”Land grabs” and contract farming: A win-win situation? Land and Poverty Conference 2016: Scaling up Responsible Land Governance March 14-18, 2016Washington, DC Kerstin Nolte and Simone Gobien GIGA German Institute of Global and Area Studies, Hamburg

Motivation 2  Context: Intensification of agricultural production and expansion of farmland to meet growing demand for food and fuel  Large-scale agricultural land transactions still make headlines: about 40 million hectares changed hands since 2000 (LMI, 2016)  Large-scale agricultural investments (LSAIs) = operational farms have strong implications on local communities, but little is known on these implications  Key question: How to include smallholder farmers in agricultural transformation?  Contract farming as a guarantee for positive imlications?

Potential positive impacts of LSAIs  Mixed evidence on impacts, mainly based on case studies: positive and negative impacts  Transmission channels  Employment generation  Infrastructure improvements  Spillovers on smallholder farmers (knowledge transfers, access to markets)  Whether potential benefits materialize depends to a large extent on the inclusiveness of the business model 3

Contract farming 4  Agreement between a farmer and a firm  farmers provide a certain quantity and quality of commodity  firm provides production support and processes the farmer’s produce or puts it on the market  Contract farming plays an important role in LSAIs for a variety of crops  140 LSAIs out of 299 for which we know whether CF is used or not  Main crops: oil palm (40), sugar cane (24), jatropha (21), maize (19), soya beans (18), rice (17), rubber (16) Contract Farming Frequency Size in million hectares Yes No Information missing Source: LMI, 2016.

Contract farming: Depots in Zambia 5 Own photo, Mumbwa District, Amatheon Agri ( und ).

Challenges in determining the effects of Contract Farming  No random selection  of participants and location: Firms choose the „more able“ farmers in „suitable locations“  difficult to isolate effect of CF, find a suitable control group  Effects differ across time  Many schemes become profitable only after some time  What is the counterfactual?  Smallholder farming  Wage labor on a plantation  Contract farming  … 6

Transmission channels of contract farming  Production support: inputs, fertilizer, training  Increase productivity and therewith income  Increase human capital  If combined with a loan: increase liquidity  May have positive spillover effects on non-contract crops and non- participants  Farmers may become too dependent  Guaranteed market and fixed prices  Reduce transaction costs 7

Effects of contract farming on participants II  Change of production and management technique  Diversify income towards not-agricultural activities  Increases risks due to specialization in contract crop  Higher quality standards (e.g. certification)  Threaten social cohesion  Offers possibility to participate in global value chains  Organization in group  Increases bargaining power 8

Diversity of outcomes Outcomes of contract farming schemes debated in the literature. Sucess related to:  Context conditions  Choice of crop and production model  External factors (weather, market prices)  Local context (legal framework, socio-economic characteristics of participants)  Power balance between firm and participating farmer  Often unbalanced contracts favour firm over small-scale farmer  Inclusion of independent third party might increase bargaining power 9

LSAIs with and without contract farming  In principle: beneficial effects of LSAIs may occur with and without contract farming  Contract farming increases potential for positive spillovers, and can mitigate job losses  Benefits from contract farming do not happen automatically but depend on  Context conditions  Power balance between firm and smallholder farmer  Contract farming can improve potential of LSAIs to benefit local smallholders, but no guarantee 10