediary Model


Choice depends on:Choice depends on: the productthe product the resources of the company, andthe resources of the company, and the intensity of the relationship between farmer the intensity of the relationship between farmer

and company that is necessaryand company that is necessary


What are different strategies that What are different strategies that companies can use to set purchase companies can use to set purchase

prices with contract farmers?prices with contract farmers?

Fixed pricesFixed prices Spot market pricingSpot market pricing Split pricingSplit pricing


Fixed pricesFixed prices

Price specified in the contract at the beginning Price specified in the contract at the beginning of the seasonof the season

Different rates for different grades can be Different rates for different grades can be specifiedspecified


Prices determined onPrices determined on spot- market price spot- market price

Determined by a price fixing committee at Determined by a price fixing committee at specific times after the harvestsspecific times after the harvests

In many cases the price that is fixed is slightly In many cases the price that is fixed is slightly higher than the market pricehigher than the market price


Split pricingSplit pricing

An agreed base price is paid at the time of An agreed base price is paid at the time of purchase purchase

Final price is calculated (and paid) once the Final price is calculated (and paid) once the commodity is sold by the companycommodity is sold by the company


CONTRACT FARMING APPROACHCONTRACT FARMING APPROACH(from agribusiness company perspective)(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


Panelist CasesPanelist Cases

Bill Grant – Tanzania (paprika)Bill Grant – Tanzania (paprika)

Frank Lusby – Bangladesh (groundnuts, chilies, Frank Lusby – Bangladesh (groundnuts, chilies, potatoes)potatoes)


What is Paprika?What is Paprika?


Tanzania Spices Limited, IringaTanzania Spices Limited, Iringa

Spanish buying company established in 2001, based in Spanish buying company established in 2001, based in IringaIringa

Works with smallholder and commercial farmers in Works with smallholder and commercial farmers in Iringa, Mbeya, Tabora, RuvumaIringa, Mbeya, Tabora, Ruvuma

Buys all paprika output for processing in SpainBuys all paprika output for processing in Spain Grade A: Tsh. 1,020/kgGrade A: Tsh. 1,020/kg Grade B: Tsh. 580/kgGrade B: Tsh. 580/kg Grade C: Tsh. 130/kgGrade C: Tsh. 130/kg

High profitability under good management practicesHigh profitability under good management practices Income/ha: 2,000 kgs x Tsh. 850/kg = Tsh. 1.7millionIncome/ha: 2,000 kgs x Tsh. 850/kg = Tsh. 1.7million Production costs/ha: Tsh. 720,000Production costs/ha: Tsh. 720,000 Profit/ha: Tsh. 1millionProfit/ha: Tsh. 1million


DAI PESA Paprika ActivitiesDAI PESA Paprika Activities

Following subsector study, project activities began in Following subsector study, project activities began in Iringa (October 2003) and Ruvuma (March 2004)Iringa (October 2003) and Ruvuma (March 2004)

Iringa Rural DistrictIringa Rural District 9 village level associations (1,415 MSEs - 34% women) 9 village level associations (1,415 MSEs - 34% women) Association of Iringa High Quality Farmers Products Company Association of Iringa High Quality Farmers Products Company

LimitedLimited Roles of apex company: marketing, advocacy, address member Roles of apex company: marketing, advocacy, address member

needsneeds

Songea Rural & Namtumbo DistrictsSongea Rural & Namtumbo Districts 19 village level associations (2,707 MSEs – 17% women)19 village level associations (2,707 MSEs – 17% women) 2 apex companies: Association of Songea/Namtumbo High Quality 2 apex companies: Association of Songea/Namtumbo High Quality

Farmers ProductsFarmers Products


DP Farmer Association Model, Iringa DP Farmer Association Model, Iringa

APEX

Mangalali117 Members(77 M / 40 F)

Kaning’ombe 381 Members(237 M / 144 F)

Kidamali105 Members(72 M / 33 F)

Muwimbi163 Members(93 M / 70 F)

Magubike64 Members(40 M / 24 F)

Lumuli185 Member

(116 M / 69 F)

Ifunda51 Members(32 M / 19 F)

Idodi47 Members(39 M / 8 F)

Ihemi62 Members(42 M / 20 F)

Iringa SocioeconomicAlliance

(An all-stakeholder socioeconomic,district-level, development alliance)

MEMBERS:Association of Iringa High QualityFarmers Products, District Council(DED, DCO, DTO, DALDO),GOT, DAI PESA, Tanzania SpicesLimited, Chairmen ProducerAssociations, Businessmen,Transports, TCCIA, Concern, CIRD

Association of Iringa HighQuality Farmers Products

Company Limited

EXECUTIVE MEMBERS:Chairman, Vice Chairman, Secretary

and Treasurer

Tanzania SpicesLimited(TSL)(Buyer)


Well-Maintained Smallholder Well-Maintained Smallholder FarmFarm

Smallholder Farm, Iringa


Poorly-Maintained Smallholder FarmPoorly-Maintained Smallholder Farm

Smallholder Farm, Songea


Commercial FarmCommercial Farm

Selous Farming, Iringa


Promotion of Contract Farming in Promotion of Contract Farming in BangladeshBangladesh

Katalyst Project – large market development Katalyst Project – large market development project in Bangladesh (AFE is subcontractor) project in Bangladesh (AFE is subcontractor)

After value chain analysis - identified large After value chain analysis - identified large buyers in three sectors with significant backward buyers in three sectors with significant backward linkages to small scale farmers / interest in linkages to small scale farmers / interest in direct procurement with small-scale farmersdirect procurement with small-scale farmers


Company profiles: Company profiles: Company A – Largest domestic producer/distributor of Company A – Largest domestic producer/distributor of

snack foods (also exports)snack foods (also exports) Company B – Chili based spices for domestic / export Company B – Chili based spices for domestic / export

marketmarket Company C – Potatoes for export Company C – Potatoes for export

All companies interested in expanding local All companies interested in expanding local sourcing to reduce imports, control sourcing to reduce imports, control quality/content, develop secured source of quality/content, develop secured source of productionproduction


Project worked with company to narrow down Project worked with company to narrow down products and geographic locations for contract products and geographic locations for contract farming productionfarming production

MOUs were signed with companies and project MOUs were signed with companies and project in early 2006 after several months of negotiationin early 2006 after several months of negotiation

Work plans/ implementation Work plans/ implementation Currently in the first season with each cropCurrently in the first season with each crop


Company Development of Chili Company Development of Chili Seeds for CF OperationsSeeds for CF Operations


Choosing the best seedChoosing the best seed


Company reps signing agreement Company reps signing agreement with lead farmerswith lead farmers


Company Orientation withCompany Orientation withContract FarmersContract Farmers


What contract farming models were used What contract farming models were used in the cases?in the cases?

How were operations structured between How were operations structured between the companies and the farmers?the companies and the farmers?


What were advantages andWhat were advantages and disadvantages of these models for the disadvantages of these models for the

agribusiness companies?agribusiness companies?


Advantages and disadvantages of the Advantages and disadvantages of the different modelsdifferent models

Centralized model provides greater control over Centralized model provides greater control over the production process but is more expensive to the production process but is more expensive to implement implement

Intermediary model is less expensive and entails Intermediary model is less expensive and entails less investment and financial risk but ability to less investment and financial risk but ability to control quality and production is less (also control quality and production is less (also difficult to control what goes on with the difficult to control what goes on with the individual farmers)individual farmers)


How were lead farmers or individual How were lead farmers or individual contract farmers identified?contract farmers identified?

What criteria were used?What criteria were used?

Illustrative Selection Criteria for Contract Farmers:Illustrative Selection Criteria for Contract Farmers: Practical experience on the targeted crop Practical experience on the targeted crop Resources to cultivate selected cropResources to cultivate selected crop Residence in the target area Residence in the target area Suitability of land for targeted cropSuitability of land for targeted crop Good reputation in the communityGood reputation in the community


Contract farmers must have their own land or Contract farmers must have their own land or acceptable leasing arrangement (not acceptable leasing arrangement (not arrangement where farmer must give arrangement where farmer must give percentage of production to owner)percentage of production to owner)

Not involved with competing companies for Not involved with competing companies for targeted croptargeted crop

Have time to devote to contract farming activitiesHave time to devote to contract farming activities


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

participating farmers?participating farmers?


What were the advantages of What were the advantages of contract farming for farmers?contract farming for farmers?

Advantages for contract farmers:Advantages for contract farmers: Inputs often supplied by the sponsorInputs often supplied by the sponsor Introduces new technology and varieties Introduces new technology and varieties

(resulting in improved yields and income)(resulting in improved yields and income) Enables farmers to learn new skills (that can be Enables farmers to learn new skills (that can be

also be applied to other crops)also be applied to other crops) Price risk reduced Price risk reduced Assured marketAssured market Opens up new markets which would otherwise Opens up new markets which would otherwise

be unavailable to small farmersbe unavailable to small farmers


Risk of market failure and production problemsRisk of market failure and production problems

Inefficient management from sponsor company or Inefficient management from sponsor company or changes in markets can result in manipulation of quotas changes in markets can result in manipulation of quotas

Sponsoring companies may be unreliable or exploit a Sponsoring companies may be unreliable or exploit a monopoly positionmonopoly position

Staff of sponsoring organizations may be corruptStaff of sponsoring organizations may be corrupt

Farmers may become indebted because of production Farmers may become indebted because of production problems and excessive advancesproblems and excessive advances

What were the potential risksWhat were the potential risksfacing contract farmers?facing contract farmers?


What were the advantages for What were the advantages for the agribusiness companies?the agribusiness companies?

More consistent quality can be obtained than if More consistent quality can be obtained than if purchases were made on the open marketpurchases were made on the open market

More reliable source of supply than with open-market More reliable source of supply than with open-market purchases or importspurchases or imports

Working with farmers overcomes land constraintsWorking with farmers overcomes land constraints

Production risk is shared with the contract farmersProduction risk is shared with the contract farmers

Contract farming with small farmers can be more Contract farming with small farmers can be more politically acceptable than estate farming politically acceptable than estate farming


What were the potential risks for What were the potential risks for agribusiness companies?agribusiness companies?

Farmers may sell outside the contract Farmers may sell outside the contract

Farmers may divert inputs supplied on credit to other Farmers may divert inputs supplied on credit to other purposes, thereby reducing yieldspurposes, thereby reducing yields

Poor management and lack of consultation with farmers Poor management and lack of consultation with farmers may lead to farmer discontent and jeopardize the CF may lead to farmer discontent and jeopardize the CF operationsoperations

Contracted farmers without control of the land may run Contracted farmers without control of the land may run into problems with landowners that can affect sales to into problems with landowners that can affect sales to the companythe company


What did the development project What did the development project learn about facilitating contract learn about facilitating contract

farming relationships?farming relationships?


Thank-youThank-you

Ken Smarzik / Emerging Markets GroupKen Smarzik / Emerging Markets [email protected]@emergingmarketsgroup.comwww.emergingmarketsgroup.comwww.emergingmarketsgroup.com

Bill Grant / DAIBill Grant / [email protected][email protected]

Frank Lusby / Action for EnterpriseFrank Lusby / Action for [email protected]@actionforenterpise.orgwww.actionforenterprise.orgwww.actionforenterprise.org

Contract Farming Integrating Small Farmers into Productive Value Chains

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