What We Wished Everyone Took Seriously About Contract Farming – Experience from Tanzania
Contract farming, also known as out-grower scheme, has been in existence for decades. In recent years, its use for organising agricultural production is growing rapidly with the rise of agricultural commercialisation, mainly in developing countries. It may not be a suitable business model for all contexts, and its past records show mixed results, especially benefiting poor and smallholder farmers.
This blog post takes us to Tanzania’s Central Corridor. We look at the experience of the Rural Livelihood Development Programme (RLDP). [1] Our aim is to show how the success or failure of contract farming arrangements is shaped by business practices for building strong and reliable relationships.
To begin with, why contract farming?
The programme in Tanzania sought to establish mutually beneficial relationships between processors and producers in three sectors: sunflower, rice and cotton. It tried to address root causes of poor quality and quantity of produce. There were weak relationships between producers and the buyers in the selected crops sectors. The contract arrangement, therefore, was for increasing “shared benefits”. Producers partly accessed services and inputs on credit, while buyers purchased with more ease needed volumes and quality of raw material to run their operations and reach new markets.
As often the case in many contract farming arrangements, processors in Tanzania were worried about the risk of investing in smallholder farmers who may not produce the required volumes and/or quality, or may even sell to another buyer (“side-selling”). For producers, if the processors were not able to locate the market and buy from them as agreed, they would lose their income. The processors might also take advantage of monopoly and lower buying prices, especially in cases of informal or unwritten contracts.
What did the programme achieve?
The contract farming model showed that processors were willing to innovate and were capable of taking up pro-poor business models when motivated by business incentives. Certain processors took up the model out of their own initiatives and without receiving additional support from RLDP, e.g. a cotton ginner piloted a “farmer business hub” model in 2014 that established a central site for producers within a walking distance of three to five villages. Each processor also had different ways of solving challenges, for example, producers defaulting on loans and high costs in delivering services to rural areas.
Cotton ginner, Tabora
Some processors said that producers were sometimes hesitant to enter into agreements with them and take on credit due to a lack of trust. A few processors solved this challenge, mainly in the sunflower sector, by bringing local government extension officers (district, ward and village levels) into the model. These officers, who already had an established relationship with community members, assisted processors in building trust with smallholders.
Sunflower processor, Dodoma
In the rice sector, however, poor weather and difficult regulatory issues did not attract private sector investment and discouraged producers from improving performance. Partners were not willing to make large investment due to a lack of gains during harvest. In general, processors did not establish mutually beneficial relationships with producers and therefore there was little evidence of concrete impacts.
Rice miller, Shinyanga
In all the three sectors, our experience showed that investing in and working with strong producer cooperatives and groups helped to promote contract farming. This was because organised groups held the potential for higher levels of accountability regarding financial agreements. Engaging with producer groups reduced the inefficiency of working with many individual smallholders, therefore lowering the overall cost of investing in smallholders as suppliers. Development projects facilitating contract farming arrangement should thus consider both buyers and producer organisations as part of interventions for improving relationships between them.
Yet we would exercise caution here. Many projects supporting collective actions of farmers end up in creating dependency or establishing parallel structures. A typical example is providing direct support without taking into account if farmers really see the benefits of working in groups and if such actions will continue after the end of projects. The RLDP project carried out analysis to ensure that the groups had strong internal accountability processes and legality to enter into binding contracts. In the cotton sector, for example, the project worked with three local producer organisations but with mixed results. Analysis and strengthening of farmer organisations may have been insufficient.
Some processers found a gender lens useful to their business as they valued female suppliers for their loyalty. This perception meant that they were more willing to invest in gender initiatives. Other processers, however, saw no advantage to investing in gender training, which RLDP tried to strengthen. In these scenarios, processers either primarily interacted with male suppliers or did not see any significant difference in working with either men or women.
What did we learn?
Overall, contract farming is and can be an appropriate arrangement for supporting inclusive market development, especially in thin markets – a context shaped by remoteness and corruption where a pool of motivated and capable partners is narrow, markets are relatively uncompetitive and private sector activities are only gradually picking up. Since market actors have their own challenges and needs, one business model may not work for all. The contract farming experience of RLDP shows that interventions should engage with market actors to develop tailored models or solutions to specific constraints affecting their business operations.
In addition, the Tanzanian experiences showed processors often set false expectations with producers, who continued to be prone to side-selling. Thus, for contract farming to be effective, processors must overcome the inefficiency of working with many small units of producers. Trust is key to this model’s effectiveness. Facilitators promoting contract farming through partnerships with processors are advised to put particular emphasis on relationships. Practically, this means:
- Starting small and support gradual growth, in particular, focusing on common purpose, clear communication, full disclosure and transparency (e.g. price determination).
- Getting involved, as justified, to stimulate change but do not taking on key market roles; for instance, negotiating and signing memorandum of understanding with buyers on behalf of farmers in contract farming shifts focus from market actors to the project
- Being firm regarding the vision (long-lasting and large-scale impacts) but being flexible in the way to realise such as vision. For example, working in the cotton sector required decisiveness but also flexibility in addressing enabling environment issues
Additional sources:
- Contract farming: status and prospects for Tanzania
- On systemic approach: what it is and what it is not
[1] The programme was financed by the Swiss Agency for Development and Cooperation (SDC) and implemented in a consortium by Helvetas and Swisscontact.
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