Farmers are smart. I have always thought so, and that was the only conclusion that could be reached from a meeting I had with farmers in Bangladesh last month. As we sat on a mat with a group of farmers who are part of the ACI Agribusiness contract farming project, muffled up against the unusually cold weather that was sweeping through the country, I reflected that these were savvy operators. I was reassured that they would not be over matched when it came to negotiating the terms of a contract farming arrangement for the coming season.
Sometimes when agricultural supply chains are discussed, farmers are portrayed as being powerless, starved of information and lacking key skills and knowledge. In a system-wide analysis this may well be true, but this does not mean that farmers themselves are not capable of making complex judgements and managing their risk astutely. In fact, they have to. Talking with this group, it was very evident that they have a good understanding of both the benefits and risks of working with a large company.
The headline of any contract farming arrangement will be the commercial terms, and in particular the price that the buyer will pay for the goods, and how that relates to prevailing market price. In the ACI sustainable contract farming model, farmers are also buyers, as they are sold ACI seed, fertiliser and agricultural chemicals. This is common: as Caroline Ashley notes in her recent Editor's Choice ‘...farmers are not just producers in a value chain (selling produce) or just consumers (buying inputs). They are both.’
These are some of the judgements that the farmers we spoke to are making about the commercial deal with ACI:
1. Buying decisions
Up to now this group has not been able to buy ACI seed. Price is not the main factor in this purchase. What they want to know is the yield per unit area of tomatoes they will get relative to other, possibly cheaper, seed. So what are these smart farmers doing? They are running their own trials of ACI seed alongside other varieties in the season before the details of the contract with ACI will be negotiated. In this buying decision, quality trumps price, but this needs to be assured.
Three different types of tomatoes on show, with the ACI variety lower right
2. Credit decisions
Farmers in this area use fertiliser on their tomatoes, and also spray chemicals to keep the crops clear of pest and disease. What is important to the farmers in this regard is the seasonal credit that is available for these inputs. The fact that ACI will build in credit to the contract farming model matters a great deal to these farmer, who compare the deal on offer from ACI to the alternative products in the market. Microfinance, while widely available in Bangladesh, is often not available for the relatively short period that is needed for a cropping season, and often has to be serviced in monthly instalments. Personal loans are available, but these are very expensive. Within the contract farming model, farmers will be given ACI inputs, the cost of which will be deducted from the sale of tomatoes to the company. This is therefore a perfectly tailored financial product in respect of both duration and repayment terms.
3. Investment decisions
Farming is hard work, and there are only so many hours in the day. Land is scarce and has a cost. There were landless farmers in the group we spoke to who are renting land, and everyone else in the group knew what rents were paid, suggesting that there is a market for such land. Therefore even if you have land, when making decisions about how to use it a farmer will take into account the opportunity cost of renting it to someone else.
Farming is also a risky business, subject to uncertain weather and to large fluctuations in market price for your products. These farmers reduce such risk by having a diversified portfolio of crops – not just tomato but a wide range of other vegetables, fruit and grains.
They are also highly aware that the returns from a credit-intensive model such as contract farming can be high – but this also requires higher investment on their part to safeguard these returns. They therefore adopt different farming systems for the same crop, depending on a risk/return calculation. For the ACI tomatoes they are trialling they have invested in building cane structures to train the tomatoes up and keep them off the ground. They have planted them in rows with gaps between to aid in care of the plants and harvesting – which means more bare soil to weed. There are other tomato varieties in the same field which are planted at high density, with no canes and high soil coverage, even though it is likely that some of the crop will rot on the ground.
The well organised growing system for ACI tomatoes. Compare that to system that the farmers are using for the other varieties, pictured above
4. Marketing decisions
What deal should these farmer strike with ACI for selling the tomatoes? Should they agree a fixed priced up front, and thereby guard against having to sell at a loss? Or should they have a price pegged to a market benchmark at the time of sale, in case this happens to be very high? Talking to the farmers, they don’t see maximising the sales price as the main driver. Firstly, they know the value of the credit they are being offered. Secondly, being able to sell all of their crop when it is ripe is a major factor (i.e. sales volume). Thirdly, the convenience of transport arriving to collect the crop is important to them, as taking a crop to market is time consuming and awkward. All these factor make them very persuaded as to the wisdom of negotiating a below market price with ACI, which will still be a very good deal for them. What they fear most is that this deal won’t then be executed by ACI: that the transport won’t turn up when the crop is ready. When asked whether they will be tempted to side sell if the market price is very high – the answer was a baffled look. They explained that this is not possible because they will have a contract to honour.
So my conclusion is that farmers are smart. How about the companies that they seek to contract with? They also make considered judgements. In ACI’s case, the company’s decisions are based on careful research and analysis, assisted by consultants that have worked with them as part of the BIF support. For this side of the story you can review the excellent report that the consultants prepared for ACI here.
ACI recognises that the key to contract farming is to build a long term relationship with farmers such that there is trust on both sides. This trust will be built up over time, and will grow every time an ACI transport stops at the roadside near the village and the new crop of tomatoes is loaded.
Further information: Engaging farmers as suppliers and consumers know how page
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