Download Ways of linking companies to farmers

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; companyformed 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 companyfarmer 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/a
gmarket/agmarket.html
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