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Contract Farming Integrating Small Farmers into Productive Value Chains

Contract Farming Integrating Small Farmers into Productive Value Chains. SEEP Annual Conference / Oct 2006. What is Contract Farming?.

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Contract Farming Integrating Small Farmers into Productive Value Chains

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  1. Contract FarmingIntegrating Small Farmers into Productive Value Chains SEEP Annual Conference / Oct 2006

  2. 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.

  3. 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

  4. What are the different typesof contract farming? • Centralized Model • Intermediary Model

  5. 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

  6. Centralized Model Company Contract Farmer Contract Farmer Contract Farmer Contract Farmer Contract Farmer

  7. The intermediary model • Company contracts with lead farmers (intermediaries) who in turn contract with individual farmers

  8. Intermediary Model Company Lead Farmer Lead Farmer Lead Farmer Contract Farmers (10-20) Contract Farmers (10-20) Contract Farmers (10-20)

  9. Choice depends on: • the product • the resources of the company, and • the intensity of the relationship between farmer and company that is necessary

  10. What are different strategies that companies can use to set purchase prices with contract farmers? • Fixed prices • Spot market pricing • Split pricing

  11. Fixed prices • Price specified in the contract at the beginning of the season • Different rates for different grades can be specified

  12. 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

  13. 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

  14. 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

  15. Panelist Cases • Bill Grant – Tanzania (paprika) • Frank Lusby – Bangladesh (groundnuts, chilies, potatoes)

  16. What is Paprika?

  17. 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

  18. 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 – 17% women) • 2 apex companies: Association of Songea/Namtumbo High Quality Farmers Products

  19. DP Farmer Association Model, Iringa

  20. Well-Maintained Smallholder Farm Smallholder Farm,Iringa

  21. Poorly-Maintained Smallholder Farm Smallholder Farm, Songea

  22. Commercial Farm Selous Farming, Iringa

  23. Promotion of Contract Farming in Bangladesh • Katalyst Project – large 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

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

  25. 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

  26. Company Development of Chili Seeds for CF Operations

  27. Choosing the best seed

  28. Company reps signing agreement with lead farmers

  29. Company Orientation withContract Farmers

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

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

  32. 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)

  33. 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

  34. 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

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

  36. 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

  37. What were the potential risks facing contract farmers? • 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

  38. 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

  39. 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

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

  41. Thank-you Ken Smarzik / Emerging Markets Group ksmarzik@emergingmarketsgroup.com www.emergingmarketsgroup.com Bill Grant / DAI William_Grant@dai.com www.dai.com Frank Lusby / Action for Enterprise flusby@actionforenterpise.org www.actionforenterprise.org

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