LINKING FARMERS TO MARKETS THROUGH CONTRACTS

THE MALAWIAN CONTEXT OF CONTRACT FARMING AS A MODEL FOR STRENGTHENING MARKET LINKAGES

Presented by Mapenzie Chikhwaza African Institute of Corporate Citizenship (AICC)

Format of the presentation

• Background &Objective• Definition & historical context of contract

farming• Prerequisites , benefits & models• Case study & summary findings• Recommendations and conclusion

Background

Agriculture: is key to poverty reduction in Malawi; indubitable substantial

contribution to the GDP, food security and reduction to unemployment levels

Prominent role in achieving Malawi Development Growth Strategy (MGDS); particularly the poverty reduction objective

The ParadoxIn reality agriculture is associated with poverty, poor

production & productivity levels and a set of production activities that does not earn enough returns due to weak market linkages in the value chain

…Continued

Agriculture is faced with a lot of challenges. However, efforts to address these challenges have been made although main focus has been on production interventions; adoption and use of improved farm inputs and new technologies, capacity building, and the need for mechanization

The instrumentality of marketing interventions has not been given its due attention: farmers willingness to investment in new production technologies and production assets is directly related to the ability to earn a reasonable return

…cont

Production interventions are making coercive affirmative strides there is therefore the need to strengthen market linkages in the value chain to ensure the achievement of poverty reduction amongst the smallholder farming community

Main objectiveTo demonstrate the importance of strengthening market

linkages within the Malawi context with specific focus on contract farming as a model

ApproachA literature review on the historical analysis of the

attempts, models, progress and challenges of contract farming

An analysis of cotton contract farming case study drawing on the historical analyses, to reach general conclusions about contract farming and its importance as a model for strengthening marketing linkages

Definition & Historical ContextContract farming has been widely defined by different authors; “A binding arrangement between a firm (contractor) and an

individual producer (contractee) in the form of a ‘forward agreement’ with well-defined obligations and remuneration for tasks done, often with specifications on product properties such as volume, quality, and timing of delivery” (Catelo and Costales, 2008);

“A contractual arrangement between farmers and other firms, whether oral or written, specifying one or more conditions of production, and one or more conditions of marketing, for an agricultural product, which is non-transferable” (Rehber, 2007)

For the purposes of this paper, and drawing from the definition of Renber (2007), contract farming is defined as;

A verbal or written contractual agreement between a farmer and a firm stipulating conditions of production and intentions for the firm to buy the produce upon harvest

… continuedThis definition

Captures the basic and common concept about most of the different types/ models of contract farming across varying literature.

Reflects the concept of agreement between two parties

Accepts the notation of existence of a contract without restricting it to verbal or written only

Illustrates the defined production and intention for forward supply; forms the foundations of contract farming.

Captures more types of contract farming specially found within the context of Malawi without alienating a world understanding of the term

Historical expansions; World Context

Source: Prowse (2012)

Region Year Commodities under contract farming

Latin America (Hondurus, Peru, Mexico)

Since 1950 Bananas, barley, vegetables and grain

South east and South Asia Since 1956 Cotton, soya, tea and fresh milk

East Asia (China) 1990 Rice fruits and vegetables

Sub Saharan Africa (Kenya, Mozambique, Malawi)

1980 Sugar cotton tobacco coffee

Region year commodity

…continuedMalawian context– Pre-market liberalization;

• Government institutions; Farmers Marketing Board later on ADMARC (1971); main buyers and input provider,

• Ministry of Agriculture provided of extension services• Smallholder Agricultural Credit Administration provided

credit and loans (Warren, 2010)

- Post market liberalization• Private sector /agribusinesses involvement in contract

farming; the provision and financing of inputs and crop pricing was a challenge. Government assistance was not sustainable (Kumwenda and Madola, 2005)

Prerequisites

• Willing parties (Warren, 2012)

• A comprehensive/well detailed contract (Agar and Chiligo, 2008)

• Well organized farmers body• Reward for compliance (Agar &Chiligo, 2008)

• Existence of safety nets• Some degree of Profit sharing (Kumwenda &Madola,2005)

• Effective management (Nthara, 2002)

• Government support

The benefits to the farmer

• Access to farming inputs• Increased production and productivity• Improved farmer welfare and organizations• Readily available marketsAccording to Warren( 2010);

• Planning tool and for budgeting• Quality management• Enhancing partnerships platforms

ModelsAccording to Mighell & Jones (1963)

• Market-specification; guarantee a farmer a marketing outlet and time of sale, and possibly a price structure, if some degree of quality is met .Farmers retain full production control.

• Resource-providing ; certain physical or technical inputs are provided by a firm, with the requirement that produce is marketed through that same firm. This reduces the farmers’ cost of choosing, accessing and purchasing inputs, and the firm is assured quality of produce and (usually) repayment

• Production-management; the firm stipulates and enforces conditions of production and farm-based processing. Farmers thus relinquish a degree of control over the production process on the farm.

The Malawian Cotton Case Study

• Mainly a smallholder crop grown by about 100,000 to 200,000 smallholder farmers, on small parcels of land averaging between 0.5 to 1 acre (0.2 to 0.4 ha) of land coming to a total of about 50,000 ha land on average each year.

Access to production inputs is limited due to the limited resource base for raising capital, hence a high dependence on seasonal loans every year.

• Model of the contract; Initiated by Cotton development Trust (CDT), inputs, extension services and loans were provided with expectation of recovery during marketing. Farmer registration took place to keep track of the output and performance of the all the farmers during the contract period.

• The arrangement broke after the initial two yearsdown due to third party buyers who wanted to buy the crop at a high price without paying for the cost of the investment made. The initial investors discontinued the investment as a result.

Summary findings

Source: Warren (2012), Agar & Chiligo (2008)

Output ImpactRegistered farmers (percentage change) 33

National seed cotton production (percentage

change)

42

Lint output (Percentage change) 74

Quality improvement Yes

Price improvement Increased above int’l price (2003-6 +200%,

2006-8 +216%)

Price determined by; GoM specified minimum price and world market prices

Farmer profitability Improved due to high yield and world prices

Recommendations for contract farming as a model• Provision of production inputs, credit/loans

and extension services;– Increased production and productivity– Improved quality

• Provision of assured Markets– Increase in production– Improved farmer welfare through increased profitability earned

through increased yields and better prices

• Strengthens farmers organization• Enhances partnerships in the value chain

Conclusion

• The use of contract farming as a model for strengthening market linkages in the agriculture value chain within the Malawian context; is a viable alternative for strengthening the market linkages. It increases agriculture’s potential in alleviating poverty as it not only addresses the weak market linkages challenge, but it does so while also addressing other pressing challenges in agriculture such as low production and productivity as well as poor access to production inputs, credit/loans and extension services.

THANK YOU