Report: Integrating Small Farmers in to Regional and Global Value Chains through Contract Farming Workshop, November 3-7, 2014, Vietnam

Group Photo of Participants

Group Photo of Participants

BACKGROUND

Globalization and the liberalization of trade in agriculture and food products have been reshaping the organization of markets and relationships of the players. Traditional supply driven, open marketing systems for agri-food products are being replaced by market-driven, closed, coordinated value chains. This trend could leave many unorganized small farmers at a great disadvantage with no bargaining power in markets and unable to compete with well connected players. They also have to bear all the risks associated with crop failures due to climate change, physical damage due to poor postharvest handling, and depressed market prices, among others. One way of enabling farmers to reduce their exposure to various risks and have a guaranteed market outlet for their products is through contract farming. The scheme offers great potential to be mutually beneficial to small farmers and purchasing firms. Although the contract farming concept was introduced several years ago, many small farmers are still unable to benefit from such schemes, and some of those who have participated in a scheme faced many issues due to their lack of knowledge and the absence of enabling environments and effective facilitators. There is a huge demand for information and technical support on contract farming practices and issues in various countries, especially in the Asian region.

The Food and Agriculture Organization of the United Nations (FAO) has been responding to this growing demand by disseminating knowledge and publications on the conceptual, operational, and legal aspects of contract farming. To complement FAO’s efforts, the APO has integrated the subject into a few workshops conducted in its member countries in the past.

OBJECTIVES

1) To enhance understanding of the value chain approach in agribusiness and  importance for small farmers to increase their productivity and incomes; and

2) To develop ability to train and facilitate setting up contract farming operations involving small farmers.

PARTICIPANTS

There are 21 total number of participants, 19 overseas and 2 locals.

PHILIPPINE PARTICIPANTS

Ms. Dawn Jamandre
President
Jamandre Industries Inc

Mr. Joselito Gutierrez
Senior Vice President
Land Bank of the Philippines

Ms. Pamela Henares
Co-owner
BuroBuro Springs Vermi Farm

SCOPE, CONTENT AND METHODOLOGY

TOPICS DISCUSSED AND KEY INPUTS DELIVERED BY RESOURCE PERSONS

Presentation  1 – Value chains and supply chains: Concepts, principles, and agribusiness applications;
Presentation 2 – Enabling Environment to support farmers’ involvement in the value chains;
Presentation 3 – Contract farming:  Basic concepts;
Presentation 4 – Setting up contracting operations, Rice case from India, Poultry case from Brazil;
Presentation 5 – Considerations on legal aspects of contract design and enforcement;
Presentation 6 – Contract farming in Vietnam;

METHODS OF DELIVERY INCLUDING SITE VISITS

• Lectures with power point presentations
• Site visit to farmers cooperative producing vegetables for BIG GREEN CORPORATION
• Site visit to one of the BG GREEN retail stores in Hanoi
• On-line resources for contract formats, and a legal guide for contract farmers
• Group work
• Country radar graph

HIGHLIGHTS OF THE PHILIPPINE COUNTRY PAPER

Pamela Henares and Dawn Jamandre prepared a presentation on Poultry Contract growing.  Mrs. Henares, a contract grower of San Miguel delivered the paper, The Country Paper also touched on how Negros Island is organizing small coffee growers in the mountains.

Mr. Joselito Gutierrez shared a proforma contract of the Landbank of the Philippines.  Except for identification of the party to provide the transport and delivery of produce, it contained the items recommended by the FAO experts. Further, it highlighted the commitment needed from buyer firm to ensure technical assistance for viability and sustainability.

HIGHLIGHTS OF COUNTRY PAPERS PRESENTED BY OTHER PARTICIPANTS

All countries reported the strong support of their Governments for small farmers.  Contracts for flowers, fruits, and vegetables were reported by Taiwan.  Informal contracts were also discussed.  CD with the country papers and power points is included as part of this report.

OUTCOMES AND EVALUATION

KNOWLEDGE AND BENEFITS ACQUIRED FROM PARTICIPATION TO THE PROJECT

• Guidelines for drafting the contract between producer and buyer.
• Use of contract growing to address the large volume required for globalization, and to make the small farmers (land reform beneficiaries, for example) profitable and sustainable.

WHETHER THE PROJECT MET ITS OBJECTIVES

Yes in terms of providing the participants with information on the contract farming activities of neighboring ASEAN countries.  FAO shared their online resources as well as documents we could access when making contracts

WHETHER THE PROJECT MET THE OBJECTIVES FOR PARTICIPATING AND EXPECTATIONS

Contract farming may offer organized small farmers the advantage of better bargaining power in markets and allow them to compete with well connected players, as in the case of the ASEAN Integration set for next year (2015).  Contract growing for small farmers may lessen the risks associated with crop failures due to climate change, physical damage due to poor postharvest handling, and depressed market prices, among others. Contract farming may enable small farmers to reduce their exposure to various risks and have a guaranteed market outlet for their products.  This may be an option to make Agrarian Reform Beneficiaries profitable and sustainable.

WHETHER THE RESOURCE PERSONS WERE KNOWLEDGEABLE AND EFFECTIVE IN THEIR PRESENTATION

Resource persons have had a lot of experience reviewing contracts and monitoring projects.  While some of the contracts they provided for review and workshop sessions were sometimes deficient in the translation and at first appeared to be one-sided, the projects actually benefited the contract farmers. The participants were provided with the radar chart to quantify the technical, cultural, economic and enabling environment aspects for contract farming to be adopted by the stakeholders.

• For more information http://www.fao.org/ag/ags/contract-farming

RECOMMENDATIONS AND ACTION STEPS

• Agriculture should be treated as a business. Optimize the farmer group organizing programs by strengthening farmer organizations’ viability.  Agreement for the price should be based on specific standards of the product. Crop insurance schemes should be in effect to protect producers.

• While contract farming is a good vehicle to establish a high efficiency agricultural marketing system of horticulture, the understanding and maintenance of contracts for farmers and business are initially challenging. It is recommended that government regulations be in place to lead to a sustainable relationship that is advantageous for both parties in Contract Farming.

• Successful contract farming will require Integrating support from government, solid R&D (market & cultivation), a strong relationship with farmers, production of a variety of vegetables with high standard, and well-known branding as in the case of the Royal Project for the Hilltribes in Thailand.

• Contract growing shares equitably risk and profit between farmer and integrator. Company owned farms are more expensive to operate and land use is now restricted with agrarian reform.  Scaling up production through farmers is faster than company farmers can expand their markets with new products. Micro insurance may reduce risk for small farmers. Contract farming is acceptable to communities because of job generation. Community organizing and capability building is sine qua non for success. Company-farmer relationship should be transparent and equitable.

• New initiatives to promote involvement of the youth in the agriculture sector (Young Agropreneur Program).  Development of idle land – as long as suitability of the land for particular crop is identified . Contract farming has to be mutually beneficial for:

Producers – if Inputs and production services are provided, such as:
• Access to credit
• Skill and technology transfer
• Assured market outlet
• Stabilized income

Purchasers – who will be assured of
• Reliable supply of raw materials
• Overcoming land constraints
• Greater conformity to desired quality and safety standards
• Labor cost/ issues reduced

RECOMMENDATION ON POTENTIAL ACTION STEPS TO BE TAKEN BY THE PHILIPPINE NPO (DAP)

Pursue the possibility of contract farming options of the Agrarian Reform Beneficiaries if proper financing and mechanization are used for larger parcels of land to maximize economies of scale.  This should be done in collaboration with Land Bank of the Philippines or the Development Bank of the Philippines.

• Review Government incentives that can promote inclusion, but:
 May pose risks to the Contract Farming (CF) scheme in cases of policy changes
 Need for risk assessment in CF business plans

• Further research is required to better understand the cost to companies of smallholder inclusion in Contract Farming
 Actual costs (investment and transaction costs) are rarely discussed
 Will likely influence the diversity of private sector firms engaging with smallholders through CF (large vs. SMEs)

RECOMMENDATION ON POTENTIAL ACTION STEPS TO BE TAKEN BY THE PHILIPPINE GOVERNMENT

Move into another phase of Land reform – identify best use for 100 hectare parcels of land, find purchasers and financiers for contracts to reduce cost of production, and rationalize the use of mechanization.   This will improve the Philippines’ position in the Asean Integration next year. Expansion of CF will not necessarily lead to exclusion of smallholders from agrifood supply chains

• Factors other than farm size play a role in the selection of suppliers (location, type of agricultural product, access to land, government incentives
• The territorial dimension should not be overlooked
• Firms select farmers from within a given geographic domain. Motivations include socio-cultural aspects, agro-climatic specificities, the existence of irrigation infrastructure and the relative distance to processing facilities.
 Inclusion of smallholders: Positive effects depending on farmer location & commodity type
 Clauses and conditions:
o Market-based pricing mechanisms
o Explicit quality requirements & penalties
o Inputs access, training, supervision
o Risk mitigation

RECOMMENDATION ON POTENTIAL ACTION STEPS TO BE TAKEN BY OUR COMPANY/ORGANIZATION

Advocate for fair contracts to produce quality products at reasonable cost, allowing the small farmers to be profitable and sustainable.

ACTION PLAN TO DISSEMINATE THE KNOWLEDGE YOU GAINED TO OTHERS TO GENERATE MULTIPLIER EFFECT

Coordinate with APO to organize a workshop with the Land Bank of the Philippines and the Departments of Trade and Industry, Agrarian Reform and  Agricultue to determine best places to implement contact farming and identify the best sites (relatively free of weather and climate change disasters) to develop a method for contract farming, or at least clustering of producers of a high value crop. Realities to consider:

• Expansion of CF will not necessarily lead to exclusion of smallholders from agrifood supply chains.
• Factors other than farm size play a role in the selection of suppliers (location, type of agricultural product, access to land, government incentives.
• The territorial dimension should not be overlooked.
• Firms select farmers from within a given geographic domain. Motivations include socio-cultural aspects, agro-climatic specificities, the existence of irrigation infrastructure and the relative distance to processing facilities.
• Common clauses & conditions, despite commodity differences.
• Market based pricing mechanisms, explicit quality requirements and penalties, penalties for non-compliance.
• Good contractual design important for inclusion.
• Provision of technical assistance and pre-financing of inputs: an essential requirement for inclusive market access.
• Technology uptake essential to ensure ability to comply with quality; input pre financing also favors cost competitiveness.
• Newer roles for third parties in CF operations.
• In addition to matchmaking, extension, financial intermediation and dispute resolution: third-party certification; commission agents providing value adding services; management certification.
• Market competition at the first-handler buying level does not necessarily threaten the success of CF.
• May also be a factor that contributes to strengthening the sustainability of CF operations as firms come up with innovative procurement solutions through CF to offer better conditions to their contracted farmers .
• Side-selling (pole vaulting) is  inevitable, but:
 Does not necessarily impede successful implementation & sustainability of CF with smallholders.
 Conducive enabling environment is important for long-term sustainability, but innovative contractual design can help to overcome legal and regulatory constraints.

SUBMITTED BY:

PAMELA HENARES
Co-Owner
Buroburo Springs Vermi Farm

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