2. Contract Farming & smallholder inclusion Flashcards
What is Contract Farming?
Isager et al. (2018)
CF is a contractual relationship between an international buyer and (associations of) host-country farmers (including through intermediaries), which establishes conditions for the farming and marketing of agricultural products
What are the pros and cons of CF for farmers?
Bellemare (2015)
Pros:
- Reduce risk and uncertainty (prices)
- Compensate for imperfect factor markets -> the processor advances inputs such as fertilizer, seeds, pesticides (using the crop as the collateral)
- Access to new markets
- Extension services -> processors provide extension services (e.g. tech support, covering transport cost) that often lack in developing countries
Cons:
- Monopsony and opportunistic behaviour -> processor can refuse to pay or delay payment (big power distance)
- Rigid requirements & contracts -> specific quality requirements of consumers and sanitary requirements of regulators in contracts which adds costs for farmers (also they cannot control for how the crop will turn out)
- Crop failure (e.g. new crop)
What are the pros and cons of CF for buyers?
Bellemare (2015)
Pros:
- More politically acceptable compared to large plantations (CSR/brand)
- Avoid land ownership/constraints
- No collective power of smallholders
Cons:
- Side selling and opportunistic behaviour by smallholders (‘Leakage’) -> they can just use inputs from processors and sell to other buyers
- No control of inputs (e.g. used by smallholders on own farm)
What are the challenges with CF?
- Problems of enforcement within legal system: for example with specifying the content of the contract and a high cost of legal enforcement
- Despite the fact that many institutions like the World Bank commit to a win-win scenario, in reality there is a big power distance between smallholders and international buyers: the farmers’ bargaining power depends on the existence of alternative sources of income
- There is lack of empirical data on the effect of CF on incomes and economic growth; what exists has a selection bias
What are farmer organization and how are they related to CF?
Isager et al (2018)
Farmer organizations are formed by local farmers as a measure to improve their bargaining power in relation to international buyers. They can also help reduce transaction costs and overcome information and communication deficiencies between farmers and buyers. They are most successful when they act as intermediaries between farmers and agribusiness groups
Cons:
- the heterogeneous composition of out-growers means members have different economic interests
- they are often under-capitalized and have limited management skills
- they are often captured by village elites who also benefited from earlier systems
- farmers’ organizations often imply corruption, inefficient input delivery, and increasing costs of production for their members
What are the implications of CF for development?
Oya (2012)
CF’s implications are widely contested.
Some (World Bank freaks) say CF is a win-win -> everyone has to gain from such contractual agreements and therefore governments should support farmer organizations
Political economists/Marxists say that CF is a win-lose situation-> new way of farmer exploitation and essentially benefits only buyers.
The empirical evidence is based on case studies, therefore the impact of CF depends on location and conditions -> therefore we can’t formulate a clear development thesis about the impact of CF on poverty alleviation and economic growth.
What are the drivers of CF in Africa?
Oya (2012)
Technological and agro-ecological drivers associated with different crops:
- Like perishability, economies of scale in processing and distribution, etc.
- This assumes CT is a rational institutional response to specific conditions of production
Political economy perspective:
- Importance of market structures and nature/distribution of actors involved in different commodity chains (basically that CT is a way to include small guys in the big global production chains)
