Contract Farming in Sub-Saharan Africa: An Empirical Review

Contract farming may be defined as agricultural production carried out according to a prior agreement in which the farmer commits to producing a given product in a given manner and the buyer commits to purchasing it. Proponents of contract farming argue that it links small-scale farmers to lucrative markets and solves a number of problems small-scale farmers face in diversifying into high-value commodities. Opponents argue that the imbalance in power between the buyer and the farmer leads to an agreement unfavorable to the farmer. A large majority of empirical studies suggest that contract farming schemes raise the income of farmers participating in the schemes. Contract farming schemes typically face a number of challenges that limit their ability to deliver inputs, credit, and technical assistance to small-scale farmers like side-selling, unwillingness of the company to pay the negotiated price and use quality standard to evade their commitments and high cost of working with large numbers of small-scale farmers. So, government policy should be to facilitate the development of contract farming schemes and developing countries can also promote pro-poor contract farming by creating a conducive policy environment.


EXPERIENCE WITH CONTRACT FARMING 2.1 Impact of contract farming on participating farmers
pointed out a more skeptical view of the benefits of contract farming by compiling a set of seven case studies on contract farming in Sub-Saharan Africa. The case studies focus on the historical and political context of contract farming, conflicts between farmers and the contracting firms, the imbalance of power between the two parties, intra-household tensions over the division of labor and the allocation of new revenues, and the increasing rural inequality as contract farmers grow wealthy enough to hire farm laborers. In his summary of the cases, Little (1994, 221) concludes that incomes from contract farming increased for a moderate (30-40 percent) to a high (50-60 percent) proportion of participants. This income was not enough to live on, however, and farmers had to rely on other farm and nonfarm income. In several cases, households lost land that was appropriated for government-run contract farming schemes.
In a review of the experience of contract farming in Africa, Porter and Phillips-Howard (1997) conclude that farmer incomes are raised by contract farming, but they focus on social problems that it may cause, including lack of control over production, imbalance of power, income inequality, and intra-household conflict. They also note that contract farming schemes may be established on land appropriated from local communities. They propose a number of policies to limit the adverse effects of contract farming, including protection of property rights and independent mediation in case of disputes. Warning and Key (2002) study contract production of groundnuts in Senegal to compare income and other outcome variables for contract farmers and other similar farmers. NOVASEN, a private cooking-oil manufacturer, contracted with 32,000 growers and produced approximately 40,000 tons of groundnuts annually. Warning and Key find that the increase in gross agricultural revenues associated with contracting is statistically significant and large, equal to about 55 percent of the average revenue of noncontract farmers. They argue that the leverage of contract farmers is increased by the existence of parallel markets for the groundnuts.
Contract farming is used to produce organic coffee in eastern Uganda. The company contracts close to 4000 coffee farmers, providing technical assistance and organic certification. Bolwig et al (2007) compare farmers in the scheme with a control group, showing that there are positive revenue effects from participating in the scheme, even after controlling for a variety of other factors.
Thus, the weight of evidence suggests that successful contract farming schemes generally raise the incomes of farmers who join them. The cases where contract farming does not improve farm income or at least reduce income volatility are often short-lived as the scheme collapses.

Participation of small-scale farmers in contract farming schemes
Even if farmers benefit from their contractual relations with processors and exporters, there is still the issue of whether small-scale farmers are able to participate in contract farming schemes. Some critics of contract farming argue that firms tend to work with medium and large-scale farmers (Little and Watts 1994). If so, contract farming may be an interesting institutional mechanism for vertical coordination, but it would have less relevance for poverty reduction strategies. In fact, by contributing to income inequality, it may exacerbate tensions between the social groups in rural areas.
A number of studies examine the proportion of contract farmers that are smallholders, as an indicator of the pro-poor impact of contracting. Guo et al. (2005) use data from farm-level surveys in China covering several products to estimate the likelihood of participating in a contract farming scheme as a function of household characteristics, crop mix, and farm size. The results show that small farmers are less likely to participate in contract farming than larger farmers. Key and Runsten (1999) look at contract farming by the tomato-processing industry in Mexico. Multinational agro-processors from the United States first contracted with large growers but then involved small growers, partly because as a lucrative market for fresh tomatoes developed, firms found it increasingly difficult to enforce contracts they had with larger growers.
In the study of groundnuts in Senegal, Warning and Key (2002) compared contract and independent farmers by various measures of assets. They found that indicators of asset ownership were not significant predictors of participation in the contract farming scheme, suggesting that contractors were typical rural households. In the study of contract farming in Indonesia, Simmons et al. (2005) found that contract seed growers had larger farms than independent growers, but contract poultry producers tended to be smaller than independent poultry growers.
A few studies give examples of buyers shifting from small-scale to large-scale farmers or the reverse. One example, cited in World Bank (2006), is an exporter in Thailand that started producing its own horticultural products on company land and later shifted to smallholder contract production. Minot and Ngigi (2004) describe the evolution of several contract farming schemes in Kenya, including one (Del Monte pineapple) that gave up on contract production and shifted to vertically integrated plantation production. Maartens and Swinnen (2006) pointed out that Green bean exporters in Senegal switched from smallscale contract production to large-scale contract production. These findings confirm that the comparative