Contracted Farming for higher farmer profits
Small-scale farmers produce 70% of marketed farm commodities in Kenya. However, they enjoy low profits because of 3 key challenges. Depending on brokers, highly volatile farm-gate prices and limited bargaining power in informal fragmented markets. Finally, they suffer huge post-harvest losses of 30% to 50% of their produce.
How can smallholder farmers earn high profits? Contracted farming is a simple way to improve the farmer’s profits. It works by bypassing brokers, locking better prices and access to farm inputs, credit and information on time.
What is Contracted farming? We can define contract farming as: “an agreement between farmers and processing and/or marketing companies. The Agreement involves production and supply of agricultural produce under forward agreement at predetermined prices”.
How does contracted farming work?
The basis of contracted farming is having a formal arrangement between a farmer and a buyer.
The grower undertakes to provide a specific farm commodity in quantities and at quality standards determined by the company. The agreed quantities are in kilograms, metric tons or litres. Qualities can be external, internal or a hidden attribute. These include feel, defects, colour, gloss or size. Internal attributes are mostly odour, texture and taste. Hidden qualities are mostly the product of safety.
The buying company commits to support the farmer’s production and to purchase the commodity on agreed prices. To improve yields, the out-grower will provide quality farm inputs (certified seeds or seedlings, fertilizers and pesticides) on credit (check-off system). They will offer extension advice from planting to harvesting on set guidelines. They may offer other services such as ploughing and crop spraying. Upon harvesting, the buyer will collect the acceptable product at the contracted price range. The company will remit the earnings less the costs of products and services offered.
Benefits of contracted farming
Contracted farmers enjoy improved food security and incomes. These arise from following benefits;
- Timely access to quality basic inputs (certified seeds and fertilizers), production services (field preparation, harvesting, spraying, etc.) And a wide range of managerial, technical and extension services.
- Access to credit, either advanced, arranged or facilitated by the purchasing company or a partner financial provider.
- Access to technology and opportunities to upgrade agricultural commodities for markets that demand prime quality; these include irrigation, field management and vaccination, GAPs, etc.
- Transfer of skills and knowledge (e.g. record-keeping, improved methods of applying chemicals and fertilizers, knowledge related to quality and the requirements of export markets);
- Higher profits through guaranteed and fixed pricing structures, as it fixes prices in advance. Besides, it respects weights and measures.
- Access to reliable markets, which would otherwise be inaccessible to small farmers. The company may aggregate, store and transport produce on behalf of farmers.
Contract farming and farmer groups
A farmer group is better in contractual farming than individuals. It serves as a convenient and efficient organizational unit. The company can coordinate bulking of produce and provide farm inputs, credit and technical help to the group members.
Individual members and the off-taker have a role to play for success. The buyer should invest in building the capacity and improving the cohesiveness of the groups. Training them on group forming skills, formally registering the group and providing literacy and numeracy training can help in this. Contracted members have to comply with group rules and regulations to ensure quality yields and profitability.
Contract farming and supply chain development
Sustainability is key in agriculture and rural development. Contracted farming can act as a reliable approach to change how a market operates. Individual smallholder farmers taking part in spot trading in an informal and segregated market environment can start by signing seasonal contracts with local buyers and companies. As they interact more, they can mobilize members into formal producer groups such as farmer groups or cooperatives. They can use this to negotiate for better formal short-term and long-term supply contracts.
As their cooperative or company grows, they can negotiate joint ventures with suppliers to invest in expensive investments such as milk coolers. As a strategic goal, the company can dominate various areas of the value chain such as running a farm input shop, transport of produce from farms to the processing plant, Value addition and distribution.