SMALLHOLDERS:HOWTOINVOLVESMALLSCALE FARMERSINCOMMERCIALHORTICULTURE

A paper prepared for the 6th video seminar in the series High Value Agriculture in Southern and Eastern Africa

Peter Jaeger Accord Associates LLP www.accordassoc.biz

October 2010

PREAMBLE
Thefollowingpaperispresentedasanintroductiontothesixthofthevideoseminarsintheseries High Value Agriculture in Southern and Eastern Africa organized by the World Bank, GlobalHort, theEUandACP.Althoughtheseriestitlereferstohighvalueagriculture,thefocusisdirectedatthe horticultureandspecificallythefreshproducevaluechain.Thispaperreviewstheissuesaroundthe integrationofsmallscalefarmersintothechainofproduction,tradeandconsumptionoffruitand vegetablesthatarecommercializedandtradedintheirfresh,moreorlessentirestate. While cut flowers and foliage also fall within the scope of commercial horticulture and fresh produce,theirtradewithintheregionisminimal.Intermsofinternationalexports,cutflowersare important for some countries, particularly for Kenya and Ethiopia, and the value if not volume is comparabletotheexportstoEuropeoffreshvegetablesfromthewholeofAfrica.Nevertheless,the sophistication of the supply chain to the European consumer limits the opportunity for the independentsmallscalefarmer1. Thescopeofthediscussionexcludesthoseproductsofhorticulturethataredriedsuchasthepulses whichtendtobelowervaluestaplesthoughofgreatimportancenutritionally. We intend that this paper gives a structure to the issues around the integration of smallscale farmersontothefreshproducevaluechain,whethertheyarerealconstraintsorpossiblesolutions, inordertofacilitatediscussionratherthantopresentaconclusiveview.

1.

INTRODUCTION

SmallscalefarmersarethebackboneofagriculturalproductioninAfrica.Toputsomenumbersto this,fromNagayets(2005)andFAOdatawecanderiveanestimateoftheorderof36millionsmall scale farmers in Africa with access to 2 hectares or less out of a total population approaching 1 billion.Spencer(2002)estimatedthat90%ofallagriculturalproductioninAfricaisderivedfromthe outputofsmallscalefarmers.Thesituationisprobablynotsodifferentin2010,andthesmallscale farmersofAfricacontinuetorepresentahugeresourceoflaborandland. ThetitleoftodaysseminarHowtoinvolvesmallscalefarmersincommercialhorticulturecarries three embedded assumptions. Firstly, there is an implication that it is a desirable objective for smallscalefarmerstobeinvolvedincommercialhorticulture,thattherearebenefitsandrewards availabletothesmallscalefarmersfromcommercialhorticulture.Secondly,thetitlesuggeststhat commercial horticulture can benefit from smallscale suppliers, for why else would we want to involvethemunlesstherearesoundcommercialreasons?Thirdly,wecaninfertheassumptionthat theparticipationofthesmallholderscallsforexternalsupport.

AttheturnofthetwentyfirstcenturytherewereonlytwoflowergrowersinEthiopia.Withaninvestment promotionandincentivepolicyfromtheGovernmentofEthiopiaandsupportfromtheDutchgovernment therearenowover100farmsclusteredaroundAddisAbabacomprisingamixtureofforeignandlocal investment.Mostofthefarmsgrowrosesingreenhousesbutthereisalsosomeproductionofcuttings, carnations,liliesandsummerflowers.OneexampleofoutgrowersisseenintheDutchownedSherEthiopia wholeasefullypreparedplots(withgreenhouses,irrigation,packsheds,coldroomsetc),whichallows investorstostartimmediatelyonalargescale.

If we are to look for answers to the question of how to integrate the smallscale farmers in the horticulturevaluechainthenweneedtounderstandwhythesmallscalefarmersshouldbeinvolved andwhyinterventionmightbeneededtogaintheirparticipation.

1.1

Howcancommercialhorticulturebenefitthesmallscalefarmers?

SincesmallscalefarmersareamongthepoorestofthepoorinAfrica,anycommercialactivitythat supplements, but does not interfere with, the subsistence agriculture and food security has a far greaterimpactonlivelihoodsthanadditionalincomeinanother,moreprosperous,environmentor sector. The direct revenue from commercial farming into smallscale farmers households is a straightforward means of tackling poverty with all the onward implications for rural health and education. But, there are further indirect benefits of stimulating commercial agriculture among smallscale farmers. Income gained from commercial activity tends to be spent locally as the opportunities for spending in more remote markets are limited. This in turn boosts the rural nonfarm economyaswellasprovidingmarketopportunitiesforotherfarmproducts. The introduction of commercial agricultural activity to smallscale farmers to take them beyondasubsistenceexistencecomeswithalaborrequirementthatisusuallyfilledbythe household. The labor supply to the local nonfarm economy is thereby reduced and this shouldhaveapositiveeffectonruralwages. A new market opportunity is introduced, bringing with it the benefit of a more diversified locallyeconomy A new technology, such as irrigation, may be introduced that can be applied to existing cropping Theconsumptionoffruitandvegetablesaddsimportantnutritionalvaluetoadietbasedon staple grains by supplementing calories with mineral salts and vitamins, and possibly protein,essentialforhealth.Theadoptionofcommercialhorticulturecanbringnutritional valuetothelocaldiet, While we can see then that involving smallscale farmers in commercial horticulture can be highly desirableforgooddevelopmentreasons,weneedtoaskwhetheritisfeasiblefromacommercial pointofview,andtoestablishwhethersmallscalefarmerscancompeteinthefreshproducevalue chain.Theanswerherethencanhelpustodefinetheroleofgovernmentpolicy:istheroleofthe government to facilitate the entrance of smallscale farmers into commercial horticulture or to supporttheparticipationofsmallscalefarmersoverthelongterm,orsomewhereinbetween?

1.2

Cansmallscalefarmerscompeteinthefreshproducevaluechain?

Asagriculturehascomebackintofocusoverthelastfewyearsasakeysectorforgovernmentand donor partner policy support for poverty alleviation (World Bank 2008), so the argument among observers in support of large versus smallscale farmers has become polarized. On the one hand, there are those who would argue that the World has changed and that agriculture must industrialize:

Usingsmallholderagricultureasadevelopmentpolicyislikepromisinganautomobiletoeveryone in the world, but limiting construction to hand labor. Romanticists may prefer starvation, but the principles of industrialization and mass production for increasing productivity apply as equally to agricultureastheydotononagriculturalgoods.Blumenthal(2009) WhileintheothercamparethosewhorecognizethatthemanymillionsmallscalefarmersinAfrica cannotcompeteinglobalizedmarketwithfreetradeandnosupport. However, between these two views is a practical realization that the situation is rather more complex(Wigginsetal2010).InmuchofAfricanagriculturethereisoftennotasimplerelationship betweenscaleandefficiency:theremaybenoobviouseconomiesofscale,andsmallscalefarmers may have distinct advantages over the larger organizations. In particular, where there is a high requirementforlaborsmallscalefarmersmaywellbeatanadvantage.Householdlabor,managing smallplotsis Selfsupervising Motivated Flexibleinseasonalworking Capableofhighyieldsthroughintensivehusbandry Conversely,smallscalefarmersareatadisadvantagecomparedtolargercompaniesin Procuringinputs,intermsofavailabilityinremotesettingsandabilitytonegotiatevolume discounts Farminfrastructure Obtainingcredit,withoutcollateral,andpoorlycapitalized,andexportfinance Collectingandinterpretingmarketinformation Marketingandmarketlinkages Managingstandards Management:supplytiming,postharvesthandling,logistics,reliability,performance The critical point is that the relative competitive strength of large versus smallscale farmers depends on the importance to the crop of labor versus inputs, and of the characteristics of the market,notablyintermsoftheconcentrationofbuying.So,therearecrop/marketcombinations thatsuitthesmallscalefarmersandcombinationsthatsuitthelargerenterprises.LevyandPoulton (2007)distilthisintoamatrixshowninTable1below. Table 1 suggests that largescale farming operations are likely to be more competitive in long distancehorticulturalexports,buttheviewisinconclusiveforthecompetitivenessofsmallinvestor farmers and the commercial smallholders who can however compete well in local and regional markets.

Note here that the relative inability of smallscale farmers to compete in the extraAfrican fresh produce markets is relatively recent and has been brought on by retail market and supplychain developmentsinEurope:tenyearsagothesmallinvestorfarmerwaswellabletocompete. According to Leavy and Poulton (2007) the smallscale farmers and the investor farmers can be competitiveinthenationalandregionalmarketsandthisisindeedtheexperienceinmanypartsof Africa. These markets offer substantial potential, as discussed by Tschirley (2010) in Video ConferenceNo.4ofthepresentseries,andweparticularlynotetheincreasingneedsofsupplyby theprocessingsector. Table1
Poulton2007) SmallholderFarmers Noncommercial Local, National FoodStaples and Regional Markets HighValueCrops Yes Commercial Yes Yes Small Investor Farmers Yes

Predictingcompetitivenessoffarmtypesindifferentcropsandmarkets(afterLevy&

LargescaleFarming

Doubtful Doubtful

Low Value Export Commodities (cassava,soya,grain) Remote Export Traditional Export Markets Commodities Horticultural Products

Doubtful

Coffee, cotton, cocoa, Yes tea,groundnuts Doubtful Doubtful

Sugar,tea,tobacco

Yes

Wecoulddividethe tablefurtherbyhorticulturalcropandmarkettype,forexamplefreshchillies into EU wholesale markets against fresh chillies to EU supermarkets, and demonstrate the point madeabovethattheconcentrationofbuyinginthemarketalsomakesadifference. Theanalysisherepointsustofourdifferentareasinwhichtoseeksolutionstothequestionhowto involvesmallscalefarmersincommercialhorticulture: 1. Markets. In which markets can smallscale farmers best participate in commercial horticulture?Marketsaredynamic,somightsmallscalefarmersbecomelesscompetitivein somemarketsandmoreinothers? 2. Size. Can the benefits of scale seen in some crop/market combinations be achieved by associatingfarmersintogroups? 3. Contractualarrangements.Canwelinkfarmersdirectlyintothevaluechain? 4. Government. What is the role of government in supporting the integration of smallscale farmersintocommercialhorticulture? Each of these areas will be examined in turn in this paper. We will also consider in Section 5 the potentialforprivatesectorsupport.Wewillconcludewithsomepointsfordiscussion. 4

2.

EXPORTHORTICULTUREOR.LOCAL/REGIONALTRADE?

ThevideoseminarfacilitatedbyTschirley(2010)earlierinthisseriesdiscussedtheopportunitiesfor and constraints on the fresh produce trade of East and Southern Africa. As he describes, the literatureonhorticultureinAfricafrom1990uptoafewyearsagowaslargelydominatedbythe opportunitiespresentedinthelongdistanceexportmarkets,mostlyinEuropebutalsointheMiddle East and North America. It is only relatively recently that the scale of the opportunity for fresh produceinlocalandregionalmarkets,andmoreimportantlytherateofgrowthofthedemand,has beguntobeappreciated. While the paper by Tschirley, therefore, focused on the opportunities and constraints in the local and regional markets, the longdistance export markets are however still active and represent an opportunityforAfricangrowers.Despitethemanyprojectstointegratethesmallscalefarmersinto the Europedirected fresh produce chain that have failed to survive, smallscale farmers are today supplyingavarietyofproduceintoEurope. Here we will compare the opportunities between longdistance export markets and the local/regional demand. Since local markets and regional trade in fresh produce are closely integratedwemakenodistinctionbetweentheopportunitieswithinacountryandthatavailablein theneighbours.

2.1

ExportHorticulture

TheprincipalmarketforAfricanfreshproduceistheEuropeanUnion.Figure1showsthegrowthin Europeanimportsoffreshfruitand 3,000,000 vegetablesfromAfricasince2001. Onlyafewproductsdominatetheimports: amongthefruits,tradeincitrus,bananas, pineapples and grapes far outweighs the otherproductswhileinthevegetablesthe trade is concentrated in the legumes, tomatoes and potatoes. Among these leaders there are some that integrate smallscalefarmersintothechain,suchas peas and beans in the legume trade, through contracting to larger farmers in Kenya.

2,000,000 tonnes Fresh Fruit Fresh Vegetables 1,000,000

0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure1ImportsoffreshfruitandvegetablestoEuropefromAfrica(Data:COMEXT) Further down the scale, with much lower quantities there are other products, such as the Asian vegetablesandchilliesaswellasyams,thatinvolvemanysmallscalefarmerstradingmoreorless independently. It is important to note that even though the quantity and tonnage of product imported into the Europe from such farming enterprises might be small compared with the total marketopportunity,theseexportsareimportanttothefarmersandtheworkforcethataregrowing thecropandexportingtheproduct. Recentreviewsbytheauthoroftheopportunitiesfortropicalfruitandvegetablesinotherdistant marketssuchasthe Maghreb,the MiddleEastand Eastern MediterraneanandSouthEast Europe suggest that the opportunities here are still quite small and heavily influenced by the large fruit 5

tradingcompanieslookingforalternativemarketsfortheirsurplus.MeanwhiletheNorthAmerican market remains quite distant and more easily accessed by South American produce while being secludedbyphytosanitaryregulations. TheEuropeanmarketforimportedfreshproduceislarge,varied,segmentedandofferssignificant opportunities to those who can supply. African growers, depending on their location, have comparativeadvantages(ofwater,climate,logistics)thatgiveaccesstothoseopportunities,butthe changes in the structure of European retailing over the last 25 years has squeezed out the independent smallscale farmers from the value chain. We find now that buying is now so concentratedinthemajormultipleretailers,thesupermarkets,thatonlythelargerwellresourced farmerscancompete. Thosesmallscalefarmerswhoareinthemarkettendtobesupplyingeitherthroughexistinglarger farming operations or into the lowervalue commodity markets that trade through the European wholesale markets. For example, the chilli sales from the larger growers in Kenya achieve substantiallyhigherpricesintheUKbysellingintothesupermarkets,whilethesmallscalefarmers ofGhanaselllowvaluebulkpackedchilliesintothewholesaleandethnicmarket.Similarlywesee, amajorexpansioninconsumptionofsweetpotatoesinEurope,largelydrivenbysupermarketsales, particularly in the UK, and although this is a common crop in West Africa, the European imports derivefromthelargegrowersintheUSAandIsrael.TubercropsaredoingwellfromWestAfrica, butitistheyamtrade,tothelowpricedethnicmarketthatisexpanding. Supermarkets dominate the retail landscape across Europe even in the south where the developmenthaslaggedbehindthenorthernEuropeanmarkets.Inconsequence,thefreshproduce opportunitiesinEuropebeyondtheconcentratedbuyingofthesupermarketsarelimited.Therewill always be a trade outside of the multiples, but it must be recognised that it is at the least not growingandalwaysthreatenedbythesurplusproductsfromthesupermarketsupplychain. WhereoncetherewasamultiplicityofbuyersintheEuropeanmarkets,smallscalefarmersinAfrica couldsupplyintoavaluechainthatpassedthroughthewholesalemarkets.Overthelast30years thatmodelhaschangeddramatically.Thesupplytothesupermarketsisnowhandledbyarelatively smallnumberofcategorymanagerswholookforarangeofcriteriasuchasreliability,collaboration, standards,traceability,aswellaspriceamongothersthatrequirelevelsofmanagementskill,logistic capabilityandfinancialvigourwhicharenotsuitedtotheindependentsmallscalefarmerorindeed thetraderwhocanconsolidatealoadandsendittoEurope. Butanewmodelhasemerged,principallyinKenya,wherethenumberoffarmersdroppedasthe industryconcentratedintofewer,largerplayersbuttheyinturnnowareincreasinglyengagingsmall scalefarmers to supplement their production for the agronomic advantages noted above in the introductionhere.WewilldiscussthiscontractfarminginSection4. Africansmallscalefarmersgenerallynowparticipateinthefreshproducevaluechainthatleadsto theEuropeanconsumerinoneoftwoways: Ascontractedsupplierstolargerfarmsorexportenterprisesabletoaccessthefullspectrum ofEUretailing As independent farming operations supplying a product, perhaps consolidated by local traders,intoEuropethatispositionedinthemarketsimplyonthebasisoflowprice 6

2.2

HorticultureforLocalandRegionalMarkets

Tschirleycoveredthisaspectinthe4thvideoconferenceofthisseries.Hiskeyfindingswere: Existingdataonthelocalandregionaltradeinfreshproducearelimited,butthatthetrade canbesubstantialincropssuchasonions,cabbage,orangesandIrishpotato,whichareless perishableandtransportfairlyeasily Rapidurbanizationandpercapitaincomegrowtharedrivingastrongdemandformarketed freshproduceintheregion,withgrowthindemandforfruitoutstrippingthatforvegetables Theregionalsystemmustbeassessedinconjunctionwithlocalsystems,sincethetwoareso integrated The local/regional system is much larger than the modern export system (to Europe and otherlongdistancedestinations)andwillcontributefarmoretoabsolutegrowthindemand overthenext20years Farm level marketing is highly concentrated, with 35% of farmers in most countries providingatleast80%ofthemarketedsurplus Currentsupermarketsharesofthefreshproducemarketarelowandgrowingmoreslowly than once anticipated. Open air markets, kiosks and other informal outlets will dominate thelocal/regionalsystemformanyyears Wholesaling is the necessary focus of improvements in this system. Approaches to improvements must lodge hard infrastructural investments within substantially revised legislative,regulatoryandattitudinal

2.3

Conclusions

The market for fresh produce represents a substantial opportunity for particular crops. It seemshoweverthatparticipationbyindependentsmallscalefarmersinAfricaislimitedto thelowerpricedcommodityendofthemarket. ThesmallscalefarmerswhoareintegratedintotheEuropeansupermarketsupplychainsdo soascontractorstolargerfarmersintheirarea. The market opportunity to supply locally or regionally in Africa is far greater than the opportunityforlongdistanceexports. Thesupplyoffreshproduceintothesemarketsismostlymadethroughtraditionalchannels suppliedbysmallandmediumscalefarmersandbrokeredthroughwholesalemarketstoa variety of small retailers. Tschirley identified two broad areas of opportunity for improvementininformationflowandinhardinfrastructure. SupermarketsarenotimpactingonthefreshproducetradeinAfricaassignificantlyashad been predicted despite the rapid urbanization of the population and the development of retailinginothergrocerysectors. As noted earlier, much of the support given to horticulture in Africa over recent years has been directedatexploitingtheopportunitiespresentedbytheEuropeanmarket.TheKenyanexampleof 7

substantial earnings from supplying into Europe provided both a model and an incentive that was misleading without a full understanding of the issues. The success of the Kenyan horticultural exports was multifaceted with many factors that were not replicated elsewhere. Some might be straightforward and obvious: the altitudinal range in Kenya allows the cultivation of temperate vegetablesthroughouttheyear,whichcannotbesuccessfullygrowninthetropicalclimateofWest Africawherethetropicalvegetablescanonlybesuppliedtoacomparativelyminordemand.Other factors,suchasthehumancapitalintheformofmanagementexpertise,werelessobvious,andit seems,oftenoverlooked. Manyofthefactorsthatseemedtoconstrainsmallscalefarmersfromparticipatinginthemarket appearedtobeaconsequenceofscale.Onewayforwardthathasbeenoftentried,andindeedstill ispromoted,wasthedevelopmentofproducerorganizationsthatmight,bytheaggregateactionsof theirmembers,actasifalargerscaleproducer.

3.

PRODUCERORGANIZATIONS

Producerorganizationcomeinavarietyofformsfromfarmercooperativestotradeassociationsto farmer owned trading companies. They are formed often with the promotion of an NGO or developmentprojectforavarietyofpurposes.AnNGOforexamplethatistaskedtodeliverfarmer trainingIsbetterabletomanagethetrainingsoveralargenumberofsmallscalefarmersbyforming farmergroupsthatcanbecoordinatedintofieldschools.Butgroupsalsoformwithouttheinputof NGOs:ZEGA2forexamplegrewoutofanallianceoffarmer/exporters. Asregardsdevelopingfreshproduceexportswehaveseenthatthereareanumberofproblemsof scale.Thesmallscalefarmersarelesswellabletocompetethanthelargerfarmers.Inparticular, theyareatadisadvantagein,forexample: Financeitisdifficultforasmallscalefarmertogetandmanagefinanceevenwherethere areruralcreditfacilitiesavailable Inputs inputs such as agricultural chemicals may not be available in the area because of insufficientaggregateddemandwhichtheproducerorganizationshouldbeabletosupply. Equally,thevolumediscountsarenotavailabletotheindividualsmallscalefarmer Marketstrengththesmallscalefarmerisunlikelytohaveanyinfluenceinthemarketnot onlybecauseofsizebutalsobecausetherearelikelytobeintermediaries Similarlytheindirectmarketingreducestheflowofmarketinformationbacktothefarmer Indirectmarketingislikelytoincurhighertransactioncosts Andfinally,theindividualfarmerhasnopoliticalvoice. Althoughthelogicoforganizingproducersissound,thepracticeislesssuccessful.Theymayormay notformvoluntarilyandsomeculturesseempredisposedtothisformofcollaborationwhileothers are not, just as the French farmers more willingly form cooperatives while the English do not. It does however usually take some incentive to cause them to form. Producer organizations do not
ZambiaExportGrowersAssociation

arisespontaneously.Ifthatincentiveisexternal,perhapsdrivenbyanNGO,thenthereisariskthat withoutsustainedsupporttheorganizationwillfail. The formation of smallscale farmers groups is not a goal in itself. The cohesion of a group depends on sufficient, recurring motivation to maintain that group. Ideally, the rewards of aggregationneedtobecommercial,butthatdoesnotguaranteesuccess. Studying the producer marketing organizations Berdegu (2001) and Berdegu et al (2005) found thatinChileandCentralAmericathegreatmajorityoftheseorganizationsfail.Theynotedthatit was relatively easy to form organizations and even for them to facilitate initial access to supermarkets.Buttheproblemlayinfindingtherightcombinationofmanagerialexpertise,physical investmentandorganisationalapproachestostayinthemarketandsurvive. AsimilarexamplecanbefoundinGhanawherethefarmerownedcompanyFARMAPINE,hadinitial success and quite quickly became the second largest exporter of pineapples. It was however a shortlivedgloryandwithinanotherfouryearstheorganisationwasdeclaredbankrupt.Whilethe obviousexplanationmighthavebeenamassivechangeinpineappledemandinEurope,infactthe issues within the management, with a bloated, overstaffed administration, with an inability to managefinancesproperly,togethercausedthedownfalloftheheavilysubsidizedorganization. TheFARMAPINEexampledemonstratesthetwomaindefectsthatareusuallyinherentinproducer organizations: Aninabilitytoinnovate,inthiscaseinresponsetochangingEuropeandemand Thedeficientcalibreofmanagement Wecanseethenthattheinabilityofsmallscalefarmerstointegrateintotheexternalfreshproduce valuechainisnotsimplyaquestionofsize.Itisundoubtedlymoredependentontheavailabilityof managementandhumancapital,whoamongtheirskillsethaveanabilitytoinnovate,thatleadsto successinexporthorticulture.Largerscalefarmsareabletosucceedinexporthorticulturebecause theycanmanagenotsimplythehusbandry,butalsothepostharvest,thefinance,thelogisticsand themarketing. Withinthelocal/regionalvaluechaintheproblemisnotsodifferent.Withoutsoundmanagementa marketingorganizationorproducergroupisdoomedtofailure.Themanagementneedstobeable tomaintainthecohesionofthegroupanddemonstratethebenefitofmembership.Itisunusualto find that capability among farmers, and hired management is expensive. Across Africa, there are producerassociationsthatpersistthroughcontinuedandexpensiveexternalsupport.

4.

CONTRACTFARMING

Whereexperienceseemstoshowthattherealityofproducerorganizationsoftendoesnotachieve the expectations of the theoretical model, then what other options are there for overcoming the scaleproblemsfacedbysmallscalefarmers? One alternative solution lies in establishing a contractual relationship. The logic behind contract farmingisthatthebuyercanguaranteethesupplyofrawmaterialwhereprice,quantity,delivery timeandqualityareallestablishedinadvance.Thefarmershouldbenefitataminimumfromthe assured market and but may also have access to inputs, technical support, postharvest 9

infrastructure. Both parties also benefit because contract farming gives the opportunity for transaction/marketcoststobetakenoutofthechainaswellasprovidingaconduitforinformation flow.

4.1Practice
Contractfarmingoperationscanhaveanumberofadvantages: Theshortersupplychainshouldreducetransactioncosts.Foraprocessorthiscanbecritical butthebenefitcanalsobepassedtothefarmerintermsofhigherfarmgateprices Theassuranceofafixedpriceallowsthefarmertodecideontheuseofchemicalinputs Areliablesupplyofproductiscriticalforforwardcontractsforlongdistanceexportsorto processorstomanagefactoriesefficiently; Productioncredit,perhapsasinputs,canbeprovided Extensionservicesandtechnicaladvicecanbeprovided Newcropsandvarietiescanbeintroducedwithaguaranteedmarket Forthelongdistanceexportsthemarketrequirementsfortraceability,andduediligenceare satisfied Where population pressure on the land is high the larger farm can expand its area under control without the difficulties of securing tenure of increasing the numbers of landless in thepopulation Acontractedsupplyreducestheriskinastartupofanewfactoryorprocessingline WeseenowKenyanflowerandvegetablegrowersextendingtheirrangeofoperationsbyengaging smallscalefarmerstosupplementtheproduction,forexampleFrigoken,orinMadagascarthefresh vegetable exporter and processor Lecofruit manage the production of a large number (10,000) of smallsuppliers.AsurveybyMintenetal(2009)foundthatthecontractingoffarmersinMadagascar improvedtechnologyadoption,ledtobetterresourcemanagementandshowedaspilloverintothe productivity of rice. As a group, the contracted farmers had higher welfare, more income stability andshorterleanperiodsthanthosenotinthecontractscheme. Another example is seen in China where Miyata et al (2008) showed that contract farmers earn significantlymorethanindependentfarmersandthatthemannerinwhichcontractingcontributes varies: in apples for example the contracting led to higher yields (presumably due to technical assistance)whilethegreenoniongrowersreceivedbetterprices(presumablyfrombetterquality). ButthenumberofsuccessfuloutgrowercontractoperationsinAfricaisrelativelysmall.SeeKirsten andSartorius(2002)forareviewoftheliteratureonthehistoryofcontractfarminginAfrica.There arecleartheoreticaladvantagestocontractfarming,yettheschemestoooftenfailinpractice.Why dotheyfail?

4.2

Failure

Causesoffailureinclude: 10

 Contract abuse. Sideselling is a common reason that longer term arrangements break down. The offer of a higher price from alternative buyers is a strong incentive to break a contract.Theissueofsidesellingismosteasilyavoidedincropsorregionswithonlyone buyer.Suchmonopsonyisfoundforexampleinthesugarandtobaccoindustriesbutnot seeninthefreshproducesectorwhereanumberofbuyersusuallyoperate.Buttheother side of contract abuse is the nonpayment, delayed payment or even reduced payment of thedelinquentcontractor(KirstenandSartorius2002) Cost of managing the scheme exceeds the benefits. This is particularly true of scattered holdingsofsmallplayerswheretheinfrastructureisinadequateandtransactioncostsspiral upwards.Therearealsosituationswheretheintegrationoftheoutgrowersintothenucleus farms own infrastructure is difficult. A banana farm for example, that uses overhead trackways to move bananas from field to packhouse without bruising is unable to benefit fromsmallscalefarmerssupplementingsuppliesfromdistantlocations. Lack of motivation in the participants. Both sides must achieve an adequate reward and anyintermediaries,agentsorstaffmustbefullyengagedintheoutcomeofthescheme.

4.3

Conditions3

Contractfarmingcanwork.Whatthenaretheconditionsnecessaryforsuccess? Farmerselectioniscritical.Clearly,thefarmmustenjoyappropriateclimateandsoil,butit mustalsobeofaneconomicscale:thebuyer,forexamplemayneedvolumeforprocessing ormayneedtraceabilityoffewsuppliers,ormaysimplyneedtominimizetransportcosts. Further, the relationship with the farmers is critical since the pact will succeed or fail on trust. Bellamare (2010) also points out that the in a study of a single contractor, the processor Lecofruit in Madagascar, the impact of agricultural extension service was more effectiveforgrowerswhohadcompletedfeweryearsofeducation. The production of the commercial crop must not interfere with issues of food security, whichmightbeavoidedby,forexample,intercroppingastaplewithacommercialcroporby bringingfurtherlandintoproductionorproducingcropsoutofthefoodcropseason Clusteringthefarmswillminimizethemanagementcostsandalsoencourageinformation andtechnologyexchangewithinthecluster Farmergroupsprovideaforumforanexchangeofinformationandopinionthatinturnhelp tocementtherelationship The costs of establishing and managing the contractual arrangement must be fully recoveredbythereducedproductionortransactioncosts The contract must be respected, and there must be an adequate capability for dispute resolution Allpartiestothecontractmustbeadequatelyrewarded,whichinturndemandsalevelof transparency Both parties must be committed to a continual improvement and farmer training is key. Thisinturnrequiresamotivatedteamworkingforthecontractor
3

SeealsoDorwardetal(1998)

11

4.4

Conclusions

Weconcludefromtheextentoftheseconditionsforsuccessthataninformalapproachtocontract farming is unlikely to remain viable over the longer term. An outgrower scheme demands a significant investment in time, training, management and possibly credit from the buyers side to makeitwork.Thisthenpresumesamotivated,technicallycompetent,wellcapitalisedbusinessin placeinordertoprovidethesmallscalefarmerwithalinkagetothemarket. Evenso,sidesellingcanwrecktheschemeasindeedcandefaultbythebuyer. The solution to contract abuse lies in the development of a relational contract between an established business and a select group of smallscale farmers that is not focussed on a single exchangebutonacontinuedcodependenceovertime. Themaintenanceof arelationalcontractdoesnotdependonthelegalsystemorthelawcourts ability to enforce a contractual agreement, but relies on the willingness and capability of the two sidestofindequitablesolutionsandtomoveforward.Thismeansthatbothsidesneedtohavea continuedinterestinthesuccessofthejointventure.Itisinthatrespectthebeginning ofatrue valuechainwhereeachlinkisnotonlydependentontheperformanceofthelinkoneithersidebut alsorecognizesthedependence. It is not surprising then that contract farming so often fails. The maintenance of the contract requires a level of understanding between the intermediary and the smallscale farmer that is unusualinacommercialsettingwhereshorttermprofitistoooftenthedriver.Forcontractfarming tosucceedaleveloftrustneedstobebuiltthatgoesbeyondthesimplepriceagreement.Where thereisadependenceonsubsidiesfromGovernmentordonorpartnertherelationshipisunlikelyto succeed. Finally,itisalsoapparentthatcontractfarmingfavoursthemediumtolargerscalefarmers.Thisis not only a question of reducing transaction costs, but for the intermediary (the nucleus farm, exporter or processor) it is easier to achieve a consistency of quality and supply and to develop a closerelationalagreement.Thereisthenariskthatthesmallscalefarmersoriginallytargetedfor integration are in the end excluded by the scheme intended to support their participation. While producerorganizationshavebeensuggestedasameanofavoidingthis,theexperienceofthelong term sustainability of such groups is, as we have seen above, poor. Perhaps the activity of the intermediary buyer might improve the cohesion of the organisation, but the reality is that the grouping adds other problems to the relationship removing the individual trust that is needed to securetherelationship.

5.

POTENTIALFORCONTRIBUTIONFROMTHEPRIVATESECTOR

The private sector players in the horticulture value chain all have an interest in the continued success and growth of the industry. To this end, there are strong reasons to establish national collaborative support structures in order to promote the industry, tackle constraints, develop nationalstandardsandpossiblybrands,influencetheenablingenvironmentdefinedbygovernment policy,providemarketintelligenceandnewsandsoon.Weseeexamplesinthetradeassociations in East Africa such as the Fresh Produce Exporters association of Kenya (FPEAK), Tanzania Horticultural Association (TAHA), Zambia Export Growers Association (ZEGA), and Ethiopia HorticultureProducerExportersAssociation(EHPEA). 12

Therearemanypotentialrolesforatradeassociationandthescopewilldependtoanextentonthe interestsofthemembers.Table2liststhepotentialroles. Table2

Potentialrolesofahorticulturaltradeassociation
Definition Implementation Revision Allows sector (fruit/vegetable/flowers) identities tobemaintained,whilecoordinatingactivities Coordinatesdonorpartnersupporttothesector Managefundingtothesector Provideaunifiedsectorresponsetoissuesofthe day Providenetworkingandlinkageopportunities Innovationinproductionandprocessing Manage/coordinateresearch Knowledgemanagement Technology transfer for production processing

IndustryStrategy

2.

Coordination

3.

Technical

and

4.

Economic

InvestmentPromotion o specialisedsupporttotheGIPC o outreach Marketdevelopment o Market intelligence not only external but also domestic and regional,freshandprocessed o Industrypromotion o Quality/safety o Standards o Reputation Nationaldevelopmentissues Regionalissues Nutritionalissues Labourissues Pesticides Waterextraction Waterpollution Carbonfootprints/airfreight Biodiversity LinkagetointernationalorganisationsegWTO, EC o Tradebarriers Contractfarming Mediation service for land, contract farming, tradedisputes Advocacy/lobby Linkingpublicandprivate Businessenablingenvironment

5.

Social

6.

Environmental

7.

Legal

8. Political

13

Whiletheorganizationsmayinitiallybeestablishedbylargergrower/exporterstheyareincreasingly including support to smallscale farmers in their strategy and planning. The support can take a numberofforms: TrainingforexampleinGoodAgriculturalPracticesandstandardscompliance.ZEGAitself invested in a small training farm that could also be run as a commercial unit, while the EHPEA established a diversification programme to increase the incomes of vegetable producers,particularlysmallholdersandoutgrowers. Advocacy is important to the smallscale farmers who individually have no political voice. Theprivatesectorneedstoleadgovernmentpolicy.SeeSection6 Linkage the associations should be able to provide opportunities for networking and developinglinkswithinthevaluechain,verticallyandhorizontally,domesticallyandonthe exportmarket,aswellasworkinginpartnershipwithdonorsandNGOs.Individuallythese mightbedifficulttoachieveforthesmallscalegrower. Market intelligence the smallscale grower has no capacity to research either the background market knowledge or the current uptodate market information that a trade associationcanpotentiallycompile. Asatradeorganizationthefundingforthesetypesofactivitiescanbesoughtfromdonorpartners suchasUSAIDandtheECandthepracticalactivitiescandrawonthesupportofmembercompanies.

6.

THEROLEOFGOVERNMENTPOLICY

Intheintroductiontothispaper,wearguedthatthedevelopmentofcommercialhorticulturewas desirable as a straightforward means of tackling rural poverty with onward implications for rural health,welfareandeducation.Itisclearthenthatgovernmentpolicyshouldvaluethecontribution that commercial horticulture can make to a poverty alleviation strategy while also recognizing the wider economic benefit of employment, a diversified economic base and possibly also export earnings. Acommercialhorticulturesectorneedsgovernmentpoliciesthatprovideanenvironmentinwhich the sector can thrive. It does not need direct intervention from the government in its activities; rather government should recognize the need for a vigorous private sector as the engine of commercialgrowth. We see five areas in which government policy can provide an active support to commercial horticulture. Infrastructurefirstlyausabletransportinfrastructureiscriticaltothesuccessofanycommercial horticulture.Notonlydopoorroadsincreasethetransactioncosts(time,delays,andwearandtear onthetrucks)buttheproduceishighlyperishableandofteneasilydamagedonpoorroads.Further, ifthetransportcostsofevacuating producearesowillbetheimportcosts ofbringingfoodstuffs intothelocality.Thisincreasesthefarmerdependenceontheirsubsistencecropsandreducesthe timeavailabletogrowincomegeneratingcrops. Secondly, improvements to the infrastructure of water, health services and education all lend supporttodevelopmentsoftheruraleconomy. 14

 InvestmentGovernmentmustrecognizetheimportanceofinvestmentbothfromlocal/domestic sourcesandalsoforeigninvestors.Itisthelargerfarmsthatwilldrivethesectorforwardthatwill provide employment that will generate the critical mass to attract buyers and transporters. If contract farming is the best option for integrating small farmers into the horticulture value chain then it is selfevident that there must be an intermediary of sufficient scale to manage the outgrowers. Inparticularitisimportanttorecognizethepotentialcontributionfromforeigninvestorswhobring in not just funds but also technical know how as well as management expertise and very likely marketlinkagestoo.Theircontributiontoafledglinghorticulturesectorcanbeenormous,andthe investmentshouldbeencouraged.Notealsoherethatthescaleofhorticulturalinvestmentsisofa differentordertothemassivelandacquisitionsthatareattractingsomuchadversecommentsnow. Supporttoinvestorsmightinclude: Asimplifiedinvestmentcode Support to land acquisition: the identification of available land, the titling of the property, andtheacquisitionbyleasecanalltakeundulylongandwilldiscourageinvestors. Appropriate fiscal incentives: tax incentives are not always useful when broadly applied throughholidaysforinvestors,buttaxbreakstosupportspecificactivitiescanhaveamore preciseeffect. Supporttoinwardinvestors,aonestopshopforinformation,guidesandofficialpaperwork Institutionalinstitutionalinnovationsarethehardestaspectsofdirectinggovernmentpolicy.For the business community it is important to reduce the bureaucratic overhead (Customs, VAT, licensing costs etc) that adds to the cost of doing business. We have seen how important the regional trade has become and government needs to provide support not only with the infrastructurebutalsobyeasingborderprocedures. Innovationakeycomponentofcompetitivenessistheabilitytoinnovate.Withoutaninnovative capacityanyindustrywillfallbehinditscompetitors.Innovationcanbeencouragedinanumberof ways: A matching grant scheme in Zambia helps companies by sharing the cost of new developments Innovativecompaniesmightbegiventaxreliefontheirresearchanddevelopmentspending The government might bring in specific technical assistance where there are particular problems. The capacity to innovate needs to be supported by an active agricultural research programmedeliveringthroughawidespreadextensionservice.

15

Human capital Where we have discussed the development of commercial horticulture in African countrieswefindthatanimportantconstraintisoftenthequalityoftheworkforce.Dependingon thecountry,theshortfallisseenatalllevels.Thetrainingofunskilledlabourputsamajorcostonto thedevelopmentofanewproject.Theshortageofsupervisorsandmiddlemanagerscanbecritical tothesurvivalofthelargercompaniesbutitisraretofindgraduateswillingtoconsideracareerin horticulture. Training schemes to encourage the development of middlemanagement would no doubt also generate new farmers from those wanting to try on their own. And finally senior management:exporthorticultureinparticulardemandsasuiteofmanagerialstrengthsthatarenot readilyavailableandforeigninvestmentismostimportanttobringinthiscapability.

7.
1.

DISCUSSION
The reasons why we should seek opportunities to involve smallscale farmers in commercialagriculturewerecoveredin1.1ofthispaper.Thepotentialbenefitliesnot simply with improving the prosperity of individual agriculturalists but in the positive impactonruralincomeasawhole Whetherornotcommercialhorticultureisanappropriateandfeasiblesectorforsmall scalefarmersisnotsoclear.Commercialhorticultureisoneofthefewopportunities forruralincome,buttheparticipationofsmallscalefarmersinthevaluechainhasbeen difficult. Certainlytherearecommercialopportunitiestobeexploited.Aswehaveseenmuch of the focus of agricultural development assistance over the past 15 years has been aimedatthelongdistanceexports,butmorerecentlylocalandregionalmarketshave beenshowntobeofgreaterpromiseandpotentiallymoreaccessible. Marketsandtheirdemandshavechanged:inEuropethechangehasbeenradicaland the multiple retailers, with their concentrated procurement through a select list of category managers, are now dominant throughout the grocery sector. In Africa, supermarkets,urbanizationandtheformalcateringsectoraregaininggroundinmany countries. While this change is impacting on the grocery sector, it seems that fresh producemarketinginAfricaislesssusceptibletochangeandthetraditionalchannelsof wholesalemarketsandopenairretailersandkiosksstillhandlemostoftheproduct. The opportunities for smallscale farmers to supply independently into Europe, either through market growth or supplier substitution, have shrivelled or are now quite restricted. This is only partly a question of standards blocking the way since market penetration through the category managers, who have requirements of continuity of supply,performanceandreliability,isbeyondthereachofmostsmallscalefarmers. AccessingtheEuropeanmarketisnotaquestionoflearningthetechnologyandfinding scaleperhapsthroughconsolidation.Thedemandsarefarmoresophisticated.Assuch themodelofoutgrowerssupplyingtoanucleusfarmoramanagingexporterhassome attractions.Buttherealityisthattheseschemesareexceptionallydifficulttorun.The best examples are seen with the most sophisticated grower exporters in Africa, for exampleinKenya.Otherschemessurvivebyvirtueofheavysubsidiesandpoliticalwill.

2.

3.

4.

5.

6.

16

7.

Accessingthelocalandregionalmarketsissimpler,butstillfraughtwithdifficultiesof transactioncosts(inviewofthestateoftheinfrastructure),marketrisk(glutsinsupply are hard to manage), and counterparty risk (default and non payment) on top of the productionrisks(weather,disease).Assuchitisdoubtfulwhetheragainthesmallestof thesmallscalefarmersshouldparticipate.Contractfarmingmayprovidethesolution buttheburdenofsupportingthecontractingfarmerswithcredit,inputsandtechnical adviceisincreasinglyonerouswithsmallerfarms. Withcontractgrowingitseemsthatlargerfamersarefavouredandthatthemajorityof smallscalefarmersareunlikelytohaveaccess. A shift in thinking is perhaps needed now. Firstly, rather than looking for income generatingprojectsforthepopulationofsmallscalefarmersperhapsweshouldlookat themarketopportunity,andaskhowtoexploititgiventheruralresourcesavailable. Weperhapsthenneedtoacceptthattheverysmallestfarmersthebottomquartile whoarevirtuallylandlessandhaveaccesstolessthan0.1haperhead(Hazelletal2010) are not at present in a position to participate commercially in a value chain as self employed growers. Their needs are far more immediate and these are issues of development,offoodsecurityandpovertyalleviation,ratherthancommerce,butthe improvement of rural income, not individual incomes but the overall income in the locality, should impact on their livelihoods. As discussed in the introduction here, successful commercial horticulture can have a significant nonfarm impact in the local economy. The activities of projects and schemes and government interventions that seek to include the very smallestscale farmers are costly and constraining the very schemes that can bring prosperity to a region. We shy away from supporting a few farmers in favour of distributing the trainings or mentoring or credit among all. This spreadstheinterventiontoothinlyandprovidesinappropriatesupporttomany. Secondly,theimportanceofinvestmenthasbeenundervalued.Smallscalefarmers are in no position, either in terms of capability or in terms of resources, to drive the sectorforward.Atbestwemightexpectanincrementalgrowthpatternasproductivity goes up, areas extend and markets grow. The stepwise growth, which is so urgently needed, requires investment. Investment too is a precondition of any outgrower scheme, whether based around a processing factory or a nucleus farm. Without the factory and without the largescale farm there can be no outgrower scheme. Foreign directinvestment(FDI)isimportantherenotonlyfortheimportofcapitalbutalsofor thetechnicalknowhowandaboveallforthemanagement.Commercialhorticulture requiresalevelofmanagementexpertisethatisnotseenelsewhereinagriculture:the postharvesthandlingandmarketingofperishableproduceisaraceagainsttime,with no room for compromise in quality or cost. It is unfortunate that FDI in African agriculturehashadsomuchcriticismrecentlyanditisimportanttoredressthebalance, bringintheforeigninvestmentorencouragethelocalinvestmentandinvolvetherural population. Thirdly,thehumancapitalmustbedeveloped.Wecannotrelyonimportedexpertise and it is critical that the abilities of the local population are developed at all levels. Intellectualcapital,intermsoftheabilitytoinnovate,isentwinedwiththis. 17

8.

9.

10.

11.

12.

Therearenoquicksolutionstotheintegrationofsmallscalefarmersintocommercial horticulture,butcommercialhorticulturecangenerateincomeforruralcommunities.

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