Trendy but Risky: Questioning Outgrower Schemes in Light of the Agrica Rice Plantation in Tanzania

Wednesday, July 1, 2015

“Before I entered into the outgrower scheme, my life was not very easy, but it was ok. After joining the scheme, my situation became much harder. It was stressful to think about the loan and about not being able to get enough harvest. I was not free.” – Villager, Kilombero Valley, Tanzania, November 2014 

Contract farming and outgrower schemes are two terms used interchangeably to describe contractual agreements between farmers (outgrowers) and firms (offtakers). In contract farming, the outgrower agrees to provide a pre-determined quantity of a product at a given time and price, meeting the quality standards set by the offtaker. In return, the firm commits to purchasing the product and sometimes supports the production, for instance through the sale or the loan of agricultural inputs (e.g. seeds, fertilizers, pesticides).

Woman weeding rice fields next to KPL Plantation. Credit: Greenpeace

Although contract farming isn’t new, in recent years it has been increasingly promoted by large institutional and bilateral donors. Outgrower schemes are promoted as a silver bullet solution to link smallholders to global markets, introduce “modern” agricultural technologies, and increase small farmers’ productivity. In 2014, the International Finance Corporation (IFC), the World Bank’s private sector arm, even created a web platform and a handbook on “Working with Smallholders,” encouraging big agribusinesses to integrate small farmers into their supply chains. 

The new trend favors outgrower schemes for they are labeled “responsible investment practices.” As such, they benefit from government incentives like in Tanzania, where the government program known as Southern Agricultural Growth Corridor of Tanzania (SAGCOT), established in 2010, encourages a model of nucleus plantations and outgrower operations. This is the model chosen by the rice producer Kilombero Plantation Ltd (KPL), a subsidiary of the British company Agrica. KPL established a 5,818-hectare nucleus plantation in the fertile Kilombero Valley of Tanzania and sought to expand its sales by contracting outgrowers who cultivate rice in the Valley. 

The company received financial backing from Norfund, the Norwegian investment fund for developing countries; Capricorn Fund, a US private investment firm co-founded by eBay philanthropist Jeff Skoll; as well as from the Alliance for a Green Revolution in Africa (AGRA), and from aid agencies such as the UK aid department (DfID) and USAID. With this significant financial support, KPL developed a program to train farmers to use system of rice intensification (SRI) technologies. The SRI consists of a mix of agricultural practices with proven track record of increasing rice yields. 

As of 2014, out of 6,527 farmers trained in SRI, about 800 had signed an outgrower contract with KPL. Through this agreement, they received a loan from a local microfinance institution (MFI), which they had to repay through both cash and in-kind payment. The contracts specified the quantity and price of the rice that farmers would sell to KPL to repay their loans. The contract also required that farmers use part of the loan to purchase an input package of seeds, Yara’s chemical fertilizers, and weeding equipment. 

According to a June 2015 report by the Oakland Institute, released in collaboration with Global Justice Now and Greenpeace Africa, while KPL’s SRI training was successful in helping farmers improve yields, the outgrower program soon became problematic. Farmers reported overwhelming debts with difficult payment deadlines. Some of the cash payments were due only two weeks after receiving the loan, at a time when farmers had had to make important pre-harvest investments. One of the MFIs experienced default rates of 46 percent in 2013. Farmers feared that their household’s possessions would be seized in case of default. Some reported their beds, bicycles, and mattress were seized to compensate lack of payment. Others were forced to sell their homes to clear the debt. The MFIs interest rates, which outgrowers had to repay in addition to their loans, ranged between 8 and 10 percent.  

Farmers in Kilombero express important doubts about the input package they were forced to buy from the KPL-Yara partnership. “Through the contract, we were forced to accept technologies that we don’t really need to get a good harvest,” a farmer explained. In other contexts, often less hospitable than the fertile Kilombero Valley, SRI practices perform extremely well with the application of manure and compost, and sometimes small quantities of inorganic fertilizers. In these cases, the reduction of chemicals significantly cut farmers’ production costs. In contrast, KPL’s scheme forced farmers to spend close to half of the TZS 400,000 ($175) loan on agricultural inputs, including TZS 100,000 ($44) solely for Yara fertilizers. 

Heavy use of manufactured inputs and chemicals is a common feature of contract farming operations. This creates a situation where farmers are dependent on external inputs, which profits large companies instead of improving smallholders’ livelihood. In Kilombero, farmers report that profits from their increased yields were barely sufficient to repay the loans. 

Finally, farmers enrolled in the KPL outgrower scheme complain about the lack of autonomy. Not only the company dictated their methods of production, but they also depended on KPL to sell their output. According to outgrowers KPL breached the contract agreement on paddy prices after the 2013 harvest. The company paid half of the price previously agreed per debe (20 kg) and made the farmers bear the weight of bad rice market prices, which intensified the debt issue. 

KPL’s outgrower scheme was stalled during the 2014/2015 season because of the failure of the loan program. It is striking that this component of the project’s operation, which justified its “responsible investment” label and attracted funding from aid agencies, is precisely the one that failed. This poses a crucial question as to whether outgrower schemes are the way for agricultural development in Tanzania. Other studies of similar operations in the country have shown situations where outgrowers depended dangerously on a large buyer and therefore ended up bearing all the negative effects of market volatility. In another case involving the Swedish-owned company EcoEnergy, outgrower schemes were even accused by the NGO Action Aid of disguising a large land grab in the SACGOT area.   

Interestingly, when preaching the benefits of contract farming, the IFC explains: “a growing reality is that local resistance to land privatization in many indigenous areas means that large exporters must work with smallholders and their small landholdings in order to increase exports.” In other words, since large-scale land acquisitions have become riskier, outgrower schemes now seem an increasingly attractive means to secure companies’ commodities supply and access to land. 

This should warn us against the intentions of companies and large donors who back such schemes. While pretending to reconcile the interests of big agribusinesses with those of smallholders, outgrower models could be yet another way to extract more of countries’ natural and human resources. 


Notes

1. Contract farming rose in sub-Saharan Africa in the second half of the twentieth century as a response to the decline in large-scale plantations, which became riskier in the post-colonization context. See: Smalley, Rebecca. Plantations, Contract Farming and Commercial Farming Areas in Africa: A Comparative Review. Working Paper, Future Agriculture Consortium, April 2013. http://www.fao.org/uploads/media/FAC_Working_Paper_055.pdf (accessed June 25, 2015).

2. Working with Smallholders: A Handbook for Firms Building Sustainable Supply Chains. International Finance Corporation, World Bank Group, July 2013. http://www.ifc.org/wps/wcm/connect/8dc5628042112fdbba2fff494779b2ad/Handbook+-+Working+with+Smallholders.pdf?MOD=AJPERES  (accessed June 25, 2015).

3. In addition to the IFC’s observation that local resistance against land privatization is growing, we can add that media exposure and international advocacy denouncing land grabs has increased scrutiny and risk of large-scale land investments.