1. Contract Farming Integrating Small Farmers into Productive Value Chains SEEP Annual Conference / Oct 2006

2. SEEP AGM 20062 What is Contract Farming?   Contract farming can be defined as an agreement between farmers and companies for the production and supply of agricultural products under forward agreements, frequently at predetermined prices.   The arrangement also invariably involves the purchaser in providing a degree of production support through, for example, the supply of inputs and the provision of technical advice.

3. SEEP AGM 20063 Basis of Arrangements   Commitment on the part of the farmer to provide a specific commodity in quantities and at quality standards determined by the purchaser   Commitment on the part of the company to support the farmer’s production and to purchase the commodity

4. SEEP AGM 20064 What are the different types of contract farming?  Centralized Model  Intermediary Model

5. SEEP AGM 20065 The centralized model  Involves a centralized company contracting directly with large number of individual farmers  Is typically used for high value export crops, tree crops, poultry, and dairy.  Products often require a high degree of quality and need to meet international specifications

6. SEEP AGM 20066 Company Contract Farmer Centralized Model

7. SEEP AGM 20067 The intermediary model The intermediary model  Company contracts with lead farmers (intermediaries) who in turn contract with individual farmers

8. SEEP AGM 20068 Company Lead Farmer Contract Farmers (10-20) Intermediary Model

9. SEEP AGM 20069 Choice depends on: the product the product the resources of the company, and the resources of the company, and the intensity of the relationship between farmer and company that is necessary the intensity of the relationship between farmer and company that is necessary

10. SEEP AGM 200610 What are different strategies that companies can use to set purchase prices with contract farmers?  Fixed prices  Spot market pricing  Split pricing

11. SEEP AGM 200611 Fixed prices Price specified in the contract at the beginning of the season Price specified in the contract at the beginning of the season Different rates for different grades can be specified Different rates for different grades can be specified

12. SEEP AGM 200612 Prices determined on spot- market price  Determined by a price fixing committee at specific times after the harvests  In many cases the price that is fixed is slightly higher than the market price

13. SEEP AGM 200613 Split pricing  An agreed base price is paid at the time of purchase  Final price is calculated (and paid) once the commodity is sold by the company

14. SEEP AGM 200614 CONTRACT FARMING APPROACH (from agribusiness company perspective) Ready market/need for targeted product(s) Selection of geographic area  Selection of contract farmers  Signing of agreements with contract farmers  Distribution of inputs  Technical assistance + monitoring of production  Procurement of production  Payment  Storage and Shipment

15. SEEP AGM 200615 Panelist Cases  Bill Grant – Tanzania (paprika)  Frank Lusby – Bangladesh (groundnuts, chilies, potatoes)

16. Contract Farming Case Study DAI PESA Project

17. SEEP AGM 200617

18. SEEP AGM 200618 What is Paprika?

19. SEEP AGM 200619 Tanzania Spices Limited, Iringa  Spanish buying company established in 2001, based in Iringa  Works with smallholder and commercial farmers in Iringa, Mbeya, Tabora, Ruvuma  Buys all paprika output for processing in Spain Grade A: Tsh. 1,020/kg Grade A: Tsh. 1,020/kg Grade B: Tsh. 580/kg Grade B: Tsh. 580/kg Grade C: Tsh. 130/kg Grade C: Tsh. 130/kg  High profitability under good management practices Income/ha: 2,000 kgs x Tsh. 850/kg = Tsh. 1.7million Income/ha: 2,000 kgs x Tsh. 850/kg = Tsh. 1.7million Production costs/ha: Tsh. 720,000 Production costs/ha: Tsh. 720,000 Profit/ha: Tsh. 1million Profit/ha: Tsh. 1million

20. SEEP AGM 200620 DAI PESA Paprika Activities  Following subsector study, project activities began in Iringa (October 2003) and Ruvuma (March 2004)  Iringa Rural District 9 village level associations (1,415 MSEs - 34% women) 9 village level associations (1,415 MSEs - 34% women) Association of Iringa High Quality Farmers Products Company Limited Association of Iringa High Quality Farmers Products Company Limited Roles of apex company: marketing, advocacy, address member needs Roles of apex company: marketing, advocacy, address member needs  Songea Rural & Namtumbo Districts 19 village level associations (2,707 MSEs – 17% women) 19 village level associations (2,707 MSEs – 17% women) 2 apex companies: Association of Songea/Namtumbo High Quality Farmers Products 2 apex companies: Association of Songea/Namtumbo High Quality Farmers Products

21. SEEP AGM 200621 DAI PESA Paprika Activities, Contd.  Business and technical training: Business awareness, cash management/budgeting, record keeping, SACCOS sensitization Business awareness, cash management/budgeting, record keeping, SACCOS sensitization Technical training on pre- and post harvest Technical training on pre- and post harvest TSL provides training and limited extension services TSL provides training and limited extension services  Market linkages All paprika sold to TSL (3 grades) All paprika sold to TSL (3 grades) Seeds provided by TSL, initially on credit, now for cash Seeds provided by TSL, initially on credit, now for cash Farmers linked to RPMS (Rural Participatory Microfinance Scheme) to finance inputs, production Farmers linked to RPMS (Rural Participatory Microfinance Scheme) to finance inputs, production

22. SEEP AGM 200622 DP Farmer Association Model, Iringa

23. SEEP AGM 200623 Quantitative Indicators  In Iringa 1,415 farmers produced 315 tons in 2005 Average yield per farmer: 568kgs/hectare Average yield per farmer: 568kgs/hectare Average income per farmer: Tsh. 403,000/hectare Average income per farmer: Tsh. 403,000/hectare  In Ruvuma, 2,707 farmers produced 305 tons in 2005 Average yield per farmer: 348kgs/hectare Average yield per farmer: 348kgs/hectare Average income per farmer: Tsh. 247,000/hectare Average income per farmer: Tsh. 247,000/hectare  % of different grades sold (A/B/C) Target: 70/20/10 Target: 70/20/10 Achieved 2005: 55/20/25 Achieved 2005: 55/20/25

24. SEEP AGM 200624 Well-Maintained Smallholder Farm Smallholder Farm, Iringa

25. SEEP AGM 200625 Poorly-Maintained Smallholder Farm Smallholder Farm, Songea

26. SEEP AGM 200626 Commercial Farm Selous Farming, Iringa

27. SEEP AGM 200627 Promotion of Contract Farming in Bangladesh  Katalyst Project – large market development project in Bangladesh (AFE is subcontractor)  After value chain analysis - identified large buyers in three sectors with significant backward linkages to small scale farmers / interest in direct procurement with small-scale farmers

28. SEEP AGM 200628  Company profiles: Company A – Largest domestic producer/distributor of snack foods (also exports) Company A – Largest domestic producer/distributor of snack foods (also exports) Company B – Chili based spices for domestic / export market Company B – Chili based spices for domestic / export market Company C – Potatoes for export Company C – Potatoes for export  All companies interested in expanding local sourcing to reduce imports, control quality/content, develop secured source of production

29. SEEP AGM 200629  Project worked with company to narrow down products and geographic locations for contract farming production  MOUs were signed with companies and project in early 2006 after several months of negotiation  Work plans/ implementation  Currently in the first season with each crop

30. SEEP AGM 200630 Company Development of Chili Seeds for CF Operations

31. SEEP AGM 200631

32. SEEP AGM 200632 Choosing the best seed

33. SEEP AGM 200633 Company reps signing agreement with lead farmers

34. SEEP AGM 200634

35. SEEP AGM 200635 Company Orientation with Contract Farmers

36. SEEP AGM 200636 What contract farming models were used in the cases? How were operations structured between the companies and the farmers?

37. SEEP AGM 200637 What were advantages and disadvantages of these models for the agribusiness companies?

38. SEEP AGM 200638 Advantages and disadvantages of the different models  Centralized model provides greater control over the production process but is more expensive to implement  Intermediary model is less expensive and entails less investment and financial risk but ability to control quality and production is less (also difficult to control what goes on with the individual farmers)

39. SEEP AGM 200639 How were lead farmers or individual contract farmers identified? What criteria were used? Illustrative Selection Criteria for Contract Farmers:  Practical experience on the targeted crop  Resources to cultivate selected crop  Residence in the target area  Suitability of land for targeted crop  Good reputation in the community

40. SEEP AGM 200640  Contract farmers must have their own land or acceptable leasing arrangement (not arrangement where farmer must give percentage of production to owner)  Not involved with competing companies for targeted crop  Have time to devote to contract farming activities

41. SEEP AGM 200641 What inputs / services were provided or facilitated by the companies to participating farmers?

42. SEEP AGM 200642 What were the advantages of contract farming for farmers? Advantages for contract farmers:  Inputs often supplied by the sponsor  Introduces new technology and varieties (resulting in improved yields and income)  Enables farmers to learn new skills (that can be also be applied to other crops)  Price risk reduced  Assured market  Opens up new markets which would otherwise be unavailable to small farmers

43. SEEP AGM 200643  Risk of market failure and production problems  Inefficient management from sponsor company or changes in markets can result in manipulation of quotas  Sponsoring companies may be unreliable or exploit a monopoly position  Staff of sponsoring organizations may be corrupt  Farmers may become indebted because of production problems and excessive advances What were the potential risks facing contract farmers?

44. SEEP AGM 200644 What were the advantages for the agribusiness companies?  More consistent quality can be obtained than if purchases were made on the open market  More reliable source of supply than with open-market purchases or imports  Working with farmers overcomes land constraints  Production risk is shared with the contract farmers  Contract farming with small farmers can be more politically acceptable than estate farming

45. SEEP AGM 200645 What were the potential risks for agribusiness companies?  Farmers may sell outside the contract  Farmers may divert inputs supplied on credit to other purposes, thereby reducing yields  Poor management and lack of consultation with farmers may lead to farmer discontent and jeopardize the CF operations  Contracted farmers without control of the land may run into problems with landowners that can affect sales to the company

46. SEEP AGM 200646 What did the development project learn about facilitating contract farming relationships?

47. SEEP AGM 200647 Thank-you Ken Smarzik / Emerging Markets Group ksmarzik@emergingmarketsgroup.com www.emergingmarketsgroup.com Bill Grant / DAI William_Grant@dai.com www.dai.com Frank Lusby / Action for Enterprise flusby@actionforenterpise.org www.actionforenterprise.org