Contract Farming Handbook

Contract farming handbook
A practical guide for linking small-scale producers and

buyers through business model innovation
Published by
Contract farming handbook
A practical guide for linking small-scale producers and
buyers through business model innovation
Margret Will
Contract farming handbook 5
List of Contents
A/ About this guide:
which purpose? for whom? and how to use it? .................................................................................................................................................................. 12
B/ Conceptual foundations
B.1/ Contract farming (CF): the basics at a glance ............................................................................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.1 Definition, contract farming models and contract types ............................................................................................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.2 Drivers and trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................................................................................................................................ 21
1.3 Incentives (benefits) and disincentives (disadvantages) for contract farming ........................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.4 Conditions for success and failure . . . . . . . . . . . . . . . . . . . ......................................................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.5 Crop suitability for contract farming . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................................................................................................................................... 31
B.2/ Facilitation of contract farming:

moderation of processes, technical and financial assistance ................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.1 Justification and objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................................................................................................................................ 38

2.2 Facilitation principles, facilitation tasks and facilitator profiles ...................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.3 CF facilitation in least developed countries or fragile environments .................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
C/ The contract farming facilitation guide
C.1/ GIZ contract farming concept: the central role of CF business model selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
C.2/ Process-structure: three phases for developing contract farming schemes . . . .......................................................... 46
C.3/ Phase 1: Initiate & plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................................................................................................................................ 50
Step 1/ Decision to develop a contract farming scheme – identify opportunities and risks, costs and benefits . . . . . . . . . . . . . . . . . . . 54
Activity 1.1/ Clarify the company’s interest in and capacities for initiating a CF business model ............................................................ 55
Activity 1.2/ Realise a rapid screening of potential production areas and farming systems ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Activity 1.3/ Map the Value Chain (VC operators, VC economics, VC upgrading needs) ...................................................................................... 57
Step 2/ Development of a CF capacity development plan – identify non-financial and financial service needs ................... 59
Activity 2.1/ (Pre)Select production area(s) and farmers/ farmer groups for the start-up phase . . . . . . . . . . . . .................................................. 62
Activity 2.2/ Assess farmers‘/ groups’ and buyer‘s capacity development and service needs ....................................................................... 64
Activity 2.3/ Draft a CF service plan (embedded and external services) ................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Step 3/ Development of a CF business plan – outline solutions for the start-up and operation of the scheme . . .................. 67
Activity 3.1/ Screen alternative CF arrangements and select an appropriate CF business model ............................................................ 69
Activity 3.2/ Outline the prospective structure and management plan of the CF business model . ........................................................ 71
Activity 3.3/ Outline contract details (1st draft only reflecting the buyer‘s perspective) .................................................................................... .. 73
Activity 3.4/ Draft a CF business plan (incl. prospective return on investment, risk assessment, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
6
C.4/ Phase 2: Implement & learn . . . . . . . . . . . . . . . . . . . . . . . . . ....................................................................................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Step 4/ Negotiations and farmers’ acceptance of CF contract – initiate working relations and trust building . . . . . . . . . . . . . . . . . . . . . . . . . 85
Activity 4.1/ Prepare the CF agreement and enable farmers to take informed business decisions ....................................................... 87
Activity 4.2/ Offer the CF contract and explain the specifications to farmers ................................................................................................................ 89
Activity 4.3/ Accept the CF contract following fair and transparent negotiations . . . . . . . . . . . . . . . . . . ................................................................................... 91
Step 5/ Start up CF field operations – develop an efficient system for supplier network management ........................................ 92
Activity 5.1/ Finalise the CF business and management plans and frame a seasonal CF budget ............................................................. 94
Activity 5.2/ Set up CF infrastructure and management for field operations ............................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Activity 5.3/ Develop CF capacities of farmers, farmer groups, field and management staff . . . . . . . ................................................................ 98
Step 6/ Monitoring, feedback, learning – generate business information for strategic decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Activity 6.1/ Set up a CF business information system for farmer-firm interface management ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Activity 6.2/ Establish routines for feedback to farmers, field staff and management ..................................................................................... 102
C.5/ Phase 3: Sustain & grow 104

- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Step 7/ Continuous improvement for sustainability– further strengthen the CF for reaching break-even ................................... 108
Step 8/ Step 8: Generic growth through up-scaling– innovate the CF business model to include more farmers ........... 110
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . ..................................................................................................................................................................................... 112

List of boxes
Box 1/ Contract farming business models . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................................................................................................................................ 17
Box 2/ Contract types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........................................................................................................................................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Box 3/ Incentives and disincentives of contract farming for farmers and buyers ........................................................................................................................ 24
Box 4/ Six key conditions for successful CF and selected related success factors ....................................................................................................................... 28
Box 5/ Step 1 – Activities, issues to be considered and milestone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................................................................................................... 54
Box 6/ Activity 1.1 – Purpose, selected questions and selected tools ......................................................................................................................................................... 55
Box 7/ Activity 1.2 – Purpose, selected questions and selected tools .............................................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Box 8/ Activity 1.3 – Purpose, selected questions and selected tools ......................................................................................................................................................... 57
Box 9/ Step 2 – Activities, issues to be considered and milestone ............................................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Box 10/ Activity 2.1 – Purpose, selected questions and selected tools ..................................................................................................................................................... 62
Box 13/ Step 3 – Activities, issues to be considered and milestone ............................................................................................................................................... . . . . . . . . . . . . . . 68
Box 15/ Activity 3.2 – Purpose, selected questions and selected tools ..................................................................................................................................... . . . . . . . . . . . . . . . . 71
Box 17/ Typical contract specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................................................................................................................................ 75
Box 18/ Possibilities to reduce moral hazard/ default risks .............................................................................................................................................................. . . . . . . . . . . . . . . . . . . . . . 78
Box 20/ Step 4 – Activities, issues to be considered and milestone ............................................................................................................................................................. 86
Box 24/ Step 5 – Activities, issues to be considered and milestone ............................................................................................................................................................... 93
Box 28/ Step 6 – Activities, issues to be considered and milestone ........................................................................................................................................................... 100
Box 29/ Activity 6.1 – Purpose, selected questions and selected tools ................................................................................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Box 30/ Activity 6.2 – Purpose, selected questions and selected tools .............................................................................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
List of figures
Figure 1/ Contract farming models and defining characteristics ..................................................................................................................................................................... 19
Figure 2/ The new business model principles . . . . . . . . . . . . . . ........................................................................................................................................................................................................... . 30
Figure 3/ Market segments for inclusive business models ....................................................................................................................................................................................... 33
Figure 4/ Crop suitability for contract farming . . . . . . . . . . . ............................................................................................................................................................................................................ 34
Figure 5/ CF business model for the management of the farm supply-firm procurement interface ................................................................... 45
Figure 6/ Process structure: phases and steps for developing CF schemes ......................................................................................................................................... 48
Figure 7/ Overall process structure: phases, steps and activities for developing CF schemes ..................................................................................... 49
Figure 8/ Value chain analysis as basis for the selection of a CF business model, the design of
CF business and management plans and the negotiation of a CF contract .............................................................................................................. 52
Figure 9/ Three steps and related activities for phase 1 “initiate & plan” ............................................................................................................................................... 53
Figure 10/ Three steps and related activities for phase 2 “implement & learn” .............................................................................................................................. 84
Figure 11/ Two steps for phase 3 “sustain & grow” ........................................................................................................................................................................................................ 107
8
Abbreviations
ACA African Cashew Alliance
ACi African Cashew Initiative
AFD Agence Française de Développement
AISP II Agricultural Input Supply Project II
BDS Business Development Services
BMZ Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung
BoP Bottom of the Pyramid
CAADP Comprehensive African Agriculture Development Programme
CBZ Cotton Board of Zambia
CF Contract farming
CmiA Cotton made in Africa
CoC Code of Conduct
COMPACI Competitive African Cotton Initiative
CoP Code of Practice
CSR Corporate Social Responsibility
CSV Creating Shared Value
DCED The Donor Committee for Enterprise Development
EABC East African Business Council
EAGC East African Grain Council
FA Financial assistance
FAO Food and Agriculture Organization of the United Nations
FBS Farmer Business School
FPEAK Fresh Produce Exporters Association of Kenya
GAP Good Agricultural Practices
GGC Ghana Grains Council
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH
GTZ Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH (now: GIZ)
HCDA Horticultural Crops Development Authority
ICT Information and Communication Technologies
IFAD International Fund for Agricultural Development
IVLA International ValueLinks Association e.V.
KENFAP Kenya National Federation of Agricultural Producers
LDC Least Developed Country
MFI Micro finance institution
NGO Non governmental institution
PPP Public Private Partnership
RFLC Rural Finance Learning Center
RoI Return on Investment
SWOT Strengths, Weaknesses, Opportunities and Threats
TA Technical assistance
UNIDO United Nations Industrial Development Organization
USAID United States Agency for International Development
VC Value chain
Acknowledgements
This handbook is a joint product of three projects Special thanks go to Frans Grey/ Cargill in Zambia;
financed by the Federal Ministry for Economic Charles Hayward and Graham Chilimina/ Dunavant
Cooperation and Development (Bundesministerium in Zambia and the Dunavant lead farmers
für wirtschaftliche Zusammenarbeit und Mr. Kandesha, Mr. Muene and Mr. Chidenda; Dafulin
Entwicklung/ BMZ) of the Federal Republic of Kaonga/ Cotton Board of Zambia; Dr Stephen
Germany and implemented by the Deutsche Mbithi and Francis Wario/ Fresh Produce Exporters
Gesellschaft für Internationale Zusammenarbeit Association of Kenya (FPEAK); Boris Binnewerg/
(GIZ) GmbH; namely the Sector project Agricultural Indu-Farm (EPZ) Ltd. in Kenya; Booker Owuor/
Policy and Food Security, the Competitive African Kenya Small Scale Cereal Growers Association;
Cotton Initiative (COMPACI) and the Agricultural Stanley Guantai/ ACDI VOCA Kenya Maize
Input Supply Project II (AISP II) in Zimbabwe. The Development Programme; Harun N. Baiya/ SITE
author would like to thank the project managers, Enterprise Promotion in Kenya; Sean Johnson,
Mr Ingo Melchers, Mr Wolfgang Bertenbreiter and Brendan Smith and Masimba Kanyepi/ Prime Seed
Dr Ulrich Weyl for having entrusted this highly and the contract farmer group in Mutasa District in
interesting subject to her. Zimbabwe; Tafadzwa Madondo/ Consultant AISP II
Zimbabwe; Theresa E. Makomva and Prince
The touch with reality of this contract farming J.T. Kuipa/ Zimbabwe Farmers Union; Thomas Gardiner
guide would not have been possible without the and Kudzai Mariga/ USAID Zimbabwe Agricultural
support of many people. The author expresses her Income & Employment Development Program;
gratitude to all interview partners who provided Helmut Anschuetz/ GIZ Advisor Zimbabwe Farmers
particularly valuable and interesting insights into Union; and Chris Masara/ SNV Zimbabwe.
on-going activities and future projects during the
author’s visit to Kenya, Zambia and Zimbabwe. It The author especially appreciated the inspiring
was a real pleasure and a great help to exchange discussions on all aspects of contract farming with
ideas and learn from highly experienced company Dr Ulrich Weyl and Christoph Pannhausen during
management and staff and committed representa- her stay in Zimbabwe, just like their recommenda-
tives of public and private sector organisations tions for structuring this handbook. Furthermore,
and donor programmes. special acknowledgement goes to Max Baumann/
GIZ Environment and Rural Development (EnRD)
Program Philippines, Christoph Pannhausen/
GIZ AISP II Zimbabwe, Till Rockenbauch/ GIZ
Sector project Agricultural Policy and Food Security
and Leonard Efison Munjanganja/ Zimbabwe for
their constructive comments on the draft of this
handbook.
Margret Will
10
Headline
About this guide 11
Headline
A/
“Good things only happen when planned;

bad things happen on their own.
It is always cheaper to do the job right the first time.”
(Crosby, n.d., p.2)
12
A/ About this guide:
which purpose? for whom? and how to use it?
Seen as a powerful tool for linking farmers to which farmers and buyers bear the risk of invest-
buyers in an increasingly concentrated agri-food ments into land, labour and capital and have to
sector, and buyers to supply sources in ever-more take an independent informed decision whether
competitive agricultural markets, contract farming to venture into such an innovative business model
experiences a new popularity. However, neither is (see insert) or not. At the same time, farmers and
contract farming a panacea for rural development buyers tend to rest on their laurels: buyers are
nor does a blueprint exist for the design and opera- readily willing to leave the difficult task of building
tion of successful and sustainable contract farming capacities of large numbers of small-scale farmers
arrangements. Rather, every single scheme calls for to external agents; and farmers are thought not to
situation-specific design according to market op- be capable of defending their interests in contract
portunities, product features, suppliers’ and buyers’ negotiations without external support. In the end,
capabilities, capacities of business development none of the players assumes his or her distinct role
services as well as local, national, regional and inter- and fails to concentrate on his or her core com-
national framework conditions for private invest- petencies in managing or supporting sustainable
ments into agri-food business development along business linkages.
the entire value chain (VC).
A business model is characterised by the logic and
The history of contract farming, equally in devel- the arrangements of how a company (farm or firm)
oped and developing countries, shows quite mixed creates, delivers and captures value.
results. While in developed countries, contracts are
more widely used with larger-scale farms, success It is obvious that lessons need to be learnt from
stories in developing countries are also written with past experiences to guide practitioners in the de-
smallholders mainly in high-value product or com- velopment of contract farming arrangements that
modity segments for exports and for overseas’ or in- are profitable for farmers and buyers thus justify-
country processing. However, there are also hidden ing the risks taken in venturing into such a joint
success stories in so called traditional markets link- business. To furthermore legitimate assistance
ing small-scale farmers with village-level or small to from government and development partners,
medium-scale traders or processors through infor- the supported schemes also have to contribute to
mal contractual agreements. Little is known about achieving overarching macro-economic devel-
the scope and scale as well as the factors for success opment objectives (e.g. pro-poor growth, food
and failure of such arrangements. But the tradi- security, protection of natural resources, and
tional ways of communication and coordination adaptation to climate change).
and the home-grown networks may well inform the
design of new schemes or serve as starting point for
upgrading and up-scaling existing ones. Which purpose does this handbook serve?
Against this background, the purpose of this guide
On the other side, there are many reasons why is to provide a practical and process-oriented ap-
quite a number of schemes collapsed in the past. proach for a sound planning and implementation
In developing countries, it is often failure to of contract farming (CF) schemes. Meant to assist
adequately analyse the starting position, assess practitioners to make such private business ar-
optional contract arrangements, design viable solu- rangements work, this guide provides answers and
tions, develop realistic and realisable business plans, proposes tools for:
competently manage contract relations and adapt t he clarification of roles and responsibilities of
external support to co-contractors’ needs. Problems farmers and buyers as business partners and gov-
also arise when the promotion of contract farming ernmental, non-governmental or development
is driven by third-party facilitators (governmen- partners or others as third-party facilitators;
tal, non-governmental and development partners t he design of viable contract farming arrange-
or consultants). Primarily pursuing development ments as part of an urgently required business
objectives, they often disregard that contract farm- model innovation based on a rapid but sound
ing is first and foremost a business arrangement, in assessment of the starting situation;
About this guide 13
A/
the implementation of trust building and capac- a process-structure for CF development with
ity development activities to support necessary three phases (initiate & plan, implement &
change of attitudes and the adoption of relevant learn, sustain & grow) and eight steps;
new technologies; and a systematic description of the three phases
the reporting and monitoring systems required and respective steps in a clearly structured and
for managing CF schemes, giving feedback easy-to-capture format;
on performance and serving learning loops s pecific guidance on selected key features of
necessary for consolidating and up-scaling the contract farming (e.g. contract terms, pricing
scheme. mechanisms, causes of conflict and conflict
resolution); and
f or each phase and step, references for litera-
Who is this handbook for? ture on the subject.
This guide has been developed to serve practi-
tioners involved in starting up and managing or In order not to further bloat this guide, the edi-
supporting the initiation and implementation of tors intend to provide detailed descriptions of
contract farming schemes: proposed tools and case examples in a separate
companies (buyers) interested to develop net- document. And, to make this guide usable for field
works of small-scale farmers as competent and agents and farmers, a shortened version will be
reliable preferred suppliers; prepared that focuses more on the farm-level and
farmers’ organisations (farmer groups, as- post farm-gate features of contract farming. It is
sociations, cooperatives) interested to service also intended to develop a training course and
members (e.g. joint learning and possibly joint training material.
contract negotiation, input distribution, collec-
tion, marketing);
sector organisations like national inter-profes- How can this guide be used?
sional bodies or regional federations interested The main thrust of this guide is to provide a
to develop trade and exchange platforms or hands-on and process-oriented approach for
codes of conduct for contract farming; and the development of contract farming schemes.
t hird parties (governmental, non-governmental Following the logic stages of starting up a busi-
and development organisations or consultants) ness, the overall structure is easy to capture. And,
interested to promote CF as innovative business while giving orientation for a focussed approach,
arrangement in a broader development context. the guide remains flexible leaving the selection of
tools and sequencing of activities to the discretion
of users according to the reality on the ground.
What coverage and limitations does this handbook
feature?
As a generic guide, the proposed approaches are
applicable for any type of product and situation,
provided users are capable of using it in a flexible
way and adapting the tools and recommendations
to the specific local situation and the ever-faster
changing production and market contexts in de-
veloping countries. With a view to facilitating this
task, the handbook provides:
the conceptual foundations of contract farm-
ing and its facilitation as basis for understand-
ing the proposed phases and steps for contract
farming development;
14
I no tnetrrnaactti o
C fanr
aml iLnega d
( Ce Fr) s: ht ihp e T braasi inci sn g
at a glance 15
Headline
B.1/
B/B.1/
“While it is conceivable that exogenous change in

education, literacy and awareness would assist tran-
sition to contract-based relationships, it is unlikely
that court-aided enforcement would ever render trust
irrelevant, as has been pointed out repeatedly even in
developed countries.”
(Narayanan, 2012, p.13)
16
B/Conceptual foundations
B/1 Contract farming (CF): the basics at a glance
1.1 Definition, contract farming models and gration within a firm. For designing the best pos-
contract types sible contract farming arrangement under given
Contract farming (CF) is defined as forward agree- local conditions, there is hence a need to analyse
ments specifying the obligations of farmers and the opportunities and limitations for building
buyers as partners in business. Legally, farming trustful, reliable and sustainable coordination and
contracts entail the sellers’ (farmers’) obligation cooperation linkages between farmers and buyers.
to supply the volumes and qualities as specified,
and the buyers’ (processors’/ traders’) obligation According to Eaton and Shepherd (2001, p.44f),
to off-take the goods and realise payments as “Contract farming usually follows one of five
agreed. Furthermore, the buyers normally provide broad models, depending on the product, the
embedded services (see insert) such as (for more resources of the sponsor [the buyer] and the
details see section C.2): intensity of the relationship between farmer and
upfront delivery of inputs (e.g. seeds, fertilizers, sponsor that is necessary.” While CF schemes may
plant protection products); take various forms and involve different actors,
pre-financing of input delivery on credit (ex- a formal contract concluded between the farm
plicit rates not always charged; see insert); and and an agribusiness firm is common to all types
other non-financial services (e.g. extension, of schemes, thus forming a distinctive difference
training, transport and logistics).
Embedded services are financial or non-financial
With regard to substance, form and the process of services provided by the off-taking company as
concluding such arrangements, farming contracts integral part of the business transaction. Service
are quite variable (for more details see sections C.2 charges are usually deducted from the farmers’ final
and C.3): sales revenue.
agreements may be established informally or
formally, in verbal or written form; Interest rates for pre-financing of input delivery
contracts may be concluded with individual are not always transparently specified in contracts
farmers or farmer groups; either to avoid discussions or they are not charged
description of obligations may remain quite if intended to incentivise farmers.
vague or be reasonably specific;
contracts may be renewed each season or cover Contract farming and outgrower schemes: While
long-term agreements; some authors use the terms synonymously, there
specifications may be based on case by case ne- is a difference: an outgrower scheme is a particular
gotiations or on a sub-sector code of practice. contract farming model. Typical characteristics are
a high degree of service provision on the side of the
Whatever process applied or contents itemised, buyer in exchange for land and labour provided by
to be successful and sustainable, contract farm- smallholders (see nucleus estate model in Box 1 and
ing arrangements have to be designed in a way Figure 1).
that promises benefits to both co-contractors (see
section B.1.3). Business Development Services (BDS) “are services
that improve the performance of the enterprise,
Given the diversity of produce features and its access to markets, and its ability to compete.”
geo-climatic situations, existing forms of transac- (DCED, 2001).
tion and business development services (BDS),
business cultures and entrepreneurial capacities, Vertical integration relates to a merger of two or
socio-economic structures (e.g. farmer organisa- several nodes of the value chain within one com-
tions) and attitudes (e.g. business attitudes, oppor- pany (e.g. backward integration of processors into
tunistic behaviour) and investment climate, it is farming or forward integration of farmers into trad-
obvious that there is no one-size-fits-all blueprint ing and/ or processing).
for designing contract farming arrangements.
Rather, there are various forms in the continuum Spot markets are characterised by one-off sales
from spot market exchange to full vertical inte- transactions without prior agreement.
Contract farming (CF): the basics at a glance 17
B.1/
to spot-market/ arms-length marketing relations.
The following provides an overview on different
contract farming models and their respective
features (Box 1 and Figure 1) and on contract
types (Box 2).
Box 1/ Contract farming business models
(adapted/ complemented by the author from Eaton & Shepherd, 2001, p. 44f; van Gent, n.d., p.4f)
Informal model
“This model is the most transient and speculative T
he success often depends on the availability and
of all contract farming models, with a risk of default quality of external extension services.
by both the promoter and the farmer” (van Gent, E
mbedded services, if at all provided, are limited
n.d., p.5). However, this depends on the situation: to the delivery of basic inputs, occasionally on
interdependence of contract parties or long-term credit; advice is usually limited to grading and
trustful relationships may reduce the risk of oppor- quality control.
tunistic behaviour. Typical
products: requiring minimal processing/
Special features of this CF model are: packaging, vertical coordination; e.g. fresh fruit/
Small firms conclude simple, informal seasonal vegetables for local markets, sometimes also
production contracts with smallholders. staple crops.
Intermediary model
In this model, the buyer subcontracts an intermedi- incentive-structures are adequate and control
ary (collector, aggregator or farmer organisation) mechanisms are in place.
who formally or informally contracts farmers T
his model can bear disadvantages for verti-
(combination of the centralised/ informal models). cal coordination and for providing incentives to
Special characteristics of this CF model are: farmers (buyers may lose control of production
T
he intermediary provides embedded services (usu- processes, quality assurance and regularity of
ally passing through services provided by buyers supplies; farmers may not benefit from technol-
against service charges) and purchases the crop. ogy transfer; there is also a risk of price distortion
This model can work, if well-designed and if and reduced incomes for farmers).
Multipartite model
This model can develop from the centralised or nucleus T his model may also feature as farm-firm ar-
estate models, e.g. following the privatisation of para- rangement complemented by agreements with
statals. It involves various organisations such as govern- 3rd party service providers (e.g. extension, train-
mental statutory bodies alongside private companies ing, credits, inputs, logistics).
and sometimes financial institutions. Special features: S eparate organisations (e.g. cooperatives) may
This model may feature as joint ventures of organise farmers and provide embedded services
parastatals/ community companies with domestic/ (e.g. credits, extension, marketing, sometimes
foreign investors for processing. The vertical also processing).
coordination depends on the discretion of the T his model may involve equity share schemes for
firm. Due attention has to be paid to possible producers.
political interferences.
18
Centralized model
In this model, the buyers’ involvement may vary The
quantities (quota), qualities and delivery
from minimal input provision (e.g. specific conditions are determined at the beginning of the
varieties) to control of most production aspects (e.g. season.
from land preparation to harvesting). T
he production and harvesting processes and
This is the most common CF model, which can be qualities are tightly controlled, sometimes directly
characterised as follows: implemented by the buyer’s staff.
The buyer sources products from and provides Typical
products: large volumes of uniform quality
services to large numbers of small, medium or usually for processing; e.g. sugar cane, tobacco,
large farmers. tea, coffee, cotton, tree crops, vegetables, dairy,
The relation/ coordination between farmers and poultry.
contractor is strictly vertically organised.
Nucleus estate model

In this model, the buyer sources both from own The
farmers are at times called ‘satellite farmers’
estates/ plantations and from contracted illustrating their link to the nucleus farm.
farmers. The estate system involves significant T
his model was in the past often used for state
investments by the buyer into land, machines, owned farms that re-allocated land to former
staff and management. This CF model can be char- workers. It is nowadays also used by the private
acterised as follows: sector as one type of CF.
The nucleus estate usually guarantees supplies T
his model is often referred to as “outgrower
to assure cost-efficient utilisation of installed model”.
processing capacities and to satisfy firm sales T
ypical products: perennials
obligations respectively.
In some cases, the nucleus estate is used for
research, breeding or piloting and demonstration
purposes and/ or as collection point.
B.1/
The following illustration gives an insightful idea
of the five basic models that can guide the selection
of appropriate CF arrangements based on a sound
analysis of the specific situation on the ground.
Figure 1/ Contract farming models and defining characteristics
(Technoserve and IFAD, 2011, p.3)
MFIs/
rural banks
NGO/
gov‘t agency
buyer buyer
buyer buyer
input
suppliers
Informal model Intermediary model Multipartite model Centralized model Nucleus estate model
Increasing buyer investment
Increasing risk of inconsistent supply
Input/credit
Extension services
Use of contracts
Farmer grouping
Grower management
Centralized
production/processing
Post-harvest logistics
(packaging, transport)
Summary: Summary: Summary: Summary: Summary:

speculative, seasonal semi-formal to formal buyer sources from farmers buyer provides technical buyer operates centralized
sourcing on an ad-hoc subcontracting by buyers to & farmer groups; technical assistance/inputs directly, production and processing
or semi-formal basis and partner intermediaries (e.g. assistance/ input/credit purchases crop, handles (estate), supplementing
spot-market transactions; lead farmers, farmer groups, provision & grower manage- many post-harvest activ- throughput via direct con-
few if any inputs/services buying agents) who manage ment via 3rd parties; limi- ities; farmers provide land tracting with outgrowers;
provided to farmers; mini- outgrowers & provide ted firm/ farmer coordina- & labor; high degree of buyers often own/control
mal firm/farmer coordi- services; limited direct firm/ tion; higher level of product firm/farmer coordination; land used by farmers who
nation; little to no product farmer interaction; enhanced specification necessitates strict product specifica- supply labor; buyer provi-
specification by buyer but limited product speci- close monitoring/supervisi- tions monitored by inhouse des technical assistance/
fication on of production technical staff; often linked inputs/ credit; close moni-
to processing toring/ supervision
Pros: Pros: Pros: Pros: Pros:

little to no buyer invest- reduced risk, assuming effec- limited investment & re- enables high level of con- high level of control over
ment in technical/ financial tive management; minimal duced costs due to partner trol over product qual- supply chain; simplified
support; low operational buyer investment in techni- cost-sharing; reduced risks ity & volumes; frequent technical assistance/ex-
costs; high level of sourcing cal/financial support; margi- (vs commercial production) interaction with farmer tension/farmer oversight;
flexibility nally improved supply chain due to geo-dispersal of inhibits side-selling reduced risk of supply
management; low cost of outgrowers rupture
switching to new partners
Cons: Cons: Cons: Cons: Cons:

limited control over lower buyer visibility among greater risk of side-selling; high level of investment requires heavy investments
production (i.e. prod-ucts, farmers; marginal control no core production, reliant for in-house technical (land, labor) in production;
varieties, quality, etc.); high over production (volumes, on smallholder production; assistance and pre- and higher crop-related risks;
risk of supply ruptures; quality) high transport costs post-harvest logistics and limited flexibility/options
strong buyer competition related infrastructure in selecting outgrowers
Inputs Outputs Processing Never Rarely Sometimes Often Always

20
With respect to the description of the different CF As regards contract types, Bijman (2008, p.5) men-
models in the preceding illustration it should be tions: “A classical typology of agricultural con-
noted that: tracts has been made by Mighell and Jones (1963),
the boundaries between one model and the who distinguish between market-specification
other are fluid with regard to organisational contracts, production-management contracts,
structures and operational arrangements; and resource-providing contracts. These contracts
the models chosen for starting up a scheme differ in their main objectives, in the transfer of
may (usually do) change over time through the decision-rights (from the farmer to the contractor),
integration of lessons learnt (‘trial & error’), and in the transfer of risks.” The specific features
changing attitudes and adoption of new tech- of the different contract types are explained in the
nologies; and following box.
a model that proves to be appropriate for the
start-up phase may need to be adapted and per-
haps changed for the consolidation and scaling
up phase respectively.
Box 2/ Contract types
(Bijman, 2008)
Market specification (or marketing) contract

Pre-harvest farmer-contractor agreement on T
he farmers maintain most of the decision rights
terms of delivery (e.g. varieties, qualities, quanti- over farming activities and farm assets.
ties/ quota, time of delivery) that are crucial for T
he farmers bear the production risk; the market-
farmers’ production decisions. ing risk is partly transferred to the buyer.
Production management contract

The farmers delegate a substantial part of deci- T
he contractor specifies and inspects production
sion rights over production/ harvesting practices processes and bears most of the marketing risk.
to buyers by agreeing to follow contractor’s
farming specifications.
Resource providing contract

The contractor provides inputs as in-kind credits T
he level of transfer of decision-making and risks
with costs being recovered upon product delivery. from farmers to buyers ranges from production
management by farmers up to full production
management by contractors.
B.1/
1.2 Drivers and trends
As the citation of Mighell and Jones (1963; cited in n egative effects of market failure that can
Bijman, 2008, p.5) in the preceding section illustrates, possibly be mitigated through CF arrangements
contract farming is not a new concept. On the con- (e.g. input supplies, non-financial services such
trary, there is evidence of use in the 19th century al- as extension, training, information and access
ready in Asia and Latin America. In the 20th century, to markets and financial services such as bank
the concept spread in the United States and Europe transfer systems, savings, credits and insurance);
and was introduced into North and Sub-Sahara growing
disputes over large-scale land acqui-
Africa. According to da Silva (n.d., slide 5), interest sitions by (global, regional or local) investors
and adoption rates have increased in the recent past (catchword „land grabbing“) and the search for
as the following examples illustrate: politically and socially sound and economically
in the United States, CF rose from 12% of agri- viable alternatives such as formalised coopera-
cultural production in 1969 to 36% in 2004; tion with smallholder farmers (e.g. in the form
in Brazil, 75% of poultry production are under of contract farming);
contracts; and increasing
requirements for compliance with
in
India, Vietnam, Morocco, Thailand and others, food safety/ quality standards and traceability
policies have been developed for promoting CF. needs in international mainstream markets but
increasingly also in local and regional markets
It should however be noted, that even in indus- (e.g. fresh produce supplies to supermarkets or
trialised countries, CF is not as common as may staple food channelled through commodity
be assumed given its real or perceived advantages exchanges);
over spot market conditions, apart from some increasing
demand for sustainability certifica-
commodities that are largely governed by con- tion (social and environmental standards) of
tracts (e.g. sugar beets, feedstock for biofuels, raw cash crops such as palm oil, rubber, coffee, tea,
materials for baby food). The main reasons are cocoa and for specialty products (organic cer-
lack of trust between potential business part- tification; origin labelling; etc.), not necessarily
ners and the possibility to achieve similar prices triggering premiums for certification;
through other distribution channels in usually p eak oil prices and the effects on transport
quite stable markets. costs (local, export, import) for the procure-
ment of inputs and distribution of produce
The rising interest of private investors, policy mak- and on production costs for inputs (fertilizers,
ers and development partners in CF arrangements packaging material);
in developing countries is driven by the following urgent
need to adopt appropriate technolo-
recent changes in the agri-food systems: gies to adapt to or mitigate climate change in
high agri-food prices and improving terms of order to prevent/ minimise the damage climate
trade open opportunities for the long-time change can cause or to take advantage of op-
neglected farm sector; provided the positive portunities that may arise;
effects trickle down to farming and trading to recent
droughts in the Horn of Africa and the
incentivise investments into technologies for Sahel leading to efforts to achieve national aut-
increasing yields, improving quality and redu- archy or to develop food reserves at the level of
cing post-harvest losses; Regional Economic Communities respectively;
worldwide population growth, shifting urban e merging discussions on the role of the private
consumption patterns, increasing purchasing sector in improving food security through
power of emergent middle income segments in the upgrading of value chains to better link
emerging economies and developing countries production surplus with consumption deficit
and the related market growth and structural areas;
transformation of agri-food markets (super-
markets, fast food);
22
diverse challenges: the need to achieve food of this concept, see a real opportunity in CSV con-
security without increasing the pressure on tributing to “unleash a wave of innovation and
natural resources; the need to balance required growth”, two objectives that are also encouraging
foreign and domestic direct investments into the renaissance of contract farming.
agriculture with the rights of smallholders
(competition for scarce land resources usually It is in this context that the still largely untapped
referred to as ‘land grabbing’); and finally the market potential at the Bottom of the Pyramid
need to restore the reputation of agriculture to (BoP) is increasingly recognised: poor consum-
attract future generations to venturing into far- ers offer opportunities on the demand-side and
ming or accepting employment opportunities resource-poor farmers offer opportunities on
in rural areas given rural-urban migration of the supply-side. As a consequence, awareness is
young people and the resulting ageing farmer growing among downstream traders and proces-
population in many developing countries. sors and upstream input dealers that inclusive
business models can open attractive business
In this setting, access to ever-scarcer produc- prospects in ever more competitive and de-
tion assets (in the first instance land and quali- manding markets. At the same time, national
fied and affordable labour; only in the second governments and development partners start to
place capital) turns out to be a decisive aspect of recognise inclusive business models as engine for
competitiveness of processing and trading firms, socially inclusive economic growth. Unlike CSR,
be they small, medium or large, national or global which primarily aims at improving the company’s
players. At the same time and for diverse products reputation through societal contributions and
destined to local, regional or the international philanthropy, the main objective of inclusive
market, smallholders can become a source of business models is to integrate poor sections of
competitive advantages (e.g. providing access to the population either as customers or as suppli-
ever scarcer land resources; assuring dedicated ers into viable business models and, by doing so,
family labour for more diligent crop husbandry; to increase the economic and social benefit for all
providing family labour for more cost-effective business partners involved (see Step 2, Activity 2.1
production; having location-specific traditional for the selection of farmers/ farmer groups).
knowledge required for e.g. adaptation to climate
change). 1.3 Incentives (benefits) and disincentives
(disadvantages) for contract farming
To become and remain competitive in increasing- For planning viable and sustainable CF schemes,
ly globalised agri-food markets is a special chal- it is necessary to understand the motivation of
lenge for value chain actors in the (large majority farmers and buyers to conclude or not to conclude
of) net food importing countries in Sub-Sahara farming agreements. While in the end mutual
Africa, since otherwise, farmers, traders and pro- trust is the basic and critical reason why
cessors risk of being crowded out of national and contracts succeed or fail, a realistic and realisable
regional markets by price and quality-wise more cost-benefit-‘plus’ (profit) is crucial for creating a
competitive imports. Against this background, viable business that can sustain itself. This cost-
awareness increases among off-taking companies benefit-‘plus’ that constitutes an incentive (benefit)
that better cooperation with smallholder farmers motivating farmers and buyers to conclude con-
is required for assuring sustainable access to agri- tracts can be quite diverse and is largely different
cultural produce. If in the past, linkages of global in the perspectives of farmers and buyers.
players and home-grown champions with local
communities were largely inspired by ‘corporate Incentives (or benefits) are defined as “... factors
social responsibility’ (CSR) this now gradually that motivate human behaviour. They can be
shifts to the paradigm of ‘creating shared value’ positive and foster certain behaviour, but they
(CSV). This concept highlights that business can also act as disincentives and deter people
partnerships will only succeed and sustain if both from doing something.” (Fischer et.al., 2004, p.9).
partners, farmers and buyers, benefit. Porter and The success of efforts aimed at promoting con-
Kramer (2011), the most prominent proponents tract farming depends to a large extent on the
B.1/
willingness and preparedness of stakeholders to However, contracting smallholders also bears
commit resources, develop their capacities and risks, since “small farm production often suffers
join forces. It is often argued that the resource- from capital constraints, and a lack of capacity
poor are not capable of investing in new ventures. to adopt technological innovations. Moreover, …,
However, this depends on (Will, 2008, p.97; verba- smallholders often lack the ability to meet exact-
tim citation): ing standards from actors further down the value
the type of capital that needs to be invested, chain. Contract farming can overcome these limi-
which is not necessarily financial (e.g. savings, tations: it can deliver the scale benefits typically
access to credits) but may as well be human associated with large-farm production systems.
capital (e.g. indigenous knowledge, skills and Economies of scale through the firm decrease the
the ability to work), natural (e.g. access to land cost of inputs and transport. In addition, firms
for production), physical (e.g. access to trans- have a comparative advantage in marketing and
port, water, energy) or social (e.g. networks, technical knowledge, and product traceability and
trust, access to service institutions); and quality. In terms of poverty reduction, contract-
ing with smallholders can reap large dividends:
the possibility of reducing the risks of invest- small farms are generally owned and operated
ments in new ventures in order to minimise by the poor, often using locally-hired labour,
any adverse effects on their livelihoods and and often spend income within nearby locales,
to overcome the widespread risk adversity of creating multipliers (Hazell et al., 2006). Overall,
small-scale farmers, by identifying realistic and there are good reasons why contract farming with
realisable benefits from any commitment of smallholders can succeed” (Prowse, 2012, p.23).
resources. The following box gives an overview of possible
incentives and disincentives that may play a role
This calls for a solid analysis of the livelihood in decision-making of farmers and buyers.
framework and the concrete benefits, prior to
embarking on any CF project. In the light of the
crucial role business linkages play in ensuring
market access for farmers, benefits also have to
accrue at the up- and downstream stages of the
value chain (VC) to assure the collective commit-
ment of all business partners. The simple reason
is that investments into inputs, farming, whole-
sale trading, processing and retailing will only
translate into income for VC operators if the final
product is marketable and competitive enough to
be sold.
The main reasons for smallholders to enter farm- Transaction costs are associated with the exchange
ing contracts are: higher and more stable incomes, of goods at every stage of the value chain: e.g.
access to markets, access to more affordable cred- search costs for suppliers or buyers, for market and
its and inputs, access to new technologies, exten- price information; costs for monitoring of producers
sion, training and information and reduction of and quality control, for logistics and distribution, for
production and marketing risks. With respect to security services for cash payments, for bribery and
the advantages for buyers to work with small- for dealing with contract breach.
holders, Prowse comes to the conclusion that:
“Small farms are frequently the most efficient
agricultural producers, and have advantages over
large farms in terms of labour-related transaction
costs, in particular supervision and motivation.”
24
Box 3/ Incentives and disincentives of contract farming for farmers and buyers
Potential incentives
in the ideal case of well-designed/ well-managed CF schemes and mutually beneficial contract terms
For Farmers
Monetary incentives Non-monetary incentives
better/ more stable income through higher yields, r eliable and stable market access (traditional and
reduced losses, possible premiums new markets)
improved access to inputs through buyer credits improved
access to non-financial services (e.g.
or direct provision by buyers technologies, extension, training)
reduced input costs due to procurement in bulk r educed market risk through forward contract-
by buyers ing/ market-oriented production planning
improved liquidity (e.g. through pre-financing of r educed production risk through longer term
inputs or adequate terms of payment) farm planning/ better utilisation of capacities
reduced credit risk in case banks accept forward r educed production risk through access to inputs,
contracts as collateral extension and new technologies
financial support for standard compliance/ certi- lower
barrier to produce higher-risk crops, which
fication to satisfy market requirements resource-poor farmers usually avoid
improved
overall farm system performance
through spill-over of technologies and skills
improved
food security/ better nutrition through
increased diversification
For Buyers
lower investments/ operational costs for own sustainable
supply of required volumes and quali-
production (land, machinery, staff) ties at required delivery dates
reduced staff costs through outsourcing produc- solution
for buyers’ problems in access to land
tion/ subcontracting intermediaries and labour
reduced transaction costs for (i) coordination due reduced
supply risks compared to spot market
to agreed arrangements for regular and stable procurement
supplies; and (ii) procurement owing to scale reduced
disease/ weather induced supply risks
economies, higher productivity through geographical diversification
reduced post-harvest losses due to more efficient reduced
marketing risk owing to better alignment
post-harvest transport and logistics of supplies and customer requirements
reduced investment risk thanks to more efficient more
consistent supplies through better control
utilisation of installed capacities over production processes and quality
more
flexible response to growing/ depressing
markets thanks to fewer fixed assets
improved
reputation and public relations owing
to inclusiveness of CF business model
For both
reduced transaction costs thanks to direct link- specific crop characteristics (e.g. perishability
ages (e.g. reduced screening and default costs) requiring efficient collection and delivery)
reduced price risk for agreed quota based on pre- better access to up-market segments requiring
agreed prices or price calculation formula compliance with (local/ global) standards
B.1/
Potential disincentives
in the negative case of ill-designed CF arrangements, intransparent relations and deceptive practices
For Farmers
increased risk of loss of decision-making non-understanding

of contract terms if not avail-
autonomy able in vernacular resulting in mistrust/ default
increased production, marketing and investment/ mismatch
between long-term investment
credit risk if the CF business model is not viable requirements and short-term purchase commit-
over-indebtedness in case of insufficient consid- ments
eration of the livelihood framework/ farm assets mismanagement
of production quota/ output
weak negotiation power resulting in depressed manipulation by the buyer or corrupted staff
prices if the buyer exercises monopsony market disregard
of the required farm household cash
power crop-food balance (competition/ opportunity
weak claiming position in case of buyer default costs for land and labour)
(unduly high rejection rates, late or non-payment)
For Buyers
high
infrastructure and transaction costs and high unreliable
business attitudes of farmers leading
risks in organising supply from dispersed producers to high credit default rates
insufficient and inadequate farm management p
oaching by competitors and side-selling by
skills and technologies leading to inconsistent farmers leading to undersupply of buyers’ capaci-
supplies ties/ needs
reduced yields due to diversion of inputs pro-
vided by buyers
However, the above compilation of incentives and agricultural and agri-food business development
disincentives is a mere theoretical review of mo- and private investments. Accordingly, there is a
tivations, while the real incentives and disincen- vast range of conditions for success and failure
tives depend on the CF arrangement, on contract that need to be taken into consideration when
terms, on the commitment of co-contractors, on analysing the situation on the ground and plan-
their business attitudes and last but not least on ning CF arrangements. And, equally important,
the trust or mistrust which governs the behaviour right from the beginning, monitoring of perfor-
of the contracting parties. mance and feedback loops have to be built in for
early identification of problems and of appropri-
1.4 Conditions for success and failure ate solutions for the necessary modification of CF
As said at the onset of these guidelines, there arrangements.
is no blueprint for the design and operation of
successful and sustainable contract farming ar- In the same line of thinking, Vermeulen and
rangements. Rather, every single scheme calls Cotula come to the conclusion that “Among the
for situation-specific design according to market different business models reviewed here, no single
opportunities, product features, suppliers’ and model emerges as the best possible option … in
buyers’ capacities, existing business development all circumstances. Rather, what works best for
services and the overall local, national, regional smallholders while still being attractive to inves-
and international framework conditions for tors is very much context-specific, and is contin-
26
gent on tenure, policy, culture, history as well as Failure to access to rural finance services, neces-
on biophysical and demographic considerations. sary investments for upgrading technologies from
Also, none of the arrangements reviewed here can inputs through farming and processing up to
be said to be perfectly fair, nor a holistic solution trading remain negligible. And the usually weak
to rural development at local or national levels. rule of law makes business relations and invest-
By their very nature, these arrangements link two ments, also from the enforcement perspective,
sets of players – agribusiness and smallholders – a risky venture. Last but not least, unfavourable
with very different negotiating power, which has macro-economic framework conditions (e.g. in-
direct implications for the design and implemen- flation, terms of trade, fiscal policies) and an often
tation of the arrangements. Finally, the devil is inappropriate investment/ business climate (first
often in the detail: in defining the extent to which and foremost land tenure rights, but also eco-
an investment shares value with local smallhold- nomic and social context, business start-up and
ers, the detailed arrangements of the scheme development conditions, private sector financing,
may be more important than the abstract model.” economic and social infrastructure) impede the
(Vermeulen and Cotula, 2010, p.6). private sector from making the essential changes
happen towards better functioning of markets.
Overall, contract farming is a way of doing busi-
ness, in which both contract partners aspire to In this setting, contract farming can serve to
make profit through improved security of access mitigating market imperfections. Depending on
to supplies and markets. The setting in many de- the arrangements, contract farming can equally
veloping countries, however, is difficult for devel- make a change in the physical input and output
oping and maintaining viable, fair and equitable markets, in the required rural finance and adviso-
business relations between firms and small-scale ry service markets as well as in business attitudes.
farmers. The main reason is that developing coun-
tries are characterised by ample market imper-
fections resulting in prohibitive business start-up
and transaction costs. Fragmented production,
trading and largely also processing structures as
well as fragile vertical linkages along the value
chains result in high production and marketing
risks for producers and high supply and sales risks
for buyers. In this challenging environment it is
hardly astonishing that professional relations are
further complicated by low levels of trust. Moreo-
ver, road and market infrastructure are often
inadequate, transport means and logistic facilities
(e.g. grading, packaging and storage) are outdated
and inefficiently organised. And, low volumes
supplied by a multitude of dispersed small-scale
farmers result in power imbalances between sup-
pliers and buyers and are one of the root causes
for unstable markets.
Furthermore, prices are highly volatile due to sea-

sonal and annual supply fluctuations, speculation
and frequent government interferences, especially
in staple food markets. Also, the lack of harvest
forecast and market information systems impede
a more efficient balancing between production
surplus and demand deficit regions as well as
more transparency in price setting mechanisms.
B.1/
To mitigate market imperfections, six key condi-
tions for successful contract farming have been
identified, that integrate the criteria of Vermeu-
len and Cotula (2010) for assessing the ways of
value sharing between partners in different types
of business models (see insert) while adopting a
broader view of the requirements for developing
successful contract farming arrangements (the
criteria of Vermeulen and Cotula are written in
italic):
trust and scope of negotiation: appreciation The four criteria of Vermeulen and Cotula (2010,
that trustful relations are the foundation for p.5) for assessing value sharing between the busi-
success and that trust builds on fair give-and- ness partners (partly verbatim citation):
take relations and equal voice in contract nego- Ownership: includes ownership of the business
tiations and conflict settlement; (equity shares), and of key assets such as land and
economic viability and incentives: recognition processing facilities.
that farming contracts are clear-cut com- Voice: concerns the ability to influence key business
mercial agreements that can only be viable decisions, including weight in decision-making, ar-
and sustainable if farmers and buyers equally rangements for review, and mechanisms for dealing
realise a cost-benefit-‘plus’ (profit/ reward) that with asymmetries in information access.
incentivises both parties to fulfil their commit- Risk: includes commercial (i.e. production, supply
ments (see section B.1.3); and market) risk, but also wider risks such as politi-
contract farming arrangements and risks: cal and reputational risks.
realisation that contract farming bears risks Reward: concerns the sharing of costs and benefits,
requiring arrangements for sharing ownership price setting and finance arrangements.
as well as distributing and minimising risks of
conjoint investments according to the quite Investment climate: involves the regulatory envi-
divergent capabilities of contract partners; ronment and rule of law; the quality of infrastruc-
technology transfer and innovation: apprecia- ture, health and education system; political stability
tion that the adoption of appropriate technolo- and security; functioning financial markets; trade
gies and innovations can stimulate increased liberalisation, international rules and standards. The
farm productivity and chain efficiency, pro- investment climate represents the “location-specific
vided embedded or external services contribute factors that shape the opportunities and incentives
to building required capacities; for firms to invest productively, create jobs, and
investment climate and 3rd party support: expand (World Bank, 2004)” (adapted from UNIDO
awareness that conducive political, legal, and GTZ, 2008, p.6f)
administrative and infrastructure framework
conditions are decisive for building CF schemes
that can compete in national, regional and
international markets;
sound analysis and planning: recognition that
sound analysis and situation-specific design
are a prerequisite for success since CF arrange- The following table provides a list of success
ments have to be adapted to market opportu- factors related to each of these key conditions
nities, product features, farmers’ and buyers’ for successful contract farming. Just like the CF
capacities, existing services and framework arrangements are as diverse as the specific condi-
conditions. tions on the ground require, the list of success
factors is neither relevant in all its details for all
CF cases nor is the list exhaustive. Approaches and
tools for translating the sought success factors into
CF-reality will be discussed in part C of this guide.
28
Box 4/ Six key conditions for successful CF and selected related success factors
Trust and scope of negotiation

Successful contract farming (CF) arrangements A ssuring a fair scope of negotiation for farmers
provide conditions that contribute to: in decision-making (e.g. price-setting) built on
Building trust based on a common purpose, mu- unbiased information sharing, transparent com-
tual benefits (‘win-win’), recognition of mutual munication, participatory negotiations.
interdependency, fair contracts and commitment I ncorporating chain-wide approaches to self-
to honour the contract. regulation of CF practices (e.g. sector-wide
Providing sufficient time to build trust in the agreement on seasonal minimum prices; code of
course of business dealings based on efficient practice for contracting).
management, open communication and direct
interaction in the field.
Economic viability and incentives (see section B.1.3)

Successful CF arrangements provide conditions that A ssuring reliable supply of required volumes/
contribute to: qualities at agreed dates for buyers.
Meeting end-market requirements (volume, qual- E nabling buyers to utilise logistics/ processing
ity, price, time of delivery). facilities more efficiently.
Increasing farm productivity/ reducing unit pro- R educing VC inefficiencies and hence unit trans-
duction costs through capacity building. action costs (e.g. coordination, logistics).
Increasing market shares through improved R educing unduly high post-harvest losses thus
competitiveness. contributing to reducing unit costs.
Providing better returns on investments/ stabilis- I ntroducing new remunerative crops through
ing incomes of farmers and buyers. technology transfer and innovation.
Assuring reliable and timely access to markets, F acilitating fast adaptation to changing consumer
credits, inputs, etc. for farmers. preferences/ customer requirements (e.g. food
safety/ sustainability standards; shift to super-
markets).
Contract farming arrangements and risks

Successful CF arrangements provide conditions that R educing risks of buyer default (e.g. late or non-
contribute to: payment, unduly high rejection).
A
greeing on clear contract terms and transparent S haring ownership of CF assets according to part-
pricing mechanisms. ner capabilities (e.g. shares for smallholders in the
A
greeing prices/ payment terms beneficial for both logistics centre or the off-taking company as partial
(fair margins, financial liquidity). payment for supplies).
R
educing production, supply, marketing and credit I nvolve neutral 3rd party individuals/ organisa-
risks (including case of force majeure). tions for brokering linkages (e.g. facilitation of
M
otivating farmers to form farmer groups/ associa- trust-building between co-contractors, control of
tions/ cooperatives to realise scale economies and contract observance of farmers and firms).
joint investments (e.g. collection centre) and develop E stablishing equally accessible and mutually recog-
mutual risk sharing. nised dispute settlement mechanisms.
R
educing risks of farmer default (e.g. input diversion,
poaching and side-selling).
B.1/
Technology transfer and innovation
Successful CF arrangements provide conditions that C
ombining financial services with other embed-
contribute to: ded/ external services to facilitate the adoption
Speeding up the adoption of new technologies of innovations and to build capacities for using
and innovations through embedded/ external credits successfully.
services to stimulate increased farm productivity A
ligning VC processes to improve quality assur-
and VC efficiency. ance/ introduce standards and certification with
a view of accessing more lucrative markets.
Investment climate and 3rd party support

Successful CF arrangements require governments/ A
voiding any measures that may create political
development partners/ NGOs to: risks for private sector investments (e.g. undue
Recognising CF as a private sector driven and market interferences).
owned business arrangement that may nev- A
cting as honest brokers/ ethical agents if need
ertheless require 3rd party (external) technical arises to assist in reducing risks of exploitative
assistance, incentives for kick-starting innovative behaviour of buyers or deceptive practices of
businesses and, if necessary, smart subsidies. farmers respectively.
Addressing sovereign tasks that are at the origin
of market failures and constitute risks for the vi-
ability and sustainability of CF.
Sound analysis, planning and monitoring

Successful CF arrangements require a solid analysis, T
he social capital (e.g. trust) and structures (e.g.
planning and monitoring regarding: existing networks), on which CF arrangements
The initial position for starting up a CF scheme can build or which may have adverse effects on
(VC analysis; livelihood framework of farm/ the CF success.
household systems; cost and benefits/ incentives T
he possibilities of and the measures to counter-
for farmers/ buyers). vail a trade-off between household food security
The existing financial/ non-financial and opera- and CF crops (e.g. due to competition for land,
tional services and overall framework conditions labour, capital).
(policies, legislation, public infrastructure). T
he establishment of systems for monitoring/
The suitability of agro-ecological conditions and feedback for learning lessons (good practices,
farming systems in potential production areas. problems) to modify CF arrangements and opera-
tions if necessary.
Altogether, everybody involved has to get straight Sufficient time and resources for the formation,
that starting up a contract farming scheme re- start-up and up-scaling of CF schemes (including
quires all partners to be serious about their com- necessary investments into capacity development,
mitments regarding required time, efforts and the establishment of CF management structures
resources to make the joint undertaking a success. and systems, logistics facilities and operations,
It has to be clearly understood that CF schemes etc.) have hence to be built into the feasibility
usually do not achieve break-even in the first year study, the risk assessment and finally the CF busi-
and quite frequently they will only do so after ness planning.
three to five or even more years.
30
Furthermore, since resource-poor smallholders The following illustration provides an easy to

have to be paid for their supplies from the very recall overview of similar ideas of key success
onset, appropriate measures have to be built into factors for inclusive business models and CF ar-
the CF arrangements to bridge the financing gap rangements respectively.
between short-term payments for supplies and
investments into qualification and infrastruc-
ture and medium to long-term return on invest-
ments. Otherwise, smallholders will not be able to
honour their contracts.
Figure 2/ The new business model principles
(Lundy et.al., 2012, p.83)
1. Chain wide 2. New market 3. Fair and transpa- 4. Equitable access 5. Inclusive inno- 6. Measurement
collaboration linkages rent governance to services vation of outcomes
The resolution of For farmers and their Fair and transparent One of the special New business models The business axiom
problems in both, the organizations, market governance refers to challenges faced by promote innovation states that you cannot
commercial and social linkages should the establishment and small-scale producers by multiple actors manage what you do
performance of new provide a stable enforcement of clear is access to services along the chain in not measure. Our sixth
business models requi- market with clear and consistent grades such as finance, products and services principle is to incorpo-
res all or most chain quality, volume and and standards, clear market information, as well as the pro- rate tailored indicators
actors to set shared price signals as well as commitments to buy and best agronomic cesses that underpin and monitoring plans
goals for collaborati- access to key services and sell certain volu- practices that could both. Innovations to assess the health of
on. The development (Principle 4). mes of certain grades improve quality, should be done ‘with’ the on-going trading
of a systemic view These linkages must at certain times, and yields, food safety, smallholder farmers, relationship as a for-
of the chain recog- contribute to impro- processes of equitable and environmental rather than ‘for’ them. profit business and
nizes and values the ved livelihoods. For risk management. performance. Success- Inclusive access to also its effectiveness as
interdependence of the buyers, solutions must Mutually recognized ful solutions enable innovation provides a vehicle for commu-
actors. Reaching and provide consistent interdependency bet- smallholders to access a means to remain nity development.
implementing agree- supply of safe and ween chain actors is credits, knowledge, competitive in dyna- Constant monitoring
ments often involves quality products at a a key criteria. Shared technology, and de- mic markets; build the of the health of the
identifying one or competitive price. The commercial risk and velop incentives that commercial value of trading relationship
more champions along achievement of both, insurance against encourage producers goods and services; reduces the risk that
the chain to lead the producers’ and buyer’s failure are frequently to invest in their own and, share innovation minor problems will
process. goals requires the cited as the cement of production based on gains among partners, destroy the business.
delivery of social and successful relation- market needs. all of which building
commercial value up ships. business durability.
and down the chain.
B.1/
In a reverse deduction, it can be concluded that f ailure to build solutions for contract default
contract farming fails where key success condi- into farming contracts (e.g. including contract
tions or success factors do not exist. The most terms such as weather insurance or dispute
frequent reasons for failure are: resolution mechanisms that become effective
absence of informed investment decision- in case of default of farmers or buyers or exter-
making both on buyers’ and farmers’ sides due nal risks such as force majeure);
to an ill-informed interest to create quick-wins g overnments/ development partners/ NGOs
and lack of awareness on the high risks entailed creating disloyal competition through the
with a hasty start-up of a joint CF venture creation of subsidised parastatal or NGO-type
without sound analysis and proper business companies, allegedly to provide smallholder
planning; farmers with market access, but realistically of-
governments/ development partners/ NGOs ten not as a viable and sustainable solution; and
promoting CF for development objectives u nderrated complexity of the undertaking
without looking at the viability of the business throughout all phases of CF development
proposition, the required capacities, the risk- (start-up, implementation, consolidation and
aversion of farmers, the investment/ manage- up-scaling) and consequently underestimated
ment capacities of buyers or the specificities of time, effort and resources required from co-
crops/ locations; contractors and 3rd party supporters.
buyers relying on government/ development
partners/ NGOs for the selection of locations Force majeur relates to unforeseeable events after
and farmers without considering that the cri- conclusion of a contract that are beyond the control
teria need to be guided by business reasoning of farmer and buyer. In CF, force majeure may
and not by location decisions and development arise, inter alia, from war, strikes, civil unrest, insect
objectives of 3rd parties; plagues/ disease epidemics or natural disasters
low productivity and trade-offs between (so-called Acts of God) such as drought, floods, hail,
household food security and CF crops especial- storms and lightning. Because of this unforeseeable
ly regarding competition for scarce smallholder and exceptional situation, both farmer and buyer
farm assets (opportunity costs for the use of shall be considered exempted from liability for non-
land, labour and capital assets for CF produc- performance of their contractual duties and shall
tion; even labour is frequently more scarce not be held in breach of contract (partly verbatim
than many may think); citation Pultrone, n.d., p.2).
lack of scope of negotiation/ voice of farmers
in designing CF arrangements and deciding on
contract terms due to uneven balance of power 1.5 Crop suitability for contract farming
(lack of farmer organisation and information Contract farming is not a new approach. Never-
on markets, prices, technologies), intransparent theless, contract farming is an innovative un-
communication by buyers or lack of 3rd party dertaking for most smallholders and for many
mediation; buyers in developing countries. Calling for the
contract default either by buyers (delayed or willingness and capacities to change, contract
non-payment, unjustified rejection) or farm- farming is a quite demanding challenge for both
ers (side-selling, supply of low qualities) due business partners. Farmers have to adopt new
to lack of trust, intransparent contract terms, farming technologies and farm management
opportunistic behaviour and short-sighted skills, develop new negotiation and marketing
preference for short-term benefits over long- capacities, build new alliances in the form of busi-
term advantages (e.g. side-selling by farmers ness oriented farmer organisations and contract
when other buyers offer higher prices without farming arrangements. Buyers have to develop
considering the long-term benefits of reliable enterprise strategies as well as management and
market access especially for products featuring logistics systems and structures that reach far
fluctuating prices); beyond the core business. They furthermore have
32
to provide or leverage technical and financial as- farmers are familiar with the production methods
sistance to promote on-farm innovations neces- and market requirements, then transaction costs
sary to increase productivity and assure quality. are low and spot markets would be the most ef-
Last but not least, both business partners have ficient arrangements. These factors explain why
to change attitudes to build trustful, reliable and many commodities, such as grains, root crops and
mutually beneficial contract relations. It is obvi- pulses, are usually sold through market arrange-
ous that “contract farming is not for everyone. It ments.” (Bijman, 2008, p.11)
requires willingness to honour agreements, deliver
products at the right time, and resist the tempta- By contrast, in quite a number of developing
tion to sell to other buyers.” (Shepherd, 2012) countries CF is favoured by institutional arrange-
ments that historically evolved from (existing
With this in mind, the following criteria may be more or privatised) parastatals for the marketing and/
decisive for the success of contract farming schemes or processing of commodities (e.g. cotton, coffee,
than the technical suitability of certain crops: sugarcane, tea, tobacco).
the careful selection of both business partners;
t he identification of mutual interests and benefits; Goldsmith (1985; cited in Baumann, 2000, p.20)
the awareness on their interdependency; identified five technical requirements that favour
the promise of balanced negotiation influence; the development of a contract system:
the establishment of transparent two-way p
erishability: crops with limited storage capac-
information flows; ity that require fast marketing are more likely to
the development of necessary technical and be contracted than crops suitable for storage;
managerial skills; bulkiness: while crops with a high value per
the establishment of an efficient logistics and unit of weight or volume are more viable for CF,
CF management structure; and bulkier crops with lower value per unit are less
the internal availability or external access to apt if long-distance transport is necessary;
financial resources for pre-financing short-term p ermanence: perennial crops (e.g. tree crops) are
operational costs and medium to long-term more suited since growers cannot easily aban-
investments into qualification, technological don them given the up-front investments that
innovations and infrastructure (e.g. irrigation, only pay off after some years;
access roads, collection centres, transport and p rocessing: crops requiring processing lend
logistics). themselves more to contract farming since
buyers depend on reliable supplies to utilise
In so far, the following typology is not a blueprint installed processing capacities efficiently;
for success, since there are ample cases of failure in q uality: crops varying in quality or grown for
crops that are regarded as promising for contract markets requiring certain food safety, quality or
farming and many (often hidden) success stories in sustainability standards and certification are better
crops that are esteemed to be too challenging for suited for CF than commodities of uniform quality.
contract farming.
The following considerations (adapted and com-
SNV (n.d.) recommends to selecting products that: plemented by the author from Minot, 2007; cited
farmers can grow successfully; in Bijman, 2008, p.11) shed a more comprehensive
have primary and secondary (for lower quality) light on some of the aforementioned criteria. Con-
markets; tract farming schemes are more likely to emerge
are not easily side-marketed; and and sustain if the following conditions are in place:
can make a profit for both, company and farmers. w
hen buyers (processors, retailers, exporters)
expect a sufficient return on investments that
Looking at technical characteristics and market allows to bear the costs of (i) paying quality
access requirements, there are situations that premiums to farmers at least covering additional
lend themselves more to CF than others. “When a production costs (incentive); (ii) supporting
product is of uniform quality and non-perishable, farmers financially in investing into upgrad-
when quality can easily be observed, and when ing farm facilities and equipment (overcom-
B.1/
ing capital constraints of small-scale famers); Rockenbauch, Will and Vielhaber (2013) use the
(iii) providing special inputs (resolving capital, following criteria for typifying product suitability
knowledge and access constraints); (iv) build- for inclusive business models between smallholders
ing farmers’ capacities (resolving education and and buyers:
skills constraints); (v) investing into CF logistics t he product features, the processing stages and
and (vi) managing a CF scheme; the required infrastructure;
when products are perishable, (i) the need to t he degree of farmers’ organisation and the role
coordinate the timing of harvest and delivery of lead firms;
between farmers and buyers becomes crucial for the structure of the value chain (formalisation and
reducing post-harvest losses and resulting loss degree of cooperation/ integration); as well as
of income; (ii) the bargaining power of farmers t he availability of technical and financial services
in spot markets weakens once the products are and the overall framework conditions.
harvested thus motivating farmers to produce
perishable products when there is some guaran- Against these considerations, the authors distin-
tee of market access through farming contracts; guish between three market segments for inclusive
when technologies required for growing certain business models (see also the following graph):
products are demanding and farmers lack the r aw materials (e.g. sugar cane, cotton, palm oil);
necessary technical skills, special inputs and p remium products (e.g. coffee, cocoa, fresh veg-
access to finance for investments into special etables); and
farm facilities and equipment, contract farming s taple crops (e.g. grains, legumes, tubers).
arrangements can compensate through embed-
ded financial and non-financial services.
Figure 3/ Market segments for inclusive business models
(Rockenbauch, Will and Vielhaber, 2013)
Segment I Segment II Segment III
Raw materials for High-value/ labour inten- Staples, mostly for local
Product industrial processing; sive products, mostly for and regional markets;
e.g. sugarcane, cotton, export; e.g. coffee, cocoa, e.g. grains, legumes, tubers
palm oil fresh vegetables
Highly coordinated up to Usually high concentration Little integration and

Value Chain fully integrated value at the down-stream value formalisation; highly
chains; “bottleneck” due chain; growing coordination fragmented value chains
to centralised processing at the farmer level
+ Value Chain Coordination –
Increasing global demand Usually high profit margins; Potentially highly dynamic
and increasing prices due competitive advantage due to growing local and
Opportunities to growing competition of smallholding (e.g. low regional demand (e.g. food,
for sourcing raw materials family labour costs; feed and industrial use)
(e.g. bioeconomy) agro-ecological conditions)
Quality and safety require- High food quality and safety Enabling environment
ments as well as sustain- requirements as well as sus- (e.g. policies, infrastructure);
Challenges ability standards; scale and tainability standards; main- structuring markets
continuity in supply streaming standards into (e.g. public procurement,
local and regional markets quality assurance systems)
34
Approaching the subject from another angle, s mallholder production has no advantage over
Technoserve and IFAD (2011, p.10) distinguish the commercial production;
suitability of crops for CF according to the follow- p oor potential for price differentials (i.e. qual-
ing criteria (verbatim citation): ity, certification); and
high risk of side-selling due to well-developed c rop has strong links to food security.
local/ export markets;
technical expertise/ assistance is not required Each step in the decreasing colour intensity in the
to meet market requirements; following illustration represents one of the afore-
specific varieties are not required to meet mentioned criteria. The summation of the criteria
buyer/ market specifications; per crop range signifies the degree of suitability of
commodity is not input intensive; that array of crops for contract farming.
Figure 4/ Crop suitability for contract farming
(Technoserve and IFAD, 2011, p.10)
High suitability Low suitability
Staple crops
(millet, sorghum, wheat, maize,
rice, barley, teff, etc.)
Legumes
(haricot bean, groundnut,
soybean, cowpea, etc.)
Tubers/pulses
(sweet potato, cassava, sugar
cane, etc.)
Oil seeds
(sesame, rapeseed, sunflower,
castor, etc.)
Tree crops
(coffee, tea, cocoa, cashew,
mango, banana, orange, etc.)
Horticultural crops
(strawberry, tomato, garlic, onion,
chili pepper, paprika, etc.)
High risk of side-selling due to well-developed local/ export markets

Cash crops Technical expertise/ assistance is not required to meet market requirements
(tobacco, cotton, etc.) Specific varieties are not required to meet buyer/ market specifications
Commodity is not input intensive
Smallholder production has no advantage over commercial production
Livestock/Poultry/Aquaculture Poor potential for price differentials (i.e. quality, certification)
(pigs, chickens, fish, prawns, etc.) Crop has strong links to food security
However, as said before there is no one-size-fits- contract partners to seize opportunities of other-
all typology of suitable crops since in some cases wise suitable commodities. Regarding the whys and
location-specific conditions may outweigh factors wherefores that may turn less promising features
limiting the fitness of crops for CF and in other into opportunities and vice versa, the following by
cases the situation on the ground may impede far not exhaustive list gives some ideas:
limited assets in small farms especially land,

B.1/
Further reading section B.1
labour, capital (while capital constraints can be Bijman, Jos (2008): Contract farming in developing countries: an overview;
Working Paper; Wageningen University; available online at:
addressed through embedded or external finan- http://edepot.wur.nl/1763
cial services, competition of CF with food crops Eaton, Charles and Andrew W. Shepherd (2001): Contract farming – Part-
for land and labour quite frequently reduce the nerships for growth: A guide; FAO [Food and Agriculture Organization of
the United Nations] Agricultural Services Bulletin 145; available online at:
CF-potential); http://www.fao.org/docrep/014/y0937e/y0937e00.pdf
weak infrastructure and transport systems can be DCED [The Donor Committee for Enterprise Development] (2001):
Business Development Services for Small Enterprises: Guiding Princi-
an advantage for establishing CF for otherwise ples for Donor Intervention; available online at:
less suitable crops since the establishment of lo- http://www.enterprise-development.org/download.ashx?id=1291
gistic systems can open market opportunities for Gent, Rudy van (n.d.): Contract farming; paper prepared by AGRIDEV
Consult Ltd., Lusaka; available online at:
remote farmers, provided the logistical solutions http://apf-contractfarming.wikispaces.com/file/view/WUR+WI+Contra
are viable despite existing constraints; ct+Farming+Presentation+070706.pdf
Holmes, Sarah (2012): Key success factors and best practices in outgrower
previous successful cooperation between farmers schemes; Agribusiness Forum 2012; available online at:
and buyers in other business areas can compen- http://www.emrc.be/documents/document/20111107141531-agri11-
workshop_v-technoserve.pdf
sate crop features that may elsewhere impede CF
Lundy, Mark, Gertjan Bexc, Nancy Zamierowski, Alexandra Amrein, John
sustainability (e.g. the recent move of cotton CFs Jairo Hurtado, Erika Eliana Mosquera, Fernando Rodríguez (2012):
to start up staple crop CFs for improved house- LINK methodology: A participatoy guide to business models that link
smallholders to markets; International Center for Tropical Agriculture
hold food security/ additional farm income); (CIAT), Cali, Colombia; available online at:
well organised smallholder farmers who benefit http://dapa.ciat.cgiar.org/wp-content/uploads/big-files/2012/LINK_
Methodology.pdf
from membership in functioning farmer organi- MacDonald, James (2004): Contracts, Markets, and Prices: Organizing the
sations (groups, associations, cooperatives) and Production and Use of Agricultural Commodities; United States Depart-
ment of Agriculture; Economic Research Service; Agricultural Economic
the provision of relevant services (e.g. extension, Report Number 837; available online at:
credits, collection of produce) or newly emerging http://www.ers.usda.gov/media/284610/aer837_1_.pdf
well-educated young farmers; Pearce, Douglas (n.d.): Rural Finance Innovation Case Study – Buyer and
Supplier Credit to Farmers: Do Donors have a Role to Play? available
inter-reliant investments between the firm and online at:
the farmers that create strong interdependency http://pdf.usaid.gov/pdf_docs/PNADF042.pdf
Prowse, Martin (2012): Contract Farming in Developing Countries:
can contribute to making contracts self-en- A Review; Institute of Development Policy and Management, University of
forcing; Antwerp; Agence Française de Développement (AFD); available online at:
http://www.value-chains.org/dyn/bds/docs/830/12-VA-A-Savoir_Con-
ethical approaches of companies that are capable tractFarmingReview.pdf
and willing to invest into smallholder community Pultrone, Caterina (n.d.): Legal fundamentals for the design of contract
development projects inspired by the ideas and farming agreements; FAO; with contribution from Carlos A. da Silva;
available online at:
reputational benefits of CSR; http://www.fao.org/ag/ags/contract-farming/toolkit/briefs-list/en/
business-driven approaches of companies capa- Rockenbauch, Till, Margret Will and Burkhard Vielhaber (2013): Inklusive
Geschäftsmodelle in der Agrarwirtschaft – Anknüpfungspunkte für die
ble and willing to invest into capacity develop- Internationale Zusammenarbeit (Inclusive Business Models in Agri-
ment and market integration of smallholders culture – Entry Points for International Cooperation); edited by Federal
Ministry for Economic Cooperation and Development (BMZ); forthcoming;
through inclusive business models; and available at: till.rockenbauch@giz.de
enabling framework conditions with regard to Silva, Carlos Arthur B. da (n.d.): Critical Issues in Contract Farming; FAO
CF policies, legislation and enforcement and Rural Infrastructure and Agro-industries Division; available online at:
http://www.unidroit.org/english/meeting/papers/19-dasilva.pdf
smart subsidies as well as access to financial and Technoserve and IFAD [International Fund for Agricultural Develop-
non-financial support services that strengthen ment] (2011): Outgrower Schemes – Enhancing Profitability; Technical
Brief September 2011; available online at:
the capabilities of contract partners and foster http://www.ifad.org/ruralfinance/pub/technoserve.pdf
the commitment of complying with contract Vermeulen, Sonja and Lorenzo Cotula (2010): Making the most of agricul-
agreements. tural investment: A survey of business models that provide opportuni-
ties for smallholders; IIED/FAO/IFAD/SDC; London/ Rome/ Bern;
ISBN: 978-1-84369-774-9; available online at:
Accordingly, it remains to be evaluated in every sin- http://www.ifad.org/pub/land/agri_investment.pdf
gle case, which location-specific conditions foster For a selection of related papers:
and which limit the prospective and desired success FAO [Food and Agriculture Organization of the United Nations] (n.d.):
Contract Farming Resource Centre; available online at:
of a planned contract farming scheme. The delibera- http://www.fao.org/ag/ags/contract-farming/en/
tions in this section give an idea of the complexity of Prowse, Martin (2012): Contract Farming in developing Countries:
Appendices; available online at:
factors that need to be considered before venturing http://www.afd.fr/webdav/shared/PUBLICATIONS/RECHERCHE/
into a CF arrangement. Scientifiques/A-savoir/12-VA-A-Savoir-Appendices.pdf
36
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moderation of processes, technical and financial assistance
Headline
B/B.2/
38
B.2/ Facilitation of contract farming: moderation
of processes, technical and financial assistance
2.1 Justification and objectives the dynamics in each local setting, a participatory
It is obvious that contract farming offers op- and action-oriented bottom-up approach is the
portunities for overcoming market access barri- most appropriate methodology for CF facilita-
ers for farmers and procurement constraints for tion. While letting the farmers and firms do their
buyers. However, prevailing market imperfec- business, the public sector, development partners
tions often impede the development of trustful or NGOs interested in assisting CF development
and long-term farmer-firm business linkages in have to be prepared to provide support in areas, in
many developing countries (see section B.1.4). The which the private sector is not capable of helping
reasons are manifold and lie both in the private itself.
sector (market failure due to e.g. low productivity,
lack of scale economies, asymmetric information, With well-designed arrangements and true com-
inequalities in ownership and voice and result- mitment of business partners and supporting
ing mistrust) and the public sector (government organisations, contract farming can become a
failure due to e.g. inadequate economic and rural strong tool (among other measures) for changing
development policies, poor public infrastructure, investment challenges into business opportunities
inappropriate administration and resulting over- while contributing to overarching development
all weak investment climate). As a consequence, objectives. Aspiring to support the emergence of
CF business start-up costs, unit production and viable and sustainable CF schemes and to achieve
transaction costs as well as post-harvest losses are broad-based development impact, 3rd party facili-
high and products cannot compete in regional tators have to plan for adequate resources and
and international markets and often even not a sufficient time horizon for their assistance (‘as
with growing imports in local markets. little and short as possible as much and long as
necessary’). At the same time, they have to develop
In this setting, CF development is a risky and and communicate a clear exit strategy from the
costly venture for farmers and buyers. Consider- very beginning.
ing the often significant support needs for inte-
grating smallholders into CF schemes that bear Since the requirements for 3rd party assistance are
on the company’s assets and liquidity and hence CF-specific, decisions on support have to be based
on its competitiveness, public or private sector on a capacity development and service needs
organisations, development partners or NGOs assessment of all stakeholders involved in start-
may decide to provide assistance for initiating ing up a particular CF scheme, including farmers,
and starting up promising CF ventures as well as nucleus farmers and buyer’s staff just like exter-
consolidating and up-scaling viable CF business nal stand-alone service providers if required (see
models. Facilitation of contract farming may section C.3, Phase 1, Step 2). Forming part of the
include the moderation of CF development pro- CF business plan (see section C.3, Phase 1, Step 3),
cesses as well as technical and financial assistance the results of the needs assessment have to guide
respectively. the decision of 3rd party facilitators’ on the type
and timing of assistance to provide. By doing so,
2.2 Facilitation principles, facilitation tasks and facilitators offer truly demand-oriented assistance
facilitator profiles while avoiding top-down offer-oriented ap-
Given the significant role facilitators may play in proaches that neither meet actual requirements,
CF development, certain principles have to be re- nor find the acceptance of farmers and buyers and
spected. With contract farming first and foremost may even jeopardise CF development.
being a private sector activity, facilitators have
to leave the driver’s seat to farmers and their The following overview on types of CF-facilita-
business partners as they bear the investment tion gives a rough although by far not compre-
risks and they have to take business decisions on hensive idea of possible support needs (for more
their own. Since the questions how the required details see section C.3, Phase 1, Step 2):
transformation is managed and who contributes
to making necessary changes happen depend on
the commitment of stakeholders in each VC and
Facilitation of contract farming: 39
B.2/
Moderation assistance for CF development It is obvious that CF development requires strong
may include quite a variety of activities such as support at the grass-roots level (micro level) for
facilitating the identification and screening of upgrading farmers’ capacities, developing farmer
potential CF business partners, the intermedia- groups, linking farmers and firms, supporting
tion of contacts, the moderation of meetings trust-building between suppliers and buyers,
and negotiations, the mediation of conflicts setting up produce collection facilities as well as
or the coordination of external support. Of establishing embedded or stand-alone non-finan-
particular importance is the ability of facilita- cial and financial services. With a view to devel-
tors to act as ‘honest brokers’ (sometimes also oping sustainable structures for CF promotion,
referred to as ‘ethical agents’) capable of facili- technical and financial assistance are furthermore
tating trust-building between smallholders and usually necessary for developing an effective and
buyers (e.g. by supporting the development of efficient service sector (at the meso level) and im-
joint solutions for transparency and participa- proving the overall business and investment cli-
tion, equal voice, mutual benefits and fair risk mate (at the macro level). Hence, CF development
sharing). requires a systemic approach integrating meas-
Technical assistance may be provided in the ures at the micro, meso and macro levels as well
form of support to analysing VCs, implement- as at the meta level. That is often even the most
ing CF relevant research and transferring tech- vital area for facilitation with regard to encourag-
nologies (e.g. improved varieties, integration of ing changes in business attitudes, cooperation
CF products into prevailing farming systems, in farmer groups and fostering trust-building as
innovative production, logistics and processing perhaps the most important factor for success in
technologies and development of good prac- CF development.
tices), training trainers/ company or external
extension staff, developing CF business plans, In many cases, support organisations will work
drafting model CF contracts, setting up quality with teams of facilitators acting at different
assurance systems, supporting organisational geographical levels (e.g. district, regional, national)
development of farmer groups/ associations/ and assuming different tasks. Roles and responsi-
cooperatives, qualifying service providers, as- bilities can hence be distributed according to the
sisting policy-makers in relevant areas and the skills and experiences of the team members (e.g.
like. extension, training, service development, business
Financial assistance may take the form of planning, and policy advice). To avoid confusion
financial services development (e.g. adequate and instead create confidence in the team, the
credit, savings and insurance products), legal roles and responsibilities of different members
framework revision (e.g. leasing regulations) or have to be communicated to farmers, buyers and
public sector incentive scheme development to other support organisations.
(e.g. reduced levies and fees, provisions for tax
breaks, credit guarantees or smart subsidies).
Of particular importance for the success and
sustainability of CF schemes is to develop solu-
tions for bridging the financing gap between
short-term payments to farmers necessary to
support their livelihoods and initial invest-
ments into qualification and CF infrastructure
on the one side and the return on investments
that usually only materialises in the medium to
long-term on the other side. Even if subsidies
are not excluded, developing suitable financial
services should be given priority over providing
subsidies, which often do not trigger sustain-
able solutions.
40
As the previous thoughts suggest, there is a large he International Institute for the Unification
T
variety of public and private, public-private, of Private Law (UNIDROIT) in collaboration
development partner and non-governmental with FAO and representatives from producer
organisations and individuals that may play a role and industry organisations prepares a legal
in facilitating CF development. And some of the guide on contract farming (see UNIDROIT,
meso and macro level local players may require 2013a and 2013b).
support themselves. In some countries, institu-
tional approaches have been developed either Given the investment risks farmers and firms take
initiated and governed by the public sector (partly by venturing into joint CF schemes, the responsi-
regulatory and hence mandatory) or initiated and bility of CF facilitators for providing competent
operated by the private sector (voluntary but in support cannot be underestimated. Since the
the sense of self-regulation) or, in some instances, profile of honest brokers encompasses techni-
jointly developed by the public and private sec- cal, business and managerial expertise as well as
tors. The following very few examples illustrate strong communication and networking skills, it is
the broad scope of institutional approaches to obvious that facilitators have to be well qualified.
supporting or regulating contract farming respec- While the competence and an open-minded and
tively: performance-oriented personality are essential
Producer organisations may support members for farmers and buyers to develop confidence in
in understanding farming contracts, weighing the facilitator’s intentions and support capacities,
risks and opportunities and negotiating with incompetent support and wrong methods, inad-
buyers (e.g. Kenya National Federation of Agri- equate attitudes in dealing with the private sector
cultural Producers/ KENFAP). (farmers, traders, processors, service providers,
Public or private organisations develop codes associations) and top-down approaches are all too
or practices to facilitate transparent and fair often at the origin of CF failure.
partnerships or model contracts (templates
adaptable to the individual case) to facilitate CF By bringing in an outside impartial viewpoint,
start-ups and CF development (e.g. Horticul- facilitators can play a key part in contributing
tural Crops Development Authority/ HCDA in sustainability considerations and solutions with
Kenya). regard to achieving broader economic devel-
Inter-professions in the francophone sys- opment impacts, improving social equity and
tem unite representative organisations along introducing environmentally sound production,
the entire value chain and usually provide a trading and processing practices.
platform for negotiations between representa-
tives of farmer and buyer organisations (e.g. on
floor/ minimum prices, seasonal planning).
Commodity Boards (public sector entities in
some countries increasingly involving private
representatives) regulate sector development
in general and frequently also provide regula-
tions (mandatory) or standards/ guidelines
(voluntary) for contract farming (e.g. the Cotton
Board of Zambia).
T
he Association of the Inter-profession for Cot-
ton in Burkina Faso (AICB) established a ‘price
smoothing fund’ with the objective to reduce
the amplitude of yearly fluctuations in produc-
er prices (the formerly public, recently revised,
now public-private fund still has to prove its
feasibility).
Facilitation of contract farming: 41
B.2/
2.3 CF facilitation in least developed countries or Further reading section B.2
fragile environments Curtis, Lisa et.al. (2010): Private Sector Development in Conflict-Affected
Environments: Key Resources for Practitioners; edited by The Donor
With regard to the often-expressed perception Committee for Enterprise Development (DCED); available online at:
that it is more difficult to promote CF in Least De- http://www.enterprise-development.org/page/download?id=1627
veloped Countries (LDCs) or fragile environments Fowler,Ben and Adam Kessler (2013): Measuring Achievements in Private
Sector Development in Conflict-Affected Environments: Practical
than in developing countries, Prowse (2012, p.6) Guidelines for Implementing the DCED Standard; edited by The Donor
comes to the following conclusion: “Interestingly, Committee for Enterprise Development (DCED); available online at:
http://www.enterprise-development.org/page/download?id=2098
the comparison of ‘successful’ with ‘failed’ cases
Grossmann, Helmut et.al. (2009): Sustainable Economic Development in
indicates that contract farming can operate suc- Conflict-Affected Environments: A Guidebook; edited by Daniel Bag-
cessfully in a very wide range of socio-economic witz, Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ;
now GIZ); available online at:
conditions, including conflict-affected countries, http://www.enterprise-development.org/page/download?id=1282
fragile states and Least Developed Countries (as UNIDROIT [International Institute for the Unification of Private Law]
contract farming is one response to overcom- (2013a): Preparation of a Legal Guide on Contract Farming – A preliminary
outline of issues;
ing the very high transaction costs in the thin http://www.unidroit.org/english/documents/2012/study80a/wg01/s-
and imperfect markets commonly found in such 80a-01rev-e.pdf
UNIDROIT (2013b): Report on the First Meeting of the UNIDROIT Work-
contexts).” ing Group for the preparation of a Legal Guide on Contract Farming,
Rome, January 2013; available online at:
http://www.unidroit.org/english/documents/2012/study80a/wg01/s-
Since the factors hampering CF development are
80a-02-e.pdf
generally the same (ranging from risk-adversity
For a selection of related papers:
of resource-poor smallholders, prevailing mis- DCED [The Donor Committee for Enterprise Development]: PSD in
trust between farmers and firms, inexistent or at Conflict-Affected Environments; available online at:
least inefficient services and an overall obstruct- http://www.enterprise-development.org/page/cae
FAO [Food and Agriculture Organization of the United Nations] (n.d.):
ing business investment climate), the possible Contract Farming Resource Centre; available online at:
solutions are largely compatible. However, given http://www.fao.org/ag/ags/contract-farming/en/
the specific situation in LDCs and fragile environ- Prowse, Martin (2012): Contract Farming in developing Countries:
Appendices; available online at:
ments, CF facilitation has to apply a ‘conflict-lens’ http://www.afd.fr/webdav/shared/PUBLICATIONS/RECHERCHE/
and may require more resources and a longer time Scientifiques/A-savoir/12-VA-A-Savoir-Appendices.pdf
horizon than in other settings. Since there is no

one size fits all answer to the question which type
and intensity of technical and financial assistance
is appropriate, all depends on the analysis of the
specific capacity development and service needs
of farmers and firms in their respective environ-
ments. It goes without saying that more attention
has to be paid to sound analysis, especially regard-
ing social structures and trust/ mistrust relation-
ships as well as to identifying and integrating
mutually respected opinion leaders.
Private sector development in general and value

chain development (including contract farm-
ing) in particular are recognised as possible tools
(among others) that can contribute to stabilising
fragile environments through economic devel-
opment (see Fowler and Kessler, 2013, p.12ff).
Recommendations for planning and managing
projects aiming at facilitating value chain devel-
opment in conflict-affected environments that
may also serve CF development needs can be
drawn from Curtis et.al. (2010; see in particular
Appendix G, p.45ff) and Grossmann et.al. (2009).
42
InZ
GI t ecronnattri a
o cn ta lf aL re m
adi ne g
r schoi n
p cTerpat i n i n g 43
Headline
C/C.1/
“Undoubtedly, there are costs in creating trust or

dealing only with those with whom you have long-term
continuing relationships. Nonetheless, these may be
necessary costs because formal impersonal contract is
too weak a reed to support business transactions.”
(Macaulay, 1994, p.6)
44
C/ The contract farming facilitation guide
This guide offers a structured and comprehensive

approach for the planning, initiation and implemen-
tation of contract farming schemes. Since feasi-
bility is decisive for the success and sustainability
of CF arrangements, the guide attaches priority to
a business-oriented approach. Yet, development
objectives are incorporated and in the ideal case
they are anyhow congruent with the CF business
objectives.
GI Z c o n t r a c t f a r m i n g c o n c e p t 45
C.1/ GIZ contract farming concept:
the central role of CF business model selection
C.1/
Contract farming is a business model that forms d
esign of an efficient CF management system
integral part of the business strategies of firms enabling the buyer to establish close working
and farms as co-contractors. Newly introducing relations with farmers (directly or indirectly
contract farming implies that both, firms and through intermediaries);
farms, have to adopt innovative business models p
rovision of room for ‘learning by doing’ to
that overlap at the farm supply-firm procurement adapt the CF business model as need arises dur-
interface (see insert and following figure). The ing the course of implementation.
design of a business model for the management
of the farm supply-firm procurement interface A business model is characterised by the logic and
has to be guided by the following criteria for suc- the arrangements of how a company (farm or firm)
cessful CF: creates, delivers and captures value. As the follow-
creation of mutual benefits (incentives), e.g. ing illustration shows, the CF business model is
through increased productivity, reduced post- challenging since it closely links the buyer’s strategy
harvest losses, reduced transaction costs and with the farming systems at the farm supply-firm
improved market access respectively; procurement interface. The illustration perfectly
negotiation of fair and equitable contract terms depicts the interdependency between the co-con-
relevant for successful contract fulfilment (e.g. tractors and the risks involved if the design of the
prices, supply quotas, embedded services, rejec- CF model is not appropriate for committing one or
tion modalities, payment terms); the other partner to fulfil their obligations.
Figure 5/ CF business model for the management of the farm supply-firm procurement interface
Contract farmers’
business model
(farming system of small,
Farm supply-
medium or large-scale
firm procurement
farmers or farmer based Buyer’s
interface
organisation) business model
(off-taking traders or
processors)
CF business model for managing

the farm supply-firm procurement interface
∙ Informal model
∙ Intermediary model
∙ Multipartite model
∙ Centralised model
∙ Nucleus estate model
(and intermediate CF models and forms of operations)
The conceptual foundations in the first part of t he incentives and disincentives for CF in
this guide provide essential information for sup- section B.1.3 (Box 3);
porting the selection of appropriate CF business t he conditions for success and failure in
models: section B.1.4; and
the description of CF business models in t he discussion on crop suitability in
section B.1.1 (Box 1 and Figure 1); section B.1.5.
46
IP n
r to ecre ns a
s -tsi to rnuacl t Lueraed: e r s h i p T r a i n i n g 47
three phases for developing contract farming schemes
C/C.2/
48
C.2/ Process-structure:
A well-planned and practice-oriented strategy
is required for translating the theory of contract
farming into action. High-level management com-
mitment of firms, serious commitment of farmers
and reliable support from facilitators, an adequate
time horizon and sufficient resources provided,
this guide can give valuable input for building sus-
tainable CF schemes and avoiding obstacles in the
course of relationship building and CF business
development. This guide proposes three phases for
building sustainable contract farming structures
and workable management systems for the benefit
of both, farmers and buyers:
Phase 1: Initiate & plan;
Phase 2: Implement & learn;
Phase 3: Sustain & grow.
The following illustration gives an overview of the

phases and the related recommended steps. The
rationale and proposed procedures of each phase
and each step will be further explained in the suc-
ceeding sections
Figure 6/ Process structure: phases and steps for developing CF schemes
Phase 1 Phase 2 Phase 3

Initiate & plan Implement & learn Sustain & grow
Step 1 Step 4 Step 7

Decision to develop Negotiation and acceptance Continuous improvement
a CF scheme of CF contract for sustainability
Development of a CF Start-up of CF Generic growth
capacity development plan field operations through up-scaling
Step 3 Step 6
Development of Monitoring, feedback
a CF business plan and learning
For a full picture of the overall process structure

including phases, steps and related activities, see
Figure 7 below. As a printout, the following figure
may be instrumental when navigating through
the phases, steps and activities in this part of the
handbook.
Process-structure: 49
Figure 7/ Overall process structure: phases, steps and activities for developing CF schemes
C.2/
(as a printout, the following figure may be instrumental for navigating through the phases, steps and activities in this part of the handbook)
Activity 1.1
Clarify the company’s interest in and P. 55
........... .....................................................................................................................................................................................................
capacities for initiating a CF business model
Step 1 Activity 1.2
Decision to develop Realise a rapid screening of potential P. 56
a CF scheme production areas and farming systems
Activity 1.3
Map the Value Chain (VC operators, P. 57
VC economics, VC upgrading needs)
Activity 2.1
(Pre)Select production area(s) and farmers/ P. 62
farmer groups for the start-up phase
Step 2
Development Activity 2.2
Assess farmers‘/ groups’ and buyer‘s capacity P. 64
of a CF capacity development and service needs
development plan
Phase 1 Activity 2.3
Initiate & plan Draft a CF service plan P. 66
(embedded and external services)
Activity 3.1
Screen alternative CF arrangements P. 69
and select an appropriate CF business model
Activity 3.2
Outline the prospective structure and P. 71
Step 3 management plan of the CF business model
Development of
a CF business plan Activity 3.3
Outline contract details (1st draft only P. 73
reflecting the buyer‘s perspective)
Activity 3.4
Draft a CF business plan (incl. prospective P. 80
return on investment, risk assessment, etc.)
Activity 4.1
Prepare the CF agreement and enable P. 87
farmers to take informed business decisions
Step 4
Negotiation Activity 4.2
Offer the CF contract and explain P. 89
and acceptance of
the specifications to farmers
CF contract
Activity 4.3
Accept the CF contract following fair P. 90
and transparent negotiations
Activity 5.1
Finalise the CF business and management P. 94
Phase 2 plans and frame a seasonal CF budget
Implement & learn
Step 5 Activity 5.2
Start-up of Set up CF infrastructure and management P. 96
CF field operations for field operations
Activity 5.3
Develop CF capacities of farmers, farmer P. 98
groups, field and management staff
Activity 6.1
Step 6 Set up a CF business information system P. 101
for farmer-firm interface management
Monitoring,
feedback and learning Activity 6.2
Establish routines for feedback to farmers, P. 102
field staff and management
Step 7
Continuous improve-
Phase 3 ment for sustainability
Sustain & grow Step 8
Generic growth
through up-scaling
50
I n t ePrhnaastei o1 n
: a
I nl i Lt ei a t
d ee r& s p
h li a
p nT r a i n i n g 51
Headline
C/C.3/
52
C.3/ Phase 1: Initiate & plan

It goes without saying that the necessary adop- the strengths and weaknesses of actors involved
tion of new managerial and technical skills as as well as the opportunities and risks connected
well as the necessary change in behaviour (e.g. with the adoption of CF as an innovative busi-
commitment to fulfil contracts) and attitudes (es- ness model. To assess the feasibility of the busi-
pecially trust, transparency and fairness) of both ness model and design realistic and realisable CF
parties require a careful planning to translate into arrangements it is hence necessary to analyse
viable CF arrangements. Even if most smallhold- the VC and to assess the investments required
ers so far do not realise that they run a business for the selection of co-contractors and for the
model and require a business strategy, they have establishment of appropriate CF arrangements.
(to be assisted) to develop a farming-system based Furthermore, it is necessary to assess the needs
business plan that serves as basis for informed and related costs for upgrading the performance
CF negotiations as well as for well-founded busi- of farmers and other actors involved in the CF
ness and investment decisions (e.g. annual crop scheme with regard to technology transfer and
planning). capacity building (individual farmers and farmer
based organisations respectively) as well as the in-
Solid farm, firm and CF business planning de- vestments related to the establishment of logistic
pends on a sufficiently profound but as simple as facilities and CF management structures. Finally,
possible analysis of the current supply-demand the terms of the CF contract are informed by the
situation and prospective future market trends, results of the VC analysis as well as the selected
the existing business and investment climate, CF business model and the CF management plan.
the cost-benefit of alternative business solutions, The following illustration captures these linkages.
Figure 8/ V
alue chain analysis as basis for the selection of a CF business model, the design
of CF business and management plans and the negotiation of a CF contract
VC analysis considering Selection of CF business CF business plan

∙ VC operators‘ capacities model based on principles Brief analysis; objectives; business
(e.g. management, technical) partners; product requirements;
∙ VC economics (costs, margins) marketing/ development/ financial plans;
(e.g. production/ transaction Trust Scope of funding
costs, margins) transparency, negotiation
CF management plan
participation voice
∙ Social impacts Field operations plan; staffing;
(e.g. farm communities) responsibilities
∙ Environmental impacts Incentive Risk
Farming contract
(e.g. soil fertility, climate) mutually sharing/
Legal obligations; farmers’ and
beneficial mitigation
∙U
pgrading needs buyers’ obligations; pricing, marketing
business of risks
(e.g. management, technologies) and payment terms
Objectives of phase 1 “initiate & plan”

The purpose of phase 1 is to assess the feasibility t o develop solutions:
of the envisaged contract farming scheme. The CF internal: CF business model, CF business
outputs are: plan, CF management plan, CF contract;
to understand the opportunities and risks: CF external: CF support/ facilitation service
CF internal: buyers’ and farmers’ incentives, plan.
attitudes and capacities;
CF external: markets, support services, frame-
work conditions, motivation of facilitators;
Phase 1: Initiate & plan 53
Figure 9/ Three steps and related activities for phase 1 “initiate & plan”
C.3/
Decision to develop Development of a CF capacity Development of a
a CF scheme development plan CF business plan
– identify opportunities and – identify non-financial and – outline solutions for the
risks, costs and benefits financial service needs start-up and operation of the CF
Activities Activities Activities

1.1 2.1 3.1
Clarify the company’s interest (Pre)Select production area(s) Screen alternative CF
in and capacities for initiating and farmers/ farmer groups for arrangements and select an
a CF business model the start-up phase appropriate CF business model
1.2 2.2 3.2
Realise a rapid screening of Assess farmers‘/ groups’ and Outline the prospective
potential production areas and buyer‘s capacity development structure and management plan
farming systems and service needs of the CF business model
1.3 2.3 3.3
Map the Value Chain Draft a CF service plan Outline contract details
(VC operators, VC economics, (embedded and external services) (1st draft only reflecting the
VC upgrading needs) buyer‘s perspective)
3.4
Draft a CF business plan (incl.
prospective return on investment,
risk assessment, etc.)
Facilitation, if and as required: moderation, technical/ financial assistance
Depending on the situation, neither all three Further recommendations

steps and all activities have to be implemented, R
educe the complexity of analysis to ‘as much
nor have the activities to be applied in the given as necessary, as little as possible’.
sequence. C
onsider that a viable return on investment for
both co-contractors is key to success.
Key recommendation C
onsider that the adoption of innovations
Even if Step 1 will primarily involve the man- requires commitment, resources and time.
agement of the off-taking company as well as P
lan a gradual CF growth to reduce risks and
internal and external key experts but not the costs of necessary learning loops.
farming community, due attention has to be paid
to informing and involving potential smallholder
suppliers before rumours reach farmers’ commu-
nities bearing the risk of:
creating false hopes about easy market access,
premium prices or the like; or
stoking fears about loss of autonomy or that
smallholders will be driven off their lands or
the like.
54
Step 1/ Decision to develop a contract farming scheme – identify opportunities

and risks, costs and benefits
Looking at successful and failed CF schemes shows that level management commitment and decision-making is
the point in time and the way they were planned are required given the investments involved for setting up and
critical for the outcome. For the right point in time, the operating CF schemes.
pressure to change for internal or external reasons (e.g.
competitive pressure) is an important criteria for success. To reduce the risks and associated costs of failure, success
As regards planning, a structured and competent analysis rather has to happen by design than by default. Investing
is vital for success. enough time and money into an assessment of the feasi-
bility, of opportunities and risks and prospective costs and
Whether introduced by processing or trading companies, benefits will pay back through more secure and sufficient
parastatals or cooperatives, the decision whether or not return on investments for sustaining the CF scheme.
to embark on CF is a strategic business decision. High-
Box 5/ Step 1 – Activities, issues to be considered and milestone

Activities
1.1 Clarify the company’s interest in and capacities for 1.3 Map the value chain (VC operators, VC economics,
initiating a CF business model VC upgrading needs)
1.2 Realise a rapid screening of potential production
areas and farming systems
Issues to be considered
In the decision on a CF scheme, the following risks have Disloyal
competition through the creation of subsi-
to be considered: dised parastatal or NGO-type companies, allegedly to
Insufficient
preparation due to an ill-informed provide smallholders with market access, but realisti-
interest to create quick-wins and lack of awareness cally often not as a viable and sustainable business
on the perils entailed with a hasty startup of a CF solution;
venture without sound analysis and proper business Over
or underestimating the capacities of farmers
planning; (e.g. neglecting the potential competition of food
Giving
development objectives priority over the and cash crops for scarce land, labour and capital;
viability of the business model thereby neglecting underrating the capacities of farmers in producing
problems that put the success of the CF at risk (e.g. traditional crops, peer learning, self-organisation,
insufficient capacities of smallholders, inappropriate 1st stage processing e.g. grading, de-hulling, drying).
production areas, insufficient company resources);
Milestone
An appropriate CF business model is selected and
outlined.
C.3/
Activity 1.1/ Clarify the company’s interest in and capacities for initiating
a CF business model
Since the upfront investments into an innovative CF requirements, the supply-side structures as well as the
business model will only pay back if the products can be company’s technical and managerial capacities are to be
sold in the end, the company has to know its markets and considered. Finally, a strategic decision has to be taken on
the respective market access requirements. Furthermore, the sought return on investment.
the product characteristics, the company’s procurement
Box 6/ Activity 1.1 – Purpose, selected questions and selected tools
Purpose
The purpose of this activity is to clarify the company’s
interest in and capacities for initiating and developing a
CF business model.
Selected questions
The following questions give ideas for clarifying the with large-scale farms, backward/ forward integra-
company’s interest in and capacities for initiating a CF tion with own estates)?
business model (the list of questions has to be complet- H as the company got the necessary financial/ human
ed according to the reality on the ground): resources for establishing a CF and assuring embed-
Is there a viable long-term market opportunity? ded services/ presence in the field for trust-building
Which market and price trends/ fluctuations have and monitoring?
an influence on CF viability (e.g. world market prices, D oes a CF scheme promise sufficient advantages over
seasonal price fluctuations)? the current supply model to justify the required up-
Which market access requirements are to be met (e.g. front investments and recurrent operational costs of
food safety and quality, traceability, sustainability a CF business model?
certification, packaging, labelling)? I n conclusion: Which interest and which capacities
Which product features lend themselves for ventur- has the company got for initiating a CF business
ing into CF (e.g. market access requirements, specific model? Subject to further analysis: Which advan-
inputs, technological complexity, outsourcing first tages have smallholders over large-scale production?
stage processing)? Which production and (e.g. 1st stage) processing
Which alternative procurement options compete stages can presumably be outsourced at a reasonable
with a smallholder CF solution (e.g. spot market, CF cost-benefit for both co-contractors?
Selected tools
Internal brainstorming at management level Sources (see Bibliography):
Consultation with internal or external technical C
heck-list of issues to address when developing link-
resource persons ages; in: Shepherd, 2007, p.57
Q
uestion Guide #1; in: Action for Enterprise and
Match Makers Ltd., 2009, p.3f
56
Activity 1.2/ Realise a rapid screening of potential production areas and farming systems
The procurement needs identified in activity 1.1 guide key experts who are knowledgeable about the farming
the rapid screening of potential production areas in dif- conditions in different locations. Based on the rapid as-
ferent locations of the country or sub-region. Usually, sessment, the company or the key experts develop a plan
such a rapid assessment can be realised through desk for a more in-depth VC analysis in pre-selected areas (see
research and by organising a round-table discussion with activity 1.3).

Purpose
The purpose is to pre-select possible production sites systems, labour availability, traditional knowledge,
based on a rapid assessment of agro-ecological and existing infrastructure).
socio-economic conditions (e.g. prevailing farming
Selected questions
The following questions give ideas for realising a rapid D o farmers already have experience in cooperating
screening of potential production areas and farming within farmers’ organisations (important for scale
systems (the list of questions has to be completed ac- economies, peer learning, peer control e.g. for group
cording to the specific needs of the off-taking company loans/ certification)?
and the reality on the ground; some questions may not D o farmers have the necessary capabilities (e.g. tradi-
be answered in a first rapid assessment but need a more tional knowledge) and commitment?
in-depth analysis and field visits): H ow do farmers perform (e.g. productivity, produc-
Which production areas are appropriate with regard tion unit costs, quality)?
to agro-ecological and climatic conditions, land C an productivity be increased, production unit costs
tenure for farmers, cropping history, proximity to the reduced, quality improved?
company’s collection centre(s), community frame- D o farmers already sell to the market/ supply other
work conditions (e.g. roads, utilities, community companies/ work in a CF scheme?
support, levies)? I s there potential for clustering several farmers’
Do the prevailing farm/ household systems favour organisations around collection centres?
the integration of the CF crop, or is there a risk of A re the farmers capable of doing 1st stage processing
competition for limited land, labour, capital assets? Is (e.g. grading, de-hulling, drying)?
it recommended to provide solutions for nutrition- I n summary: which conclusions can be drawn from
balanced cash crop promotion? the screening of potential production areas and the
Do the socio-cultural conditions favour cooperation pre-selection of areas that are promising for starting
with the company (e.g. existing networks/ conflicts up a CF scheme?
based on origin/ language; gender roles/ conflicts;
traditional leadership)?
Selected tools
Consultation with internal or external resource L
INK Methodology; in: Lundy et.al., 2012
persons (key experts) Q
uestion Guides #3 and #4; in: Action for Enterprise
Review of existing studies and Match Makers Ltd., 2009, p.13f
Sources (see Bibliography):
Check-list of issues to address when developing link-
ages; in: Shepherd, 2007, p.57
C.3/
Activity 1.3/ Map the value chain (VC operators, VC economics, VC upgrading needs)
As a special solution for linking farmers to markets, the t he performance of public and private non-financial
contractual agreement is located at the farm supply- and financial support services;
firm procurement node of the value chain. Obviously, t he business framework conditions/ investment cli-
the entire value chain (VC) system has an influence on mate; and
the opportunities and risks for setting up a CF business t he stakeholder behaviour/ attitudes that may foster/
model, and hence has to be considered in the decision on hinder cooperation within the CF scheme.
whether to develop a CF scheme. Therefore, a VC map has
to be prepared giving a sufficiently clear picture of: VC mapping is not an end in itself, but aims at under-
the business actors involved from input supplies standing the business reality and external landscape as
through farming up to (competing) processors, traders, basis for viable business solutions/ CF business model
parastatals and cooperatives; design. While a solid analysis is essential, reducing the
the chain functions i.e. the flow and processes of pro- complexity of analysis to the notion of ‘as much as neces-
duce, information and payments; sary, as little as possible’ has to be considered to limit the
the production, processing and transaction costs along money spent on analysis to the really necessary and to
the VC; avoid pointless delays in getting started.
Purpose
The purpose of the VC mapping is to provide essential t he assessment of alternative CF solutions;
information for: t he development of the CF business plan; and
the company’s final decision on whether to embark t he discussion on contract details.
on CF or not;
Selected questions
The following questions give ideas for mapping the W
ith regard to the special interest in the supply side of
value chain (the list of questions has to be completed the VC: which special features at the farming inputs
according to the reality on the ground): and farming node of the VC need a more in-depth
How is the VC organised? Who are the key operators, analysis to complement the questions answered
what are the key functions? Which relevant financial under activity 1.2?
and non-financial services are available/ which es- D
o farmer organisations (farmer groups, associations,
sential services are missing? Which framework condi- cooperatives) exist? If yes, which role do they play in
tions (investment climate) influence VC competitive- service provision to farmers (extension, training, col-
ness? lection, marketing, processing, contract management,
How do different supply channels perform (VC op- price negotiations, lobbying)? How do they perform?
erator capacities, VC economics)? Which 1st stage pro- H
ow many companies/ traders compete in which
cessing (e.g. grading, sorting, drying) is implemented production areas for which markets for supplies from
by which VC operators? Do additional income op- the same smallholder farmers? How likely is the risk
portunities exist for farm household members (youth, of farmer default due to poaching by competitors/
women)? side-selling by farmers?
S ince transaction costs are a critical factor for deciding Does a sector organisation (association, federation, in-
whether to make or buy as well as where and from ter-profession, board) exist? Which role does it play (e.g.
whom to procure a product, the question is: which fac- market information services, platform for seasonal/
tors influence transaction costs and which transaction annual price negotiations between farmer and buyer
costs are incurred along different supply channels? organisations, CF code of practice, policy dialogue)?
58
How favourable/ unfavourable are the national/ local I n summary: What can be concluded from the VC
framework conditions (e.g. company law and specific mapping? Is the VC competitive? Which strengths,
CF legislation, company registration and bribery, eco- weaknesses, opportunities and threats (SWOT) are
nomic and social infrastructure)? How likely are gov- relevant for the CF model design and CF business
ernment interferences (e.g. in strategic food crops)? plan? Which innovation and upgrading needs are
Which 3rd party support organisations (government, crucial for CF success? Which political, production,
development partners, NGOs) are already working marketing, credit etc. risks need to be considered?
with farmers or are prepared to support CF develop-
ment?
Selected tools
Consultation with internal or external resource FATE methodology; in: Match Makers Ltd., 2008
persons (key experts) LINK Methodology; in: Lundy et.al., 2012
Review of existing studies M4P Toolbook for VC Analysis; in: M4P, 2008
Sources (see Bibliography): Question Guide #1; in: Action for Enterprise and
Check-list of issues to address when developing link- Match Makers Ltd., 2009, p. 3f
ages; in: Shepherd, 2007, p.57 ValueLinks methodology; at: IVLA website
C.3/
Step 2/ Development of a CF capacity development plan
– identify non-financial and financial service needs
The success and sustainability of CF schemes largely The buyer in turn requires access to banks or other finan-
depends on the willingness and capacities of small-scale cial services to re-finance the credits provided to farmers
farmers and their organisations, buyers and their staff alongside own investments into CF operations and logis-
and probably intermediaries (e.g. nucleus farmers or hired tics as well as trading or processing facilities. Availability
collection centre or external extension staff, sometimes of and access to further financial services will support CF
NGOs) to adopt new skills and innovative technologies; in development: e.g. money transfer (important to reduce
particular: risks of handling large cash amounts for payments to
technical
(e.g. Good Agricultural Practices/ GAP for farmers at collection centres), savings (e.g. individual
known or new crops, good post-harvest handling prac- accounts for re-investments into farming; or group sav-
tices and perhaps value addition/ 1st stage processing ings), leasing (e.g. for farm machinery and equipment) and
technologies); insurance (e.g. weather-indexed crop insurance). Further-
managerial
(e.g. farming as a business, record-keeping, more, governments or development partners may provide
contract negotiation, input logistics and collection financial assistance with a view to promoting agricultural
centre/ area management, CF operations manage- or VC development in general and CF development in
ment); and particular (e.g. co-financing of initial investments, credit
organisational
(e.g. development of strong famer guarantees, first loss default guarantees, input or other
groups/ associations/ cooperatives, efficient communi- subsidies).
cation and coordination between farmers and buyers).
Finally, capacity development in general and the offer of
Equally important are the availability of and access to embedded services in particular contribute to changing
financial services for farmers and buyers, both for medium attitudes necessary for building long-term and reliable CF
to long-term investments and short-term operational relations and thus reducing default risks on both sides.
costs. Considering the literally inexistent (even if slowly Change of attitudes refers to building mutual trust, re-
emerging) rural finance sector in many developing coun- specting own contract obligations and the co-contractor’s
tries, embedded credits provided by buyers (or input contract rights, sharing information in a transparent way,
suppliers) are often the only source of financing for small- agreeing on fair contract relations and granting equitable
scale farmers. Embedded financing is primarily made scope of negotiation and the like for the mutual benefit of
available in-kind by facilitating access to appropriate both CF partners.
inputs (e.g. seeds of improved varieties, fertilizers, plant
protection products) and sometimes also for CF crop-
specific farm/ farmer group equipment (e.g. harrows,
oxen-ploughs, possibly tractors) and facilities (e.g. storage,
grading shed, 1st stage processing). As trust-building
measure, pre-financing may also be provided for school
fees, farmers’ livelihood needs or social obligations.
60

Activities
2.1 (Pre)Select production area(s) and farmers/ farmer 2.3 Draft a contract farming service plan (embedded
groups for the start-up phase and external services)
2.2 Assess farmers’/ groups’ and buyer’s capacity devel-
opment and service needs
The following issues have to be considered in the (pre) In
the past, many farmer organisations have been
selection of production areas and suppliers, the assess- formed to serve social/ community interests and
ment CF capacity development and service needs and many cooperatives have been formed top-down by
the drafting of a CF service plan: governments to channel e.g. input subsidies. Conse-
If
Step 1 does not provide sufficient information for quently, member commitment, structures, leadership
a final selection of locations for the start-up (pilot) and member services are usually not appropriate for
phase, the buyer has to pre-select production areas CF needs and have to be upgraded.
and farmers/ farmer groups to generate more evi- Given the weak contract enforcement systems in
dence (e.g. service needs) to back the final selection many developing countries, neutral arbitration services
process. (e.g. traditional court, opinion leaders) are vital for me-
Following
the (pre)selection of locations, the buyer diation in case of default of either contract side; pro-
initiates contacts with potential suppliers (possibly vided arbitration is accessible for small-scale farmers.
via 3rd party facilitators already working in the area) Financing
CF usually implies high risks for both
to create awareness on the company’s interest and co-contractors: farmers risk over-indebtedness and
introduce the CF concept in general. buyers risk default in supplies (volumes, quality,
The first contacts between farmers and buyers are timeliness) and/ or recovery rates; next to failure of
critical for initiating trust-building and due attention appropriate legislation and enforcement, the risks are
has to be paid not to create false hopes among farm- linked to weak scope of negotiation on the farmers’
ers (e.g. easy market access, premium prices) or to side, to inappropriate CF arrangements and/ or weak
stoke fears (e.g. loss of autonomy or land use rights). CF business management and especially to mistrust
For
the start-up (pilot) phase, it is recommended to between the business partners. It is therefore recom-
select smallholders already coming with basic farm- mended, not to provide more embedded financing
ing/ business skills, showing some risk readiness and than really necessary, at least in the beginning and
innovation capacities (early adopters). This allows as long as the farmer-buyer linkages remain fragile;
rapid success to motivate contract compliance on furthermore, there are different possibilities for buy-
one side and fast learning for quick up-scaling on the ers to reward repayment and to mitigate default risks
other side. The bias against assistance to more ad- (see Step 3).
vanced smallholders should lose ground against the The perhaps most challenging task is to assure
opportunity to advance the up-scaling of CF projects proximity of CF management and service delivery
and hence the achievement of broader development to farmers. Depending on the CF business model
impacts. and the capacities of potential service providers,
Both,
technical assistance and credit services are non-financial services can be provided as embedded
usually required to introduce innovations in farms. service through company staff, nucleus farmers or
Smallholders appreciate embedded services provided other intermediaries or by farmer organisations or
by buyers. This can contribute to strengthening CF external service providers such as sector associations,
linkages but may also trigger default risks (see Step 3). government extension or NGOs.
To become strong CF business partners, it is neces- Given
the buyer’s specific interest and product
sary that smallholders realise scale economies by requirements, for which farmers have to acquire
joining farmer groups/ associations/ cooperatives (to distinct skills and capacities, it is usually the compa-
reduce transaction costs and improve performance e.g. ny’s responsibility to organise and finance necessary
through peer learning, joint negotiations/ collection). training and mentoring systems.
C.3/

The relation between the buyer’s embedded service Since
the objective of governments and donor
offer and the government extension service has to organisations is usually to assist resource-poor and
be clarified and approaches aligned. While public marginalised farmers with a view of fostering rural
extension usually focusses on basic messages, specific economic growth and reducing food insecurity,
CF technologies are better extended through CF due attention has to be paid not to let development
structures given the economic interest of the buyer objectives override business reasoning (e.g. in the
in improved farm and CF performance. selection of production areas and farmers). This is a
However,
considering the often considerable non- crucial success factor since farmers and buyers take
financial and financial service needs for integrating the business and investment risks and have to sus-
smallholders into CF that may bear on the com- tain the CF scheme in the long run without external
pany’s assets/ liquidity and on its competitiveness, assistance.
governments or development partners may decide to
support CF development through technical or finan-
cial assistance (see section B.2). While sufficient time
and resources have to be provided to support the
emergence of sustainable schemes, external partners
have to plan for a clear exit strategy from the very
beginning.
Milestone
A contract farming capacity development and service
plan is drafted.
62
Activity 2.1/ (Pre)Select production area(s) and farmers/ farmer groups for the start-up phase
The (pre)selection of locations and farmers/ farmer Note

groups for the start-up phase (usually used for piloting Since considerable costs and time are involved in search-
the CF model) draws upon the results of Step 1. If the ing, screening and qualifying suppliers, it is reasonable for
rapid screening of potential production areas and farming buyers to invest sufficient time and money into the initial
systems (see Activity 1.2) and the VC mapping (see Activ- selection of locations and farmers. The higher the prob-
ity 1.3) do not provide sufficient information for a final ability to retain trained and experienced producers in the
selection of locations and suppliers, the capacity needs system, the less the search/ training costs and time in the
assessment has to be realised in pre-selected production long run and the easier the up-scaling of the CF scheme
areas and among pre-selected farmers/ farmer groups. The (e.g. through farmer-to-farmer enrolment).
information generated in Step 2 will then serve the final
decision on locations and suppliers for the start-up phase.
Purpose
Given the fundamental importance of the selection of and sustainability of a joint CF business, the purpose is
appropriate locations and committed farmers/ farmer to support informed decision making of buyers.
groups willing and capable to contribute to the success
Selected questions
The following questions provide ideas for the (pre) If
the company intends to spread procurement ac-
selection of locations and suppliers: cording to harvest seasons in different agro-ecolog-
Which locations are suitable with regard to agro- ical zones or to spread the potential risk of weather-
ecological and climatic conditions, land tenure, induced crop failure: which locations complement
farm sizes and yield potential, sufficient numbers each other within a country or sub-region?
of potential CF farmers in spatially limited areas (to Are there extension services, donor programmes or
reduce transaction costs), availability of workers, sup- NGOs who know potential suppliers and can broker
portive local government and traditional leadership, linkages?
infrastructure (roads, communication, water, power, Due attention has to be paid to apply clear criteria
etc.) and prevalence of insecurity (risk of loss of pro- for supplier selection guided by business and not by
duce or cash through theft or bribery)? development reasoning, clan relations or the like.
Which of these locations are close to the company’s Are there farmer groups/ associations/ cooperatives
location or possible sites for collection and/ or service with committed membership and leadership, experi-
centres (important regarding transport/ transaction ences in joint economic activities and/ or peer-learn-
costs, visibility in the field/ proximity of services and ing? Does the socio-cultural context foster or impede
speedy handling of inputs and perishable products)? horizontal cooperation in farmer organisations?
If
required agro-ecological conditions are far-off, Do
the farmers have secure usufructuary or propri-
more appropriate farm systems are secluded in less etary rights over the farm land? Do they have access
densely populated areas or the risk of side-market- to draught animals or machines and equipment (own
ing/ poaching is high in easily accessible areas: Does or hired)? If need arises, do farmers have access to
the cost-benefit ratio speak in favour of selecting external labour at reasonable costs?
more remote areas? Which activities are currently implemented by wom-
en or young people and which influence will the CF
scheme have on their roles, work load and inclusion?
Which barriers have to be overcome and measures
taken to assure their inclusion at equal terms?
C.3/
Does
the CF crop fit into the farming/ household there service providers for capacity building (e.g.
Are
system without compromising subsistence needs? Or training, extension, research, demonstration plots),
is there a risk of trade-offs between household food for operational services (e.g. input supplies, transport,
security and the CF crop regarding scarce smallhold- storage) and for financing needs (e.g. credits and sav-
er assets (land, labour, capital)? ings, money transfer, insurance) within reach?
Labour
is often scarcer than assumed: what are the Is
there a nearby market or processing opportunity
opportunity costs for the use of family labour for the for the second/ lower grade to provide an additional
CF crop? Does the farm have sufficient family labour income for farmers/ perhaps providing income for
in case the CF crop requires care at the same time as women selling in the market or processing?
the food crops? Can workers be hired at reasonable This may also contribute to reducing the risk of side-
cost? marketing.
Have
the farmers got sufficient basic farming skills If
the CF-product lends itself for establishing
or even specific knowledge on the CF crop? Can they value-addition/ 1st stage processing close to farmers’
relatively fast and with reasonable input in training/ fields (e.g. to improve shelf-life or reduce transport
extension meet the buyer’s quality requirements? volumes): are farmer groups/ village-level people,
Are there ‘recommended’ smallholders having a especially women interested to venture into these
track record in CF or as reliable suppliers to trad- activities?
ers/ processors or having met their loan repayment While such activities offer additional income op-
obligations in input programmes? Are more innova- portunities, due consideration has to be paid to the
tive farmers pro-actively approaching the buyer? opportunity costs for farmers/ women given the
Are there ‘new generation’ farmers who are better commitment of assets (space, labour, capital) that
qualified and better informed? will not be available for other activities (e.g. core
In
many developing countries, the farm population activities and competencies such as the production
is ageing due to rural-urban migration. In case of of food crops).
longer-term investments (e.g. irrigation, perennials/ In
order to avoid resentments against the buyer, ten-
permanent crops), do the farmers have a succession sions/ conflict in the farmer community and farmer
plan or can the farmers sell/ let the land for rent? default (e.g. extra-contractual selling): Which farm-
Are there intermediaries already known by farmers or ers, aggregators, traders are presently involved in the
members of farmer groups who are respected opinion VC and risk to be crowded out by the CF scheme?
leaders capable to become nucleus farmers? Are there
committed traders capable to manage collection cen-
tres either independently or as company staff?
Selected tools
Rapid
assessment tools Firm
choice of a procurement location; in: Barrett
Sources (see Bibliography): et.al. (2011), p.8
Contract
farming checklist; in: Wageningen et.al. (n.d.) Identifying
production areas/ selecting farmers; in:
Eaton and Shepherd/ FAO (2001), p.86f
64
Activity 2.2/ Assess farmers’/ groups’ and buyer’s capacity development and service needs
To improve productivity and reduce unit farm produc- the buyer in the form of embedded services. Availability,
tion and unit CF transaction costs and hence improve CF access and service costs as well as the own capacity devel-
profitability, farmers and buyer’s staff have to develop opment needs of private and public service providers have
new technical, managerial and organisational skills. to be assessed. This will facilitate a decision on whether
Since inputs, machine services, harvesting, transport and these services can be met by external partners or have to
storage, grading and packaging (operational services) are be provided as embedded services.
frequently provided by private traders, partly by farmer
organisations or by the off-taking company, they also Overall, non-financial and financial services may be
have to be considered in the CF service plan. Furthermore, required by nearly every actor within and outside (external
financing requirements for initial investments (facilities, service providers) the CF scheme: farmers and their or-
setup of management structures, training and advice, etc.) ganisations; intermediaries such as nucleus (lead) farmers
and recurrent operational costs and re-investment needs or company field staff or externally hired extension agents
have to be met. or aggregators; CF management staff such as farmer
group representatives, company or externally hired collec-
Both, non-financial and financial services can be offered tion centre/ area managers; the company staff; and often
by private service providers (e.g. companies, associations), also external service providers (government extension,
governmental or non-governmental organisations or by NGO staff, private service providers).
Purpose
To better understand the non-financial and financial needs is evident for finalising the CF business model
service needs of all actors involved in the CF scheme, a and developing a viable CF business plan.
rapid assessment of capacity development and service
Selected questions
The following questions give ideas for the assessment
Which technical guidance do farmers/ workers need
of the capacity development and service needs of farm- for producing traditional or new crops according to
ers and the company: buyer’s specifications (e.g. integration of the CF crop
Which conclusions can already be derived from the into the prevailing farming systems, GAP, possibly
results of Step 1 and Activity 2.1 with regard to ca- international quality or sustainability standards/
pacity development and service needs of all internal certification)?
and potentially also external actors involved? Which How,
by whom, where and at which costs can the
questions remain to be answered? respective extension/ training best be organised,
Whose and which specific skills and other relevant specific materials be developed (external training
capacities require upgrading at farm level when institutions, farmers’ unions, government extension
looking at the prevailing farming systems and the services, consultancy companies, buyer’s staff)?
distribution of work between men, women, youth on How, by whom, where and at which costs can the
the one side and family or hired labour on the other close-by mentoring/ monitoring best be realised (farm-
side? er groups, near-to-site nucleus farmers, company staff,
Which entrepreneurial skills do farmers need to hired field advisers, public extension, NGO advisers)?
become competent partners in the CF scheme Are close-to-farmers sites for demonstration plots
(keywords: farming as a business, farmer business available (e.g. nucleus farmer fields, public extension/
schools, production planning and cost management, training or company’s collection centre sites) that can
grasp of contract contents and negotiation skills)? be used to demonstrate farming practices following
the seasonal work schedule? Where and at which costs?
C.3/
farmers already organised in groups, asso-
Are
Which input support do farmers need for realising
ciations or cooperatives? Are these organisations expected yield increases/ meeting quality require-
strong enough for common activities within the CF ments? Who has got a sufficiently developed distri-
scheme? Which kind of organisational development bution system for delivering inputs in-time (embed-
is necessary to strengthen them? Who can do it at ded/ external)? Which costs are implied?
which costs? Which further operational services are required
Which
other capacity development needs have farm- (machine services for land preparation, plant protec-
ers, female family members or enterprising young tion, harvesting, collection, storage, transport)? Are
village people got in related areas such as provision of external private service providers available/ acces-
operational services such as seed multiplication, plant sible or is it more desirable to use embedded services
protection, aggregation or 1st stage processing, etc.? for better visibility of the buyer in the field? How do
Which other ways of conveying technical skills, costs and benefits compare?
transferring new technologies, imparting experi- Which financing needs have farmers got? Are finan-
ences on good organisational practices in farmer cial service providers within reach of farmers (banks,
organisations, motivating farmers can be used (e.g. mobile banking, micro-finance institutions, insur-
exchange visits with other groups, company/ pro- ance)? If yes, are the credit/ insurance conditions
cessing plant visits)? affordable for farmers in relation to prospective sales
Which technical and managerial skills and capacities returns?
do other CF actors such as nucleus farmers, collec- Which alternative options exist for short, medium
tion centre managers, transporters have to develop and long-term financing? At which conditions can
(e.g. quality assurance from farm to firm, farm audit- buyers re-finance if they have to provide embedded
ing, management of input distribution and produce loans? Can farmers or buyers access financial assis-
collection)? tance offered by governments, donor organisations
Which capacity development needs do the inter- or NGOs?
nal/ external service providers have to serve the CF Overall,
which innovative service solutions can be
scheme in a competent and business-oriented way used for reaching out to large numbers of farmers
(nucleus farmers, farmer organisations, CF managers, and reducing service transaction costs (e.g. informa-
training institutions, extension agents, etc.)? tion and communication technologies/ ICT for a
Capacity
development is not a one-off event; rather, broad range of information/ extension messages/
to enable farmers and other CF actors to translate mobile banking)?
theory into daily work routines it is indispensable to
assure post-training mentoring and regular refresh-
er/ upgrading trainings. How can this be organised?
Selected tools
Capacity
development needs assessment tools Rural
Extension/ Vol. 1: Basic Issues & Concepts; in:
Sources (see Bibliography): Hoffmann et.al., 2009
Business
development services/ financial services; Rural
Extension/ Vol. 2: Examples & Background
in: Will, 2008, p. 55ff/ 64ff Material; in Hoffmann et.al., 2009
Check-list
of issues to address when developing link- Rural
Extension/ Vol. 3: Training Concepts & Tools;
ages; in: Shepherd, 2007, p.57 in: Gerster-Bentaya, Hoffmann, 2009
Developing
the capacities of target groups; in: Will Rural
Finance decision tools; in IFAD, 2010
et.al., 2008 Rural
Finance Learning Centre (RFLC); RFLC website
Question
Guides #6, #7, #8; in: Action for Enterprise Supporting
institutions; in: Dawes et.al. (2007), p.18ff
and Match Makers Ltd., 2009, p.21ff
66
Activity 2.3/ Draft a contract farming service plan (embedded and external services)
Summarising the results of Activity 2.2, the buyer can draw up and run the CF scheme. Furthermore, decisions can be
conclusions on the efforts and resources involved in provid- taken which of the required services can better be provided
ing necessary non-financial and financial services to start through embedded systems or external service providers.
Purpose
The resulting CF service plan gives an overview on vital 3rd parties (e.g. government, donor projects, NGOs). The
services in the short, medium and long run, potential CF service plan forms part of the CF business plan (see
private or public implementing partners, resources Activity 3.4).
involved and potential financing contributions from
Selected questions
The CF service plan summarises the results of Activity there institutional approaches supporting capac-
Are
2.2 and delivers important information for developing ity development that can be involved?
the CF business plan (see Activity 3.4) by answering the To mention just a few: initiatives at national level
following questions: uniting actors along the VC (e.g. the Cotton Board of
Which non-financial and financial capacity develop- Zambia/ CBZ or the Ghana Grains Council/ GGC);
ment and service needs have CF operators and service federations or round tables at regional or interna-
providers got in the short, medium and long run at all tional levels (e.g. the East African Grain Council/
relevant nodes of the VC? EAGC, the East African Business Council/ EABC or
Which non-financial and financial services shall be pro- the African Cashew Alliance/ ACA) or regional donor
vided through embedded systems and which through supported projects (e.g. the Competitive African
external service providers (in the latter case: consider Cotton Initiative/ COMPACI, the African Cashew
the possible negative implications on trust-building of initiative/ ACi or the Trade and Global Value Chains/
reduced visibility of the company at farm level)? TGVC initiative).
Which actors will be involved for embedded services Are there institutional initiatives supporting financ-
(e.g. own company staff, farmer organisations, nucleus ing of CF?
farmers) and for external services (private, public, To mention just a few: Burkina Faso set up a Cotton
projects, NGOs)? Fund (fonds de lissage) mainly meant to smoothen-
Which investments are required into service facilities ing world market price volatility and safeguarding
(e.g. input storage and distribution, collection centres, revenues for producers; Zimbabwe launched a US $
training places, on-farm/ near to collection centre 12 million Agriculture Fund in 2012 among others
demonstration sites)? meant to stimulate CF development; and the Round
Is
the government/ are donor organisations inter- Table on Sustainable Palm Oil (RSPO) recently an-
ested to implement public-private partnership (PPP) nounced the introduction of a smallholder support
projects with the buyer? If yes, for what kind of fund to assist small-scale farmers achieve certifica-
investments/ activities (infrastructure investments/ tion and reduce the risk of exclusion from standards-
capacity development)? ruled markets.
Selected tools
See
activities 2.1 and 2.2
C.3/
Step 3/ Development of a CF business plan
– outline solutions for the start-up and operation of the CF scheme
As shown in Figure 8, the development of the CF business hazard problems such as diversion of inputs or side-sell-
plan is based on the VC mapping (see Activity 1.3), the as- ing (the latter often in response to poaching by competing
sessment of capacity development and service needs (see buyers), unduly imbalanced negotiation power, biased
Step 2) and the decision on the CF business model (see rejection practices, late or non-payment. Recognising the
Activity 3.1) while it informs both the CF management impact of these realities on the success of the CF venture
plan and the design of the farming contract. It is obvious (and hence on the return on investments of the CF for
that CF requires thorough planning since it is about the farmers and buyer), due care has to be exercised on screen-
management of the usually quite fragile farm supply-firm ing alternative CF arrangements, selecting an appropriate
procurement interface (see C.1, Figure 5). Tying large CF business model, outlining pertinent contract details and
numbers of smallholders (even if organised in farmer drafting a realistic and realisable CF business plan.
organisations) with one buyer, the management of such
a conjoint business is a real challenge. The main reason is Note
that largely different capacities and at least partly diver- When
drafting the CF business plan, due attention has
gent interests have to be aligned to a degree that allows to be paid to considering a realistic growth path for
to creating and sustaining a mutually beneficial venture. the CF scheme and guesstimate the maximum size, at
which the scheme is still manageable and cost-benefit-
In this setting, farming contracts are intended to provide wise competitive with other business models (see
the necessary sound footing for the fair and equitable Phase 3, introduction).
sharing of risks and benefits between farmers and buy- The
CF business plan and the CF management plan
ers. But experience shows that a farming contract is not remain drafts as long as no agreement has been con-
worth the paper it has been written on if there is no trust cluded with the farmers since the final CF business/
between farmers and buyers. TRUST is decisive for the management plans have to reflect the farmers’ ideas
willingness to honour agreements and for reducing moral and concerns (see Phase 2, Step 4).
68
Activities
3.1 Screen alternative CF arrangements and select an 3.3 Outline contract details (1st draft only reflecting the
appropriate CF business model buyer’s perspective)
3.2 Outline the prospective structure and management 3.4 Draft a CF business plan (incl. prospective return on
plan of the CF business model investment, risk assessment, etc.)
Alongside the results of Step 1 and Step 2, the descrip- the CF business plan are also influenced by regulations
tion of CF business models and contract types (see sec- or voluntary standards. To give just a few examples:
tion B.1.1) as well as the deliberations on incentives and regulatory code of conduct (CoC) for contract farm-
disincentives (see section B.1.3), conditions for success ing (e.g. Horticultural Crops Development Authority/
and failure (see section B.1.4) and crop suitability (see HCDA in Kenya), national sector-wide code of practices
section B.1.5) provide fundamental information for the (CoP; e.g. Cotton Board of Zambia), international
final screening of alternative CF arrangements. sustainability standards (e.g. Cotton made in Africa/
Considering that trust is key for the sustainability of CmiA, FairTrade) or corporate standards (e.g. Nestlé’s
business relationships, the CF design has to factor Creating Shared Value). Another interesting move is the
in relevant concepts. Trust accrues from ownership, ‘Green Paper on unfair trading practices (UTP) in the
voice, risk and reward (Vermeulen and Cotula, 2010, business-to-business food and non-food supply chains’
p.5), involving quite ambitious but necessary success recently adopted by the European Commission, which
factors such as (see section B.1.4): (i) economic viabil- aims at promoting fairer and more sustainable trade
ity and incentives with an equitable cost-benefit-‘plus’ relationships (including overseas supplies).
for both, suppliers and buyers; (ii) fair give-and-take A dditionally, regulators (e.g. Conseil Café Cacao/ Cote
relations (scope of negotiation); (iii) sharing of owner- d’Ivoire) or chain-wide organisations (e.g. Cotton
ship and risks according to the quite divergent capa- Board of Zambia) or inter-professions may set/ recom-
bilities of both sides; (iv) opportunities for technology mend seasonal minimum prices. However, if the prices
transfer and innovation to stimulate increased farm are not based on business reality or if the set price is
productivity and chain efficiency; (v) an enabling in- not flexible enough to adapt to seasonal/ inter-annual
vestment climate and 3rd party support that promote price fluctuations in main markets (e.g. world market),
the competitiveness of the CF scheme; as well as (vi) CF schemes may break down (the case of cotton in
sound analysis and planning as precondition for the Zambia some years back or of soya in Ghana in 2012).
design of viable CF schemes. Hence, sophisticated price finding mechanisms have
F
urther key principles: (i) ownership is with the to be developed if the regulated/ recommended price
farmers and the buyer as co-contractors, not with the is to promote and not to risk smallholder inclusion
facilitators (government, donor programmes, NGOs); through contract farming.
(ii) farmers have to remain independent and have to When drafting the business plan, buyers have to con-
be qualified to take their own business decisions since sider that CF schemes hardly can achieve break-even
they bear the investment/ production risks; (iii) farm- in the first year (experience shows that break-even will
gate prices and payment conditions have to consider only be realised after three to five or even more years).
the needs of farmers (for the price: recovery of produc- T
he CF business plan and the CF management plan
tion costs plus fair margin; for the payment: consider- remain drafts, as long as no agreement has been con-
ation of seasonal cash-flow/ livelihood requirements). cluded with the farmers since the final CF business/
The decision on the CF business model as well as the management plans have to reflect the farmers’ ideas
outline of the management plan, the CF contract and and concerns (see Phase 2, Step 4).
Milestone
The business plan explains the CF structure and gives a
realistic assessment of its viability.
C.3/
Activity 3.1/ Screen alternative CF arrangements and select an appropriate
CF business model
Since the CF arrangements (especially the visibility and t he boundaries between one model and the other
accessibility of the buyer/ buyer’s staff or representatives are fluid with regard to organisational structures and
in the field and the quality of embedded/ external ser- operational arrangements;
vices) have an important influence on relationship conti- t he models chosen for starting up a scheme may (usu-
nuity, CF business model options have to be weighed up ally do) change over time through the integration of
carefully. The better the CF model is planned at the onset, lessons learnt and changing attitudes or due to the
the less costly and time-consuming adaptation will be emergence of new technologies or changing external
necessary at a later stage. With respect to the different CF conditions (markets, regulations, policies); and
business models (see section B.1.1, Box 1 and Figure 1), a model that proves to be appropriate for the start-up
it should be noted that: phase may need to be adapted and perhaps changed
for the consolidation and scaling up phase respectively.
Purpose
The purpose of this activity is to screen alternative CF the external setting (markets, support services, frame-
arrangements, to identify the most appropriate CF work conditions, facilitators) and to outline the busi-
business model for the given internal situation (buyers’ ness model in detail.
and farmers’ incentives, attitudes and capacities) and
Selected questions
The following questions give ideas for screening alter- W hich explicit initial investments and recurrent
native CF arrangements and selecting an appropriate CF costs are involved in meeting specific quality or sus-
business model (based on the results of Step 1 and Step tainability standards?
2 as well as the description of the CF business models I f 1st stage processing/ value addition at farm, farmer
in section B.1.1, incentives and disincentives in section group or village level is an opportunity (depending
B.1.3, the conditions for success and failure in section on produce characteristics and presumably only in
B.1.4 and crop suitability in section B.1.5; possibly also the medium term): Who will invest into this venture
some questions under Activity 3.2): and how can this activity best be integrated into the
How shall the functions/ work routines be distrib- communication, product and payment flows?
uted between farmers and the buyer’s staff in the first W hich services should and can the buyer provide
instance and possible intermediaries in the second as embedded services (depending on e.g. the spe-
instance (nucleus farmers, farmer organisations, ag- cific skills and knowledge required and buyer’s staff
gregators or committed traders)? capacities, the existence, performance and costs of
H
ow shall the CF operators relate to each other regard- external service providers, the financing needs and
ing communication and coordination (e.g. from sea- sources)?
sonal crop planning and contract/ price negotiations W hich CF arrangements are furthermore appropriate
through exchange on crop development/ harvest fore- for: access to improved seeds (e.g. farmer field mul-
casts during the season up to end of season wrap-up)? tiplication); training and extension (including dem-
How shall the product flow be organised (from on- onstration fields); input loans and input distribution
time input distribution/ probably mechanisation and systems; collection/procurement logistics; record-
advisory services up to timely harvest and collection keeping, quality assurance and traceability from
of produce and appropriate post-harvest handling)? farm to firm; reducing the risk of extra-contractual
This decision is largely influenced by the product marketing (side-selling poaching)?
features (e.g. perishability) and the requirements
regarding quality assurance/ food safety standards.
70
As regards the last point, it is recommended to organ- In order not to raise over-ambitious expectations,
ise weighing, grading and the decision on rejections prudent assumptions should be made on yields/ pro-
close to farmers. Ideally, grading is done by farmers ductivity increases, chain efficiency and also default
themselves or at least in their (or a neutral person’s) rates during the start-up phase.
presence to avoid that farmers feel cheated. This H
ow do the different CF business models compare
will also enable farmers to sell low-grade (yet safe) with regard to specific advantages or risks such as:
produce to local markets. Instead of wasting rejects, ease of transfer of innovative technologies to improve
farmers can thus realise revenues, improve the gross farming practices of traditional crops or to introduce
margin and reduce the production unit costs. new crops/ varieties, raise productivity and improve
W
hich CF business model (see section B.1.1, Box 1 and quality; supervision of production and harvest
Figure 1) fits the specific situation best? practices; control of volumes, qualities and timeliness
Further important decision criteria are: the buyer’s of supplies; organisation of post-harvest handling;
company management and financial capacities; the tracking of contract fulfilment; and prevention against
spatial dispersion of producer locations; the mini- default either on the farmers’ or the buyer’s side?
mum requirements for farmer grouping to achieve I n conclusion: Which CF business model is the most
necessary scale economies and chain efficiency; the appropriate according to the screening of alternative
availability/ non-availability and capacities/ qualifica- CF arrangements? How does the CF business model
tion needs of external intermediaries such as nucleus have to be designed to fit to: (i) the buyer’s medium to
farmers/ farmer organisations/ contracted service long-term business strategy; (ii) the suppliers’ farm/
providers. If required, a tri-partite CF business model household systems and their livelihood needs; (iii) the
may be considered involving a bank accepting the existing capacities (land, labour, capital) and the short,
contract or supplied produce as collateral for pre- medium and long-term capacity development needs
financing farm/ livelihood needs. of both co-contractors; (iv) the local, national and in-
H
ow does the prospective feasibility (rough estimate of ternational framework conditions (including prospec-
the cost-benefit) of different CF business models com- tive future market trends/ price fluctuations); as well
pare with regard to: required investments and expected as (v) the need to reduce/ mitigate risks (production,
return on investments; operational complexity and op- marketing, political, credit risk, etc.) for both business
erational costs; expected productivity (increased yields, partners and the way to share risks according to the
reduced unit production costs) and efficiency gains divergent capacities of both business partners?
along the supply chain (reduced transaction costs and
post-harvest losses); and overall regarding expected
cost-benefits for the buyer and farmers?
Selected tools Sources (see Bibliography):

Management team of the buyer’s company, at least CF arrangements and challenges for buyers and
partly involving farmer/ farmer organisation repre- farmers; in: Holmes, 2012, p.3
sentatives as well as perhaps intermediaries, external CF arrangements for reducing the risk of side-selling;
experts and facilitators in: Holmes, 2012, p.3
Description and pros & cons of CF business models FATE methodology; in: Match Makers Ltd., 2008
in section B.1.1 (Box 1 and Figure 1) Institutional arrangements in the Zambian cotton
Incentives and disincentives for CF in section B.1.3 sector; in: Tschirley & Kabwe, 2009, p.18
(Box 3) Organisation of production; in: Lundy et.al., 2012,
Conditions for success and failure in section B.1.4 p.160ff
Discussion on crop suitability in section B.1.5 Question Guide #1; in: Action for Enterprise and
Types of contract farming; in: Eaton and Shepherd/
FAO, 2001, p.43ff
C.3/
Activity 3.2/ Outline the prospective structure and management plan
of the CF business model
The firm’s visibility in the field, the suppliers’ confidence This activity is about the structures and procedures for
in the CF management and the control of potential risks CF coordination and internal communication necessary
(cost drivers, food safety and quality, default) by both to reduce supply/ procurement uncertainties and risks,
partners are vital for the sustainability of the CF scheme. increase supply chain efficiencies (and hence reduce
This requires a situation-specific physical setup and a transaction costs) and increase value-added for farmers
suitable mentoring/ monitoring system. Accordingly, the and buyers (through technology transfer and change of
CF organisational structure and CF management system business attitudes and relationships). The structures and
have to provide efficient solutions for timely, transparent procedures depend on the product features, the farmers’
and trustful coordination and communication between capacities and farming systems, the existing infrastruc-
farmers and buyer. ture, the staff’s competencies and the availability of com-
petent intermediaries and the company’s management
and financial resources. Step 2 and Activity 3.1 already
provide essential information for drafting solutions for the
organisational structure and management system.
Purpose
The purpose of this activity is to outline solutions for a organisational structure and setup of the management
smooth, effective and efficient management of the farm system depend on the results of the negotiations with
supply-firm procurement interface according to the suppliers (see Step 4).
selected CF business model. The final layout of the
Selected questions
Which organisational structures and management Since the systems depend on the type, qualification,
system are appropriate to assure the timely distribu- spatial dispersion and number of farmers/ farmer
tion of inputs, the transfer of appropriate technolo- groups and intermediaries involved: How many
gies, the scheduling of harvest and collection of suppliers have to be integrated to satisfy the buyer’s
produce, the organisation of post-harvest logistics requirements regarding installed processing capaci-
and finally the on-time and transparent settlement of ties/ sales opportunities?
payments and deduction of pre-financed loans? Consider: the better the suppliers are already known
Which CF setup and procedures are presumably (to the buyer, intermediaries, 3rd party supporters),
required in the medium to long run? To reduce initial the less dispersed their locations and the closer the
investments to the necessary and risks of losses in ties between farmers and buyer’s staff/ intermediar-
case of failure to the minimum: Is it possible to take ies through mentoring/ monitoring, the lower the
a gradual approach to developing the organisational number of suppliers to be contracted. In reverse, it
structure and management system? is necessary to contract larger numbers to secure at
Which elements are indispensable for the start-up least the minimum supplies required to satisfy the
phase? buyer’s needs.
Consider: the better the scheme is managed right Which CF arrangements are required for encourag-
from the beginning, the closer the relations between ing productivity gains and quality assurance, transac-
farmers and buyer and the lower the default rate as tion cost-efficiency and reduction of default risks
well as the risk of failure and loss of initial invest- as well as probably 1st stage processing at farmer or
ments. village-level and/ or sales of rejected lower grades to
rural markets/ processors?
72
Possible solutions: (i) build on existing relations and Since the competence and commitment of all staff
references for supplier selection; (ii) set up a multi- involved in the CF management are vital for success
levelled structure that allows guidance of farmers or failure: Which CF-coordination/ management
throughout the production cycle/ visibility of the capacities have to be built and incentive systems es-
company in the field (e.g. setup of a cascade learn- tablished at the different nodes of the multi-levelled
ing/ mentoring/ control system involving individual management system?
farmers/ 10-15 farmers organised in farmer groups/ Which farmer groups/ associations/ cooperatives
nucleus farmer/ field adviser/ collection centre/ area exist already? How strong are they? Which organisa-
manager); (iii) know the farms and farming systems tional support do they need to become member/ ser-
and develop a quota system that considers the supply vice/ business oriented and able to take on CF-tasks
capacity of individual farmers; (iv) develop applica- (e.g. concerted crop planning, input distribution,
tion and control structures and procedures (embed- application/ control of the use of plant protection
ded or external services) if plant protection is a sensi- according to standards, internal auditing for group
tive issue due to standard compliance/ certification certification, group lending, peer learning, contract
needs; (v) introduce harvest forecast systems allowing negotiation)?
to monitor individual farmers’ prospective harvest Note that quite many cooperatives have produced
volumes and times; (vi) create an incentive system to mixed results in numerous developing countries
improve commitment for mentoring and monitor- especially when government/ NGO driven and
ing at the different cascade levels (e.g. premiums for influenced.
volumes and share of first quality supplied; reward for Concluding, which initial investments and short/
high repayment rates); or (vii) allow farmers to sell a medium/ long-term re-investment and operational
certain share of the produce to other buyers or to use costs are involved for setting up/ maintaining the
it for household subsistence; (viii) involve traditional structures and managing the CF scheme (consider
leaders and consider visibility in/ contributions to also possible additional externally caused costs such
community development; etc. Note that the higher as for security measures due to prevalence of theft
the pre-financing volume by the firm (mainly inputs and bribery)?
on loan), the better structures and procedures have
to be established involving sometimes considerable
transaction costs.
Selected tools
Management team of the buyer’s company, at least CF arrangements for reducing the risk of side-selling;
partly involving farmer/ farmer organisation repre- in: Holmes, 2012, p.3
sentatives as well as perhaps intermediaries, external Basic models and key characteristics; in: Technoserve
experts and facilitators and IFAD (2011), p.2ff
Conditions for success and failure in section B.1.4 Institutional arrangements in the Zambian cotton
Discussion on crop suitability in section B.1.5 sector; in: Tschirley & Kabwe, 2009, p.18
Sources (see Bibliography): Question Guides #5-8; in: Action for Enterprise and
CF arrangements and challenges for buyers and Match Makers Ltd., 2009, p.19ff
farmers; in: Holmes, 2012, p.3 Managing the project; in: Eaton and Shepherd/ FAO,
2001, p.83ff
C.3/
Activity 3.3/ Outline contract details (1st draft only reflecting the buyer’s perspective)
The farming contract specifies the sellers’ (farmers’) is especially true in settings, in which contracts are hardly
obligation to supply the volumes and qualities as specified enforceable due to failure of the judiciary system; but
and the buyer’s (processor’s/ trader’s) obligation to pro- even if the legal system works it is close to impossible for
vide embedded services, to off-take the goods as specified smallholders due to the costs involved.
and to realise the payments as agreed.
Note
Clarity on contract obligations and rights as well as fair Farming contracts have to be simple enough to be under-
and equitable contract terms based on transparent criteria stood by largely illiterate farmers and comprehensive
(e.g. price formula and input and credit cost calculation) enough to assign clear obligations and rights to farmers
are fundamental for trustful business relations, contract and buyers.
fulfilment and reduced moral hazard on both sides. This
74
Purpose
The main purpose of this activity is to flesh out a draft
contract that will serve as basis for discussions/ nego-
tiations with farmers (see Phase 2, Step 4).
Selected questions
Which contract type fits best for the CF arrangement
Which legal contract elements have to be observed?
(see contract types in section B.1.1, Box 2): market The following legal elements are to be observed: (i)
specification contract, production management Freedom to contract (free decision of farmers/ buy-
contract or resource providing contract? ers to negotiate and conclude a contract); (ii) Good
Which contract form and substance fits best for the faith (trust in the honest intention of both parties
CF arrangement (see section B.1.1): (i) informal or not to cause damage to each other); (iii) Termination
formal, verbal or written form; (ii) concluded with (specification of the conditions of contract expiry);
individual farmers or farmer groups; (iii) obligations (iv) Force majeure (possible exemption from liability
described quite vague or reasonably specific; (iv) in case of unforeseeable/ exceptional situations);
renewable each season or long-term agreements; (v) (v) Performance (both contract parties are bound to
specifications based on case by case negotiations or realise their obligations as specified); (vi) Non-perfor-
on a sub-sector code of practice? mance/ compensation (consequences for any party’s
For typical contract specifications see Box 17 below. failure to meet obligations); (vii) Dispute settlement
Are there already contracts that can serve as a basis (agreement on ways to settle contractual disputes
for the planned CF since they have proven to satisfy through mediation, arbitration, prosecution).
the requirements of farmers and buyers? In case external intermediaries are contracted in
Be aware that there is no contract blueprint but a multi-levelled CF arrangement (see Activity 3.1):
models can be used provided they are adapted to the Which business partners conclude contracts with
specific case. whom? How can the buyer in this case assure contract
Which regulatory (government) or self-regulatory transparency/ consistency and visibility in the field?
(industry/ sector code of conduct) provisions can In
case women do the (main part of) farm work but
guide contract development or are mandatory (e.g. have neither the land rights nor the voice nor the
regarding contract rights, price-setting, dispute set- authority to sign a CF contract: How can the contract
tlement)? be specified to reflect the rights and requirements of
women?
How
to reduce moral hazard/ default risks?
Since side-selling by farmers/ poaching by compet-
ing buyers are a real threat to CF success, co-contrac-
tors should try to obviate risks by adopting appropri-
ate contract specifications (see Box 18 below).
Selected tools
Buyer’s CF contract task group involving, if possible, Contracts and their specifications; in: Eaton and
farmer representatives and, if necessary, 3rd party Shepherd/ FAO, 2001, p.58ff
facilitators/ experts European Commission Green Paper on unfair trad-
Sources (see Bibliography): ing practices; see CTA, 2013
Question Guide #9; in: Action for Enterprise and
Match Makers Ltd., 2009, p.32ff
Box 17/ Typical contract specifications

C.3/
Contract parties
On the side of the suppliers, the contract can be signed I n case of multi-levelled CF arrangements, contracts
by individual farmers or farmer group representatives. are signed between different partners at different
S pecial attention has to be paid to assure female farm- nodes of the chain (it is important to assure consist-
ers’ rights if conventions or the absence of a land title ency along the cascade).
preclude women from signing farming contracts.
Contract duration
Depending on crop characteristics: l onger-term contracts with provisions for periodical
seasonal contracts for annual crops (possibility of re-negotiation/ amendments for perennial crops.
renewal/ re-negotiation)
Quality specifications
Clear definition of: t he quality control procedures (when, where, by
the required varieties/ seed and the quality stand- whom, in the presence of farmers?);
ards/ grades; t he payment for possible external costs such as labo-
the quality assessment criteria and method (includ- ratory analysis (by whom?); and
ing tolerances); t he consequences of non-conformity (rejection,
price reduction).
Quantity specifications and procurement schedule

Allocation of a supply quota by supplier or farmer only procure e.g. 70% while allowing farmers to use the
group (volume or area-based, entire crop or fixed other part for subsistence or sales in the free market).
quantity). To avoid default, the quota should be based T
he timing of delivery is important for the efficient
on the farm size, farming system and livelihood utilisation of the buyer’s capacities and meeting his
needs of the farm household. customers’ procurement requirements (in some crops,
Agreement on the minimum share of the 100% pro- the harvesting time can be influenced through crop
duced from seeds provided by the buyer (as a trust- husbandry practices e.g. planting time, irrigation, etc.).
building/ default risk mitigation measure, buyers may
Production specifications
Explanation of the cultivation practices to be applied Usually, the buyer claims the right to frequently inspect
such as integrated crop management, good agricul- farmers’ field operations to assure compliance with re-
tural practices/ GAP (detailed crop-specific guide- quired standards (especially if the buyer provides inputs
lines may be annexed to the contract). such as seeds, fertilizers, agrochemicals and wants to
control correct application or probable diversion).
Harvesting and crop delivery specifications

D
ecision on crop delivery and transport arrangements I f these operational services are provided by the
(at farm gate, at collection centre, at processing unit). buyer or external intermediaries/ service providers,
Distribution of farmers’ and buyer’s tasks and the costs may be fully or partly charged to the farm-
required handling practices in harvesting, collecting, ers (to be negotiated).
grading, packaging, transporting and/ or (intermedi- Provisions for the usage of rejected produce (see also
ate) storage of the produce. Box 18 below).
76
Pricing specifications
To assure transparency, the pricing formula (calcula- (iv) auction quotations or (v) consignment prices.
tion basis) has to be explained to farmers and speci- Under the flexible formula, prices may also be freely
fied in the contract; furthermore, market and price negotiated thus reflecting the bargaining power of
information have to be made available to farmers the contract parties.
and effects of market dynamics on contract prices T
he pricing formula ‘split pricing’ involves a floor
explained. price paid on delivery or at the end of the season
Floor prices (also referred to as minimum or base and a final instalment factoring in the price realised
prices) are sometimes fixed by governments, public- by the buyer when selling on. Typically, farmers and
private platforms or inter-professions (especially in buyers agree on sharing resulting costs and revenues.
commodities) using usually quite complex pricing T
he pricing formula also has to make transparent the
mechanisms. costs involved for embedded services that are usually
The pricing formula ‘fixed pricing’ is agreed at the deducted from farmers’ sales revenue at the end of
beginning of the season or at contract conclusion the season (inputs supplied, technical assistance/
respectively. The price is usually based on prevailing operational services provided, loans extended).
market prices and trends (the reference market has T
o extenuate the shortcomings all three aforemen-
to be stipulated) and is typically aligned with quality tioned pricing mechanisms entail, farming contracts
criteria/ grades (‘indexed’), since rewarding quality usually combine elements of all three pricing formu-
generally pays back. For excess of quota fulfilment, las depending on criteria such as production costs
the buyer may pay a bonus (see payment specifica- and profit margins for producers, transaction costs
tions below). and a sufficient return on investment for buyers,
The pricing formula ‘flexible or dynamic pricing’ re- competition in the production area (considering the
flects the market situation. The price calculation may risk of poaching in open markets), prevailing market
be based on (i) real-time local or regional prices (spot- prices or if applicable, international commodity
market price, but usually slightly higher), (ii) interna- prices or import/ export parity prices, seasonal price
tional commodity or import/ export parity prices, (iii) fluctuations and prospective long-term price trends.
varying seasonal prices (seasonal price-scale),
Payment specifications
Common payment terms: if possible, the agreement through which payments can be realised; bank
should provide for scaled instalments according to transfers are also necessary in case of tri-partite agree-
the liquidity requirements of farmers during the ments involving banks for pre-financing or inventory
season, especially at harvest time; the final payment credits (e.g. warehouse receipt system); for reasons of
is usually due at the end of the season or after the transparency and trust-building, payments should
buyer knows the on-selling price; the contract has in general be made to individual farmers, not via
to clarify the provisions for award for 1st grade or nucleus farmers or farmer groups; payment modes
deduction for lower grades respectively; the costs also have to cater for appropriate arrangements for
for pre-financing embedded services by buyers (e.g. assuring payment to women involved in contract
input supplies, other loans, advisory services, opera- farming activities.
tional services) are deducted from the farmers’ sales I n contracts with intermediaries, performance based
revenues, usually from the last instalment. Some payments are quite frequent. In case of multi-levelled
buyers do not charge extension services or interest CF arrangements, the buyer may reward nucleus
rates; some hide these costs in other items, which is farmers, own staff or contracted intermediaries
not recommended since such behaviour jeopardises managing a collection centre or a CF area e.g. for
transparency and trust. the fulfilment (or the excess of fulfilment) of agreed
Typical payment modes: farmers usually prefer cash- quotas, achievement of high shares of first grade or
in-hand (possibly involving security problems at the high repayment rates. Note: whether the premiums
place of payment); with the emergence of mobile cascade down to also motivate farmers is difficult to
banking, more farmers have opened bank accounts control for buyers in a multi-levelled system.
C.3/
Embedded service specifications
Specification of the provision (and timing) of non-fi- S
pecification of financial embedded services (seed,
nancial and operational embedded services (e.g. input fertilizers and/ or plant protection products on
delivery, advisory services, training, land preparation, credit, possibly cash credits or insurances) including
plant protection, harvesting, transport and logistics) credit modalities (especially interest rates) and meas-
and related costs. ures to mitigate credit risks.
C
ost recovery (see payment terms above).
Dispute settlement specifications

The contract should prescribe ways of settling T
he agreed dispute settlement mechanism should
contract disputes that are typically judicial proceed- be near to farmers and involve a mutually respected
ings, arbitration or mediation. Generally, amicable person (e.g. traditional leaders, representatives from
dispute resolution is preferable over legal proceed- the municipality) and a representative of the farmers
ings, especially for smallholders who have not got and of the buyer.
the means to go to court and in countries with weak
judicial systems.
Registration
In some countries, farming contracts have to be
registered with statutory bodies to verify for example
whether the buyer is licensed or has a track record as
CF contractor (the purpose is to avoid that farmers
are subject to unfair contract practices).
78
Box 18/ Possibilities to reduce moral hazard/ default risks
Contract negotiations
Assure fair and transparent price negotiations in- E
xplain the benefits of contract compliance while
cluding joint development (at least farmers’ under- clarifying the sanctions for non-compliance (e.g.
standing) of price formula and joint calculation of denial of contract renewal and hence exclusion from
prices. input supplies).
Make sure that farmers realise a cost-benefit-’plus’ D
o not make promises that the buyer cannot keep,
(incentive) and explain that better profits may only do not expect more from farmers than they can
be realised in the medium to long run. realistically fulfil.
Contract specifications
Clearly specify the buyer’s obligations (e.g. provision C
onsider price formulas for lower (rejected second)
of embedded services, payment delays) and rights (e.g. grade produce if off-taken by the buyer and sold to
to control quality) and possible sanctions in case of other outlets.
default. O
ffer farmers the opportunity to grade the produce
Clearly specify the farmers’ obligations (e.g. quality, themselves and the right to sell rejected produce to
volumes, delivery times) and rights (e.g. presence rural markets.
during quality control) and possible sanctions in case S
pecify a share of contracted produce that has to be
of default. sold to the buyer (e.g. 70%), leaving a share to farmers
Develop a price formula based on a reasonable mini- they can use for subsistence needs or sales in the free
mum price and a flexible top-up to reflect market price market.
fluctuations (however, in highly volatile markets, this O
ffer a convincing package of embedded services at
system is only feasible for buyers if a realistic mini- reasonable conditions compared to external services.
mum price is calculated and accepted by farmers). A
gree on a mutually respected 3rd party for dispute
Offer price premiums for contract fulfilment regard- settlement based on amicable conflict resolution
ing agreed qualities, volumes (quota) and repayment through mediation/ arbitration (see above).
schedules.
Agree on scaled payment instalments according to
the liquidity requirements of farmers (due attention
has to be paid to the cash-flow capacity and pre-
financing possibilities of buyers).
Other measures linked to farmers

Identify farmers that are willing/ capable to comply A
ssure intensive monitoring while providing clear
with contracts (e.g. farmers with a track-record of provisions for sanctions in case of default (e.g. ‘pun-
repayment in CF or input programmes, 3rd party ishment’ through exclusion from the CF scheme).
references). S
upport access to relevant services that are not
Establish a good data-base on CF farmers/ farmer embedded in the CF arrangement (e.g. access to
groups (either as individual firm or as pre-competi- improved seeds, extension services for other crops,
tive measure among several firms or at association/ credits or insurance).
inter-profession level). F
acilitate technology transfer both for the CF crop
Employ motivated staff (collection centre/ area and other crops produced for subsistence or surplus
managers)/ contract committed nucleus farmers marketing.
and give incentives (e.g. bonus payments) to foster F
oster group lending as a way to assure contract
accountability. compliance through peer pressure. However, group
A
ssure field presence, good communication and trust- lending needs strong leadership, functioning demo-
ful cooperation between farmer representatives, nu- cratic structures and trustful relations within the
cleus farmers and collection centre/ CF area managers. group; preconditions that are rarely met.
C.3/
Develop opportunities for additional farmer/ house- 1st stage processing if initially set up by the buyer.
hold income (e.g. opening markets for other crops M
ake contributions to farmers’ welfare/ community
that fit into the CF system e.g. for intercropping; 1st development (e.g. health and funeral funds, school
stage processing). fees, school building and equipment).
Offer shares in the company (primarily practised in
cooperative-owned or social enterprises) or shares in
Other measures linked to 3rd parties

L
ink up with government bodies involved in agricul- I f there is no industry or public-private dialogue
tural/ rural development (ministry, municipal entities, platform: agree with other buyers on a pre-compet-
public extension), explain the benefits of CF and the itive basis not to buy from farmers contracted by
threats through extra-contractual selling and moti- competitors; as a further step, a joint data-base may
vate them to support contract compliance by farmers. be set up providing information on all CF farmers
Establish relations with national producer asso- including information on default; finally, a code of
ciations/ farmer unions, chambers of agriculture, conduct/ code of fair competition may be developed.
emerging VC boards or inter-professions to create a
platform for CF promotion and self-regulation (see
next bullet point).
80
Activity 3.4/ Draft a CF business plan (incl. prospective return on investment,

risk assessment, technical and financing requirements, etc.)
The CF business plan describes the strategic objectives as Note

well as the operational and financial means necessary for a The business plan may be used for credit applications.
successful development of a CF venture. Guidance by a well However, it is usually not advisable to run into heavy debts
thought-out business plan is especially important for an with a start-up CF scheme given the quite frequent default
undertaking, in which the complex management of the farm risks. On the contrary, to increase the probability of success
supply-firm procurement interface presents a real chal- and reduce the risk of failure, it is recommended to start
lenge. In this setting, a CF business plan can serve several small and adopt a stepwise approach to consolidating
internal and external objectives, namely: and up-scaling the scheme. Once a critical consolidation
As
a design instrument, the plan provides vital informa- achieved, the (up-dated) business plan may also serve
tion for financial and managerial decision-making for the credit application needs.
CF start-up, consolidation and (if up-dated) the up-
scaling phase. Even if it is recommended to start up a CF scheme as far
As
a management instrument, the CF business plan as possible with own resources (farmers and buyer), the
provides strategic and operational orientation for running business plan may be submitted to 3rd party facilitators
the CF scheme. for technical or financial support. Presenting an elaborate
As
a monitoring instrument, the plan provides facts and concept will contribute to gear 3rd party assistance to real
figures for CF decision-making (e.g. contract specifica- CF business needs (instead of overriding development ob-
tions, investments) and for the assessment of business jectives). If well prepared, the business plan also provides
results. a baseline for the monitoring of impacts required by 3rd
As
a financial management tool, the CF business plan party facilitators (government or donor organisations) for
provides detailed information that can be used for credit documenting impacts.
applications or 3rd party technical or financial support.
C.3/
Purpose
The purpose of this activity is to draft a CF business following discussions and negotiations with farmers in
plan providing practicable solutions for CF manage- Step 4 (the results of which will be integrated into the
ment and CF financing (both key for CF success or final business plan).
failure). The draft CF business plan will be finalised
Selected questions
Which minimum investments into production and
Drawing on the information generated in Steps 1 and 2 logistics facilities and equipment and which opera-
and Activities 3.1 to 3.3, this activity is meant to answer tional systems and costs are involved for an efficient
the following questions: management of embedded services and sufficient
Which elements have to be covered in the CF busi- visibility in the field necessary for trust-building with
ness plan? and mentoring and monitoring of farmers?
Apart from the outline of the vision, mission and With regard to operational costs, due attention has
objectives, the description of the ownership, the to be paid to CF-specific transaction costs since they
business (location, human, financial and natural are usually neglected or underestimated (e.g. costs
resources, organisational structures and manage- of drafting, negotiating and enforcing contracts
ment, infrastructure and processes, procurement and (through internal or external means); maladapta-
marketing, etc.), the financial part is of major impor- tion costs in case of farmers’ or buyer’s default;
tance (break-even, liquidity and profitability analysis, CF-specific set-up and operational costs related to CF
cash-flow analysis and return on investments as well governance; trust-building/ bonding costs for secur-
as risk assumptions, financial needs and funding ing commitments).
sources). At which point in time should banks be approached?
Which
period should be covered by the business plan? Even if it is not suggested to apply for bank credit
It is recommended to follow a strategy of healthy ge- and risk a high debt burden for starting up a (still
neric growth for the CF scheme (slowly enough to be fragile) CF scheme, financing institutions should be
financially affordable and to allow the development involved at an early stage to build reliable working
of sustainable structures, fast enough to achieve a relations and, if necessary, jointly develop CF-specific
viable scale). Experience shows that it takes 3 to 5 products.
years (sometimes longer) for CF schemes to reach Which measures should be considered in the busi-
break-even. ness plan to reduce investment risks, which are
On
which assumptions should the business plan be especially high in the early years of CF development
based? before trustful relationships are built (non-supply/
Given the challenging setting in most developing procurement risk, low recovery rate/ credit risk)?
countries, it is recommended to use conservative Expecting
that break-even will realistically only be
estimates (e.g. adoption of new technologies and re- achieved after 3 to 5 years: Which solutions can be
sulting yield increases, contract compliance regard- developed for bridging the financing gap between
ing quota fulfilment and quality compliance, etc.) immediate investment and operational as well as
and to consider relatively high management efforts farmers income requirements and expected return
and costs for the start-up and consolidation phase. on investment?
Selected tools
Buyer’s
CF contract task group involving, if possible, Sources (see Bibliography):
farmer representatives and, if necessary, 3rd party Agricultural business plan guidelines; in: Republic of
facilitators/ experts South Africa, 2011
82
In
P h taes re n2a: tIim
o pnlaelmLeenatd &
e rlseha irpn T r a i n i n g 83
Headline
C/C.4/
84
C.4/ Phase 2: Implement & learn

Just like sound planning is imperative for adopting to be negotiated and CF schemes managed in a
a realistic CF strategy and for developing a realis- transparent and participatory manner. Involving
able CF business plan (Phase 1), implementing a farmers from the onset and respecting their busi-
trial period and learning from contract partners’ ness interest is essential for creating ownership for
initial experiences, success cases and challenges the CF development process.
(Phase 2) is vital for developing viable CF ventures
and up-scaling CF schemes (Phase 3). Objectives of phase 2 “implement & learn”
t o facilitate responsible participation of both
Since a CF scheme will only be as successful as parties in CF negotiations and implementation;
both business partners are committed, reasonable t o develop necessary basic skills of farmers to be
care has to be paid to building mutual trust and able to assess the firm’s contract offer and take
loyalty. Equally important for motivating farm- an informed decision on contract acceptance;
ers and the buyer to honour their contracts are t o clarify roles and responsibilities and to set up
adequate capacities enabling both to take in- the organisational structures and a CF manage-
formed business decisions and to perform in their ment system for the start-up of field operations;
respective functions. Consequently, trust, loyalty t o generate business information for strategic
and performance are indispensable for making the decisions and daily operations as well as con-
joint CF venture profitable for both. Having this in tinuous improvement of the CF scheme (moni-
mind, it becomes obvious that CF contracts have toring, feedback and learning loops).
Figure 10/ Three steps and related activities for phase 2 “implement & learn”

Negotiations and farmers’ Start-up of CF field Monitoring, feedback and
acceptance of CF contract operations learning
– initiate working relations and – develop an efficient system for – generate business information
trust building supplier network management for CF management
Activities Activities Activities
4.1 5.1 6.1
Prepare the CF agreement and Finalise the CF business and Set up a CF business information
enable farmers to take informed management plans and system for farmer-firm interface
business decisions frame a seasonal CF budget management
4.2 5.2 6.2
Offer the CF contract and Set up CF infrastructure Establish routines for feedback
explain the specifications and management for field to farmers, field staff and
to farmers operations management
4.3 5.3
Accept the CF contract Develop CF capacities
following fair and transparent of farmers, farmer groups,
negotiations field and management staff
Depending on the situation, neither all three Recommendations

steps and all activities have to be implemented, Respect farmers as serious business partners.
nor have the activities to be applied in the given Enable farmers/buyers to take informed decisions.
sequence. R
ecognise that trust, loyalty and reward create
ownership that is at the origin of success.
U
se the trial phase for identifying viable strate-
gies for consolidation and up-scaling.
Phase 2: Implement & learn 85
C.4/
Step 4/ Negotiations and farmers’ acceptance of CF contract
– initiate working relations and trust building
Responsibility for the performance and sustainability Note

of the CF scheme rests with the buyer and the farmers. Against this background, it is recommended to involve
Both have to bear the business risks for their parts in farmers at an early stage into the assessment of the CF
the investments of land, labour and capital. At the same potential, the development of CF arrangements, the CF
time, they have to reap the fruit in an equitable, fair and contract and the CF business plan (see Phase 1). In so far,
transparent way. Sharing risks and rewards in this sense Phase 1 and 2 partly run in parallel.
requires trust and ownership meant as willingness and
capacity to take responsibility for own business and joint It is furthermore obvious that farmers have to be sup-
CF decisions and for the reliable and accountable fulfil- ported to develop basic skills for understanding and
ment of all obligations arising from the farming contract. managing their part in the CF scheme as a business.
In such a joint venture, trust and ownership are key to Farmers have to be able to assess the implications of the
success. However, the reality often looks differently re- CF contract on their farming system, to decide on the
sulting in uninformed business behaviour, in mistrust and required investments of usually scarce farm assets and
contract default. This may be due to insufficient informa- to calculate the prospective return on these investments.
tion on the reality on the ground (thus the prominence of Basic skills of this kind have to be built before the buyer
Phase 1) and it is often due to insufficient knowledge and offers the contract and the farmers negotiate and accept
skills for informed business decision-making on the side or refuse the agreement.
of smallholders. Even though not sufficiently recognised,
it is in the obvious interest of the buyer that farmers
develop proper entrepreneurial skills to become serious
business partners able to conduct negotiations and con-
tribute to CF development in a competent way.
86

Activities
4.1 Prepare the CF agreement and enable farmers to
take informed business decisions
4.2 Offer the CF contract and explain the specifications
to farmers
4.3 Accept the CF contract following fair and transpar-
ent negotiations
Issues to be considered the financing gap between short-term obligations

The final selection of locations and farmers (based on (pre-financing of inputs and services and payment
Activity 2.1) has to be guided by strategic CF consider- of farmers in time) and the medium to long-term
ations and strict criteria; the selection should never be return on investments, the farmers have to appreci-
done arbitrarily or imposed by external stakeholders. ate that honouring their part of the contract is just as
Fair
and transparent conditions for farmers’ participa- decisive for success or failure of the CF scheme as the
tion in the negotiation process and sufficient time and buyer’s commitment.
explanations enabling farmers to really grasp the CF To facilitate farmers’ understanding of quite complex
arrangements and both parties’ obligations and rights, legal contract issues, it may be considered to invite a
are important for achieving farmers’ commitment. legal adviser as a neutral person to explain contract
Respecting
the capacities and concerns of farmers details to farmers. This will also contribute to creat-
and trying to find joint answers to their questions ing trust into a fair negotiation process.
(about risks and rewards, technical implications and Consider
male-female relationships and customary
knowledge gaps, etc.), are the first and vital steps for rules for authority for contract negotiation and sig-
building the trust that is necessary for success. nature; if women do the farm work, their workload
Only
if farmers get a voice in this sense and are capa- has to be observed in the design of CF arrangements
ble of taking an informed decision whether to accept and a fair income share assured in the CF contract.
the CF contract or not, they will be willing to commit Consider
the effects the CF will have on the farming
necessary resources and to honour the contract. systems and livelihoods of farmers and their fami-
For
a better understanding of the buyer’s invest- lies; to avoid adverse impacts of potential additional/
ment risks, it is necessary to explain farmers that it seasonally conflicting work load on the livelihood/
usually takes 3 to 5 years before a CF scheme pays food security situation, appropriate solutions have to
off for the buyer. While the company has to bridge be found.
Milestone
A critical number of farmers required for satisfying
the procurement needs of the buyer have accepted the
mutually negotiated and agreed CF contract.
C.4/
Activity 4.1/ Prepare the CF agreement and enable farmers to take informed business decisions
As already discussed, informed business decisions are preneurial skills and usually do not keep farm records
important for success. Since farm and firm investment providing information on production costs and sales
decisions are largely based on the expected return on returns. Furthermore, resource-poor farmers are usually
investments (reward), cost-benefit and risk assessments risk-averse owing to inadequate understanding of and
have to be realised to allow informed decision-making. capacities to calculate business risks and identify risk
However, most smallholders lack the necessary entre- mitigation possibilities.
Purpose
In a bid to enabling farmers to take an informed deci-
sion on whether to join the planned CF scheme or not,
the purpose is to build basic skills to understand the
CF arrangements and the prospective costs, risks and
benefits involved.
Selected questions not in place, the buyer may support organisational

Building on the results of Activity 2.1 ((pre)selection of development to make farmer organisations part of
production areas and farmers/ farmer groups for the the CF arrangement. The main interest is to achieve
start-up phase) and Activity 2.2. (assessment of farmers’/ scale economies by bundling input distribution and
farmer group’s and buyer’s capacity development and members’ supplies, facilitating peer learning, collec-
service needs), the following questions provide further tive bargaining and joint access to external services
information for planning appropriate measures in (e.g. group lending, transport) and, if possible, reduc-
preparation of CF negotiations: ing the risk for individual farmers. If well managed,
Which elementary skills do farmers require to weigh the scale economies arising from collective action
their decisions with regard to joining the CF scheme will contribute to reducing transaction costs, both
or not? Which skills do nucleus farmers require? for farmers and buyers.
An introductory course such as the Farmer Business In case of absence of strong farmer groups: Does
School or the Farming as a Business approach would it make sense to transform existing more socially-
serve the needs of farmers and nucleus farmers if oriented or to create new farmer groups to serve as
adapted to the requirements for CF negotiations. contract partners or intermediaries between farmers
This should also involve a basic understanding of the and the buyer?
costs and margins incurred at the up- (input dealers) As a matter of principle, farmer organisations should
and downstream (buyer) ends of the VC as well as the never be created top-down or forced by outsiders to
transaction costs involved between farms and firm. change since the probability of failure is high. If there
This will enable farmers to negotiate as a compe- is no farmer group that exhibits basic strengths, or-
tent business partner able to assess farm economics, ganisational development efforts will not bear fruit
weigh investment opportunities and risks and to within short and hence not within the start-up phase
understand his own position within the CF scheme. of the CF scheme. Sufficient resources and time will
Which role can existing farmer groups/ associations/ have to be made available to build farmer organisa-
cooperatives play at this stage? tions bottom-up, which is the only way to assure
Farmer organisations can play a key role in CF commitment, leadership and necessary accountabil-
development if they are strong enough e.g. regard- ity for joint economic activities.
ing ownership by members, democratic structures,
committed leadership, competent management and
clear benefits for members. If these conditions are
88
How can farmers/ nucleus farmers/ farmer organisa- Who will implement the farmers’ training in basic
tion representatives get a better picture of the buyer’s entrepreneurial skills?
procurement requirements and hence better judge This question is left to the buyer’s decision. However,
the challenge of meeting his specifications? in many cases 3rd party facilitators are willing to sup-
To facilitate a better understanding of usually quite port with technical assistance given their interest in
strict compliance criteria, farmer representatives promoting the inclusion of smallholders into VCs/
may be invited to visit the buyer’s facilities where the CFs, their experience and competence in farmer
requirements for processing, logistics and market ac- trainings and organisational development (however,
cess can be explained while visiting the facilities and training quality should not be taken for granted but
observing the work processes. checked case by case).
Selected tools
Farmer
Business Schools, Farming as a Business or Sources (see Bibliography):
other approaches Capacity
development concept; in: Will et.al., 2008
Development
of posters explaining the basics and Farmer
Business Schools; in: Matthess, 2012
principles of CF Organisational
development; in: Winkler et.al., 2006
C.4/
Activity 4.2/ Offer the CF contract and explain the specifications to farmers
One of the foundations of contract legislation is the free- accepted by the other side before it becomes binding. In
dom to contract. For CF, this implies the free decision of the majority of cases, a buyer offers a contract to farmers;
farmers and buyers to negotiate and conclude a contract. in exceptional cases, (strong) farmer organisations may
Furthermore, a contract has to be offered by one side and offer a contract to buyers.
Purpose
To provide a sound basis for decision-making, the assessing the contract offer by talking it over with other
buyer has to explain the contract details, leave room for farmers, trusted 3rd party facilitators or others.
discussing concerns and give farmers sufficient time for
Selected questions
The following questions may guide the process of offering possible bonus payments or deductions according
the CF contract to candidate farmers: to grades) and payment terms, risk sharing and prospec-
Before submitting the offer: Have the contract terms be tive cost-benefits (according to varying performance);
checked for comprehensibility also for a largely illiterate and in the 3rd meeting discussion of roles and responsi-
farming community and, if necessary, translated into bilities of both contract partners as well as arbitration
vernacular (usually recommended to avoid misunder- and conflict resolution possibilities. Further subjects are:
standings and the fear of farmers to be cheated)? the possible role of commodity organisations/ boards in
Have any farmers, nucleus farmers or farmer group floor price setting or other pricing formulas (mostly for
representatives participated in the drafting of the CF commodities such as cocoa, cotton, sometimes cashews
contract (see Activity 3.3)? or for strategic staple crops). It may be thought of invit-
If yes, these representatives may be best placed to ex- ing a representative to one of the meetings.
plain the draft contract to fellow farmers. What is the benefit for the buyer to use such a lengthy
Which approach should be taken to assure that farm- process?
ers feel well informed and treated as serious business First and foremost, the discussions provide a platform
partners? for knowing each other and starting to building trust.
It is recommended to take enough time and organise In the second place, the additional information gener-
several meetings to allow farmers to ask questions and ated (e.g. on specific pros and cons of the location, on
raise concerns during the meetings and reflect and traditional knowledge of farmers, on activities of other
re-consider opportunities and risks between meetings. buyers or potential service providers nearby the loca-
Possible topics: in the 1st meeting discussion of the tion) as well as the concerns raised and proposals made
CF arrangements, possible benefits and risks and risk by farmers will provide sound material, facts and figures
mitigation possibilities; in the 2nd meeting assessment of for finalisation of the CF contract as well as the CF busi-
embedded/ external services, pricing formula (including ness and management plans.
Selected tools
Buyer’s
CF contract task group involving farmer rep- European
Commission Green Paper on unfair trad-
resentatives and, if necessary, 3rd party facilitators ing practices; see CTA, 2013
Development
of posters explaining the basics and Guiding
principles for responsible contract farming
principles of CF operations; in: FAO, 2012
Sources (see Bibliography): Question
Guide #9; in: Action for Enterprise and
Contracts
and their specifications; in: Eaton and Match Makers Ltd., 2009, p.32ff
Shepherd/ FAO, 2001, p.58ff Stage
2: firm contract offer; in: Barrett et.al., 2011, p.4
90
Activity 4.3/ Accept the CF contract following fair and transparent negotiations
As a logical consequence to the buyer‘s contract offer As stated earlier (farmer selection; see Activity 2.1), more
(see Activity 4.2), the farmers may or may not (freedom pro-active and innovative farmers (early adopters) are more
to contract) accept the contract following negotiations of likely to join the CF scheme at an early stage, while others
conditions offered. To achieve commitment it is indis- will only commit themselves once the advantages (cost-
pensable that each individual farmer decides on his or benefit-‘plus’) are proven, the structures are settled and the
her own, whether to join the CF or not. If the decision is management is known. The decision of farmers should be
based on ill-informed considerations or false hopes or if accepted, even if this may result in low participation at the
it is directed by unequal power relations, social pressure beginning. It will be easier to create a quick success story
or external advisors (well-meaning but not necessarily with early adopters. The laggards will join in once they
in the interest and according to the risk-preparedness or witness the improved technologies, easier access to inputs
priorities of farmers), failure or at least low performance is and operational services, increased yields and incomes or
usually inevitable. an improved reputation of their neighbours.
C.4/
Purpose
The purpose is to develop a joint buyer-farmer ap- additional information gathered along the way form
proach to transparent and fair negotiations as a further the basis for the finalisation of the CF contact, the CF
step towards developing efficient communication and business and management plans.
trustful cooperation. The negotiation results and
Selected questions
How
can buyers create a platform, in which farmers
Which further issues have to be considered that may
feel respected as serious business partners and do not not be specified in the CF contract but concern the
suspect the buyer to assert his greater negotiation management of the CF scheme?
power? Buyers and farmers have to reach a consensus on
Aspiring to develop a network of reliable suppliers, their respective roles and responsibilities in maintain-
the buyer (his representatives) should have a lively in- ing an efficient and trustful relationship, on structures
terest in creating a favourable climate for negotiations and areas for shared decision-making, on regular
based on equal footing. Buyers may invite an honest exchange of information, on problem-solving mecha-
broker to facilitate negotiations. However, due atten- nisms before dispute settlement becomes a need, etc.
tion has to be paid that facilitators do never speak on What particularities have to be considered if inter-
behalf of farmers but moderate the discussions be- mediaries are involved in the CF scheme and the
tween farmers and buyers who both have to speak for contract relations are not directly negotiated and
themselves. To facilitate farmers’ understanding of the signed between farmers and the buyer?
quite complex legal contract issues, buyers may also In this case, the buyer should try to negotiate con-
consider to inviting a legal adviser as a neutral person tract terms with the intermediary, that oblige him to
to explain contract details to farmers. conclude appropriate agreements with farmers that
Which contract specifications have to be agreed are likely to motivate them to comply with their sup-
upon before the contract can be signed/ farmers ply obligations. To achieve the intermediary’s com-
registered? mitment, the buyer may agree on bonus payments
Apart from the pricing formula and payment terms, (e.g. for quota fulfilment, high shares of first quality or
the allocation of a supply quota is among the most reward for high recovery rates).
important specifications to be agreed upon. Quotas Have
registration rules and regulations to be consid-
may be volume-based but are usually area-based ered?
with the supply quantity calculated on the basis of In some countries and usually for commodities,
expected yields; the criteria for the quota alloca- contract farmers have to register with authoritative
tion commonly comprise suitability of land, farm bodies and pay a registration fee (sometimes paid by
size, farmer’s cultivation skills, land preparation and the buyer on behalf of the farmers). Occasionally, the
cultivation methods, historical yield data if available, buyer obliges the farmers to pay a registration fee to
availability of family or hired labour and subsistence assure their commitment, to increase the probability
requirements. Furthermore, the contract parties have of recovery of input loans and to reduce the (liquidity
to agree on the timing of supplies, services to be pro- straining) pre-financing burden on the buyer’s side
vided and the dispute settlement/ arbitration system. for inputs, operational services and CF management.
Selected tools
Buyer’s
CF contract task group involving, if possible, Contracts
and their specifications; in: Eaton and
farmer representatives and, if necessary, 3rd party Shepherd/ FAO, 2001, p.58ff
facilitators/ experts European
Commission Green Paper on unfair trad-
Sources (see Bibliography): ing practices; see CTA, 2013
Question
Guide #9; in: Action for Enterprise and Stage
3: smallholder contract acceptance; in: Barrett
Match Makers Ltd., 2009, p.32ff et.al., 2011, p.5
92
Step 5/ Start up CF field operations

– develop an efficient system for supplier network management
Step 5 is about implementing what has been planned in Note

the first phase and agreed upon in the CF contract (see Since a successful start-up phase will convince suppliers
Step 4). While the CF capacity development and service to stay with the buyer and laggards to join in, sufficient
plan (see Activity 2.3), the CF management plan (see time and resources have to be made available for strategic
Activity 3.2) and the CF business plan (see Activity 3.4) are and efficient management of the CF scheme right from
to be kept as simple and concise as possible, they have to the very beginning. Furthermore, great importance has to
provide an easy to apply and operational foundation for be attached to employing committed and able profession-
getting the CF started. als for CF management as well as selecting skillful and
adept nucleus farmers or other intermediaries working di-
The more mature the CF planning, the better the opera- rectly with the farmers. A successful start-up phase is es-
tional structures and the management system are adapted pecially important since the experiences gained and good
to the reality the faster the field operations can be put in practices developed will be used for consolidating the CF
place. Yet, the supplier network management has to be scheme and for developing a concept for up-scaling.
very flexible to remain alert and smart in answering to the
multitude of challenges that will certainly emerge during
the course of implementation.

C.4/
Activities
5.1 Finalise the CF business and management plans and 5.3 Develop CF capacities of farmers, farmer groups,
frame a seasonal CF budget field and management staff
5.2 Set up CF infrastructure and management for field
operations
By
finalising the CF capacity development, manage- Since
visibility in the field will be decisive for estab-
ment and business plans drafted in Phase 1, further lishing trustful farmer-buyer relations and two-way
information gathered during initial farmer trainings information flows are necessary for detecting pos-
(see Activity 4.1) and contract negotiations (see Activi- sible problems at an early stage, due care has to be at-
ties 4.2 and 4.3) should be integrated to come up with tached to set up operational structures that are close
realistic and realisable plans. to farmers (via company staff and nucleus farmers/
During
the start-up phase, realistic procurement farmer organisations or other intermediaries).
planning for assuring the utilisation of installed For
the same reasons, buyers should be careful in
processing capacities and the fulfilment of customer selecting and preparing own field staff, nucleus
requirements will be a real challenge for the buyer farmers and intermediaries since their attitudes
given uncertainties about capacities and reliability towards farmers and their technical and managerial
of suppliers. Trying to avoid undersupply, the buyer qualifications will be critical for farmers’ acceptance
may contract more farmers than necessary if only and hence in the end for farmers’ compliance with
calculating expected area-based supply volumes. CF agreements.
But in this case, the buyer has to have a solution at Given
uncertain credit repayment as long as buyer-
hand for alternative marketing of potential surplus farmer relations are in their infancy, it is recom-
in order not to be obliged to reject oversupplies since mended to limit the credit risk by reducing input
the resulting frustration of farmers would create a pre-financing to the really necessary. With maturing
serious risk for CF sustainability. CF relations and satisfying recovery rates, credits
To avoid tensions, it should again be checked may gradually be increased (for inputs up to the level
whether farmers’ contract obligations are appropri- needed for reaching profitable yields).
ate for the prevailing farming systems/ farm assets. In
the same line of thinking, it is not advisable to
Due attention has to be paid, not to trap farmers in extend credits to farmers or other village-based
debt overload, not to prompt rededication of land or investors for establishing 1st stage processing at the
labour to the CF crop to the detriment of staple crop very beginning and as long as there is no track record
(subsistence) production and not to create gender of credit repayment.
inequalities when farmers try to honour contracts. Given
the challenging technical and financial
Against this background, jointly developing a seasonal requirements for jump-starting a CF scheme with
CF work plan including benchmark data and framing smallholders, the buyer may consider to apply for
a seasonal CF budget based on the business plan will assistance by the government or development
provide the buyer and farmers with a clear mandate partners. The CF business plan provides an excellent
and a management tool facilitating farm-level and basis for doing so.
CF-level planning, operations and monitoring.
Milestone
The CF operational structure and management system
provide an efficient and effective setup for the practical
organisation of CF scheme.
94
Activity 5.1/ Finalise the CF business and management plans and frame
a seasonal CF budget
As pointed out above, the CF business plan describes the Once the business plan is finalised, a CF task group
strategic objectives as well as the operational and financial (including the buyer, the company’s management/ field
means necessary to develop the CF scheme. The business staff together with farmer representatives/ intermediaries)
plan serves financial and managerial decision-making, pro- develops an annual/ seasonal work plan and a CF budget.
vides strategic and operational orientation for CF manage- The CF work plan and CF budget will serve as management
ment and facts and figures for the assessment of business tool at all levels from farm to firm.
results. The business plan may also be used for applying
for credits or 3rd party technical or financial support. The
CF management plan outlines solutions for a smooth,
effective and efficient management of the farm supply-
firm procurement interface according to the selected CF
business model.
Purpose
The purpose of this activity is to lay the foundations
for efficient CF management by completing the CF
business and management plans and developing a joint
buyer-farmers work plan and CF budget.
Selected questions
Which considerations guide the finalisation of the CF representatives in the field (including advice and
business and management plans? control/ monitoring of crop husbandry, harvesting,
If well developed, the draft plans already give a clear collection and procurement). Furthermore, bonus
picture about the prospective development of the CF systems for farmers, nucleus farmers, intermediar-
scheme over the next 3 to 5 years as well as about the ies and own staff should be considered to foster
operational structures and the management system. performance (based on quota fulfilment, share of first
However, the intensive dialogue between the CF grade, loan recovery rates, etc.). The buyer should also
partners during Step 4 provides additional insights carefully re-think the level of pre-financing farmers,
that will contribute to making the plans more since credit risks are high for both partners (recovery
realistic and realisable. For further directions on the risk for buyers and over-indebtedness for farmers),
development of the business and management plans especially during the start-up phase.
see Activities 3.2 and 3.4. Which elements are to be considered in the seasonal
Which critical success and risk factors have to be re- CF work plan?
assessed before finalising the plans? The work plan is about joint crop planning includ-
First and foremost, the buyer has to re-calculate ing timelines and responsibilities for distribution of
whether the expected margins will be sufficient to seeds and other inputs, for crop husbandry (follow-
justify and support significant up-front investments ing GAP principles or explicit standards required by
(e.g. collection and service centres, mobility solutions the buyer), quality assurance, harvesting, collection,
for nucleus farmers, field staff or other intermediar- grading, logistics, transport and record-keeping,
ies) and recurrent operational costs (staff, logistics, etc. The work plan also includes all other services
embedded services). An often underestimated cost provided within the CF arrangement either through
factor are the time and resources necessary for creat- embedded services or by external providers (e.g. op-
ing good working relations (coordination, informa- erational services, extension and training, credits).
tion exchange) and visibility of the buyer’s
C.4/

What is the CF budget about? financing is shared by farmers (investing into land,
The CF budget states the related expected costs and labour and sometimes small amounts e.g. for regis-
returns and sources of financing (buyer, farmers or tration) and buyers; with a high burden and risk on
external through bank credits, technical or financial the latter given the usually substantial CF scheme
assistance). The CF budget should also present the establishment costs. In many countries, bank lend-
timelines for expenses and revenues (cash flow) as ing is not (yet) a solution since financial institutions
a basis for farm and firm business planning and for still perceive agriculture in general and smallholder
smallholders’ livelihood/ liquidity requirements (the agriculture in particular as a high risk venture. While
importance of the latter for reducing moral hazard some adequate financial products exist (e.g. invento-
has been explained in Box 18). ry credits, insurance), barriers for longer-term start-
Given
that the start-up phase involves considerable up infrastructure investments are still quite high. In
financial engagement (even if calculations are on the this setting, governments and development partners
conservative side): Which optional solutions exist for are increasingly prepared to provide financial as-
realising necessary CF start-up investments? sistance to CF scheme development. Yet, due care has
The main question is, how the financing gap can be to be taken that general development objectives do
bridged between short-term payments for supplies not override the CF business strategy thus probably
and the upfront investments into qualification and reducing the prospects for success. In this context,
infrastructure on the one hand and the return on the CF business plan makes relevant information
investments on the other hand, which only material- available for government’s/ development partners’
ises in the medium to long run. Basically, the start-up decision-making on support.
Selected tools
CF
task group (buyer’s management and field man- Managing
the project; in: Eaton and Shepherd/ FAO,
agement staff, selected nucleus farmers, other farmer 2001, p.83ff
representatives and, if involved, intermediaries) Question
Guides #5-8; in: Action for Enterprise and
Sources (see Bibliography): Match Makers Ltd., 2009, p.19ff
Agricultural business plan guidelines; in: Republic of See
also Activities 3.2 and 3.4
South Africa, 2011
96
Activity 5.2/ Set up CF infrastructure and management for field operations
The CF management plan, CF work plan and the CF to

assure well-timed ordering and distribution of suf-
budget provide the framework for the establishment of ficient inputs as well as the coordination of harvesting
field operations. The main CF management functions are: and collection, quality control, transport and logistics;
to
assure sufficient presence of the firm in the field to
identify, communicate and manage possibly emerg-
(especially at farm/ nucleus farm level) to build the ing risks (cost drivers, food safety/ quality, default, etc.).
suppliers’ confidence in the buyer’s commitment and
management capacities; The effective management of field operations requires
to
select farmers and nucleus farmers, to assure their appropriate human and financial resources, hands-on and
timely registration, to train and advise farmers, to efficient (regarding transaction costs) approaches, a sit-
monitor and control the application of agreed agricul- uation-specific physical setup and a suitable mentoring/
tural practices; monitoring system for engaging large numbers of farmers
via nucleus farmers, intermediaries and/ or own staff.
C.4/
Purpose
Managing CF schemes necessitates clearly defined
priorities, roles and responsibilities, strategic location of
collection/ service centres as well as timely, transparent
and trustful coordination and communication between
farmers and the buyer.
Selected questions
Which physical structures and logistics provisions mitment is key to success); a CF department at the
respond to the requirements for the start-up phase? company’s principal office (overall planning and co-
On the one hand, the operational and physical struc- ordination); CF collection/ service centre managers
tures have to be up to the requirements for managing (own staff or intermediaries; responsible for similar
usually dispersed smallholders in the selected loca- tasks but at the de-central level); if the area is quite
tions. On the other hand, operational and infra- extended or farms are very dispersed, (own or hired)
structure costs have to be limited to the absolutely CF zonal managers may be required; contracted
necessary. Weighing up the options is especially nucleus farmers or farmer organisations (responsible
difficult for the start-up phase given the interest to for coordinating, mentoring and monitoring farmer
create a success story as basis for up-scaling while groups of 10-15 individuals); and contract farmers.
trying to reduce the investment risks as long as At all management levels, clear roles, responsibilities
the outcome is uncertain regarding procurement and work routines have to be defined and capacities
security and loan recovery. The location and layout built for CF management as a new job profile.
of the CF infrastructure depends on the product Which are the main tasks of the CF management?
features, the farmers’ locations and capacities, the The performance of the CF management is decisive
existing infrastructure (e.g. access roads, warehouses), for success or failure of a CF scheme. At each CF
the requirements for input distribution, produce col- management level, the staff or externally contracted
lection, grading, transport (often very important for intermediary is responsible for the smooth function-
timely conveyance of produce from the farm to the ing of: knowledge transfer (e.g. GAP, quality assur-
collection point) as well as potentially for mechanisa- ance, traceability, record-keeping), bulk input pro-
tion services (e.g. for land preparation). curement and distribution, pre-financing and loan
Which operational structures and management ar- recovery, coordination of operational services as well
rangements are appropriate for an efficient coordi- as organisation of training and extension, mentoring
nation of field activities, transfer of improved farm- and monitoring services, record-keeping and ac-
ing practices and information exchange as basis for counting, etc. The management duties are explained
the development of reliable, trustful and long-term in detail by Eaton and Shepherd (2001) as well as
farmer-firm relationships? Action for Enterprise and Match Makers Ltd. (2009;
While the operational layout largely depends on see Bibliography below). Last but not least, staff and
the specific situation, it is obvious that a CF scheme intermediaries at all levels are held to be alert to spot
generally builds on a multi-level operational system possible conflicts before they become a serious prob-
involving: the firm’s management (high-level com- lem to be able to take early remedial action.
Selected tools
Sources (see Bibliography): J ob description for field extension officers; in: Eaton
I nstitutional arrangements in the Zambian cotton and Shepherd/ FAO, 2001, p.138
sector; in: Tschirley & Kabwe, 2009, p.18 M
anaging the project; in: Eaton and Shepherd/ FAO,
I ntervention Brief #2; in: Action for Enterprise and 2001, p.83ff
Match Makers Ltd., 2009, p.70 Q
uestion Guides #3-13; in: Action for Enterprise and
Match Makers Ltd., 2009, p.19ff
98
Activity 5.3/ Develop CF capacities of farmers, farmer groups, field and management staff
Alongside access to inputs, markets and credits, farmers ing yields and the share of first grade output and reduce
explicitly appreciate technical assistance by buyers in the transaction unit costs by increasing supply chain efficiency
form of training, extension and mentoring and farmer and reducing post-harvest losses. In a fair and equitable
group development. All these services constitute non- partnership, both, the buyer and the farmers will increase
monetary incentives for CF farmers (in contrast to mon- their profits through these efficiency gains. At the same
etary benefits as explained in Box 3). The buyer’s primary time, technical assistance provided by buyers contributes
objective in building farmers’ (and other VC operators’) to trust-building and to motivating farmers to honour
capacities is to reduce production unit costs by increas- their contracts (reduced default risk).
C.4/
Purpose
While capacity development and service needs of and implement capacity and organisational develop-
farmers, farmer organisations, nucleus farmers, buyer’s ment activities either through embedded services or
field or office staff or external intermediaries have been externally contracted service providers.
assessed in Step 2, the purpose of Activity 5.3 is to plan
Selected questions
Which tasks are involved in implementing capacity mitigate climate change effects, to fight new pests and
development activities? diseases (e.g. fruit fly has become a serious threat to
In a first step, service needs are identified (see Step 2). African tree fruit producers in recent years) or to adopt
The preparation, implementation and follow-up of more sustainable agricultural practices (e.g. conserva-
trainings are described in Will et.al. (2008, p.17ff). An tion farming/ minimum tillage).
important decision for buyers is whether to develop in Which approaches prove to be especially effective?
house staff capacities for embedded services or to out- Exposure to good agricultural practices (field days,
source to external service providers This is not only in- demonstration fields, exchange visits between farmer
formed by a simple cost-benefit assessment but should groups) or to quality assurance requirements (visits
also consider possible unintended side effects, namely of the buyer’s packaging station or processing plant)
visibility in the field and trust-building with own staff proves to be very important since the farmers can
versus the risk of cutting off farmer-buyer relations themselves discover the differences between prevailing
when contracting external services. If government or and required practices. Such approaches are especially
development partners offer technical assistance, it has effective when staged according to key crop husbandry
to be assured that the trainings or extension services or activities starting from land preparation through dis-
other services are truly needs-oriented (not offer-orient- ease control and crop protection up to harvesting and
ed) and meet the quality requirements of the CF scheme. post-harvest handling at the buyer’s place. Further-
In the past, the risk of disconnection between the buyer more, entrepreneurial/ farm management skills and
and suppliers was distinctively higher when government joint activities in farmer groups play a decisive role
or development partners came in as facilitators since for upgrading smallholder farming systems. Trainings
they tend to directly train farmers instead of doing so in Farming as a Business or Farmer Business Schools
through the CF scheme. and organisational development have opened eyes for
Which topics are of special importance? better crop planning, joint action in farmer groups and
In general farmers’ capacity development needs cut more reliable linkages with off-takers.
across various areas including crop-specific technolo- What else has to be considered?
gies (to enhance productivity, assure quality, take up The specific roles and needs of male and female farm-
new crops, produce according to buyer’s requirements), ers and farm workers have to be considered when
entrepreneurial and CF business management skills planning and implementing trainings, extension
(among others gross margin and cash flow analysis, programmes, field days and the like (e.g. trainings for
financial management regarding required re-invest- women should be organised near to the farm locations
ments into farms) and farmer group development and since they usually cannot afford to be absent from the
the like. Furthermore, new skills may be required to household for longer than a few hours).
Selected tools
Organisation
of trainings/training of trainers, exten- Intervention
Brief #6; in: Action for Enterprise and
sion, field days, organisational development, etc. Match Makers Ltd., 2009, p.74f
Sources (see Bibliography): Question
Guides #6-8; in: Action for Enterprise and
CF
capacity development plan; see section C.3, Step 2 Match Makers Ltd., 2009, p.21ff
Capacity
development concept; in: Will et.al., 2008 Rural
Extension/ Vol. 3: Training Concepts & Tools;
Farmer
Business Schools; in: Matthess, 2012 in: Gerster-Bentaya, Hoffmann, 2009
100
Step 6/ Monitoring, feedback and learning

– generate business information for CF management
Monitoring is a management tool for strategic decision- control

of operational efficiency and risks (e.g. control
making and daily operations. CF monitoring is about the of production and transaction unit costs, control of pro-
planning, operationalisation and control of activities in duction/ handling/ credit/ marketing/ external risks);
line with the objectives and approaches outlined in the adoption
of innovations (e.g. introduction of improved
CF business plan. It is hence about the sequencing and varieties/ uptake of new farming practices with results
timing of input-to-farm-to-firm operations, the control expressed in yield increases or quality improvements);
of contract fulfilment, of costs and revenues and, as a identification
of good practices for up-scaling and areas
result, of individual CF operators’ and overall scheme for improvement (e.g. identification of over- or under-
performance. If appropriately designed, monitoring of CF performing locations, cost-efficient performers or cost
activities can provide data for various uses: drivers, contract default);
timing
of daily management of CF operations (e.g. etc.

input distribution, organisation of extension/ field days
according to cropping calendar); Without creating additional costs, the reporting system
progress
in business operations (e.g. input procure- should also provide data for assessing broader impacts
ment/ distribution according to seasonal needs, indi- such as farmer incomes, employment creation, gender
vidual farmers’/ overall harvest forecasts); participation or community welfare development. These
performance
of CF operators (e.g. productivity, quota data are required by government or development partners
fulfilment, share of first grade supplies, recovery rate, providing technical or financial assistance but may also
outstanding repayments); serve the company’s reputation.

Activities
6.1 Set up a CF business information system for farmer- 6.2 Establish routines for feedback to farmers, field staff
firm interface management and management
Traditional monitoring known from technical or
The objectives of monitoring have to be made transpar-
financial assistance projects is not well suited to CF ent and the relevance and usefulness explained to all
business needs. CF operators to create acceptance, facilitate data collec-
While the monitoring system should be designed tion and create willingness to learn from the feedback.
as simple and user-friendly as possible to assure With a view to facilitating early adjustments to
continuous maintenance and use, it should be as changing framework conditions, community and
comprehensive as necessary to provide relevant market as well as social and environmental devel-
information for strategic business decision-making opments should be monitored as well (even if less
and operations. frequently). This will help identify new opportuni-
Clear
objectives and monitoring requirements have ties (e.g. famers interested to join, small-scale service
to be defined to guide the development of the system firms) and possible risks (e.g. trade-offs between
(reporting, data collection and processing as well as subsistence and CF crops, tensions within the com-
feedback and knowledge management routines). munity due to included winners and excluded losers
or new buyers starting to poach CF farmers).
Milestone
A manageable monitoring, feedback and learning sys-
tem is in place and is integrated into daily work routines.
C.4/
Activity 6.1/ S
et up a CF business information system for farmer-firm interface management
Just like in any business, the CF management and opera- harvesting, collection, transport and logistics and so forth
tors have to generate necessary data for steering the quite up to the point when the off-taker sells to his customers)
complex and challenging farm supply-firm procurement but also about the efficient and effective interconnec-
interface, which is the CF business. As a consequence, tion and interpretation of these records and correspond-
monitoring is not only about credible record-keeping ent business decision-making and management of daily
at every operational level (input supplies, production, operations.
Purpose
The challenge is to develop a simple and user-friendly
CF business information system that provides required
facts and figures for strategic CF business decision-
making and daily CF operations.
Selected questions
What can and should be measured?
Which additional or complementing information
Since monitoring will only serve as a management systems may facilitate transparency and CF business
tool, if it is integrated into daily work routines of decision-making?
CF operators from farm to firm, expectations on In Zambia, the Cotton Ginners Association, the Cot-
measurable data have to be realistic and monitoring ton Board of Zambia, the Food Security Research
systems kept simple. Project and the Competitive African Cotton Initiative
How
can smallholders comply with record-keeping (COMPACI) jointly developed the Cotton Producers’
obligations? Database, which monitors sector productivity and
Illiterates can usually handle simple data collection income performance at household and national lev-
sheets or (up-coming) text-message based data col- els as well as information on side selling and pirate
lection. If this is not possible (or not trusted), nucleus buying based on individual farm data.
farmers, farmer organisations, external extension For
further information see sources below.
workers or others can be involved into farm-level
record-keeping.
Selected tools
Sources (see Bibliography): New
Business Model Principles Scorecard; in: Lundy
Cotton
Producers’ Database Zambia; in: Zambia Cot- et.al., 2012, p. 97ff
ton Ginners Association et.al., n.d. Question
Intervention
Brief #14; in: Action for Enterprise and Match Makers Ltd., 2009, p.46ff
Monitoring
performance; in: Eaton and Shepherd/
FAO, 2001, p.105ff
102
Activity 6.2/ Establish routines for feedback to farmers, field staff and management
The CF business management system has to provide market or price developments, quota adjustments due
two-way information flows. While recorded data are fed to changing supply capacities (e.g. introduction of new
from the field to the office, information generated by technologies or weather-induced crop failure), farmers’
processing these data has to be fed back to the field. If, and buyer’s representatives have to meet to re-negotiate
for example, the buyer’s management concludes that the the CF contract or re-adjust the work plans.
contract terms or work plans have to be attuned due to
Purpose
The purpose of this activity is to develop transpar-
ent and efficient communication systems for timely
feedback of information generated by the CF business
information system and related buyer’s proposals or
decisions to the field.
Selected questions
How
can the feedback systems be organised?
Which CF levels have to be involved in case the CF
Information can be channelled during regular meet- contract has to be re-negotiated?
ings, which are anyhow organised between farm- If contract relevant issues are up for discussions,
ers and buyer’s representatives in the field (at the out-of-band farmer-management meetings have to
occasion of input distribution, trainings, mentoring be organised (similar to Activities 4.2 and 4.3). It is
and monitoring, etc.). To assure timely communica- recommended that such sensitive topics are raised
tion of urgent issues at all CF levels, a cascade system before they become a problem and are dealt with in a
for information distribution has to be established transparent and fair manner to avoid conflicts.
(e.g. via mobiles, which are also increasingly used for
providing extension messages, for record-keeping
and traceability needs).
Selected tools
Intervention
Brief #14; in: Action for Enterprise and New
Business Model Principles Scorecard; in: Lundy
Match Makers Ltd., 2009, p.87f et.al., 2012, p. 97ff
Monitoring
performance; in: Eaton and Shepherd/ Question
FAO, 2001, p.105ff Match Makers Ltd., 2009, p.46ff
C.4/
104
In
P h taes re n3a: tSi u
o sntaali nL e&a d
grer
o swh i p T r a i n i n g 105
Headline
C/C.5/
106
C.5/ Phase 3: Sustain & grow

Developing and sustaining a CF scheme is a chal- business models. It may for example be that larger
lenging and risky venture; and that during busi- farms and more efficient and profitable planta-
ness start-up, consolidation and growth. The main tions crowd out smallholder solutions when
reasons are the investments involved, namely those reaching a certain size. But every case is different
of small-scale farmers who are resource-poor and since even then the market may prefer and appre-
risk-adverse and those of buyers who are chal- ciate smallholder solutions if certifiable accord-
lenged with bridging the financing gap between ing to international (or increasingly regional or
short-term pre-financing and medium to long- national) sustainability standards.
term return on investments and resulting frequent
liquidity problems. Just like for any other business, It is obvious that sufficient time and resources
persevering the first seasons (often years) is decisive are necessary for consolidating and growing
for reaching break-even and permitting healthy ge- CF schemes up to a point where they are really
neric growth is decisive for achieving sustainability. sustainable. Since experience shows that quite
a number of schemes break down once direct
With experience showing that it takes at least governmental or development partners’ assis-
three to five years to reach break-even, the start-up tance ceases, business planning and arrangements
phase has to be followed by a consolidation period, for CF growth have to be viable, primarily based
which already has to be scheduled and budgeted in on own resources of the business partners and
the original CF business plan (see Step 3). Consoli- guided by business reasoning and not by develop-
dation is of particular importance since CF growth ment objectives.
will only succeed if anchored in stable founda-
tions, which are characterised by trustful and loyal Objectives of phase 3 “sustain & grow”
farmer-buyer linkages, workable CF structures and t o reach break-even and sustainability without
accountable and efficient CF management. During over-indebting farmers and over-stretching
consolidation, the CF business model, business buyer’s financing capacities and liquidity;
plan, operational structures and management t o integrate lessons learnt and good practices
system are reviewed for their practicability, cost developed during the start-up phase into the
effectiveness and scalability and are, if necessary, strategy for the consolidation and up-scaling of
revised. By doing so, special attention has to be the CF scheme;
paid to envisage a realistic and realisable growth t o adapt the initially developed CF business
path and to appraise the approximate maximum model and arrangements with a view to mak-
size, at which the CF scheme is still manageable ing the scheme resilient against ever changing
and cost-benefit-wise competitive with other internal and external challenges.
Phase 3: Sustain & grow 107
Figure 11/ Two steps for phase 3 “sustain & grow”

C.5/
(for activities refer back to Steps 1 to 6)
Step 7 Step 8
Continuous improvement Generic growth through
for sustainability upscaling
– further strengthen mutual trust – innovate the CF business
and loyalty for reaching breakeven model to include more farmers
Recommendations
Pay enough attention to further strengthening I f governments or development partners de-
trust and loyalty based on mutually beneficial cide to support CF up-scaling: provide a clear
supply-uptake relations (‘win-win’) to avoid low exit strategy from the very beginning while
quota fulfilment and high credit losses. committing sufficient time and resources.
Adapt contractual arrangements if necessary and B ut: avoid over-reliance of the CF scheme on
invest into continued capacity development to 3rd party facilitators for reaching break-even
facilitate repeated contracting since starting over and growing since this may compromise CF
and over again with new farmers is too costly. farmers’ and the buyer’s commitment.
Assure transparency/ avoid mistrust by involving
farmers into decision-making on possibly neces-
sary adjustments of the CF business model and
plan (farm supply-firm procurement interface).
108
Step 7/ Continuous improvement for sustainability

– further strengthen the CF for reaching break-even
As said before, the better the CF business model and ar- Consequently, both farmers and the buyer and the CF
rangements are planned at the onset, the less costly and management have to be prepared to learn from feedback
time-consuming adaptation will be necessary at a later and own observations and be capable of adjusting the CF
stage. Accordingly, the original CF business plan (see business plan, operational structures and management
Step 3) already has to consider activities, time and re- system or even of completely re-inventing the CF business
sources required for the continuous improvement of the model and turning the CF arrangements all over. Continu-
scheme during the consolidation period. But experience ous improvement is essential for gaining and maintaining
shows that CF business models often have to be revised the commitment of farmers (e.g. to avoid that CF farmers
during or after the start-up phase and even later due to become manipulable by poaching) and is hence important
insufficient understanding of the starting position and re- for the sustainability of the CF scheme and forms integral
sulting ill-informed planning, the uncertainty of farmers’ part of the CF management’s tasks.
response as well as changing market, political and other
framework conditions.

Activities
Refer back to: Steps 1 to 6 and related Activities
Issues to be considered Support

farmers (training, extension) to carefully
Assess the track record of farmers, nucleus farm- plan and realise re-investments of (reasonable parts
ers, collection centre managers at the end of every of) the CF revenues into farming to reduce produc-
season (screening for e.g. quota fulfilment, share of tion unit costs and increase yields and quality while
first grade, recovery rate) and decide on whether to not compromising subsistence needs.
continue the CF or employment contract or not. Develop
systems for supporting farmers to gradually
Integrate
new farmers/ nucleus farmers to replace increase input use while avoiding high risks of diver-
those who have been screened out and to reach the sion or non-repayment (e.g. progressive pre-financing
number of participating farmers necessary to reach of inputs from season to season as embedded service
break-even (motivate laggards to join, use nucleus or through a tri-partite agreement with a bank).
farmers and others to recommend new entrants). Work with farmers and, if relevant, with extension
Derive
lessons learnt (see Step 6) for upgrading CF and research to improve the farming systems (e.g. in-
business model and CF performance (see also Activity tercropping, crop rotation, conservation farming) for
1.4/ success and failure and Box 18/ moral hazard, the benefit of farmers (e.g. balance subsistence-cash
default risks). Document scalable good practices in crops) while better meeting the buyer’s requirements.
the form of e.g. CF standards and/ or operational Support
farmer organisations to take up a role in CF
guidelines. management in proximity to farmers (e.g. joint learn-
Further
qualify CF staff and/ or intermediaries to effi- ing, input distribution, produce collection, mentor-
ciently manage the scheme (e.g. mentoring and moni- ing and monitoring, internal audits in case of group
toring farmers; identification of problems whether due certification, group lending, risk sharing, dispute
to pests, diseases, weather or farmer-firm relationships; resolution).
development of problem-solving measures). Improve
the post-harvest handling of produce
Improve
the CF business information system (if nec- (e.g. transport, grading, packaging, storage, 1st stage
essary) to better integrate it into daily work routines processing) to reduce post-harvest losses and unit
and better serve CF management needs (e.g. upgrad- transaction costs to improve the profitability of the
ing from basic hand-written forms to a mobile or CF scheme and increase the income of all contract
computer-based ‘paperless’ system). parties.
C.5/
Establish
routine analyses of farm and post-harvest Organise
regular meetings involving different
economics since production and transaction unit vertical levels of the CF scheme i.e. farmers, nucleus
cost and cash-flow assessments provide valuable farmers and collection centre managers and buyer’s
management information for continuous improve- representatives from the principal office to assure
ment, preventive and corrective action. transparency and discuss issues of CF interface
Improve
the CF’s internal capacities for reducing management.
default risks (e.g. transparent and clear criteria and Take stock of relevant service providers, assess their
rules for rejection, for sanctions in case of default, for capacities and promote their settling near CF loca-
the accountability of own staff or intermediaries, for tions to create agribusiness clusters (clusters are
late payment). groups of farms and allied enterprises/ organisations
Identify
opportunities/ support additional income that cooperate to achieve shared goals).
generation and off-farm labour opportunities for Promote
spill-over effects of the CF scheme and
CF farmers and their families as well as other com- leverage emerging interest of communities or other
munity members (e.g. identification of markets for entities to start local economic development activi-
rejected produce, 1st stage processing, if reasonable a ties (e.g. construction/ rehabilitation of access roads/
2nd CF crop). market places; promotion of CF/ service business
Organise
regular exchange visits at all horizontal start-ups).
levels of the CF scheme i.e. between farmers, between D
evelop an ‘early warning system’ for the observa-
farmer group representatives, between nucleus farm- tion of relevant external changes (e.g. market trends,
ers, between collection/ service centre managers to political or regulatory changes) to facilitate early
discuss CF upgrading opportunities and learn jointly. decision-making on necessary adjustments.
Milestone
The start-up CF scheme is financially viable and suffi-
ciently sustainable to withstand possible future setbacks.
110
Step 8/ Generic growth through up-scaling

– innovate the CF business model to include more farmers
Even if up-scaling is commonly necessary to achieve criti- Up-scaling is about reaching out to integrate more farm-
cal profitability and hence sustainability, due attention has ers into the CF scheme by using scalable approaches and
to be paid not to expand faster than the buyer’s company tested instruments. While outreach costs may be reduced
can manage and sustain financially. Thinking of the out- by using scalable good practices, it cannot be taken for
reach objectives, they have to be guided by an appraisal of granted that the approaches and instruments developed
the approximate ‘optimum’ size, at which the scheme is and adjusted at an earlier stage can directly be applied in
still manageable and cost-benefit-wise competitive with other regions and settings. In order to reduce the (quite
other procurement solutions. When screening alternative frequent) risk of failure, the original CF business model and
CF arrangements (see Activity 3.1) and developing the CF arrangements may have to be adapted to the specific
CF business plan (see Activity 3.4), the question of size agro-ecological, socio-economic, market competition, in-
already has to be preconceived. But it is a difficult issue frastructure and political conditions, etc. in other locations.
and there is so far no documented experience available
that could guide decision-making on the ‘optimum’ size of Further to site-specific disparities influencing up-scaling,
CF schemes. changes in framework conditions (e.g. policies, regulations,
prices, consumer preferences) require to be monitored and
When reaching out to new locations, it has to be consid- considered in CF business model innovation.
ered that CF arrangements, operational structures and
management systems can usually not be perpetuated It is obvious that up-scaling requires sound planning, a
without adaptation. Since up-scaling requires substantial strategic approach and sufficient time and resources (hu-
investments (facilities, equipment, staffing, training and man, financial) for the establishment of the necessary CF
other services, input pre-financing), the buyer has to think infrastructure, the presence of the company in the field
through the financing needs and the company’s own and broad-based capacity building of suppliers, staff and
resources followed by an assessment of the possibilities intermediaries.
of external financing through the bank sector or through
technical or financial assistance offered by 3rd party
facilitators. In the ideal case, the original CF business plan
(see Activity 3.4) already considers the activities, time and
resources required for the generic growth of the scheme.

C.5/
Activities
Refer back to: Steps 1 to 6 and related Activities
Identify possible private and public service providers
Assess the ‘optimum’ CF size, which the buyer can still in the new locations and conclude cooperation agree-
manage and sustain financially and which is cost- ments/ contracts if advisable (see also section B.2):
benefit-wise still competitive with other solutions (i) associations, unions, inter-professions or a board
comparing smallholder with probably more efficient providing services such as market information, a CF
larger farm arrangements (see Activities 3.1 and 3.4). farmers’ database, a platform for price negotiations
Attach due attention to the selection of appropri- between farmer and buyer organisations, a CF code
ate locations and nucleus farmers/ farmers/ farmer of practice or policy dialogue (see Activity 6.1);
groups given the importance of this step for the suc- (ii) providers of operational services (e.g. external
cess and sustainability of CF up-scaling (the selection input dealers, agricultural machinery services, trans-
process can draw on the results of Activities 1.2 and 2.1). port & logistics services, plant protection services);
Build
on existing relations with nucleus farmers/ (iii) providers of other non-financial services (e.g.
farmer groups/ intermediaries/ service providers to research, extension, training, organisational develop-
identify and select truly interested new entrants; use ment);
likely spill-over effects such as awareness on the CF (iv) providers of financial services (e.g. short-term
scheme in neighbouring communities. loans, medium to long-term investment credits,
Develop
an up-scaling strategy adapted to location- insurance, leasing, bank accounts and savings).
specific conditions, based on a realistic assessment of Identify
possible governmental, development partner
required time and resources for initiating contacts, or NGO supporters and, if advisable and possible,
building trust, developing capacities, establishing the conclude cooperation agreements for CF up-scaling
CF infrastructure/ field operations (see Steps 1 and 2). (see also section B.2):
Select
and contract qualified staff and/ or interme- (i) regional or local authorities interested in support-
diaries responsible for CF field operations and CF ing CF up-scaling (local or regional economic devel-
management at different levels between the principal opment) or agricultural/ rural development entities
office and the field and develop the management and (e.g. extension services for basic agricultural skills)
technical skills of new staff/ intermediaries. but consider whether they are sufficiently equipped;
Check
the scalability of the good practices developed (ii) governmental organisations at the national level
during the start-up and consolidation phase and do- or development partners offering support to value
cumented in the form of CF standards or operational chain and/ or CF development.
guidelines and adjust them to the specific circum-
stances in the selected new locations (if necessary).
Milestone
The CF scheme follows a sustainable growth path
(slowly enough to be financially affordable and to allow
the development of sustainable structures, fast enough
to become/ stay competitive in main target markets).
112
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A practical guide for linking small-scale producers and

B.1/ Contract farming (CF): the basics at a glance ............................................................................................................. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

B.2/ Facilitation of contract farming:

C/ The contract farming facilitation guide

C.5/ Phase 3: Sustain & grow 104

“Good things only happen when planned;

“While it is conceivable that exogenous change in

Box 1/ Contract farming business models

Nucleus estate model

Figure 1/ Contract farming models and defining characteristics

(Technoserve and IFAD, 2011, p.3)

Increasing buyer investment

Increasing risk of inconsistent supply

Summary: Summary: Summary: Summary: Summary:

Pros: Pros: Pros: Pros: Pros:

Cons: Cons: Cons: Cons: Cons:

Inputs Outputs Processing Never Rarely Sometimes Often Always

Box 2/ Contract types

Market specification (or marketing) contract

Production management contract

Resource providing contract

increased risk of loss of decision-making non-understanding

Furthermore, prices are highly volatile due to sea-

Trust and scope of negotiation

Economic viability and incentives (see section B.1.3)

Contract farming arrangements and risks

Investment climate and 3rd party support

Sound analysis, planning and monitoring

Furthermore, since resource-poor smallholders The following illustration provides an easy to

Figure 2/ The new business model principles

(Lundy et.al., 2012, p.83)

Figure 3/ Market segments for inclusive business models

(Rockenbauch, Will and Vielhaber, 2013)

Segment I Segment II Segment III

Highly coordinated up to Usually high concentration Little integration and

+ Value Chain Coordination –

Figure 4/ Crop suitability for contract farming

(Technoserve and IFAD, 2011, p.10)

High suitability Low suitability

High risk of side-selling due to well-developed local/ export markets

limited assets in small farms especially land,

horizon than in other settings. Since there is no

Private sector development in general and value

“Undoubtedly, there are costs in creating trust or

This guide offers a structured and comprehensive

CF business model for managing

The following illustration gives an overview of the

Figure 6/ Process structure: phases and steps for developing CF schemes

Phase 1 Phase 2 Phase 3

Step 1 Step 4 Step 7

For a full picture of the overall process structure

C.3/ Phase 1: Initiate & plan

VC analysis considering Selection of CF business CF business plan

Objectives of phase 1 “initiate & plan”

Activities Activities Activities

Facilitation, if and as required: moderation, technical/ financial assistance

Depending on the situation, neither all three Further recommendations

increased risk of loss of decision-making non-understanding

limited assets in small farms especially land,

Step 1/ Decision to develop a contract farming scheme – identify opportunities

Dispute settlement specifications

Other measures linked to 3rd parties

Activity 3.4/ Draft a CF business plan (incl. prospective return on investment,

Step 5/ Start up CF field operations

Activity 5.2/ Set up CF infrastructure and management for field operations

Step 6/ Monitoring, feedback and learning

Figure 11/ Two steps for phase 3 “sustain & grow”

Step 7/ Continuous improvement for sustainability

Step 8/ Generic growth through up-scaling