Module 2: How to set up a contract farming scheme
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The "Contract Farming Resource Centre" has been established to offer a "one-stop" site, where information on contract farming is freely made available. Interest in contract farming as a mechanism to coordinate linkages between farmers and agribusiness firms has grown recently, in view of the international trends towards tighter alignment in agrifood supply chains. FAO has been responding to the growing demand for information and technical support on planning and implementing contract farming operations. http://www.fao.org/contract-farming
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Module 2: How to set up a contract farming scheme
- 1. http://www.fao.org/contract-farming Course on OPERATIONAL AND LEGAL ASPECTS OF CONTRACT FARMING SCHEMES MODULE 2: HOW TO SET UP A CONTRACT FARMING SCHEME
- 2. http://www.fao.org/contract-farming Contents You will better understand: • When is CF needed? • Initial scoping • Getting stakeholder buy-in • Selecting farmers • Preparing farmers • Designing and negotiating contracts • Preventing conflict • Monitoring and evaluation • Conclusions
- 3. http://www.fao.org/contract-farming 1. When is contract farming needed?
- 4. http://www.fao.org/contract-farming A road map When is CF needed? Initial Scoping Getting Stakeholder Buy-in Selecting Farmers Preparing Farmers Designing and negotiating contracts Preventing conflict Monitoring and evaluation
- 5. http://www.fao.org/contract-farming When is CF needed? • Market considerations ▫ Identified / Established Market is needed Export; Domestic; Fresh product; Processed product; quality & quantity parameters ▫ Cases Sugar beets in Afghanistan Potatoes for Frit-o-Lay in India Eucalyptus trees in Thailand
- 6. http://www.fao.org/contract-farming Market considerations • Can the market be supplied through other forms of coordination? ▫ CF x open markets x full vertical integration Open Markets Contract Farming Full Vertical Integration Contract Farming
- 7. http://www.fao.org/contract-farming A basic check list The physical environment • Climatic factors • Soil fertility • Water availability/irrigation • Etc. The social environment • Current agricultural heritage • Farmer adaptability • Labor availability • Crop and livestock security Land Issues • Availability • Tenure laws • Farm size Government support • Quarantine services • Extension services • Sanitary and Phytosanitary Services • Appropriate legislation Public utilities • Energy • Communication • Water • Waste disposal • Etc. Financial issues • Credit institutions • Crop and Livestock Insurance • Others Inputs and supplies • Fertilizers • Chemicals • Feeds • Veterinary medicines • Farm machinery • Building supplies Operational issues • Contracts • Farmer selection • Etc.
- 8. http://www.fao.org/contract-farming Assess costs and investments of the CFO • Cost and investment items ▫ Staff costs (coordination, field agents, etc.) ▫ Fees of commissions to lead farmers ▫ Training of staff and farmers ▫ Demonstration units ▫ Interest payments on financing ▫ Inputs to be supplied to farmers ▫ Payments to farmers ▫ Processing ▫ Logistics ▫ Losses, defaults, etc. • Cash Flow Analysis
- 9. http://www.fao.org/contract-farming 2. Initial scoping and getting stakeholder buy-in
- 10. http://www.fao.org/contract-farming Initial scoping • Assessment of the enabling environment ▫ General contract laws ▫ Land tenure laws ▫ Contract enforcement mechanisms ▫ Competition regulations ▫ Regulations on associations ▫ Grades and standards ▫ Finance and risk mitigation mechanisms ▫ Others?
- 11. http://www.fao.org/contract-farming Initial scoping (cont.) • Learning from existing experiences ▫ Look for cases of successful and failed CF operations in the region of concern ▫ Talk to development organizations, traders, government agencies, researchers, community leaders, etc. • Assessing risks ▫ What are the potential risk sources and how can they be mitigated?
- 12. http://www.fao.org/contract-farming Main risks in CF • Weather • Plant and animal diseases Production related • Price and cost variations • Demand variations Market related • Crop Insurance • Technology choicesMitigation strategies • Contractual flexibility • Risk sharing principle • Alternative markets • Alternative products Mitigation Strategies
- 13. http://www.fao.org/contract-farming Main risks in CF • Side selling • Misuse of inputs People related • Political events, including conflicts • Policy changes • Extreme weather events • Etc. Non- controllable • Strict treatment of defaulters • Flexible contracts • Group lending • Payment related to performance Mitigation Strategies • Political representation and advocacy • Intelligence monitoring • Force majeure clauses in contracts Mitigation Strategies
- 15. http://www.fao.org/contract-farming Getting stakeholder buy-in •Stakeholders •Role of Responsibility and/or Influence •Firm / Investors •Promote CF, guarantee markets; may advance inputs and technical advice to the contracted growers. •Farmers / Farming Groups / Lead Farmers •Primary producers of CF. •End Purchasers and Consumers • Purchase the end product. Feedback on product acceptance and future demand. • Governments • Major responsibility for the enabling environment for CF. • Extension services • Provided technical advice • Development organizations and NGO •Facilitate / promote CF
- 16. http://www.fao.org/contract-farming 3. Selecting and preparing farmers
- 17. http://www.fao.org/contract-farming Selecting farmers • Own the land to avoid problems stemming from landlords/farmers disputes. If land is leased documentation must be clearly written and understood by all parties. • Be personally involved in growing the crop / rearing livestock (i.e. be a real farmer). • Having existing knowledge of the crop / livestock. • Land must have appropriate soil and sufficient water for the crop to be planted. • Be able to repay loans they receive. • Respect the agreement and be trustworthy. Criteria (USAID, 2009)
- 18. http://www.fao.org/contract-farming Selecting farmers • Be able to implement advanced production practices (e.g. irrigation, etc.). • Own the land to avoid problems stemming from landlords/ farmers disputes. If land is leased, documentation must be clearly written and understood by all parties. • Have the minimum amount of land and production capacity to produce crop(s) the company requires and in the correct context. • Be able to repay loans they receive. • Be pro-active and willing to invest in improved production practices. • Be able and willing to comply with company infrastructural requirements (adequate storage, drying, cooling facilities, etc.) Criteria (USAID, 2009)Farmers should:
- 19. http://www.fao.org/contract-farming Preparing farmers • Information sharing is essential • Training ▫ Technologies, management, social issues, etc. ▫ Demonstration plots, field days, tours, farmer field schools • Organizing farmers ▫ Lead farmers ▫ Establish / create associations • Gender issues
- 20. http://www.fao.org/contract-farming 4. Designing and negotiating contracts
- 21. http://www.fao.org/contract-farming Designing and negotiating contracts • Formal or informal contracts? • “verba volant, scripta manet” = "spoken words fly away, written words remain". • Formal contracts should be recommended • Negotiation phase is central
- 22. http://www.fao.org/contract-farming Contracts can be based on… • Market specifications … only quality standards are specified and input provision is minimal • Management and income specifications ▫ … which are the most intensive and may involve predetermined pricing structures, farm input advances, technical support and managerial control • Land tenure and ownership specifications … a variation of management and income model with additional clauses relating to land tenure • Resource specifications … where production details are specified. Input provision is often limited and income guarantees minimal
- 24. http://www.fao.org/contract-farming Preventing conflict • Selection process should be transparent and well communicated to participants • Information sharing is essential • Roles, responsibilities and expectations must be well understood • Advice can be sought from community leaders, business partners, local government agri-services or existing farmers • Compensation mechanisms, regulations for contract breaches and potential disputes should be communicated
- 25. http://www.fao.org/contract-farming Monitoring and evaluation • Companies should set up good management information systems • Efficient monitoring and evaluation activities are vital for the success of CF schemes Accumulation, analysis and distribution of information • Goals: maintain sustainability and maximize quality and output Through monitoring the environment, human resources, quality and yields. Deterioration of quality can affect factory throughput, efficiency and hence markets.
- 26. http://www.fao.org/contract-farming Monitoring and evaluation 1. Monitoring quality and yields ▫ Quality controls, yield estimations, production matrices 2. Monitoring human resources ▫ Appraising employees, reviewing farmer performance 3. Protecting the environment ▫ Ecological considerations, sound agricultural practices
- 27. http://www.fao.org/contract-farming In sum When is CF needed? Initial Scoping Getting Stakeholder Buy-in Selecting Farmers Preparing Farmers Designing and negotiating contracts Preventing conflict Monitoring and evaluation