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Contributions from
the Column
Monitor
Tsunami relief: Too much of a good thing
Merits and limts of contract farming
EU sugar regime: Double-edged pledge
Afghanistan’s drug cultivation at a record high
US government agency assesses Millenium Challenge Account
More votes for emerging nations at IMF
Oil: World Bank and Chad reach agreement
Slow progress in fight against desertification
Private sector: Making money in peace
10/2006
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[ Agriculture ]
Merits and limits of contract farming
The most likely chance many poor countries have on the world market is with agricultural products. Smallholders can also benefit – with the help of contract farming, for instance, whereby they commit to supply larger companies with certain products. The companies guarantee they will purchase a certain quantity and they often make advances, for example by supplying seeds, fertiliser or giving advice.
Should development agencies support this approach? Yes, says Andreas Foerster from the African Division of the German Development Ministry (BMZ). At a conference held by the German Development Institute (DIE) and the German Investment and Development Company (DEG) in July, Foerster stated that the Ministry wants to encourage market and profit oriented agriculture and public-private partnerships in the agricultural sector in Africa more strongly. The DEG, a subsidiary of the KfW development bank, supports contract farming programmes for around half a million smallholders worldwide, with loans at market interest rates.
According to John Humphrey from the University of Sussex, the trend towards contract farming results from changes occurring on the global agricultural markets, whereby large companies increasingly control the entire production process. Furthermore, exporters who want to export vegetables or tropical fruit to Europe or North America continuously have to meet more – and stricter – standards. These no longer just regulate the product’s qualities but, increasingly, the production methods too.
This trend has various impacts, depending on the commodity. For certified coffee and cocoa, for example, there may be considerable additional charges, explains Matthieu Vidal from the Swiss company Ecom. Ecom supplies the café chain Starbucks with coffee – in line with the company’s own standards – for an above-average price. The costs for monitoring the cultivation are thus covered. Ecom helps contract farmers in Côte d’Ivoire comply with environmental standards. It is worth the farmers’ while, primarily because they receive greater returns.
It is a different story when it comes to fruit and vegetables. Compliance with standards in this sector does not attract higher prices. However, some markets are only accessible to certified producers. Products that do not meet the EurepGAP standards put in place by European traders, for example, cannot be sold in Europe, explains George Solomon from the East African Growers’ Association. The Kenyan company produces half of its fruit and all its vegetables through contract farming. Ensuring that the smallholders comply with ever more complex standards is time-consuming and increases production costs by a quarter. The company receives a slight premium for some products, but not more than 10 %. However, Solomon admits that standards which include requirements relating to the environment and labour conditions contribute to the modernisation of Kenyan horticulture. But he feels that importing countries should help out with the costs and that the certification of small operations should be simplified.
For the companies, one advantage of contract farming is that they can use land which belongs to small farmers. Furthermore, smallholders produce labour-intensive products more cost effectively than waged workers, says Solomon. In the vegetable industry, cooperation with growers in different climatic zones enables year-round cultivation. Contract farming can provide smallholders with access to new technologies, open new markets and stabilise income. At the same time, however, ongoing costs for compliance with standards are incurred because production processes have to be documented. How the advantages are shared between the farmer and the company largely depends on the world market and the underlying political conditions, maintains Michael Brüntrup from DIE. The beneficiaries tend to be the better established farming households with a certain level of education rather than the poorest ones. Many very small producers are even driven out of the market. Solomon points out however, that successful contract farmers in Kenya employ seasonal workers and thus create income opportunities for some of the poorest inhabitants.
Promoting contract farming has its merits. But, according to John Humphrey, one should insist upon simpler standards, and above all encourage production for less demanding markets such as the Middle East and Asia. All summed up, contract farming is no ideal solution for poverty reduction – since agriculture in Africa mainly serves the poor people’s own needs, as observed by Christoph Kohlmeyer, head of the BMZ rural development division.
Bernd Ludermann
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