Thursday
September 25
2014

Jane Abramovich and Samantha Krause

Outgrower Schemes: A pathway to sustainable agriculture

Editor’s note: This is the first of a two-part post from TechnoServe sharing research insights about outgrower schemes. TechnoServe works with enterprising people in the developing world to build competitive farms, businesses and industries. Please check out part tow here.

Outgrower schemes are systems that link networks of unorganized smallholder farmers with domestic and international buyers. Also known as contract farming, these schemes provide benefits to players along the supply chain. Buyers can improve their control over crop supply, often at pre-agreed prices, as well as crop quality standards. And farmers can access more secure markets, often receiving technical and financial support by cultivating within outgrower schemes.

When effectively designed and well managed, outgrower schemes can address numerous sustainable agriculture objectives. They can facilitate greater private sector investment in developing countries, improve sustainable sourcing practices by bringing smallholder farmers into mutually beneficial partnerships with large buyers, and increase smallholder farmer incomes by improving yields and quality through training, access to credit and markets.

In practice, however, outgrower models do not always reach their full win-win potential – something we’ve seen firsthand in the field. Without a readily available blueprint for success, we set out to investigate the features of effective and sustainable outgrower models, focusing on three priority questions:

1. What are the drivers of success or failure in an outgrower scheme?

2. What can be learned from outgrower schemes that have scaled and stood the test of time?

3. What elements contribute to mutually beneficial outcomes for farmer and company in an outgrower scheme?

To answer these questions, we have examined outgrower models from a range of different perspectives. TechnoServe’s 2011 technical brief on outgrower schemes, in collaboration with the International Fund for Agricultural Development (IFAD), addressed the drivers of success and failure. The study helped to categorize the diverse spectrum of outgrower models, ensuring that local knowledge of market dynamics and stakeholders translates into customized and integrated approaches.

Below, we discuss what can be learned from large-scale, long-standing outgrower schemes. In Part 2 of this series, we will explore how contract farming can achieve mutually beneficial outcomes through the examples of medium-size outgrower schemes.

Common challenges in large-scale outgrower schemes

To better understand the challenges and best practices in operating large-scale, long-standing outgrower schemes, we assessed 25 of the largest outgrower programs in sub-Saharan Africa, each involving at least 15,000 farmers and many in operation for decades.

?(Tea farming in Tanzania, left. Photo courtesy of TechnoServe)

From the perspective of a company doing business with an outgrower, one of the biggest and most well-known challenges of contract farming is side selling, when farmers sell outside of the contract to another buyer. This reduces sourcing volumes and often results in farmers defaulting on company-provided input loans (credit extended to farmers for purchases of seeds, fertilizers and other agricultural inputs). Companies also struggle with other elements of contract enforcement due to weak legal frameworks. Finally, a lack of third party financing and risk-sharing mechanisms with traditional finance institutions constrains companies’ ability to expand their programs.

From the farmer’s perspective, a lack of thorough understanding and application of best agronomic practices and post-harvest handling techniques can result in low yields and poor quality. When yields or prices are lower than expected, smallholder farmers may retain little net income after paying off their input debt, which can lead to default and side selling. Finally, without savings, insurance or suitable forms of credit, limited cash flow can force smallholders to default on their contracts in the face of unexpected emergencies, or motivate them to use inputs provided through the scheme for other crops.

Addressing the challenges

First, we found that nearly all large-scale, long-standing outgrower schemes operate in cash crops, rather than staple crops, most likely because local markets are less robust for cash crops, which limits side selling opportunities. Such schemes use several common approaches, or best practices, to address the challenges of contracting smallholders, including:

• Employing organizational models that allow for high levels of farmer-company interaction to build trust and effectively transfer knowledge and skills;

• Securing buy-in and support from local authorities and community leaders;

• Leveraging NGO or other third-party support in program design and implementation, either at inception or when adding new program components;

• Providing training on good agricultural practices, directly or via third parties, typically leveraging lead farmer models; and

• Utilizing formal contracts with the following elements:

– Clear explanation of quality specifications;

– Expected volume based on the size of the farm and input package;

– Minimum guaranteed price or an indicative price based on quality grades; and

– List of pre-financed inputs with transparent pricing and payment deducted from crop purchase.

In addition to these widespread best practices, we also found that companies operating large schemes continue to explore new techniques to mitigate risks. Some of these include:

• Developing robust systems for collecting, tracking and analyzing program and farmer data and using this data to inform resource deployment and continuous improvement of the scheme;

• Employing a merit-based process for farmer selection and consulting community leaders and authorities;

• Creating farmer loyalty programs, including incrementally raising input package sizes or providing a bonus for farmers who fully repay their loans and deliver according to pre-agreed volumes, quality and timelines;

• Leveraging mobile solutions, including mobile payments and tracking crop deliveries;

• Leveraging NGO support to establish partnerships with local financial partners such as banks, microfinance institutions or local savings groups, in order to secure third-party input financing and structure risk-sharing mechanisms;

• Supplementing traditional agronomic training with training in personal finance and business management, as well as climate-smart agriculture;

• Deploying holistic outgrower finance, including incorporating savings programs, as well as weather, life or health insurance into input packages; and

• Intercropping staple crops to improve soil quality, farmer incomes and food security.

The long-standing and large-scale nature of these schemes illustrates the potential of contract farming to produce benefits for both companies and smallholder farmers. In Part 2, we’ll take a closer look at how outgrower schemes can be designed and managed to achieve mutual benefits for companies and farmers.

Given the strong potential of the contract farming model, TechnoServe and its partners are working to expand the reach of outgrower schemes and enhance their value to participants through the adoption of improved practices. In light of this objective, we are building a coalition of companies operating large-scale outgrower schemes that are interested in learning about, testing and adopting innovations in contract farming. For more information about this initiative, please contact us at A2F@tns.org.

Jane Abramovich leads TechnoServe’s Access to Finance practice group, where she supports development of sustainable financing solutions. Samantha Krause works with TechnoServe’s Strategic Initiatives group, where she supports corporate partners in developing sustainability strategies.

Categories
Agriculture, Education
Tags
agribusiness, farmers, financial inclusion, skill development, smallholder farmers, SME finance