Incentive-based contract farming (IBCF) was developed as a solution to overcome issues with side-selling and loan defaults in agricultural markets in Malawi. The IBCF approach provides farmers with incentive packages that improve each year if contracts are fulfilled, with insurance as the key incentive. Other incentives include prize drawings and risk-reduction measures. Communications are also important to explain the nature of IBCF. Key factors for success are consistency, investing over multiple years, and focusing on predictable supply rather than short-term gains. IBCF led to improved repayment rates, smallholder participation and yields, and now serves as a model for other commodities and the Malawi Agricultural Commodity Exchange.

1. Incentive-Based Contract Farming
(IBCF)
and
Agricultural Commodity Exchanges
Cuan Opperman
3 October 2018

2. Origins of IBCF
• A key constraint to inclusion of the poor in the cotton, sesame,
groundnut and soybean market systems is:
“Insufficient access to
productivity-enhancing inputs,
notably seed, inoculant and
crop protection products”

3. Incentive-Based Contract Farming
• High risk of side selling and
loan default meant ginners no
longer willing to provide input
loans.
• Was appetite for contract
farming, if side-selling could be
squeezed out, and loan
recovery sufficient.
• Contract farming could be
attractive where growers and
ginners could trust each other
to supply inputs (ginner) and
sell the crop (grower)• Challenge: Overcoming the moral hazard of grower side-selling and loan defaults
• Solution: Creating long-term grower loyalty to a buyer through incentives, rather than enforcement
• Method: Tiered pre-financed packages improving each year if contract fulfilled. Insurance as the key
incentive

4. The IBCF Approach …
Other Incentives
• Apart from inputs, SHF may benefit from other incentives such as
prize draws for compliant SHF and groups – better to be “in” than
“out”
• Risk reduction measures – such as WIII, DII and FEI that address
some of the major events that lead to non-compliance
• Incentives for aggregator/firm staff that align with seeking
compliance by SHF
Effective Communications Programme
• Starts with senior management for buy-in, through middle and lower
management to staff engaged with SHF- use of mini clips
• Communications on nature of IBCF to SHF important as it is
fundamentally different from past approaches - focus on incentives

5. The IBCF Approach …
Key Success Factors
• Firms need to act consistently with a longer-term scheme and avoid
the temptation to reject excess volumes by increasing quality
standards, and vice versa, or offering to cancel loans if SHF bring
the crop rather than side sell
• A successful IBCF can only be built over 2-3 years of operation.
IBCF requires investment and time to pay back that investment
• Firms make more money from a predictable supply of the right
quality as this leads to processing efficiencies and ability to tie up
contracts compared to making short-term savings by buying
cheaper.

6. Progression to Agricultural Commodity
Exchange
• Cotton repayments of around 95% (usual is 30%)
• Smallholder Farmers (SHF) can now participate in the market as they have
access to productive inputs
• Smallholder yields improved- and ginner pays the market price for the
cotton- no discounts or deductions
• Firm provides SHF a pathway for growth- if they deliver requisite volumes
• Cotton Council of Malawi have recommended IBCF approach for all cotton
production- hope to rejuvenate Malawi cotton market in this way
• Lessons learned from MOST work in the cotton market system was then
applied to soybean and groundnut
• Collaboration with the Malawi Agricultural Commodity Exchange (ACE)
• “Chithumba” model established

8. The MOST Programme
• https://www.youtube.com/watch?v=m516pVoSSjA&feature=yout
u.be

9. Thank you