Contract farming involves agricultural production carried out according to a prior agreement between farmers and buyers. There are several models of contract farming including centralized, nucleus estate, multipartite, informal, and intermediary models. Contract farming can provide benefits like higher incomes, access to markets and inputs, and risk reduction. However, it also presents some risks if farmers become overly dependent on a single buyer. Breach of contract by buyers or lack of alternative livelihoods for farmers can threaten rural livelihoods. Overall, contract farming impacts capitals like social, human, physical and financial capital in both positive and negative ways for rural households.

1. ZEBRA GROUP

2. GROUP WORK- ZEBRA
CONTRACT FARMING AND RURAL
HOUSEHOLDS LIVELIHOOD IN
DEVELOPING COUNTRIES.

3. LEARNING OUTCOMES
At the end of the lecture students are expected to be able to;-
i. Give an overview of the Meaning of contract farming
ii. Describe the models of contract farming
iii. Explain the reasons for contract farming
iv. Explain the meaning of Rural livelihood
v. Explain the determinants of rural livelihood
vi. Ascertain the relationship between Determinants of rural
livelihood and contract farming (Positive and Negative)
vii.Explain the ways to improve contract farming schemes in
developing countries and
viii.Discuss possible policy options to be undertaken to improve
contract farming in LDCs

4. Contract Farming
Meaning
Contract farming may be defined as
agricultural production carried out according
to prior agreement in which the farmer
commits to producing a given product in a
given manner and the buyer commits to
purchasing it. Often, the buyer provides the
farmer with technical assistance, seeds,
fertilizer, and other inputs on credit and offers
a guaranteed price for the output (Minot N,
2007).

5. Contract Farming
Meaning…
Little and Watts (1994). They define it as “forms
of vertical coordination between growers and
buyers-processors that directly shape production
decisions through contractually specifying market
obligations (by volume, value, quality, and, at
times, advanced price determinations); provide
specific inputs; and exercise some control at the
point of production (i.e., a division of
management functions between contractor and
contractee)”.

6. Contract Farming
Meaning…
Glover and Kusterer (1990) define contract
farming as those contractual arrangements
between farmers and other firms, whether
oral or written, in which non-transferable
contracts specify one or more conditions of
marketing and production.

7. Contract Farming
Meaning…
• The contractor can be a firm, private or public,
focusing either on processing or marketing
and trading. The farmer commits to supply a
predetermined quantity of a specific
commodity and of a certain quality standard,
while the contractor assists the farmer in the
production and agrees to buy the commodity

8. Contract Farming
Meaning…
• Contracts involve costs for both farmers and
buyers. The buyer must draft a contract,
educate potential farmers about the terms of
the contract, sign up participants, monitor
compliance with the contract, and develop a
strategy for enforcing the contract. The
farmer makes a commitment to sell to a buyer
at a given price and gives up some autonomy
in production decisions.

9. Models of Contract farming
• Contract farming usually follows one of five
broad models, depending on the product, the
resources of the sponsor and the intensity of
the relationship between farmer and sponsor.
• Five different models of contract farming that
are distinguished by Eaton and Shepherd
(2001) and Bijman (2008) includes, Centralized
model, Nucleus estate model, Multipartite
model, Informal model and intermediary
model

10. The centralized model
• It is usually conceived as the classical contract
farming model.
• The model consists of a centralized processor
purchasing commodities from a large number of
contracted smallholders.
• It is vertically coordinated and there are usually
strict quality controls of the products.
• The commodities in these schemes often require a
high degree of processing, for example tea, coffee,
sugar cane and cotton, and the involvement of the
contractor in the production varies from a strict
control of the process to very limited
participation.

11. The centralized model

12. The nucleus estate model
• The contractor not only acquires commodities
from contracted farmers, but also administers
a central estate or plantation for production.
• The central estate is commonly used for
guaranteeing throughout for the processing
plant, it is also used for research or breeding
purposes.
• The nucleus estate model provides a
significant degree of material and
management assistance.

13. The multipartite model
• It developed from the two former models
through the organisation of farmers into
cooperatives or the involvement of a financial
institution.
• It often includes a statutory body in a joint
venture with a private firm, but it can also involve
a number of different organisations.
• This model was frequently used by governments
in developing countries during the liberalisation
process in the 1980s and 1990s.

14. The informal model
• It consists of contracting schemes based on
individual entrepreneurs and small firms.
• It is characterized by informal contracts which
are often on a seasonal basis.
• The crops require a low degree of processing, for
example fresh fruits and vegetables.
• The contract schemes in the informal model may
require government support for research and
extension services and often involve a risk of
extra-contractual marketing.
• The opportunities for vertical coordination are
smaller than in the more formal models.

15. The intermediary model
• This model includes a contractor, normally a
processor or trader, who contracts formally with
an intermediary i.e cooperatives, NGOs,
extension agent etc.
• The farmers are then contracted by the
intermediary informally.
• The danger with these types of contracting
schemes is that the contractor may not be able
to keep the control of the production, the quality
of the commodities and the prices received by
the farmer.

16. STRUCTURE-
MODEL
SPONSORS GENERAL
CHARACTERISTICS
Centralized Private corporate sector
State development agencies
Directed contract farming. Popular
in many developing countries for
high-value crops. Commitment to
provide material and management
inputs to farmers.
Nucleus estate State development agencies Private/public
plantations
Private corporate sector
Directed contract farming.
Recommended for tree crops, e.g.
oil palm, where technical transfer
through demonstration is required.
Popular for resettlement schemes.
Commitment to provide material
and management inputs to farmers.
Characteristics of contract farming structures

17. Multipartite Sponsorship by various
organizations, e.g.
-State development agencies
-State marketing authorities
-Private corporate sector
- Landowners
- Farmer cooperatives
Common joint-venture
approach. Unless excellent
coordination between sponsors,
internal management difficulties
likely.
Usually, contract commitment
to provide material and
management inputs to farmers.
Informal developer Entrepreneurs
Small companies
Farmer cooperatives
Not usually directed farming.
Common for short-term crops;
i.e. fresh vegetables to
wholesalers or supermarkets.
Normally minimal processing
and few inputs to farmers.
Contracts on an informal
registration or verbal basis.
Transitory in nature.

18. Intermediary (tripartite) Private corporate sector
State development
agencies
Sponsors are usually from
the private sector.
Sponsor control of material
and technical inputs varies
widely.
At time sponsors are
unaware of the practice
when illegally carried out
by large-scale farmers.
Can have negative
consequences.

19. FUNCTIONS OF AGRICULTURAL CONTRACTS
• Contracts are used for coordination so that the
right quantity of products with the required
quality is produced and delivered at the
determined time and place.
• It provide incentives for both parties to comply
with the agreement. Without these incentives
there would be no transaction.
• The contract accounts for the financial risks
which are included in the agreement.

20. Reasons for Contract Farming
• Higher and more stable incomes
• Access to product markets
• Access to more affordable credits and inputs
• Access to new technologies, extension,
training and information
• Reduction of production and marketing risks.

21. Rural Livelihood
Meaning…
• A livelihood encompasses individuals and their
capabilities and means of living which includes
income, food and assets, both tangible and
intangible.
• It implies that livelihoods do not only depend on the
actual assets of an individual but also on what
people are capable of doing and able to perform
with these assets.
• Only when a livelihood is strong enough to
recuperate from shocks and has a sound
maintenance in both a short and long term
perspective it will be sustainable.

22. Determinants of livelihood
• Five capital assets have been identified upon
which livelihoods are built and the
accumulation of these assets is important
factor for sustainable livelihoods.
• Poverty is related to a lack of these assets or
the ability to use them productively.

23. Determinants cont…
• Natural capital - The natural resource stock
from which resource flows useful for
livelihoods are derived e.g. land, water,
wildlife, biodiversity and environmental
resources.
• The choices of rural livelihood strategies are
often dependent on the natural resource
base.

24. Determinants cont…
• Social capital - The social resources
(networks, membership of groups,
relationships of trust, access to wider
institutions of society) upon which people
draw in search of livelihoods.
• It is vital for the wellbeing of rural people.
• It enables people to make living meaningful
and to transform structures and rules.

25. Determinants cont…
• Human capital - the skills, knowledge, ability to labour
and good health
• are important to the ability to pursue different
livelihood strategies.
• Physical capital - The basic infrastructure (transport,
shelter, water, energy and communications) and the
production equipment and means which enable
people to pursue their livelihoods.
• Physical capital such as shelter and water is essential
for survival.

26. Determinants cont…
• Financial capital - The financial resources
which are available to people (whether
savings, supplies of credit or regular
remittances or pensions) and which provide
them with different livelihood options.
• A regular income is essential for the building
of livelihoods.

27. CAPITAL ASSETS AND CONTRACT FARMING
• The five capital assets are the core of the
sustainable rural livelihoods.
• All assets must be combined in order to
generate a desired livelihood.
• Contract farming contributes to an increased
access and accumulation of capital assets in
several ways.
• There are major gains in social, human,
physical and financial capital which can
furthermore increase the opportunities for
rural livelihoods.

28. Natural capital
• Contract farming does not generally add to the
natural capital assets of small-scale farmers
and the rural community. Contract farming is
most common in areas with fertile soil and
where the agriculture is already widely spread,
hence the risk of overexploitation is high.
• Even though contract farming does not
contribute to the accumulation of natural
capital, the higher income received from
selling the produce regularly can help farmers
to acquire extra land if available.

29. Social capital
• The relationship with the contracting firm is a
social resource that is utilized by farmers to
obtain a better position in negotiations and
gain valuable experience for the future.
• Homegrown, a Kenyan firm, have a good
cooperation with its farmers and the firm
emphasize good relationships to the farmers.
The firm also supports the farmers through
various corporate social responsibility
measures (Strohm and Hoeffler, 2006).

30. Social capital cont…
• In Nigeria the communication between the
farmers and the company is facilitated by
indigenous field officers employed by the
company.
• The farmers get in contact with the firm
through visits by the field assistance, meetings,
the delivery of commodities and even
sometimes study visits at the processing plants
by the farmers (Porter and Howard, 1997).
• All of these activities add to the social capital
of farmers.

31. Social capital continue…….
• Social capital is also obtained when farmers
organize themselves in groups.
• Farmers benefit from being member in a group
through the network that is built and they can
exchange experiences, give advice and help
each other
• Some firms only contract with already
established farmer groups, while others
contract with individual farmers organizing
themselves on their own initiatives eg.Farmer
groups in Silibwet-Kenya .

32. Social capital cont…..
• Contract farming increase women’s social
capital by accepting them in the schemes.
• In Frigoken’s schemes in Kenya, 16 000 – 20
000 farmers are participating, from which
approximately 80 percent are women (Strohm
and Hoeffler, 2006).
• In a scheme in Zimbabwe, 60 percent of the
smallholders are women (Woodend, 2003)

33. Human capital
• The majority of the contracting firms provide
the farmers with information, technical
assistance and training which increase the
farmers’ knowledge and skills. In certain
cases, external support is provided by a
consulting company. For example East African
Growers Limited (EAGA) in Kenya.
• The knowledge can be utilized by the
smallholders even after an ending of the
contract and it can also be transferred to
future generations.

34. Human capital cont…
• Farmers who receive a regular payment are
able to pay the school fees for their children.
Thereby contract farming indirectly leads to a
higher human capital for the younger
generation.
• A higher income may also enable farmers to
purchase medicines and get better access to
health care. A good health is a prerequisite to
be able to operate a farm and sustain a
livelihood.

35. Physical capital
• The majority of the contracting firms provide the
farmers with inputs and extension services.
• In most of the contract schemes inputs are supplied
on credit by the contracting company. The cost for
these is subtracted from the payment the farmers
receive for the commodities they deliver, thus they
have an incentive to cultivate and manage their crop
growing.
• New technology and machineries are sometimes
introduced to farmers who enter into contract
farming. These can intensify the cultivation and
increase yields.

36. Physical capital cont…
• Access to markets.
• If a farmer has a contract he or she is ensured
of a market for the commodities produced,
hence it becomes a security for them. This
also gives incentives for investments and
motivates farmers to work harder and
increase production.

37. Physical capital cont…
• In some countries transport is arranged by the
contracting firm, either with their own vehicles
or with an external transporter. An example is
the contracting firm Steers in Kenya who
organize their own transport from Nairobi.
• In other cases, the farmers are in charge of
transporting the produce to the delivery spots,
for example the farmers supplying potatoes to
Deepa in Kenya (Strohm and Hoeffler, 2006).

38. Financial capital
• Farmers obtained a higher income from
contract farming which means that they can
develop their livelihoods and improve their
standards of living
• higher income can make it possible for
farmers to save a small amount of their
income and then use it in times of hardship or
to recover from shocks

39. Financial capital cont…
• There is a possibility for farmers to obtain a
supplementary payment for high-quality
products or additional delivery. For example
The Cotton Company of Zimbabwe (COTTCO),
offering additional payment for high quality
cotton (Woodend, 2003).
• In places where contract farming can raise
the income for these farmers, poverty in
terms of financial assets is reduced

40. Financial capital cont…
• Farmers involved in contract farming get
access to credit through the contracting
firms .
• Some companies offer cash loans to their
contracted farmers so that they can hire extra
labour or make supplementary investments.
For example, in COTTCO’s contract schemes in
Zimbabwe, farmers who have performed well
may receive a cash loan to pay labour,
however any remaining loan is carried on to
the next seasonal contract and then an

41. PROBLEMS OF CONTRACT
FARMING ON RURAL LIVELIHOOD
• Depending on the government and the legal
framework, the contracting firm and the
surrounding institutions, the farmers are more
or less protected from risks.
• If the farmers are unfortunate, contract
farming can have detrimental impacts on their
livelihoods.

42. Problem conti…
• Breaching the contract.
• The legal framework and the litigation process are
often weak and imperfect in many developing
countries
• If a company chooses to breach the contract, the
individual farmer or the farmers’ group become
vulnerable
• Even if a contract has been signed, farmers are at
risk of being abandoned by the firm and this can
have devastating consequences for the livelihoods of
farmers who depend on contract farming for their
income

43. Problem conti…
• There are always a risk for farmers that the
contracting firm ends the contract without
prior notice. If a cheaper alternative appears
to the firm, it might abandon the contracted
farmer.
• Small-scale farmers in Malawi are at risk
when entering contracts because they lack
collateral and the legal and insurance systems
are weak, Kumwenda and Madola (2005)

44. Problem conti…
• Problems in land tenure
• Land tenure is important in contract
farming.
• If the farmers do not have legal
authority to their land they may be
obliged to apply practices imposed by
the contracting firm or they can be
bereaved of their plot

45. Problem conti…
• In South Africa the contracts require high-
quality commodities including matters of
social behaviour and discipline
• If the farmers do not live up to standards, the
company might reclaim the plot whereby the
farmers lose an important source of income.
• Farmers living under such conditions have
more difficult to build a sustainable livelihood.

46. Problem conti…
• Alternative production possibilities.
• Farmers entering into contracts become
vulnerable if they do not have alternatives to
their production on contracts or diversified
income strategies.
• If the contracting firm for any reason chooses
to end the contract, farmers may loose their
source of income and their livelihoods will be
threatened

47. Problem conti…
• In a Nigeria, Porter and Howard (1997) find
that farmers were restrictive concerning the
land area devoted for the crop grown for the
contract scheme in order to be able to grow
vegetables for the local markets .
• In South African, farmers have less ability to
maintain alternative production possibilities
hence they are in a more vulnerable position.

48. Problem conti…
• The pricing system.
• If the agreed price is fixed, farmers may no
benefit from a price increase on the world
market.
• If the price is adjusted to the world market,
farmers must cope with the volatility in prices
and can never be sure how much they will
receive. If the world price is reduced it affects
the farmers directly and this has been a source
of conflict between growers and contractors.

49. Problem conti…
• In Zambian contract farming, agribusiness
have been paying a lower price to the farmers
than stipulated in the contract because the
price has been tied to the dollar (Likulunga,
2005).
• There are also contracts which give firms the
right to change the price on a three-month
basis in order to follow the market price

50. Problem conti…
• The exclusion of groups of farmers
• Black farmers in South Africa have been left
out from contract farming.
• Smallholders in Malawi are often excluded
from contract farming, especially in the
production of maize.
• In a contract scheme in Zimbabwe, farmers
who want to participate need to prove that
they are able to supply a minimum yield in
order to be accepted in the scheme

51. Problem conti…
• Monopsony on Market.
• When contracting firms enjoy
monopsony on the market, farmers
become dependent upon one buyer.
• This can lead to mono-cropping which
can be negative in ecological aspects and
often implies a higher risk for farmers.

52. WAYS TO IMPROVE CONTRACT
FARMING
• Strong legal framework protecting both farmers and
firms should be built.
• The governments should provide an executive body
which can settle disputes and solve conflicts
• Investments in infrastructure such as roads, irrigation
are essential for agricultural sector and successful
contract scheme.
• Effective pricing policies with positive influences on
the profitability to both farmers and firms should be
developed.

53. Ways to improve cont…..
• More extensional services to farmers should
be given emphasize to increase the
production capacity of farmers.
• More attention basing on research and
development should given towards
agricultural production
• Farmers have to be more involved in
contracts especially which involve land
ownership.

54. Policy options in Developing
countries.
Developing countries can promote
contract farming to improve the
livelihood of the rural people by
creating a conducive environment.

55. Policy options in Developing
countries…..
The following policy goals should be considered
• Improve the investment climate. An investment
climate that facilitate private investment in
Agribusiness sector is a necessary pre condition for
the development of private contract farming
schemes
 Reducing unnecessarily high capital requirement to
start new firms
 Developing a fair tax codes
 Minimizing corruption and
 Simplifying customs clearing procedures.

56. Policy options in Developing
countries……
• Legalize direct firm-farm contract.
 Removing legal restrictions that prevent firm from
buying directly from farmers in some countries. The
government role should be ensuring that both
parties are reached in appropriate agreement.
• Develop effective grades and standards.
 This will facilitate communication and negotiations
between buyers and farmers and among traders.
Also it will make easier for buyers to establish
contract with farmers.

57. Policy options in Developing
countries……
• Facilitate farmer’s organization and other
intermediary extension agents.
A cooperative, and NGO, SACCOS or even large
scale farmer may serve as a link between the firm
and small scale farmers. This will reduce
transaction cost associated with dealing with a
large number of farmers. Although the
organization should involve voluntary members
by farmers and voluntary constructional relative
with firm to ensure that they are productive.

58. Policy options in Developing
countries…….
• Promote public-private partnership in
extension services;
In providing technical assistance
Providing marketing assistance
The use of intermediary in providing extension
services on behalf of firms will reduce cost to
the firm of working with small scale farmers.

59. Policy options in Developing
countries……
• Promote competition
Encourage policy which limits the market
power of firm by promoting competition
among firms
Policy makers should be reluctant to offer
monopoly power to firms.

60. Policy options in Developing
countries…….
• Provide mediatory services- intervene to resolve
conflict.
One of the most common problems in contract
farming in developing countries is violation of the
contract.
Government officials particularly extensions
officers should play a role in mediating between
contract growers and the buyer.
The policy should encourage organization of non
government mediatory bordies with members
acceptable to both sides.

61. END
THANKS

62. References
1 Eaton C and Shepherd A (2001) Contract farming, Partnership for
growth. FAO Agricultural Services Buttelm 145.FAO, Rome.
2. Glover D and Kusterer K (1990) Small farmers, Big Business: Contract
farming and Rural Development.
3. Minor, N (2007), Contract farming in Developing Countries: Pattern,
Impact and Policy Implication. Case study H.6-3 of the Program “Food
policy for development countries: The role of government in the global
food system 2007: Cornell University, New York.
4. Litte P. and Watts M (1994) living Under Contract; Contract farming in
Agrarian Transformation in Sub-Saharan Africa. The University Of
Wisconsin London.
5 Strohm, K and Hoeffler H (2006) Contract farming in Kenya: Theory,
evidence from selected value chain and Implication for development
Cooperation.
6 Woodend J (2003) Potential Of Contract Farming as a mechanism for the
commercialization of Small holder agriculture- The Zimbabwe Case
study. Report prepared By FAO.