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6. ADVANTAGES AND DISADVANTAGES OF CONTRACTING AND SUB-CONTRACTING IN MARKETING OF AGRICULTURAL PRODUCE:
6.1 Advantages of Contracting:
There are notable advantages (to smallholder farmers) of contract marketing in agriculture and these include:
- Quantity and quality requirements are stipulated and are known in advance. Farmers manage their produce using the requirements as targets. This makes planning easier.
- The price per grade is known in advance and this removes uncertainty on the farmer's side. The farmers are guaranteed the market (stabilising the market which is usually volatile).
- If produce is exported, farmers benefit from higher export realisations.
- Some companies scan market conditions in and outside the country and thus can advise farmers to produce and sell at times when prices are high.
- Farmers can benefit from contract packages which include appropriate seed varieties, fertilizers, agro-chemicals, payment for labour as well as extension support.
- Some contracts include free transport of produce to Company premises. Where this is done in groups, both parties benefit substantially.
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- Even under scenarios where a transport fee (usually low) is charged, farmers still benefit because of better handling and timeous delivery. Damage to perishable produce is minimised (as opposed to bus-carrier transport [ Can be soaked in rain or exposed to the sun and strong winds.] ) and thefts are also prevented (unlike selling to Mbare Market where thefts are common).
- Despite delays through the grading process, farmers are paid within a relatively short-time of around two weeks.
- Some companies offer part-payments (in advance) upon delivery. The final payment will be made after grading and this leeway assists in meeting the farmer's immediate cash flow needs.
- Payments according to grades offers incentives for quality.
- For well-drafted contracts obligations of either party are clearly spelt out. This assists in conflict management and facilitates negotiations and re-negotiations. This can also be aided by inclusion of variation clauses.
- The potential exists as the majority of the emerging companies processing agricultural produce are operating below capacity.
- Group contracts fit well with other schemes such as the Agricultural Finance Corporation (AFC)'s Group lending scheme; Ministry of Lands and Agriculture's Agro-Input Dealer Scheme as well as for those involved in various communal area irrigation schemes dotted around the country.
- In contracts where grading of produce is done on the farm, transport costs are minimised for the farmer and the fact that all family members see minimises mistrusts. As every member sees discouraged aspects, all are stimulated to do better next time.
- Farmers can split produce with first grade honouring contracts (for export) and second grade going to Mbare and other residual markets. Total earnings are eventually maximised with such types of arrangements.
6.2 Disadvantages of Contracting:
Despite listed advantages (6.1), there also several limitations to contracting and these include:
- The perishable nature of certain produce limits the radius of production. Thus not all smallholder farmers can enter contracts.
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- Both farmers and contracting companies are vulnerable to price fluctuations (volatile nature of agricultural produce). In some instances these are beyond the control of both and this disrupts contracts if there are no variation clauses. Sometimes parallel markets offer higher prices than those agreed in contracts.
- Farmers differ in capabilities and commitment to contracts and this adversely affects group contracts. Petty jealousies among group members themselves adversely affects the contract.
- Smallholder farmers do not fully understand and appreciate the significance of contracts (verbal, written or implied). This leads to high defaulting rates.
- The companies also default knowing that farmers may not afford legal costs needed or may not even consider going this far.
- Non-contract companies and middlemen can lure farmers out of agreements by offering slightly higher prices. Such marginal offers derail the whole contract process.
- Grading at companies' premises (sometimes unavoidable) delays payments to farmers and brings in an element of mistrust.
- Derailment of contracts causes disruptions to farmers' production programmes.
- Only first grade is accepted for export-related contracts and many farmers may not attain this quality in their production activities.
- Defaulting attracts relatively high penalties (discontinued input support; mistrust; cancelled contract which may be followed by black-mailing etc).
Considering the volatile nature of agricultural marketing, contracts are beneficial to both parties. It brings in a stabilisation element between smallholder farmers on one side and the buyers and companies on the other. What is missing is mutual trust and proper education (mostly among farmers) to promote the arrangements. This task is better handled by representatives of farmers (ZFU, AGRITEX, local authorities) among others. This is further highlighted under the recommendations section.
This entails a contracted farmer (sometimes contracted middleman) entering into a verbal/written agreement with (other) surrounding farmers to grow (and deliver) stipulated quantity and quality of produce for subsequent fulfilment of his own (prime) contract.
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Elements of sub-contracting include:
- the farmer has bigger contract with a company for factory processing or export which he/she can not meet through own produce
- the enters into an agreement with smallholder farmers prior to production and stipulates quality, quantity , delivery time as well as offer prices.
- the farmer can also give a supporting package (production inputs, transport, extension advice, regular inspections etc)
- after grading the farmer pays for produce and subsequently uses the produce to fulfil his quota which can also increase depending on demand.
It has been estimated that sub-contracts in agriculture accounted for about 10% of exports (valued at US$30 million). Authoritative sources revealed that this can be increased to about 30%.
Despite these encouraging sentiments, evaluating this type of arrangement has been rendered difficult by the fact that it is happening behind the scenes. It is disallowed for certain commodities like tobacco. Furthermore companies exporting agricultural produce prefer direct contracts with farmers so that they can supervise production and preserve their reputations. Whilst further investigations are required, suspicions seem to be retarding the development of sub-contracting as a marketing tool. The fact that it is happening behind the scenes indicate that the potential exists.
It should also be noted that some of the advantages and disadvantages covered under contracts also apply to sub-contracts.
© Friedrich Ebert Stiftung
| technical support | net edition
fes-library | Januar 2002