Agricultural Market linkages

This topic looks at one of the strategies used by farmers and small firms in the agribusiness sector to leverage cost, access markets and become competitive in the market. Emphasis was made on the use of contract farming (vertical linkage) and cooperatives (horizontal linkage).

1. Agribusiness Marketing Linkages in Agricultural Marketing Daisy Odunze

2. Linkages Whether small or large, farmers in developing countries face tough challenges. Producers of traditional commodity crops have experienced a consistent decrease in prices as world demand has fallen behind supply capabilities. Meanwhile, prices for inputs continue to climb. For many commodities, most of the value added is captured by agribusinesses in importing developed countries.

3. Linkages From a development point of view, the goal is often to push value added activities back toward the farm gate, so that small, local players can participate more effectively and profitably.

4. Linkages Linkages have been widely acknowledged as a means by which small farmers and processors gain competitive advantage in the market. to be competitive, there is need for Linkages through factor markets (labor, capital, land) Linkages through product markets Non-market linkages

5. Linkages VERTICAL LINKAGES refer to market and non-market relationships between firms operating at different levels of the value chain. Small to medium scale agribusinesses may not be connected to value chains that reach beyond their local community. Understanding the entire chain and facilitating the establishment of these linkages are often among the initial steps needed to provide these businesses access to more promising market opportunities.

6. Linkages The relationships between buyers and their suppliers are often indicative of the larger economic order and closely related to the relative size and resources of each player. Power is likely to reside with those who control access to markets and information about competing suppliers; understand consumer demand; define grades and standards; know how to employ specific technologies or production processes, and possess the ability to advocate for policy advantages.

7. Linkages Strong and dynamic vertical linkages are critical to the long-term competitiveness of value chains, as well as to the inclusion of small to medium scale producers in those networks. These linkages are the primary mechanism through which producers learn about changing market requirements. And it is through vertical linkages, in the form of contracts and other purchase agreements, that value chain coordination or governance is established .

8. Linkages Vertical linkages ; Contract farming Contract farming is a contractual arrangement between producers and buyers of a farm product. In essence, contract farming commits the farmer to produce a certain commodity at a certain time for an agreed price and, in return, the contractor undertakes to buy the commodity, and may provide agricultural extension and other services to producers in order to satisfy production requirements in terms of quality and quantity.

9. Linkages The contract can either be oral or written, and will specify one or more conditions of production and marketing of an agricultural product . Contract farming in Zimbabwe includes schemes for crops, livestock, timber, and wildlife.

10. Linkages A marketing contract is an agreement between a contractor and a grower that specifies some form of a price or pricing system and outlet ex ante. Production contracts are more extensive forms of coordination and typically include detailed production practices, inputs supplied by the contractor, specifications regarding the quantity and quality of a commodity and a price or pricing system .

11. Linkages Production contracts may also offer support such as the provision of credit, technical assistance and/or transportation. Contractors may be supermarkets, processors, or hotel, restaurant and institutional buyers. Such supply agreements spread the production and marketing risk between buyers and producers, capture economies of scale in bulk purchasing of inputs, reduce transactions costs, and provide a mechanism for buyers to source higher quality products.

12. Linkages Most buyers typically prefer to contract with larger producers, since transactions costs are lower, larger farms are more likely to be able to make necessary investments, and small farms usually require more assistance per unit of output . But s mall farms may have cost advantages in labor-intensive production activities. Last , farms’ willingness to learn and attitude may be more important than size.

13. Linkages In a “supplier’s market,” where there is a substantial gap between the amount of supply available and the amount demanded, buyers will work with small suppliers. In other cases, buyers may have no choice if small farms represent most of the supply base or control most of the land. In addition, contract enforcement may be more problematic with large farms.

14. Benefit Description Market Access Farmers can access markets that were formerly out of reach for them. Increased Incomes Contract farming promotes production of commodities that are sold for a higher price and may be grown without significant extra effort. Reduction in the Risk of Price Fluctuations Binding product prices are normally specified in the contract before production, thereby cushioning both the farmer and the contractor against price fluctuations. Credit and Financial Intermediation Contracting offers opportunities for lending to farmers who would otherwise be ineligible for credit. Timely Provision of Inputs Contracting enables timely delivery of inputs and products to markets, even in areas that have poor road networks. Monitoring and Labour Incentives Contract farming is a more efficient way of managing the productivity of labour since efficiency is directly related to return. Reduction of Production Risk Contract farming allows farmers to significantly reduce their risk in the event of crop failure because losses are shared by the contracting parties. Introduction of Higher-Value Crops Through contract farming, farmers can start growing new crops that they would otherwise not produce under conventional farming arrangements. Improved Collective Bargaining Contract farming results in improved awareness of the need for collective efforts for farmers’ common good and promotion of group and farmer association development. Household Spill-over Benefits Household spill-over benefits include improved food security, which results from adoption of improved husbandry methods. Improved Access to Extension Many contracting companies provide extension advice and other technical assistance that would, otherwise, not be available to farmers under normal circumstances. T ABLE 10.1: BENEFITS OF CONTRACT FARMING TO THE CONTRACTED FARMERS

15. Benefit Description Cost Efficiency Contract farming allows agro-business firms to improve cost efficiency and minimise risk by avoiding land purchases and hiring of labour. Quality Consistency With firms extending production methods and monitoring farmer practices, product quality consistency is improved. Facilitation of Trade Standard Requirements Multinational firms are using contract farming to facilitate the flow of traceable standard practices and to maintain control over inputs and production processes. BENEFITS OF CONTRACT FARMING TO CONTRACTING FIRMS

16. Challenge Description Contract Enforcement There is currently no legal enforcement of contracts in Zimbabwe, making it easy for both parties in the agreement to breach some clauses in the contract. Increased Labour Burden Contracting may reduce the burden of labour management for the contractor, but in actual fact, the burden is transferred to the producers. Monopsony Control Some buyers pay low prices to desperate farmers as they hold monopoly on the marketing of a given commodity. Bias Toward Large Farms One criticism that has been levelled against contractors is their bias toward large-scale producers at the expense of smallholders. Demand for Top-Level Managerial Skills Contract farming requires high-level managerial skills on the part of the contracting firms to be able to supervise producers. Increased Risk Contracting firms are required to bear increased risk in contract farming. CHALLENGES FACING CONTRACT FARMING IN ZIMBABWE

17. Linkages C ontract farming is not always beneficial to small producers. Small producers may be excluded; small producers may become trapped in unfavorable agreements and be unable to break the contracts; local markets may narrow as contracted production for goods demanded internationally squeezes out local production of staple goods; contract terms may deteriorate as contracts mature, and contract farming does not generally provide many opportunities for small producers to participate in value-added activities beyond the farmgate .

18. Linkages Contract farming depends on either legal or informal agreements between the contracting parties. These, in turn, have to be backed up by appropriate laws and an efficient legal system. Government needs to be aware of the implications of all laws and policy decisions on agribusiness development, including contract farming. While it may not be considered a precondition, it is desirable that governments play an arbitration or dispute resolution role.

19. Linkages HORIZONTAL LINKAGES refer to market and non-market relationships between firms at the same level of the chain . Development projects can contribute to the formation and strengthening of horizontal groupings as a way to increase the market power of small producers. Often these organizations (such as cooperatives or other member-based associations) provide a platform for smallholders to move into value-added processing activities.

20. Linkages When small farmers are grouped together, they can overcome many of the disadvantages of being small: lack of economies of scale, poor negotiating position with buyers and suppliers, inability to differentiate products, lack of access to market information and services needed to upgrade, and limited political clout.

21. Linkages C ompetitive position or market power is enhanced when producer groups organize themselves to perform other functions in the value chain, such as purchase of inputs; post-harvest packaging and processing; transport, or sales and marketing. When competently managed, such initiatives can increase benefits to smallholders by allowing them access to profits from multiple levels of the chain.

22. Linkages Cooperatives A cooperative is a corporation formed to provide goods and services to members either at cost or as near to cost as possible. Cooperatives are not formed to make profits, but to serve the people who own shares in the organization. In the agriculture industry, there are three kinds of cooperatives: supply (purchasing) cooperatives, marketing cooperatives, and service cooperatives.

23. Linkages The motivation to form co-operatives has three particular aspects: the need for protection against exploitation by economic forces too strong for the individual to withstand alone the impulse for self-improvement by making the best use of often scarce resources t he concern to secure the best possible return from whatever form of economic activity within which the individual engages whether as a producer, intermediary or consumer.

24. Linkages Supply (purchasing) cooperatives : these associations buy supplies, such as feed, seed, fertilizer, and fuel, in quantity for resale to their members . T he big advantage is that by buying in large quantities, cooperative members are usually able to save money over what they would have paid individually. In some cases, a supply cooperative manufactures its own supplies instead of buying from another company.

25. Linkages Marketing cooperatives : for the most part, marketing cooperatives assist production agriculturalists in marketing their agricultural products by finding buyers who will pay the highest price. Some marketing cooperatives process agricultural products, such as milk and vegetables, and sell them directly to consumers and retailers. Examples of marketing cooperatives are fruit growers’ cooperatives.

26. Linkages Service cooperatives : service cooperatives provide their members with a specific service, rather than a product, that members probably could not afford to obtain individually. Service cooperatives are not as numerous as marketing and supply cooperatives, but they provide valuable services to many farmers. Specific examples of service-type cooperatives include farm credit services, banks, rural credit union, mutual irrigation cooperatives, and artificial breeding cooperatives.

27. Linkages Structure and organization of co-operatives Primary co-operatives: A primary co-operative is one in which the shareholder are individuals; each of them having an equal share in its control. Secondary co-operative: A secondary (or federal) co-operative is one in which other co-operatives are the members. Apart from this basic difference the structure and organization of both types follow a very similar pattern.

28. Linkages Selling arrangements of co-operatives Outright purchase: In this case members are paid for their produce, at prices fixed by the co-operative, at the time of delivery, and the co-operative takes title to the produce. The co-operative then resells the produce at the most advantageous terms it can secure. Profits made on the transaction will be used first to meet the operating expenses, any surplus balance being used or distributed by decision of the General Meeting.

29. Linkages This approach requires the co-operative to have high levels of funds available . The main objection to outright purchase is that the co-operative carries all of the post harvest risks including: fall-off in demand, price fluctuation, reduction of produce value due to down-grading, deterioration giving rise to loss of quality and so value, failure of transport arrangements, spoilage, fire and theft. Some of these can be covered by insurance but most cannot.

30. Linkages Sale on commission: This far simpler, virtually risk-free, operation leaves the co-operative as the producers' agent with no legal title to the goods. All attendant risks therefore remain with the individual producers. The co-operative collects produce from members and sells in the most advantageous markets. It then deducts a commission at a previously agreed rate from the sale price. The co-operative meets the cost of its expenses from its commission income.

31. Linkages The main disadvantage of sale-on-commission is that neither the member nor the co-operative is able to exploit possible price improvement. Another is the possible delays in the producer receiving cash for his crop. No payment will be made by a co-operative until it has been paid by the customer.

32. Linkages The weakness of co-operatives Unfortunately, the potential of co-operatives, and the extent of their development, has, in many cases, fallen far short of expectations. Realism of objectives Conflict between economic and social purposes Misuse of co-operatives to pursue political objectives Managerial problems

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