Reducing Default in Contract Farming Arrangements June 25, 2013

1. Reducing Default in Contract Farming Arrangements June 25, 2013 Bronwyn Irwin Senior Technical Director Enterprise Development

2. Objectives of this Session • Desired Outcomes: • Better understand how incentives can drive side-selling • Have practical tools to strengthen the design of contract farming programs

3. Contract farming is not always best Contract Farming is… any agricultural production that takes place under an agreement (written or verbal) between a buyer and seller that provides conditions for the production and sale of the commodity.

4. When Does Contract Farming Make Sense? • Better fit when: • Strong vertical coordination is needed • Higher value crop • Barriers to entry

5. Farmers • Firms Benefits of Contract Farming Risk decreases • Benefits • Consistent quality and volume of supply • Reduced transaction costs • Don't have to invest in land or fixed labor for own production • Risks • Production failure • Inefficient management that results in lost sales • Corruption from the firm • Benefits • Consistent market with a known floor price • Embedded services (information, training, finance) • Risks • Insecure tenure of contracted farmers • Dispute with farmers • Side-marketing • Input diversion Returns increase

6. Farmers • Firms Benefits of Contract Farming Risk decreases • Benefits • Consistent quality and volume of supply • Reduced transaction costs • Don't have to invest in land or fixed labor for own production • Risks • Production failure • Inefficient management that results in lost sales • Corruption from the firm • Benefits • Consistent market with a known floor price • Embedded services (information, training, finance) • Risks • Insecure tenure of contracted farmers • Dispute with farmers • Side-marketing • Input diversion Returns increase

7. Firm Default Contract Default • Late Supply of Inputs • Input shortage • Collection delay/failure • Price terms

8. Side-Selling Inventory of Smallholder Contract Farming Practices: Revised Final Report, December 2009. SNV Netherlands Development Organisation.

9. Side-Selling Inventory of Smallholder Contract Farming Practices: Revised Final Report, December 2009. SNV Netherlands Development Organisation.

10. Impact of • Firm Default Impact of Contract Default • Reduced yields • Reduced quality of crop • Reduced farmers’ trust

11. Video • Perspectives on Contract Farming From Farmers and Firms in Zimbabwe http://www.youtube.com/watch?v=x4JIZjzbUWI

12. Case Study • Discussion Questions: • What are the clauses that could create issues and lead to contract default? • What are the underlying causes of that potential contract default? • What are potential strategies to mitigate side-selling in this particular case?

13. Strategies to Mitigate Default: Carrot • Build Trust (Good Management by Firm) • Payment Terms • Incentive Payment • Structures • Preferred Supplier • Program

14. Strategies to Mitigate Default: Stick • Farmer Selection • Firm Coordination • Joint Liability • Suing Farmers in Court • Debt Collection

15. REALIZ Contract Farming Data

16. Emerging Strategies to Mitigate Default • Improve efficiency and relationships with technology (SMS, direct deposits, barcodes, management systems) • Biometrics

17. Results of Good Contract Farming Northern Tobacco Smallholder Farmers’ Yield Northern Tobacco Smallholder Production Share

18. Results of Good Contract Farming Cotton Sector Repayment Rates Zimbabwe Cotton Yields

19. Closing the Yield Gap Source: 2010 data from AMA; potential yield from FAO Handbook; calculations use budgets in Annex III.

20. Since 1963 and in 146 countries, ACDI/VOCA has empowered people to succeed in the global economy.