Policy problems affecting the production system of contract farming in Zimbabwe [Submitted by unkown scholar ]

Of late contract farming between agribusiness and small holder farmers in Zimbabwe has taken root and contract farming programmes have been carried out with varying degrees of success, duration and magnitude. This presentation intends to explore and expose the policy problems that have affected contract farming as a production system in Zimbabwe. The presentation shall start by defining the contract farming concept and this shall be followed by a brief background of contract farming and policy issues guiding contract farming in Zimbabwe. The presentation shall then discuss the problems that are being encountered in the macro and micro contexts by the producer / farmer and contractor. Recommendations as to how the problems could be rectified shall also be suggested.

Contract farming is defined as agricultural production carried out according to an agreement between a buyer and farmers, which establishes conditions for the production and marketing of a farm product or products. [Contract Farming Center of the Food and Agricultural Organization of the UN 2008]

Typically the farmer agrees to provide a set of specific agricultural product which meets the quality standards of the purchaser and is supplied at the time determined by the purchaser. In turn the buyer commits to purchase the product and , in some cases ,to support production through , for example , the supply of farm inputs, land preparation and the provision of technical advice.

Along the same line of reasoning Philip et al [2009:1] give an almost similar definition when they define contract farming as ”a  contract by which a producer agrees to sell all of a designated crop raised in a manner set forth in an agreement to a contractor and paid according to a formula established in the contract  or agrees to feed and care for livestock or poultry owned by the contractor until such time as the animals are  moved in exchange for a payment based on a formula typically tied to the performance of the animals.”

Thus a production contract usually specifies in detail the production inputs to be supplied by the contractor, the quality and quantity of the particular commodity involved and the manner in which compensation is to be paid to the producer.

As mentioned earlier on in the introduction the policy problems affecting contract farming can be dichotomized into two categories. One dichotomy has to do with the macro context in which contract farming is taking place and the other dichotomy regards the way in which contract farming is being executed between the farmer and the contractor.

The Government of Zimbabwe, through Ministry of Agriculture Mechanisation and Irrigation Development, [MoAMID ] indicated its interest in contract farming by formulating a general policy on contract farming for all crops. This is not a formal written policy but rather a series of ministerial policy directives adopted to guide practice. The details of the policy are difficult to determine as many of the directives have been announced by the Minister of Agriculture and printed only in the press. Any contracting firm that failed to see the announcement in the press could be in breach of the policy. The policy is intended to ensure equitable contractual relationships among all parties. In July 2010 the government of Zimbabwe suspended all contract farming due to concerns that unscrupulous firms were taking advantage of smallholders. Subsequently, a new policy directive required all contracting firms to enter into a Memorandum of Understanding (MoU) with the government of Zimbabwe, represented by MoAMID. The MoU is reviewed by the cabinet and signed by the Minister of Agriculture. The purpose of the MoU appears to be to allow government to monitor and regulate contract farming activities in the country. The MoU outlines the proposed contract farming activities of the contracting firm, including the resources they intend to invest in the sector. The Department of Agricultural Economics and Markets [MoAMID] also reviews farming contracts on an ad-hoc basis, but does not approve contracts. The contracts are evaluated to ensure that the expected results are realistic and achievable, that the contracts are fair to both sides, and most importantly, and that the activity is profitable for the smallholder farmer. MoAMID purports to represent the interest of the smallholder farmer. There are plans within the MoAMID to open a contract farming office in the Department of Agricultural Economics and Markets, whose sole function will be to provide oversight in regulating contract farming activities.

In some districts where farmers are contracted, the Rural District Councils (RDCs) require an additional MoU with the RDC and some RDCs also charge the firms operating in their district with levies. This additional requirement may not be part of the official policy framework, as it is not applied consistently by all RDCs in the country.

Policies and legal framework

Looking at the macro context it can be noted that the legal and regulatory framework of Zimbabwe does not create an appropriate enabling environment for contract farming activities in the country in its current state. The main concern is the long duration in resolving disputes and the high cost of litigation, primarily due to legal fees. In the case of smallholder contract farming, the costs of litigation can easily exceed the amount claimed. For example, one firm currently is pursuing damages from a farmer who failed to repay her inputs. The farmer’s debt is $1,000, but the firm already has spent $7,000 in legal fees. In spite of this, other firms such as Northern Tobacco pursue debtors through the courts and while it finds that debt recovery is not profitable, it uses the system to make an example for defaulters.

Small claims courts can provide a more expedient and lower-cost alternative, but currently only individuals are permitted to institute proceedings in small claims courts. Farmers can sue a contracting firm using small claims courts, but firms cannot sue using these courts. Small claims courts also do not allow legal representation, which is why they are lower-cost. While the cost savings is a benefit, the lack of legal representation raises some concerns about the ability of farmers to directly argue equitably against firms. [Mugwagwa 2005]

The legal and regulatory framework on contract farming is highly fragmented and difficult to determine. One set of laws forms part of the general legal framework that is applicable across all sectors and not exclusively for contract farming; a second set of laws is an amorphous group of policy directives; while a third set specifically regulates contract farming but on a crop-specific basis. As a result of this fragmentation, there is no common legal and regulatory framework that establishes minimum standards and harmonizes policies across commodities. The challenge of fragmentation is exacerbated because the existing framework is not properly coordinated; and that some of the provisions are general and not contract farming-specific.

At the national level, there should be a legal framework that supports contract farming. Such a framework does not currently exist in Zimbabwe. The cotton industry has been lobbying government to introduce legislation to assist them with the rampant side-marketing and deteriorating cotton quality that threatens to derail the industry. It is also important to assess the level of support from local government and traditional

leadership.

There are currently multiple registration requirements for contract farming firms, some of which come with multiple fees. In addition, it currently is difficult to determine what requirements are in place for contracting firms of different commodities. As a result, there is a high cost associated with complying with these regulations. These fees, levies and the administrative burden of regulatory compliance increase contractor operating costs. While the majority of these fees are paid by contracting firms, the net impact is that the firms must pay a lower price to farmers in order to cover their costs and ensure a profit. [Rukuni M et al 2006]

Access to Finance

It has been observed that there is also over reliance on input credit schemes which can result in farmers expecting the contracting company to cater for every eventuality. This can be risky at times because certain issues need swift reaction. A disease outbreak may happen which threatens to wipe the crop. The over -reliant farmer will have to wait for the contracting company to provide assistance with chemicals rather than taking quick appropriate action themselves [ Fintrac and IRD-AIED Programe 2011] Smallholder farmers now dominate the agricultural sector and most currently do not have the resources to retain earnings to fund their own crop production. In addition, smallholders do not have access to finance through the formal banking sector due to their lack of collateral. In Zimbabwe today, contract farming arrangements offering pre-financed inputs provide a key opportunity for smallholders to access inputs and other services. Access to inputs allows smallholders to upgrade their activities, adopt a commercial approach and ultimately increase their income. However, contracting firms face constraints in accessing finance which severely limit the expansion of contract farming.

High-risk  environment reduces availability of finance

Bronwyn I. et al [2012:03], says,” the perception that Zimbabwe is a high-risk investment environment has dramatically affected the availability and cost of finance in the country. Liquidity levels dropped as a result of the economic crisis and the ensuing adoption of international currency, completely nullifying the Zimbabwean dollar. In addition, effective demand for finance is weak due to the high cost of finance, collateral issues and contracting firms’ unwillingness to increase their exposure to Zimbabwe in the face of certain government policies that are perceived of as disenabling. These factors limit access to finance and the potential for expansion of contract farming, which firms need to achieve economies of scale and reduce costs per unit of output. “

Given that the supply and costs of finance are unlikely to improve in the short term, firms will need to maximize returns on the limited finance that is available. This can be achieved by improving the rate of return on the investment through increased production volumes and quality and reduced transaction costs. There are a number of innovative financial products and services that can reduce transaction costs such as mobile banking, insurance, input-guarantee programs and leasing. Greater use of mobile banking can decrease transaction costs and shorten payment timeframes. There has been a recent expansion of e-banking in Zimbabwe and the current networks allow for many farmers to be reached. Contracting firms are already using this new payment mechanism.  

The shortage of viable farmer-organization structures in Zimbabwe results in increased transaction costs in contract farming arrangements, reducing the returns to both farmers and contracting firms.

Farmer unions, associations and informal farmer groups have the potential to reduce the transaction costs of engaging smallholders in contract farming, improving the returns to all actors. These farmer organizations could provide the services to farmers that contracting firms currently provide, passing the costs on to farmers, as contracting firms currently do through the pricing structure

Policies to guide operations between contractor and farmer should be crafted within the wider framework of laws and policies put in place by the government to guide how contract farming should be run in Zimbabwe. Policy problems common between contractor and farmer will now be considered.

DISPUTE SETTLEMENT

 The contract enforcement options currently available in Zimbabwe are mostly inappropriate due to their cost, the logistics involved and the time required, or because the structure of the system precludes one party, for instance, small claims courts are not allowed to institute proceedings but individuals only. This presentation would want to recommend arbitration as the most appropriate dispute settlement strategy. In order to legally entrench arbitration as an appropriate mechanism for settling contract farming disputes, MoAMID should in the process of formulating the proposed framework law of contract framing:

• Single out arbitration as the default dispute settlement approach for all contract farming disputes unless the parties to the contract choose otherwise.

• Specify simplified arbitration procedures that ought to be followed in proceedings related to contract farming to solve the problem of high costs commonly associated with arbitration proceedings.

• Specify other alternative dispute resolution mechanisms, such as mediation, that are currently used by industry bodies, as appropriate alternatives to arbitration.

Contract farming in Zimbabwe would also benefit from a neutral or non-aligned dispute settlement organ put in place specifically for contract farming. The exact nature of the organ would need to be determined in consultation with stakeholders, including contracting firms, farmers’ representative organizations and the government. It is clear that stakeholders would have to perceive such a contract farming dispute settlement body as neutral for it to be successful in resolving disputes. [Bronwyn I et al 2012]

Pricing

Pricing is one of the major and common problems in contract farming. The major problem about pricing is that the prices are rigid; they do not take into consideration changes that take place in the market later on. Once the farmer is contracted, there is no room for maneuvering to other players even if the shift is justified by unsustainable prices being offered by the contractor. Also famers view the pricing system as unfair in that the contractors vary their prices from one farmer to the other without using grading as the deciding factor. Contractors have been accused of breaching the contractual agreement by violating the terms of the agreement that requires them to announce the producer price at the beginning of the season. This has greatly affected the farmer s’ decision making on whether to continue with the production of the crop or not. Farmers would rather have the contractors announce the prices at the beginning of the season as is the case in Zambia and Mozambique. [Chirarura 2005, Kabwe and Tschirley, 2008]. However certain companies like Fresh Trade set floor prices in their contracts which can be adjusted to suit the ruling prices on the market. This strategy reduces the contractor’s price risk and also provides an incentive to the farmer to improve quality.

Contracts should be negotiated. Many Zimbabwean companies present farmers with contract agreements in a take-it-or leave-it manner. Farmers should be consulted when drafting contracts and every effort should be made to ensure that they are well understood. In an effort to improve communication, Northern Tobacco growers drafted their 2007/2008 agreements in Shona because of the smallholder farmers are Shona..

The situation is however equally difficult for the contractors as market forces might create a down turn of prices at national  level or at the world markets causing the contractor to lose at the end. In the interest of business prudence the two should agree on pricing terms that take into account possible increases or decreases in market prices for their product.

Inputs

Wooded (2003), Contends that contract farming has lightened the burden of sourcing scarce and expensive inputs to rural farmers. However some of the farmers have complained that inputs provided to the farmer are invariably inadequate. As a consequence of that farmers fail to repay loans and assets declared get attached or impounded. The farmers remain caught up in the vicious cycle of deprivation. The contractors on the other hand attribute their failure to fulfill their part of the agreement on the unavailability of inputs such as fertilizers in the country. This forces them to import the inputs from outside and pass on the extra charge to the farmer who again complains of the higher price. The higher charge of inputs due to importation inevitably leads to a breach of the initial contract which had a lower price for the inputs. Many a times the farmers have to supplement the inputs from their own savings or from additional borrowing.

Still on the input problem, it has been observed that the nature of the cotton seed market is monopolistic. COTTCO has been observed to have monopolized cotton seed production and this has become the only source for farmers and other contractors who decide to venture into contract farming. This has forced some farmers to enter into contract farming with COTTCO in order to get seed. There is need to liberalize  seed production and supply system to promote competition and that will be to the advantage of the farmers as it encourages rational pricing of seed. [Eaton C and Shepherd A.W 2001]

Marketing

Larpar et al [2008], notes that contract farming improves market access. However in Zimbabwe transporting the crop or produce to the market has extra cost implications that further eats into the farmer‘s profit margin. The contractors are no longer coming to buy the produce at the farmer‘s gate.

Power or energy crisis

Maximizing yields is only possible if crops get a constant supply of water. Paprika companies have stressed the importance of irrigation to maximize productivity. Companies sponsoring farmers at irrigation schemes cited the unreliability and unavailability of electricity as a major reason for low productivity. However it has been noted that even if the supply of water is constant, failure to irrigate correctly can also lead to low productivity. That can only be solved by the provision of technical advice.    [ Esterhuizen E  2004]

Labour constraints

The shortage of agricultural labour at one time was a national crisis for both the commercial and smallholder farmers due the economic instability in the country at that time. Farmers at Mkwasine Sugar Estates complained about severe labour shortages. The traditional labour pool had dried up as people sought better livelihoods in Mozambique or informal trading and mining operations. Tobacco companies had to go to the extent of providing farmers with funds to pay labour at certain times in the crop cycle. Now the labour pool has improved due to the improvement in the economy. Other contractors can thus adopt the tobacco companies’ idea and provide their farmers with monetary support for labour. Wages for farm workers can also be made competitive in order to attract more workers. [Jackson J.C and Cheater D.P 1994]

Poor mechanisation

Inadequate mechanization can delay land preparation, which in turn leads to delays in planting and this impacts negatively on crop yields. In many areas of Zimbabwe the optimal planting date for dry -land farmers is with the first summer rains which occur between mid and late November. Yields diminish as one plants beyond this date. Planting at the correct time is particularly critical for horticultural produce. Horticultural companies provide farmers with planting programmes to ensure a constant supply of produce for processing. By producing crops outside the scheduled period, the defaulting farmers risk to lose their contract market. Contractors should in that view consider providing financial aid to help their contracted farmers mechanize so that they can meet their schedules.[ Kwenda G 2009]

Side marketing

Side-marketing is yet another problem with contract farming. It happens when a contracted farmer sells his produce to a third party in breach of his   contractual agreement. It is a major problem in Zimbabwe where 60% of the companies have complained that their contracted farmers had side –marketed harvest produce. This results in reduced quota delivery to the company, decreased processing efficiency and increased production costs. Both the contractors and the farmers agree that the main reason for side marketing has to do with prices. Farmers get attracted by lucrative prices offered by companies outside the contract agreement. The farmers feel justified to do so because they think the contractor is profiteering. Companies like Capsicum, a paprika marketing company, encouraged farmers to notify them when competitors were offering higher prices so that they could negotiate prices. However one wonders if the farmers would also understand if the reverse was true.

Side-marketing can also be due to delays by the contractor to collect non-perishable crops. Contractors should be aware that by the time farmers sell their produce, the farmers will have gone for too long without income, so under such circumstances farmers are tempted to sell even to middlemen who are common during such periods. Similarly a tendency of late payment forces farmers to side market. This at one time was a common problem at Hama Mavhaire irrigation scheme. Olivine paid farmers by cheque after collecting the produce. Farmers anticipated long payment delays and made partial deliveries to company trucks sent to collect produce. The remainder of the crop was then sold locally or at the farm gate to assist cash flows until the arrival of company payments.[ Bronwyn I. 2012]

Contract default is not the sole prerogative or farmers – it is also commonplace with companies. A common form of company default occurs when, for one reason or another, they are unable to supply the farmer with the promised inputs. Often the inputs are supplied too late, after a critical period in the crop cycle. As previously mentioned farmers are often particularly reliant on companies for inputs and this default will reduce productivity and sometimes compromise the farmer’s ability to repay his input loans.

One of the most serious forms of company default is late or non-collection of produce. This was reported to have occurred at Mutambara Irrigation Scheme . The effect of this default on smallholder farmers can be calamitous. Late collection of perishable produce results in the produce being downgraded or rejected due to poor quality. Farmers have been known to sit by the side of the road waiting for transportation to collect the product of months of hard work. At Mutambara the produce was not collected at all and farmers received no compensation from the contracting company. Farmers do not easily forget this type of default and may seek ways to prejudice the company during future contracts.

Any successful contracting method will seek to improve productivity and minimize the

under lying causes of default. [Moyo S et al, 2012]

Side harvesting

There is also a problem in contract farming that is termed side- harvesting. This occurs when contracted farmers collude with friends or neighbours to sell non-contracted produce to the company in order to benefit from higher prices. This is a big problem in the seed industry where farmers are awarded a premium price compared to commodity prices. The other challenge is that side –harvesting compromises the genetic purity of the harvested seed. The contractors end up paying out more for polluted seed.

If contracted farmers realize that other crops for domestic consumption have failed, they retain part of the contracted crop for domestic consumption or for planting in the next season.  Seedco reported that during years of drought, cowpea deliveries were very low in Zaka because other crops had failed and would then substitute the failed crops with the contracted crop for domestic consumption.

When companies provide inputs to contracted farmers it is for the purpose of maximizing yield and quality of the contracted crop. Inputs diversion defeats the objective. It happens when the inputs are not applied to the contracted crop by the farmer. The inputs may then be sold or used on other crops that are not part of the contract. There are times when people even sign a contract but with no intention of growing the contracted crop. [Bronwyn I 2012]

Loan default is yet one of the most common malpractices in contract farming. This happens when farmers are unable to repay their loans at times due to poor yields or because they are just unwilling to repay their loans. Loan defaults may be reduced if companies make timely deductions. Input deductions should be made early in the marketing season or from the first produce delivered. Other contractors encourage early loan repayment by using low interest incentives. Loan default can also be reduced by timely contract agreements. Contracts for the next season can be issued at the time of harvest and only farmers who have repaid their loans can be signed on for the coming season.

There is also the problem of post-harvest storage facilities which normally results in losses due to crop deterioration and theft. Tobacco for instance, once it has been cured needs to be stored for up to six months before being sold at the auction. According to ZTA, small holder farmers experience great losses during this period.

Yield fraud

Though it is not as common as other problems, yield fraud happens in contract farming. This is when producers add large stones or excessive moisture to packed produce, the idea behind being to increase the weight of the produce and earn more money. Companies can easily go around this problem by labeling the packs of the commodity after allocating marketing numbers to the farmers. This helps them to track the culprits easily.

Contract farming in Zimbabwe is not yet full fledged and still has gaps that should be plugged by policy and well thought out legal frameworks. Farmers and contractors’ interests need to be harmonized for the benefit of both parties.

References:

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