CONTRACT FARMING MODEL OF
FINANCING SMALLHOLDER FARMERS IN SOUTH AFRICA:
THE CASE OF THE IDC-KAT RIVER
CITRUS DEVELOPMENT SCHEME
KWEKU YEBOAH KORANTENG
Research report presented in partial fulfilment
of the requirements for the degree of
Master in Development Finance
at the University of Stellenbosch
Supervisor: Prof. Meshach Aziakpono
Degree of confidentiality: A
December 2010
ii
Declaration
By submitting this research report electronically, I, Kweku Yeboah Koranteng, declare that the
entirety of the work contained therein is my own, original work, that I am the owner of the copyright
thereof (unless to the extent explicitly otherwise stated) and that I have not previously in its entirety
or in part submitted it for obtaining any qualification.
K. Y. Koranteng
October 2010
Copyright © 2010 Stellenbosch University
All rights reserved
iii
Acknowledgements
There is an Akan proverb that says, “Obi a n’akyi apae no, ɛnyɛ ɔno ara na ɔpam”, someone
whose back is broken, it is not he himself that mends it. I will not have been able to overcome this
challenge without the support of my family, friends and colleagues.
I will like to dedicate this thesis to my parents Isaac Koranteng and Florence Koranteng who have
been an inspiration in the way they have lived their lives and the good example they have set for
me to follow. I also thank my sisters, Napanin and Akosutiwaa, for their continued support – you
are my sunshine.
To all my friends who constantly asked, “how is your thesis going?” even when I did not want to
hear that question anymore, a big thank you to you all. Your concern fuelled my late night efforts
as I needed to give you a good progress report.
To my colleagues at IDC, thank you for the support and allowing me the time to be able to
complete my studies. To all my colleagues that thought me all that I know now, thanks for sharing
your knowledge. I promise that the knowledge shared will be put to good use.
To all the managers, mentors, farmers, extension workers on the Kat River Scheme, thank you for
opening up to me and answering my questions. I admire your passion and dedication to the
project.
To Meshach Aziakpono, my supervisor, thank you for helping me to write this paper. I hope we can
do more good work going forward.
Lastly, thank you to God, who has brought me this far and whose wisdom, strength and protection I
cannot live without.
iv
Abstract
The constraints that impede the growth of smallholder farmers have been attributed to lack of
access to markets and technical expertise. This has led to mainstream banks classifying
smallholder farmers as high risk and therefore unwilling to finance smallholder farmers. Contract
farming has developed as a model that may be able to link smallholder farmers with
agribusinesses who have the expertise and have built marketing channels that can be utilised by
the smallholder farmers. Despite its potential to bring smallholder farmers into the mainstream
agriculture industry, literature on contract farming has indicated that contract farming can be
skewed in favour of the agribusiness due to their superior bargaining power and information
asymmetry in favour of the agribusiness.
This study examines the Industrial Development Corporation (IDC)’s Kat River Development
Scheme to finance nine farmers through a contract farming arrangement with Riverside (Pty) Ltd.
More particularly, the study examines how this financing model contributes to improved access to
finance, markets and technical expertise for the farmers. It also examines how the arrangement
contributes to reducing the risk of financing smallholder farmers for IDC.
The empirical analysis indicates that, despite the fact that the farmers are able to obtain access to
finance, market and technical expertise, the ability for the scheme to meet its objectives in the long
term is dependent on improving transparency between the agribusiness and the farmers, providing
appropriate incentives for the farmers to apply the required effort and the farmers buying into the
long term strategic aim (or “big picture”) of the scheme.
Keywords:
smallholder farmers
contract farming
agribusiness
agriculture finance
information asymmetry
v
Table of Contents
Declaration
ii
Acknowledgements
iii
Abstract
iv
List of tables
viii
List of figures
ix
List of acronyms and abbreviations
x
CHAPTER 1 INTRODUCTION AND BACKGROUND
1
1.1
CONTEXT OF RESEARCH
1
1.2
THE OBJECTIVE OF THE RESEARCH
3
1.3
MOTIVATION FOR THE STUDY
3
1.4
ORGANISATION OF THE STUDY
4
CHAPTER 2 SMALLHOLDER FARMERS AND CONTRACT FARMING IN PERSPECTIVE
6
2.1
INTRODUCTION
6
2.2
SMALLHOLDER FARMERS IN PERSPECTIVE
6
2.2.1
Challenges of smallholder farmers
7
2.2.1.1 Marketing and technical constraints
8
2.2.1.2 Financial constraints
9
2.3
CONTRACT FARMING IN PERSPECTIVE
9
2.3.1
Definition and historical development of contract farming
9
2.3.2
Risk mitigation of contract farming
10
2.3.3
Types of contract farming and its application
11
2.3.4
Advantages and disadvantages of contract farming
12
2.4
CONCLUSION
14
CHAPTER 3 OVERVIEW
15
3.1
INTRODUCTION
15
3.2
AGRICULTURE IN SOUTH AFRICA
15
3.3
SOUTH AFRICA AGRICULTURE AND ITS APARTHEID HISTORY
17
3.4
LAND REFORM IN SOUTH AFRICA
18
3.5
SUPPORT PROGRAMMES
19
vi
3.6
THE INDUSTRIAL DEVELOPMENT CORPORATION
21
3.7
CONTRACT FARMING FINANCING IN IDC
23
3.7.1
Wholesale facility
24
3.7.2
Medium to long term financing facility
26
3.7.2.1 Special purpose vehicles (SPV)
26
3.7.2.2 Direct funding to farmers
27
3.8
IDC KAT RIVER CITRUS FARMERS DEVELOPMENT SCHEME
28
3.8.1
Financing mechanism for farmers
33
3.8.2
Technical mechanism for farmers
34
3.8.3
Marketing mechanism for farmers
34
3.9
CONCLUSION
34
CHAPTER 4 METHODOLOGY
36
4.1
INTRODUCTION
36
4.2
THE SUITABILITY OF THIS CASE TO THE RESEARCH
36
4.3
RESEARCH DESIGN
37
4.4
DATA COLLECTION
37
4.5
DATA ANALYSIS
39
4.6
CONCLUSION
40
CHAPTER 5 EMPIRICAL ANALYSIS
41
5.1
INTRODUCTION
41
5.2
BACKGROUND OF FARMERS
41
5.3
MARKETING ASSISTANCE
42
5.4
TECHNICAL ASSISTANCE
44
5.5
FINANCIAL ASSISTANCE
45
5.6
GENERAL DEALINGS WITH IDC AND RIVERSIDE
47
5.7
CONCLUSION
49
CHAPTER 6 RECOMMENDATIONS AND CONCLUSION
51
6.1
INTRODUCTION
51
6.2
THE KEY ELEMENTS THAT ARE NEEDED FOR THE MECHANISM TO IMPROVE
REPAYABILITY
51
ASSESSMENT OF RIVERSIDE ROLE IN THE KAT RIVER SCHEME
53
6.3
vii
6.4
ASSESSMENT OF THE ROLE OF THE FARMER IN THE KAT RIVER SCHEME
53
6.4.1
Understanding the “big picture”
54
6.4.2
Transparency
55
6.4.3
Appropriate incentives for farmers
56
6.4.4
Empowered to take ownership of their operations
57
6.4.5
Limitation of this study and area for further study
58
LIST OF SOURCES
59
Annexure A
66
viii
List of tables
Table 3.1
: IDC financial performance
Table 3.2
: Food beverage and agro processing business unit (FBA)
performance
21
21
Table 3.3
: IDC business unit and mandate
23
Table 3.4
: History of farms
30
Table 3.5
: Funding
31
Table 5.1
: Common themes in interview
49
ix
List of figures
Figure 3.1 : Percentage share of gross value of production in South Africa
16
Figure 3.2 : Service and facilities availability to farming operation that need
between former RSA and former homelands
17
Figure 3.3 : Debt Equity structure for SPV
27
Figure 3.4 : Kat River Scheme: Financing Structure
32
Figure 6.1 : Maximisation of Return
52
x
List of acronyms and abbreviations
CDE
Centre for Development and Enterprise
CASP
Comprehensive Agriculture Support Programme
CGAP
Consultative Group to Assist the Poor
DOA
Department of Agriculture (currently Department of Agriculture Forestry and
Fisheries)
DBSA
Development Bank of South Africa
DAFF
Department of Agriculture, Forestry and Fisheries
FSP
Farmers Support Programme
FOB
Free on Board
IDC
Industrial Development Corporation
MAFISA
Micro Agriculture Finance Institution of South Africa
MGK
Magaliesbergse Graankoöperasie
NAMC
National Agriculture Marketing Council
OVK
Oos Vrystaat Kaap Operation Limited
SACCOs
Saving and Credit Cooperatives
StatsSA
Statistics South Africa
SPV
Special Purpose Vehicle
TNC
Transnational Companies
UN
United Nations
UNCTAD
United Nation Conference on Trade and Development
1
CHAPTER 1
INTRODUCTION AND BACKGROUND
1.1
CONTEXT OF RESEARCH
Agriculture is widely seen as an important factor in the alleviation of poverty in Africa. This can be
clearly seen in the importance that many African economies place on improving agriculture
production. According to the World Investment Report (UNCTAD, 2009), there are certain
developing countries that have arable land and water, but are unable to become self-sufficient in
food production due to the underutilisation of the arable and low productivity. The 2008 food crisis
experience has highlighted the importance of Agriculture and the need for more investment in
agriculture to improve productivity
According to the UN population statistics, 61 percent of Africa population is in the rural areas (UN,
2007). Although declining, 57 per cent of income in rural areas is from farming; therefore ‘increase
in agriculture productivity can play an important role in relieving poverty (Llanto, 2006).
The
importance of smallholder farming in Africa is the fact that 95 per cent of the agriculture is
smallholding farming (Seymour, 2010).
In South-Africa, 40 per cent of the population live in the rural areas with 60 per cent in the former
homelands. According to the Department of Agriculture, Fisheries and Forestry, agriculture remain
the most “palpable means of production that is immediately available to people in the former
homelands” (DAFF, 2010)
The South African agriculture scene has been characterised by deep inequalities along racial lines
due to past discriminatory policies that favoured the white minority over the black majority, leaving
the black population mainly in the homeland and outside the economic mainstream activities. Since
1994, the government has pursued redistributive land reform policies to correct the past
imbalances. With lack of access to finance, access to markets and technical expertise, most of the
redistributed land has been unproductive and not achieved their full potential prompting the
director-general of the department of land affairs to state that 50 per cent of the government land
reform projects have failed to make their beneficiaries better off. Beneficiaries, mainly smallholder
farmers have not been able to unlock the income potential of land transferred to them (Centre for
Development and Enterprises, 2008).
In addition, the face of agriculture and the food retail industry has been changing over the past
three decades, resulting in major growth and consolidation in the agriculture industry. A
combination of the growth in supermarkets, a more sophisticated consumer demanding a greater
2
variety of valued added products that requires more processing and complex distribution systems
and high sanitary and health requirements for exporting has led to high capital cost requirement in
the agriculture and food retail industry. Smallholder farmers are constrained by the lack of the
required technical and market expertise, especially in developing countries, leaving them unable to
obtain the potential gains that can be realised from entry into more sophisticated markets. The
challenge for smallholder farmers is therefore, to be able to access capital to fund it investment to
increase productivity and obtain the adequate technical expertise to produce at the market required
quality and specifications. The challenges noted, specifically relating to access to markets and
technical expertise, has a negative effect on the financial sustainability of smallholder farmers. Due
to this, mainstream funders are reluctant to fund smallholder farmers fearing that their funds may
not be recoverable. This has led to a market failure relating to funding of smallholder farmers. The
challenge for funders is to find mechanisms that can guarantee access to markets and technical
expertise for smallholder farmers.
Agribusinesses in the normal course of their business have intimate knowledge of these markets
and generally have the necessary technical expertise, research capacity and production expertise
to access the sophisticated markets. They also have the capital to establish processing capacity
for further value addition to meet the changing taste of consumers. Agribusinesses have the option
of securing their raw material through the open market, vertical integration and contractual
relations. Due to consumers becoming more demanding and requiring better quality, niche
varieties and consistency of supply; agribusinesses are moving away from sourcing from open
market where the quality and consistency of supply is not guaranteed (Minot, 1986).
Contract farming is a form of vertical integration that lies between spot market purchases and
production at own land. The Agribusiness is able to specify by contract, the quality, quantity and
variety required, guaranteeing its supply for its pre-determined markets with the advantage that it
does not have to invest in the land and is freed from the logistics of managing farm labourers. The
agribusiness can then provide the technical expertise and inputs to ensure that the farmer
produces to the required quality and specifications (Echanove & Steffen, 2005; Sartorius, 2003). A
contract farming partnership between smallholder farmers and agribusiness is a mechanism that
can allow smallholder farmers to gain access to high value markets and also obtain the required
expertise and technical input to produce for these markets. In the South African context, a
partnership between smallholder farmers and agribusinesses is essential as the beneficiaries of
land reform generally lack the technical expertise and marketing channels to be sustainable.
IDC has partnered with an agribusiness, Riverside (Pty) Ltd (“Riverside”) to fund nine smallholder
citrus farmers in the Kat River Scheme in Fort-Beaufort Eastern-Cape. The funding is through a
3
contract farming arrangement where Riverside is the agribusiness that administers the funds on
behalf of IDC and also provide technical and marketing support to the farmers.
The objective of the funding is to deal with the market failure relating to funding of smallholder
farmers. By funding the smallholder farmers through a contract farming mechanism, it is hoped that
this will address the challenges of smallholder farmer relating to access to markets and access to
technical expertise thereby improving the recoverability of the loans from the farmers. It is also
hoped that with the monitoring role of the farmer transferred from IDC to the agribusiness that have
the capacity and technical knowledge, this mechanism will improve the monitoring of the funder
thereby reduce the information asymmetry relating to funding smallholder farmers.
1.2
THE OBJECTIVE OF THE RESEARCH
The purpose of the research is to examine the Kat River Scheme between IDC, Riverside and
smallholder farmers in the Kat River valley to assess, whether the arrangement achieves the
following objectives which IDC aims to achieve to aid the repayability of the debt:
•
Improved access to finance for smallholder farmers.
•
Improved access to markets and logistics facilities for smallholder farmers
•
Improve access to technical expertise for smallholder farmers.
The study will make recommendation on what other role IDC can play to facilitate the objectives as
set out above.
1.3
MOTIVATION FOR THE STUDY
Rosen (2003) cited in Duma (2007) notes that in general financial institutions view small firms
(smallholder farmers included) as high risk and small farmers generate high transaction costs and
low returns. In his assessment of contract farming in Zimbabwe, Duma (2007) notes that contract
farming help in addressing the constraints relating to market access but falls short in relation to
access to finance, revealing that only three out of ten agribusinesses surveyed assisted
smallholder farmers with finance.
According to Sartorius and Kirsten (2003) for agribusinesses, the transaction costs associated with
dealing with smallholder farmers are higher than for larger farmers. To facilitate linkages between
smallholder farmers and agribusinesses, a mechanism needs to be in place to compensate
4
agribusinesses for the incremental cost associated with dealing with smallholder farmers and
incentivise agribusinesses to take on smallholder farmers.
The IDC, with its mandate from government of increasing industrialisation and productivity in
agriculture, has taken on the responsibility of facilitating linkages between contract farmers and
agribusinesses for the improvement of productivity of smallholder farmers. The IDC’s wholesale
and medium to long term financing facility for smallholders has been setup to facilitate the linkage
between smallholder farmers and agribusinesses by providing funding and a structure that
compensate the agribusinesses for taking on smallholder farmers.
The wholesale and medium to long term funding facility provides a mechanism where IDC can fund
smallholder farmers by partnering them with agribusinesses that provide a monitoring and
technical mentoring service to the farmers. The agribusiness provides the farmer a channel to
market its products. Apart from providing access to finance for smallholder farmers, linking the
agribusiness with the smallholder farmer is aimed at improving the smallholder farmer technical
expertise, productivity and access to markets.
Despite its potential to bring smallholder farmers into the mainstream agriculture industry, literature
on contract farming has indicated that the contract farming can be skewed in favour of the
agribusiness due to their superior bargaining power and information asymmetry in favour of the
agribusiness. This has led to arrangements where the substance of the contract is such that the
farmer is an exploited employee.
The focus of the study will be on the challenges that smallholder farmers face regarding access to
finance; access to markets and access to technical expertise. Can contract farming arrangements
between smallholder farmers and agribusiness address these challenges and thereby address the
market failure in their funding? How can development financiers facilitate the relationship between
smallholder farmers and agribusiness to make it more effective in addressing the challenges faced
by smallholder farmers?
The aim is to develop a framework that will enhance the impact that the IDC can have on the
smallholder farmers and also showcase to other development financiers a mechanism that can be
used to fund emerging farmers.
1.4
ORGANISATION OF THE STUDY
The remainder of the report is organised as follows: Chapter 2 will assess the challenges
smallholder farmer face, present the theoretical framework and review the empirical literature on
5
contract farming. Chapter 3 will give the background of South African agriculture, the inequalities
associated with South African agriculture and policies aimed at addressing this inequality. It goes
on to present the role of IDC in SA economy and the Kat River Scheme funded by IDC. Chapter 4
describes the research methodology utilised for the study. Chapter 5 presents the empirical results
and Chapter 6 discusses the results, make recommendations and conclude the studies with
recommendations and suggestion for areas for further studies.
6
CHAPTER 2
SMALLHOLDER FARMERS AND CONTRACT FARMING IN
PERSPECTIVE
2.1
INTRODUCTION
This chapter will elaborate on the dynamics of smallholder farmers that translates to the challenges
facing smallholder farmers in relation to access to markets, technical expertise and finance. The
chapter will go on to review the various support programmes that aim to address the challenges of
smallholder farmers and the reason for their limited success.
The chapter will then review the literature in relation to contract farming assessing the various
contract farming models and the advantages and disadvantages of contract farming. The chapter
will put into perspective the challenges of smallholder farmers and how contract farming can
possibly address these challenges.
2.2
SMALLHOLDER FARMERS IN PERSPECTIVE
There are various terms used to refer to smallholder farmers in South Africa, including small
growers, emerging farmers, subsistence farmers, small scale farmers and resource poor farmers.
In general these terms are all used in reference to farmers that are not commercially sustainable in
contrast to commercial farmers (Boonzaaier, 2009). Due to the dualistic nature of the South African
agricultural sector and the smallholder sector being mainly subsistence, there are negative
perceptions associated with smallholder farmers.
In this study the classification of smallholder or emerging farmers does not necessarily mean that
the farmer is subsistence. It refers to the fact that the farming operation does not have a
combination of suitable farm size, technical expertise and marketing access to be commercially
viable over the long term.
Historically, the smallholder farmers in South Africa have been black and as indicated earlier, the
apartheid policies of the past repressed the commercial growth of black farmers. Smallholder
farmers emerged out of the apartheid era with major deficiencies compared to white farmers. The
land reform process in its quest to address the inequalities in agriculture has transferred some
productive land to black smallholder farmers who generally don’t have the required expertise and
have struggled to produce at the level of the previous owners. There is a need to address these
problems facing smallholder farmers but an understanding is required of the challenges facing
smallholder farmers before appropriate policies and programmes can be developed.
7
2.2.1
Challenges of smallholder farmers
Several authors, such as Makhura et al. (1996), Du Plessis et al. (2000) and Essa and Niewoudt
(2003) cited in Van Averbeke and Mohamed (2006), describe a successful smallholder farmer as
highly productive and able to participate in markets, earning sufficient cash income to enjoy a life
style free of poverty. This can also be used to describe the transition from subsistence to
commercialisation. Constraints faced by smallholder farmers that prevent them from achieving this
can generally be classified into marketing, technical and financial constraints.
2.2.1.1 Marketing and technical constraints
The growth of the supermarkets and food retail sector has changed the sourcing and procurement
practices of supermarkets and others in the food retails sector. Consumer preference and
demands as well as high health requirements have meant that supermarkets and agro-processing
companies have had to develop sophisticated logistical systems and have moved from wholesale
procurement to a system of purchasing from few preferred customers who can meet the stringent
health and quality demands as well as providing consistent supply. They also prefer suppliers who
have the technology and expertise to be able to adjust their product to consumers changing tastes
and needs (Louw, Jordaan, Ndanga & Kirsten, 2008). The supermarkets generally want to deal
with a few suppliers or importer with whom they arrange supply programmes to supply them with a
wide basket range of produce consistently throughout the year at high volumes. Supermarkets also
require produce to be packaged by their suppliers.
To meet the demands of the supermarkets and food retailer, farmers require high level of expertise
to meet the high quality health and safety standards. They also need capital to invest in
infrastructure, technology and research to meet the consistency of supply required by
supermarkets and also to adapt to the changes required by consumers. Due to the past policies
and lack of appropriate support structure for beneficiaries of redistributed and restituted land,
smallholder farmers in South Africa lack the expertise and the capital required to meet these
demands.
Using research done on the South African fresh produce market in KwaZulu-Natal, Eastern Cape
and the Western Cape, De Wet (2004) cited in Boonzaaier (2009: 44), noted that there is
“significant difference in quality and yield distribution of small scale emerging farmers compared to
commercial farmers with most of the harvested produce of emerging farmers only of processing
grade and local markets”. The study attributes the difference to lack of knowledge, skills,
experience, equipment, infrastructure and other factors. The technical gap between commercial
and smallholder farmers prevent smallholder farmers from gaining the high returns that can be
obtained from exporting or the high end of the market.
8
The size of smallholder farmer may also present a constraint due to two main reasons. Firstly,
supermarkets and other big retailers prefer to deal with large producers. This help decrease the
transaction cost associated with dealing with many small producers. Secondly, certain products
require large scale production to take advantage of the economies of scale and to run efficiently
(Marcoul & Veyssiere, 2008).
2.2.1.2 Financial constraints
As noted earlier, access to the more sophisticated markets requires investment in infrastructure
needed to meet the stringent requirements of these markets. Capital is also required to finance the
normal farming operations. Access to formal finance by smallholder farmers is a constraint that has
been widely documented in the literature. The following has been noted as the reasons for the
constraints of access to credit by smallholder farmers:
•
Small loans have high transaction cost per unit associated with searching, screening,
monitoring and enforcement to reduce information asymmetry and moral hazard. This
discourages lenders to finance smallholder farmers. (Spio, 2002; Dorward, Poulton & Kydd,
2001; Fenwick & Lyne, 1998).
•
Insurance markets generally fail because of the high covariant risk associated with rural
markets and high cost of monitoring behaviour to protect against moral hazard and adverse
selection. Consequently, insurance markets in rural areas and specifically rural smallholder
agriculture are usually non-existent (Dorward et al., 2001).
•
To mitigate against information asymmetry, moral hazard and adverse selection and
compensate for default, financiers usually require collateral. Land is usually the most obvious
source of collateral but smallholders usually lack title of it or are risk adverse to mortgage the
land as they depend on it for their livelihoods (Pillarisetti & Mehrotra, 2009). Sub-Saharan
Africa smallholders lack collateral due to lack of freeholder rights to the land. In South Africa,
community owned land cannot be encumbered (Spio, 2002; Dorward et al., 2001).
•
Seasonal characteristics of agriculture lead to high demand for finance at the start of a
season, followed by several months without income when farmers may not be able to make
the principle and interest payment (Dorward et al., 2001). Added to this certain horticulture
crops such as citrus and avocadoes require a two to four year establishment period before
any fruits are harvested and even after that a slow yield build up before the optimal yields are
achieved in year seven to nine. This requires innovative financial instruments structured to
9
take into account the unique cash flow requirement of the farming operation which most
financial institutions do not offer.
•
Long bureaucratic application processes especially from government institutions means
credit is granted too late and not when needed for seasonal plantings (Spio, 2002).
•
The marketing and technical constraints that smallholder farmer’s face translates to an
unsustainable operation making smallholder highly susceptible to default.
The perceived high risk associated with agriculture finance and especially the finance of small
scale farmers lead to financial institutions avoiding the financing of smallholder farmers. With the
lack of credit from formal financial institution, informal institutions like saving and credit
cooperatives (SACCOs) have stepped in to fill this gap but these generally are only able to offer
small amount of loans with very short terms and extremely high interest rates (George, 2009).
2.3
CONTRACT FARMING IN PERSPECTIVE
As noted by the Department of Agriculture, Fishing and Forestry in the 2010 budget speech, joint
venture partnership between established agribusinesses, commercial farmers and smallholder
farmers will be a key element of its strategy to boost agriculture productivity for smallholder farmers
(DAFF, 2010). Contract farming model is a mechanism that can bring these players into
partnerships that could benefit all and boost productivity in smallholder farmers. This section will
examine the literature on contract farming, firstly from its historical beginnings to the practice as it
is currently being practiced. The chapter will explore the mechanism of contract farming and the
risks that it attempt to mitigate for the financier, agribusiness and farmer and examine the literature
relating to the advantages and disadvantages of contract farming.
2.3.1
Definition and historical development of contract farming
Minot (1986) defines contract farming as agriculture production carried out according to an
agreement between farmers and a buyer which places conditions on the production and marketing
of the commodity. Viewed from another perspective it is a way for the agent or agribusiness to
control production directly or indirectly without owning land.
The recent rise of contract farming is attributed to changes in food consumption habits of people in
developed countries leading to greater demand for a greater variety of value added products, on
demand and with consistency of supply. This requires a greater need for agribusinesses to have a
direct control over their inputs. This has led to a move away from open market sourcing of produce
by agribusinesses and supermarkets to various forms of vertical integration with contract farming
10
emerging as one of them. With agribusiness having to invest increasing levels of capital to add
value for the demands of people in the developing world, contract farming allows them to
guarantee and specify the quality and specifications and timing of their raw materials thereby
reducing the uncertainty with regards to supply of raw material without having to invest directly in
land and the farming operation (Echanove & Steffen, 2005; Rehber, 1998; Sartorius & Kirsten,
2002).
The use of contract in farming has been in existence for as long as commercial agriculture has
been practiced, with Eaton and Shepherd (2001) as cited in Duma (2007) dating it back to the
ancient Greeks where contract farming was a mechanism used for the payment for tithes, rents
and debts. Contract farming as it is know at present could be dated back to the late twentieth
century in Western Europe, North America and Japan where contract farming became an integral
part of the food and fibre industry (Duma, 2007).
According to the United Nation Conference on Trade and Development UNCTAD (2009), there has
been a move away from foreign ownership of land in the past two decades with Transnational
Companies (TNC’s) agribusinesses especially, moving away from cultivating their own plantations
into contract farming to source their produce. This is to avoid the political sensitivity associated with
ownership of land in certain developing economies and the challenges associated with dealing with
local labour. It also allows the agribusiness to focus more on the upstream activities where more
value creation lies.
2.3.2
Risk mitigation of contract farming
As noted earlier the sustainability of smallholder farmers are constrained by the lack of access to
markets and technical expertise leading to an inability to meet the high quality, logistical demand
and changing preferences of the more sophisticated markets. This translates to a high risk sector
for financiers. Also, the lack of collateral of smallholder farmers, lack of insurance markets for
smallholder farmers, high transaction cost associated with monitoring smallholder farmers, lead to
financiers not been able to mitigate against the adverse effect of information asymmetry and moral
hazard associated with smallholder farmers. Rosen (2003) cited in Duma (2007) notes that in
general financial institutions view small firms (smallholder farmers included) as high risk and
generate high transaction costs and low returns.
Contract farming has emerged as one of the innovative ways to fund smallholder farmers and has
been adopted by financiers, especially in the microfinance sector, as a mechanism that can
mitigate against the adverse effect of information asymmetry and moral hazard associated with
smallholder farmer. For financiers it also reduces the high risk associated with smallholder farmers
11
due to their lack of access to markets and technical expertise (Llanto, 2006; Pillarisetti & Mehrotra,
2009, CGAP, 2005). The basic principle behind contract farming, according to Roy (1972) as cited
in Echanove and Steffen (2005: 167) is an arrangement between direct producers or farmers and
anyone of a wide range of agents or agribusiness either; wholesalers; processors; retailers;
packers; producer organisation; public sector enterprises etc, through which various aspects of the
production and commercialisation of agriculture products are regulated.
Contract farming mitigates against the risk for financiers as it establishes linkages between
suppliers, financiers, output buyers, extension and technical service providers so that the financiers
can invest confident that the complementary services that the farmers need to make profits are
available (Poulton, Dorward, Jowett, Peacock & Urey, 2004).
2.3.3
Types of contract farming and its application
In analysing the different types of contract farming, new institutional economists classify contract
farming by the information asymmetry or market access barrier and the vertical coordination
mechanism it addresses. Mighell and Jones (1963) cited in Minot (1986), reduces the different
types of contract farming schemes into three broad categories, market specification contracts;
resource providing contracts and production management contract.
1.
Market specification contracts simply specify the product quality measures that will be
acceptable to the agribusiness. From the farmer perspective, they are guaranteed a buyer at
a specific price if the agribusinesses specifications are met.
2.
Resource providing contracts the agribusiness provides resources with managerial help and
supervision with limited income guarantee for producers. Resources may include farming
implements, seeds, fertiliser etc, the cost of which are deducted from the harvest income at
the end of the season.
3.
Production and managerial contract combine the market and resource providing contracts
(Rehber, 1998).
The spread of contract farming in developing countries is mainly in non-traditional crops that have
to meet certain stringent requirements in relation to quality standards, texture colour, and shape to
be allowed into certain markets and also in markets where the efficient timing of delivery of the
produce and freshness of the produce is important (Echanove & Steffen 2005). This is seen in the
fresh flower contract farming arrangement between farmers and agribusinesses in Kenya. Mangala
and Chengappa (2008) illustrate a case where agribusinesses establish backward linkages with
12
smallholder farmers. In this case Spencers, a leading food retailer procures in a contract farming
arrangement, its fresh fruits and vegetables from farmers in India with the main aim of ensuring a
continuous supply of fresh vegetable to its stores with increased control over the quality, supply
reliability and price stability. The same principles are illustrated in cocoa farming contracts in
Ghana (Caria, Teal & Zeitlin, 2009); wheat farming in Ethiopia (Wubalem & Fufa, 2007); tea
production in Vietnam (Saigenji & Zeller, 2009); soya, cotton, tobacco, sorghum production in
Zimbabwe (Duma, 2007), Sugar production in South Africa and Swaziland (Sartorius, 2003) and
many more.
2.3.4
Advantages and disadvantages of contract farming
The difficulty in assessing contract farming for its effectiveness of meeting the needs of the
agribusiness and farmers is in the fact that there are such large variations in the contracts and the
effect on producers could be as a result of many factors. As noted by Singh (2009), contract
farming arrangements are structured to take account of the different characteristics of the firms,
farmers, crops and socio-economic environment. The literature is varied and the analysis differs
depending on the problem area being investigated. Therefore in assessing contract farming and
developing a framework it is important to assess the context in which it is practiced.
The sentiments surrounding contract farming are as diverse as the different types of contract
farming that exist.
On the negative side Watts (1994) cited in Gina and Kevin (1995) illustrating from studies in North
America, Africa and Asia observes that the history of contracting is littered with incidents of
exploitation and manipulation by agribusinesses. The potential for exploitation arises out of the
unequal power relationship that steers the bargaining power towards the agribusiness. The
contract may effectively transfer control from the farmer to the agribusiness by allowing the
agribusiness to specify the types of varieties to be planted, the selection of seed, the use of certain
fertilisers or pesticides and the use of mechanisation or intensive labour
making the farmer
effectively a quasi-employee of the agribusiness (Kirsten & Sartorius, 2002). The unequal power
relationship also arises out of the monopsony power that favours the agribusiness due to the fact
that the farmer is restricted to a single buyer. In studying contract farming activities in India
Sivramkrishna and Jyotishi (2008) noted that, a single buyer is a necessary but not sufficient
condition for unequal bargaining power, a lack of alternative marketing opportunities for the farmer
is necessary to affirm the Monopsonistic advantage of the agribusiness. From lessons learnt from
contract farming schemes in Thailand, Sriboonchitta and Wiboonpongse (2008) noted that the
viability of contact farming depends on the satisfaction and the buy in of all parties involved. It is
13
important that the both the agribusiness and the farmers have a clear understanding of the
concept, their roles and responsibilities.
Rehber (1998) points out that the monopsony power enjoyed by the agribusiness lead to a contract
“negotiated between two unequal, economically powerful agro-business and rather weak farmer”.
This may result in the agribusiness “violating contract provision in his favour”. In addressing the
monopsony power that can arise, in the same study Glover, notes that the availability of
alternatives is one of the most important factors in ensuring an equitable contract.
Offering a more subdued view, Little (2000) in Sivramkrishna and Jyotishi (2008: 57) points out the
unequal power relations but goes on to suggest that contract farming should be assessed in light of
“realistic alternative option for increased production and incomes for smallholder farmer”. He
concludes that in assessing the equitability of a contract the focus should be on the “motives and
power relationships of contracting parties than on the generic institution”.
On the part of the farmers, there is a possibility of “side-selling” produce that has been contracted
as part of the contract farming arrangement with the agribusiness to other parties who are not part
of the contract. This happens if the farmer can obtain or perceive that he/she can obtain better
returns by selling to other parties who are not part of the contract (Caria et al., 2009). In instances
where a financier is funding a farmer through a contract farming arrangement, “side-selling” could
mean collusion between the farmer and the agribusiness against the financier.
In investigating contract farming Echanove and Steffen (2005) observed that despite the
disadvantages associated with contract farming for growers, they enter into contract farming
because they lack alternatives for financing, technical assistance and access to markets. Several
studies have indicated that contract farming is able to increase income for farmers compared to
non-contract farming. In South Africa a study in the Bonjala district revealed that contract farming
has contributed to the upgrade of skills of smallholder farmers (Anim, Raphala & Mandleni, 2008).
Saigenji and Zeller (2009), in their study of the effect of contract farming on productivity and
income of smallholder farmers in Vietnam noted that contract farming achieved a higher technical
efficiency compared to non-contract farming. In their study of farming in the Tumkur District of
Karnataka State, India, Kumar and Kumar (2008) observed that total income for contract farmers is
almost double that of non-contract farmers. Observing rice yields between contract and noncontract farmers in India, Sharma (2008) observed that rice yields for contract farmers are 23 per
cent higher than for non-contract farmers, this was mainly attributed to better quality of seeds,
appropriate crop management practices and close monitoring of the crop at all stages.
14
A key debate surrounding the effectiveness of contract farming is whether it allows the farmer to
move from his/her small scale operation to commercial farming. It is difficult to assess the
mechanisms that have to be in place to facilitate this transition. With contract farming having the
potential to increase farming income and also with the transfer of technical skills to the farmer,
commercialisation as measured by long term sustainability of the farmer is more likely for contract
farmers than non-contract farmers. A key factor to consider is not just a transfer of technical skills
but improvement of management and business skills of the farmer with` the perspective that the
farming operation is viewed as business (Duma, 2007).
The general consensus among the literature assessing contract farming is that it is not the contract
farming mechanism itself that can be harmful but the how it is practiced in a particular context. An
assessment of any contract farming scheme should consider the context in which it is practiced by
examining the various actors, the relationship between the actors and the factors in the
environment which will influence the outcome of the scheme.
2.4
CONCLUSION
The chapter has indicated the potential for contract farming to address the challenges faced by
smallholder farmers. The unequal power relations noted between smallholder farmers and
agribusinesses can impede the effectiveness of contract farming arrangements. There has to be
systems in place to mitigate against the potential for abuse of power on the part of the agribusiness
and also negative actions on the part of farmers.
The study will go on to analyse the contract farming system of the Kat River scheme and assess
how the scheme addresses the potential adverse effect noted in literature.
15
CHAPTER 3
OVERVIEW
3.1
INTRODUCTION
This chapter will outline the agriculture economy in South Africa. It will go on to document the
apartheid history and its contribution to the inequality in agriculture of South Africa. It will also detail
the attempts by the post apartheid government at redistribution through the land reform process.
The second part of the chapter describes IDC role in the economy and outlines its operational
structure. It will expand on the activities of the Food, Beverage and Agro-Industries, its activities in
the agriculture landscape of South Africa and it strategy to support emerging smallholder farmers
through contract farming. The chapter then describes the operation of Riverside (Pty) Ltd, the
details of the arrangement between IDC, Riverside (Pty) Ltd, and the emerging farmers in the Kat
River Valley and how it aims to address the constraints facing smallholder farmers through contract
farming.
3.2
AGRICULTURE IN SOUTH AFRICA
Compared to the rest of the continent, South African agriculture industry is more developed with
sub-sectors like citrus, grape and grains at an advance stage of maturity and producing for export
to the rest of the continent and Europe. As noted in Figure 3.1, the production share is made up of
23 per cent horticulture, 33 per cent field crops and 44 per cent in animal production. In 2009
agriculture contributed 2.7 per cent to the GDP of South Africa but contributed 7 per cent to the
employment numbers indicating its importance in contributing to employment (Department of
Agriculture, Fishing and Forestry (DAFF), 2009).
Agriculture in South Africa faces environmental constraints such as us unreliable rainfall and
drought. Although 80 per cent of the country’s surface area is used for agriculture only 15 per cent
is arable (Nel & Davies, year unknown). Despite these challenges, commercial farmers have
developed technical and marketing expertise in produce such as maize, wheat, deciduous and
subtropical fruit, sugar cane, vegetable, poultry, sheep, goat and cattle, making South Africa
agriculture competitive in the export market.
16
Figure 3.1: Percentage share of gross value of production in South Africa
Source: DAFF, 2009.
The South African agriculture sector is often described as dualistic consisting of large scale,
industrialised and commercial sector mostly controlled by the white population with the black
population mostly involved in smallholder subsistence farming (Boonzaaier, 2009). The dualism in
the agriculture is also replicated when assessing agriculture between the former homelands and
the former South Africa regions. This can be seen in a survey by Statistics South Africa in 2002,
which showed that of the estimated turnover of R1 198 152 million generated from agriculture
during 2002, 99 per cent is generated from former South Africa regions and about 1 per cent in the
former homelands. In relation to services and facilities that are needed for production in the two
regions, the survey indicated that availability to facilities and services in the former South Africa far
exceeded the availability of the facilities and services in the former homelands as noted in Figure
3.2 (StatsSA, 2002). Although the commercial farming sector and the subsistence sector are
estimated to employ the same number of people, the area cultivated by the commercial sector
cover about six times that of the land under the subsistence sector (DBSA, cited in Spio, 2002).
The polarisation and resource imbalance of the agriculture sector along racial lines exposes it to
political pressure that has dominated the sector since 1994.
17
Figure 3.2: Service and facilities availability to farming operation that need between former
RSA and former homelands
Source: StatsSA, 2002.
3.3
SOUTH AFRICA AGRICULTURE AND ITS APARTHEID HISTORY
In an attempt to understand the reasons for the current inequality and the motives for current
reforms in the agriculture sector in South Africa it is important to understand the apartheid history
of South African agriculture.
Like other aspect of South African history, the apartheid history of agriculture is dominated by the
segregation between whites and blacks. The main aim of the segregation was to restrict black
farmers from partaking in large-scale commercial agriculture in order to serve as labour for the
growth of the industrial and mining sector in South Africa (Boonzaaier, 2009).
Legislation such as the 1913 and 1936 Land Acts, the 1937 Agriculture Marketing Act, the 1939
Agriculture Co-operatives Act, and the 1970 Act on the sub-division of agricultural land act together
with support structures such as controlled marketing to reduce market risk, state run extension
services and agriculture credit all contributed to creating an enabling environment for white
commercial farming to thrive (Van Rooyen & Nene, 1995).
In contrast to their white counterparts, black farmers were faced with challenges relating to
insecure and fragmented land rights, communal tenure arrangements, non-viable and small farm
18
units, over stocking and the deterioration of land as well as lack of support structures,
infrastructure, water supplies, transportation networks, financial support, extension and research
services ((Van Rooyen & Nene, 1995: 45).
The agriculture landscape and discrimination became increasingly unsustainable as by the 1980’s
90 per cent of the agriculture land supported about 5.3 million people, while the remaining
agriculture land in the then homelands supported 13 million people (Van Zyl & Thirtle, 2000 cited in
Boonzaaier, 2009).
According to a World Bank study in 1994 homeland farmers faced challenges relating to poor soils,
high level of diseases and pests, low and unreliable rainfall, serious soil erosion and other natural
problems (World Bank, 1994 cited in Spio, 2002).
The effect of the segregation has been that black farmers estimated at 1.2 million, were confined to
the former homelands farming on 17 million hectares, which constitutes 13 per cent of the total
land of which 11 per cent is arable and white farmers consisting of 55 000 farmers farmed on 102
million hectares of which 15.6 per cent is arable (Van Rooyen & Nene, 1995).
3.4
LAND REFORM IN SOUTH AFRICA
In 1994, the end of apartheid came with the realisation that the agriculture economy was highly
polarised along racial lines with black farmers at a disadvantage as they were generations behind
in terms of technology, skills and access to markets.
In an attempt to rectify these imbalances drawn along racial lines, the post apartheid government
enacted policies and reforms for land redistribution and restitution. In addition, the rural
development strategy which aims to alleviate poverty and to correct the high income inequality in
South Africa sees growth in the agriculture sector and land reform as a critical component for
poverty alleviation.
The land reform programme was launched in 1994 by the then Department of Land Affairs. The
land reform is implemented through three main programmes, land redistribution, land restitution
and land tenure reform. Land redistribution involve providing the poor with land to improve their
livelihoods; land restitution involves restoring land to people disposed in the past by racially
discriminatory legislation; land tenure reform is aimed at ensuring security for different forms of
land occupation, which enables individuals or group to earn the benefit of their property and enjoy
recognition and protection, without the fear of arbitrary action by the state or land owners.
19
These 3 programmes together with support programmes in the form of the Comprehensive
Agriculture Support Programme (CASP) and the Land Redistribution for Agriculture Development
(LRAD) have set lofty target of transferring 30 per cent of South Africa agriculture land to black
South African citizens by 2014 (Hall, 2009).
But the process has been riddled with problems. As at 2009, only five per cent of agriculture land
has been transferred under the land redistribution programme (Du Plessis et al., 2009).
Government officials have blamed the lack of progress on high land prices, lack of willing sellers
and budget constraints. Farmers blame the slow progress on lack of capacity and experience staff
in the Department of Land Affairs. 49 per cent of the land transferred to black farmers is not been
used productively. Due to lack of skills, financial resources and conflict, beneficiaries of land
restitution and redistribution programme are not able to maintain the previous level of productivity
on the redistributed and restituted farms (Centre for Development and Enterprise (CDE), 2008).
Although 90 per cent of validated land claims have been settled, the land restitution process has
been slowed down by the long bureaucratic process and false claims which have led to uncertainty
among white farmers whose farms are under claim or potentially up for claim (CDE, 2008). The
uncertainty has led to a slowdown in the investment and expansion on these farms.
Despite its good intention the land reform has had many critics blaming it for the declining
productivity in the agriculture sector.
3.5
SUPPORT PROGRAMMES
As noted above, support for the agriculture industry in South Africa was initially limited to promoting
the white commercial agriculture sector. Due to the high population density in the homelands and
lack of sufficient arable land the situation in the homelands were not sustainable. To boost
agriculture production in the former homelands with the aim of establishing self-sustaining,
homelands the government started introducing agriculture programmes as part of the agriculture
development approach for homeland areas, advocated by the Tomlinson Commission in 1995.
Large farming projects were established that were centrally managed. These were primarily aimed
at providing physical structures with little emphasis on infrastructural, institutional support. The
projects were designed using a top down approach with little consideration of the constraints and
capacity of the beneficiaries and their communities (Van Rooyen & Nene, 1995; Van Rooyen &
Botha, 1998). In the 1970’s and 1980’s, the farming projects approach was adjusted to a
settlement approach where selected persons were settled on the established farms all under the
control of a central project management team. This approach failed to produce self-reliant farming
businesses and the centrally managed approach led to a mentality by the farmers of not accepting
20
ownership and accountability for their failures. This together with lack of enforcement of debt
meant lack of incentive to repay loans by farmers leading to high debt default (Van Rooyen &
Nene, 1995).
With the establishment of the Development Bank of Southern Africa (DBSA) in 1982, the
improvement of access to support services was identified as a key element in boosting agriculture
in rural areas. With this in mind the farmer support programme (FSP) was established by DBSA in
1984. Directed at a broad range of independent farm producers and smallholders, the FSP aimed
to provide access to support mechanisms in the form of extension, training, research, inputs,
financial services, mechanisation and marketing services. (van Rooyen & Botha, 1998). The FSP
showed signs of a positive impact on agriculture production but was constrained by lack of capacity
and lack of credibility and legitimacy of the support institutions in the homelands in the late 1980s
and early 1990s
Currently, the main agriculture programme is the Comprehensive Agriculture Support Programme
(CASP) programme and its funding arm Micro Agriculture Finance Institution of South Africa
(MAFISA). Launched in 2004 and allocated R750 million, the programmes aim is to provide
support and financial services to farmers as part of the land reform process.
The progress of these programmes have been hampered by bureaucratic procurement process
and lack of coordination between the land reform process and the support programmes, leading to
delays in beneficiaries accessing support and financial assistance. A review of the programme by
the Department of Agriculture, noted that support offered by CASP has not been comprehensive
enough both in terms of reach and the types of support provided. A recent review by the
Department of Agriculture revealed that in most regions support in the form of technical advice,
training, marketing, production inputs had been missing from the CASP programme (DOA 2007
cited in Hall, 2009).
The South African agriculture history is full of initiatives to boost agriculture through support and
access to credit. These initiatives have mostly failed due to being underfunded; lack of capacity in
implementation agencies; lack of adequate technical support and extension services; limited reach;
lack of clear strategy to boost access to markets; a top down approach without considering the
unique characteristics and challenges of participants. In designing support programmes for
agriculture, innovative ways need to be sought to address these challenges. This could be in the
form of greater stakeholder consultation and designing programmes to address the unique
challenges of the participants. More involvement is needed of the private sector, existing
commercial farmers and agribusiness to aid access to technical support and access to markets by
21
emerging and smallholder farmer. This will also aid the capacity constraint faced by
implementation agencies of agriculture support programmes. The private sector, existing
commercial farmers and agribusiness involvement could be fostered by incentivising their
participation through compensation or appealing to their commercial needs as the emerging and
smallholder farmers could be a market for their products and the produce of emerging and
smallholder farmers can be a source for the marketing channels of the agribusiness.
3.6
THE INDUSTRIAL DEVELOPMENT CORPORATION
The IDC was established in 1940 as a development finance institution to drive industrialisation in
South Africa. It is state-owned under the Department of Trade and Industry but funded through its
own operations. Its functions have evolved over the years to take into consideration the challenges
facing post apartheid South Africa but its vision primarily remain, to promote commercially
sustainable industry development in South Africa and the rest of the African continent through its
financing activities (Nieman & Nieuwenhuizen, 2009).
Table 3.1: IDC financial performance
Profit for the year (R'm)
Funding approved (R'm)
Jobs created and saved
2009
5 621
10 800
29 200
2008
3 951
8 500
35 500
2007
4 345
5 900
36 900
2006
753
4 200
26 000
2005
1 186
3 700
16 700
Source: Industrial Development Corporation (IDC) Annual Reports, 2005-2009.
IDC is one of the few state owned enterprises in South Africa that has remained self funded and
sustainable from its own operations without financial support from government (DTI 2009). Table
3.1 indicate that in 2009, IDC financed enterprises to the tune of R10.8 billion and created and
saved 29 200 new jobs. It reported a profit of R 5 621 Million in 2009, an increase of 58 per cent
from the profit of the prior year and has an asset base of R73 377 Million (IDC, 2009). Approvals
for the period 2005 to 2009 totalled R33 billion creating and saving 144 300 jobs. IDC’s major
investments include Sasol Limited Group and FOSKOR (Pty) Ltd.
Table 3.2: Food beverage and agro processing business unit (FBA) performance
Funding approved (R'm)
Jobs created
2009
390
2334
2008
700
4600
2007
380
4000
2006
245
5600
2005
158
2600
Source: Industrial Development Corporation (IDC) Annual Reports, 2005-2009.
22
IDC operations are classified into strategic business units based on industrial sectors. Table 3.3
illustrates the mandate of each business unit. The wholesale facility and term finance aimed at
emerging smallholder farmers was initiated by the Food, Beverage and Agro Industries division
(FBA). The FBA funding is mainly in the horticulture primary agriculture sector; food processing
sector; agro industries rural development and job creation. Its major investments include Karsten
Group holdings (Pty) Ltd a diversified agriculture and exporting company; Eastern Produce Malawi
(Pty) Ltd which produces and processes tea and macadamia nuts in Malawi; Amajuba Berry
Project, a 60 ha raspberries project in Charlestown, Kwazulu-Natal and Bethlehem Farmer Trust, a
110 ha apple orchard in Bethlehem, Free State. As at February 2009, FBA had a R1.5 billion
exposure with 70 per cent in primary agriculture. The exposure is spread across all nine provinces
with 19 per cent of the exposure outside South Africa. As indicated in Table 3.2, FBA has approved
funding of R1.8 billion from 2005 to 2009 creating approximately 19 000 jobs over that period.
23
Table 3.3: IDC business units and mandate
Source: IDC Annual Report, 2007.
3.7
CONTRACT FARMING FINANCING IN IDC
As part of its aim to address the market failure relating to access to finance and help boost
agriculture production in South Africa, IDC FBA department formulated a strategy to facilitate
access to finance for emerging smallholders farmers in 2005. IDC assessed that the most
24
appropriate solution to address the challenges facing smallholder and emerging farmers is a
strategy that provides for affordable finance, training, access to technology and access to
marketing and logistical support. The focus of the strategy is on areas where agriculture output is
not fully maximised, particularly in rural areas, restituted land and communal owned farms.
The strategy aims to develop partnership arrangement between smallholder black farmers and
existing agribusinesses facilitated and financed by IDC. The aim is to facilitate access to markets,
access to technical expertise and access to finance to smallholder farmers. This is done through a
risk sharing financing mechanism between the IDC, the smallholder farmers and existing
agribusinesses.
There are two financing mechanism employed in this strategy. They are the wholesale facility and
the medium to long term financing facility (IDC, 2005).
3.7.1
Wholesale facility
The wholesale facility is mainly used to finance short term cash crops like maize, sorghum and
wheat, which do not require more than one season after first planting before the farmer can
harvest. Farmers are partnered with agribusinesses with operation in close proximity with the
farmer. Agribusinesses are approached by IDC based on the strength of their balance sheets to
absorb potential losses; mentoring capabilities; the effectiveness of its marketing and logistics
structures and its expertise in farming. To assess whether the agribusiness has the capacity, a due
diligence is performed of the agribusiness which involves a detailed study of its operations, site
visits and budget analysis.
At the beginning of each planting season prospective farmers apply to the agribusiness for funding.
The agribusiness determines whether a farmer meets certain broad criteria e.g. confirming that a
farmer has access to appropriate farming land and fulfilling conditions relating to the National
Credit Act. If successful the agribusiness will contract with the farmer to provide finance, mentoring
and marketing services to the farmer. The mentoring and marketing services will be provided to the
farmer at no cost to the farmer.
At the beginning of the planting season the agribusiness determines the funding requirement of all
the farmers under its supervision. Funding for the season is sort from IDC. If approved a loan is
made by IDC to the agribusiness who then lends it to the farmers. Typically, IDC will charge the
agribusiness a concessionary interest rate below prime, and the agribusiness will add a margin to
IDC’s interest rate before lending it to the emerging farmer. The margin has to be approved by the
25
IDC as part of the funding conditions and it compensate the agribusiness for the mentoring and
marketing services provided.
As part of the funding conditions, the agribusiness is responsible for administering the loan to the
farmers and recovering the loans as well as providing the required mentorship and technical
expertise to the farmers.
Request for finance is made by the farmer to the agribusiness against written request by the farmer
and co-signed by the farmer’s mentor who is provided by the agribusiness. Only wages and cash
related expenses are advanced directly to the farmer. Services and supplies are settled directly
with suppliers.
Also as part of the funding conditions the agribusiness is responsible for marketing the produce on
behalf of the farmer through its marketing channels after harvest. The agribusiness recovers the
loan on behalf of IDC by subtracting the loan liability owing by the farmer from the proceeds of the
sale and the surplus is given to the farmer. In the case of a deficit, the loss is shared on 50:50
basis between IDC and the agribusiness.
The farms will be insured against insurable agriculture risk. Proceeds from insurance are used to
settle the farmer’s obligation and the surplus is paid to the farmer. Deficit arising from general
farming failures are not written-off but are transferred to the next season to be potentially paid
through next seasons proceeds. The wholesale facility is renewable on annual basis.
The wholesale facility has been used to fund farmers in the North-West with the funds
administered by Magaliesbergse Graankoöperasie (MGK) and farmers in the Free State
administered by Oos Vrystaat Kaap Operations Limited (OVK).
The structure of the wholesale facility attempts to address the constraints involved in funding
smallholder farmers relating to the high transaction cost associated with monitoring, and reduce
the risk of default by the farmers by ensuring that finances are used appropriately and the farmer
have access to the necessary technical mentoring and market needed to be sustainable. IDC as
an institution does not have the capacity to assess and monitor a lot of smallholder farmer
operations therefore giving the assessment to an agribusiness with the expertise, decreases the
transaction cost incurred in assessing and monitoring all the farmers. The agribusiness is
incentivised as the success of the farmer means it will have a ready market for its agriculture inputs
and it will also have access to the farmers produce to market through it value chain or process to
obtain higher returns. Also, due to the 50:50 sharing of loss between IDC and the agribusiness,
risk is shared between the agribusiness and IDC and therefore it is in the best interest of the
26
agribusiness to help the farmers succeed reducing the moral hazard associated with funding smallholder farmers (IDC, 2005).
3.7.2
Medium to long term financing facility
The medium to long term financing facility are utilised for farmers with medium to long term crops.
Like citrus, medium to long term crops require 3 to 4 year establishment period before the first
harvest. After the first harvest, there is a slow build of yields before the crops reach its maximum
yield per hectare.
Because of the structure of these crops, they require longer term finance compared to the
seasonal finance required by farmers utilising the wholesale facility. Farmers are funded with long
term finance through a special purpose vehicle (SPV) or directly to the farmer.
3.7.2.1 Special purpose vehicles (SPV)
In this structure an SPV is established, with the shareholding divided between the agribusiness
and a group of farmers with a view to developing a farming project owned by the agribusiness and
the farmers. The agribusiness chosen for the project is selected based on its expertise in
producing and marketing the produce to be cultivated in the farming project and its ability to make
an equity contribution. The split of shareholding between the farmers and the agribusiness varies
depending on the circumstances. The total funding requirement of the farming project is
determined through due-diligence performed by the IDC which involves assessing the current
operation of the farm and using 5 to 10 year budgets the IDC determines the funding requirement
of the operations till the peak period, which is the period until the cash flows of the operation will be
able to start repaying the loans of the SPV. The due diligence also assesses the technical and
marketing feasibility of the project.
When the total funding requirement for the project has been determined, the total funding
requirement is split between equity and debt. The split is dependent on the cash flows of the
project. The agribusiness shareholding will be funded by the agribusiness. The shareholding of the
farmers is funded by the farmers and the shortfall on the farmers’ shareholding is funded by the
IDC through a hybrid facility to the farmer. The hybrid facility is structured to have characteristics of
debt and equity to allow for flexibility in the timing of repayment. The IDC funding to the farmer is
structured in such a way that the repayment to IDC is dependent on the cash-flows of the project.
Marketing, technical and administration agreement are signed between the SPV and the
agribusiness to aid access to markets and access to technical expertise by the SPV and the
farmers.
27
Figure 3.3 illustrates an example of such a funding facility. In this example the total funding
requirement of the project is R30 million with 50 per cent of the project to be funded with equity and
50 per cent to be funded with long term and short term debt. The agribusiness portion of the equity
is funded by the agribusiness itself to the tune of R7.5 million and the farmer’s portion will be
funded by IDC. The debt portion of the funding requirement will be funded by IDC or another
financial institution.
Figure 3.3: Debt Equity Structure for SPV
3.7.2.2 Direct funding to farmers
Another form of long term finance for farmers with medium to long term crops is to fund the farmer
directly. The farmers operation will be structured into a company or a close corporation owned
solely by the farmers. As with the SPV structure the funding requirement is determined by budgets
and the total funding requirement determined at the peak funding period. The ability of the farmer
to fund the operation is assessed and the shortfall in the funding requirement is funded by IDC
through a loan or equity facility.
An agribusiness is then contracted to administer the funds to the farmer on behalf of the IDC. The
role of the agribusiness is to provide financial management service, mentorship and access to
markets to the farmer. The agribusiness is paid a management fee from the cash flows of the
farming operations based on the number of hectares administered. IDC funding is also repaid from
the farming operations. The repayment is structured with grace periods for interest and capital
depending on the cash flows of the farming operations.
Like the wholesale facility structure, the medium to long-term financing facility addresses the
challenges of smallholder farmers relating to access to markets, access to technical expertise and
28
access to finance by linking the smallholder farmer with an agribusiness with the technical
expertise and the market links, thereby reducing the risk for IDC in funding the farmer. The
partnership between small farmers and the agribusiness help to reduce transaction cost and moral
hazard as the agribusiness with their technical expertise and marketing access will be act as a
monitoring agent on behalf of the IDC. The structure of funding with equity together with capital
and interest grace period for the debt funding allows it to be flexible enough to fund crops that may
require long establishment periods.
3.8
IDC KAT RIVER CITRUS FARMERS DEVELOPMENT SCHEME
The Kat River Valley is located near Fort Beaufort in the former Ciskei region of the Eastern Cape.
The area is regarded as a prime citrus producing area. During the late 80’s 22 farms comprising
534 hectares of fully developed citrus orchards in good conditions were allocated to lessees by the
then Ciskei Government through the Ciskei Development Corporation. The lessees were all
emerging black farmers.
By 2000, the farmers had built up debt in excess of R15.6 million with Uvimba Bank, formerly
known as Ciskei Agriculture Bank. The farms were all in poor state and required major replanting
and upgrading of infrastructure. IDC began engaging with the department of Land Affairs and
Uvimba Bank to formulate a strategy to restructure the farming operations and bring the farms
back into full production. Uvimba agreed on an early settlement offer of 30 cents to every Rand for
final settlement of the outstanding debt.
In August 2006 IDC approved R7 million for the funding of the first phase of the Kat River project
known as the Kat River Citrus Farmers Development Scheme. The Kat River scheme is falls under
the SPV direct funding to farmers model.
Nine legal entities were formed with the previous lessees as owners of the farms. Part of the
funding was used to finance the acquisition of land for the farmers who were previously lessees
and the land capitalised into the new legal entities.
In 2009, a funding shortfall arose due to the following reasons:
•
Higher than budgeted input costs and capital infrastructure;
•
Delay in implementation of the project due to delays land transfer;
•
Adverse climatic conditions;
•
On some farms, more hectares were cultivated than budgeted.
29
In March 2010, a further R27 million was approved to the nine farms for the funding shortfall and
expansion on some of the farms. The funding is to finance the land purchase, rehabilitation;
expansion and working capital requirement until peak funding period. In total, phase I and phase II
funded 17 emerging black farmers on 527 hectares of land. The funding is split into debt and
equity depending on the cash flows of the business. The loan bears interest of prime +1 and the
equity has an IRR requirement of three per cent. Table 4 has the history of all the nine farms since
IDC’s first approval in 2006.
Riverside was appointed to administer the loan on behalf of IDC and the Department of Agriculture
and Land Affairs provided grant funding which amounts to R3 million. Riverside is an agribusiness
based in the Eastern Cape and has been involved in citrus production in the Kat River Valley since
1969. Riverside has its own nursery, packhouses with marketing and logistics structures supplying
major retail chains in Europe. It also has its own farming operation in the Kat River Valley
producing mainly citrus.
30
Table 3.4: History of farms 2006 - 2010
Farm
Gatyena
Huduza
History
R1 394 000 approved in 2006. There were no citrus orchards before IDC funding. 19
ha of citrus was established from the first tranche of funding in 2006. Development
was a year late due to delay in transfer of land. Projects budgets were exceeded
mainly due to increase in irrigation equipment and increases in fertilizer in 2007/08.
Second tranche of funding of R3 800 000 was approved in 2010 to fund shortfalls in
original funding, additional 7 ha and retained losses until 2014.
R 406 000 approved in 2006. The farm had 10 ha of citrus orchards that were
redeveloped due to their age. Projects budgets were exceeded mainly due to increase
in irrigation equipment and increases in fertilizer in 2007/08. Second tranche of funding
R3 250 000 was approved in 2010 to fund shortfalls in original funding, an additional 15
ha orchard and to fund retained losses during establishment period till 2014. Also for
upgrading of plant and equipment.
Letas
R487 000 approved in 2006. 14 ha of citrus orchards was developed against a budget
of 23 ha from the first funding in 2006. Development was a year late due to delays in
land transfers. Funding shortfalls arose due to increase in infrastructure costs and
increases in fertilizer cost in 2007/08. Second tranche of funding of R5 326 000 was
approved in 2010 to fund the shortfalls on original funding, an extra 13 ha of citrus and
also to fund the retained losses during the establishment period till 2014.
Lovers Retreat R952 000 approved in 2006. 5 ha established against the budget of 10ha. Project cost
exceeded initial budget due to increase in capital expenditure costs and input costs.
Second tranch R2 mil approved in 2010 to fund the shortfall on the first tranche and
also to fund the expansion of a further 5 ha.
Naudeshoek R276 000 approved in 2006 . 20 ha was established but shortfalls were funded by
Riverside. Shortfall due to increase in infrastructure and input costs. R5 125 000
approved in 2010 to refinance Riverside and to fund an additional 5 ha.
R1
360 000 approved in 2006 . 26 ha was established but shortfall funded by
Oakdene
Riverside. Shortfall due to increase in infrastructure and input costs. R4 250 000
approved in 2010 to refinance Riverside and to fund an additional 15 ha.
R 642 000 approved in 2006 . 14 ha was established against a budget of 20ha.
Siyamila
Shortfall due to increase in infrastructure and input costs. Second tranch of R4 500
000 approved in 2010 to fund the shortfall and also for an expansion by 15 ha.
R967 000 approved in 2006 . 7.5 ha was established against the budget of 23 ha.
Topkat
Shortfall due to increase in infrastructure and input costs. Second tranch of R3 500
000 approved in 2010 to fund the shortfall and also for an expansion by 15 ha.
R567 000 approved in 2006 . 13 ha was established against the budget of 17 ha.
Torties
Shortfall due to increase in infrastructure and input costs. Second tranch R2 700 000
approved in 2010 to fund the shortfall and also for an expansion by 15 ha.
Source: Industrial Development Corporation submission reports, 2010.
To utilise the spare capacity in its packhouse and marketing channels it began marketing produce
from other farmers in 2000. Due to the poor quality of fruit from these farmers, Riverside began
providing technical support to the farmers and their success attracted other farmers to Riverside
technical support programme prompting Riverside to form an advisory division to facilitate
technical, administration and marketing support to farmers in the Kat River Valley. The company
31
benefits from improved yields and fruit quality into their packhouse and marketing channels.
Through diversifying and increasing its produce, Riverside obtains competitive advantage as it is
able to maintain consistency of supply to its buyers for most part of the year and also offer its
buyers a wider variety of produce.
The arrangement between the IDC, Riverside and the farmers is governed by loan agreement
between the IDC and the farmers, an administration agreement between IDC and Riverside, a
management agreement between Riverside and the farmers and a marketing agreement between
the farmers and Riverside.
Table 3.5: Funding
Farm
Loan
Capitalised Interest Quasi- Equity Total
R 2 426 000
R 158 595
R 2 900 000 R 5 484 595
Lovers Retreat R 1 000 000
R 314 711
R 1 000 000 R 2 314 711
Torties Farm
R 1 700 000
R 399 410
R 1 000 000 R 3 099 410
Huduza
R 1 250 000
R 393 388
R 2 000 000 R 3 643 388
Topkat
R 1 500 000
R 472 066
R 2 000 000 R 3 972 066
Naudeshoek R 2 325 000
R 815 072
R 2 800 000 R 5 940 072
Oakdene
R 2 000 000
R 698 465
R 2 250 000 R 4 948 465
Gatyena
R 2 000 000
R 629 421
R 1 800 000 R 4 429 421
Siyamila
R 1 000 000
R 314 711
R 3 500 000 R 4 814 711
TOTAL
R 15 201 000
R 4 195 839 R 19 250 000 R 38 646 839
Letas Farm
Source: Industrial Development Corporation submission reports, 2010.
The administration agreement provide that Riverside shall have control of the bank account of the
farmer administering the funds on behalf of the farmer, Riverside will be paid R2000 per hectare
per month for its services, Riverside is permitted to impose a reasonable charge for packaging
comparable to the citrus industry charge and Riverside will provide IDC with audited financials.
The management agreement is a service level agreement between Riverside and the farmer in
which Riverside undertakes among others to:
•
Provide services for the effective oversight and supervision of the farming operations, the
performance of contractors and sub-contractors.
•
Facilitate the procurement of agriculture inputs, plant stocks and related matters
32
The farmer undertakes to:
•
Follow technical advice provided by Riverside or its employees, contractors and consultants
in the process of development of the farm.
•
Refrain from the sale or donation of fruit or inputs out of land, unless specific written authority
is obtained from Riverside.
The marketing agreement provides for Riverside to have the exclusive right to the market of the
produce on behalf of the farmer subject to conditions normally applied in the citrus industry. The
purchase price for each sale is define in the contract as the price that the Riverside sells in the
overseas export market, less an amount equal to eight per cent of the FOB value and less all cost
that Riverside incur in respect of transport, storage, shipping and duties and any other cost that are
incurred in the course of exporting that fruit to the overseas market (IDC, 2008).
IDC
Administration
Agreement
Repayment of Loan
LOAN AGREEMENT
RIVERSIDE
Management
Marketing
Agreement
Agreement
FARMERS
Figure 3.4: Kat River Scheme: Financing Structure
Source: IDC re-submission report, 2008.
33
The arrangement between IDC, Riverside and the farmers attempt to address the constraint of
funding smallholder farmers as it gives them access to markets and access to technical expertise
through the services provided by Riverside and also provides access to finance through IDC’s
funding. It also addresses the high transaction cost associated with funding smallholder farmers as
the administration and monitoring has been transferred to Riverside but there has to be monitoring
by IDC of Riverside to ensure that Riverside obligations are being met. It also helps with the moral
hazard problem as the agribusiness monitors the farms on behalf of IDC. For IDC instead of having
to monitor 9 farmers individually the monitoring is transferred to Riverside with IDC monitoring role
limited to Riverside to assess whether Riverside is fulfilling its role as a monitoring agent providing
the farmers with the technical and marketing expertise as envisaged.
3.8.1
Financing mechanism for farmers
The main intention of the financing structure in place between IDC, Riverside and the farmers is to
provide financing to the smallholder farmers but with the finances controlled by Riverside on behalf
of the farmer as they have the financial expertise to spend the money effectively. The farmers
generally have no expertise in managing finances due to the fact that before IDC intervention they
were mainly involved in subsistence farming or were farm labourers. The financial agreements are
signed between the farmer and IDC but the funds are controlled by Riverside on behalf of the
farmer.
Every farmer has a loan account with Riverside. After the due-diligence of IDC determines the
amount of funds required by the farmer until it reaches maturity, the funds are disbursed into the
growers loan account with Riverside. From these funds the farmer spends the funds on the
operations of the farm. Also income from the farmers operations also goes into this account and
not directly to the farmer. The farmer earns interest income on a positive balance and interest
expense on a negative balance.
The farmer’s mentor together with the farmer determines on a monthly basis what expenses need
to be paid for the farming operations. Some expenses are weekly expenses like wages and some
are less regular expenses like fertiliser plant, plant material and pesticides etc. Riverside
purchases items on behalf of the farmer together with other farmers’ items on Riverside own
account to take advantage of bulk discounts and leverage on Riverside contacts with suppliers.
The item purchased is invoiced to the farmer without any mark-up on the original price purchased
by Riverside. At least once a month a report is drawn of the expenses purchased and the farmer
signs the report to signify that the items per the report agrees with the items delivered on the farm
and also that the amount agrees to the invoice from the supplier. Most expenses are purchased
through Riverside except for wages, for which the cash is given to the farmer to pay his labourers.
34
Due to the possibility that the farmers may have fictitious (ghost) employees for whom the farmer
may pocket the money the mentor do spot checks during wage payout to verify employees.
The expenses per the report are then transferred to the farmer’s trial balance and the financial
position of the farmer is explained to the farmer and compared to budget (Painter, 2010).
3.8.2
Technical mechanism for farmers
On an annual basis, soil and leaf analysis are performed on all the farms to determine fertiliser and
chemicals required for the nutritional needs. From this analysis a fertiliser and spraying programme
is drawn up for the year. The programme takes into consideration export requirements, in relation
to health and safety and customer specific requirements. Each farmer is allocated a mentor to
provide technical expertise to the farmers. The mentor discusses the programme with the farmers.
Mentors have regular visit to the farmer and monthly report is drawn between the farmers and
mentors which documents the budgets versus actual and general operations of the farm. Some
farmers do not have enough implements and tractors needed during peak activity period like the
harvesting and orchard planting period. Riverside has a pool of implements and tractors which is
hired out to the farmers when needed with the required personnel if necessary.
Apart from the mentoring system, there are periodic classroom training provided through Fresh
Produce Exporter Forum on topics like the value chain and financial management on a needs
basis other workshops are provided to the farmers on different topics (Painter, 2010).
3.8.3
Marketing mechanism for farmers
Fruits are picked from the farmers during the harvest season. Boxes are packed at the packhouse
with the farmer’s code on it to distinguish it from other farmers. This also helps with traceability of
diseased fruit to identify the problems on the farm. A report is given to the farmer detailing the tons
of fruit sold at what grade and price and all the related costs of selling the fruit. The cost includes
packing cost charged to the farmer by Riverside. The farmers produce are marketed together to
the overseas market giving them an advantage in relation to ensuring adequate volumes,
consistency of supply to secure shelf space (Painter, 2010).
3.9
CONCLUSION
IDC financing structures for emerging smallholder farmers aim to give farmers access to finance
but also want to address the emerging farmers constraints regarding access to technical expertise
and access to market by partnering the farmers with agribusinesses with expertise in this area.
35
The potential benefit for IDC is that the risk of default is reduced, the farmer is able to access the
market and acquire much needed skills and the agribusiness has access to produce whose value
can be unlocked in its value chain.
The study aims to study this arrangement between IDC, Riverside and the farmers and answer the
following questions:
1.
2.
Are the objectives of IDC funding being met in relation to:
•
Improved access to funding for smallholder farmers
•
Improved access to markets and logistics facilities for smallholder farmers
•
Improve access to technical expertise for smallholder farmers
What other role can IDC in its function as a development financier play in making this funding
model more effective in achieving the objectives above.
36
CHAPTER 4
METHODOLOGY
4.1
INTRODUCTION
As noted earlier the funding is an intervention by IDC to address the market failure relating to
funding of smallholder farmers in South Africa. As set out in the objectives in section 1.2, IDC
hopes to address the problem of market access and technical challenges facing smallholder
farmers by funding through a contract farming mechanism. Meeting the objective in 1.2 is important
to improving the recoverability of loans to smallholder farmers and thereby addressing the market
failure. Therefore, data was collected and analysed to assess whether the objectives as per 1.2 are
being fulfilled.
This chapter sets out the technique and mechanisms that was employed to ensure the validity and
reliability of the data collected and also the mechanism to ensure that the conclusions and
recommendation made from the data analysis captures as accurately as possible the phenomenon
of the Kat River Scheme in relation to the objectives of section 1.2.
The chapter is organised as follows: section 4.2 details suitability of this case to the research
objective and section 4.3 describes the research design and methodology utilised with section 4.4
and 4.5 detailing the data collection and analysis methodology employed.
4.2
THE SUITABILITY OF THIS CASE TO THE RESEARCH
Since the approval by IDC to fund the nine farming entities under the Kat River Scheme in 2006,
the farmers have gone through four seasons. Three of the nine farmers were already involved with
Riverside before IDC funding. It takes three years for citrus plant to start bearing fruit. From then,
the yield curve progress slowly until maturity in year seven to eight. All the farms have gone
through at least three seasons of receiving technical expertise from Riverside. The farms are at
various stages of the yield curve with four of the farms (i.e. Torties, Naudeshoek, Huduza and
Siyamila) already producing citrus for export marketed through Riverside. The case therefore
allowed the research to explore the objectives of marketing, technical and financial access as set
out in 1.2.
The literature of contract farming as detailed in Chapter 3 indicates the potential for unequal power
relation and bargaining power to the advantage of the agribusiness at the expense of the farmers.
The dynamics of the Kat River Scheme leaves it susceptible to such faults. Before the IDC
intervention most of the farmers were mainly uneducated smallholder farmers with limited
knowledge of citrus production and markets. Also, the farmers are all black and the agribusiness is
37
represented mainly by white employees. These characteristics leave the project exposed to the
possibility of the farmers being dictated to and not treated equitably making the Kat River Scheme
a good case to explore the advantages and disadvantages of contract farming noted in the
literature.
4.3
RESEARCH DESIGN
According to Manstead and Semin (2000) as cited in Robson (2002), the strategies and tactics that
are selected in carrying out research depend on the type of question you trying to answer.
The entities funded by IDC in the Kat River Scheme have not reached maturity and repayment of
the funds has only being scheduled to start in year 7 due to the cash flow of the entities and
therefore it is not possible to assess the effectiveness of the scheme in addressing the challenges
of contract farming through an analysis of the repayment.
The questions asked as per section 1.2 seeks to answer if the process and mechanisms
implemented at Kat River help to address the challenges of smallholder farmers and achieve the
objectives of IDC’s intervention. This meets the definition of an evaluation study. Robson (2002)
defines an evaluation study as among other things to assess the effect and effectiveness of an
intervention. The evaluation can be of an outcome or the process. This case study will be
concerned with examining the processes involved in the contract farming mechanism with the aim
of establishing whether what is intended in relation to this programme is what is going on the
ground.
Welman, Kruger and Mitchell (2008: 9) indicates with respect to research design, qualitative
implies an “emphasis on the process and meaning that are not rigorously measured in terms of
quantity, amount or frequency” while quantitative studies emphasis the measurement and analysis
of causal relationships. As the focus is on the process and not the outcome due to the stage at
which the project is at, the study was a qualitative study with emphasis on the process and how
they meet the IDC objectives. Emphasis of the study was on the meaning and experiences of the
stakeholders’ involved (Welman et al., 2008).
4.4
DATA COLLECTION
The challenge in relation to data collection is what mechanisms can be employed to ensure that
the data collected is valid and reliable.
Lincoln and Guba, 1985 identify three threats to the validity of data. Reactivity, respondent biases
and researcher biases. Reactivity relates to the way the researcher presence may interfere with
38
the behaviour and the response of the people involved. Respondent bias can take the form of
respondent giving responses to please the interviewer and not say anything that might threaten the
respondent interest. Researcher bias relates to the preconceptions that the researcher brings to
the study. Lincoln and Guba (1985), go on to elaborate that the ability of a design to ensure the
validity or “truth” of data collected depends on the ability of the researcher to employ suitable
control mechanisms to counter these threats.
Reliability of data collected generally refers to whether the tools used produced consistent data.
This relates to whether the tools used ensure that the data collected are accurate in its collection
(Robson, 2002).
Primary data was collected using face to face interviews of the agribusiness (Riverside), IDC and
the 9 farmers involved in the Kat River scheme. The agribusiness and IDC interview is aimed at
obtaining the details of the programme as detailed in section 3.6.1 to 3.6.3. The interview of the
farmers is aimed at obtaining information on how the programme is functioning on the ground and
whether they are meeting the objectives as set out in 1.2.
The farmers interviewed are the nine that are appointed by the farming entities to deal on a day to
day basis with the Riverside. This ensures that information is obtained directly from the source at
which the intervention is directed. The interview of the farmers was face to face and semi
structured. Some of the farmers have low literacy levels and certain concepts have clarified for
their understanding during the interview. The semi-structure nature of the interview allows the
interviewer the flexibility to elaborate vague concept and seek elaboration on incomplete answers
(Welman et al., 2008; Robson, 2002; Babbie, Mouton, Vorster & Prozesky, 2001). Where the
farmer does not speak English, a translator was utilised.
All the 9 farmers involved in the IDC-Kat River scheme were interviewed by the author as it is
logistically possible to interview all of them. The questions were grouped under themes relating to
the objectives of the funding that is, access to funding, access to markets, access to technical
expertise and dealing with IDC and agribusiness.
As noted earlier the validity of the data collected depends on the controls in place. Considering that
the author is an employee of IDC the threats of reactivity and respondent bias relates to the
possibility that the farmers and Riverside may alter their behaviour to what the author wants to see
during the interviews to please the funder. The farmers may also withhold information due to fear
that the disclosure may lead to them being out of favour with Riverside or being withdrawn from the
39
scheme. On the other end, the farmers may exaggerate their responses due to other ulterior
motives that do not have anything to do with the functioning of the scheme.
These threats to the validity of the data were mitigated firstly, through the setup of the interviews.
The interview of the farmers was at the farmer premises out of sight and sound of Riverside. The
interviews of the farmers were conducted by the author and an IDC personnel from the region who
has an understanding of the language and the cultural idiosyncrasies. The farmers were assured
that the aim is to ascertain the effectiveness of the scheme in order to alter it to benefit them. They
were also assured that none of the responses will be disclosed to Riverside and will not lead to
them being withdrawn from the scheme. Beyond that, the author observed the body language of
the respondents to assess whether their behaviour betrays their thoughts and followed up with
questions to reveal any misgivings.
Secondly, validity was attained through data and observer triangulation. Data triangulation
involves the use of multiple sources to enhance the rigour of the data collected and observer
triangulation is the use of more than one observer in the study (Robson, 2002; Lincoln & Guba,
1985). Data triangulation in this case involves contrasting responses between the farmers and the
agribusiness and between the farmers themselves. Extension service workers from the citrus
growers association who deal with the farmers directly were also interviewed to ascertain their
independent perspective on the programme. A member of the department of agriculture, forestry
and fisheries who is a stakeholder in the scheme was also interviewed.
The researcher is exposed to bias as he is directly involved in the interviews and in control of the
respondents. Observer triangulation was achieved through the use of two persons to do the
interview with a peer debriefing at the end of each interview to ensure that both observers have
accurately captured the respondent remarks.
To ensure the reliability of data, the interviews were audio recorded and key parts of the interview
transcribed for analysis with participant verbal consent.
4.5
DATA ANALYSIS
Welman et al. (2008) note that the search for recurring patterns and consistent regularities is an
important part of data analysis in case studies.
Data analysis of this case study is in the form of narrative analysis. In the narrative analysis focus
is on classifying the narrative into similar themes and patterns. These are analysed by contrasting
the themes, identifying differences between themes and phrases, expounding on generalisation
40
identified in the narrative and linking them with theory identified in the literature (Robson, 2002).
The themes and patterns will be analysed in relation to the objectives identified in section 1.2.
4.6
CONCLUSION
This chapter reviewed the framework that is used to assess whether objectives of IDC intervention
through the Kat River scheme is being met. It started with the suitability of the case in relation to
the said objectives and went on to assess the research design and methodology used for the
analysis and the data collection mechanisms to be employed.
With the framework established, the next chapter focuses on the collection of data and analysis
thereof with recommendation of how to improve scheme.
41
CHAPTER 5
EMPIRICAL ANALYSIS
5.1
INTRODUCTION
This chapter presents the results of the interview with the farmers, extension service worker and
other stakeholders dealing directly with the farmers of the Kat River Scheme. As noted in the
literature, the consensus among most of contract farming scheme studied is that it not the contract
farming mechanism itself that can be harmful but how it is practiced, therefore in assessing the
scheme emphasis should be on assessing the relationship between the various stakeholders
involved.
The questions to the farmers as detailed in Annexure A is aimed at evaluating the structure of the
programme as detailed in the section 3.6.1 to 3.6.3 which is aimed at providing financial, technical
and market access to the farmers but also at assessing their perspective on the relation with the
Agribusiness and IDC.
The chapter presents the analyses of the interviews by exploring the themes and assessing the
patterns and contradiction of the responses. The chapter also attempts to validate or dispute the
responses by contrasting them against each other also by comparing it to responses from the
independent extension workers dealing with the farmers.
The chapter is organised as follows: 5.2 details with the responses in terms of the farmer’s
background and motives for joining the Kat-River Scheme; 5.3–5.5 assesses the farmer responses
in relation to the marketing, technical and financial access provided by the scheme.
5.2
BACKGROUND OF FARMERS
All the farmers interviewed had similar backgrounds that can be summarised as follows. All the
farmers have been involved in citrus production in the Kat River area for most their lives. They
were involved in the Ulimcor scheme established in 1984 for the development of agriculture in the
former Ciskei areas. Their roles in the farming operation then ranged from farm managers, farm
labourers, nursery men and women and extension officers. With the decision by the government to
privatise the farms in 1994, the land was transferred to the present farmers and funding was
provided by Uvimba Bank which was established to replace the old Ulimcor Scheme. Due to
financial shortage, funding from Uvimba was erratic and was dissolved in 2000. This left all the
farmers stranded without finances and led to a deterioration of the orchards. 3 of the 9 farmers
joined packhouses in the area to obtained production finance and market access but lacked capital
42
funding to redeveloped their orchards. Most of the farmer resorted to livestock and vegetable
farming and other ventures to sustain themselves.
Between 2004 and 2007 the farmer were approached by Riverside and most joined the Kat-River
IDC scheme on the back of the promise that they will obtain capital funding to redevelop their
orchards and production loans. This confirms the literature that most farmers join contract schemes
due to lack of alternative which leads to reduced bargaining power from the farmer’s perspective
(Echanove & Steffen, 2005). All of the farmers see the scheme as saving them from a desperate
situation where their farms were failing due to lack of funding. Apart from that, one of the farmers
joined because he expected that packing cost at Riverside will be less than his previous
agribusiness packhouse.
All the farms cultivate citrus at various stages of development with sizes ranging from 5 to 25 ha.
Due to their history, most of the farmers have practical farming experience and have the farming
culture and passion. Two of the farmers have a diploma in agriculture. One of the farmers is
illiterate and three of the farmers don’t speak English. All the farmers lack financial expertise and
ability to interpret financial information. It is observed that the lack of financial expertise by the
farmers contributes to mistrust by the farmers of Riverside as they don’t clearly understand the
utilisation of the funds.
5.3
MARKETING ASSISTANCE
As per standard in the citrus industry, Riverside provides packing services to all the farmers. This
involves collecting the fruit from the farms, sorting and grading the fruit, classifying the fruit into
different classes for exports and the locals market. The fruit is all pooled together and marketed by
an export company. The return to the farmer after marketing the fruit is net of the packing cost of
Riverside and the marketing cost of the exporting company.
Five of the nine farmers currently produce fruit and it is expected that they will harvest R3million
worth of fruit in the current season. All the farmers confirmed that after their fruits are picked from
the farm it is delivered to the Riverside packhouse for sorting and grading after which Riverside
gives the farmers a quality analysis report indicating how many cartons were packed from the
farmer’s fruit and at what grades they were packed. This meets one of the objectives of contract
farming which is to allow farmers to gain market access by obtaining value added services that will
allow the farmer to gain access the more lucrative export market.
Three of the five farmers harvesting are able to reconcile the quality report given by Riverside to
their own report to assess the validity of the quantity report. The other two cannot because they do
43
not keep their own records of fruit picked. In term of the grades, none of the farmers gave an
indication whether they are able to understand fully how Riverside packhouse come to the
conclusion of the grades.
In relation to the net amount that is attributed to the farmer after packing and marketing cost, all the
farmers indicated that it is explained to them and this was confirmed by Riverside who indicated
that they give farmers print outs once the fruits are sold. But there are different levels of
understanding of this information. Three of the five producing farmers noted that they don’t fully
understand the net amount but are able to compare the costs to other farmers packing at different
packhouses and feel the cost at Riverside are reasonable.
Informal discussion with the other farmers who export fresh produce and the extension workers
indicated that there is a general lack of transparency in calculation of the market returns to the
farmer. Farmers who export through intermediaries generally don’t know what has happened to
their fruit when it leaves their farm gate for the export market. They only receive a statement after
the fruit has been marketed by the exporter. There is a lack of transparency regarding how the fruit
is marketed and what is the meaning of the various cost deducted from the gross amount.
Interviews with importers in Europe indicate that they pay the exporter 50 per cent of the estimated
market value when the good leaves the port. But most smallholder farmers indicate that they only
get their money up to six months from when the produce leaves the port. This is an industry wide
problem and not limited to Riverside but it adds to the mistrust by the smallholder farmer of the
agribusinesses and exporters. The lack of knowledge by the farmers of what is going on, reduces
their bargaining power and leave the farmer open to exploitation by the agribusiness as noted in
the literature (Sivramkrishna & Jyotishi, 2008).
All the farmers know of alternative marketing channels and packhouses but consult with other
farmers in the area and believe that the Riverside is on par with other alternatives in terms of the
return obtained from their harvest. All the farmers indicated that they don’t necessarily want to
market to alternative market options aside from Riverside but don’t like the fact that they are
restricted as per contract with IDC to market through Riverside as this undermines their feeling of
control of their own affairs and also means that they don’t have any bargaining power in
negotiations with Riverside on the marketing aspects.
In the context of the study area, there are two established packhouses including the Riverside
packhouse and one new packhouse. All of the farmers who have dealt with other packhouses in
the area before have had similar transparency issues as the one with Riverside and therefore in
the context of this research the farmers don’t have an alternative even if they were not tied to
44
Riverside by virtue of the arrangement with IDC. The lack of alternatives as noted in the literature
has added to the skewed power relations in favour of Riverside (Sivramkrishna & Jyotishi, 2008).
5.4
TECHNICAL ASSISTANCE
According to the contract between the IDC, Riverside and the farmers, farmers are supposed to
obtain technical advice through mentorship from Riverside. At the beginning of the season
Riverside obtain leaf and soil samples from each farm for analysis to determine the fertiliser and
chemical needs of each farm. They also provide technical advice in relation to disease control,
lower than expected yields and any adverse condition that may occur on the farm. This
arrangement was confirmed with Riverside.
Riverside determines the strategy in terms of what varieties to plant and where in relation to
climate, soil and market compatibility and also determines the programme for the planting while
assessing the infrastructure requirement of each farm. They determine what resources are to be
utilised on the farm in terms of labour, fertiliser, pesticides, water etc. Riverside purchases these
production inputs on behalf of the farmer. Riverside also determines what produce apart from citrus
the farmers should cultivate. This fulfils the role of contract farming as a risk litigant for financiers
by giving the farmer all the support service that is needed to be sustainable in the long term
(Llanto, 2005; Pillarisetti & Mehrotra, 2009; CGAP, 2005).
Some implements are shared among the farmers, and the rationing of the use of these implements
is determined by Riverside taking into consideration need and availability. Riverside determines
when to harvest and how to stretch out the harvesting period as determined by the market
requirement.
All the farmers indicated that they all have mentors who they see at least once a month and also
when required during emergency. The mentors are also easily available telephonically when
required. The farmers are at different level of technical expertise and most indicated that they are
able to run the day to day operation of the farm without the input of the mentors. All the farmers
indicated that they mostly implement the technical advice given by the mentor, the more technically
advanced farmers said they also seek second opinions from the extension service members on
certain decisions before implementing and are allowed to contradict and discuss these with their
mentors if they deem necessary but generally feel it’s in their best interest in terms of staying in the
programme to just follow the mentors’ advice. The level at which the farmers question and try and
understand the technical input of their monitors seem to vary according to the level of farming
expertise. The farmers with a low level of farming expertise tend to accept whatever their mentors
advice without questioning it or trying to understand it themselves.
45
All the farmers indicated that they are able to get industry related to training from institutions like
the National Agriculture Marketing Council (NAMC), Citrus Grower Association (CGA) relating to
technical aspect of their farming.
The farmers with the higher level of technical experience indicated that they will be able to farm
without the input of Riverside and the mentors but added that technical advice from experts is
always needed and will be able to source this from other industry stakeholders like the extension
service workers other more experience farmers and industry research institution like the citrus
grower association. They all admitted though that current input of the mentors is invaluable as it
easily available when needed.
The concern that farmer have in term of technical access is that they don’t have any say in the
overall strategic direction of their farms. All the farmers expressed this feeling and this was
expressed strongly by the farmers who are more experienced in citrus production who added that
they can do it on their own without “Riverside looking over their back all the time and taking over
their operations”. They feel the strategic decision of what to farm and the implementation thereof is
decided between IDC and Riverside without the farmers input. Some of the expressions used like
“Riverside is our God” and “the farmer is a junior partner” implied that, the farmers feel
disempowered and feel like employees on their own land. This echoes the top down approach that
has been contributed to the failure of some of the support programmes for farmers in the past (Van
Rooyen & Nene, 1995). The centrally managed approach leads to the farmers not accepting
ownership and accountability of their operations and also the strategic skills needed to operate the
farming operation is not transferred to the farmer. This may impair the long term sustainability of
the farmers’ operation leading to default of the loans given. It also confirms the quasi-employment
status that the literature indicates as one of the potential downside to the farmer of contract farming
(Gina & Kevin, 1995).
Riverside confirmed that they need to find ways to involve the farmers more in formulating the
technical strategy. The strategy that was implemented is agreed between IDC and Riverside but
there was no extensive consultation with the farmers.
5.5
FINANCIAL ASSISTANCE
As indicated in sections 3.6.1 to 3.6.3, according to the arrangement between IDC riverside and
the farmers, the financial management of the farms is managed by Riverside on behalf of the
farmer meaning the farmers don’t deal directly in the finances despite the fact that the IDC loan is
their obligation.
46
All inputs needed on the farm are purchased by Riverside through its own suppliers. At the end of
each month the invoices for each farm is grouped for inspection by the farmers to ensure that the
invoices match the goods received on the farm. All the farmers indicated that they check their
invoices on a regular basis although this is contradicted by Riverside who mentioned that not all
the farmers check their invoices on a regular basis. Most of the farmers indicated that when they
have queries with their invoices it generally sorted out quickly.
The farmers indicated that they also check the invoices to the monthly report and it is explained to
them what was purchased. Most of the farmers are not aware of the monthly management
accounts that document their cumulative expenses for the year. Riverside indicated that they have
communicated this to the farmers but perhaps they don’t understand it. Riverside indicated that
farmers are not diligent in coming to check their monthly invoices.
Although all the farmers seem to check their invoices on a monthly basis, they are not able to
reconcile this to any report which indicates their total loan utilisation and therefore how much is
owed to IDC. All the farmers but one indicated that although they get a six monthly management
account and financial statement if they request it they are not able to firstly, understand it to assess
how the monthly report that they assess on a monthly basis relate to the financial statement and
management account and secondly, how the information on the management account and
financial statement relate to the liability of the IDC. Most of the farmers don’t ask for these
statements because of these reasons. The exception is the farmer who has some financial
background and keeps his own records for purposes of checking to Riverside information. Most of
the farmers made statement like “I want a statement” implying that they don’t understand the
information as it is given to them in the current format.
All the farmers don’t have any idea of how much of their loans have been used and are very
perplexed and disgruntled when told by Riverside that their loan from IDC has run out or has
become low and therefore they can’t afford certain things. This is due to the fact that they don’t
have the all round picture of how their funds are used.
All the farmers don’t have an understanding of the terms of the loan in terms of the repayment.
Despite the fact that the loans have grace periods on interest and capital until year 3 and year 5
respectively, most of the farmers believe that they are currently in the process of repaying the loan
from their current harvest. None of the farmers have an understanding of how their yearly finances
are structured and to what extent their yearly harvest goes into payment for their production
expenses and developing new orchards leading to a misunderstanding that their income from their
harvest is being used to repay the loan.
47
All the farmers indicated that when it comes to the finances, there is a lack of transparency with
regards to the usage of the loans and harvest income. The lack of understanding relates to the lack
of financial skills of the farmers. It also relates to the lack of financial systems capacity on the part
of Riverside to be able to give information in a format that can be understood by the farmers. This
scenario has significantly impaired the financial trust between the farmers and the agribusiness
and it leads the farmers feeling that they maybe cheated. It is foreseen by the author that this
problem that will be compounded in later years when the farmers reach the peak of production and
making some profits but will not be able to gain access to the production income as it will go
towards repaying their loan leaving the farmers aggrieved as they don’t understand their financial
status.
Riverside indicated that they need to consider simplifying the statement for the farmers to
understand.
5.6
GENERAL DEALINGS WITH IDC AND RIVERSIDE
All the farms recognise that IDC is trying to improve the effectiveness of their funds and reduce the
possible mismanagement of the funds by disbursing the loans to the farmers indirectly through
Riverside. Despite this, all the farmers expressed in some way or another that they see this
mechanism as a sign that the funders “don’t trust them because they are black and they trust the
Riverside because they are white”. Most of the farmers despise the sense that this mechanism
means they lose control of their own affairs and are dictated to by someone else. The impression
received by the author is that they don’t necessarily feel mistreated but the lack of control they
have robs them of their pride that can be gained from owning their own farms. The mechanism as
it is structured currently reduces the sense of ownership that the farmers have of their operation
and this can have a negative effect for the financier as it may lead to the farmer not taking
responsibility of his operation (Van Rooyen & Nene, 1995).
As per the loan agreement, the only income received by the farmers from the farming operation is
a salary. All the harvest income goes into paying for the development of new orchards as per each
farm development plan as agreed between IDC and Riverside; the payment of production inputs
and from year three onwards, the payment of the IDC loans.
Therefore, effectively for the duration of the loan which ranges for 10 to 12 year, the farmer will
only receive a salary from their farming operation. The salaries range from R2 000 to R15 000
depending on the cash flows of the farming operations. All of the farmers indicated that this salary
is not adequate for their household needs and some even enquired from the author whether IDC
48
can consider giving them some funds for emergencies and family needs such as funerals and
helping out other family members.
The problem of inadequacy of income was expressed more strongly from farmers who mainly
relied on the income from their salaries for survival compared to farmers who had alternative
income sources.
The lack of sufficient income to cater for household needs is a challenge of rural and agriculture
finance as invariably, the challenges of maintaining the household affects the ability of the farmer
to finance the development required in the farming operation.
As noted by Andrews (2006),
financiers should consider the household and the farming operation as one income and expense
unit in financing rural and agriculture households when determining repayability.
The farmers producing fruit came across as demotivated by the fact that, despite the success or
not of their harvest in a season, their remuneration does not change. They indicated that “they get
the same salary even if they are able to achieve a good harvest in a year”. They hinted at wanting
a “lump sum payment for their efforts if they overachieve on the harvest. This will be an incentive
for working hard”.
The lack of incentive again undermines the sense of ownership that the farmers should have for
their farming operation.
The other impression received by the author in terms of the farmers challenging Riverside on
issues they might not agree with is the fact that Riverside is seen as the saviour who brought the
farmers hope of developing their farms when they had no alternative funding sources after Uvimba
Bank. Most of the farmers stated that “you can’t bite the hand that feeds you” when asked why they
have not challenged Riverside on some of the issues they are not happy with. This also points to
the lack of alternatives for the farmers and one of the main reasons why farmers join contract
farming schemes which reduces the bargaining power as noted in the literature (Sivramkrishna &
Jyotishi, 2008).
In terms of improving the system all of the farmers indicated that improvement of transparency in
terms of the usage of the funds is the key aspect they will like to be improved. The documentation
for the usage of their funds should be in the form they can easily understand.
49
Table 5.1: Common themes in interviews
Positive
Negative
Farmers joined the scheme due to
lack of alternatives.
Background of famers Already have farming experience.
Lack financial expertise lead to
mistrust of the scheme.
Lack of transparency in relation to
Farmers are able to obtain accesss to the returns obtained leading to
export market through the scheme.
mistrust of Agribusiness.
Markets assistance
Reduced Bargaining power:
Lack of knowledge of the export
value chain.
Lack of alternative due to obligation
with IDC.
Farmers have access to technical
expertise to improve production.
Strategy determined by Agribusiness
- lack of ownership by the farmers.
Technical assistance
Lack of strategic management skills
Mentors readily available.
transfer.
Access to technical training.
Able to produce export quality produce.
Farmers obtain financial access to aid Financial reporting not understood by
development
farmers.
Financial assistance
Lack of transparency in relation to
the utilisation of farmers funds.
Lack of understanding of terms of
loan.
Lack of trust of agribusiness due to
lack of transparency.
The contract farming mechanism
implies to the farmer that they are
General dealing with
not trusted to handle the finances.
IDC and Agribusiness
Lack of control of their own
operation.
Salary income is not sufficient.
No incentive for exceeding harvest
expectations.
Lack of alternatives - reduced
bargaining power.
5.7
CONCLUSION
The responses received from the farmer’s survey indicate that overall the farmers see the scheme
as something that has aided them in obtaining much needed capital to resuscitate their dying
orchards and develop new orchards. But the dynamics relating to lack of transparency, ineffective
communication and misaligned expectations can be noted at this early stage of the project and has
the possibility to adversely affect the repayability of the loans in the future when the collection
starts.
50
The next chapter will summarise and conclude by analysing these problems in their contexts and
making recommendation that may be lead to better prospects in relation to the recoupment of the
loan in the future.
51
CHAPTER 6
RECOMMENDATIONS AND CONCLUSION
6.1
INTRODUCTION
The challenges limiting smallholder farmers from making decent returns from their production has
been well documented in literature and summarised as lack of finance, technical expertise and
market access. This has discouraged lenders from lending to smallholder farmers with many
attributing this to high risk and high transaction costs associated with smallholder farmers (Spio,
2002; Dorward et al., 2001; Fenwick & Lyne, 1998).
Although contract farming is seen as a mechanism to reduce the risk associated with smallholder
farmers, a survey of the literature indicates the dynamics of the relationship between the
agribusiness and the farmer may skew the bargaining power in favour of the agribusiness and can
possibly reduce the farmer to a quasi-employee of the agribusiness leaving the farmer open to
exploitation by the agribusiness (Gina & Kevin, 1995).
Despite this, contract farming is a structure that is perceived to reduce risks for financiers and if
utilised appropriately can facilitate an increase in capital flow and production for smallholder
farmers. As noted earlier the logic behind the IDC contract farming mechanism is to improve the
repayability of the loan by linking the smallholder farmers with markets and technical expertise with
the aim of mitigating the high risk associated with smallholder farmers through linking the farmer
with the required support services (Echanove & Steffen, 2005). Chapter 5 documented the
responses received from the farmers based on the survey questions in Annexure A. The
responses indicated that although the Kat River scheme gives the opportunity for the farmers to
receive much needed capital, technical expertise and marketing access, there are certain aspects
that may undermine the repayability of loan to IDC in the future if they are not addressed now.
This chapter will analyse the responses in their context and what the responses mean for the aims
that the IDC mechanism is trying to achieve. The chapter will begin with an overall analysis of what
is needed for such a mechanism to be successful and then will analyse the responses in relation to
this. The chapter will indicate the limitation of the study and suggest areas of further studies.
6.2
THE KEY ELEMENTS THAT ARE NEEDED FOR THE MECHANISM TO IMPROVE
REPAYABILITY
Improving repayability involves two aspects. Firstly, to facilitate the production on the farm at the
appropriate yields at the right quality and to obtain the highest possible return from the investment.
Secondly, to facilitate the farmers to access markets that will bring the highest possible returns.
52
For a development financier there are two main areas of concern. Firstly, structuring mitigants to
reduce the risk of funding the smallholder farmer and maximise the return from the farm. Secondly,
is to ensure an equitable treatment of the smallholder farmer.
The maximisation of return on the farm can only happen if both the farmer and the agribusiness
are putting in the required effort. As noted in the literature, the viability of contract farming depends
on the buy in and the alignment of interest of all the parties involved (Sriboonchitta &
Wiboonpongse, 2008). The buy in of all the parties involve and translates to all parties putting the
required effort and therefore the maximisation of return. The agribusiness effort is in providing the
technical and marketing assistance, the farmers effort is in providing the on the ground work and
supervision. Unfortunately and as noted from the literature most contract farming mechanisms are
structured in a manner that places a lot of importance on the technical expertise and marketing
access that the agribusiness bring but the farmer’s effort in relation to maximising the return from
the farm is not valued reducing the bargaining power of the farmer. The farmer is essentially
reduced to a quasi employee (Kirsten & Sartorius, 2002).
FARM
Farmer effort
Agribusiness effort
Figure 6.1: Maximisation of return
Due to the unequal power relation between the farmer and the agribusiness in contract farming,
the potential for exploiting the farmer is high and therefore development financiers requires a
mechanism that can balance the power between the farmer and the agribusiness without losing the
risk mitigation factor that contract farming brings.
In the Kat River scheme specifically, the agribusiness and the farmer have to fulfil their roles to
ensure that the mechanism work in fulfilling the promise of improve repayability. The agribusiness
role is to:
•
To apply the finance appropriately and to ensure that the finance given to the farmer is applied
effectively.
53
•
To provide the required technical expertise needed to maximise the production capacity from
each farm.
•
To provide the required marketing access to maximise the return from the produce from each
farm.
The role of the farmer is to apply their effort in a way as to maximise the production capacity of the
farm for the duration of the loan. For this to happen, the following needs to happen:
•
The farmers need to understand the “big picture” and the strategic direction of the scheme in
which they are involved in.
•
The scheme needs to be transparent to the farmers.
•
The farmers need to be incentivised appropriately.
•
The farmers need to be empowered to take ownership of their activities.
6.3
ASSESSMENT OF RIVERSIDE ROLE IN THE KAT RIVER SCHEME
In relation to providing technical expertise and market access, the responses received from the
study indicate that the Riverside is fulfilling their role at least to the standard of the industry and this
has been recognised by the farmers as adding value to their activities. The farmers all have
mentors and are able to access their mentors when needed. Farmers are able to sell their produce
through the marketing channels available to Riverside to obtain the best return per industry. The
manner and appropriateness in which this is provided will be assessed as part of exploring the
farmer’s role in the scheme.
In relation to the effectiveness and appropriateness in terms of the usage of the funds as agreed
upon between IDC and Riverside, the study can conclude that IDC funds are contributing to the
farmers having access to finance but the study cannot infer whether the funds are used and
allocated as intended by IDC as the study did not do a financial analysis in terms of the usage of
funds.
6.4
ASSESSMENT OF THE ROLE OF THE FARMER IN THE KAT RIVER SCHEME
As expressed earlier to improve the repayability of the loan, the scheme has to have a framework
in place that will maximise the farmer’s effort in production. The key aspect of this framework will
be discussed here in relation to the Kat River scheme.
54
6.4.1
Understanding the “big picture”
Citrus is a long term crop that requires about four to five years to maturity. The budgets indicate
that if funded with debt, the farming operation need six to seven years before the loan can start to
be repaid. The term of the loan is 10 to 12 years. Due to the long term nature of this arrangement it
is important that the farmer has the “big picture” of the strategic direction of the funding provided to
them and is committed. In this instance the “big picture” is that the funding is provided to the
farmers to establish citrus orchards on their land as a long term investment from which the return
from the investment and effort by the farmer will not be fully realised until the full repayment of the
loan. Income from the farm will not come to the farmer but will be used for the establishment of
new orchards. The strategic direction and decisions made in relation to the usage of the land is
made to maximise the return from the farm to ease the repayability of the loan.
If the farmers does not understand the strategic directions and the reasons for certain decisions
made and therefore the farmer does not buy in into the idea, they will not be motivated to apply the
required effort at best and at worst can abandon the scheme which will mean a loss for the
financier in terms of funds already invested in the scheme.
The survey of the farmers indicated that the farmers don’t have full grasp of the strategic direction
of this scheme. The two main reasons given for this are that strategic decisions are made between
IDC and Riverside without appropriate consultation with the farmers and lack of transparency in
relation to the usage of funds. Transparency will be explored in the next section.
From their background it is clear that all the farmers have an understanding of citrus and the long
term nature of the returns on citrus but from the statements and enquiries made by the farmers it is
also clear that they don’t understand their strategic relationship with IDC. Some expressed the
wish to plant something else apart from citrus.
On the strategic level decisions are made as to varieties and produce; how to phase out the
plantings and when to plant and how this relates to obtaining the best returns for their farms, are
made without appropriate consultation with the farmers.
If these decisions are made without the input of the farmer, the farmer will start harbouring feelings
that they are just quasi employees in this scheme; they could lose trust for the stakeholders in the
scheme and this may lead to reduced commitment of the farmer and therefore reduced effort. The
lack of credibility of the institutions is one of the reasons for the failure of previous support
programmes (Van Rooyen & Botha, 1998).
55
It is recommended that with each existing and new farmer, they are informed and consulted of the
nature of the relationship with Riverside and IDC. The farmer’s expectation should be assessed
and aligned with the strategic direction of this scheme. In this way, the farmer takes ownership of
the strategic direction and decisions and therefore with the long term benefit in mind will be able to
put in the required effort. Also, as the ultimate aim of the scheme is to develop farmers who can be
independent of IDC and Riverside after the loan has been repaid, a better understanding of the
strategic decisions will ease the process of transfer of the business into farmer’s hands.
The limitation with regards to smallholder farmers in this regard is that because of the lack of
alternatives in relation to access to capital, they will agree to anything without necessarily being
committed to it because they are desperate for capital.
6.4.2
Transparency
Riverside acts as conduit for the funds that are loaned to the farmers. They manage the usage of
the funds to the farmers. Thus, control over the usage of funds is taken away from the farmer.
From enquiry from the farmers, it is noted that the farmers do not clearly understand the usage of
their funds. They infer that their funds are being misused and this leads to an environment of
mistrust between Riverside and the farmers which negatively affect the communication between
the agribusiness and the farmers. The farmers may feel cheated correctly or incorrectly so, and as
these grievances escalate, the farmer’s effort will be suboptimal.
Currently, the farmers check their invoices monthly of goods delivered to the farms but from
enquiries from the farmers it is clear that the farmers don’t understand how these monthly invoices
relate to how much revenue is generated; what is their return after the harvest; what is their total
cost of production since joining the scheme and how much of the IDC loan has been utilised. The
farmers can request management account financials but most don’t as they don’t understand the
accounting structure in which these are presented.
Farmers expressed a wish for a simplified statement. It is recommended that a simplified
cumulative statement be used to communicate the financial status of each farm. A simplified
document that will summarise the cumulative revenue, cumulative cost and loan balances on one
single sheet that is easy to understand to the financial illiterate. The idea of this statement is that if
the farmer can reconcile the monthly statement and invoices to the cumulative statement, it will
improve the transparency and also keep Riverside accountable on how the farmer’s funds are
spent. With the farmers being able to clearly understand the finances, this will be an added
mechanism for IDC to monitor the agribusiness and help balance the unequal power relation
between the agribusiness and the farmers.
56
It is also recommended that specialised financial training be given to the farmers on how to keep
their own records of expenditure and income and how to reconcile the statement to the simplified
statement that will be given by Riverside. Specialised marketing training is also required by the
farmers that focuses on understanding the market returns from their produce.
This will also empower the farmer to take control of their own affairs and help understand the
overall usage of their funds thereby contributing to the farmer understanding the “big picture” and
strategy for the usage of their funds as indicated above.
Due to financial weakness on the part of the farmer it also recommended that IDC monitor closely
the usage of the funds with annual high level review of the usage of the funds.
6.4.3
Appropriate incentives for farmers
Currently, as per arrangement with IDC and Riverside, the farmers obtain only a salary from their
operations on their farm for the duration of the loan term with IDC. All revenue from their farming
operations goes into establishing new orchards, paying for production cost and repaying the IDC
loan.
There were two main reactions to this from the farmers. Firstly, all of the farmers feel that the
salaries are not enough to sustain them and their household needs. Secondly, the farmers who are
producing fruit indicated that they don’t feel incentivised because irrespective of the quality and
quantity of their produce they will obtain the same income. From enquiry from Riverside and IDC it
was established that the salary is based on the projected incomes of the farm and budgeted as
part of the loan from IDC.
With respect to the sufficiency of the farmers income, due to the long term nature of the product
and also the fact that it will take six to seven years for the income from the farms to reach their
maturity diversification of income should be considered. It was noted that, the farmers who have
other sources of income from other business apart from their citrus operation did not aggressively
object to the low level of their salary. They perceived that the “big picture” with the loan is not to
obtain a salary but it’s a long term investment from which they will obtain rewards after the loan is
repaid. In their study of what has contributed to successful micro-finance lenders in agriculture,
CGAP (2009) and Andrews (2006) noted that lenders who insist on lending to households with more
than one source of income are more successful than others who do not.
In this case diversification is to give the farmer another source of income while they wait for the
income from their citrus operation to mature. Short term crops like vegetables from which short
57
term income should be considered. In considering other sources of income for the farmers, a
thought should be put into the possibility of the farmer being distracted from their main operations;
the funding of the second source of income and the feasibility of a second crop or second income
generating activity on the farm.
Following from the issue of sufficiency of the salaries, appropriateness of funding smallholder
mainly resource poor farmers through long term debt that means that they will not obtain return
apart from their salary for 10 to 15 years should be considered. Long term debt of this nature may
be a burden that ties down the farmer for too long considering the context of smallholder farmers
that have limited resources to support their households. Governments, development financier and
promoters of smallholder farmers should consider whether it will be more feasible to fund the
capital expenditure and establishment cost with grants and the annual production cost during the
period when the trees are bearing with short term debt that can be paid out of revenue.
On the issue of incentives, consideration should be made into incentivising farmers if their
performance exceeds expectations according to budgets. This will encourage the farmers to
increase their effort in their operation and help eliminate the perception that they are quasi
employees in the scheme on their own land.
6.4.4
Empowered to take ownership of their operations
From the survey of the farmers, it is noted that the farmers feel that they are “junior partners” in this
scheme. In terms of decision making, the farmers perceive that IDC has empowered Riverside
more than them. This is attributed to: the lack of financial transparency; insufficient communication
of the “big picture” and long term strategy of the scheme and insufficient involvement of the
farmers in decision making and the lack of direct access of the farmer to the IDC.
It is important that the farmers feel empowered and take ownership of their operation as it will lead
to increase efforts on their part and above all it is more likely that the farmer will succeed after the
loan has been repaid and the relationship between IDC, agribusiness and the farmers is over.
Apart from the recommendation already made in this regards the farmers indicated that they will
feel more empowered if they had more communication with IDC. As this will mean they will have a
direct channel to lay their grievances. Currently, they don’t have such a channel and therefore
have to complain to Riverside when most of their complaints will be against Riverside. This will
also help balance the powers between the farmer and agribusiness and contribute to an equitable
treatment of the farmers.
58
6.4.5
Limitation of this study and area for further study
The limitation of this study is the possibility that the farmers and agribusiness response could be
false. An attempt has been made to contrast and triangulate the responses among the farmers and
between the farmers and agribusiness to identify inconsistencies. Also interviews were made of
other role player in the Kat River scheme to establish an independent view.
Due to the project being at an early stage and the fact that the repayment of the loan has not
commenced, it is difficult to assess the financial impact of the scheme in terms of repayability. A
suggestion for further study is a financial analysis of how funding through a contract funding model
improves repayability for lender as opposed to funding directly to farmers.
The case studied in this paper is of contract farming of a long term crop. The dynamics of funding a
long term crop like citrus could be very different from the funding of a short term crop like maize. It
is suggested that further studies be conducted into the dynamics of funding short term crop
through contract farming. Another area of study is to assess the funding models that are used in
funding farmers through contract farming and the effectiveness thereof. As indicated earlier due
the income level of the farmers and the long term nature of their crops it should be considered
whether it is appropriate to burden the farmer with a liability with such a long term till repayment,
especially in agriculture where there are many unknown factors that can adversely affect the cash
flows and lead to default.
59
LIST OF SOURCES
Andrews, M. 2006. Microcredit and Agriculture: How to Make it Work.
Canada: Mennonite
Economic Development Associates (MEDA).
Anim, F.D.K., Raphala, S.B. & Mandleni, B. 2008. Contract Farming: a Case Study of Small Scale
Sunflower Farmers in Bonjanala District of North West Province. Unpublished research report.
Pretoria: University of South Africa.
Babbie, E., Mouton, J., Vorster, P. & Prozesky, B. 2001. The Practice of Social Research. Cape
Town: Oxford University Press Southern Africa.
Boonzaaier, J.W. 2009. A Framework for the Improved Competitiveness of Resource Poor
Farmers. MScEng (Industrial Engineering) thesis. Stellenbosch: University of Stellenbosch.
Caria, S., Teal, F. & Zeitlin, A. 2009. Impact of Group-Based Microfinance in Agriculture: Evidence
from Ghana’s Cocoa Abrabopa Association. Unpublished research report. University of Oxford.
Center for Development and Enterprise (CDE). 2008. Land reform in South-Africa – Getting Back
on Track. Johannesburg, May.
Chang, C., Chen, C., Chin, M. & Tseng, W. 2006. Is Contract Farming More Profitable than NonContract Farming – A Survey Study of Rice Farmers in Taiwan. Selected paper prepared for
presentation at the American Agricultural Economics Association Annual Meeting. Long Beach,
California, July 23-26.
Consultative Group to Assist the Poor (CGAP). 2005. Managing risks and designing products for
agricultural microfinance. Rome: International Fund for Agricultural Development (IFAD).
Consultative Group to Assist the Poor (CGAP). 2009. Emerging Lessons in Agriculture
Microfinance. Rome: International Fund for Agricultural Development (IFAD).
Department of Agriculture, Forestry and Fisheries (DAFF). 2009. Economic Review of South
African Agriculture. Pretoria: Department of Agriculture, Forestry and Fisheries (DAFF).
Department of Agriculture, Forestry and Fisheries (DAFF). 2010. Budget Speech. Pretoria:
Department of Agriculture, Forestry and Fisheries (DAFF).
60
Department of Trade and Industry of South Africa (DTI). 2009. Industrial Development Corporation
of South Africa. [Online] Available: http://www.dti.gov.za/thedti/idc.htm. Accessed: 28 May 2010.
Dorward, A., Poulton, C. & Kydd, J. 2001. Rural and Farmer Finance: An International Perspective.
Paper presented at Workshop on Rural Finance, South African Association of Agricultural
Economists, 19 September.
Duma, M. 2007. Contract Farming as a Tool for the Development of Smallholder Farmers.
Unpublished dissertation. Stellenbosch: University of Stellenbosch.
Du Plessis, W., Pienaar, J. & Olivier, N. 2009. Land Matters and Rural Development. [Online]
Available: https://repository.up.ac.za/upspace/bitstream/2263/13167/1/DuPlessis_Land(2009).pdf.
Accessed: 20 April 2010.
Echanove, F. & Steffen, C. 2005. Agribusiness and Farmers in Mexico: The Importance of
Contractual Relations. The Geographical Journal, 171(2), June, 166–176.
Fenwick, L.J. & Lyne, M.C. 1998. Factors influencing internal and external credit rationing among
small-scale farm households in KwaZulu-Natal. Agrekon, 37(4), 495-504.
George, O. 2009. Is Micro-finance Addressing its Goal Among Smallholder Farmers in Africa?
Empirical Evidence Using Propensity Score Matching. Paper submitted for Visual presentation at
the XXV11 International Conference of Agricultural Economists, 16-22 August, Beijing, China.
Gina, P. & Kevin, P.H. 1995. Farm Labourers and the Company: Exploring Relationships on a
Transkei Contract Farming Scheme. Journal of Development Studies, 32(1), October, 55-73.
Guo, H. & Jolly, R.W. 2009. Contract farming in China: Perspective of Smallholders. Contributed
Paper prepared for presentation at the International Association of Agricultural Economists
Conference, Beijing, China, August 16-22.
Hawes, A. 2010. Chief Programme Officer – Department of Agriculture Forestry and Fisheries of
South Africa. Pretoria: Personal Interview, 22 July.
Horna, J. & Oppen, vM. 2006. Supporting Agriculture Extension: Could Farmers Contribute?
Contributed paper for presentation at the International Association of Agriculture Economist
Conference, Gold Coast, Australia, August 12–18.
61
Industrial Development Corporation Annual Report. 2005–2009. Johannesburg.
Industrial Development Corporation, 2005. IDC/Agribusiness/BEE Partnership Scheme.
Industrial Development Corporation. 2008. Kat River Scheme – IDC Re-Submission Report.
Katchova, A. 2008. Agriculture Contracts and Alternative Marketing Options: A Matching Analysis.
Illinois: University of Illinois.
Kirsten, F.K., Dorward, A.R., Poulton, C. & Vink, N. 2009. Institutional Economics Perspective on
African Agriculture Development. Washington D.C. International Food Policy Research Institute.
Kirsten, J. & Kherallah, M. 2002. The New Institutional Economics: Applications for Agriculture
Policy Research in Developing Countries. Agrekon, 41(2), June, 111-134.
Konlambigue, A. 2007. Financing Agriculture Input in Northern Togo through an Inventory Credit
System: An Economic Analysis of Institutional Response. AAAE Conference proceedings, 119124.
Kudadjie-Freeman, C., Richards P. & Struik, P. 2008. Unlocking the Potential of Contract Farming:
Lessons from Ghana. The Gatekeeper Series 139, December.
Kumar, J. & Kumar, P. 2008. Contract Farming: Problems, Prospects and its Effect on Income and
Employment. Agricultural Economics Research Review, 21, July-December, 243-250.
Lincoln, Y. & Guba, E. 1985. Naturalistic Inquiry. London: International Educational and
Professional Publisher.
Llanto, G. 2006. Overcoming Obstacles to Agriculture Microfinance: Looking at Broader Issues.
Asian Journal of Agriculture and Development, 4(2), 23-40.
Louw, A., Jordaan, D., Ndanga, L. & Kirsten, J.F. 2008. Alternative Marketing Options for SmallScale Farmers in the Wake of Changing Agri-food Supply Chains in South-Africa. Agrekon, 47(3),
September, 1-22.
Mangala, K.P. & Chengappa, P.G. 2008. A Novel Agribusiness Model for Backward Linkages with
Farmers: A Case of Food Retail Chain. Agricultural Economics Research Review, 21 (Conference
Number), 363-370.
62
Marcoul, P. & Veyssiere Luc. 2008. A Financial Contracting Approach to the Role of Supermarkets
in Farmers’ Credit Access. Selected Paper prepared for presentation at the American Agricultural
Economics Association Annual Meeting, Orlando, FL, July 27-29.
Matshe, I. 2009. Boosting Smallholder Production for Food Security: Some Approaches and
Evidence from Studies in Sub-Saharan Africa. Agrekon, 48(4), December, 483-511.
Minot, N. 1986. Contract Farming and its Effect on Small Farmers in Less Developed Countries.
Michigan: Michigan State University.
Miyata, S., Minot, N. & Hu, D. 2007. Impact of Contract Farming on Income. Washington:
International Food Policy Research Institute.
Mulaudzi, M. 2010. Transformation officer – Citrus Research Institute. Fort Beaufort: Personal
interview, 26 July 2010.
Nel, E. & Davies, J. Unknown year. Farming Against the Odds: An Examination of the Challenges
Facing Farming and Rural Development in the Eastern Cape Province of South Africa.
Unpublished research report. Grahamstown: Rhodes University.
Nieman, G. & Nieuwenhuizen, C. 2009. Entrepreneurship: A South African Perspective. Pretoria:
Van Schaik.
Painter, C. 2010. Director, Riverside. Fort Beaufort: Personal interview, May 2010.
Pauw, K. 2005. Quantifying the Economic Divide in South African Agriculture: An Income-Side
Analysis. Unpublished research. PROVIDE Project.
Pillarisetti, S. & Mehrotra, N. 2009. Credit Markets for Small Farms: Role of Institutional
Innovations. Canterbury: University of Kent.
Porter, G. & Phillips-Howard, K. 1995. Farmers, Labourers and the Company: Exploring the
Relationships on a Transkei Contract Farming Scheme. Journal of Development Studies, 32(1),
October, 55–73.
Poulton, C., Dorward, A., Jowett, A., Peacock, C. & Urey, I. 2004. Priorities and Pre-Conditions for
Successful Investment in Smallholder Agriculture in Sub-Saharan Africa. Proceedings of the
Inaugural Symposium, 6–8 December, Grand Regency Hotel, Nairobi, Kenya.
63
Rehber, E. 1998. Vertical Integration in Agriculture and Contract Farming. Department of
Agriculture Economics. Turkey: Uludag University.
Robson, C. 2002. Real World Research. Melbourne: Blackwell Publishing.
Hall, R. 2009. Dynamics in the Commercial Farming Sector. Another Country Side. Bellville:
Institute of Poverty, Land and Agrarian Studies, School of Government, University of the Western
Cape.
Saigenji, Y. & Zeller, M. Effect of Contract Farming on Productivity and Income of Smallholders:
The Case of Tea Production in North-Western Vietnam. Stuttgart: University of Hohenheim.
Sartorius, K. & Kirsten, J. 2002. Linking Agribusiness and Small-Scale Farmers in Developing
Countries: Is there a New Role for Contract Farming? Unpublished Research. Pretoria: University
of Pretoria.
Sartorius, K. 2003. Linking Small-Scale Farmers to Agribusiness: The Economics of Contracting.
DCOM–dissertation. Pretoria: University of Pretoria.
Sartorius, K., Kirsten, J. & Masuku, M. Unknown date. A New Institutional Economic Analysis of
Small Farmer Contracts and relations in the Sugar Supply Chains in South Africa and Swaziland.
Unpublished research report. Pretoria: University of Pretoria.
Seymour, R. 2010. Agriculture Moves Centre Stage. African Business, August–September, 26–28.
Sharma, V.P. 2008. India’s Agrarian Crisis and Corporate-Led Contract Farming: Socio Economic
Implications for Smallholder Producers. International Food and Agribusiness Management Review,
11(4), 25-48.
Simmons, P. Unknown year. Overview of Smallholder Contract Farming in Development Countries.
Unpublished research report. Graduate School of Agriculture and Resource Economics, Australia:
University of New England.
Singh, R. 2009. Effectiveness of Contract Farming Practices for Agriculture Development and
Equity. New Delhi: Consortium for Trade and Development (Centad).
Sivramkrishna, S. & Jyotishi, A. 2008. Monopsonistic Exploitation in Contract Farming: Articulating
a Strategy for Grower Cooperation. Journal of International Development, 20, 280–296.
64
Spio, K. 2002. The Impact and Accessibility of Agriculture Credit: A Case Study of Small-Scale
Farmers in the Northern Province of South Africa. Pretoria: University of Pretoria.
Sriboonchitta, S. & Wiboonpongse, A. 2008. Analysis of Contract Farming in Thailand.
Unpublished research report. Thailand: Chiang Mai University.
Statistics South Africa (StatsSA). 2002. Report on the Survey of Large and Small Scale
Agriculture. Pretoria: Statistics South Africa.
Tiongco, M.; Lapar, M.L.; Costales, A.; Son, N.T.; Jabbar, M.; Staal, S. 2009. Is contract farming
really pro-poor? Empirical evidence in northern Vietnam. Contributed paper presented at the 27th
conference of the International Association of Agricultural Economics, Beijing, China, 16-22 August
2009. Nairobi (Kenya): ILRI.
United Nation Statistics Division (UN). 2007. [Online] Available: http://unstats.un.org/unsd/
demographic/default.htm. Accessed: 30 May 2010.
United Nations Conference on Trade and Development (UNCTAD). 2009. The World Investment
Report (WIR). New York: United Nation.
Van Averbeke, W. & Mohammed, S.S. 2006. Smallholder Farming Styles and Development Policy
in South Africa: The Case of Dzindi Irrigation Scheme. Agrekon, 45(2), June, 136-157.
Van Rooyen, C.J & Botha, C.A.J. 1998. Small Farmer Development in South Africa: Problems and
Proposals. In Van Rooyen, C.J., Groenewald, J.A., Ngqangweni, S. & Fenyes, T.I. (eds.)
Agriculture Policy Reform in South Africa. Cape Town: Africa Institute for Policy Analysis and
Economic Integration, 52-62.
Van Rooyen, C.J. & Nene, S. 1995. Experiences with Small Farmer Support Programmes. In Van
Rooyen, C.J., Groenewald, J.A., Ngqangweni, S. & Fenyes, T.I. 1998. Agriculture Policy Reform in
South Africa. Cape Town: Africa Institute for Policy Analysis and Economic Integration, 44–51.
Welman, C., Kruger, F. & Mitchell, B. 2008. Research Methodology. Cape Town: Oxford University
Press Southern Africa.
Woodend, J. 2003. Potential for Contract Farming as a Mechanism for the Commercialisation of
Smallholder Agriculture – A Zimbabwe Case Study. Food and Agriculture Organisation,
September.
65
Wubalem, G. & Fufa, B. 2007. Integrating Small Scale Farmers into Bread Wheat Marketing Chain
through Contract Farming in Ethiopia. AAAE Conference Proceedings, 239-242.
66
Annexure A
Background of farmers
•
How long have you being involved in the Kat River Scheme?
•
What was your experience in farming before joining the Kat River Scheme?
Market assistance provided
•
After harvesting, what assistance is provided by Riverside in marketing your fruit?
•
After the sale of your produce, is the net amount attributable to you excluding the selling cost
explained?
•
Do you understand how the net amount attributable to you after the harvest is attained?
•
Do you know of other alternatives available to market your produce at harvest?
•
Will those alternatives offer you a better return than selling through Riverside?
•
Will you like to sell to these alternative marketing options if you were not restricted to the
Riverside arrangement and why?
•
If it is because these alternatives offer higher prices than Riverside, how do you know that
the prices are higher than from Riverside?
Technical and training assistance provided
•
Do you have a mentor?
•
Who is your mentor?
•
How often do you see your mentor in a month?
•
Do you understand the instruction and advise your mentor gives you?
•
What technical assistance does your mentor provide you?
•
Do you always implement the instructions that your mentor gives you and if not why?
•
Assuming that you had access to the same amount of capital that you have now for
production and you did not have the mentor’s technical assistance, do you feel that the
technical assistance provided by Riverside has improved your output compared to if you did
not have a mentor? If yes or no, why?
Financial assistance provided
•
Are the expenses (e.g. Fertilizer, pesticides etc.) paid for, on your behalf, discussed between
you and your mentor to your satisfaction?
•
Do you, on a weekly or monthly basis check the expenses paid for on your behalf to third
party invoices? If not why?
67
•
Do you on a monthly basis check the invoices to an expense report?
•
Are you aware of your management accounts that documents your monthly income and
expenses?
•
Do you reconcile the expense report to your management accounts every month?
•
Are your queries addressed?
•
Are your queries addressed to your satisfaction?
Dealing with Agribusiness and IDC
•
Do you obtain a salary from Riverside for your work?
•
How much is your salary?
•
Are you aware of the fact that you will only obtain a salary from your farming operation until
the loan with IDC is repaid?
•
How do you feel about the fact that after harvesting, none of the selling income comes to you
but goes into repaying the loan with IDC?
•
What do you think can be done to improve this arrangement between IDC, Riverside and
you?