Contract farming is agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products.
Typically, the farmer agrees to provide established quantities of a specific agricultural product, meeting the quality standards and delivery schedule set by the purchaser.
In turn, the buyer commits to purchase the product, often at a pre-determined price. Importantly, the buyer also commits to support production through providing farm inputs on credit to the farmer, and also possibly providing land preparation, technical advice and transporting produce to the buyer’s premises.
Contract farming enables ginneries to actively engage in seed cotton production process. Through contract farming, ginners provide credit inputs to farmers to increase yields and stabilize their seed cotton supply chain. Key benefits for farmers include access to credit inputs and a guaranteed market. Access to inputs and training can enable farmers to improve their incomes and productivity significantly.
In cotton, the three-year pilot of contract farming has shown that farmers who have contracts typically have 30% higher productivity compared to those who do not benefit. No wonder farmers and local government have been so supportive of the new approach!
In 2007, Tanzania Gatsby Trust and the Tanzania Cotton Board conducted a study to identify issues and opportunities that exist in the Tanzanian cotton and textile industry. The study highlighted low volume and quality of seed cotton and low domestic consumption of lint.
In order to address these problems, it was recommended that a contract farming system be considered to transform ginneries into “hubs” in which seed cotton production and marketing efforts would be anchored. In April 2008, contract farming was endorsed by the cotton sub-sector stakeholder meeting with a recommendation to pilot it in Mara, Pwani and Morogoro regions.
The success of a contract farming model hinges on the relationship between the farmer and the ginner. Both parties need to honor their commitment to each other on time and in full.
That is, buyers must supply the right inputs on schedule and farmers need to “repay” the credit by selling seed cotton back to the ginner and not engage in side-selling. In order to negotiate on a level playing field, farmers need access to information and to enhance their bargaining power on one hand. On the other hand, the ginners, who are incurring most of the risk, need some certainty that they will receive the seed cotton that they have invested in.
The CTDP and the Tanzania Cotton Board have designed a standard contract that spells out the terms of an agreement between ginning companies and farmer business groups.In order to ensure input accessibility and seed cotton quality, as well as optimal level of price competition, the contract includes clauses that address the key issues in the farming and marketing of seed cotton:
1. Guaranteed market for seed cotton
2. Pricing mechanism
3. Goods and services to be provided by ginners
The contract stipulates that the buyer is providing a guaranteed market for the entire seed cotton crop produced by contracting farmer business group during the season under consideration (the contract is valid for one season).
The contract recognizes that the buyer will pay a market price defined as the going rate at the time of marketing. The floor price will still be the indicative price negotiated between TCB, ginners and the cotton growers’ association.
The contract requires ginning companies to supply on credit cotton seeds and sufficient pesticide required for the area to be planted by the cotton growers (grouped in Farmer Business Groups). In addition, the contract requires the buyer to organize and pay for transportation of the seed cotton from the warehouse to the ginnery within 30 days from the start of the buying season as declared by TCB.
When it was first piloted in 2008, contract farming faced some challenges in Tanzania.
Firstly, there was originally inadequate preparation by ginners and farmers: although the decision to pilot contract farming in 2008 was taken several months before the start of the programme, some key stakeholders were reluctant to fully participate.
Some farmer groups that were in existence before the advance of contract farming viewed contract farming as just another project that would provide hand-outs.
The lack of information on contract farming prior to the launch of the pilot was the main cause of farmers’ and ginners’ reluctance. Since then, contract farming has been well-known among ginners and local farmers for its success.
Secondly, the first contract farming pilot in 2008 coincided with the global downturn in the financial sector that resulted in a virtual freeze in credit markets. Ginners and farmers were sceptical to invest in cotton farming as the market outlook was not optimistic. However, the offer of inputs on credit meant that the initial demand for contract farming exceeded the planned level of effort.
The initial target contract farming pilot programme was 3,700 farmers grouped in 48 farmer business groups. By January 2009, the total number of farmers who had requested to be included in the pilot programme was 9,312. As the success of contract farming emerged, by 2010 the size of the pilot had grown to include 38,000 farmers and the number of ginners involved had grown from 3 to 7.
How has the pilot been so successful? It has shown that contract farming can succeed with a few key elements in place.
Firstly, the commitment of the ginners is critical to proving that the model can work. In 2009, Olam and Badugu demonstrated commitment to contract farming by making an investment in the system. Both ginners were early adopters of contract farming and provided inputs on credit to farmers.
They both delivered the inputs on time to the farmers, and ensured fairness in marketing (e.g. no tampering of the weigh scales was reported, which is otherwise a pervasive practice in the industry) – this signalled to the farmers that the ginners could be trusted.
Badugu went one step further and forged a public-private partnership with the local government and provided necessary inputs e.g. motorcycles and fuel, to the government extensions officers in order to increase their outreach to contracted farmers. The commitment of these ginners contributed to their high repayment rates (about 90%).
Secondly, allowing farmer groups to add and capture more value increases the quality of seed cotton and helps ginners to recover the loan extended to farmers. Ginners who involved FBG leaders in the purchasing operations paid a commission to the groups that ranged from Tsh. 15 to 30 per kilogram of seed cotton. This was a compensation for their time and value added in terms of bulking and quality assurance.