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Farming under contract

Contract farming is all the rage in Zimbabwe at the moment. Indeed, more generally across Africa, there is growing interest in linking up smallholder farmers with larger business operations to produce and market certain agricultural commodities. Advocated by the World Bank and others, it seems like a perfect ‘win-win’ scenario. Smallholders get access to inputs and markets, and agribusiness gets guaranteed products at good prices and at scale, without having to take over large areas of land and produce everything themselves. Thus, in the great ‘land grab’ debate, some offer contract farming, with smallholders linked into global value chains, as an alternative.

Of course contract farming arrangements are not new in the Zimbabwean agricultural sector. The great cotton boom from the 1990s when smallholders entered cotton production in a big way was driven by contract arrangements, initially with the parastatal Cottco, and then with a variety of companies following liberalisation. This has been hailed as a massive success. Production increased and quality was maintained, and the Zimbabwe cotton industry thrived. The same is now happening in tobacco, as contract producers, on new resettlement farms, both A1 and A2, are hooking up with contractor, including some major contracts with the Chinese company Tianze. Other commodities have seen positive contracting experiences, including specialised crops like paprika. Where there are high demands for expensive inputs (fertilisers, sprays, seeds) and a need for specialist marketing support, then contracting makes much sense.

Now though contracting arrangements are expanding to other crops, including food staples like maize. This is in response to a different set of drivers, created in particular by the land reform programme. The land reform distributed over 8 million hectares to some 170000 households. Many, especially in the A1 smallholder schemes have got going on production, based on relatively low capital inputs and investments. Many have hooked into the tobacco or cotton contract schemes already mentioned. But there are also quite a number of particularly A2 farmers and some A1 farmers with larger plots who have found it difficult to get production moving on their new farms. This is for a variety of reasons, including lack of credit, poor access to machinery, limited skills and knowledge of larger scale farming, tenure insecurity and so on. There are quite a few A2 farms that remain underutilised. Of course this was also the case in the former large-scale sector, where over 1400 farms were deemed underutilised in the late 1990s, but under the land reform where new land is supposed to be put under production to meet national food security needs and enhance agricultural incomes, this situation is needs to be reversed.

Contract farming provides a way of overcoming some of the obstacles facing the new farmers, and is being embraced by many, particularly it seems in the higher potential areas of the Highveld. With contractors offering credit, inputs and transport and marketing facilities, and the new farmers offering land and labour, there is a matching up of capacities not being provided either by government or the banking/credit system. Economists should be delighted: demand and supply are being matched up, and market imperfections are being resolved.

Who then are the new contractors and contractees, and what problems are being faced? There has been little in-depth research on this evolving phenomenon, and it will be important to dig deeper. But a number of patterns are clear. The new contractors are not the classic large-scale agribusiness operations who run the tobacco, cotton or paprika contracting arrangements, they are often new entrepreneurs with some capital and out to make a buck (or many in fact). For the maize trade, purchasing a three-tonne truck is a key investment, as well as having contact with multiple land owners in an area. Supplying some inputs, and supporting a network of contract farmers requires good social relations and some keen business acumen. The new contractors are often urban based, with jobs in town, but perhaps no land, or not enough of it. They are well connected and highly entrepreneurial. Their operations are small, but sometimes allowing considerable quantities of produce to be traded in a season. They play the price differentials well, selling into informal markets at key moments to maximise profit. A number of such players are former white farmers, often in consortia with others, who know the production system, and the economics and technical requirements of production and trade.

On the other side, the A2 farmers with spare land have a range of arrangements, from classic contracting where they produce the crop to land leasing, where the contractor takes on the production on their land. Maize and livestock production seem to dominate, as these both have high demand local markets into which products can be sold. For the new farmers demonstrating that the land is being used is also important, as the threat of a land audit is always around the corner. There are downsides of  ‘living under contract’, as the classic literature shows. There may be little competition and it is often a buyers’ market, with produce being sold off at knock-down rates. Contracting tends to benefit men more than women, and the cash that comes may come late or not at all. Inputs supplied may be sub-standard or inappropriate, and becoming reliant on one product and one market may increase risks for producing households.

There are also particular risks to these new contracting arrangements in the post-land reform context in Zimbabwe. These revolve around land ownership and tenure security. In many of the Highveld areas, particularly where high value land with infrastructure is at stake, there continues to be insecurity in land holdings, especially on the A2 farms. An avaricious politician or military officer may eye up land that looks productive, and try and take it over. This process of politically-driven land grabbing continues today, despite attempts to stop it. Leases have not been issued, as uncertainty about the legal status of ‘contested land’ persists, and so land holders have little recourse to law, and must rely on local political connections to hold on to land – a risky and volatile strategy. In the same way contractors must balance the risks of this highly uncertain land ownership situation. They usually spread their risks, preferring to invest in multiple, smaller land areas than contract at scale in one place. This increases transaction costs substantially, but offsets the risks of default, take-over and disruption. Indeed, many prefer the more stable and settled A1 schemes to the more politicised, turbulent A2 areas, where well connected big chefs can intervene at any time.

There are pros, cons, risks and opportunities of the new contract farming boom in Zimbabwe. Past experiences show the need to be cautious, as outlined in the excellent recent review by Carlos Oya. But it’s certainly a trend worth tracking, and especially the new, private entrepreneur led strategies. As new farmers, particularly on larger plots, fail to get production moving due to lack of credit and other input support from government or the private sector, a contracting arrangement may be a positive solution, especially as it draws new entrepreneurs with new finance and skills, as well as former white farmers who lost their land, into the sector, reshaping economic and political relationships and spreading the gains of land reform in new ways.

This post was written by Ian Scoones and originally appeared on Zimbabweland

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The golden leaf: boom time in Zimbabwe

Zimbabwe’s tobacco industry is booming once again. From the low point in 2008, at the peak of hyperinflation, when only 48m kg was sold, optimistic estimates for 2012 suggest that around 150m kg will be sold, with prices early in the selling season around 30% higher than last year. Production levels are not back to the peak level in 2000 of 236m kg, but the trend is ever upwards, with sales rising from 65m to 123m to 132m kg between 2009 and 2011. In 2011, the sales generated around US$360m, helping to fuel the dramatic 34% growth in the agricultural sector in the past year. With the season not yet concluded over US$440m has been sold in 2012.

Once the almost exclusive preserve of around 3000 large-scale white farmers, tobacco is now being produced and sold by around 60000 black farmers from the new A1 and A2 resettlement areas. With average sales of around 10 bales per farmer, this will result in an income of around US$5000 – no mean sum in Zimbabwean terms. And of course tobacco creates employment along the value chain, as well as tax revenues.

This is one of the really unexpected success stories of the land reform. While many accepted that small-scale A1 farmers with larger areas of land could engage in successful staple production and ‘accumulate from below’, as we described across our sample areas in Masvingo, for new farmers to participate so successfully in the high value export industry of tobacco farming was seen as unlikely. Most had written off the industry, expecting it to atrophy and die.

But contrary to expectations, the tobacco industry has been transformed, from the farms to the auction floors. A whole new set of people are involved. It is not only the farmers who have changed, but also the labourers, the buyers and the financiers. Women are increasingly involved, particularly in the processing, sorting and auction-floor activities. White farmers are still involved too in the high quality/high cost end of the industry, in a few farms remaining under their control, but also in lease arrangements with A2 farmers, who needed the skills and expertise for the production of top quality flue cured Virginia.

New contracting arrangements have emerged to support smaller scale farmers grow tobacco. Contracting reputedly resulted in the production of 34m kg in 2011, out of the total of 132m. Some major new entrants have emerged in the market, notably those with Chinese connections. Tianze, for example, has around 250 growers linked to it. Overall there are around 13 contract companies operating, as well as multiple smaller scale leasing and other arrangements.

It is this financing aspect that has been critical for the dramatic growth of the small-scale sector. This has allowed farmers to invest in inputs, and the rate of refusal has declined, and overall quality has increased. Chinese contract companies, loan facilities and other forms of finance have transformed the system. More traditional players, from the western based companies and other commercial lenders, are now re-engaging knowing that there is money to be made.

There are downsides of the tobacco economy, of course. Curing is largely carried out using local fuelwood sources, and the impact on forests and woodland resources has been high. A more sustainable source of fuel will clearly be necessary. Equally, the high labour demands have resulted in accusations of child labour on the farms, flouting labour laws and undermining child rights. These of course were core issues when white farms took on tobacco as a core crop some decades ago, and will hopefully only be transitional challenges.

For the longer term, the tobacco story in the last five years has some important lessons for the wider agrarian transition. While tobacco is not a crop appropriate everywhere (and is not significant in our study areas in Masvingo, for instance), there are some more generic insights worth noting. First, A2 farmers, who have really struggled elsewhere including in Masvingo with poor production due to low capitalisation and investment, can make it under the right circumstances. Second, markets are key, but so is support to engage in markets. It is not just price levels, demand and supply, but up-front investment, skill development and knowledge building about quality control and market niches. Third, finance is vital; and that’s where Chinese finance and contracting arrangements become critical. Fourth, there are definitely roles for white farmers with skills and capacities in a particular commodity area, but probably involving engagement in different ways, at the high end of the market.

Hopefully the lessons from the tobacco transition can be applied to other aspects of the agricultural economy, leveraging finance, expertise and market access for the benefits of a larger group of people than the previously narrow, privileged large-farm sector.

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