The notion of contract is central to any understanding of the social integration of peasants into corporate relations of production (Watts, 1994:25). The section begins by defining the concept of ‘contract farming’ and then proceeds to outline a typology of contract farming models.
2.2.1 CONTRACT FARMING
Glover & Kusterer (1990:4) state that the concept of ‘contract farming’ is complex and therefore not easy to define. Complexities include the diversity of institutional arrangements (Da Silva, 2005; Kirsten & Sartorius, 2002), differences in historical and political economy contexts (Little & Watts, 1994) and the multiplicity of objectives, which include welfare, political, social and economic criteria (Kirsten & Sartorius, 2002). According to Glover and Kusterer (1990:4), contract farming or production can be simply defined as arrangements between a grower and firm(s), for example exporters, processors, retail outlets, or shippers, in which non-transferrable contracts specify one or more conditions of marketing and production. Eaton & Shepherd (2001:2) state that “contract farming can be defined as an agreement between farmers and processing and/or marketing firms for the
74 production and supply of agricultural products under forward agreements, frequently at predetermined prices”.
A common view is that contract farming is a form of ‘vertical coordination’ of linkages between small-scale farmers and agri-business firms (Kirsten & Sartorius, 2002; Glover & Kusterer, 1990; Little & Watts, 1994; Minot, 1986; Wilson, 1986; Dolan, 2005; Singh, 2005, 2002). In their study of contract farming in Sub-Saharan Africa, Little & Watts (1994:9) define the concept, for working purposes, as “forms of vertical coordination between growers and buyers-processors that directly shape production decisions through contractually specifying market obligations (by volume, value, quality, and, at times, advanced price determination); provide specific inputs; and exercise some control at the point of production (i.e. a division of management functions between contractor and contractee)”.
As a form of agricultural commercialization, contract farming can be seen from the perspective of New Institutional Economics (NIE), whereby contracts are a means to reduce ‘transaction costs’. Transaction costs are the costs incurred when a firm engages in an exchange process (Da Silva, 2005:12). They include the costs occurring prior to a transaction, such as obtaining information and negotiating the exchange conditions, as well as post- transaction costs, such as monitoring and enforcing terms of the contract (Ibid.). Reduction of transaction costs has often meant a reduction of government support to farmers.
2.2.2 CONTRACT FARMING MODELS
Eaton & Shepherd (2001:44) put forward a typology of various forms of contractual linkages between small-scale farmers and agri-business firms (Table 4). The typology identifies five broad models, depending on the product, resources of the sponsor and intensity of the relationship needed between the farmer and the sponsor. These include the centralised model, nucleus estate model, multipartite model, informal model and intermediary model.
The Centralized Model involves a centralised processor and/or packer buying from a large number of small farmers. The model is used for tree crops, annual crops, poultry and dairy products, which often require a high degree of processing. The Centralized Model is vertically coordinated, with quota allocation and tight quality control. The involvement of
75 sponsors in production varies from minimal input provision to the opposite extreme where the sponsor takes control of most production aspects.
The Nucleus Estate Model is a variation of the Centralised Model, wherein the sponsor also manages a central estate or plantation. The central estate is usually used to guarantee throughput for the processing plant but is sometimes used only for research or breeding purposes. The Nucleus Estate Model is often used with resettlement or transmigration schemes and involves a significant input of material and management inputs.
TABLE 4 TYPOLOGY OF CONTRACT FARMING MODELS
TYPE OF MODEL CHARACTERISTICS
Centralised Model Involves a centralised processor and/or packer buying from a large number of small farmers;
Is used for tree crops, annual crops, poultry and dairy. These products often require a high degree of processing, such as tea and vegetables and fruit for canning of freezing;
Is vertically coordinated, with quota allocation and tight quality control; Sponsors’ involvement in production varies from minimal input provision to the opposite extreme where the sponsor takes control of most production aspects.
Nucleus Estate Model Is a variation of the centralised model where the sponsor also manages a central estate or plantation;
The central estate is usually used to guarantee throughput for the processing plant but is sometimes used only for research or breeding purposes;
Is often used with resettlement or transmigration schemes; Involves a significant input of material and management inputs.
Multipartite Model May involve a variety of organisations, frequently including statutory bodies; Can develop from the centralised or nucleus estate models, e.g. through the organisation of farmers into cooperatives or the involvement of a financial institution.
Informal Model Is characterised by individual entrepreneurs or small companies; Involves informal contracts, usually on a seasonal basis;
Often requires government support services such as research and extension services;
Involves greater risk of extra contractual marketing.
Intermediary Model Involves sponsor in sub-contracting linkages with farmers to intermediaries; There is a danger that the sponsor loses control of production and quality as well as prices received by farmers.
Source: Eaton & Shepherd, 2001
76 The Multipartite Model may involve a variety of organisations, and frequently includes statutory bodies. This model can develop from the centralised or nucleus estate models, for example through the organization of farmers into cooperatives or the involvement of a financial institution.
The Informal Model is characterised by individual entrepreneurs or small companies and involves informal contracts, usually on a seasonal basis. The model often requires government support services, such as research and extension services. The Informal Model involves greater risk of extra-contractual marketing, wherein producers surreptitiously sell portions of produce to buyers outside the ambit of the informal contract.
In the Intermediary Model, the sponsor sub-contracts linkages with farmers to intermediaries. The danger is that the sponsor may lose control of production and quality as well as prices received by farmers.
The above typology provides a useful tool for this study’s characterization of the joint ventures and strategic partnerships that have emerged under the RESIS Programme and similar initiatives in Limpopo Province. In applying the typology, however, this thesis is mindful of the possibility that the permutations obtaining within the case study sites may vary in structure and content from the five models outlined in Eaton & Shepherd’s (2001) typology. As such, the typology is used with a degree of flexibility.
2.2.3 THE CONCEPT OF ‘SMALLHOLDER’
According to Cousins (2010), the term ‘smallholder’ is often defined and used in an inconsistent manner to refer to, among other things, producers who occasionally sell produce for cash as a supplement to other sources of income; those who regularly market a surplus after their consumption needs have been met and those who are small-scale, market-orientated commercial farmers. While the two main criteria that distinguish between these types of smallholder are, firstly, size of landholding and, secondly, extent of production for the market, other criteria include use of different types of labour (e.g. household or family labour, hired workers or cooperative labour) and/or source of faring capital.
77 The smallholder model, which has been adopted by many international development institutions (e.g. IFAD) and regional development organizations (e.g. NEPAD), positions small-scale farmers as a potential engine for growth for rural areas, particularly in Africa (Béné et al, 2010:7; Valdes & Foster, 2005; Hazell et al, 2007). The ‘success-story’ of the Eastern Africa export-oriented high-value horticulture sector (Dolan & Humphrey, 2000; Minot & Ngigi 2004 in Béné et al, 2010:7) is viewed as additional evidence that the smallholder model might be a solution, and that trade with developed-country markets is of particular importance in this process (DFID 2005 in Béné et al, 2010:7). Consequently, an increasing number of donor agencies and governments of developing countries have been encouraged by their academic and policy advisors to push their national agri-food sectors (i.e. crops, livestock, forests and fisheries) along this high-value, export-oriented avenue. Proponents of such approach claim that the exportation of agri-foods (in particular high value agri-food products) to developed countries’ markets could be a powerful engine for poverty reduction and economic development (Béné et al, 2010:8; Cunningham, 2000; Valdimarsson & James, 2001; FAO, 2007). However, the debate about whether such trade actually benefits small-scale producers, such as smallholders and fishers, as well as local populations or possibly the wider national economy remains unresolved (Béné et al, 2010:8; Kaczynski & Fluharty, 2002; Hersoug, 2004).
International experience suggests that a major problem with smallholder-oriented agricultural commercialization in many rural contexts relates to predication of interventions upon the wealth-based model. According to Béné et al (2010), this model conceives the solution to problems of poverty and resources degradation as revolving around making smallholders more ‘economically efficient’ while enhancing the productive capacity of the resource base. A central objective of the wealth-based approach is to ‘unlock’ the inherent wealth or resource rent value (i.e. the ‘economic rent’) from high value produce and then add value throughout the agri-food chain (Sumaila 2008 in Béné et al, 2010:9). The wealth- based model espouses and reproduces the logic of the conventional Malthusian narrative, which argues that since poverty is the result of too many people depending directly on too limited resources, the solution is to restrict resource access to a limited number of users through an efficient rights allocation system and to maintain and maximize the overall productivity of the resource base (Cunningham et al 2009 in Béné et al, 2010:9). Such an
78 approach is presumed to lead to maximization of wealth or economic rent for the smallholder sector, improve the profits of smallholders who remain included in productive enterprises and possibly redistribute resultant benefits to the rest of local rural communities and the broader public. Mechanisms for achieving this include diverting part of the tax and license fees (i.e. ‘resource rent’) levied on the productive sector towards social expenditure (Béné et al, 2010:9; Cunningham & Neiland, 2005).
The theory and the reasoning of rent extraction has been an alluring option for those seeking to create wealth from smallholder irrigation schemes and thereby contribute to local, regional and national economic growth and development as well as poverty reduction. Such reasoning resonates with arguments put forward by South African agricultural economics scholars in support of an integrated rural development approach that predicates upon high growth rate within the core or mainstream economy, which spreads favourable trickle-down effects to the impoverished rural periphery (Terreblanche, 1998:49). Such argument resonates, to an extent, with ISRDP and RESIS Programme formulations (see Section 2.5 and Chapter Three, respectively).