A Path to Prosperity New Directions for African Livestock

6.3 Contract Farming
Informal, traditional markets for livestock products
are still dominant in most of SSA. For example, 90%
of Ghana’s beef supply is channelled through the
informal markets. Smallholders can compete in
informal or ‘spot’ markets because they have lower
quality standards and the markets don’t depend on
regular supply from a given producer. However, rising
incomes and expectations of urban consumers
promote more sophisticated and formal market
arrangements. This is symbolised by the growth of
supermarkets across the developing world. Though
Africa lags behind other regions, supermarkets and
the value chains they represent are slowly becoming
a reality. In the early 2000s, supermarkets had
50–60% of the market in Latin America, 10–30% in
S.E. Asia and increasing market share in eastern and
southern Africa. In Kenya, for example, they had a
20% share of the processed food market 127 . These
figures are now probably higher.
As markets develop they expect four key requirements
that all involve higher costs per unit of product for
small farmers and potentially allow larger
producers to capture the market. These are:
> Quality and safety standards, which often
require on-farm investments;
> Uniformity of the product, requiring investments
in breeding, feeding, and veterinary health;
> Reliability of supply, which requires product
specialization and/or higher level of production; and
> Verifiability of origin, which requires traceability
systems 128 .
Of course, not all small farmers will be able to
meet the requirements of a formalised market and
will either drop out of farming or continue supplying
informal local markets. In Brazil in the 1990s
supermarketisation was directly linked to the exit of
small dairy farmers. Sixty thousand farmers ceased
production in ten years and the average farm size
increased by 55%, with similar patterns in Argentina
and Chile 129 . Whilst Africa is still a long way from
value chains being dominated by supermarkets,
policy makers and agri-business do need to
determine how to assist those small farmers who
are willing and capable of meeting higher standards
and how to create the jobs for those who are not.
Experience from the horticultural sector suggests
small African farmers are able to meet higher
standards and thrive when supported to do so.
The three ways for supporting small farmers
commonly cited are first, strengthening cooperative
action between farmers, secondly, contract farming
and thirdly, strengthening farmers associations.
Cooperative farming systems can be very successful.
For example: the National Dairy Development Board
in India; Fonterra, the world's largest exporter of
dairy products and owned by 13000 New Zealand
dairy farmers; Land O’Lakes, the USA’s second
largest cooperative serving 300,000 farmers and the
Development Foundation of Turkey (TKV) working
with 2500 broiler producers. However, these tend to
be exceptions. Most cooperatives are unable to
compete with private companies 130 and their
establishment is both complex and relatively slow.
Contract farming appears to offer more potential and
there is evidence to suggest that in the developing
world contract farmers have, in most cases, higher
profits per unit of output than independent farmers
(both large and small). Contract farming can
incorporate smallholders in high-value supply chains
that require specialized inputs and sell to markets
for specialized outputs. The three main types of
contract farming have been described by Minot 131 as:
1 Market-specification contracts – where the
contract involves an exchange of technical and
market information about the product quality
required, timing and prices for specified markets.
2 Management-providing contracts – where the
farmer is assisted in terms of least-cost
production practices to attain higher quality and
control the timing of output. The contractor
recoups the costs of extension provided from the
proceeds of marketing a higher-quality product.
3 Resource-providing contracts – where credit,
inputs and/or agricultural services are provided
by the contractor who then recoups outlay
through marketing of the product.
Which type of contract is needed will vary by value
chain and depend upon the circumstances of the
farmers. While vertically integrated systems that
depend on contracts sound like an excellent solution
to improving market access and the capacity of small
livestock farmers, there are unfortunately very few
examples of them functioning in SSA. (Box 7 provides
some examples of successful contract farming
arrangements). This lack of examples is perhaps
related to the fact that contract farming requires
effective enforcement of a clear legal framework and
this is a problem in many SSA countries. Interestingly,
contract farming is the norm in the developed world
for poultry and pork value chains. How to develop
contract farming operations in SSA is a key challenge.
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