ADVANTAGES AND DISADVANTAGES OF CONTRACTING AND SUB-CONTRACTING OF AGRICULTURAL PRODUCE:
Advantages of Contracting:
There are notable advantages (to smallholder farmers) of contract marketing in agriculture and these include:
- Quantity and quality requirements are stipulated and are known in advance. Farmers manage their produce using the requirements as targets. This makes planning easier.
- The price per grade is known in advance and this removes uncertainty on the farmer’s side. The farmers are guaranteed the market (stabilising the market which is usually volatile).
- If produce is exported, farmers benefit from higher export realisations.
- Some companies scan market conditions in and outside the country and thus can advise farmers to produce and sell at times when prices are high.
- Farmers can benefit from contract packages which include appropriate seed varieties, fertilizers, agro-chemicals, payment for labour as well as extension support.
- Some contracts include free transport of produce to Company premises. Where this is done in groups, both parties benefit substantially.
- Even under scenarios where a transport fee (usually low) is charged, farmers still benefit because of better handling and timeous delivery. Damage to perishable produce is minimised (as opposed to bus-carrier transport [ Can be soaked in rain or exposed to the sun and strong winds.] ) and thefts are also prevented (unlike selling to Mbare Market where thefts are common).
- Despite delays through the grading process, farmers are paid within a relatively short-time of around two weeks.
- Some companies offer part-payments (in advance) upon delivery. The final payment will be made after grading and this leeway assists in meeting the farmer’s immediate cash flow needs.
- Payments according to grades offers incentives for quality.
- For well-drafted contracts obligations of either party are clearly spelt out. This assists in conflict management and facilitates negotiations and re-negotiations. This can also be aided by inclusion of variation clauses.
- The potential exists as the majority of the emerging companies processing agricultural produce are operating below capacity.
- Group contracts fit well with other schemes such as the Agricultural Finance Corporation (AFC)’s Group lending scheme; Ministry of Lands and Agriculture’s Agro-Input Dealer Scheme as well as for those involved in various communal area irrigation schemes dotted around the country.
- In contracts where grading of produce is done on the farm, transport costs are minimised for the farmer and the fact that all family members see minimises mistrusts. As every member sees discouraged aspects, all are stimulated to do better next time.
- Farmers can split produce with first grade honouring contracts (for export) and second grade going to Mbare and other residual markets. Total earnings are eventually maximised with such types of arrangements.
Disadvantages of Contracting:
Despite listed advantages , there also several limitations to contracting and these include:
- The perishable nature of certain produce limits the radius of production. Thus not all smallholder farmers can enter contracts.
- Both farmers and contracting companies are vulnerable to price fluctuations (volatile nature of agricultural produce). In some instances these are beyond the control of both and this disrupts contracts if there are no variation clauses. Sometimes parallel markets offer higher prices than those agreed in contracts.
- Farmers differ in capabilities and commitment to contracts and this adversely affects group contracts. Petty jealousies among group members themselves adversely affects the contract.
- Smallholder farmers do not fully understand and appreciate the significance of contracts (verbal, written or implied). This leads to high defaulting rates.
- The companies also default knowing that farmers may not afford legal costs needed or may not even consider going this far.
- Non-contract companies and middlemen can lure farmers out of agreements by offering slightly higher prices. Such marginal offers derail the whole contract process.
- Grading at companies’ premises (sometimes unavoidable) delays payments to farmers and brings in an element of mistrust.
- Derailment of contracts causes disruptions to farmers’ production programmes.
- Only first grade is accepted for export-related contracts and many farmers may not attain this quality in their production activities.
- Defaulting attracts relatively high penalties (discontinued input support; mistrust; cancelled contract which may be followed by black-mailing etc).
Considering the volatile nature of agricultural marketing, contracts are beneficial to both parties. It brings in a stabilisation element between smallholder farmers on one side and the buyers and companies on the other. What is missing is mutual trust and proper education (mostly among farmers) to promote the arrangements. This task is better handled by representatives of farmers (ZFU, AGRITEX, local authorities) among others. This is further highlighted under the recommendations section.
This entails a contracted farmer (sometimes contracted middleman) entering into a verbal/written agreement with (other) surrounding farmers to grow (and deliver) stipulated quantity and quality of produce for subsequent fulfilment of his own (prime) contract.
Elements of sub-contracting include:
- the farmer has bigger contract with a company for factory processing or export which he/she can not meet through own produce
- the enters into an agreement with smallholder farmers prior to production and stipulates quality, quantity , delivery time as well as offer prices.
- the farmer can also give a supporting package (production inputs, transport, extension advice, regular inspections etc)
- after grading the farmer pays for produce and subsequently uses the produce to fulfil his quota which can also increase depending on demand.
It has been estimated that sub-contracts in agriculture accounted for about 10% of exports (valued at US$30 million). Authoritative sources revealed that this can be increased to about 30%.
Despite these encouraging sentiments, evaluating this type of arrangement has been rendered difficult by the fact that it is happening behind the scenes. It is disallowed for certain commodities like tobacco. Furthermore companies exporting agricultural produce prefer direct contracts with farmers so that they can supervise production and preserve their reputations. Whilst further investigations are required, suspicions seem to be retarding the development of sub-contracting as a marketing tool. The fact that it is happening behind the scenes indicate that the potential exists.
It should also be noted that some of the advantages and disadvantages covered under contracts also apply to sub-contracts.
CONCLUSIONS AND RECOMMENDATIONS
Liberalisation has had the effect of attracting new companies into purchasing horticultural produce for the domestic and export market. Most horticultural products are perishable such that without proper handling they will deteriorate and loose quality. On the other hand the export market on which the produce is to be sold demands first grade produce. To meet the stringent quality levels, the companies contracted to supply horticultural commodities on the export market prefer to contract farmers directly. Even companies dealing with paprika, a crop which is not likely to loose quality very quickly, prefer to work directly with the farmers. The companies are also of the opinion that horticultural crops need to be grown under good management and they would like to supervise the farmers so that the best crop is produced.
However in operationalising the sub-contracts between the companies and the small holder farmers, there are a numbers of aspects which farmers need to guard against lest they end-up losing. During this study evidence of loopholes which sometimes lead to revenue losses were encountered eg. some companies change the terms of the contract or do not pay for the delivered produce.
The potential for marketing horticultural commodities through sub-contracts is very large and needs to be exploited by farmers. Informed sources in the horticultural industry estimate that sub-contracting currently contributes 10 percent of fresh horticultural produce exported whose total turn over in US$30 million. There is potential for this contribution to increase to 30 percent if the necessary strategies where put in place. Companies are also working towards increasing this contribution. Hortico is to increase the number of growers from the current 700 through the creation of more farmers’ groups. Canpac is to initiate new contracts with farmers for the production of fine beans. More irrigation facilities can be set up. One of the bottlenecks is farmers’ lack of information about where and with whom they can enter sub-contracts.
Overally, contract marketing is advantageous to communal area farmers. This is especially so for horticultural produce which requires marketing expertise. By committing themselves to contracts the farmers are assured that there will be a buyer for their crop. The buyer also makes sure that particular products are sold for export when they are most likely to give the highest prices and highest returns to the farmers. Marketing through contracts provides smallholder farmers with an opportunity to reduce the risk of not finding a market for their produce. It ensures that they are able to plan ahead where the prices and logistical arrangements are decided even before the crop is harvested.
In entering a contract farmers need to consider the attractiveness of the other options of marketing the produce or even other commodities that could be produced at the same time as the contract crop. Where prices have to be agreed to at an early stage, they might seem attractive at the time of signing or entering into the contract, however at the time of
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delivering the produce, due to high inflation rates, contract prices might have depreciated to such an extent that farmers might feel cheated by the buyer when they compare the contract price against the open market ones.
For field crops companies are also keen to produce through contracts since that enables them to work out their cash flows appropriately. They are however concerned that farmers can decide to sell the contracted produce through channels other than those specified in the contract.
Farmers need to be monitored constantly during the period of production to ensure that they feel part of the contract. When the company representatives do not visit the farmers, they feel that they have been forgotten and may make them feel insecure. The farmers might panic and sell the produce through other channels.
Experiences which farmers at Principe had with sub-contractors showed that even though there might be potential, the prices offered by the sub-contractors, which have to leave a profit margin for the middle-person, are not attractive to farmers. For the field crops, as in the case of cotton, farmers only sell through sub-contracts, not out of wish but due to pressing financial requirements they have to meet before the crop is harvested.
Farmers entering into contracts to produce a given crop need to ensure that they have clarified details about the following aspects of the contract:
Inputs: eg. Seed, fertilisers and chemicals.
Does the contractor provide these. If provided on loan, what is the price at which they are to be sold?
Is seed provided. If so, are farmers charged for it and at what cost.
Who will transport the produce? If the company supplies the transport, what are the payment arrangements i.e. is it to be deducted from the produced price or the producer price already takes care of the transport?
This has to be stated on entering the contract. If not farmers need to know when they will be told about the price.
The criteria on which the commodities will be graded have to be spelled out. Farmers need to know whether the grading will be conducted on the farm or at the factory. If the crop will need to be graded at the factory, sufficient reasons for grading doing so need to be given.
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Farmers need to know whether any extension services will be rendered and in what form eg. pamphlets or regular visits. They also need to check the extent to which the local extension worker might be familiar with the contract crop.
The following recommendations are also made:
Extension personnel and ZFU personnel need to be proactive by letting the companies aware of the locations and the farmers who can grow particular types of crops, rather than only wait for companies to approach the farmers on their own.
Smallholder farmers need to be aware of the binding nature of contracts and the fact that if they decide to enter a contract then it has to be respected by both parties to the contract. Once one side of the contract is not fulfilled, the other suffers great loss.
Companies dealing with horticultural crops need to work with farmers organised into groups so that they can reduce the administration costs. Experience has shown that communal area farmers can work in groups.
When producing horticultural crops, farmers need extension backup on crop management and marketing. Close supervision, even after initial training is required.
Irrigation facilities in the communal areas need to be increased. Larger acreages would then be available to the farmers for horticultural production. Irrigation facilities ensure that the quality of the crop is not affected by the unpredictable rainfall.
For horticultural and field crops, farmers need to approach companies with a view of going into contracts rather than wait for the companies to approach them.
Where possible grading should be done at point of sell even if payment is to be made later. Farmers are not very confident when their produce is graded in their absence. They fear that the grading system would then be used to enable the company to pay them less.
Contracts and sub-contracts should have variation clauses which will accommodate risks related to prices, diseases, drought etc .This will facilitate smooth negotiation among parties concerned.
Both parties should up-date one another to enhance mutual trust. Up-date information should include price trends; production constraints; new developments etc. None will be taken by surprise.
Contracts should be promoted through seminars and field days to ensure that more farmers enter contracts. Once quality output is increased, agro-industries will operate at close to full capacity which benefits the country as a whole through multiplier effects.
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Efforts should be made price produce in a manner that erodes the viability of non-contract parties (middlepersons & other companies). Linkages with policy makers in the production areas also helps to ward-off threats of non-contract parties.