An assessment of contractual arrangements for agricultural market access in South Africa : a smallholder's perspective

Smallholder farmers in South Africa have historically been precluded from the mainstream agricultural markets owing to various factors, chiefly, a non-existent enabling environment and lack of support from the government and/or relevant agencies. The post-1994 changes in the economy, and in particular in the agricultural industry, brought about the phenomenon of preferential procurement and contractual arrangements in agricultural value chains. Most agribusinesses and supermarkets in South Africa procure agricultural products under contractual arrangements. Recent studies and literature indicate that contractual arrangements are considered an ideal institutional arrangement for fostering market access for smallholder farmers. However, there has not been growth in incidences of sustained contractual arrangements between agribusiness, supermarkets and smallholder farmers in South Africa. Owing to this, it is imperative to investigate the nature of existing contractual arrangements, their salient aspects and the types of smallholder farmers actively participating in certain arrangements. This study aims at investigating the types of contractual arrangements in which certain smallholder farmers are engaged and analysing characteristics of these farmers. Furthermore, trajectories of smallholder farmers who participate in contractual arrangements were analysed in order to establish factors that enable their involvement. Contractual arrangements were categorised according to the general outline, contract conditions, roles of contractors and farmers, conflict resolution, and the advantages and disadvantages that arise from these arrangements. The study employed a geographic approach and focused on smallholder farmers and agribusinesses in the Tzaneen area. A total of 36 farmers and 4 agribusinesses were interviewed during the survey. The study employed both structured and semi-structured questionnaires for farmers and agribusinesses, respectively. In addition to farmers and agribusinesses, representatives from the Department of Agriculture and the Land Bank were consulted in order to corroborate responses from farmers and agribusinesses. In order to make suitable inferences, relevant literature on contract farming and smallholder farmers was explored. This helped to better understand various contractual arrangements, participation of smallholder farmers, and the most feasible ways in which contractual arrangements can be employed as tool for inclusion of smallholder farmers in agricultural markets. The results of this study indicated that agribusinesses prefer to initiate contractual arrangements with smallholder farmers that have access to land and certain production infrastructure. There is a positive relationship between farmers’ ownership or access to land and suitable infrastructure and their involvement in contractual arrangements. It should be noted that ownership of equipment and other machinery on the part of smallholder farmers did not have a major impact on their likelihood of participating in contractual arrangements. Smallholder farmers were drawn to most contractual arrangements for many reasons, including market reliability and guaranteed payment following deliveries of produce. Although smallholder farmers who participated in contractual arrangements earned considerably high revenues from disposal of their produce through the contractors’ channels, there were cases of late payments and reduced expected incomes. In the broiler chicken management contractual arrangement, a number of the participating smallholder farmers indicated that the contractor, Bushvalley, did not always pay within the agreed 30-day period and in some instances, the grading and subsequent pricing of their broiler birds was ‘deliberately’ stringent, thereby lowering prices and revenues. Producer prices for commodities in contractual arrangements varied, and in most cases were lower than spot market prices that could be fetched by the commodities of similar quality in the local market and elsewhere. However, it is important to note that farmers were satisfied by the fact that producer prices in contractual arrangements remained constant and stable within a production season or period, thereby allowing them to plan the financial management of their farming businesses. This study established that although there are various factors that determine successful participation of smallholder, external support in various forms from both the government, private and non-governmental organisations was crucial in enabling contractual arrangements. In cases where external support was provided, smallholder farmers entered into and participated in contractual arrangements without difficulties. Thus, this study suggests that relevant external support is an important form of intervention for fostering contractual arrangements and thereby helping smallholder farmers to access agricultural markets. This study further recommends that the government should play in important role in providing an enabling environment through deliberate policies and regulations that foster contractual arrangements and enable smallholder farmers in various sectors to access suitable agricultural markets.