What should farming contracts entail?

contracts.
And, the crop’s final destination – whether it is for the local or export market, the seasonal nature of production and the degree of competition in the marketing system literally influence the choice of crop pricing structure to be used.
In fact, there are several ways prices offered to farmers can be calculated – these include fixed prices, flexible prices, prices calculated on spot, market values, prices on a consignment basis and split pricing.
Fixed prices are the most common method. The practice is usually to offer farmers set prices at the beginning of each season.
In almost all cases, fixed prices are related to grade specifications. In calculating prices, there may be a tendency for sponsors to adopt a cautious approach because of the danger of market price fluctuations.
Fixed price formulas are usually ideal for the sponsor. However, where alternative outlets exist, farmers may consider such arrangements to be disadvantageous if prices increase on the open market.
For the contractors, set price formulas are preferable for both budgeting and marketing purposes, although they are still obliged to purchase the crop at the prices stipulated in the contract even if the open market prices decrease below the set prices.
The fixed price structure is widely used by tobacco corporations and companies processing crops for canning. Sometimes, farmers cry foul over poor prices and being ripped off yet, the contractor maintains that he will only be doing his part to the last letter.
Perennial wars over prices have consequently erupted and farmers indeed have genuine concerns – they have to produce to improve their socio-economic realities and at the same time repay their loans.
In most cases these disputes have spilled into courts and farmers have always emerged with bruised egos. They have had property attached over failure to sell their produce to the contractor and to repay the loans.
In a recent survey, farmers gave various accounts of harrowing experiences with contractors who after giving them inputs late expect them to produce and surrender all their produce regardless of the fact that they sometimes add their own inputs to supplement those from the contractor.
The situation leaves one wondering whether it is really necessary for farmers to be contracted. Do farmers have to be contracted always to produce competitively?
Agriculture, Mechanisation and Irrigation Development Minister Joseph Made believes so. Farmers need the contractors, and they have to borrow in order for them to effectively fund their operations.
“Contract farming is a global phenomenon – in Europe and the United States, it is practiced with the intention of propping up farmers.
“In farming, the farmer is exposed to the vagaries of nature and, a farmer is totally subdued to nature but has to produce and survive so, he needs funding to circumvent those natural hurdles,” Minister Made commented.
He added that when farmers complain against contractors, all they are saying is they are being short changed hence, they need the Government to intervene and save them by approving inputs and producer prices and maybe the terms of co-operation.
“In other words they are crying for fair prices but, they still need the contractor to charge realistic interests and set credible terms of settling the credit,” he said.
Many farmers however concede that they end up in contract farming because they are incapacitated to mobilise resources on their own to sustain competitive crop production and later on secure lucrative markets.
This literally means that if they had an option, the farmers, would be comfortable doing their own thing – they only go into contract arrangements because of deprivation.
Their sorry situation may be the reason why some contractors end up behaving the way they do – bringing inputs late and at times in inadequate quantities before offering very poor prices, during the marketing season.
But the big question is, “do farmers really understand how the contracts they sign operate and how they are supposed to benefit in the end?”
This is one area that appears to have a lot of gray patches that the farmer has to understand first.
Contract arrangements normally guarantee all farmers the ability to sell all of their production that meets the agreement’s conditions.
Quotas can sometimes be used to control the quality of the raw commodity. For some crops, increases in quantity may only be achieved as a result of reduced quality, for example, as measured by the extraction rate.
If yields fluctuate widely, then abnormalities can be investigated and remedial measures taken.
The use of quotas also permits the sponsor to identify whether farmers are selling crops outside of the contract (extra-contractual marketing) or, whether they are supplementing their sales to the sponsor with non-contracted production from other farmers.
Where there is no alternative market for the crop and farmers have made significant long-term investments in production (tree crops) or, processing facilities (for instance tobacco curing barns), the sponsor must be committed to purchase the entire crop covered by the quota.
While farmers can be rejected for failing to fulfil production targets or repay credit, land size allocations do not vary.
Such an approach is seen as avoiding conflict within the community and avoiding corruption in quota allocations.
On the other hand, allocating a quota that the farmer cannot cultivate, either by area or quantity, will cause serious problems.
Reductions of quotas in subsequent years or cancellation of contracts on the grounds of failure to supply agreed quantities could cause demoralisation and a loss of prestige for the farmer.
The allocation of appropriate quotas that reflect the different levels of resources and skills of the farmers and, at the same time, permit a wide range of farmers to have contracts will add to the stability of contract farming ventures.
Where there are alternative markets for crops under contract, quite often farmers are tempted to sell outside the contract. Quotas deliberately set at levels lower than the farmers’ actual production capacity may enable them to take advantage of high open market prices when they occur.
Such an arrangement is likely to apply, particularly when the pricing arrangement is for a fixed price rather than a market-based price.
It is most common under the informal model, an example being the cotton industries of Zambia and Zimbabwe where several ginneries are in active competition for the available crop.
In other circumstances, however, the absence of quotas can work to the disadvantage of the farmer.
Where the contractors purchase only the amount they require, they leave farmers with no option but to sell surpluses on the open market at a reduced price.
The buyer therefore has greater bargaining power than the farmers do.
In all ventures, there is always a degree of attrition; some farmers die, others retire or sell their land and move to other districts.
In such situations, management usually transfers the contract to family members or nominees of the previous contractor on the understanding that the newcomer meets the selection conditions.
When sponsors provide seed, fertilisers and agro-chemicals, they have the right to expect that those inputs will be used in the correct quantities.
They also have the right to expect that farmers follow the recommended cultivation practices.
Of particular concern is the possibility that farmers may apply unauthorised and/or illegal agro-chemicals, which can result in toxic residues, with dramatic repercussions for market sales.
It is therefore essential that all contracted farmers strictly adhere to the project’s input policies.
Contractors and their extension staff must make every effort to explain to farmers why the specifications and input recommendations must be followed.
Arrangements for collection of products or delivery by the farmers vary widely. Some ventures stipulate that farmers should deliver their harvest to processing plants at given dates; others may include the use of the sponsor’s transport to collect harvested crops at centrally located buying points.
For contracted fresh vegetables, a normal practice is farmgate collection. When the sponsor’s transport is used, there is normally no cost to the farmer.
Many formal contracts have clauses that outline the obligations of both the farmer and the sponsor regarding delivery and collection respectively.
As a routine practice, contractors and their extension staff should confirm delivery or collection arrangements at the beginning of each season and reconfirm these prior to harvest.
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