Development processes leading to more productivity and income are not primarily the result of good resource facilities or supply of outside capital but have more to do with the way in which societies, village communities or even individuals organise themselves, how they encourage motivation and create the conditions for it to develop or sanction the infringement of agreed rules.

Working with contract farmers is a form of social organisation in the rural environment which - if it runs smoothly - promotes and rewards the farmers' entrepreneurial initiative while creating the conditions they need to increase their productivity, to improve the quality of their products and in many instances to act with more consideration for the environment as well. There is much to be said for working with contract farmers as one of the most efficient methods of developing rural regions in sub-Saharan Africa. The example of Europe also supports this point: contract farmers cooperating with agroindustrial enterprises have made decisive contributions to the development of whole regions: this applies in particular to vegetable growing, whether in Brittany in France, in Belgian Flanders, in the German Lower Rhine region or in the Polish region of Thorun. When considering sub-Saharan Africa, the question often raised is what significance contract farming has in the context of the rural population as a whole and whether it merely applies to a limited number of relatively well-to-do farmers who almost exclusively grow cash crops. As far as we know, there are no reliable figures available on sub-Saharan Africa as a whole. Rough estimates from the four countries Burkina Faso, Cameroon, Kenya and Zambia, however, show that the significance of contract farming for African agriculture (if the members of large cooperatives are included) is clearly higher than usually assumed. In Burkina Faso and Zambia, for example, 30 to 40 per cent of all farmers are contract farmers, who cooperate with the respective cotton companies in both countries. However, countries with more diversified agricultural production, such as Cameroon and Kenya, also have a high number of contract farmers. Cameroon, for instance, has about 650,000 contract farmers (out of approximately 1.5 to a maximum of 2 million farming households) in the areas of cotton, palm oil, rubber, rice, coffee, cocoa, green beans and tobacco. In Kenya it is estimated that, out of 3 to 4 million farming households, 1.2 million are contract farmers in the coffee, tea, dairy cattle, barley for brewing, vegetable, sugar and corn sectors. The vast majority of these contract farmers work on an area of one to a maximum of 10 hectares of land. If seasonal farm workers are included, it becomes obvious that contract farming can address the core of rural poverty in sub-Saharan Africa. The above examples show that contract farming systems are not directed solely at cash crops. The example of Kenya with its well-developed agroindustry illustrates, in particular, how willing this industry is to include contract farmers in supplying the domestic market as well. This applies especially to the dairy industry with approximately 250,000 contract farmers, but also to barley for brewing, corn and vegetables, which are not solely for export. The spread of "modern" types of retail trade over the coming years - the South African retail chain Shoprite, for example, is on the march through Africa - will contribute to the rapidly growing importance of agroindustries that supply the local market in sub-Saharan Africa. These agroindustries will again be reliant on the agricultural communities they supply being well organised so that they can have regular access to products of reliable and high quality. Furthermore, quite a number of cash crops are grown in rotation (like cotton) or in mixed cultures, like coffee and cocoa. In these cases, reasonably supported cultivation of cash crops will go hand in hand with the increase in production of food for the local market. From the development-political point of view, contract farming has the huge advantage that any kind of Development Cooperation can become established on existing, more or less well functioning organisational structures of private-sector companies and cooperatives. This suggests that a Development Cooperation focussing on contract farming could make a significant contribution to reducing rural poverty in sub-Saharan Africa. This is why the efficiency of contract farming concepts is to be examined more closely.

Contract farming : the interests of the parties involved

In the ideal case, contract farming consists of farmer and agroindustrial enterprise concluding a contract before sowing, which states that the farmer will sell all or part of his harvest at an agreed price and in a defined quantity to the agroindustrial enterprise as the contractual partner. The fixed price and purchase commitment are frequently a strong production incentive for the smallholders. Moreover, the company can provide the farmer with the appropriate high-quality seeds and, if necessary, with fertiliser and pesticides, as well as technical advice and infrastructure services. Such advance deliveries and services on account will then be deducted from the product price. The scope and type of advance services and deliveries will differ from case to case. In the case of certain cash crops like coffee, the purchase price is usually not agreed owing to the liberalised environment, but is determined by the world market price on the day of sale (farm gate price) with a certain discount for the goods and services rendered in advance. The contractual relationship and the consultancy resulting from it ensure the farmers' access to high-quality seeds (from which they would otherwise be excluded) and their compliance with the standards of good agricultural practice when it comes to using fertilisers and pesticides. It is important that a contract farming relationship between a farmer and a private agroindustrial enterprise in many ways resembles the contractual relationship between the member of a cooperative and a big cooperative. Cooperatives, too, guarantee purchase and provide their members with advanced deliveries and services to a certain extent. It should also be mentioned that both contract farmers and members of cooperatives voluntarily conclude contracts with the respective agroindustrial enterprise or their cooperative. As a rule, the farmers have a choice and often make use of it by growing other products on their own account. What makes agroindustrial enterprises in Africa regularly cooperate with contract farmers instead of exclusively farming areas of land under their own direction? The motives are varied and differ from one product to another, possibly also from one country to another. For certain products, such as cotton, rain-fed agriculture in rotation with food crops has proved its unrivalled efficiency in sub-Saharan Africa. Trials on large-scale irrigation cultivation of cotton have generally failed - with few exceptions - partly because of the high maintenance costs for the irrigation systems, security patrols required, mobilisation of thousands of harvest workers, etc. Furthermore, when special care is required in the cultivation and harvesting of the plants, qualified family-run farms can produce a considerably higher quality than big plantations, as frequently demonstrated by small coffee-growers in East Africa, for instance. In addition, working with contract farmers is an important element of risk diversification for many agroindustrial companies: harvest risks, for example due to climatic conditions, can be avoided or reduced thanks to the geographical spread of the contract farmers. From the business point of view, competition between the company's own core plantation and the department organising purchase through contract farmers can also be very useful. While organising the support for contract farmers is certainly time-consuming, but the investments required and sometimes the administrative overheads are initially considerably lower when compared with the development of company-owned plantation areas. In addition, there are more and more African countries where the land question is playing a decisive role. For instance, large areas for plantations are no longer available or only as a result of protracted negotiations which might stretch over several years. Many African governments as well as the public of the countries involved are increasingly judging foreign plantation owners by their promotion of independent farms. Consequently, big South African enterprises such as South African Breweries or Ilovo (sugar) attach great importance to cooperation with contract farmers, even if it is not necessarily the most efficient solution from a business point of view - as in the case of sugar. The cooperation with contract farmers therefore becomes a core element of corporate social responsibility and the promotion of Black Empowerment by these companies. From the farmers' point of view it is particularly the guaranteed sales, possibly the guaranteed price as well (which provides a good basis for calculation) and the access to high-quality input that militate in favour of contract farming. This is all the more important for small farmers in Africa who do not have systematic access to loans unless they can support their loan requests with sales contracts and guaranteed sales prices.

The risks of contract farming

The core problem of contract farming is non-compliance with contracts by both parties. If yields are considerably higher than planned and the prices go down, companies will avoid buying from contract farmers or only buy from them as a last resort, whereas poor harvests and high prices are a strong incentive for farmers to sell on the market rather than to the company at the agreed lower prices. Depending on the amount to be deducted for prepaid inputs, farmers tend to sell their harvest against cash to traders who have not been involved in the advance financing of the harvest and therefore buy without discounts. Repeated breaches of contract will undermine contract farming in the respective region and with the product concerned. Successful contract farming therefore needs careful design customised to the specifics of the region, the product and the parties' interests. It is not a problem, for instance, if there is demand for certain products of a specified quality but only for export purposes - which applies, for example, to haricots verts grown in Cameroon for Bonduelle - and if prices well above local prices are achieved. In this case, cooperation has been successful for many years with as many as 10,000 smallholders, who only use about one-fifth of their acreage for contract farming. In contrast to this, the long-standing dispute between the World Bank and many African countries about the privatisation of quasi-governmental cotton companies was essentially a dispute about the basic philosophy of contract farming. While the World Bank wanted to give the individual farmers a certain freedom in the choice of ginnery they sold their cotton to, the Africans and French argued that this would deprive the quite successful contract farming of its basis. Meanwhile, the World Bank has partly given way to this argument. There is a consensus developing that privatised cotton companies should continue to have regional monopolies with due consideration given to the cooperating smallholders. Wherever this is not the case, as in Zambia for instance, cotton companies find themselves unable to prepay fertilisers for the farmers. Years of experience in Zambia have shown that the lower the cash payout ratio is, the stronger the tendency of farmers to breach contracts and to sell their cotton to the first trader to come along. If discounts of more than 30 % are calculated for advance financings, farmers will leave the area, no matter how high the productivity gains resulting from the fertilisers and the absolute amount of income after deductions. Moreover, many cooperatives are facing massive loyalty problems in the aftermath of liberalisation (e.g. in the coffee sector). Some of them have lost 50-80 % of their turnover to traders. These traders argue with some justification that the inefficiency of the cooperative associations burdens the farmers with very high administrative costs and that they have not let the farmers participate in the development of world market prices. The reverse of the coin is that the massive slump in turnover has deprived cooperatives of the resources to maintain their agricultural consultancy services, which many traders have benefited from as so-called "free riders". This is another reason why the liberalisation of the coffee and cocoa market has caused quality to decline markedly in many countries. Contract farming and the environment in which it is implemented should therefore be designed so that farmers are particularly encouraged to comply with contracts. The important elements are:

• Attractive prices for contract farmers to enable them to achieve higher average incomes than other alternatives over one or more years in combination with productivity.
   
• Building up confidence. Especially private agroindustrial companies have to invest in confidence-building measures for the farmers (punctual payment, incentives, compliance with contracts in difficult environments, etc.). Well-run enterprises like Bonduelle in France know very well that farmers with whom the company cooperates are a source of capital worth fostering despite all the inevitable controversy, especially about pricing. The quality of the cooperation with contract farmers therefore has a high management priority in such companies. An important element of confidence-building is that agroindustrial companies in Africa learn how to deal appropriately with the living conditions of the farmers and their families on the whole. Rotation and the cultivation of mixed cultures can thus be a strategy of risk-hedging for smallholders, which makes sense and should also be encouraged in the long-term interests of the agroindustrial companies as well.
   
• Sector policies should be designed so that they allow for regional monopolies (e.g. in the case of cotton) under certain preconditions.
   
• Fixed purchase prices should only be agreed if they can also be complied with and kept up nationwide. A recommended alternative is to take world market prices as a basis for purchase prices. Prices fixed prior to sowing do not make any sense at all in the case of certain products for the local market, whose prices are subject to severe fluctuations depending on harvest and season and where the agroindustrial company - e.g. a preserves factory for tomato sauce - competes with the local market for fresh food. As far as I know, all such projects with contract farmers in sub-Saharan Africa have failed. In such cases, purchase contracts can only be implemented if it is possible to build up efficient daily markets with generally accepted prices in the respective regions during the harvest period. These markets will then form the basis for pricing at the time of delivery by the farmers.
   
• Payment modalities are another important issue for the farmers. Prompt payment to the farmers will improve compliance with contracts. Moreover, cash-flows should be adjusted to the needs of the farmers. If, for example, the beginning of term and consequently the payment of school fees, school uniforms, etc. is two months before the harvest, many farmers might tend to sell to traders offering suitable advance payments, even if they have to put up with discounts at a later point in time. Contract compliance will increase if the agroindustrial company (or cooperative) manages to address these needs appropriately, by cooperating with micro-finance institutions, for instance.
   
• Another important element is concentrated support and supervision of the farmers. The systems should be designed to enable the agroindustrial enterprise or cooperative to be in touch with farmers via consultants or lead farmers during sowing, growing and harvest periods, if possible once a week. This will not only guarantee the necessary regularity of consultancy but will also ensure that there is a relatively accurate record of the expected yield and that its delivery can be properly monitored. The implementation of such systems, known as "encadrement", is complex, but can become a win-win situation if the farmers' productivity can be increased and the increased production be accorded to the agroindustrial company. If farmers systematically breach contracts and fail to supply all or large parts of the harvest to the contractual partner despite, for example, advance finance and intensive consultancy services, sanctions have to apply. In this context it is important for the agroindustrial companies
    to be able to rely on the local police, courts or traditional arbitration courts.

However, contract farming can also bear considerable risks from the smallholders' point of view. This is especially the case if they are tied to a single product without any alternatives in case of crisis. Big agroindustrial enterprises can also take advantage of them when fixing purchase prices or prices for inputs. The public debate about contract farming frequently overemphasises these risks but , they are usually less of an issue in the reality of sub-Saharan Africa. This is particularly because, when big international companies are contractual partners, they are subject to rigorous public control by the civil societies and governments, which usually do not permit blatantly unfair contractual relations. This attitude prevails, irrespective of the degree of democratisation of the state concerned. The farmers can and often do drop out of contract farming and turn to other alternatives if contract farming no longer seems attractive to them. From the smallholders' point of view, there is a higher risk of the contractual partner becoming insolvent - for example as a result of blatant management errors - and therefore unable to pay the farmers. The risks resulting from an unequal balance of power in relation to contract farming can be limited. It is important, for example, that there are competing private (and possibly quasi-governmental) enterprises within a sector, including when regional monopolies are allowed. This means that all parties involved will retain alternative courses of action, for example in the event of a party going bankrupt as a consequence of mismanagement. It is also important that farmers' unions or cooperative associations are qualified so that - if farmers cannot decide in favour of competing providers - they can participate in discussions on fixing purchase prices or purchase prices for fertilisers and other agrochemicals. This also requires a high degree of transparency on the purchase and sales prices agreed by the agroindustrial partner. In cases of dispute regarding quality classification, determination of purchase and input prices, neutral mechanisms of arbitration should be envisaged, particularly where farmers are confronted with regional monopolies. Added security is provided by product labels or certifications which subject all contractual partners to independent control and create more transparency (see below). With a careful design contract farming becomes a "win-win"solution for farmers, agroindustries and the development of agricultural regions as a whole.