Contract Farming as a means to provide access to lucrative markets for Small Scale Commercial and Subsistence Farmers – Critical appreciation based on a Vegetable venture in East Africa (Tanzania)

Contribution by

Andreas Rüsch
Bongani Consulting CC
Agricultural and Trade Consultants - Sub-Saharan Africa
P.O. Box 95449
Waterkloof
0145
South Africa
/ Dr. Gerhard W. Ohlde
BonganiBeratungs-GmbH
Landwirtschafts und Handelsberatung - Afrika
Hauptstr. 32
D – 55767 Gollenberg
Germany

Based on an actual venture that was exporting successfully up to 60 tonnes of vegetables per week to Europe.Here, contract farming opened access to export markets for commercial farmers and small-holders organized in cooperatives. Lessons learnt: contract aspects on quality crop production can be recommended, additional stipulations on accreditation of the management according to quality management standards should be added.

Preamble

This case study is based on an existing venture in in northern Tanzania. Permission has been granted by the investor that the information may be used provided that the entire case beanonymized and it be presented as a case study. For this study the venture will be named Meru Packing & Export (short: Meru), however, names and places of the entities are known to the authors and can be made available on individual request.

It is presupposed that the reader is familiar with contract farming concepts and as such the reader should be familiar with Contract Farming – Partnerships for growth; FAO Agricultural Services bulletin 145[1]. The authors will from time to time cross refer to that document.

  1. Introduction and Background:

Privately owned Meru estate in northern Tanzania started in the 1990s to concentrate on vegetable production for export on owned land, approximately 160 hectares in extent. This venture was driven by the significant return on investment achievable by accessing the European markets. Therefore, Meru estate built a central vegetable packing station on their farm. Collecting, sorting, grading, trimming and packing of vegetables for export were carried out on farm.

Vegetable produce,ready packed and labelled for final European or American market was transported with rented local transport capacities to the three international airports in reach: Dar-Es-Salam, Kilimanjaro International and Nairobi (including the crossing of the international border to Kenya).The vision of Meru was to produce the highest quality for export markets.

Operations at Meru were accredited according to the standards of EurepGap. On farm vegetable was trimmed, weighed and packed according to European supermarket and wholesalers’ specifications. This included price tags and bar codes.

The range of Meru’s export crops mainly comprised beans, peas, chilli, okra, leek and baby corn.

Based on experienced farm staff, Meru achieved remarkable yields – also blessed by a favourable natural environment suitable for good agriculture: fertile soils and sufficient water for year-round irrigation. For the sake of delivering grade one quality, Meru took into account that 30 – 45 % of waste / losses had to be accepted. These losses, vegetable by-products by nature, were utilized as animal feed in the Meru piggery.

On their way to increase earnings, Meru had to overcome two major problems: to cultivate a greater acreage and, to a smaller extend, to employ more farm labourers for more hectares.

The degree of mechanization for horticulture is very low due to the sensitivity of the edible parts to mechanical damage – no exception on Meru. Therefore, virtually all the horticultural work was carried out manually. As mentioned above, even the transport to airports was carried out by rented vehicles. Thus, Meru estate was faced with two challenges:

  • additional land was difficult to obtain (land use and land allocation is managed via the district governor and/or the local village chief –depending on the colonial history of the land) and
  • additional labour was hard to get (as the people were needed to tend to the families subsistence agriculture in the villages in the surrounding areas).

Meru therefore contracted commercial farmers to produce vegetables (notably beans and various peas) for export.

Further, to incorporate surrounding land and surrounding labour Meru sought to develop ways and means to contract additional land and labour from the subsistence farming communities surrounding Meru. Meru achieved this goal by forming horticultural cooperatives, which were managed by a management company, and the farmers produced according to Meru’stechnical specifications and quality requirements. These cooperatives were called Market Intermediary Cooperatives (MICs).

  1. Case Study:

Targeting on one hand on increased vegetable harvest tonnage and on the other the fulfilling of high EurepGap quality standards Meru estate re-designed the overall venture organization. Formally the enterprise changed from a simple vertically integrated farming business utilizing own staff to a complex, yet open structure including new entities and players:

  • Small scale commercial farmers
  • Market Intermediary Cooperatives pooling many small subsistence farmers which were supposed to form among themselves so called production clubs, sub-units cultivating the same crops or cultivating in a closed area.

The following diagram shows thecomplex new structures of Meru’s contracting andproducing organization:

The relationships in this scheme are very akin to the multipartite model also referred to in the a.m. FAO publication 145.

Contract farming was identified as the long-term sustainable solution for the required growth of Meru. By means of contracts several criteria had to be fulfilled:

-increase of production area to achieve crop rotation and Integrated Pest Management criteria required under EurepGap;

-Increased supply of quality product to Meru;

-Reduced reliance on employed labour as contracting producers cultivated on their own land;

-Centralised management to coordinate timing of planting productionand supply of quality produce via a multitude of land owners;

-Provision of a number of centralised services to ensure adherence to EurepGap and quality standards and requirements;

-provision and financing of inputs to contracted farmers;

-organizing the flow of produce to the packing station.

2.1.Background to the contract agreement – description of location, partners involved, duration and experience with contracting

When assessing the above diagram it is notable that the various role-players do have varying levels of proficiency, experience, skills and knowledge of contracts and contract farming. Management was required to adapt to the varying demands imposed by the diversity – something which cannot be overestimated.

In the following we try to characterize the social, physical and political environment Meru and its contract partners were subject to. The roster was taken from FAO bulletin 145 and is recommended strongly as it potentially can highlight weak points / marginal areas which have to be overcome by technical or managerial means.

Inventory of preconditions for contract farming

– Socio-political assessment

COMPONENT / RATING / REMARKS
F / A / M
Political environment
National / X / National political stability. Stated support for project.
Support for project / X
Regional-district / X / Modest support for project
Village-community / X / Positive response from local community leaders
Public utilities & services
Roads / X / Few tarmac; other roads require 4x4 vehicles.
Distances farm – packing station / X / Up to 60 km; challenge for agricultural advisors, inputs’ transport and collection of produce.
Airport /air freight / X / All by airliners
Frequency of flights / X
Public transport / X / For passengers only
Goods transport / X / Low technical standard, not in compliance with EurepGap.
Telephones / X / Mobiles good coverage. Landlines unreliable, internet very expensive, unreliable; only by direct satellite dishes.
Electricity supply for processing / X / On national grid but load shedding.
Water supply / X / Adequate for project through boreholes.
Hospitals & health / X / Access to Government Hospital for all labourers, own clinic on farm.
Schools / X / Several primary schools with a high pupil to teacher ratio but a moderate level of literacy and numeracy achieved during primary schooling. High School only in town.
Government agencies / X / Positive response from research & extension sections (Ministry of Agriculture)
Quarantine services / X / Good location and well administered
Customs services / X / Very cooperative; good knowledge of AGOA and EU preferential trade agreements.

– Physical and social assessment

COMPONENT / RATING / REMARKS
F / A / M
Market Identification
Fresh produce / X / Low demand for secondary grades in fresh form on local / regional markets.
Demand for value add product (Frozen, canned) / X / Only in international market, local demand insignificant, transport cost a hindrance.
Physical environment
General climatic factors / X / Adequate, no frosts, 80% sunlight hours
Rainfall / X / Erratic and unreliable, seasonal; good water catchment system.
Natural water availability / X / Adequate for crop requirements
Irrigation availability / X / Most subsistence farmers: gravity fed flood irrigation; others: combinations of pump and gravity fed drip and micro-irrigation.
Soil fertility / X / Soils very suitable for crop cultivation.
Topography / X
Natural vegetation / X / Natural vegetation can be incorporated into Integrated Pest Management.
Social and farming environment
Existing cropping mix / X / Practice of interrow and relay planting; traditional polyculture
Historic productivity / X / Very productive farming community.
Cultural influences / X / Cultural obligations form no obstruction to project when understood and incorporated into the management.
Land tenure
Estates above 30 ha / X / 99 years lease hold, registered at district level,can be forfeited if abused.
Commercial farmers 2,5 – 30 ha / X / 99 years lease hold, simplified conditions.
Subsistence farmers / X / Subsistence allocated by village chief; can be forfeited when abused, no registration.

F = Favourable A = Adequate M = Marginal

Vegetables sales form the essence of contract farming in the area of the investigated case. The vegetable production unit in its entirety consisted of a number of producing entities – owned producing units, rented producing units, large and small commercial contract farmers and subsistence contract growers organised in a Cooperative scheme.

Production was in all cases under irrigation using drip or overhead sprinkler irrigation for the commercial production areas and flood irrigation in the subsistence areas. Sufficient and suitably trained labour and specialists were available to the entire unit. Farmers produced under field cultivationand had no access to greenhouse or tunnel systems.

Production was, to reduce climate risk and also to exploit climatological differences, suitable for the various crops’ production over an area of approx. 60 km in a north-south direction and 120 km in an east-west direction and elevations between 1 000 m and 2500 m above sea level.

The rainy season lasts for approximately five months of the year.

The product range being produced mainly consisted of beans (Phaseolus vulgaris), mange taut and sugar snaps (both Pisumsativum), baby corn (Zea mays) and birds eye chillies (Capsicum annuum var. aviculare) all packed at the packing station in final consumer packing for the European market (United Kingdom, Germany, Netherlands, France).

Small Scale Commercial and Subsistence Farmers in the surroundings of Meru estate faced the following starting situation: Under general favourable conditions for agricultural production they still could not obtain access to markets with crops that gain highest gross margins or income – e.g.vegetables. Government extension service as well the research section of the Ministry of Agriculture provided a solid know-how on production techniques and functional service on the fields. Traditional direct marketing of fresh vegetable produce only achieved relative low income on local markets. On the other hand, subsistence farmers used to be deprived from gaining marketing revenues as their traditional focus was on self-supply. Never before were subsistence farmers in Northern Tanzania partners in contract farming. Here, Meru Packing & Export entered new territory. Nevertheless, even a small subsistence farmer cropping on one hectare or two will release production factors to a certain extent. Even though cultivating “foreign” crop varieties, he will do so provided he believes in a secure increase of income. As a consequence, marketing cooperatives were established to bundle productivity and production of small scale farmers.

After much deliberation with the local authorities and the elders in the surrounding areas it was decided that MIC’s would be created in the villages.

Advantages and problems for both sides in the contract farming system (farmers and Meru Packing & Exporting)

Both contracting parties, Meru Packing & Export as the produce receiving buyer as well as the producing farmers had to consider advantages and disadvantages they spotted in contracting farming:

Advantages for farmers

  • Inputs and production services were supplied by Meru.
  • This is usually done on credit through advances from MERU.
  • Contract farming often introduces new technology and alsoenables farmers to learn new skills even though the level of cropping know-howfor delicate crops like vegetables was already quite high.
  • Farmers’ price risk is reduced as the contracts specifyprices in advance.
  • Prices for products under contracting achieved unbeatable earnings compared with limited local marketing access.
  • Contract farming opens up new markets which wouldotherwise be unavailable to small farmers.
  • On-farm rejected crops can be consumed by the family, can be used as fodder for farm livestock, can be sold on local markets (in particular grade two commonly rejected for cosmetic reasons but virtually unblemished).

Problems faced by farmers

  • Particularly when growing new crops, farmers face the risks ofboth market failure and production problems.
  • Inefficient management, inefficient administration or marketing problems can mean thatquotas are manipulated so that not all contracted production ispurchased.
  • Inefficient management can lead to suboptimal income. The farmer is subject to strategic and swift or seasonal management decisions.
  • Sponsoring companies may be unreliable or exploit amonopoly position.
  • The staff of sponsoring organizations may be corrupt,particularly in the allocation of quotas.
  • Farmers may become indebted because of production problemsand excessive advances.

Advantages for Meru

  • Contract farming with small farmers is more politically acceptable than, for example, production on estates.
  • Working with small farmers overcomes land constraints.
  • Working with small farmers overcomes labour constraints.
  • Production is more reliable than open-market purchases and Meru faces less risk by not being responsible for production.
  • More consistent quality can be obtained than if purchases were made on the open market.
  • Supervision of fields and farmers is facilitated as Meru also provides inputs and technical advice.

Problems faced by Meru

  • Contracted farmers may face land constraints due to a lack of security of tenure, thus jeopardizing sustainable long-term operations.
  • Social and cultural constraints may affect farmers’ ability to produce to managers’ specifications.
  • Poor management and lack of consultation with farmers may lead to farmers’ discontent.
  • Farmers may sell outside the contract (extra-contractualmarketing) thereby reducing processing factory throughput.
  • Farmers may divert inputs supplied on credit to other purposes,thereby reducing yields.
  • Lack of collecting infrastructure (vehicles) may lead to extraordinary problems in delivering.
  • The same reduced mobility obstructs supervision, provision of inputs, technical advice and the essential positive and partnership relationship between MICs and producer.

2.2.. Characteristics of the contracts

Objective of the contracts was to stress upon and materialize the advantages for both sides and in the same moment reduce associated problems or dangers.

The contract between Meru and farmers, respectively cooperatives organizing / representing them, stipulated the following main details:

2.2.1. For all contracts

In order to maintain and manage the critical accreditation it was integral part of all contracts that action by

  • the farmers,
  • their staff
  • or in the case of the MIC’s the member,

resulting in violation of accreditation rules the farmer could be blacklisted.

Therefore, centrally appointed agronomists were responsible for all chemical and fertilizer application. Central stores could only issue chemicals and/or fertiliser if the appropriate documentation could be shown. The commercial farmers who were also able to buy their own chemicals were visited regularly – sometimes as often as twice per day.

Accreditation and appropriate continuous documentary evidence and/or documentary evolution (especially in the case of MICs were the responsibility of the centrally appointed accreditation manager). In the case of documents having evolved, sometimes at the request and with input from contract farmers the changes would be implemented in a consultative manner yet would become mandatory and all documents were upgraded. In the case of MIC’s that proved to be a continuous challenge.

2.2.2.Agreement between International Market and Meru Packing & Export

The International buyers contracted with the packing station for the various products. The products were standardized and clearly described. Packaging was defined and described as were the labels allowed and the barcodes that had to be affixed. Various buyers had various different barcodes and other packing requirements.

Pricing was set on a DDU[2] basis and payment terms were set at month-end statement plus 30 days.

Rejects for the period were deducted from the statement. Payment was only effected for goods ordered.

Oversupply was often not paid for and undersupplies were penalised by placing reduced orders for subsequent contract periods.

2.2.3.Contracts on the collection side between producer and packing station

2.2.3.1.Commercial Growers

The contracts with the commercial farmers were by en large the easiest contracts as both parties had the same level of sophistication, but constant dialogue meant a constant quality delivered and a common interpretation throughout.

Part A “Common features”

These contracts with Commercial Growers share the following standard features:

  • A standard price (fixed for the contract period) - Pricing was set on a delivered at pack house basis, pre-sorted and field side grading completed.
  • Calculation basis was on net graded weight once graded in the pack-house.
  • Penalties for more than 11% rejects at pack house and rejects were not returned.
  • Supplier’s representative was allowed to observe the process.
  • Standard Quality description
  • Undersupply was penalised.
  • Oversupply was penalised unless it could be offset against production variation elsewhere in the system.
  • Payment on Friday in the week following the week of delivery.

Part B “Special features”