1. Different types of contract farming
Andrew W. Shepherd
FAO, Rome

2. Types of Contract Farming linkages
large-scale processing soon after harvest
other export commodities involving processing (cotton)
agro-processing (fruits and vegetables)
dairy products
supermarket supply
fresh export

3. 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.

4. 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.

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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.

14. 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

15. 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

16. 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

17. Thank you!