Source: How contract farming may suffer quiet, slow death | The Herald October 4, 2016
Obert Chifamba Senior Reporter
The current illiquid financial market may see more and more farmers seeking to produce crops under contract arrangements especially in the wake of futile attempts to secure funding from banks.Those that manage to get funding have always complained that the interest rates, which accrue on the loans make agriculture more and more unviable.
But the contract route has in recent years given farmers more stress than peace of mind. They have waged many legal battles with contractors, as both parties accuse each other of failing to respect contractual obligations. In most cases farmers have come out with more bruised egos than the contractors.
Contract farming refers to an arrangement where agricultural production is done on the basis of an agreement between the buyer and the farm owner. In some cases it involves the buyer specifying the quality required and the price with the farmer agreeing to deliver at a future date. But it is the farmer who always negotiates from the weaker angle, which leaves him at the mercy of the contractor’s terms.
The practice is not new to Zimbabwe, as it has been practiced for many years, albeit at a small scale.
Back then, the system covered crops such as sugar cane, tea, ground-nuts, paprika, chillies, a variety of export vegetables and the production of seed for a variety of crops. In the 1990s, the country’s horticultural export sector expanded by 30 percent and brought in US$350 million per year, thanks to contract farming.
At the time, Zimbabwe was on the threshold of overtaking Kenya’s as Africa’s prime horticultural exporter to the European Union. But owing to a plethora of challenges ranging from economic to socio-political, the sector’s revenue has dropped to less than US$20 million and many companies that used to actively participate in the scheme have since opted out or significantly slashed their level of involvement since 2000.
But the story of Zimbabwe’s golden leaf – tobacco – and its white gold – cotton – is one that aptly demonstrates the successes and failures of contract farming. Challenges aside, tobacco contract farming brought moments of exhilaration to many farmers at its inception but the story is no longer the same now as farmers feel contractors (who are the buyers again in some cases) connive with independent buyers to erect price ceilings that short-change them(farmers).
The story is also the same with cotton. The entry of more players in cotton sector has been the tipping point that triggered chaos while the fact that prices are set globally without considering the farmers’ costs of production that differ with their geographical locations is another sticking issue.
Zimbabwe’s cost of production for the agriculture sector has always been on the higher side, which elicits challenges as contractors normally want to use international or regional benchmarks in setting prices, which leaves the Zimbabwean farmers poorer and at a loss.
Government has in recent years intervened to set prices, for instance, in maize where the Grain Marketing Board (GMB) buys a tonne for $390 yet buyers would have agreed with the farmers at the point of signing contracts that they would use world prices of between $180 and $240 per tonne. This means contractors make huge losses while farmers also will opt to side market their produce and go the GMB, which has a higher price.
In reality many contractors see this as policy inconsistency on the part of Government and would rather pull out or reduce funding to curb losses. It is exciting to note that the Agricultural Marketing Authority (AMA) and the Zimbabwe Farmers Union (ZFU) have this time around teamed up to help farmers accurately interpret contractual obligations before committing themselves to contracts. They are vetting all contracts to try and establish their business relevance to farmers so that both the contractor and the farmer benefit in the end.
Generally, contract agreements are diminishing, as most companies or contractors are reducing their funding allocations to the scheme- at times citing farmers as the problem in the wake of high incidences of defaulting that have in most cases ended with legal battles in which farmers have had their properties attached.
It is however the farmer who is always on the receiving end in the matrix. If they take the contract route, they are guaranteed of a market but that market’s prices are also decided by the contractors who want to maximise on profits by making sure prices per kilogramme or tonne remain very low, which means the farmer has to push huge volumes.
This may be difficult at times as some contractors do not meet their obligations in totality and deliver part of the sponsorship package yet expect the farmer to meet his re-payment obligations in their totality.
If farmers were to turn to markets outside contracts at the moment, their biggest undoing would be the depressed prices with the ultra slim profit margins yet production costs remain soaring.
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