Reducing Default in Contract Farming Arrangements ... - ACDI/VOCA

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Nov 30, 2013 (3 years and 11 months ago)

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Reducing Default in Contract
Farming
Arrangements

June 25, 2013

Bronwyn Irwin

Senior Technical Director

Enterprise
Development

Objectives of this Session

Desired Outcomes:

1.
Better
understand how incentives can
drive side
-
selling

2.
H
ave
practical tools to strengthen the
design of contract farming
programs

Contract farming is not always
best

Contract Farming is…


any agricultural production that takes place
under an agreement (written or verbal) between
a buyer and seller that provides conditions for
the production and sale of the commodity.


When Does Contract Farming
M
ake
S
ense?


Better fit when:

»
Strong vertical coordination
is needed

»
Higher value
crop

»
Barriers to entry

Benefits of Contract Farming

Benefits


Consistent
quality and volume of
supply


Reduced
transaction costs


Don't
have to invest in land or
fixed labor for own production


Risks


Production
failure


Inefficient
management that


results in lost sales


Corruption
from the firm

Firms

Benefits


Consistent
market with a


known floor price


Embedded
services


(information, training, finance)


Risks


Insecure
tenure of contracted


farmers


Dispute
with farmers


Side
-
marketing


Input diversion

Farmers

Returns
increase

Risk
decreases

Benefits of Contract Farming

Benefits


Consistent
quality and volume of
supply


Reduced
transaction costs


Don't
have to invest in land or
fixed labor for own production


Risks


Production
failure


Inefficient
management
that


results in lost sales


Corruption from the firm

Firms

Benefits


Consistent
market with a


known floor price


Embedded
services


(information, training, finance)


Risks


Insecure
tenure of contracted


farmers


Dispute
with farmers


Side
-
marketing


Input diversion

Farmers

Returns
increase

Risk
decreases

Contract Default

Farmer Default

Side selling

Side harvesting

Input diversion/ selling

Firm Default

Late Supply of Inputs

Input shortage

Collection delay/failure

Price terms

Side
-
Selling

Low
Yields

Payment
Delay

Collection
delay

Low
Prices

Greed

Transport
issues

Inventory of Smallholder Contract Farming Practices: Revised Final Report, December 2009. SNV
Netherlands Development
Organisation
.

Side
-
Selling

Low
Yields

Payment
Delay

Collection
delay

Low
Prices

Greed

Transport
issues

Inventory of Smallholder Contract Farming Practices: Revised Final Report, December 2009. SNV
Netherlands Development
Organisation
.

Impact of Contract Default

Impact of
Farmer Default

Failure to Repay Loans

Lower prices

Reduced yields

Reduced firms’ trust

Impact of

Firm Default

Reduced yields

Reduced quality of crop

Reduced farmers’ trust

Video



Perspectives on Contract Farming From
Farmers and Firms in Zimbabwe

http://www.youtube.com/watch?v=x4JIZjzbUWI

Case Study

Discussion Questions:


What are the clauses that could create
issues and lead to contract default?


What are the
underlying
causes
of
that
potential contract default?


What are potential strategies to mitigate
side
-
selling in this particular case?

Strategies to Mitigate Default: Carrot


Build
Trust (Good Management by Firm)


Payment Terms


Incentive Payment


Structures


Preferred Supplier


Program


Strategies to Mitigate Default: Stick


Farmer Selection


Firm Coordination


Joint Liability


Suing Farmers in Court


Debt Collection

Crop

Contracted
Farmers

Repayment
Rate

Actual vs.
Budgeted
Inputs

Actual Delivery
vs. Budgeted
Yield

Gooseberry

34

64%

48%

18%

Cosmos seed

296

55%

96%

27%

Paprika

424

43%

53%

15%

Cowpea

700

72%

100%

41%

REALIZ Contract Farming Data

Emerging Strategies to Mitigate
Default


Improve efficiency and relationships with
technology (SMS, direct deposits, barcodes,
management systems)


Biometrics


Results of Good Contract Farming

Northern Tobacco
Smallholder Farmers’
Yield

Northern Tobacco
Smallholder Production
Share

Results of Good Contract Farming

Zimbabwe Cotton
Yields

Cotton Sector
Repayment Rates

Closing the Yield Gap



Actual
Yield (kg)

Potential
Yield (kg)

Yield Gap

Current
Profit

Tobacco

1,200

3,000

150%

3,401

Cotton

580

1,500

159%

(2)

Coffee

500

2,000

300%

420

Sugarcane

7,430

14,160

91%

481

Paprika

1,150

5,000

335%

556

Maize

690

8,000

1,059%

24

Source: 2010 data from AMA; potential yield from FAO Handbook; calculations use budgets in Annex III.

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