Service Provision
Most agribusiness companies studied provide a wide range of extension services to farmers. These services include the provision of agricultural inputs such as seeds, fertilizer, agro-chemicals, veterinary drugs, artificial insemination, animal feed etc. as well as field preparation services, supply of irrigation water, produce transport etc. free-of-charge or on credit. The case studies revealed that the private sector is able to take over public extension services to primary producers, provided the agro-business is a profitable enterprise.
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Box 1: Some services offered to farmers by processors Homegrown Company Ltd is success story of production and export of packaged horticulture produce from Kenya. The company has focused in the last two decades on the processing and export of fresh vegetables to the UK market. In order to ensure the desired quality and supply of fresh produce, it was important for Homegrown to enter into partnership with local farmers to complement its own production. Through this partnership the company is able to source about 25 percent of total requirements and in some cases such as French Beans, 100 percent of the total requirement from contracted farmers. By entering into a supply contract, farmers not only enjoy the benefits of an assured market for their farm produce; while at the same time benefiting from the fact that their farming activity risk is minimized by the certainty with which their production decisions are made. Farmers are supplied with the latest farming technology, such as the latest crop varieties and crop husbandry techniques which has ensured that farmers are able to optimize their production in terms of quality and quantity. Homegrown also supplies fertilizers, and agro-chemicals on credit to those farmers who need material credit, so that they can be able to produce the expected quantities and qualities without exerting themselves. This is also in recognition of the fact that the credit market in Kenya is highly biased against agricultural production. Brookside Dairy Ltd has a policy of supporting dairy farmers as a strategic contribution to the development of a vibrant dairy industry in Kenya. The following services are therefore offered to farmers:
All services are provided to farmers on credit, to be deducted from their milk proceeds. The prices charged by Brookside Dairy Ltd are generally wholesale prices plus a little margin to cover transportation and other overhead costs. |
Contractual Agreements
Contractual agreements vary from informal -not based on any written document- to formal contracts, which determine prices, quantities, quality standards and services to be provided by the processor. Formal contracts are more common in Kenya and South Africa than in Uganda, Nigeria and Ghana. However, there is no evidence that formal contractual agreements are necessary for sound linkages between farmers and buyers. Especially weak contract enforcement and an inefficient jurisdiction system make contractual agreements obsolete. Mutual trust is more important which can be developed through longer -term “fair play” on both sides, reliable and fast payments, reliable and prompt product deliveries. However, a sound understanding of quality requirement, applied methods of quality control, payment terms and expected delivery schedules.
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Box 2: Example of supplier’s contract in sugar sector in South Africa The contractual arrangement between out-growers and the Transvaal Sugar Company (TSB) is controlled by a cane delivery agreement. All growers must adhere to the conditions and obligations that are specified in a comprehensive specification contract that binds the respective parties over long periods of time. The price paid to out-growers is determined by the specifications of the South African Sugar Association who determine the grower-miller split from the proceeds of sugar sales. The contracts also include transfers of areas, rights and amendments to the contract as well as the terms of the contract as a result of a force majeure. The conditions of termination, default, jurisdiction and arbitration respectively are outlined. Finally, the procedure of notification, cession and miscellaneous issues are outlined in the contracts. |
Price Determination
Prices are normally determined by the processor and not by the farmer. In some cases, prices vary from day to day, according to prevailing market prices, in other cases, like the Mwea rice irrigation scheme and Brookside Dairy Ltd. in Kenya, the processor fixes the price on a seasonal basis which then fluctuate according to market conditions. Blue Skies, a fresh fruit preparations exporter, attracts reliable buyers with prompt payment and above market prices for raw material suppliers.
Traditionally parastatals have fixed prices on a seasonal basis for cash crops especially for export crops in order to buffer farmers from price fluctuations. In this line, the Kapapet tea co-operative operating in Kenya, as well as the Afifie rice and vegetable growing scheme in Ghana both fix prices on an annual basis and may give bonuses to farmers when markets perform better than expected.
Purchasing Arrangements
Methods and practices of raw material exchange can range between simple ad hoc spot market transactions with or without the inclusion of intermediaries or informal supply arrangements to highly managed co-operation such as farming under contract, asset sharing arrangements between farmers and processors or fully vertical integration of producing and processing activities.
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Box 3: Raw material supplies of Transvaal Sugar Company, South Africa Transvaal Sugar Limited (TSB) has the capacity to produce 350 000 metric tonnes of sugar annually from its two factories and sugar production in 2000/01 was about 300 000t. The sugarcane supply-processing operation consists of the factory processing operation and a range of growers. The growers include the company estates and a range of contracted large-medium and small-scale suppliers/growers. TSB has about 18 percent estates, 58 percent private growers on contract and 18 percent of small scale contractors. The differences between the types of growers can largely be categorised on the basis of the differential farm size and the level of capital investment. In the case of the company estates, the milling company farm large tracts of land. This operation is categorised by a modern capital-intensive mono-cropped sugarcane production system with high levels of management input and control. The second category, contracted medium-large growers, are also characterised by a modern capital-intensive mono-cropped sugar cane production system with high levels of management inputs. These farmers are contracted by way of a long-term specification contract and supply in excess of 64 percent of the total volume of sugarcane delivered to the two TSB mills. Most farms are in excess of 50 hectares and in many cases, sugar cane is one of the farm enterprises together with sub-tropical fruit and vegetables. These farmers are largely autonomous and the growing and delivery of sugarcane is self managed with ad hoc inputs from the agricultural division and the factory cane supply division who co-ordinates the timing of the harvesting and delivery operations. The third category of grower, namely the contracted small-scale growers, includes in excess of 1000 small-scale farmers belonging to thirty-two different supplier groups. The average farm size of these growers is 6.8 hectares with the smallest farm recorded as around 3.7 hectares and the largest 30 |
Full vertical co-operation
Full vertical co-operation applies to situations where farming and processing are undertaken by the same business entity. The level of co-operation is highest with direct linkages between farming and processing. Examples are found in traditional export crops such as oil palm, cocoa, coffee, tea etc. as well as high value horticultural crops when processing entities secure their raw material supplies through a variety of arrangements. For example, all three agribusiness entities in South Africa, the Transvaal Sugar Company, the Sappi Saiccor Mills (Sappi Forest Products) and the Tshivase Estates of Sapekoe Tea, own large scale estates: the Transvaal Sugar Company grows 18 percentof the total annual sugarcane requirements (over 8,000ha of a total of 43,000 ha) on own estates, Sappi Saiccor Mills receive about 50 percent of wood for pulp making from their own plantations, while the Tshivase Tea Processor (Sapekoe Company) receives about 75 percent of the total annual throughput from their own plantations. Homegrown, the vegetable and flower exporter in Kenya also secures from 50 percent to up to 100 percent of raw material requirements from its own farms.
Asset sharing arrangements
These are an important means to link agro-business and farming. Commitments vary according to equity held by each party and shareholder representation on supervisory boards and within the management of the agribusiness.
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Box 4: Asset sharing in smallholder tea production in Kenya Kenya has had a successful smallholder tea sub-sector with about 344,000 producers in 2001, contributing about 60 percent of total tea production in Kenya. As a result of liberalization policies in agriculture, previously publicly own tea factories were put in the hands of tea farmers whose companies undertake tea collection and processing. There are 46 tea factories operating under the Kenya Tea Development Agency (KTDA) umbrella, some of which are wholly owned by small-holder tea farmers, in accordance with a 1995 policy change that gave farmers total ownership of the factories. By participating in a vertical ownership the processing factories and KTDA, which manages the tea factory and organizes for the marketing of tea, farmers enjoy tremendous benefits associated with vertical integration. Farmers participate in profit sharing, are able to concentrate on farming, confident in the fact that their tea business is in good professional hands. Other benefits include the availability of fertilizer on credit sourced internationally by KTDA. |
Contract farming
Successful agri-businesses have to maintain the volume and regularity of raw material supplies in order to operate at a reasonable proportion of their planned capacity. To achieve this, local companies may enter into formal contracts with wholesale traders, farmers’ organizations or the farmers themselves. The contracts involve providing assistance to farmers in return for the crop. A similar approach is adopted by large international processing companies, which may either place staff members in the producing area to negotiate with suppliers or employ a local agent to act on their behalf. This approach originated in the 16th century for the supply of spices to European trading companies, and has since been refined and modified to source fruits and vegetables, cocoa, coffee, meat, oilseeds, sugar and cereal crops among many others. Contract farming comes in various forms and includes term purchasing arrangements, out-grower schemes and nucleus estates.[1]
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Box 5: Example of contract farming in the South African sugar industry The sugarcane supply-processing operation of the Transvaal Sugar Company consists of the factory processing operation and a range of growers which include the company estates and a range of contracted large-medium and small-scale suppliers/growers. In the case of the company estates, the milling company farm large tracts of land. This operation is categorised by a modern capital-intensive mono-cropped sugarcane production system with high levels of management input and control. The second category of grower, namely, contracted medium-large growers, are also characterised by a modern capital-intensive mono-cropped sugar cane production system with high levels of management inputs. These farmers are contracted to the Transvaal Sugar Company by way of a long-term specification contract and supply in excess of 64 percent of the total volume of sugarcane delivered to the two mills. Most of these farmers operate farms that are in excess of fifty hectares and in many cases, sugar cane is one of the farm enterprises together with sub-tropical fruit and vegetables. These farmers are largely autonomous and the growing and delivery of sugarcane is self managed with ad hoc inputs from the agricultural division and the factory cane supply division who co-ordinates the timing of the harvesting and delivery operations. The third category of grower, namely the contracted small-scale growers, includes in excess of 1000 small-scale farmers belonging to thirty-two different supplier groups. The average farm size of these growers is 6.8 hectares with the smallest farm recorded as around 3.7 hectares and the largest 30 hectares. |
Informal linkages and ad hoc arrangements
In many scenarios contracts are not written down but rely on verbal agreements between entrepreneurs and farmers. Informal arrangements are common in markets with less stringent quality requirements for example and when planning skills of producers and processors are limited.
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Box 6: Informal purchasing arrangements in Nigeria Fuman Agric, a fruit juice manufacturer near Ibadan, Nigeria, purchases about 10,000t of fresh fruit per year on an informal basis. Installed capacity is 5 t/hour but the company presently due to raw material constraints produces only at 10 percent of its installed capacity. Fruits are procured locally by the company's purchasing manager and from independent traders with informal links to the company. No formal contracts are made with suppliers. The company determines the price and usually offers the average between the seasonal and off-seasonal price. The company prefers to buy in the glut season when prices are low since fresh fruit market demand is little. The processor may provide transport and in some cases provides some pre-finance to traders. Direct links to the farming community are limited to former cooperative groups that had worked with the former government owned Lafia Canning Factory in the western Nigeria. They provide soft loans, planting materials; equipment and other agricultural inputs while the farmer cooperative groups supply their produce to the company. The company reserves the right to discard poor quality products and the average annual prices are paid to farmers for their produce. At times when open market prices are better than company prices, farmers sell their produce in the open market. The company also goes farther to purchase supplies directly from producers and agents at prevailing market prices from eastern and central Nigeria. |
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[1] For further reading refer
to: Contract Farming, Partnership for Growth, by Charles Eaton and Andrew W.
Shepherd, FAO Agricultural Services Bulletin 145, Rome 2001. |
