Demythifying Contract Farming: Evidence from Rural South Africa

Transcription

1 Demythfyng Contract Farmng: Evdence from Rural South Afrca Sandrne FREGUIN-GRESH 1, Ward ANSEEUW 2, Marjke D HAESE 3 1 CIRAD, UMR ART-Dev, Insttuto de Investgacon y Desarrollo Ntlapan, Campus de la Unversdad Centroamercana, Managua, Ncaragua 2 CIRAD, UMR ART-Dev & Unversty of Pretora, Post-Graduate School of Agrculture and Rural Development, South Afrca 3 Department of Agrcultural Economcs, Ghent Unversty, Coupure lnks 653, 9000 Gent, Belgum Correspondng author: Sandrne Fregun-Gresh, Edfco A, Apartado A-242, Campus de la Unversdad Centroamercana, Managua, Ncaragua, sandrne.fregun@crad.fr Selected Paper prepared for presentaton at the Internatonal Assocaton of Agrcultural Economsts (IAAE) Trennal Conference, Foz do Iguaçu, Brazl, August, Copyrght 2012 by S. Fregun-Gresh, W. Anseeuw and M. D Haese. All rghts reserved. Readers may make verbatm copes of ths document for non-commercal purposes by any means, provded that ths copyrght notce appears on all such copes.

2 Demythfyng Contract Farmng: Evdence from Rural South Afrca Abstract Ths paper ntends to contrbute to the on-gong debate about whether and how restructured agr-food markets can provde vable market opportuntes for small-scale farmers n South Afrca. It ams at analyzng contract farmng from the small-scale farmer perspectve and at better understandng the mplcatons for small-scale farmers regardng contractual arrangements wth processng and/or marketng frms. The paper, based on emprcal research conducted n the Lmpopo Provnce of South Afrca and on a combnaton of qualtatve and econometrc analyses, argues however that contract farmng s not a panacea for small-scale farmers. On one hand, contract farmng mproves agrcultural producton for contract farmers beneftng from ncreased ncomes, enables better access to servces and resources and creates new opportuntes to partcpate n markets. However, on the other hand, the results, show that contract farmng remans lmted and mostly nvolves the already better-off, who have benefted from specfc development paths and publc support. Ths case study shows that contract farmng by tself does not appear to provde an effcent means of reducng poverty, nor does t provde an nsttutonal tool through whch to mprove rural lvelhoods. It does therefore, not represent a tool for the majorty of small farmers and for redressng the hstorcal mbalances n the South Afrcan agrcultural sector. Key words Contract farmng, small-scale agrculture, poverty, South Afrca 1

3 Introducton Poverty levels n South Afrca reman hgh and concentrated, both soco-economcally and geographcally, wth the prevously dsadvantaged communtes wthn the rural areas partcularly affected (Pauw and Mncube, 2007) 1. In ths context, agrculture, partcularly the small-scale sector, s consdered as one of the man economc sectors to revtalze the rural economy (Natonal Plannng Commttee, 2010). As such, government has mplemented several polces supportng the small-scale sector (DAFF, 2010). These ntatves have, however, had lmted success (Anseeuw, 2004; Perret et al., 2005). It s n ths context that the development of ntegrated value chans wth the emergence of new prvate actors, partly a result of the global restructurng of markets and the deregulaton of the agrcultural sector, s seen as an opportunty for small-scale farmers. Indeed, the contractual arrangements accompanyng these evolutons represent a possblty for small-scale farmers ntegraton nto modern value chans. Contract farmng s generally consdered as an attractve mechansm for ntegratng poorer farmers nto the open-market economy (Glover, 1984; Key and Runsten, 1999; Poulton et al., 2010) and, subsequently, for ncreasng producton and farm ncome. But, as mentoned by Poulton et al. (2010), t may be selectve, excludng the poor and subjectng them to hgh rsks and agrbusness normalzaton, whle falng to ncrease ncomes due to unequal barganng power wth the farmers losng out. Ths paper ntends to contrbute to the on-gong debate about whether and how restructured agr-food markets can provde vable market opportuntes for small-scale farmers n South Afrca. Based on emprcal research regardng contract farmng n the Lmpopo Provnce of South Afrca, the paper analyzes the determnants of partcpaton n contracts and estmates ther mplcatons n terms of lvelhoods. The South Afrcan case s partcularly nterestng. On one hand, due to the hstorcal mbalances n access to land and secure tenure regmes, nput and output markets, nfrastructures and qualty control systems, small-scale farmers face hgh transacton costs. Moreover, the dfferences n scale of trade between the small-scale farmers and agrbusnesses put the farmers n a dsadvantaged barganng poston (D'Haese and Van Huylenbroeck, 2005). On the other hand, the well-developed value-chans and the publc supports avalable, n partcular through land reform and postve acton programmes, represent ncentves and should contrbute to a conducve market and producton envronment (DAFF, 2010). In the frst secton, lterature revew and background nformaton on contract farmng are presented, wth a specfc focus on South Afrca. Ths s followed, n the second secton, by the methodology used n the research study. Through a combnaton of qualtatve and quanttatve approaches, we wll establsh a typology of farm households and analyze the sgnfcance and determnants of contract farmng and of farm ncomes. The results of thse are presented n secton three. These wll then also lead, n secton four, to wder conclusons on 1 Poverty rate ndces for South Afrca vary accordng to sources and methodologes: World Bank (2011) estmates that 22% lves on less than R524 whereas the Natonal Plannng Commsson (2010) notes that 49% of the populaton lves on less than R283. 2

4 the role of agrcultural contracts n general and n revtalzng South Afrca s prevously margnalzed small-scale farmng sector n partcular. Background on Contract Farmng Contract Farmng and Types of Agrcultural Contracts Contract farmng can be defned as an agreement between a farmer and a buyer, rangng from smple oral arrangements to formal wrtten documents, n whch partes respectvely commt to sell and buy specfc volumes or acreages under pre-establshed condtons (Glover, 1984; Mnot, 1986). The buyer can be a local or a transnatonal agrbusness (processor, exporter, retal outlet or shpper), a prvate plantaton, a parastatal wth ts own producton, or local merchants (greengrocers, wholesalers, hawkers, brokers etc.). In nsttutonal economcs, contract farmng s descrbed as a hybrd agreement that postons tself between the two extremes of the nsttutonal arrangement spectrum, namely spot markets and market ntegraton. On spot markets, products are sold and bought mmedately, at a prce set durng the transacton and wth no nvolvement of the buyer n the producton or n the defnton of the condtons of the transacton. At the other extreme, full vertcal ntegraton mples that the buyer controls all stages of producton, processng and dstrbuton throughout the value chan. Between these, contract farmng allows the buyer a measure of control (decson-rghts) over producton wthout formally engagng n the farmng actvtes (Grosh, 1994; Ménard, 2005). The allocaton of rsk depends on the terms of the contracts. As such, contract farmng provdes a response to market falures wth respect to nputs, credt, nsurance, nformaton and outputs, by reducng the assocated transacton costs, montorng, transfer of goods and barganng and enforcement (Key and Runsten, 1999; Poulton et al., 2010). Lterature on contract farmng dfferentates between three classc types of contracts accordng to ther man objectves, the transfer of decson-rghts and the shft of rsk from the farmer to the buyer (Key and Runsten, 1999; Mghell and Jones, 1963; Mnot, 1986). Marketspecfcaton contracts refer to pre-harvest agreements that engage a buyer n provdng a market outlet to a farmer under pre-establshed condtons often related to prce, quantty, qualty and tmng. Thus, the farmer delegates a part of the rsk to the buyer, whle keepng control over producton. Both the farmer and the buyer beneft from the prce premum on the qualty and stablty n the flow of supply of products to specfed markets. Management-provdng (producton-management) contracts are smlar to marketng contracts. These contracts however delegate some of the farmer s control over the producton process to the buyer. In terms of these contracts the adopton of specfc farmng practces (land preparaton, plantng dates, seedlngs, fertlzers applcaton rates and dates etc.) or the choce of post-harvest management practces wll come under the techncal supervson of the buyer to attan hgher qualty and to control the tmng of output. The buyer recoups the costs of extenson from the proceeds of marketng a hgher-qualty product accordng to the tmng of demand. Fnally, resource-provdng contracts are the closest arrangement to full vertcal ntegraton and requre not only that the buyer provde a market outlet to the farmer but also 3

5 that he delvers nput packages on credt and correspondng techncal assstance n ts use. It results n the buyer havng major control over producton wth the contract shftng most decson-rghts and rsks to the buyer (Fgure 1). Full vertcal ntegraton Control offered to the buyer (contractor) Resource-provdng contracts Management-provdng (producton-management) contracts Market specfcaton contracts Rsks encountered by the farmer Spot (cash) market Fgure 1: Typology of contracts Source: Adapted by the authors from Mghell and Jones (1963) and Mnot (1986) Contract farmng may overcome certan constrants small-scale farmers are typcally faced wth n developng countres, such as access to resources (nputs, servces, and nformaton) and markets. In South Afrca, black small farmers struggle wth access to resources as a result of the margnalzaton whch occurred through dscrmnatory polces under aparthed (Eastwood et al., 2006). Today, about 1.2 mllon black small farmers occupy 18% of the farm land (13% communal land n the former homelands and 5% redstrbuted land through land reform). These farmers manly engage n famly-based, subsstence agrculture (compared to around 40,000 large-scale farmers, ownng 82% of the prvately owned agrcultural land, characterzed by hghly ntensve farmng actvtes and producng 95% of the country s marketed agrcultural output). Most of them lack access to resources (land, water, nfrastructure, credt facltes). Consequently, contract farmng could facltate ther access to nformaton, techncal assstance, credt and nputs, reduce the uncertanty around marketng ther products, mprove ther ntegraton nto modern value-chans and consequently, ncrease ther farm ncomes (Glover, 1984; Key and Runsten, 1999; Mnot, 4

6 1986; World Bank, 2007), and provde nsttutonal mechansms to address the dffcultes they face. However, contract farmng could potentally also lead to ncreasng market segmentaton and excluson (Lttle and Watts, 1994; Porter and Phllps-Howard, 1997a, 1997b; Poulton et al., 2010; Vorley et al., 2007) or reman lmted n terms of the number of farmers nvolved, lmtng the overall mpact (Losch et al., 2010). Development and scale of contract farmng n South Afrca Contract farmng has a long hstory n South Afrcan agrculture (Karaan, 1999; Krsten and Sartorus, 2002a, 2002b; Louw et al., 2006; Porter and Phllps-Howard, 1997a, 1997b, Ortmann and Kng 2010). The hstorcal development of agrcultural contracts can be traced snce the early 1900s n relaton wth the emergence of cooperatves (Ortmann and Kng, 2006; 2007; 2010). Ths hghlghts the sgnfcant role of contracts n the development of whte commercal agrculture. Indeed, untl the 1990s, whte farmers benefted from nput supples (seeds, fertlzers, chemcals and credt), marketng facltes through varous boards and servce provson (storage, transport) organzed by the cooperatves through varous nsttutonal arrangements. Due to the dscrmnatory polces, black farmers located n the homelands had only lmted, f any, access to most domestc markets, and consequently to ther contracts. They commercalzed ther outputs when they were able to generate surpluses on nformal local markets wthn the homelands. Contract farmng n South Afrca has been analyzed for small-scale farmers n tradtonal value chans such as tea, sugarcane, tmber, tobacco, flowers and beverages (Krsten and Sartorus, 2002b). These schemes appear however to be more the result of specfc ntatves of large estate actors durng aparthed and the pre-lberalzaton perod, than what McMchael and Myhre (1991) call the restructurng of agrfood markets. Quantfyng the scale of contract farmng, whatever the level of analyss, s extremely dffcult. Whereas some authors attempt to estmate the scope of ts development n Afrca (Grosh, 1994; Lttle and Watts, 1994), most studes n ths respect focus on ts mpact on the farm and household (e.g., Bellemare, 2010a, 2010b; Maertens and Swnnen, 2009). In a study on contract farmng n South Afrca, Vermeulen et al. (2008) estmate ts scale n the fresh produce sector and assesses the level of partcpaton of small-scale farmers. Ths research shows that almost 80% of the volumes of fruts and vegetables supplyng the South Afrcan processng ndustry (21% of the producton) was exchanged through contracts and that between 70% and 100% of the produce sold n supermarkets were suppled under contract, whle the meat and egg sectors favored full vertcal ntegraton (Vermeulen et al., 2008). Ths study also showed that only 5% of the contracts dentfed nvolved small-scale farmers wth few supplers. These results confrm the fndngs of prevous studes whch show that contract farmng, for fresh produce n partcular, usually mples a small number of producers, and very few small farmers (table 1). 5

7 Table 1: Extent of Contract farmng n South Afrca for selected commodtes Sub-sector # of farmers under contracts # of small-scale and emergng farmers under contracts % of South Afrcan farmers under contracts* Sugar cane small-scale growers (8% of sugarcane producton) emergng growers 1.2% Tmber % Cotton % Processed fruts Snack and Nuts All Fresh Fruts and Vegetables % % Processed Vegetables ns Sources: authors complaton from Vermeulen 2008; FAO 2004, South Afrcan Sugar Assocaton 2011 and FAO Expert Consultaton on Contract farmng n Afrca, Johannesburg, South Afrca (04 07 May 2009). * The Department of Agrculture, Forestry and Fsheres annual report 2009/10 estmates commercal farm unts n 2007 and 1.2 mllon small-scale farms n the former homelands. Methodology Measurng the contrbuton of agrcultural contracts to farmers welfare levels s methodologcally challengng. Contracts are often not randomly dstrbuted among households (Barrett et al., 2010) and ther access needs to be nstrumented n a regresson analyss of ts mpact on welfare (Bellemare, 2010b). In ths paper, a three-step selecton model s developed, addressng the determnants of access to contracts, as well as the decson to market produces, whle estmatng the mpact of contracts on ncome and not on welfare. Secondly, the econometrc model s entwned wth a qualtatve approach that studes a typology of households and ther development paths. Ths enables us to draw more nformed conclusons on the reasons why some farmers are beng excluded from markets and/or contract farmng. The combnaton of standard econometrc models wth qualtatve analyses s partcularly orgnal and relevant. Ste selecton and sample Data for ths study was collected from farm households n the Greater Tzaneen Muncpalty n the Lmpopo Provnce 2 (Fgure 2). Wthn the greater muncpalty, the survey was conducted n the regon of Nwa Mtwa whch ncludes the settlements of Mandlakhaz, 2 Lmpopo Provnce s located n the North of South Afrca. It s a typcal developng area, charactersed by the export of prmary products and the mport of manufactured goods and servces. It s one of the poorest regons of South Afrca. 6

8 Mbekwan, Nwa Mtwa, Nwadjahen and Babanana as well as the prvate farms surroundng the communty (Jaffray, Welverwacht, Taganashoek, La Dauphne, Duplex and Utzoek). Fgure 2: Locaton of the study area The selecton of the study area was based on the followng crtera: 1. Agro-clmatc condtons and mportance of agrculture The area s characterzed by relatvely good agro-clmatc condtons wth a tropcal/sem-ard clmate (average temperature of 25 C, wth annual ranfall of between 500 and 700 mm) and by relatvely homogeneous sols (alluval and sandy on the top and flat areas, clay sols n the lower lyng areas). Despte a dstnct dry season, crop producton s possble throughout the year under rrgaton. As a result, agrculture s well developed and the most mportant economc actvty n the Mopan Dstrct where the study area s located Hstorcal background, land characterstcs and poverty prevalence The Southern part of Nwa Mtwa s located on trbal lands that were part of the Gazankulu Homeland. Agrculture s representatve of the overall prevalng stuaton n the former Homelands, consstng of small plots wth communal land tenure, croppng and lvestock systems based on tradtonal practces, farmng actvtes dedcated to famly consumpton, hgh demographc and land pressure etc. Most households face a daly struggle wth poverty, partcularly due to the hgh average age of the populaton as well as general under- andunemployment. The Northern part conssts of commercal farms. Ths sub-regon s subject to land clams and some governmental projects have been mplemented. 3. Market proxmty, off-farm jobs and contract farmng opportuntes The proxmty to commercal farms both located n the study regon and n the Great Letaba Rver Valley, one of the leadng regons for frut and vegetable producton, has enhanced the 3 Manly ctrus and subtropcal fruts are produced n the area for both domestc and export markets. The area s also known for ts tomatoes (consttutng approxmately 60% of tomato producton n South Afrca). 7

9 development of agrcultural wage labour opportuntes and the presence of contract farmng. The populaton of the study area s estmated at around households (Muncpal Demarcaton Board, 2006) of whch, accordng to our fndngs, ) about 2000 are nvolved n agrculture, ncludng lvestock and self-consumed croppng actvtes n gardens and ) 82 are prvate land owners. A probablty sample was not possble because exact lsts of communty members were unavalable. It was consequently decded to conduct: (a) 110 questonnares among a random group of respondents geographcally spread over the area, whch allowed, consderng the avalable tme and resources, for capturng the exstng dversty and to provde the necessary nformaton for the establshment of a typology. The survey was random but the number of commercal and contract farmers were purposefully hgher. Four cases were deleted from the analyss due to mssng data, resultng n a data set of 106 vald cases; (b) 40 complementary ntervews among selected households dentfed durng the frst 110 ntervews n order to better understand ther specfc trajectores; (c) 36 complementary questonnares among farmers engaged n contracts and also dentfed n frst round of ntervews and (d) 239 addtonal short questonnares to check how representatve the results are n relaton to the sze of the populaton n the regon. The dataset s rch and representatve regardng the dversty of farmng systems and contracts n the study area. Frstly, t combnes quanttatve and qualtatve data. Secondly, as we wll show n the analyss, t covers a whole range of farmng systems rangng from less developed and subsstence small-scale systems to more advanced large-scale and commercal ventures. Thrdly, t ncludes farmers wth and wthout contracts and assesses the type of agreements they are nvolved wth. Fnally, the dataset enables comparson across farm households wth dfferent land tenure regmes and dfferent levels of governmental support, ncludng benefcares from land reform programmes. Qualtatve data analyss Two methodologcal approaches were used to analyze agrculture and rural lvelhoods. Frstly, an agraran systems dagnostc approach was mplemented n order to characterze the agro-ecologcal, techncal, hstorcal and socoeconomc factors nfluencng the transformaton of the rural envronment (Cochet and Devenne, 2004; Dufumer, 1996). Then agrcultural practces were analsed (combnatons of crops and lvestock and ther productvty levels) whch were subsequently lnked to the asset endowment and households development paths to establsh a consstent typology. Secondly, a lvelhood approach was appled to each dentfed type of household, amed at understandng the combnaton of actvtes and ncome sources. Quanttatve analyss The econometrc approach amed at analyzng the determnants of the uptake of contracts and contract farmng s contrbuton to the households farm ncome. The analyss was done n three stages. In the frst nstance, a probt model was used to analyze the uptake of contracts. 8

10 The second step (frst model of a Heckman model) was a probt analyss of factors determnng whether or not farmers commercalze ther agrcultural produce (f not, they are consdered to be subsstence farmers). The thrd step (second model of the Heckman model) was a regresson analyss of the determnants of farm ncome for farmers partcpatng n markets. The ndependent varables ncluded the probabltes of havng a contract (saved results of the frst probt model) and the nverse mlls rato that was saved from the second probt model. The estmaton of the probt model as well as the Heckman procedure (models two and three were jontly estmated) was done usng Stata. A descrpton of the Heckman model s gven n Annex 1. The ratonale behnd ths approach s the latent endogenety and selecton-bas ssues around the uptake of contracts and commercalzaton of on-farm ncome. Whle market orentaton, as opposed to the choce of subsstence producton, s ntrnscally lnked to farm ncome, we suspected selecton bases and corrected these by estmatng a Heckman model (Greene, 2000). We also suspected that the uptake of contracts would be endogenous to farm ncome as a buyer s decson to procure from a certan regon and wthn that regon from a number of sellers, s not random (Barrett et al., 2010; Bellemare, 2010b). Because the analyss seeks to test whether contract farmng ncreases farm ncome, we needed to nstrument the uptake of contracts to address these potental endogenety problems whle controllng for the decson to sell agrcultural produce. Followng Wolln and Zeller (2007), we ntroduce the probabltes obtaned from the probt model on uptake n the farm ncome model. It s worth notng that farmers who had contracts were marketng ther produce, whle not all farmers who were marketng, had contracts. Contract uptake s nstrumented by the mportance of off-farm ncome n the total household ncome. 4 Furthermore, there s no theoretcal reason to assume a causal relatonshp between the share of ncome from off-farm sources and agrcultural ncome. Lkewse, the lkelhood to market produce s nstrumented by the level of transfers; hgh socal grants and remttances may nfluence the lkehood that farmers commercalze, but they are exogenous and arguably not necessarly causally lnked to farm ncome. The ndependent varables selected for the frst probt model are smlar to those commonly used n lterature for smlar models (Bolwg et al., 2009; Myata et al., 2009; Wolln et al., 2010; Wolln and Zeller, 2007) namely (a) household characterstcs (household sze, age and gender of the head); (b) assets endowments (land area, sze of the cattle herd) and (c) share of off-farm ncome n total ncome. The model for household then becomes: C = α share_ ncome_ off _ farm + u (1) 0 + α1householdsze + α 2age + α 3age_ squared + α 4gender + α 5land _ area + α 6cattle + α 7 4 We assume that off-farm ncome s exogenous to farm ncome at household level because t conssts manly of welfare grants and remttances. In the case of cross-fnancng, lvelhood dversfcaton (ncreasng the share of off-farm ncome n total ncome) may ncrease agrcultural ncome. It s equally possble however, that farm ncome may decrease as the share of off-farm ncome ncreases, n those nstances where the off-farm ncome satsfes the household s utlty levels. 9

11 wth C beng a dummy varable (0/1) ndcatng f the household has a contract or not, and u beng the error term. The probablty of C =1 s calculated by a probt model smlar to the frst step of the Heckman model gven n equaton (2 ) n Annex 1. Independent varables for the second probt model were smlar to exogenous household characterstcs n the frst model (household sze, age and gender of the head), supplemented wth the level of educaton of the head and ncome from transfers. As mentoned above, we consder the two latter varables as relevant because these addtonal ncome sources wll determne the choce of farmng system wthout drectly nfluencng the farm ncome. The model s for household : Market partcpaton M = β + households ranf ed + v 0 β1 ze + β 2age + β3age_ squared + β 4gender + β5educaton + β6socal_ grants + β7remttances + β8 (2) wth v beng the error term. Ths functon s the frst step of a Heckman selecton model as explaned n Annex 1. Agrcultural ncome s regressed aganst (a) the household structure (age, gender), (b) farm characterstcs (number of actve people on the farm, land, access to rrgaton and land tenure regmes) and (c) the probablty of access to contracts The model then becomes for household : Y IM + w = γ 0 + γ 1actve _ members + γ 2age + γ 3gender + γ 4land + γ 5 prvate _ tenure + γ 6land _ reform _ benefcares + γ 7ra nf ed + γ 8C + γ 9 wth IM beng the nverse mlls rato/lambda, and w the error term. The second step of the Heckman procedures s expressed by equaton (1 ) and solved as presented n Annex 1, for those households who are partcpatng n the market. It should be noted that due to the relatve low number of cases n ths second step, the number of varables were lmted and the results were nterpreted wth care. However, the outcome of the econometrc models s confronted wth the qualtatve data analyss. Results Household Typology From the 106 households ntervewed, seven types of farmng systems were dentfed (Table 2). Four crtera were used: () the sze and the type of land (garden, communal area, prvate land); () the commercalzaton of agrcultural products, ncluded the buyers (spot markets, local merchants, supermarkets, processors, export agents) and the destnaton of the products when sold (local, domestc, export markets); () the combnaton of crops and lvestock (share of staple food, of fruts and vegetables, of lvestock n the farm producton value) and asset endowment (equpments, rrgaton systems etc.) and (v) access to and the mportance of off-farm ncome. The typology enables the dentfcaton of the dfferent household strateges and the quantfcaton of the dstrbuton of contracts wthn the study area. The typology presented n ths artcle ncludes all households ntervewed, ncludng a group, sgnfcant n terms of 10

12 number of households, but whch s not engaged n the commercalzaton of ts producton. It was decded to keep ths group to address the ssue of scale and sgnfcance of contracts wthn the study regon. The other sx types enable the analyss of the condtons of engagement and entry barrers regardng contractual agreements. Table 2: Typology of farmng households n the Greater Tzaneen Muncpalty n* % of the sample % of HH** n area Mcro-farmers cultvatng resdental gardens % 53.8% for self consumpton, dependng on off-farm actvtes, remttances and socal grants Subsstence small-scale farmers dependng on % 39.6% off-farm ncome, combnng staples for selfconsumpton and vegetables for local markets Small-scale producers of staples and F&V for local markets, dependng on off-farm actvtes and socal grants 6 5.7% 4% Medum-scale producers specalzed n % 1% vegetables producton for the local and domestc markets Emergng ndustral chcken and vegetables % 0.2% producers Extensve commercal farmers, producers of % 1% fruts manly for the domestc market Intensve commercal producers of fruts and 6 5.7% 0.4% vegetables for the domestc and export markets Total % 100% Notes: *Number of detaled questonnares to a random group of respondents allowng for the capturng of the dversty n household types. **Based on the results of the 239 short ntervews conducted and beng representatve of the populaton n the study area. Mcro-farmers cultvatng resdental gardens for self consumpton, dependng on off-farm ncomes (n=15) The mcro-farmer group s very heterogeneous n terms of lvelhoods. These mostly female headed households mplement survval strateges to cope wth very low ncomes and take any opportunty that allows them to mprove ther lvelhoods such as small rregular jobs n the servce sector n the communty, casual agrcultural labour, socal grants and remttances (wth the younger, actve populaton often havng mgrated). However, despte engagng n these dverse actvtes, these households hardly succeed n generatng an ncome above the poverty lne. In terms of farmng, they have no or very poor access to land and consequently rely only on the cultvaton of resdental gardens. They combne starchy staples and vegetable producton for famly consumpton, producng only durng the rany season due to a lack of access to rrgaton water. As a result, farmng actvtes are lmted and contrbutes only margnally to ths group s subsstence (21% of global ncome). Wth nsuffcent access to assets and nsuffcent producton, ths group s manly excluded from markets and farmng provdes only a bass for food securty. 11

13 Subsstence small-scale farmers dependng on off-farm ncome, combnng staples for self-consumpton and vegetables for local markets (n=28) The second group conssts of couples composed of a retred person and an actve person engaged n a permanent actvty (small busness). Socal grants or off-farm ncome was nvested n an rrgaton system whch provdes water for domestc use, for the sale of drnkng water to the communty and for rrgaton purposes (manual only). Unlke the mcrofarmer group, these households have access to a plot of arable land n the communal lands (on average one hectare), allowng them to cultvate staples and vegetables and to keep an orchard (mangoes). They also have a small herd of cattle that graze on communal land and fatten pgs. The produce s sold on spot markets wthn the communty or to local merchants. The farmng actvty allows them to have food and a fnancal bass but for most of them, farmng s not consdered to be a productve actvty (17% of total ncome). They furthermore have no nvestment capacty and heavly rely on socal grants for ther subsstence. Small-scale producers of staples and fruts and vegetables for local markets, dependng on off-farm actvtes and socal grants (n=6) The thrd group combnes small-scale farmng (28% of global ncome), off-farm actvtes (tax, small busness) and socal grants, whch represent a sgnfcant part of ther ncome (34%). Off-farm ncome, nvested n an rrgaton system, has allowed them to develop a marketable all year round vegetable producton. These households have access to a plot n the communal area (average sze 1.8 hectares) whch they cultvate n addton to a garden. Products are sold on spot markets or to local merchants. For ths group, farmng s a productve actvty and the bass of ther lvelhoods; they would lke to develop ther farmng actvty f ther constrants can be overcome (lmted access to resources, lack of credt, dffcultes to collect and transport ther products to markets etc.). Medum-scale producers specalzed n vegetables producton for the local and domestc markets (n=24) These households are better endowed (largest plots n communal lands) and due to more effcent nfrastructure (prvate borehole, rrgaton systems, tractor and prvate vehcle) they were able to develop a marketable vegetable producton (up to three cycles per year) whch they sell to local merchants, to fresh produce markets or under formal contracts to supermarkets (organc producton-management contracts), to processors or restaurants (marketng contracts). As a result of successful but expensve practces, farmng has become the pllar of ther lvelhood (67% of total ncome), the rest beng non-farm sources. Farmng s a proftable means of exstence to them but wthout the massve support or the opportuntes from whch they beneftted on the bass of ther personal socal networks n order to access both producton factors and market opportuntes, or both, they would not have been able to develop ths actvty. Emergng ndustral chcken and vegetables producers (n=16) These households are specalzed n ntensve vegetable producton under management producton contracts wth agrbusnesses and/or ndustral broler producton under resource provdng contracts wth a local agrbusness (Bushvalley). Agrculture s ther only economc actvty. The vablty and the sustanablty of ths specalzed and ntensve but expensve 12

14 farmng system s questonable, both n agro-ecologcal as well as economcal terms. It s not clear f the farmers engaged n ths producton system would have had the means to nvest and renew ther equpment and to develop an economcally sustanable actvty wthout massve external (mostly governmental) support. Extensve commercal farmers, producers of fruts manly for the domestc market (n=11) Extensve commercal farmers combne an ndependent or a qualfed permanent off-farm actvty and manageral farm requrng numerous workers. They are well equpped wth an operatonal rrgaton system and a tractor. They have specalzed n extensve mango producton (low use of nputs and workforce). Mangoes are usually harvested green to be delvered to local processors or sold rpe to merchants, fresh produce markets or exportng agents. Some of them have contracts (marketng) whch are usually verbally concluded. Intensve commercal producers of fruts and vegetables for the domestc and export markets (n=6) The households of ths last group are specalzed n manageral farmng. They have developed an ntensve (n terms of labor, captal and nputs) producton of fruts under rrgaton. They own tractors, greenhouses, warehouses and a packng unt each to satsfy the requrements and the standards of ther buyers (local merchants, processors, fresh produce markets and exportng agents) wth whom half of them have varous types of contracts (mostly marketng but also producton-management contracts). Ther actvtes are concentrated on large areas of prvate land. They combne ther producton actvtes wth extensve cattle breedng on prvate pastures. Table 2 also presents the dstrbuton of the sx types, based on a shorter survey conducted among a larger number of farmers n the study area (n=239). The resultng dstrbuton dffers from the one based on the long survey. The mcro-farmers seem to be the largest group (53.8%) followed by subsstence small-scale farmers (39.6%). From the 106 farmers n the analyss that partcpated n the long ntervew, medum-scale farmers (1%), emergng ndustral chcken producers (0.2%), and ntensve (0.4%) and extensve (1%) commercal farmers seem to be overrepresented. Extent and characterstcs of contract farmers The extent of contract farmng n the regon remans lmted wth only 36 farmers (34% of the ntervewees) havng at least one contract, whether verbal or n wrtng. Followng our fndngs n the short survey, contract farmers represent less than 1.2% of the total number of farm households n the regon. The lmted extent of contract farmng can be explaned by the fact that, as shown by the typology analyss, the majorty (54% of the ntervewees) are mcro or small-scale subsstence orented farmers. As they do not partcpate n markets they are also excluded from contract farmng, as confrmed n Table 3 whch lnks the farm household typology wth the partcpaton n markets, contracts and the destnaton of the agrcultural produce. 13

15 Table 3: Buyers, contracts, and types of households Types of buyers % each type have at least one contract Mcro-farmers No sale 0% No contract Types of agrcultural contracts Subsstence small-scale Small-scale producers Medum-scale producers No sale Spot markets Spot markets Local merchants Local merchants Fresh Produce markets (FPM) Restaurants Supermarkets Processors Local merchants Road-sde stalls 0% No contract 0% No contract 57% No contract No contract Informal marketng agreements No contract or formal organc productonmanagement contracts Informal marketng agreements or formal producton-management contracts No contract or nformal agreements Informal marketng agreements Emergng farmers FPM 100% No contract or nformal marketng agreements Supermarkets Formal organc producton-management contracts Processors Informal agreements or formal productonmanagement contracts Local merchants No contract Extensve commercal farmers FPM Processors 27% No contract or nformal marketng agreements Informal gentlemen agreements Exportng agents Formal market-specfcaton contracts Local merchants No contract or nformal gentlemen agreements FPM No contract or nformal gentlemen marketng agreements Intensve commercal farmers Processors 50% Informal agreements or formal marketng or producton-management contracts Exportng agents Marketng contracts Tables 4 and 5 compare the mean values of major characterstcs of contract farmers and noncontract farmers. The two groups dffer sgnfcantly n ther demographc characterstcs, asset endowment and ncome structure. Contract farmers seem to have smaller households (wth less older members and more chldren) and are led by younger heads (mostly male); they have better access to land, mostly under prvate tenure or n land reform schemes and all of them have access to rrgaton (through varous types of rrgaton systems), wth larger cattle herds and hgher agrcultural ncomes. Among the group of non-contracted farmers we 14

16 count more female headed households wth sgnfcantly lower levels of educaton, less land (consstng manly of gardens) and wth a greater dependency on socal grants. Table 4: Comparson of means between contract and non-contract farmers (standard devaton n brackets) Contracted farmers Non contracted T-stat (n=36) farmers (n=70) Household sze (nb) *** (1.92) (3.11) Share chldren n household (%) ** (17.76) (18.02) Age of household head (years) ** (11.84) (14.47) Avalable land (ha) *** (106.43) (63.60) Cultvated land (ha) *** (63.76) (30.98) Share cultvated (%) *** (33) (22) Number of cattle * (43.88) (13.28) Agrcultural ncome (R/year) 2,095, , *** (3,122,966) (600,139) Remttances receved (R/year) 2,666 4, (5,928) (14,609) Socal grants receved (R/year) 4,369 8, ** (6,991) (7,714) Total ncome (R/year) 2,115, , *** (3,115,194) (601,174) Share of ncome from off-farm source (%) 16.5 (28.5) 63.7 (33.9) 7.568*** Note: *** sgnfcant at 1%, ** sgnfcant at 5%, * sgnfcant at 10% Table 5: Comparson of shares (%) of determnants between contracted and noncontracted farmers Contracted Non contracted Ch-square-stat farmers (n=36) farmers (n=70) Gender household head (% male) *** Access to off-farm ncome (% yes) *** Educaton above prmary level (%yes) *** Ran-fed producton (% yes) *** Prvate land tenure (%) Communal land tenure (%) Gardens (%) 0 63 Land reform (%) 36 0 Garden + communal land (%) *** Note: *** sgnfcant at 1%, ** sgnfcant at 5%, * sgnfcant at 10% a Ch-square test for land reform versus contract farmng In the probt model we explan partcpaton usng several varables whch are expected to determne households ablty to engage n contracts. The probt model s hghly sgnfcant and predcts almost 88% of the observed engagement n contracts (Table 6). The model 15

17 supports the conclusons of the typology analyss and fnds that land sze ncreases the probablty to engage n contracts whle the share of off-farm ncome n the total ncome decreases ths probablty. The model confrms that farmers wth low land endowments (mcro-subsstence and small-scale farmers) are more lkely to be excluded from contract farmng. Table 6: Probt model of uptake of contracts (0: no contract; 1: contract) Coeffcent Robust std. error z-stat Household sze *** Age of household head (yrs) ** Age squared (yrs²) ** Gender of household head (1:male/2:female) Share off-farm ncome (%) * Log land sze (log ha+1) ** Cattle (number of heads) Constant * N= 106 Wald ch²=36.67 Pseudo R²= Correctly classfed 87.5% The combned quanttatve and econometrc analyss thus asssts n classfyng the contract farmers nto two categores. The frst group of households conssts of large-scale commercal farmers. The analyss of ther trajectores (see Fgure 3) shows that they access contracts as preferred supplers of processors, supermarkets and exportng agents as a result of a good asset endowment base (large cultvated areas on prvate land; effcent rrgaton systems and equpment). They have succeeded n equppng the farm and becomng, relatvely speakng, hghly productve due to the publc support they receved durng aparthed (subsdzed nterest rates, tax concessons and prce support combned wth strong nsttutonal arrangements wth cooperatves). After lberalzaton, the deregulaton of markets and the dsmantlng of parastatals, only the largest and the more effcent farmers n ths group were able to meet the requred volumes and qualty (norms and safety standards) and succeeded n remanng preferred supplers. The second group, whch s the target group of the project, conssts of smaller-scale farmers located on both prvate (redstrbuted) land and communal areas. The analyss of ther trajectores shows convergent trends. Most of them accessed support measures as a result of socal networks establshed before the end of aparthed (for example, access to land and support as publc workers or as decson makers n the Homelands). Others benefted from recent publc support n the context of Broad-Based Black Economc Empowerment for Agrculture and other affrmatve acton programmes. 16

18 Land Act, Malara control program Aparthed dscrmnatory polces (Homeland, Betterment Plannng, Vllagzaton, etc.) Loss of access to arable land End of Aparthed Socal programmes safety nets Land clams Subsstence mcro-farmers Subsstence Farmng Systems (maze, pumpkns, beans, peanuts ) x cattle rearng on commonages x off-farm jobs (farm labor, mnng) Lmted access to arable land n communal areas Hgh pressure on resources Prvate nvestments n rrgaton systems Small-scale staple producers Small-scale staple and veg growers No publc support Dscrmnatory polces Specfc networks Publc support and programmes Medum-scale producers specalzed n F&V Poneer commercal Farmng Systems (mango, ctrus, avocado x vegetables. x extensve cattle rarng Publc support Development of cooperatves provdng nputs, outputs (boards), and servces Agrcultural research => for the commercal (whte) farmng sector Techncal nnovaton n fruts producton Lberalzaton, dsmantlng of parastatals, end of support measures favorng the whte agrculture Extensfcaton of agrc. prod. & combnaton wth off-farm jobs Intensfcaton n captal (prvate nvestment) Emergng ndustral chckens and veg producers Extensve large commercal mango producers Intensve large commercal F&V growers Fgure 3: trajectores of households per types of farmng systems Source: Authors The trajectores of the emergng vegetable and brolers producers are good examples of how some small-scale farmers succeeded n concludng contracts n the study area (Fgure 3). Seven ndvdual farmers receved productve farmland n 2002 through the Land Reform s Settlement Land and Acquston Grant programme, complemented wth loans from the Land Bank. After acquston ther farms collapsed due to, amongst others, nadequate experence and nsttutonal support. In 2005, the Lmpopo Department of Agrculture ntervened wth a mult-mllon Rand poultry project as part of the agr-bee drve, ncludng the constructon of envronmentally controlled houses wth a carryng capacty each of brolers per 32 day cycle (Anjuère and Boche, 2009; Busness Report, 2010). One of the condtons for the farmers to beneft from the nfrastructure was the concluson of a fve year resource-provdng contract whch the Department of Agrculture sgned wth the processor, Bushvalley. Broler producton effectvely started n The contract terms nclude the followng: Bush Valley s to provde farmers wth all the requred nputs (poultry equpment, one day old healthy broler type chcks from a local hatchery, hgh qualty balanced foodstuffs, poultry ltter, dsease preventon/control medcnes etc.) and a strct montorng plan for feedng and managng the chckens. All costs (nput, transport and processng) are to be deducted from the amount producers are pad; the prce s not pre-establshed and depends on the weght of the chckens. In addton to the provson of techncal assstance, qualty and hygene nspectons 17

19 are to be conducted to ensure the hghest qualty of the products delvered (Anjuère and Boche, 2009; Lmpopo Provncal Government, 2007). The project leaders also beneftted from ntensve tranng regardng poultry producton n envronmentally controlled facltes, provded through the DoA s comprehensve agrcultural support programs. Determnants of agrcultural ncome A Heckman model was used n order to test whether contracts could mprove lvelhoods. The frst step of the model (Table 7) s a probt model of the determnants of the lkelhood that the farmers commercalze ther produce or not. Indeed, t s obvous that f a farmer s not able to generate marketable output, he won t be able to partcpate n any arrangement; testng f contract farmng s a determnant of the farm ncome s n that case rrelevant. The frst step of the model thus shows that an educaton above prmary level s an mportant determnant of commercalzaton. Furthermore, households that receve larger socal grants and who do not have access to rrgaton nfrastructure are less lkely to commercalze any agrcultural produce, whch also corresponds wth the results of the qualtatve analyss. Table 7: Probt model of commercalzng agrcultural produce (0: no sales; 1: sales) STEP 1 of Heckman model Coeffcent Std. error z-stat Household sze Age of household head (yrs) Age squared (yrs²) Gender of household head (1:male/2:female) Secondary educaton or more (1:yes) *** Log socal grants (R) * Log remttances (R) Ran-fed producton (1:yes) ** Constant The second step of the model s a regresson of the determnants of farm ncome (Table 8). The latter seems to be postvely nfluenced by the number of actve members on the farm, the level of specalzaton n agrculture, the sze of the cultvated land and whether ths land was acqured under prvate tenure or land reform. These determnants are all classc structural varables nfluencng farm ncome, as wdely commented on n the lterature. Further lterature (Eaton and Shepherd, 2001; FAO, 2005; IFAD, 2003; Lttle and Watts, 1994; World Bank, 2007) confrms that contracts postvely nfluence farm ncome. 18

20 Table 8: Regresson results for determnants of agrcultural ncome (dependent varable: log of ncome from agrculture) STEP 2 of Heckman model Coeffcent Robust std. error z-stat Household members actve on farm *** Age of household head (yrs) Gender of household head (1:male/2:female) Probablty of contract ** Log land sze cultvated (log ha+1) *** Prvate land tenure (1:yes) * Land reform benefcares (1:yes) *** Ranfed producton (1:yes) Constant *** Inverse mlls - Lambda n= 106 Censored obs = 31 Uncensored obs = 75 Wald ch²= Rho= Sgma= The analyss of the Heckman model confrms that farmers who generate hgher farm ncomes are also better endowed wth respect to captal and producton factors (land, prvate tenure, equpment etc.). The qualtatve analyss (Fgure 3 and Table 3) suggests that these farmers engage n contracts for dfferent reasons: ) they are more concerned wth ensurng stablty n the flow of produce to specfed markets rather than wth accessng producton factors, credt and other nputs as they already have access to these; ths s specfcally the case for commercal farmers who partcpate n ether nformal agreements or formal marketng contracts; ) contract farmng s part of the deal for ganng access to development programmes (agr-bee, Publc-Prvate Partnershps, land reform programmes, other publc programmes for rural development, small-scale enterprses and agrculture, etc.), as llustrated by the emergng farmers. In ths case, contract farmng s a sne qua non condton for the farmng system whch s largely based on publc support. Concluson The objectve of ths paper was to contrbute to the on-gong debate about whether and how contract farmng can provde vable market opportuntes for small-scale farmers n South Afrca. The results show, however, that contract farmng s not a panacea for small-scale farmers. They hghlght that contracts mostly nvolve the already well-off, who are ether large-scale manageral commercal farmers havng benefted from publc support durng aparthed and whch enabled them to become hghly productve, well-equpped and well-nserted n output markets, or medum-scale farmers who have benefted from case-specfc publc programmes and/or socal or poltcal connectons. Both the qualtatve and quanttatve analyses confrm the exstence of entry barrers for small-scale farmers n concludng contracts (producton and commercalzaton scales, educaton and asset endowments such as access to land and 19

21 rrgaton). As such, although sgnfcant changes have occurred n South Afrcan agrculture, small-scale farmers wth lmted access to assets and who rely manly on dversfed ncomes (part tme work, socal grants etc.) to sustan ther lvelhoods, reman excluded and thus often margnalzed. Hence, the results support the concerns around the nclusvty of contract farmng posed elsewhere n the lterature (Losch et al., 2010; Poulton et al., 2010; Vorley et al., 2007 amongst others). The results lead us to emphasze the need for dsaggregated analyses of the farmng systems, of ther dfferent structures, ther dverse roles and, subsequently, of ther dfferent needs, polcy measures and support systems. They also queston the effectveness of contract farmng as a mythc tool to ntegrate small-scale farmers nto restructured markets and modern value-chans and to reduce rural poverty and nequalty. The heavy support and subsdzed measures necessary to make contract farmng work for the poor casts further doubt on the vablty of these nstruments. Rethnkng nstruments s a must n order to support the dfferent types and roles of agrculture n the context of socal dependency and excluson of productve ncome-generatng actvtes affectng the rural poor. Ths s partcularly the case n South Afrca, marked by ts agraran hstory. It apples however, also to other developng countres where the majorty of farmers s engaged n agrculture solely for subsstence, wthn a complex and strongly dversfed lvelhood system. References Anjuère, M., Boche, M., Dagnostc agrare des coteaux de la rvère Nwanedz, provnce du Lmpopo, Afrque du Sud, Agrculture comparée et Développement rural. AgroParsTech/Unversty of Pretora/CIRAD/NAMC, Pars, France. Anseeuw, W., La reconverson professonnelle vers l agrculture marchande et poltques publques. Le cas des mneurs du Northern Cape. Unverste Perre Mendes-France Grenoble, France. Barrett, C.B., Smallholder market partcpaton : Concepts and evdence from eastern and southern Afrca. Food Polcy 33, Barrett, C.B., Bachke, M.E., Bellemare, M.F., Mchelson, H.C., Narayanan, S., Walker, T.F., Smallholder partcpaton n agrcultural value chans: Comparatve evdence from three contnents, n: verson, W.p. (Ed.), Accessed by SSRN: January Bellemare, M.F., 2010a. Agrcultural extenson and mperfect supervson n contract farmng: evdence from Madagascar. Agrcultural Economcs 41, Bellemare, M.F., 2010b. As you sow, so shall you reap: the welfare mpacts of contract farmng, n: MPRA Paper No , p.j. (Ed.). Munch Personal RePEc Archve, Accessed by January Bolwg, S., Gbbon, P., Jones, S., The economcs of smallholder organc contract farmng n tropcal Afrca. World Development 37, Busness Report, Chcken house needs fundng to survve, Busness Report 20