Opinion

Low farm gate prices: are processors and retailers the only culprits?

Martin Prowse

Do smallholders receive a fair price through contract farming?

It is not too surprising that this question is never far from the newspapers and policymakers’ portfolios [1] in many African countries. Contract farming is growing rapidly here, with firms often including smallholders in schemes as they increase supply (sometimes to supplement estate production), absorb production risk and, where ownership can be fraught, allow access to land. But the image of large firms contracting poor, peasant households immediately conjures a picture of exploitation. When the firms are multinationals, the picture of exploitation can stoke nationalist sentiments with claims of neo-colonialism, creating a combustible combination.

Producer organisations and legislation are often seen to offer some form of countervailing power against ‘rapacious’ firms, the former through collective bargaining, the latter through the judiciary. Of the two, producer organisations may well have a greater impact on smallholders’ prices than the law. Why? Simply that the formal and informal costs of enforcement and legal redress is often prohibitive. So with firms remaining ‘above’ the law, what else can be done to ensure smallholders do get a fair price (in addition to supporting smallholders’ unions)?

One way to approach this question is to think about the incentives to honour a contract or to renege on the deal. In addition to the law, the main incentive is the relationship between the contents of the contract and market conditions. If prices move substantially, the benefits of breaking the deal may well be greater than the income and ‘image’ losses for one party, leading to default. This is the classic problem with contract farming: firms turn to spot markets when prices fall, smallholders side-sell when prices spike. So what can be done to make sure that when prices slump firms keep their word?

The good news is there are forms of innovation that can overcome this problem. The following suggestions are based on a recent review [2] of contract farming by the author.

1. Longer-term contracts and pricing arrangements smooth short-term price fluctuations and ensure that actors factor in the possible loss of future income flows. This is especially the case when both parties (for example, a producer organisation and a firm) have invested in specific assets (which have a limited range of broader economically useful applications) or have deposits in a mutual trust fund. Such assets/funds essentially increase the self-enforcement range of the contract such that spot prices can move further without precipitating default.

2. Split-pricing schedules, which pay a proportion on delivery and the balance once quality has been ascertained, can overcome immediate smallholders’ liquidity concerns and prevent them from accepting lower prices than they should.

3. Stipulating a third party and using technology to measure/check the quality/quantity of produce can increase transparency and trust between parties.

4. Using third-party providers of credit can reduce the likelihood of firm holdup or breach of contract due to the greater reputational losses suffered by the firm (which cares more about how other urban-based firms view it than rural peasants).

5. Dispute-resolution agencies which can provide arbitration procedures and spaces for reconciliation between producer organisations and firms with naming-and-shaming procedures for repeat offenders.

Such measures can help to limit the degree to which contract farming is seen through the lens of exploitation or even neo-colonialism. Large firms may well be ‘above’ the law, but through collective action, improved contract design and forms of institutional innovation, smallholders should be able to get a better prices for their work on the farm.

 

  1. http://allafrica.com/stories/201607150602.html
  2. http://www.afd.fr/jahia/webdav/site/afd/shared/PUBLICATIONS/RECHERCHE/Scientifiques/A-savoir/12-VA-A-Savoir.pdf

The Technical Centre for Agricultural and Rural Cooperation (CTA) is a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). CTA operates under the framework of the Cotonou Agreement and is funded by the EU.