Deals that can break poverty cycle afflicting local farmers

Fanny Schertzer via Wikimedia Commons

Often hailed with the potential to be "the breadbasket of East Africa", the country falls far short in agricultural productivity compared to its potential.

In Tanzania, where over 80 percent of farming is carried out by smallholders, maize production yields an average of 1.4 metric tonnes (MT) per hectare. This pales in comparison to South Africa's average yields of 4.5 metric tonnes per hectare. Considering that Tanzania has double the amount of land under maize production (five million hectares to South Africa's 2.5 million) the capacity for increased productivity is enormous.

Factors constraining production

Smallholder farmer productivity in Tanzania is constrained by a range of factors, including poor-quality or non-existent inputs, geographic fragmentation and limited access to finance.

For many Tanzanian farmers, the production and harvest cycle suffer from minimal value addition. Most farmers only access or afford low-quality or even counterfeit seeds.

Fertilisers are found in insufficient volumes, incorrect combinations, or not at all. Small-scale rural farms sit at far distances from one another and from important value chain players like wholesale input suppliers and reputable buyers. Roads are sparse and unreliable, and transport is expensive.

Moreover, with little to no physical assets to offer as collateral, farmers are often barred access to finance that would enable them to overcome some of these barriers. This is especially true in Tanzania with history of communal land ownership. Together, these factors mean that farmers struggle to sell produce profitably.

As a result, they are also less able to invest in better quality production and higher productivity.

Forward buying contracts

Forward buying contracts aim to break this cycle by linking farmers with buyers in a stable, planned-out scheme. In these schemes farmers and buyers sign a contract for the purchase of a predetermined commodity volume and price, to be executed at a future date. Some more complex schemes involve multiple buyers, input suppliers, and large aggregations of farmers. One coordinated by the WFP in Tanzania, the Patient Procurement Platform (PPP), even provides credit lines for farmers to purchase higher-quality inputs.

When functioning optimally these schemes benefit both farmers and other value chain actors. From Dalberg's work talking to farmers and partners in Tanzania's PPP, forward buying contracts increase stability and predictability throughout the agriculture value chain, ultimately boosting productivity and increasing profits.

In particular, the following were the main benefits to the different parties:

Farmers benefit from scheduled produce purchasing at predictable prices, which prevents them from having to sell below market price to middlemen.

This guarantees higher income for re-investment in production through quality inputs, equipment, and training. Regular collections significantly reduce post-harvest loss incurred by poor market linkages and poor storage. Larger schemes also provide access to extension service providers offering crop-specific market information, crop-specific knowledge, and varied training.

Most importantly, these contracts can assist farmers to aggregate into groups that can access financial products unavailable to individuals.

Buyers are promised higher-quality, lower-priced produce in comparison to what they can normally purchase from brokers. They also negotiate in advance for quantities meeting their consumption demands, allowing them to better forward-plan.

Input suppliers gain access to a relatively untapped commercial market, given the currently low penetration rates of high-quality inputs among smallholders in Tanzania.

Overcome obstacles

These schemes can help overcome obstacles like limited farmer awareness of inputs, lack of financing for purchases, and geographic remoteness hampering delivery.

Financial institutions are also exposed to a large population of mostly unbanked individuals, representing huge potential as a subscriber market down the line. But implementing effective forward buying contracts isn't always straightforward. New schemes, particularly those involving many actors, must consider competing interests and address multiple hurdles. Some of the obstacles observed include:

Farmer mistrust and unease: Farmers are not always accustomed to legally binding contracts, especially with large companies with whom they have not interacted before. They may have concerns about the consequences of not meeting required quality or quantity due to external factors (e.g. weather), or about losing their flexibility to sell to other buyers before set collection times when they need cash fast.

Communication and coordination complexities: As the number of value chain players in a scheme increases, the risk of delayed or fragmented information flow grows as well. This can compromise the system's transparency and efficiency.

Insufficient agronomic training and knowledge transfer: If higher quality seeds and fertilisers through a forward buying contract are not also accompanied with appropriate training, high productivity gains may not materialise.

Increased purchasing risk for buyers: Purchasing wholesale through one contract can put buyers at risk of lack of delivery if harvests are low due to severe weather or drought or farmers break contracts in order to sell earlier in the season.

Extreme circumstances

In extreme circumstances buyers may find themselves unable to meet consumption demands if they near the end of the season and other produce sources are already sold out, exported or priced high.

Difficulty and cost of transport: Though forward buying schemes can link remote rural farmers to input suppliers and buyers, they cannot completely eliminate the high expense of long distances travelled on rocky backroads. Deciding who bears these costs adds an additional challenge, and for some farmers, this blocks their participation in the scheme.

In summary, forward buying contracts can generate tremendous impact for smallholder farmers and others but only if designed and executed well.

Edel Were works with Dalberg Global Development Advisors; a strategy consulting firm focused on global development and social impact.