Can contract farming be an engine of sustainable development? Jean-Luc François (AFD) et Julien Lefilleur (PROPARCO) suggest three ideas to make it fairer to African farmers.

Picture: Daniella Van Leggelo-Padilla / World Bank
Picture: Daniella Van Leggelo-Padilla / World Bank

Can an international firm whose headquarters are located in Paris, Brussels or Singapore, and which trades in tropical agricultural products towards Europe and China, be a sustainable development actor for farmers in Côte d’Ivoire or Tanzania?  Is the answer to this question rather “No, because its organization is based on uneven trade by playing on the transfer prices between its subsidiaries”, or “Yes, because contract farming connects farmers with markets and is a vehicle for Northern consumers’ new requirements for the environment and social responsibility in agriculture”?

And what if the only possible answer to these questions lies in the wisdom of a Norman (farmer):[1] “It depends, yes and no, maybe, if…”?  It should first be noted that a sustainable agricultural policy contributes to policies for employment, social and territorial equity, the regulation of migration from rural areas to cities, industrialization, the trade balance, the environment, etc. This means that decisions concerning agriculture are eminently political choices, and are therefore specific to geographical and historical contexts.

African farmers are entrepreneurs

Secondly, we should bear in mind that family farms, regardless of their levels of technology, their equipment, their size and their level of formalization in terms of land tenure, accounting or tax, are companies. Farmers (tenant operators or owner operators) are entrepreneurs whose choices stem from sound economic rationality, even when all the outside observer sees is tradition. Yes, African farmers are rational. They are quick to see what is good, risky or impractical in the innovations that are proposed to them. They also work intensively, not counting their days or hours, nor those of their families. When indiscriminate policies for economic openness do not expose these entrepreneurs to unequal competition, they are the best investors. All it takes for investments to thrive along the Senegal River is for imports of broken rice from Asia to be taxed fairly.

Finally, we need to realize that the vast majority of African farmers “go on the markets”, all the markets: daily village market, weekly market in the neighboring village, to ginning plants and oil mills, the market in the capital, markets in both neighboring countries and international markets. The level and predictability of the prices of their products depend both on the structural variability of agricultural markets and on the distribution of the costs and benefits between the successive owners of the products from the farm to the final market. Direct sales, from the producer to the consumer, of products that have just been harvested or processed at the farm, are also a reality in Africa that obviously needs to be strengthened. But the fact of the matter is that “large-scale” marketing requires specialized companies. Agricultural cooperatives which play such an important role in agriculture in OECD countries should undoubtedly be extensively developed in Africa, not only to collect products for retailers, traders or industries, but also to process and export them. However, the bulk of products are today marketed by national or international companies, downstream from production, whose rationale for action is to improve their results: growth in volumes, higher margins, risk transfers, response to consumer preferences. Consequently, they are more dependent than one may think on the investments farmers will make, on volumes, product quality and delivery schedules, and the environmental and social conditions of production.


 

Yet in Africa, the services for farmers, which are essential to a dynamic agricultural economy, are clearly deficient: investment loans, agricultural disaster funds and agricultural insurance, technical and economic advice, information. It is for this reason that local or multinational companies offer these services to farmers: prefinancing of fertilizers, seeds, treatments, or labor costs, in return for the promise to deliver products.

How to make contract farming fairer

The only way to establish whether these contracts are fair is to make a detailed analysis of them. Their key components are the prices invoiced for inputs and services and the purchase pricing conditions for agricultural products. But they are not the only ones: the criteria and assessment conditions for product quality must be set out, including the social and environmental aspects and the risk sharing related to seed and product quality. In addition, it is not enough to have a balanced contract. It must also be applied. This means that the company which has prefinanced does actually have the possibility of purchasing the product it had hoped for. It means that the company honors its promise to purchase towards the farmer. This also applies to relations between farmers and international firms, local companies, and even between farmers and their groups.


 

What does the success of contract farming in Africa tell us about how to proceed, from negotiation to implementation? Three things. 1. Farmers need to have a legitimate collective representation to negotiate with companies. 2. Companies need to lay their cards on the table over their costs and procurement strategy. 3. A third actor needs to be selected by both parties in order to facilitate and validate the negotiation, ensure its terms are respected, and arbitrate disputes based on relevant cost and price references. Depending on the sectors and countries, this arbitrator may be an interbranch association, a government department, or an independent expert. This mediation comes with a cost. But it is small price to pay in view of the gains achieved by a good agreement.

[1] Translator’s note: The French expression “a Norman answer” means an evasive answer.

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