One of the recent innovations and new approach of addressing the problem of market access and inadequate farm income amongst smallholder commercial farmers in developing economies is the development of integrated systems of agricultural production, extension and marketing to enable smallholder farmers access international product market.

Many observers consider the promotion of smallholders through contract farming as a promising strategy for developing countries like Tanzania. Often mentioned benefits consist of improved product quality in the value chain, improved technical efficiency in production and improved and stable market access for smallholders. As a consequence, national development strategies should incorporate contract farming as a core component because it simultaneously tackles socio-economic problems in the rural areas and strengthen the productive linkages between the agricultural and manufacturing sector.

However, evidence on the nature, efficiency and impact of contract farming in Tanzania are scarce; not many studies have addressed the issues. There is a need for research that rigorously examines quantitative and qualitative consequences of contract implementation in different agro-industrial value chains. Research in this area will assist policy makers and private sector companies to design systems that improve efficiency and identify areas where improvements can be made.

Summary of the theoretical and methodological framework

The literature on contract farming is characterized by a pronounced division between theory and practise, and between positive and negative interpretations of the impact. Theoretical contributions on production contracts typically focus on a single problem in the set-up of the contractual system. This is a natural choice from a scientific point of view but as a means to guide smallholders, contractors and extension workers such a partial approach is far from satisfactory. Practitioners, on the other hand, often appear to rely on an unstructured trial-and-error process where contracts are gradually changed as the limitations of the prevailing agreements between the smallholders and the contractor become apparent. This means that important lessons from the real life contractual experiments are both expensive and somehow randomly obtained.

The literature based on qualitative and contextual case studies offers rather mixed judgements of the ways in which agro-industrial corporations insert smallholders in developing countries into national and global value chains. One the one hand, many studies stress the benign effects of contract farming on farmers such as minimised transaction costs, guaranteed access to market outlets, enhanced local income, access to technical advice and new production techniques, and insurance against the risk of crop failure. On the other hand, critical studies have focused on the malign effects of contract farming such as environmental degradation due to chemical intensive mono-cropping, exclusion and deskilling of farmers, debt traps, loss of subsistence farming opportunities and loss of resource rights.

A basic starting point for this project is that the formulation, effectiveness and impact of agricultural contracts depend on specific characteristics of the crop (annual or perennial, fresh or processed, singular or multiple use, etc.) and the specific dynamics of the value chain: how is it technically and geographically structured, how is it governed (including the role of standards), what kind of regulatory institutions are involved, is there any scope for upgrading, etc.

The project addresses the question of contract farming by combining traditional econometric analysis with a value chain approach to the study of the dynamics within particular agro-industries. It also applies a descriptive analysis of the actual contracts under study as the contracts in the selected value chains are described in fact sheets, thus providing a systematic appraisal of how the different contracts address the contractual problems. It is important to describe and analyze the contract arrangements in order to suggest possible improvements of the contracts. Subsequently, the fact sheets are used for comparisons across the crops. Hence, the project has three main methodological components namely 1) value chain analysis, 2) analyses of the production contracts within and across the value chains, and 3) analyses of possible technological efficiency gains in contract farming.

Four preliminary hypotheses are put forward

Hypothesis 1
Contracts lead to improvement in productivity per factor input used if farmers are provided with a production technology package.

Hypothesis 2
Contracts assure farmers of markets for their produce and lead to improvement in farmers’ incomes thereby reducing poverty.

Hypothesis 3
Formal credit in support of contract arrangements matters for farmers in cases where contracts only specify marketing arrangements.

Hypothesis 4
Contracts need to take into account the ‘nature’ of the crop and address national and regional particularities of the value chain dynamics.

Overall aim of the project

The project aims to understand the role and importance of contracts for small-scale farming of selected crops (sugar cane, tobacco, sunflower and cotton). Moreover, the project aims to understand how formal credit matters in contract farming arrangement.

The specific objectives of the project are:

• •To determine the levels of technical efficiency of smallholders in contractual relationships against benchmarked standards;
• To identify the factors causing technical efficiency of the contract smallholder by examining the relationship between efficiency level and possible factors;
• To establish the extent to which smallholders under contract have access to formal credit for agricultural production;
• To assess whether credit matters by comparing the performance of contract arrangement with a) contract arrangements without formal credit availability, and b) ‘spot-market’ arrangements;
• To understand the wider context and conditions for contract implementation in terms of governance and regulation within the corresponding value chains;
• To consider implications for policy mechanisms and strategies for improving commodity production efficiency and access to formal credit via contract farming.

Mzumbe University

Department of Economics
Institute of Rural Development Planning

Joseph A. Kuzilwa (Professor)
Batimo Sebyiga
Joseph A. Kimeme (Associate Professor)
Jennifer Sesabo (Lecturer)

PhD fellows

Daniel F. Mpeta
Ilembo Bahati
Thobias Nsindagi
Paul Nsimbila

University of Copenhagen

Department of Geosciences and Natural Resource Management

Niels Fold (Professor)
Marianne Nylandsted Larsen (Associate Professor)
Lotte Isager (Post Doc)

University of Copenhagen

Institute of Food and Research Economics

Henrik Hansen (Professor)
Jens-Martin Bramsen (Assistant Professor)

If you want to know more about this research project you can contact Joseph A. Kuzilwa or Niels Fold at the following addresses:

Joseph A. Kuzilwa
Department of Economics
Mzumbe University
P.O. Box 1
Mzumbe
Tanzania
Phone: +255 232604253
Email: jakuzilwa@mzumbe.ac.tz

Niels Fold
Department of Geosciences and Natural Resource Management
University of Copenhagen
Øster Voldgade 10
1350 Copenhagen K
Denmark
Phone: +45 3532 2561
Email: nf@ign.ku.dk